Fairfield Institute of Management and Technology

FOREIGN DIRECT INVESTMEMT (FDI)

& ITS TYPES

Subject:
International Business Management

Subject Code: 306

Submitted to :- Submitted by :-
Dr. SHALINI Tarun Sharma
Enrollment No : 44451401718
Course: BBA(G)
Semester - 6th
FOREIGN
DIRECT
INVESTME
NT AND ITS
TYPES
Table of Contents
 Contents Page No
Introduction 1
Objective 2
Foreign direct investment 3
How foreign direct investment works? 3-6

Advantages & Disadvantages 7-8

Types of Foreign direct investment 9-10
Conclusion 11
Bibliography 12

Introduction
A foreign direct investment, often abbreviated as FDI, is simply an investment
made by a company or an individual in one country into a business or company
located in a foreign land. FDIs typically occur when either international
business operations are established in another country or when an international
company acquires a business in an offshore company.

When an FDI transaction takes place, the investing company mostly takes

controlling ownership in the offshore business or company in which the
investment is made. The investing company is directly involved in the day-to-
day operations of the business in a foreign company. FDI brings with it, money
along with knowledge, skills and technology. It is common in open economies
having a skilled workforce as well as a growth prospect.

Objective
To develop further understanding of the theories and
concept covered in the course
To develop a practice of learning new aspects of the
subject and develop a habit of research related to the
subject

Foreign Direct Investment & its types

A foreign direct investment (FDI) is an investment made by a firm or individual in one
country into business interests located in another country. Generally, FDI takes place when
an investor establishes foreign business operations or acquires foreign business assets in a
foreign company. However, FDIs are distinguished from portfolio investments in which an
investor merely purchases equities of foreign-based companies.
KEY TAKEAWAYS:-

 Foreign direct investments (FDI) are investments made by one company into another
located in another country.
 FDIs are actively utilized in open markets rather than closed markets for investors.
 Horizontal, vertical, and conglomerate are types of FDI’s. Horizontal is establishing
the same type of business in another country, while vertical is related but different,
and conglomerate is an unrelated business venture. 
 The Bureau of Economic Analysis continuously tracks FDIs into the U.S.
 Apple’s investment in China is an example of an FDI. 

How a Foreign Direct Investment Works?

Foreign direct investments are commonly made in open economies that offer a skilled
workforce and above-average growth prospects for the investor, as opposed to tightly
regulated economies. Foreign direct investment frequently involves more than just a capital
investment. It may include provisions of management or technology as well. The key feature
of foreign direct investment is that it establishes either effective control of or at least
substantial influence over the decision-making of a foreign business.

The Bureau of Economic Analysis (BEA), which tracks expenditures by foreign direct
investors into U.S. businesses, reported total FDI into U.S. businesses of $4.46 trillion at the
end of 2019. Manufacturing represented the top industry, with just over 40% of FDI for 2019.

Special Considerations :

Foreign direct investments can be made in a variety of ways, including the opening of
a subsidiary or associate company in a foreign country, acquiring a controlling interest in an
existing foreign company, or by means of a merger or joint venture with a foreign company.

The threshold for a foreign direct investment that establishes a controlling interest, per
guidelines established by the Organisation of Economic Co-operation and Development
(OECD), is a minimum 10% ownership stake in a foreign-based company. However, that
definition is flexible, as there are instances where effective controlling interest in a firm can
be established with less than 10% of the company's voting shares.

Foreign direct investment – meaning and explanation

A foreign direct investment, often abbreviated as FDI, is simply an investment made by a

company or an individual in one country into a business or company located in a foreign
land. FDIs typically occur when either international business operations are established in
another country or when an international company acquires a business in an offshore
company.

When an FDI transaction takes place, the investing company mostly takes controlling
ownership in the offshore business or company in which the investment is made. The
investing company is directly involved in the day-to-day operations of the business in a
foreign company. FDI brings with it, money along with knowledge, skills and technology. It
is common in open economies having a skilled workforce as well as a growth prospect.

FDI in India – The routes for investments

Having defined foreign direct investment, let’s understand its role and investment routes in
India.

FDI is considered as a significant source of investment that aids India’s economic

development. India started witnessing economic liberalisation in the wake of the economic
crisis of 1991, after which FDI increased steadily in the country.

Routes through which FDI occurs in India :-

There are two common routes through which India gets Foreign Direct Investments.

