FDI - Foreign Direct Investment- Types And Essentials

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FDI started in India in 1991 in wake of economic crisis and since then it has steadily increased. It is an investment made by an individual or firm in one country into business interest located in another country.
Besides being a critical driver of economic growth, FDI is a major source of Non-Debt financial resource for the Economic Development of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges (Tax exemptions) etc for a country where foreign investments are being made. It also means achieving technical know-how and generating employment.
The India Govt's favorable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country to improve in view of ease of doing business and relaxation in FDI norms is yielding results. FDI equity inflows in India was US $44.37 billion in 2018-19 mainly on account of Service Sector, Computer hardware and software, Trading, Telecommunications attractions.
Indian companies having foreign investment approval through FIPB (Automatic Route) do not require any further clearance from RBI for receiving inward remittances and issue of shares to the non-resident investors. The companies are required to notify the concerned Regional Office of RBI
of such receipt within 30 days of such receipt and issue of shares to the resident investors and
submit relevant forms for the purpose. Govt. permission is required for items not covered under automatic route.
All foreign investments are repatriable except for the cases where NRIs choose to invest specifically under non- repatriable schemes. Dividends declared on foreign investments can be remitted through an authorized dealer.
An investment in a foreign firm is considered if it establishes a lasting interest. A lasting interest is established when an investor obtains at least 10% of voting power in the firm. Control represents the intent to actively manage and influence a foreign firm's operations. This is major differentiation factor between FDI and passive foreign investment. However, there are cases where this criterion
is not always applied. For example, it is possible to exert control over more widely traded firms despite owning a smaller percentage of voting stock.

Four types of FDIS are observed -

1) Horizontal - Where business expands its domestic operations in a foreign country by conducting the same activity.Such as Mac Donalds' operations in opening restaurants in Japan.

2) Vertical -  Where business expands into a foreign country by moving to a different type of supply chain. In other words, firm conducts different activities are related to main business. For example, Mac Donalds could purchase a large scale farm in Canada to produce meat for their restaurants.

3)  Platform - Business expands to a foreign country but output is exported to a third country- referred to as Export- platform FDI. It commonly happens in low-cost locations inside free trade areas. For example, Ford purchasing manufacturing plant in Ireland with the purpose of exporting cars to other countries in European Union.

4) Conglomerate - Acquisition of unrelated business in a foreign country. This is uncommon as it requires overcoming two barriers to entry. Like - Entry into a foreign country and a new market
and industry such as: Virgin Group based in U.K. acquiring a clothing line in France.

Benefits of FDI for Business-
1. Marker Diversification
2. Tax Incentives
3. Lower Labor costs
4. Preferential Tariffs.
5.Subsidies.
Benefits for the Host country-
1. Economic stimulation.
2. Development of Human Capital
3. Increase in employment.
4. Access to management, expertise and technology.

Disadvantages -
1. Displacement of local business.
2. Profit Remittances.

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