'Foreign Direct Investment - FDI'

DEFINITION

An investment made by a company or entity based in one country, into a

company or entity based in another country. Foreign direct investments differ substantially
from indirect investments such as portfolio flows, wherein overseas institutions invest in
equities listed on a nation's stock exchange. Entities making direct investments typically have
a significant degree of influence and control over the company into which the investment is
made. Open economies with skilled workforces and good growth prospects tend to attract
larger amounts of foreign direct investment than closed, highly regulated economies.
The investing company may make its overseas investment in a number of ways - either by
setting up a subsidiary or associate company in the foreign country, by acquiring shares of an
overseas company, or through a merger or joint venture.
The accepted threshold for a foreign direct investment relationship, as defined by the OECD,
is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or
ordinary shares of the investee company. An example of foreign direct investment would be
an American company taking a majority stake in a company in China. Another example
would be a Canadian company setting up a joint venture to develop a mineral deposit in
Chile.
Foreign Direct Investment, popularly known by its acronym FDI, is a key component in
global economic integration. FDI is a form of cross-border investment with the objective of
establishing a lasting interest that a resident enterprise based in one country might have in an
enterprise operating in another country. Lasting interest implies a significant degree of
influence on the management of the enterprise along with building up a long-term rapport
between the direct investor and the direct investment enterprise. According to the

Page 1 of 8

Organization for Economic Co-operation and Development (OECD), ownership of 10% of

the voting power by the foreign investor is an evidence of such a relationship.
FDIs can be achieved by one of two strategies. The first strategy is for the company to set up
new factories and plants from the ground up. This method is called a greenfield investment.
Companies like McDonald's and Starbucks tend to use the greenfield approach when
expanding overseas.
The second FDI strategy is through cross-border mergers and acquisitions that involve
acquiring an existing foreign enterprise in the country of interest. This method is called a
brownfield investment. An example of a brownfield investment occurred in 2008, when the
Indian truck company Tata Motors acquired Land Rover and Jaguar from Ford. Tata Motors
didn't have to build those factories from scratch.
FDIs can also be classified into horizontal and vertical forms. A company investing in the
same business abroad that it operates domestically is a case of a horizontal FDI. On the other
hand, vertical FDI occurs if a company invests in a business that plays the role of a supplier
or a distributor.
FDIs are seen as a healthy way for less-developed and developing nations to overcome their
saving-investment gap, which limits the level of domestic investment. FDIs fill such gaps by
bringing foreign investment into the country, as well as bridging gaps in management,
technology, entrepreneurship and skills.
The rapid growth of world population since 1950 has occurred mostly in developing
countries. This growth has been matched by more rapid increases in gross domestic product,
and thus income per capita has increased in most countries around the world since 1950.
While the quality of the data from 1950 may be of question, taking the average across a range
of estimates confirms this. Only war-torn and countries with other serious external problems,
such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita.
The data available to confirm this are freely available.
An increase in FDI may be associated with improved economic growth due to the influx of
capital and increased tax revenues for the host country. Host countries often try to channel
FDI investment into new infrastructure and other projects to boost development. Greater
competition from new companies can lead to productivity gains and greater efficiency in the
host country and it has been suggested that the application of a foreign entitys policies to a
domestic subsidiary may improve corporate governance standards. Furthermore, foreign
investment can result in the transfer of soft skills through training and job creation, the
availability of more advanced technology for the domestic market and access to research and
Page 2 of 8

development resources. The local population may be able to benefit from the employment
opportunities created by new businesses.

In India -

Foreign investment was introduced in 1991 under Foreign Exchange

Management Act (FEMA),
driven
minister
Singh.

by
Dr.
As

subsequently

then

finance

Manmohan
Mr.