1. The automatic route

The automatic route is when an Indian company or Non-Resident does not need any prior
permission from the RBI or the Indian government for foreign investment in India. Several
sectors come under the 100 per cent automatic route category. The most common ones
include industries such as agriculture and animal husbandry, airports, air-transport services,
automobiles, construction companies, food processing, jewellery, health care, infrastructure,
electronic systems, hospitality, tourism, etc. There are also a few sectors in which 100 per
cent automatic route foreign investments are not permitted. These include insurance, medical
devices, pension, power exchanges, petroleum refining, and security market infrastructure
companies.

2. The government route

The second route through which FDIs occur in India is through the government route. If
FDI occurs through the government route, the company intending to invest in India must seek
prior government approval mandatorily. Such companies are required to fill and submit an
application form through the Foreign Investment Facilitation portal, which enables them to
obtain single-window clearance. The portal then forwards the foreign company’s application
to the respective ministry that holds the discretion to approve or reject the application. The
ministry consults the Department for Promotion of Industry and Internal Trade or DPIIT
before accepting or rejecting the foreign investment application. Once approved, the DPIIT
issues the Standard Operating procedure as per the existing FDI policy, paving the path for
foreign direct investment in India.

Like the automatic route, the government route also permits up to 100 per cent FDI. Here is a
sector and per cent wise break-up as permitted under the government route

FDI Sector FDI Per Cent In India

Public Sector Banks 20 Per Cent

Broadcasting Content Services 49 Per Cent

Multi-Brand Retail Trading 51 Per Cent

Print Media 26 Per Cent

Apart from the sectors mentioned above, 100 per cent FDIs can also occur through
government sectors such as core investment companies, food products, retail trading, mining,
and satellite establishments and operations.

Sectors in which FDI is prohibited in India

While foreign direct investments are permitted through several sectors, as mentioned above,
there are specific sectors and industries wherein FDI is strictly prohibited, irrespective of the
automatic or government route. These include:

1. Atomic Energy Generation

2. Gambling, betting businesses and lotteries

3. Chit fund investments

4. Agricultural and plantation activities (excluding fisheries, horticulture and pisciculture, tea
plantations, and animal husbandry)

5. Real estate and housing (excluding townships and commercial projects)

6. TDR trading

7. Products manufactured by the tobacco industry such as cigarettes and cigars

Example of Foreign Direct Investments :-

Examples of foreign direct investments include mergers, acquisitions, retail, services,
logistics, and manufacturing, among others. Foreign direct investments and the laws
governing them can be pivotal to a company's growth strategy. 

In 2017, for example, U.S.-based Apple announced a $507.1 million investment to boost its
research and development work in China, Apple's third-largest market behind the Americas
and Europe. The announced investment relayed CEO Tim Cook's bullishness toward the
Chinese market despite a 12% year-over-year decline in Apple's Greater China revenue in the
quarter preceding the announcement. 

China's economy has been fuelled by an influx of FDI targeting the nation's high-tech
manufacturing and services, which according to China's Ministry of Commerce, grew 11.1%
and 20.4% year over year, respectively, in the first half of 2017. 3 Meanwhile, relaxed FDI
regulations in India now allows 100% foreign direct investment in single-brand retail without
government approval.4 The regulatory decision reportedly facilitates Apple's desire to open a
physical store in the Indian market. Thus far, the firm's iPhones have only been available
through third-party physical and online retailers.

Advantages of Foreign Direct Investment:-

1. Economic Development Stimulation. 

Foreign direct investment can stimulate the target country’s economic development, creating a
more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade.

Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is
quite difficult. Also, there are industries that usually require their presence in the international
markets to ensure their sales and goals will be completely met. With FDI, all these will be made
easier.

3. Employment and Economic Boost. 

Foreign direct investment creates new jobs, as investors build new companies in the target
country, create new opportunities. This leads to an increase in income and more buying power to
the people, which in turn leads to an economic boost.

