Basic Understanding about Foreign Direct Investment

Foreign Direct Investment ("FDI") is a cross border investment in which an investor in one country initiates an interest and influence in the Company of another country. It is generally an ownership stake in a foreign company made by an investor, company or government from another country. FDI is considered a source of promoting international trade and economic integration between countries due to long lasting relations established between countries. 

Companies or investments who want to pursue FDI generally take controlling positions in domestic companies and actively involved in their management. FDI includes provision of management, technology and equipment to another company belonging to another country and it establishes effective control of the foreign company or substantial influence on that company's decision making. 

TYPES OF FDI

FDI is done in many ways such as setting up a subsidiary or associate company or branch or representative office in a foreign country through merger or acquisition with a foreign company. There are different types of FDI which is categorized as follows:-

1. Horizontal FDI- In this type of FDI, a company establishes the same business in a foreign country as it is in its native country. 

2. Vertical FDI- In this type of FDI, a company acquires a supporting business in another country.

3. Conglomerate FDI- In this type of FDI, a company invests in a foreign company which runs a different business and is unrelated to the investing company's business. This type of investment leads to joint venture.

There are two types of approval when an application for FDI is filed as per the following:-

1. Automatic Route- Under this route, the investing company does not require any approval from the Government of the foreign country.

2. Government Route- Under this route, approval from the Government of the foreign country is required. Proposal for FDI under this route are considered by respective departments.

ADVANTAGES AND DISADVANTAGES OF FDI

Like any other investment, FDI also has its own sets of pros and cons which need to be tread carefully to benefit from it as FDI can either raise or destroy the economy. The following are the advantages of FDI:-

1. International Trade- FDI promotes international trade between different countries which can improve relations between them. If a company has international presence then its sales and goals are affected in a positive way which can also influence clients to pursue business with them.

2. Economic Development- FDI increases revenue of a country and is the primary source for increasing its economic development. It provides a promising environment for an investor and is beneficial for local businesses for growth.

3. Enhancement of finances- FDI provides a recipient business with access to latest technology and processes which get along in the local economy making the fintech industry more effective and independent from any problems. The recipient business can grow internationally and they can leverage any situation to their advantage.

4. Transfer of knowledge- FDI can promote transfer of knowledge and resources wherein many countries are given access to new technologies and skills.

5. Employment opportunities- FDI creates new jobs due to new companies being built which create new employment opportunities. This results in increase of income which in turn leads to economic boost.

6. Other advantages- FDI helps backward countries by turning them into an industrial centre. Goods produced may be marketed domestically and abroad creating another revenue stream. FDI improves a country's capital flow and exchange rate stability which leads to creation of a competitive market.

Even after the advantages of FDI there are still many disadvantages which prove a hurdle for many people to pursue FDI. The disadvantages are as follows:-

1. Obstruction of domestic businesses and domestic investment.

2. Financial fraud if the FDI is not checked properly.

3. Influence negatively the exchange rates and interest rates.

4. FDI is risky as relations with other countries can change any time due to politics.

5. It is quite expensive while investing in a foreign company.

CONCLUSION

Despite its disadvantages, FDI is still sought out for investment as its advantages outweigh its disadvantages. FDI is beneficial to the country receiving such investment as well as the investing country. FDI translates reduced costs and develops human resources, skills and technologies.