What is FDI?
- FDI stands for Foreign Direct Investment. As the name suggests, any investment made by a company into a company not based in that country (i.e., a foreign country) is known as FDI.
- This is the investment directly made by an individual into shares and securities of another company operating in another state. Any company that makes FDI is called a multinational company(MNC) or a multinational enterprise (MNE).
- It is also essential to know that the term FDI is not the same as foreign portfolio investment because, in the latter, investors passively hold another foreign company’s securities. In order to understand FDI better, one should know about lasting interest as only if an individual is considered to make an FDI if they establish a lasting interest.
- This is possible if they get about 10% of the firm’s voting power. India is considered the fifth-largest FDI in the world, according to data from the United Nations Conference.
History of FDI in India
- FDI in India was introduced in 1991. The Foreign Exchange Management by Dr. Manmohan Singh, India’s ex-finance minister, put this in place. In this year, the liberalization of the economy opened India to foreign investors.
- It is true that opening India to new markets after the 1991 crisis opened over one crore job opportunities. However, India has changed its FDI policy due to the 2020 pandemic and to protect Indian companies. This policy, although it doesn’t restrict markets, puts all FDI under scrutiny by the government.
Types of FDI
The two main types of FDI are vertical and horizontal FDI. Apart from this, over time, two more FDIs have emerged.
- Vertical FDI: If an expanding business moves into another country to a supply chain of a different level, then that is called vertical FDI. Here, the business overseas undertakes activities that are different but are still related to the main business.
- Horizontal FDI: If a business expands its operations inland to another country, then it is called a horizontal FDI. Here, unlike a vertical FDI, in a horizontal FDI, the business undertakes the same activities in a foreign country.
- Platform FDI: A business expanding into another country exports its output into a third country, then this investment is called platform investment.
- Conglomerate FDI: A conglomerate FDI is one where a business undertakes business activities in a foreign country. However, because of the difficulty in penetrating a completely new country as it is an early market, this type of FDI is not common.
In India, FDI is a major source of economic development. Apart from knowing the full form of FDI, it is also important to know its types, routes, and how it started in India. We have more articles that will help you with some key terms.