Singh

became

the

prime minister, this has been

one

of

his

top

political

problems, even in the current

times.
overseas

India

disallowed

corporate

bodies

(OCB) to invest in India. India imposes cap on equity holding by foreign investors in various
sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected
India as the second most important FDI destination (after China) for transnational
corporations during 20102012. As per the data, the sectors that attracted higher inflows were
services, telecommunication, construction activities and computer software and hardware.
Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on
UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last
year.
Foreign investments add a great deal to Indias economy. The continuous inflow of foreign
direct investment (FDI), which is now allowed across several industries, clearly shows the
faith that overseas investors have in the country's economy. FDI inflows to India increased 17
per cent in 2013 to reach US$ 28 billion, as per a United Nations (UN) report.
The Indian governments policy regime and a robust business environment have ensured that
foreign capital keep flowing into the country. The government has taken many initiatives in
recent years such as relaxing FDI norms in 2013, in sectors such as defense, PSU oil
refineries, telecom, power exchanges and stock exchanges, among others. The same year, big
global brands such as Tesco, Singapore Airlines and Etihad lined up to invest in India as the
government opened more sectors to foreign investment.

Page 3 of 8

Market size

Total FDI inflows into India in the period April 2000August 2014 touched US$ 341,357
million. Total FDI inflows into India during the period AprilAugust FY15 was US$ 17,445
million.
The services sector (US$ 2,336 million) attracted the highest FDI equity inflows in the period
AprilAugust 2014, followed by the services (US$ 1,086 million) and drugs &
pharmaceuticals (US$ 903 million) sectors.
Mauritius led the share of top investing countries by FDI equity inflows into India with US$
3,934 million during April-August FY15, followed by Singapore (US$ 1,892 million), the
Netherlands (US$ 1,562 million) and Japan (US$ 897 million).
Investments

US-based Nike has made a proposal to the Department of Industrial Policy and Promotion
(DIPP) to set up fully-owned stores in India. Nike is one of the world's largest suppliers of
athletic shoes and apparel globally, with a market capitalisation of US$ 68 billion.
US-based Milacron Llc plans to invest US$ 30 million in the next three years in its India
operations Ferromatik Milacron India Pvt Ltd (FMI), as per president and CEO, Mr
Thomas Goeke. FMI manufactures plastic moulding machines at its plants in Ahmedabad in
Gujarat and Coimbatore in Tamil Nadu.
Bengal looks set for one of its biggest foreign investments. A large private equity firm which
has exposure in social infrastructure and agriculture plans to invest over Rs 300 crore (US$
49.02 million) in the proposed Dankuni food park promoted by Keventer Group.
The Foreign Investment Promotion Board (FIPB) has approved a proposal from InterGlobe
Aviation, the company that runs IndiGo, to reclassify shareholding of promoter Rakesh
Gangwal as Non-Resident Indian (NRI) from FDI at present. This move enables the airline to
have access to fresh FDI.
Norway's Telenor Group plans to invest an additional Rs 780 crore (US$ 127.47 million) to
increase its ownership in Indian subsidiary Uninor to 100 per cent; Telenor currently owns a
74 per cent stake in Uninor.
Chinese telecom equipment maker ZTE Corporation plans to establish a Global Network
Operating Centre (GNOC) in India. The centre will seek to manage the networks of multiple
telecom carriers in Asia and Africa.
Japan's Suzuki Motor Corporation (SMC), the parent company of Maruti Suzuki, will spend
Rs 18,500 crore (US$ 3.02 billion) to establish a new factory in Gujarat. SMC plans to

Page 4 of 8

establish a 100 per cent subsidiary, Suzuki Motor Gujarat (SMG), to manufacture cars on a
strictly no-loss, no-profit basis for Maruti Suzuki.
US-based Leapfrog Investment has bought a minority stake in Chennai-based financial
services provider IFMR Capital Finance for US$ 29 million. This marks Leapfrog's third
investment in India, after having earlier backed insurance distribution firm Mahindra
Insurance Brokers and Shriram CCL.
Government Initiatives

Indias cabinet has cleared a proposal which allows 100 per cent FDI in railway
infrastructure, excluding operations. Though the move does not allow foreign firms to operate
trains, it allows them to do other things such as create the network and supply trains for bullet
trains etc.
Based on the recommendations of the FIPB in its 207th meeting held on July 4, 2014, the
government approved 14 proposals of FDI amounting to about Rs 1,528.38 crore (US$
249.78 million).
Additionally, based on the recommendations of the FIPB in its meeting held on June 11,
2014, the government approved 19 proposals of FDI amounting to about Rs 2,326.72 crore
(US$ 380.25 million).

