It is the investment done by the individual or firm of one country in the firm or company of another country. It is generally done when a business entity involved in the international business of goods or services or any type of outsourcing from another country. It is different from the portfolio investment in which the investor invests only the inequity of the foreign-based companies. It is started from the New Economic Policy come into force in India in which one of the parts of the policy is globalization which allows investing in the business of the foreign countries.
Globalization converts the whole world into a small village by allowing to invest in any country subject to some restrictions.
Foreign Direct Investments generally made in open economies that provide skilled workforce at a lower rate as compared to a foreign country and above-average growth to the foreign investor or investors, as the case may be. The agreement contains the provisions of management as well as technology. It establishes control over the other firms or companies in which the amount is invested.
There are many ways for Foreign Direct Investment including establishing a subsidiary company or an associate company in a foreign country or acquiring control in the existing foreign company or by merger or joint venture with a foreign company.
The threshold limit for the foreign investment that establishes is decided by the Organisation of Economic Co-operation and Development (OECD). The minimum stake that a company can take in the foreign company is 10% but in some instances, the stake is restricted less than 10%.
Difference between FDI and foreign Passive Portfolio Investment:-
When an investment is done by the investor in a foreign company then, it creates a lasting interest. A lasting interest is created when an investor of at least 10% of the voting power in the firm.
The main element of the foreign direct investment is control or stake in the foreign company. Control refers to actively influence and manage foreign firms’ operations. This is the major factor to differentiate between FDI and foreign portfolio investment.
For this reason, it is necessary to have a control at least 10% to define the FDI. However, it is the cases where the stake is not the criterion for FDI. For example, it is possible to have control over the wide traded firms despite owning a small percentage of voting control.
Types of Foreign Direct Investment:-
Foreign Direct Investment can be categorized as horizontal, vertical, or conglomerate.
1.Horizontal Direct Investment:-
A horizontal direct investment allows the investor to invest in the same business operation in the business operations as in its home country. For example, a cell phone provider based in the United States opening stores in Dubai. This reduces the competition among the firms and provides an efficient service to the consumers.
2.Vertical Direct Investment:-
A vertical investment is one in which the business operation is different but there is related activities from the investor business are established or acquired in the foreign country, such as when a manufacturing company acquires the stake in the company of a foreign country that supplies parts or raw material required for the manufacturing company to make its products.
3.Conglomerate Direct Investment:-
This type of merger allows making the foreign direct investment in the foreign company in which one company invests in the unrelated business of the home country. This type of investment involves entering into the industry in which the investor has no previous experience generally it takes the form of a joint venture.
4.Platform Direct Investment:-
This allows one country to invest in one country for the purpose of exporting to another country.
Methods of Foreign Direct Investment:-
There are many ways to do the Foreign Direct Investment for expanding their business in a foreign country. For example, Amazon opened the new headquarters in Canada and Vancouver.
Following are some of the methods through which Foreign Direct Investment is done by the investors to take the stake in foreign countries:-
1. Acquiring the voting stock in the company.
2.Mergers and acquisitions.
3. Joint ventures with foreign firms or companies, as the case may be.
4. Starting a subsidiary in the foreign country of the home country.
Examples of Foreign Direct Investment:-
Example of foreign direct investment includes a merger, acquisitions, retail, logistics, and manufacturing. Foreign Direct Investments and the laws, rules, and regulations governing them are very pivotal for a company’s strategy.
In 2017, a US-based company became the third-largest market behind the Americas and Europe. Apple announced a$507.1 million investment to enhance its research and development work in China.
Benefits of the Foreign Direct Investment:-
Foreign Direct Investment offers many advantages to both the investor and the foreign country as they give incentives to both the parties to do the FDI. Following are some benefits for the business entity:-
Market diversification and expansion.
Tax incentives like deductions.
Low labor costs.
Following are some the benefits for the host country:-
Development of human capital.
Increase in employment.
Access to management expertise, skills, and technology.
Disadvantages of Foreign Direct Investment:-
There are two main disadvantages of foreign direct investment:-
1.Displacement of the local business.
The entry of new firms such as Walmart may displace the local business. However, Walmart is very criticized for driven out from the local business to compete at lower prices.
Profit repatriation means reinvest into the operation of the business but the firms do not reinvest into the host country which leads to large capital outflows from the host country.
On August 21, 2020, the Government of Singapore has done the investment of Rs 450 crore in the qualified institutional placement (QIP) offering to the mall developer of Phoenix Mills Ltd.
On August 14, 2020, Israel-based Coralogix, provider of machine-learning, announced a strategic expansion and diversification into India with a commitment to invest over US$ 30 million in the next five years.
Between April 23 and July 16, 2020, Jio Platforms Ltd. sold 25.24 percent stake worth US$ 21.57 billion to various foreign investors involving Facebook, Silver Lake, Vista, General Atlantic, Mubadala, Abu Dhabi Investment
Authority (ADIA), TPG Capital, Public Investment Fund (PIF), Intel Capital, and Google. This is the largest continuous fundraise by any company in the world.
In May 2020, Philips, Dutch health tech and consumer electronics company, published its plan to invest Rs 250-300 crore to boost and efficient its manufacturing and R&D facilities in India.
In January 2020, Amazon India published an investment of US$ 1 billion for digitizing small and medium businesses and claim to create for one million jobs by 2025.
In January 2020, Mastercard in the press release declared its plans to invest up to US$ 1 billion in India over the next five years to boost and double its research and development effort in the Indian market.
In October 2019, the French oil and gas giant, acquired a 37.4 percent stake in Adani Gas Ltd for Rs 5,662 crore, which results in the largest FDI in India’s city gas distribution (CGD) sector.
In August 2019, Reliance Industries (RIL) declared one of India’s biggest FDI deals with Saudi Aramco to buy a 20 percent stake or control in Reliance's oil-to-chemicals (OTC) business at an enterprise value of US$ 75 billion which also leads to a huge amount of profits and employment in the country.