What is FDI?
The International Monetary Fund defines FDI as when one individual or business owns
10% or more of a foreign company capital. Every financial transaction afterwards
is considered by the IMF as an additional direct investment. If an investor owns
less than 10%, it is considered as nothing more than an addition to his/her stock
With only a 10% ownership, the investor may or may not have the controlling interest
in the foreign business. However, even with just 10%, the investor usually has
significant influence on the company's management, operations and policies. For this
reason, most governmental agencies want to keep tabs on who is investing in their
Advantages of FDI:
Foreign direct investment has many advantages for both the investor and the recipient.
One of the primary benefits is that it allows money to freely go to whatever business
has the best prospects for growth anywhere in the world. That's because investors
aggressively seek the best return for their money with the least risk. This motive is
color-blind, doesn't care about religion or form of government.
This gives well-run businesses -- regardless of race, color or creed -- a competitive
advantage. It reduces (but, of course, doesn't eliminate) the effects of politics,
cronyism and bribery. As a result, the smartest money goes to the best businesses all
over the world, bringing these goods and services to market faster than if unrestricted
FDI weren't available.
Investors receive additional benefits. Their risk is reduced because they can diversify
their holdings outside of a specific country, industry or political system. Diversification
always increases return without increasing risk.
Businesses benefit by receiving management, accounting or legal guidance in keeping with
the best practices practiced by their lenders. They can also incorporate the latest technology,
innovations in operational practices, and new financing tools that they might not otherwise
be aware of. By adopting these practices, they enhance their employees' lifestyles, helping
to create a better standard of living for the recipient country. In addition, since the best
companies get rewarded with these benefits, local governments have less influence, and aren't
as able to pursue poor economic policies.
The standard of living in the recipient country is also improved by higher tax revenue from
the company that received the foreign direct investment. However, sometimes countries neutralize
that increased revenue by offering tax incentives to attract the FDI in the first place.
Another advantage of FDI is that it can offset the volatility created by "hot money." Short-term
lenders and currency traders can create an asset bubble in a country by investing lots of money
in a short period of time, then selling their investments just as quickly. This can create a boom
-bust cycle that can wreak economies and political regimes. Foreign direct investment takes longer
to set up, and has a more permanent footprint in a country.
Disadvantages of FDI:
- FDI has and adverse effects on competition.
- FDI will be make the host country lost the control over domestic policy.
- One of the most indirect disadvantages of foreign direct investment is that the economically
backward section of the host country is always inconvenienced when the stream of foreign direct
investment is negatively affected.
- It has been observed that the defense of a country has faced risks as a result of the foreign direct
investment in the country.
- Certain foreign policies are adopted that are not appreciated by the workers of the recipient country.
- Foreign direct investment disadvantageous for the ones who are making the investment themselves.
- Foreign direct investment may entail high travel and communications expenses.
- Another disadvantage of foreign direct investment is that there is a chance that a company may lose
out on its ownership to an overseas company. This has often caused many companies to approach foreign
direct investment with a certain amount of caution.
- There is considerable instability in a particular geographical region. This causes a lot of inconvenience
to the investor.
- The host country is not well connected with their more advanced neighbors, it poses a lot of challenge
for the investors.
- Inflation is increased.
- Local market is affected badly.
FDI and INDIA :
Foreign investment was introduced in 1991 as Foreign Exchange Management Act
(FEMA), driven by minister Manmohan Singh. As Singh subsequently became a
prime minister, this has been one of his top political problems, even in the
current (2012) election.India disallowed overseas corporate bodies (OCB) to
invest in India.
Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD
survey projected India as the second most important FDI destination (after
China) for transnational corporations during 2010–2012. 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.
On 14 September 2012, Government of India allowed FDI in aviation up to 49%,
in the broadcast sector up to 74%, in multi-brand retail up to 51%, in single
-brand retail up to 100%. The choice of allowing FDI in multi-brand retail
up to 51% has been left to each state. But Government of India does not allow
foreign e-commerce companies to pick-up 51% stake in multi-brand retail sector
in business-to-consumer space citing regulatory issues, problems in checking
inter-state transactions in e-commerce activities.In its supply chain sector,
the government of India had already approved 100% FDI for developing cold chain.