Foreign Direct Investment (FDI) - What is, Importance, & Types (2024)

As businesses are widespread all over the world, the role of FDI in shaping the global economy continues to grow. FDI plays an important role in driving economic growth and development by creating new jobs, increasing productivity, and good relationships between businesses and countries globally.

The decision to invest in a particular country depends on several factors, including political situations, economic conditions, infrastructure, business growth, etc. Governments also play a significant role in attracting foreign investors by offering subsidies or tax concessions.

This blog is intended to give you a comprehensive understanding of FDI and its impact on the economic landscape.

Table of Contents:

• What is FDI?
• What is the importance of FDI?
• What are the types of FDI?
  • Horizontal FDI
  • Vertical FDI
  • Conglomerate FDI
• Examples of Foreign Direct Investment
• Conclusion

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What is FDI?

Foreign Direct Investment refers to the investment made by a company or an individual from one country to a business located in another country. This investment can be of various forms, including the creation of a new business, the acquisition of an existing company, or a joint shareholder of a foreign company.

FDI also provides businesses with an opportunity to adopt new technologies, and different business practices, which are not available in their own country. Moreover, it gives the option to expand the business in different parts of the world. The main goal of FDI is to generate earnings and get returns on investment.

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What is the importance of FDI?

Foreign Direct Investment, also known as FDI, has a big impact on the economy, employment opportunities, and competitiveness, which in turn contributes to a country’s growth and development.

Below are several reasons that support how the uses of FDI can be important in today’s economic situation worldwide:

• Increases capital- One of the most important roles of FDI is, it brings economic stability by increasing capital to a country. This results in financing new businesses, development works, and other important factors for economic growth.
• Supports developing countries- FDI can be extremely beneficial for countries that are still developing or lacking in some ways. It provides the required resources and facilities from other countries to overcome their challenges and improve their economic situations.
• Enhances international trade- FDI enhances international trade by promoting imports and exports of various business products. This increases revenue and the relationship between both the host and the source countries.
• Expands new-age technologies- For improving the quality of local and old business models, FDI can help bring new technologies to a country. This can result in increased productivity and competitiveness in the host country.

What are the types of FDI?

Foreign Direct Investment(FDI), is mainly categorized into three main types. They are discussed below:-

Horizontal FDI:-

When a company invests overseas to begin the same kind of business operations as in its nation of origin, this is known as Horizontal FDI. The primary motive for Horizontal FDI is to access new markets and technologies.

Vertical FDI:-

Vertical FDI is another type of investment that occurs when a company invests in a foreign country to gain control over the supply chain. In vertical FDI, the individual or a company invests in a foreign company that is either a supplier or a distributor. This results in creating a vertical relationship between the companies.

Conglomerate FDI:-

Conglomerate FDI is defined as an investment made by an individual or organization from one nation to another that has no connection to its current core businesses. The primary goal for Conglomerate FDI is to benefit the companies from the growth potential of new markets and diversify the company’s portfolio.

Check out our Blog on Foreign Portfolio Investment (FPI) to understand the basic difference between FPI and FDI.

Examples of Foreign Direct Investment

FDI have become a key component of economic growth and the success of many countries. FDI benefits both host countries and foreign investors and its effects can be seen in various industries right from manufacturing to technology.

Here in the below points, we will be discussing some FDI examples.

• FDI in India- One of the grocery giants of the US, Walmart’s acquisition of a stake in Flipkart, is one example of FDI in India. Due to the Walmart-Flipkart deal, India’s e-commerce sector has seen increased competition in recent years.

  This deal provided Flipkart with the financial resources and expertise of Walmart, which has helped it to grow and expand its business in different parts of the world.

• FDI in China- A Swiss company, Nestle is known for its food and beverage products worldwide, invested in China by building a research and development center. Due to this investment, Nestle was able to establish a strong presence in the country and expanded its operations through mergers and acquisitions.

• FDI in the US- Toyota, a Japanese automobile manufacturer invested in the US by building a manufacturing unit. This investment helped Toyota to establish its production hub in the US. Due to this, it was able to produce and sell its cars directly to the local market.

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Conclusion

The impact of FDI can vary depending on the factors such as the host country’s institutional capacity, regulatory environment, and level of economic development.

Countries must have a well-designed investment policy that balances the benefits and risks associated with FDI. These policies should be aimed at maximizing the benefits for the country’s economies while minimizing external costs.

FDI has the potential to be a valuable investment plan for economic development. However, governments must adhere to several rules and regulations and make sure FDI is compatible with the nation’s development goals.

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