The Union Cabinet has cleared a bill to raise the foreign investment ceiling in private
insurance companies from 26 per cent to 49 per cent, with the proviso that the management
and control of the companies must be with Indians.

Page 5 of 8

The Reserve Bank of India (RBI) has allowed a number of foreign investors to invest, on
repatriation basis, in non-convertible/ redeemable preference shares or debentures which are
issued by Indian companies and are listed on established stock exchanges in the country.
In an effort to bring in more investments into debt and equity markets, the RBI has
established a framework for investments which allows foreign portfolio investors (FPIs) to
take part in open offers, buyback of securities and disinvestment of shares by the Central or
state governments.
Foreign Direct Investment in India decreased to 2135 USD Million in August of 2014 from
3562 USD Million in July of 2014. Foreign Direct Investment in India averaged 1002.52
USD Million from 1995 until 2014, reaching an all time high of 5670 USD Million in
February of 2008 and a record low of -60 USD Million in February of 2014. Foreign Direct
Investment in India is reported by the Reserve Bank of India.
Road Ahead

Foreign investment inflows are expected to increase by more than two times and cross the
US$ 60 billion mark in FY15 as foreign investors start gaining confidence in Indias new
government, as per an industry study. "Riding on huge expectations from the incoming Modi
government, global investors are gung ho on the Indian economy which is expected to
witness over 100 per cent increase in foreign investment inflows both FDI and FIIs to
above US$ 60 billion in the current financial year, as against US$ 29 billion during 2013-14,"
according to the study.
India will require around US $1 trillion in the 12th Five-Year Plan (201217), to fund
infrastructure growth covering sectors such as highways, ports and airways. This requires
support in terms of FDI. The year 2013 saw foreign investment pour into sectors such as
automobiles, computer software and hardware, construction development, power, services,
and telecommunications, among others.
Exchange Rate Used: INR 1 = US$ 0.0163 as on October 28, 2014

'Make in India': FDI is also 'First Develop India' says PM Modi

Ease of doing business, focus on PublicPrivate

partnerships,

harnessing

the

potential of Democracy, Demography and

Demand - that's what forms the key focus
of PM Narendra Modi's 'Make in India'
campaign.

Page 6 of 8

Calling development of India a 'collective responsibility', PM Modi on Thursday said, "We

must stress on two FDIs - First Develop India and Foreign Direct Investment." "For Indians
FDI is a responsibility, it means to First Develop India, for global investors FDI is an
opportunity

in

the

form

of

Foreign

Direct

Investment,"

he

explained.

Focusing on job creation through growth of the manufacturing sector, Modi said, "We need
to enhance the purchasing power of Indians. We need to create jobs to move poor to middle
class bracket." "Treat India as not just a market. See every Indian as an opportunity to
increase

their

purchasing

power,"

Modi

emphasised.

"We have to change the economic dynamics; we have to improve manufacturing in a fashion
that benefits the poor. This is a cycle, move poor people towards being a part of middle
class," he added. "Manufacturing boost will create jobs, increase purchasing power, thereby
creating a larger market for manufacturers," he explained.

Page 7 of 8

BIBLIOGRAPHY

http://www.investopedia.com/terms/f/fdi.asp

http://en.wikipedia.org/wiki/Foreign_direct_investment

http://www.ibef.org/economy/foreign-direct-investment.aspx

http://economictimes.indiatimes.com/industry/et-auto/news/industry/Make-in-India-FDI-isalso-First-Develop-India-says-PM-Modi/articleshow/43418909.cms

http://www.tradingeconomics.com/india/foreign-direct-investment

Page 8 of 8