Why is FDI so important?
Foreign direct investment is when an investor living in one country invests in a business based in another country. Under FDI, the foreign investor (individual or business) owns 10 per cent of the company where the investment is being made. If the investor owns less than 10 per cent, the International Monetary Fund (IMF) defines it as part of his or her stock portfolio.
A 10 per cent ownership is a safe bet because it does not give the investor a controlling interest but it does allow influence over the company’s management, operations, and policies. This ensures the investor to develop a lasting interest in the business and hence we can conclude that FDI is not merely the transfer of funds. It is differentiated in this regard from foreign portfolio investment.
Foreign direct investment is significant for developing economies and emerging markets where companies need funding and expertise to expand their international sales. Private investment in infrastructure, energy, and water is a critical driver of the economy as helps in increasing jobs and wages.
Some benefits of foreign direct investment is outlines below:
- it helps in diversifying investors portfolio
- it promotes stable long term lending
- it infuses new technology in developing nations
- it provides financing to developing countries
- it brings in technological knowhow and managerial expertise
- it creates more jobs and opportunities
- it also helps in improving infrastructure in the developing countries
- it helps in raising living standards in emerging economies
- it helps create competitive global capital allocation
- it facilitates economic growth or repair.
Today, India has become one of the most attractive destinations for foreign direct investments thanks to liberalised norms, easy policies and subsidised rates. Foreign investors are also willing to invest in the country due to lower labour costs, market diversification, subsidies, and preferential tariffs.
A foreign investor can invest in an Indian business through the following means:
- Acquiring voting stock in a foreign company
- Mergers and acquisitions
- Joint ventures with foreign corporations
- Starting a subsidiary of a domestic firm in a foreign country