Foreign Direct Investment is a kind of investment into an enterprise in a country by the other enterprises situated in another country by purchasing a company in the target country or by widening operations of an existing business in that country. In the period of globalization, Foreign Direct Investment takes an important part in the development of both developed and developing countries.
Foreign Direct Investment has been connected with improved economic development and growth in the host countries which has led to the emergence of global competition to attract Foreign Direct Investment. Foreign Direct Investment provides a number of benefits like innovative products, the overture of new technology, opportunities of employment, an extension of new markets, and introduction of new skills etc., which reflect in the growth of income of any country.
FDI is one of the measures of growing economic globalization. Investment has always been a matter for developing nations such as India. The world has been globalizing and all the countries are liberalizing their policies for welcoming investment from nations which have ample capital resources. The nations which are developed are concentrating on new markets where there is the availability of a huge number of labours, the scope for products, and high profits are attained. Therefore, in emerging markets, FDI has become a battleground.
FDI inflow routes
An Indian company may accept Foreign Direct Investment under the two routes which are as under :
- Automatic Route: In this route, Foreign Direct Investment is enabled without prior consent either of the Reserve Bank of India or the Government Of India in all activities or sectors as prescribed in the consolidated FDI Policy, issued by the Indian Government from time to time.
- Government Route: Government Route where Foreign Direct Investment in sectors or activities not covered under the automatic route requires the prior consent of the Indian Government which is considered by the Department of Economic Affairs, Foreign Investment Promotion Board (FIPB) and Ministry of Finance.
Types of FDI
- Greenfield Investment: It is the type of direct investment in new facilities or the expansion of existing facilities. It is the primary method of investing in developing countries like India.
- Mergers and Acquisition: It takes place when a transfer of existing assets from local firms takes place.
Foreign Direct Investment is prohibited in the following industrial sectors which are as under
- Arms and ammunition.
- Atomic Energy,
- Railway Transport.
- Coal and lignite.
- Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
- Lottery Business
- Gambling and Betting
- The business of Chit Fund
- Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations).
- Housing and Real Estate business.
- Trading in Transferable Development Rights (TDRs).
- Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco substitutes.
Importance of FDI in India
The Indian economy stood at the 11th position in the world regarding to the nominal gross domestic product (GDP) for the financial year 2011-12 observed a year low growth of the Indian economy (grew at a rate of 6.5%) and reasons traced could be the weak financial policy, cut in investments and inflation issues. India is one of the most pleasing destinations for foreign investment. Since liberalization, when FDI were permitted to enter India, our economy has grown by manifolds. Foreign investments play a very important role in the Indian economy. The importance could be attributed to the following reasons which are as under :
- Increased Investment in the country
- Improvement in Technology
- Infrastructure Increased productivity
- Enhanced Flow of Equity Capital
- Improved Corporate Governance
- Increased Employment Opportunities.
FDI through the automatic route
The sector, where 100% Foreign Direct Investment is permitted through the automatic route, are as follows :
- Agriculture & Animal Husbandry including Floriculture, Horticulture, Apiculture and Cultivation of Vegetables & Mushrooms under controlled conditions, Development and Production of seeds and planting material, Animal Husbandry(including breeding of dogs), Pisciculture, Aquaculture and Services related to agro and allied sectors
- Single Brand Retail Trading
- Plantation Sector including Tea sector including tea plantations, Coffee plantations, Rubber plantations, Cardamom plantations, Palm oil tree plantations and Olive oil tree plantations.
- Mining and Exploration of metal and non-metal ores, Mining of Coal & Lignite and Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities.
- Exploration of Petroleum and Natural Gas.
- Defence Manufacturing
- Civil Aviation both for airports and air transport services
- Construction Development: Townships, Housing, Built-up Infrastructures
- Industrial Parks (new & existing)
- Satellites– establishment and operation, subject to the sectoral guidelines of Department of Space/ISRO
Foreign Direct Investment plays a significant role in the long-term progress of a country not only as a source of capital but also for increasing competitiveness of the domestic economy through strengthening infrastructure, transfer of technology, generating new employment opportunities and raising productivity. India emerges as the 5th largest recipient of FDI across the globe and 2nd largest among all other developing countries (World Investment Report 2010). Foreign Direct Investment always helps to create employment in the nation and also provides support to the small scale industries and helps countries to put an impression on the worldwide level through globalization and liberalization.