scorecardresearchWhat is Foreign Direct Investment?

What is Foreign Direct Investment?

Updated: 08 Apr 2022, 11:54 PM IST
TL;DR.

Foreign Direct Investment takes place to take over ownership of a certain company in a foreign country. The FDI, classified into various types, is useful to a country’s business and economy, but comes with a few disadvantages too.

Foreign Direct Investment (FDI) refers to an investment that is made by a firm of one country in another business that is located in a different country.

Foreign Direct Investment (FDI) refers to an investment that is made by a firm of one country in another business that is located in a different country.

Foreign Direct Investment (FDI) refers to an investment that is made by a firm of one country in another business that is located in a different country. Through an FDI, a company can gain ownership over assets in a foreign company and can regularly monitor its operations.

Types of FDI

Horizontal FDI – Under the horizontal fund, an investor of any company can invest in another foreign company that functions under the same industry, i.e., produces similar goods. This type of FDI is the most widely used one. For instance, a company named Audi can invest in the Indian company Mahindra. This is possible as both the companies fall under the automobiles industry.

Conglomerate FDI – This type of FDI revolves around investment made by a company in another foreign company that falls under a completely different industry. For example, if a Japan-based company named Toyota invests in an Indian clothing brand named Fab India, then this type of FDI is called conglomerate FDI.

Vertical FDI – One of the types of FDI is vertical FDI which operates along the supply chains of the companies. Any company can invest in other company’s supply chains that may or may not belong to the same industry. Under this type, if an investing company purchases from a supplier in the supply chain of a company, then it is known as backward vertical integration. Whereas, if the investment firm invests in the high-ranked supplier among the supply chains, then it is called forward vertical integration.

Platform FDI – The final type of FDI is the platform FDI. Under this type, a firm plans its expansion in country X but its products will be exported to country Y. This means the firm can set up its manufacturing plant in one company and further sell its manufactured products to other countries.

READ MORE: What are the differences between FDI and FPI?

Advantages of FDI

Economic Development – Foreign Direct Investment aids in the inflow of external capital into the country, which further increases the revenue of the country. Thus, it helps the nation’s economy to grow.

Employment opportunities - Through FDI, the requirement of the labour force rises and followingly employment opportunities increase in the country. With many people being employed, they earn a source of income and heavily contribute towards improvement in the country’s GDP. This large-scale employment leads to further overall development in purchasing power of the country.

Human resources – An individual who has been employed is considered as the human capital. The human capital is given sufficient training and scope for improving their skills, such that their contribution in terms of work becomes efficient and increases a country’s human capital quotient. So, the FDI helps in the development of human resources.

Finance and technology sectors – FDI in general means investment by one company in another company. So, when FDI takes place, the recipient company is capable of accessing tools related to technology, finance, etc of the investing company. In this way, the existing finance and technology sectors of the recipient firm develop and become more efficient.

Disadvantages of FDI

Despite its benefits, FDI has certain demerits, most of which are related to the nation’s geo-politics. FDI is sometimes seen as an intervention of foreign activity into domestic activity. 

So, it will impact the domestic political set-up, cause fluctuations in exchange rates and influence overall domestic market function. On a side note, the advantages of FDI are greater than their disadvantages, thus the benefits outweigh the cons.

However, the FDIs are considered to be beneficial to both parties, i.e., the investing firm and the recipient firm.



 

First Published: 08 Apr 2022, 11:54 PM IST