Before getting into what FDI inflow and outflow is, let us first define FDI. FDI or foreign direct investment is the investment made by a foreign entity (individual or firm) into a business based in another country. Foreign direct investment is not to be confused with foreign portfolio investment. The two are distinguished by a notion of direct control.
FDI is not just the inflow of investment into the business of one country, it also comes with a controlling ownership and therefore, the stakes are high. In India, the government has taken several steps over the years to ease overseas direct investment norms in order to encourage more investment into different sectors of the economy.
The government is a supporter of FDI in India as FDI equity inflows bring more than just monetary funds into the country. It also brings in managerial expertise, technical knowhow, improved infrastructure, more job opportunities, and new technology.
Now that we have understood the basics, let us define what foreign direct investment inflow and outflow is.
Foreign direct investment net inflow is defined as the total value of inward overseas direct investment made by foreign entities, including non-resident investors. It is therefore, investment coming into the domestic country or reporting economy.
Inward foreign direct investments into the domestic country includes all assets and liabilities exchanged between the foreign investors and enterprises based in the domestic country, where the investment is being made.
Foreign direct investment net outflow is defined as the total value of outward overseas direct investment made by the residents of the domestic country or reporting economy to businesses based in foreign economies.
Outward foreign investments includes assets and liabilities exchanged between investors based in a domestic country or reporting economy to foreign businesses based out in different countries. Inward direct investment is also referred to as direct investment abroad.
More recently, the government of India sanctioned reforms in foreign direct investment norms across several sectors of the economy including digital media, single brand retail trade, contract manufacturing, coal mining, and aviation.
The government proposed these changes first in this year’s budget. This announcement came after foreign direct investment equity inflows dipped for the first time in 6 years by 1 per cent. These changes are done in order to encourage overseas investors to invest in India. The government aims to attract big tech giants like Apple to expand their manufacturing unit in the country.