4. Development of Human Capital Resources. 

One big advantage brought about by FDI is the development of human capital resources, which is
also often understated as it is not immediately apparent. Human capital is the competence and
knowledge of those able to perform labor, more known to us as the workforce. The attributes
gained by training and sharing experience would increase the education and overall human capital
of a country. Its resource is not a tangible asset that is owned by companies, but instead something
that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human
resources while maintaining ownership
Disadvantages of Foreign direct investment:-

Exchange crisis:
Foreign Direct Investments are one of the reason for exchange crisis at times. During the year
2000, the Southeast Asian countries experienced currency crisis because of the presence of
FDls. With inflation contributed by them, exports have dwindled resulting in heavy fall in the
value of domestic currency. As a result of this, the FDIs started withdrawing their capital
leading to an exchange crisis. Thus, too much dependence on FDls will create exchange
crisis.

Political corruption:
In order to capture the foreign market, the FDIs have gone to the extent of even corrupting
the high officials or the political bosses in various countries. Lockheed scandal of Japan is an
example. In certain countries, the FDIs influence the political setup for achieving their
personal gains. Most of the Latin American countries have experienced such a problem.
Example: Drug trafficking, laundering of money, etc.

Inflation in the Economy:

The presence of FDIs has also contributed to the inflation in the country. They spend lot of
money on advertisement and on consumer promotion. This is done at the cost of the
consumers and the price is increased. They also form cartels to control the market and exploit
the consumer. The biggest world cartel, OPEC is an example of FDI exploiting the
consumers.

Trade Deficit:
The introduction of TRIPs (Trade Related Intellectual Property Rights) and TRIMs (Trade
Related Investment Measures) has restricted the production of certain products in other
countries. For example, India cannot manufacture certain medicines without paying royalties
to the country which has originally invented the medicine. The same thing applies to seeds
which are used in agriculture. Thus, the developing countries are made to either import the
products or produce them through FDIs at a higher cost. WTO (World Trade Organization) is
in favor of FDIs.

Different types of foreign direct investments:-

1. Horizontal FDI

The most common type of FDI is Horizontal FDI, which primarily revolves around investing
funds in a foreign company belonging to the same industry as that owned or operated by the
FDI investor. Here, a company invests in another company located in a different country,
wherein both the companies are producing similar goods. For example, the Spain-based
company Zara may invest in or purchase the Indian company Fab India, which also produces
similar products as Zara does. Since both the companies belong to the same industry of
merchandise and apparel, the FDI is classified as horizontal FDI.

2. Vertical FDI

Vertical FDI is another type of foreign investment. A vertical FDI occurs when an investment
is made within a typical supply chain in a company, which may or may not necessarily
belong to the same industry. As such, when vertical FDI happens, a business invests in an
overseas firm which may supply or sell products. Vertical FDIs are further categorised as
backward vertical integrations and forward vertical integrations. For instance, the Swiss
Coffee producer Nescafe may invest in coffee plantations in countries such as Brazil,
Columbia, Vietnam, etc. Since the investing firm purchases, a supplier in the supply chain,
this type of FDI is known as backward vertical integration. Conversely, forward vertical
integration is said to occur when a company invests in another foreign company which is
ranked higher in the supply chain, for instance, a coffee company in India may wish to invest
in a French grocery brand.

3. Conglomerate FDI

When investments are made in two completely different companies of entirely different
industries, the transaction is known as conglomerate FDI. As such, the FDI is not linked
directly to the investors business. For instance, the US retailer Walmart may invest in TATA
Motors, the Indian automobile manufacturer.

4. Platform FDI

The last types of foreign direct investment is platform FDI. In the case of platform FDI, a
business expands into a foreign country, but the products manufactured are exported to
another, third country. For instance, the French perfume brand Chanel set up a manufacturing
plant in the USA and export products to other countries in America, Asia, and other parts of
Europe.

If you intend to invest via FDI, you must know about the different types of FDI with
examples. With FDI, the money invested can be used to start a new business in a foreign
country or to invest in an already existing business in a foreign country. For more information
on FDIs, consult Angel Broking advisors.
 Conclusion
Foreign Direct Investment (FDI) is an appealing concept through
which companies progress and enter into new markets as a result of
globalization. Nonetheless, there are an array of factors that might
influence a company’s decision to enter into a new market such as the
availability of resources, the political stability of the identified
country, and the nation’s openness to regional and international trade.
Aesop has a better opportunity of being a successful company in
China due to the excellent economic environment which supports
businesses. Additionally, the Chinese skin care product market is
edging towards the high-end. The figures exhibited above highlight
that the market share of fast-moving skin care products outpaced the
market share of fast-moving alternatives.
 Bibliography

1. Book:- International business management by C.B Gupta

2. Website: - www.wikipedia.com