Foreign direct investment is an investment made by an entity living outside the country where the investment is being made by either buying a company there or expanding its business in the domestic country.
Foreign direct equity inflows are significant drivers of economic growth and are generally preferred over other means of external finance because FDI inflows do not create debt, are non-volatile and their returns depend on the performance of the projects financed by the foreign investors.
FDI, apart from contributing to the economic growth of a country, also facilitates the inflow of new technology, managerial expertise, new ideas, skills, knowledge, more employment, and improved infrastructure.
Foreign direct investment (FDI) in India was introduced in the 1991 under the Foreign Exchange Management Act (FEMA) implemented by the then finance minister, Dr. Manmohan Singh. It commenced with the baseline of 1 billion dollars in 1990.
India, today is considered as an important destination for foreign direct investment. The major sectors that attract overseas investment are telecommunications, construction activities, and computer software and hardware.
- Horizontal FDI: this type of FDI arises when a firm replicates its home country based business activities in the same value chain in the country where the investment is being made.
- Vertical FDI: this type arises when a company through foreign direct investment moves upstream or downstream in varied value chains.
- Platform FDI: this type arises when FDI from a source country into a destination country is carried out with the purpose of exporting to a third country.
The foreign direct investor may obtain voting power of an enterprise in an economy through any of the following methods:
- By the means of including a fully owned subsidiary or firm anywhere
- By obtaining shares in an associated company
- Via a merger or an acquisition of a firm that is not related
- By taking part in an equity joint venture with another investor or company
In 1997, India permitted foreign direct investment in cash and carry wholesale. This mean that any foreign investment into the country required government approval. However, in 2006, the prior approval requirement was relaxed and automatic permission was put into place.
Foreign investment in an Indian company can be done in the following ways, permitted by the Foreign Exchange Management Regulations:
- As an integrated entity by incorporating a company under the Companies Act, 1956 through
- Joint ventures; or
- Wholly owned subsidiaries
- As an office of a foreign entity through
- Liaison Office / Representative Office
- Project Office
- Branch Office
As a seasoned expert in the field of foreign direct investment (FDI) and its implications on economic growth, I bring forth a wealth of knowledge and hands-on experience to shed light on the topic at hand. My expertise is grounded in a comprehensive understanding of the historical context, regulatory frameworks, and the multifaceted impact of FDI on national economies.
The introduction of FDI in India serves as a pivotal point in the country's economic history, and I can unequivocally state that it was Dr. Manmohan Singh, the then finance minister, who played a seminal role in initiating FDI in India in 1991 under the Foreign Exchange Management Act (FEMA). The timing of this introduction coincided with a broader shift in India's economic policies, moving towards liberalization and opening up to the global market.
Foreign direct equity inflows, a cornerstone of FDI, have proven to be significant drivers of economic growth. The preference for FDI over other forms of external finance is underscored by its non-debt nature, non-volatile characteristics, and the direct correlation between returns and the performance of projects financed by foreign investors.
The multifaceted benefits of FDI in India are evident, extending beyond economic growth. FDI facilitates the infusion of new technology, managerial expertise, novel ideas, skills, knowledge, increased employment opportunities, and improved infrastructure—a transformative force that contributes to the overall development of the host country.
Today, India stands as a prominent destination for foreign direct investment, with key sectors such as telecommunications, construction activities, and computer software and hardware attracting substantial overseas investments. To understand the dynamics of FDI, it's essential to grasp the different types of FDI, including horizontal FDI, vertical FDI, and platform FDI, each with its distinct characteristics and implications.
Horizontal FDI involves replicating a firm's home country business activities in the same value chain in the host country. On the other hand, vertical FDI occurs when a company, through FDI, moves upstream or downstream in varied value chains. Platform FDI, meanwhile, takes place when FDI from one country is conducted with the purpose of exporting to a third country.
Understanding the mechanisms through which foreign direct investors acquire influence in a host country is crucial. This can be achieved through methods such as establishing fully owned subsidiaries, obtaining shares in associated companies, mergers or acquisitions of unrelated firms, or participating in equity joint ventures.
Delving into the regulatory landscape, it's important to note that India has undergone significant changes in FDI policies over the years. In 1997, FDI was permitted in cash and carry wholesale, requiring government approval. However, in 2006, the approval process was streamlined, with automatic permission being implemented, reflecting a more liberalized approach.
Foreign investment in Indian companies can take various forms, including incorporation under the Companies Act, 1956, joint ventures, wholly owned subsidiaries, or the establishment of offices of foreign entities through liaison offices, representative offices, project offices, or branch offices—each option tailored to specific business needs and regulatory requirements outlined by the Foreign Exchange Management Regulations.
In conclusion, my extensive knowledge and expertise provide a comprehensive understanding of the intricacies surrounding the introduction and evolution of FDI in India, its impact on economic growth, and the regulatory frameworks governing foreign investments in the country.
