Meaning of FDI

FDI is direct investment into production in a country by a company located in

another country, either by buying a company in the target country or by expanding operations
of an existing business in that country.

FDI offers an exclusive opportunity to enter into the international or global business, new
markets and marketing channels, elusive access to new technology and expertise,
expansion of company with new or more products or services, and cheaper
production facilities.
 Foreign Direct Investment
 Involves ownership of entity abroad for
– production
– Marketing/service
– R&D
– Access of raw materials or other resource
 Parent has direct managerial control
– Depending on its extent of ownership and
– On other contractual terms of the FDI
 No managerial involvement = portfolio investment
• Foreign direct investment (FDI) is an important factor in acquiring
investments and grow the local market with foreign finances when
local investment is unavailable.

• FDI can be a win-win situation for both the parties involved.

• The investor can gain cheaper access to products/services and the host
country can get valuable investment unattainable locally.
• FDIs can also be classified into horizontal and vertical forms. A

company investing in the same business abroad that it operates

domestically is a case of a horizontal FDI. On the other hand, vertical

FDI occurs if a company invests in a business that plays the role of a

supplier or a distributor.
• FDI, in its classic definition, is termed as a company of one nation
putting up a physical investment into building a facility (factory) in
another country.

• The direct investment made to create the buildings, machinery, and

equipment is not in sync with making a portfolio investment, an
indirect investment.
• FDI, therefore, may take many forms, such as direct acquisition of a

foreign firm, constructing a facility, or investing in a joint venture or

making a strategic alliance with one of the local firms with an input of

technology, licensing of intellectual property.

FDI and its Types

Strategically, FDI comes in three types :

• Horizontal

• Vertical

• Conglomerate

• FDI can take the form of greenfield entry or takeover.

 Horizontal and Vertical FDI
• Horizontal − In case of horizontal FDI, the company does all the same
activities abroad as at home. For example, Toyota assembles motor cars in
Japan and the UK.

• Vertical − In vertical assignments, different types of activities are carried out

abroad. In case of forward vertical FDI, the FDI brings the company nearer to
a market (for example, Toyota buying a car distributorship in America). In case
of backward Vertical FDI, the international integration goes back towards raw
materials (for example, Toyota getting majority stake in a tyre manufacturer
or a rubber plantation).
Conglomerate

• In this type of investment, the investment is made to acquire an

unrelated business abroad.

• It is the most surprising form of FDI, as it requires overcoming two

barriers simultaneously – one, entering a foreign country and two,

working in a new industry.

Greenfield entry and Foreign takeover

• Greenfield entry refers to activities or assembling all the elements right

from scratch as Honda did in the UK.

• Foreign takeover means acquiring an existing foreign company – as Tata’s

acquisition of Jaguar Land Rover. Foreign takeover is often called mergers
and acquisitions (M&A) but internationally, mergers are absolutely small,
which accounts for less than 1% of all foreign acquisitions.
 ADVANTAGES OF FDI:
• Foreign expertise can be an important factor in improving the existing
technical processes in the country.
• Advances in technology and process it improves the competitiveness of
countries in the domestic economy.
• Can improve the quality of products and processes in a particular sector,
increased attempts to better human resource.
•Create jobs, in an effort to increase productivity, skilled and semi-skilled
workers needed.
• Reduce unemployment and thus reduce social problems
• Expertise transfer, research and development requires the fees to the high
cost of developing the technology.
 Advantages of FDI
• Inflow of equipment and technology
• Competitive advantages and innovation
• Finance resource for expansive
• Employment generation
• Contribution to export growth
• Improved consumer welfare through reduced cost, wider choice & improved quality.
• Provide access to global markets for Indian producer.
• Access to superior technology
• Increased competition
• Increase in domestic investment
• Bridging host countries foreign exchange gaps
 DIS ADVANTAGES OF FDI
• Crowing of local industry
• Conflict of laws
• Loss of control
• Effect on notional environment
• Effect on culture
• Market monopoly
• Crowding – out and unemployment effects
• Technology dependence
• Profit outflow
• Corruption
• National security
 THE DISADVANTAGE OF FDI
The parts that the host country economically backward is always
comfortable when the flow of Foreign Direct Investment is affected.
• They need to ensure that entities that make Foreign Direct Investment in
these countries comply with environmental regulations.
• The host country has a number of state secrets is something that not
meant to be exposing to the world
• It is notes that the defence is at risk because of Foreign Direct Investment
in the country.
•Require a higher travel and communication expenses.
• Language and cultural differences that exist between countries and
investors of the host country also cause problems in the case of foreign
direct investment. o the world.
MCQ
• FDIs can also be classified into horizontal and vertical forms. A
company investing in the same business abroad that it operates
domestically is a case of a horizontal FDI. On the other hand, vertical
FDI occurs if a company invests in a business that plays the role of a
supplier or a distributor.