Foreign Direct Investment Essay in English
Essay On Foreign Direct Investment: Foreign Direct Investment (FDI) is when a company or organization from one country invests in a company or organization from another country. Foreign Direct Investment is a very important and growing part of business around the world. In this Essay On Foreign Direct Investment, we will talk about what is FDI, the type of FDI, the Benefits of FDI, and FDI in India. You can also find more Essay Writing articles about events, people, sports, technology, and many other things.
These cross-border investments, which make up more than half of all cross-border investments, have become the main economic driver of globalization.
900 Words Essay On Foreign Direct Investment for Students
What is FDI?
- A Foreign Direct Investment (FDI) is when a company or person in one country invests in a business in another country.
- Through FDI, an investor can buy a direct stake in a business in a foreign country.
- FDI can be made in many different ways.
- Setting up a subsidiary in another country, buying or merging with an existing foreign company, or starting a joint venture with a foreign company are all common ways to do this.
- FDI has been a major source of non-debt financing for India’s economic growth, as well as a key driver of economic growth.
- It is different from Foreign Portfolio Investment, in which a foreign entity just buys stocks and bonds from a company.
- FPI doesn’t give the investor any say in how the business is run.
- The determinants of FDI in host countries are:
- Policy framework
- Rules with respect to entry and operations/functioning (mergers/acquisitions and competition)
- Political, economic, and social stability
- Treatment standards of foreign affiliates
- International agreements
- Trade policy (tariff and non-tariff barriers)
- Privatization policy
Advantages of FDI
The free flow of capital across national borders is always a good idea because it encourages money to go where it will make the most money. There are also some benefits to letting capital flow freely. First, when it comes to international flows of capital, it lowers the risk that people with money have to deal with because it lets them lend and invest more. Second, when it comes to global integration of capital markets, it can help spread the best ways to run a business, follow the law, and keep track of money. Lastly, the ability of governments to change bad policies is limited by the fact that money can move around the world.
- Aside from these benefits, which only apply to private capital flows, here are some benefits of FDI for countries that host it, which can come in many forms:
- FDI helps transfer technology, mostly in the form of new types of capital inputs, which can’t be done through financial investments or trade in goods and services. FDI also makes the domestic market for inputs more competitive.
- In the process of running the new businesses, countries that get FDI train their employees, which helps the human capital of the host country grow.
- When FDI leads to profits, the host country gets more tax money from corporations.
Disadvantages of FDI
- However, there are some bad things about foreign direct investment as well. Here are some of them:
- It can be bad for domestic investment and domestic businesses.
- Small businesses in a country might not be able to compete with MNCs in their field. There is a chance that more FDI will cause a lot of domestic businesses to close down.
- The exchange rates of a country could also be hurt by FDI.
FDI Scenario in India
India is one of the world’s largest economies, and for the last few decades, investors from all over the world have been putting a lot of money into it. A recent UNCTAD (United Nations Conference on Trade and Development) survey found that, after China, India is the second most popular place in the world for FDI transactions. Most of this foreign direct investment comes from the United States, the United Kingdom, Mauritius, Singapore, and other places. It goes into the telecommunications, software, construction and services, and computer hardware industries. Foreign direct investment in India can be done in many different ways and in many different parts of the economy.
Type of Foreign Direct Investment
There are many kinds of foreign direct investments. FDI is put into different groups based on the restrictions that are put on it and the range of basic things that are needed for it.
There are two kinds of FDIs:
- Outward Foreign Direct Investments
- Inward Foreign Direct Investments
Outward Direct investment abroad is another name for direct investment in another country. In this case, the local money is used to buy foreign resources, which can then be used to buy and sell goods with other countries.
A foreign direct investment (FDI) in another country is always backed by the government of that country and is protected against all kinds of risks. Outward FDI always gets some tax breaks as well as different types of penalties. Risk coverage that is given to local industries and subsidies that are given to domestic companies are seen as obstacles to FDI from outside the country.
Indian Routes for FDI
FDI comes into India in three different ways. In the table below, you can read about them:
| Category 1 | Category 2 | Category 3 |
|---|---|---|
| 100% FDI permitted through Automatic Route | Up to 100% FDI permitted through Government Route | Up to 100% FDI permitted through Automatic + Government Route |
Automatic Route FDI
In the automatic route, the foreign entity does not need the government or the RBI’s permission first.
Examples:
- Medical devices: up to 100%
- Thermal power: up to 100%
- Services under Civil Aviation Services such as Maintenance & Repair Organizations
- Insurance: up to 49%
- Infrastructure company in the securities market: up to 49%
- Ports and shipping
- Railway infrastructure
- Pension: up to 49%
- Power exchanges: up to 49%
- Petroleum Refining (By PSUs): up to 49%
Government Route FDI
Under the government route, the foreign entity must get the government’s permission. It should fill out an application through the Foreign Investment Facilitation Portal, which makes it easy to clear things through a single window. This application is then sent to the right ministry or department, which reviews it with the DPIIT and decides whether or not to accept it.
Examples:
- Broadcasting Content Services: 49%
- Banking & Public sector: 20%
- Food Products Retail Trading: 100%
- Core Investment Company: 100%
- Multi-Brand Retail Trading: 51%
- Mining & Minerals separations of titanium-bearing minerals and ores: 100%
- Print Media (publications/printing of scientific and technical magazines/specialty journals/periodicals and a facsimile edition of foreign newspapers): 100%
- Satellite (Establishment and operations): 100%
- Print Media (publishing of newspapers, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
Sectors that don’t allow FDI
There are some areas where FDI is not allowed at all. These are:
- Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
- Atomic Energy Generation
- Nidhi Company
- Lotteries (online, private, government, etc.)
- Investment in Chit Funds
- Trading in TDR’s
- Any Gambling or Betting businesses
- Cigars, Cigarettes, or any related tobacco industry
- Housing and Real Estate (except townships, commercial projects, etc.)
New FDI Policy
- According to the new FDI policy, a country that shares a land border with India or whose citizens or residents are the real owners of investments in India can only invest through the Government route.
- Any FDI deal that helps any country that shares a border with India and involves a change of ownership will also need government approval.
- Investors from countries that aren’t covered by the new policy only need to let the RBI know after a transaction, instead of asking the relevant government department for permission first.
- Before, the only countries that could get FDI through the government route were Bangladesh and Pakistan. With the new rule, companies from China are now subject to the government route filter.
Summary
FDI benefits developing host countries, according to recent empirical evidence and economic theory. However, recent research suggests a few risks, it can be reversed with financial transactions; its benefits can be limited by leverage.
Of course, many of these sources are still unproven, but the probable risks suggest a nuanced view of FDI’s likely effects.
