Meaning
Foreign Direct Investment (FDI) refers to an investment made by an individual or company of one country into productive assets or business operations located in another country, with the objective of establishing a lasting interest and managerial influence. Unlike portfolio flows, FDI involves long-term participation in ownership, control, and decision-making.
FDI vs FPI (Conceptual Distinction)
- FDI: Long-term investment with control over management and operations
- FPI: Short-term, financial investment in securities without managerial control
Types of FDI
FDI is classified based on the nature of business integration:
Horizontal FDI
- Investor establishes the same business activity abroad as in the home country
- Aimed at market expansion
- Example: A global fast-food chain opening outlets overseas
Vertical FDI
- Investment in a complementary stage of production in another country
- Helps secure raw materials, components, or supply chains
- Example: Automobile firms investing in component manufacturing abroad
Conglomerate FDI
- Investment in an unrelated business sector in a foreign country
- Often driven by diversification motives
- Commonly undertaken through joint ventures
Modes of FDI Entry
Greenfield Investment
- Establishment of new facilities from scratch
- Full control over operations
- Higher employment generation and infrastructure creation
Brownfield Investment
- Acquisition or merger with an existing foreign enterprise
- Faster market entry using existing assets
Determinants of FDI Inflows
Key factors influencing FDI decisions include:
- Market size and growth prospects
- Political and macroeconomic stability
- Regulatory clarity and investor protection
- Quality of infrastructure
- Availability and cost of skilled labour
- Ease of doing business
Significance of FDI
FDI contributes to host economies through:
- Capital inflows and economic growth
- Technology transfer and managerial expertise
- Employment generation
- Export expansion
- Infrastructure development
- Enhanced tax revenues
FDI in India
Policy and Legal Framework
- FDI is governed under the Foreign Exchange Management Act (FEMA)
- Regulated by the
- Policy guidelines issued by the
FDI Threshold
- Investment of 10% or more in post-issue paid-up equity is treated as FDI
FDI Routes in India
Automatic Route
- No prior government approval required
- Permitted in most sectors with sectoral caps
Government Route
- Prior approval mandatory
- Applicable in strategically sensitive sectors
Sectoral FDI Limits (Illustrative)
- Defence: 74% automatic, up to 100% government route
- Pharmaceuticals:
- Greenfield – 100% automatic
- Brownfield – up to 74%
- E-commerce: 100% automatic (marketplace model only)
- Print Media: 26% automatic
- Railway Infrastructure: 100% automatic
FDI Prohibited Sectors
- Lottery and gambling
- Chit funds and Nidhi companies
- Tobacco manufacturing
- Real estate trading and farmhouses
- Atomic energy and railway operations
FDI Trends in India
- India is among the top FDI destinations globally
- Cumulative inflows since 2014 exceed USD 650 billion
- Major sources include Mauritius, Singapore, USA, Netherlands, and Japan
- Key recipient sectors: Services, IT, telecom, automobiles, trading
FDI Outflows
- Refers to overseas investments by Indian firms
- Driven by global expansion strategies
- Major destination: Singapore
- Components include equity, loans, and guarantees
Criticisms of FDI
Despite its benefits, FDI raises concerns such as:
- Market dominance by multinational corporations
- Profit repatriation reducing domestic reinvestment
- Environmental degradation
- Regional imbalances in investment distribution
- Cultural homogenisation
Conclusion
FDI remains a critical driver of growth, technology transfer, and global integration for India. However, maximizing its developmental impact requires balanced regulation, strong domestic capacity, and strategic sectoral prioritisation.
