Foreign direct investment or FDI is the investment made by an individual or organization from one country to another. This investment is made with the intent of a ‘lasting interest’ in the business of another country. This lasting interesting is established when the foreign investor (individual or organization) gets a minimum of 10 per cent of voting powers in the business based in another country, as per OECD (Organization for Economic Co-operation and Development).
Foreign direct investment, therefore, is not simply the transfer of fund from one country to another. Apart from being a significant driver of economic growth, FDI also brings in more employment opportunities, managerial expertise, new technology, better infrastructure, etc.
Advantages of FDI in India are outlines below:
1. Increased job opportunities
One of the most important reasons why a country looks to attract more foreign investment is the increased job opportunities that it bring with it. Increased FDI equity inflows boost both the manufacturing and services sectors, therefore, creating more jobs in the process. Increased employment means more income and thus, economic boost.
2. Development of backward areas
This is especially beneficially for developing countries. Foreign direct investments in developing countries like India transform backward areas. This translates to an overall economic boost.
3. Inflow of new technology
The business in the host country is privy to latest technology, financial tools, and operational practices from all over the world. The exposure to new and enhanced technology slowly gets infused with into the local economy and leads to increased efficiency and effectiveness.
4. Human resource development
FDI also results in managerial expertise. Skills are enhances through trainings and new experiences, which in turn boost the overall human capital quotient of the country. One human capital can train multiple, therefore creating a ripple effect in the process.
5. Improved capital flow
Countries having limited domestic resources or restricted possibilities of raising funds in global capital markets, especially benefit from this.
Foreign direct investment is India is done through two routes: automatic and government. While a prior government approval is required in the government route, no such approval is needed under the automatic route for investment.
Foreign investment in an Indian company can be done in the following ways, permitted by the Foreign Exchange Management Regulations:
- As an integrated entity by incorporating a company under the Companies Act, 1956 through
- Joint ventures; or
- Wholly owned subsidiaries
- As an office of a foreign entity through
- Liaison Office / Representative Office
- Project Office
- Branch Office