Foreign Direct investment- An overview

Foreign Direct Investment or FDI

Foreign Direct Investment, or FDI, is one of the most crucial channels of direct investments between countries. Unlike Foreign Portfolio Investment or FPIs, an investor in one country can hold a controlling stake of any business or organisation in a foreign country that receives the investment. FDI is also a significant and insightful indicator of a certain country’s political and socio-economic stability.

This essentially implies a country that receives large amounts of investments from foreign entities on a regular basis is more likely to have a dynamic and vibrant economy.

Understanding Foreign Direct Investment Better

Foreign investments can be either ‘organic’ or ‘inorganic’. With organic investments, a foreign investor will pump in funds to expand and accelerate growth in established businesses. Inorganic investments are instances when an investing entity buys out a business in their target country.

In developing and emerging economies like India and other parts of South-East Asia, FDIs offer a much-needed fillip to businesses which may be in poor financial shape. The Government of India has undertaken several measures to ensure that larger chunks of investments pour into the country across sectors including defence production, the telecom sector, PSU oil refineries and IT.

Since Foreign Direct Investment is a non-debt financial resource, it has the potential to become a major driver of economic development in India.

Globalisation and internationalisation are 2 factors which made FDI possible. However, the celebrated Canadian economist Stephen Hymer, considered the ‘Father of International Business‘, theorised in the 1960s that foreign investments would continue growing rapidly because –

  • It provided control over companies in a foreign land.
  • It helped certain business sectors overthrow monopolistic practices, and
  • Most importantly, since market imperfections will always exist, such investments provide companies with a cushioning effect if there was a sharp and unpredictable decline in business activity.