Foreign Direct Investment a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
FDI comes in use when domestic capital is inadequate for the economical growth. It is a temporary measure when the capital market is in process of development and also brings productive factors like technical and business knowledge from others.
Advantages
- Improves forex position of the country
- Employment generation and increase in production
- Help in capital formation by bringing fresh capital
- Helps in transfer of new technologies, management skills, intellectual property
- Increases competition within the local market and this brings higher efficiencies
- Helps in increasing exports
- Increases tax revenues
Disadvantages
- Domestic companies fear that they may lose their ownership to overseas company
- Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business
- Large giants of the world try to monopolies and take over the highly profitable sectors
- Such foreign companies invest more in machinery and intellectual property than in wages of the local people
- Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company
Types of FDI
- Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI
- Platform FDI is FDI from a source country into a destination country for the purpose of exporting to a third country.
Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.
FDI in India
FDI is introduced in India by finance minister Manmohan Singh on 1991 under act FEMA Foreign Exchange Management Act. India is the 3rd largest economy of the world in terms of purchasing power parity and so world has a special interest to invest FDI with India. Government of India is interested to take FDI for majority of sectors, but there are some critical areas like retailing and insurance where lots of oppositions are coming from local Indians and Indian companies. Telecommunications, Apparels, IT, Pharma,Auto Parts, Jewellery, Chemicals all those sectors are highly attracted by the world for FDI.
In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the Asia-Pacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.
An Indian company may receive FDI under the two routes as given under:
- Automatic Route
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.
- Government Route
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.
Sectors where FDI is not allowed both under Automatic Route as well as Government Route
- Atomic energy
- Lottery Business
- Gambling and betting
- Chit fund business
- Nidhi company
- Agriculture (Expect Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc.)
- Plantation (Except tea plantation)
- Housing and Real Estate (Except township development, residential/commercial Constructions, roads and bridges)
- Trading in TDR s (Transferable Development Rights)
- Manufacture of Cigars, cheroots, cigarillos, tobacco
Authorities dealing with FDI
- FIPB : Foreign Investment Promotion Board is responsible for expeditious clearance of FDI proposals and review of implementation of cleared proposals. It also undertake investment promotion activities and issue and review general and sectoral policy guidelines
- SIA : Secretariat for Industrial Assistance acts as a gateway to industrial investment in India and assists the entrepreneurs and investors in setting up projects. SIA also liaison with other government bodies to ensure necessary clearances
- FIIA : Foreign Investment Implementation Authority works for quick implementation of FDI approvals and resolution of operational difficulties faced by foreign investors
- Investment Commission
- Project Approval Board
- Reserve Bank of India
Reference.
