FDI is defined as a category of international investment that reflects the objective of a resident in one economy (the direct investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise).
“ investment in a foreign country where the investor retains full control over the investment”
Foreign Direct Investment (FDI) is considered as one of the most important tools of capital infusion in a country
A direct investment relationship is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad.
PROCEDURE OF BRINGING FDI IN INDIA
1. UNDER AUTOMATIC ROUTE
Under this procedure, any individual, organization or company which wants to invest in India can do so without receiving any prior approval of either Government or RBI.. eg. Coffee and rubber processing & warehousing- 100% FDI allowed under automatic route.
2. UNDER GOVERNMENT APPROVAL ROUTE
Under this procedure, any individual, organization or company which wants to invest in India in any activity not covered under automatic route can do so after taking prior approval from the Government. Approvals of all such proposals are granted on the recommendations of Foreign Investment Promotion Board (FIPB). eg. Cigars and cigarettes manufacture- 100% FDI allowed under FIPB route
EVOLUTION OF FDI IN INDIA
The need of FDI was recognized by the administration under Prime Minister Narasimha Rao and starting in the early 1990s, India began to liberalize the economic policies and started opening the Indian markets to foreign investments. Foreign Direct Investment (FDI) started flowing into India.
TYPES OF FDI FDI WHOLLY OWNED SUBSIDIARY JOINT VENTURE ACQUISITION
FDI IN INDIA S.NO. SECTOR/ACTIVITY FDI CAPITAL/EQUITY ENTRY ROUTE 1. Atomic Minerals 74% FIPB 2. Banking- Private Sector 74% (FDI + FII) Automatic 3. Construction Development Projects 100% Automatic 4. Courier Services 100% FIPB 5. Defence Production 26% FIPB 6. Hazardous Chemicals 100% Automatic 7. Power 100% Automatic
An investment fund that is from or registered in a country outside of the one in which it is currently investing is called a foreign institutional investment.
When the investor makes only investment & doesn’t retain control over the enterprise.
D/F B/W FDI & FII
Foreign direct investment involves investment in physical assets of a country. For example investment in land, building, plant, etc. whereas foreign institutional investment involves investment in the securities, stocks and shares of the companies situated outside the country of the investor .
A foreign institutional investment, once made, is easily reversible. However, a foreign direct investment once made, is not easily reversible.
FDI CONFIDENCE INDEX 2010
ADVANTAGES OF FDI
causes a flow of money into the economy which stimulates economic activity
Upgradation of technology
Exploitation of natural resources
Benefit to consumers
Development of basic economic infrastructure
the government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it
DISADVANTAGES OF FDI
domestic firms may suffer if they are relatively uncompetitive
Sometimes over exploitation of natural resources
Not providing the optimum amt. of revenue to the Govt.