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Foreign Direct Investment

Foreign Direct Investment (FDI) is the investment by a nation in another nation in manufacturing or business either by purchasing a corporation or extending its business abroad. Usually, it is through securities and shares.

According to the Financial Times, "Standard definitions of control use the internationally agreed 10% threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control."

According to the WTO, "FDI occurs when an investor based in one company (the home country) acquires an asset in another country (the host country) with the intent to manage that asset. initial control was a main criterion for the foreign inward investment, but that constituted control was not man-made specific. Thus, this moderation was done. The current definition of FDI as endorsed by the IMF (1993) and OECD (1996) has shifted their emphasis from control to lasting interest by direct investors in a resident in a country other than the country of the investor. The lasting interest refers to the long-term relationship between the direct investment company and the investor who has a significant influence on the management of the enterprise.

FDI pertains to foreign capital inflows that the investment money in the economy's production capability and are generally preferred over other forms of external financial services since they are generating non-debt, non-volatile and their gains rely on the overall performance of investor funded projects.

The RBI has projected the following characteristics of FDI:

  • The undistributed profits which are invested in the affiliates in the host country are not counted as actual FDI inflows. 
  • Overseas commercial borrowings like bonds, grants, take credits, financial leasing is also excluded from FDI inflows.
  • According to IMF guidelines, if a non-resident initially buys 10% or more equity through the portfolio route but buys additional shares in a subsequent transaction and now holds investment over 10% these additional shares will be regarded as part of FDI. However, many FIIs holding well over 20% equity in the shape of American Depository Receipts and Global Depository Receipts also do not form part of FDI.

Types of Foreign Investment:

Foreign investment occurs in three forms, i.e. Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI) and Foreign Institutional Investment (FII).

  • Foreign Direct Investment: FDI takes place when a company invests directly in a foreign nation to produce or market a product. A company becomes a multinational company once it undertakes FDI.
  • Foreign Portfolio Investment: FPI is an investment made by foreign nations /business entities and non-residents in the Indian securities including company shares, treasury bonds, corporate debt, convertible financial instruments, infrastructural securities etc. The purpose is to ensure controlled interest in India at an investment, i.e. lower than FDI, with the flexibility of the entrances and exits.
  • Foreign Institutional investment: FII is an investment in securities, real estate and other investment assets by foreign entities. investors are mutual fund firms, hedge fund firms etc. The motive is not to control interest but to expand the hedging investment portfolio and earn high yields with rapid entry and exit. The difference between FPI and FDI is significant to categorise the capitals inflows in the country.

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