Foreign direct equity inflows are the sum of inward direct investments into a country by non-resident or foreign investors. A foreign direct investment is an investment made by an entity not residing in the country the investment is being made in.
This investment is characterized by a controlling ownership in a business. FDI is, therefore, different from foreign portfolio investment (FPI) by the notion of direct control.
Foreign direct investment typically includes “mergers and acquisitions, building new facilities, reinventing profits earned from overseas operations, and intra company loans”. This overseas investment generally involves participation in management, joint-ventures, transfer of technology, and expertise.
FDI in India was introduced in 1991 under the Foreign Exchange Management Act (FEMA) in a bid to liberalize the Indian economy. This decision was driven by then finance minister Manmohan Singh.
In 2015, India emerged as the top destination for foreign direct investment exceeding China and the United States. India had attracted a total of 31 billion dollars’ worth of foreign investments as compared to 28 billion USD of China and 27 billion USD of USA. In 2016, India further liberalized FDI norms and policies, thus allowing 100 per cent FDI in many sectors.
Types of foreign direct investments
There are mainly three types of FDI
- Vertical FDI: a vertical FDI is said to have taken place when a company moves upstream or downstream through FDI in different value chains. This happens when firms undertake value adding activities, step by step in a vertical manner in the domestic country.
- Horizontal FDI: a horizontal FDI is said to have taken place when the investing company replicates activities form its home country at the same value chain in the domestic country through foreign direct investment.
- Platform FDI: a platform FDI happens when overseas investment is undertaken from a source country into a destination country with the aim of exporting to a third country.
Ways in which a foreign investor can gain voting powers in a firm
- One can gain voting rights by integrating a fully owned subsidiary or company anywhere
- By acquiring shares in an associated enterprise
- through a merger or an acquisition of an unrelated enterprise
- participating in an equity joint venture with another investor or enterprise
As the third largest economy in the world (preceded by the United States and China), India has been an attractive destination for foreign direct investment. India has a strong telecommunications, chemicals, apparels, information technology, pharmaceuticals, jewellery, etc. Sector, therefore, offering a thriving environments for foreign investments.