FOREIGN DIRECT INVESTMENT
BBA(B&I) 4TH SEM
Foreign direct investment (FDI) in its classic form
is defined as a company from one country making
a physical investment into building a factory into
In other word FDI is the process whereby residents
of one country (the home country)acquire
ownership of assets for the purpose of controlling
the production, distribution and other activities of
a firm in another country (the host country).
Generally speaking FDI refers to capital inflows
from abroad that invest in the production
capacity of the economy
FDI also facilitates international trade and
transfer of knowledge, skills and technology
The FDI relationship consists of a
parent/home country and host country which
together form a multinational corporation
In order to qualify as FDI the investment must
afford the home country control over its
foreign affiliates .
It involves ownership of entity abroad
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
ENTRY STRATEGIES FOR
Foreign Company has the following options to set up
business operations in India :
By incorporating a company under the Companies
A wholly owned subsidiary
Joint venture company - existing company or new
company with domestic partner
As an unincorporated entity:
• Liaison Office
• Project Office
• Branch Office
Liaison office is not permitted to undertake
any commercial/trading/industrial activity.
The role of the liaison office is limited.
Collecting information about possible market
opportunities and providing information
about the company and its products to
prospective Indian customers.
Acting as a communication channel
between the parent company and host
Approval for establishing a liaison office in
India is granted by RBI.
General permission to foreign entities to
establish Project / Site Offices (temporary
Such offices cannot undertake or carry on
any activity other than the activity relating
and incidental to execution of the project.
manufacturing and trading activities
abroad are allowed to set up Branch
Offices in India for specified purposes.
• Branch Offices are established with the
approval of central bank(RBI).
FDI is not permitted in the following industrial
Retail trading (except single brand product
Gambling and betting
Agricultural or plantation activities.
Housing and Real Estate Business (except
development of townships, construction of
ADVANTAGES OF FDI
Integration into global economy - Developing
countries, which invite FDI, can gain access to a wider global
and better platform in the world economy.
Economic growth - This is one of the major sectors, which is
enormously benefited from foreign direct investment. A
remarkable inflow of FDI in various industrial units in India has
boosted the economic life of country.
Trade - Foreign Direct Investments have opened a wide
spectrum of opportunities in the trading of goods and services
in India both in terms of import and export production.
Products of superior quality are manufactured by various
industries in India due to greater amount of FDI inflows in the
New Technology and knowledge transfer – FDI apparently helps in the
outsourcing of knowledge from India especially in the Information Technology
sector. Developing countries by inviting FDI can introduce world-class
technology and technical expertise and processes to their existing working
process. Foreign expertise can be an important factor in upgrading the existing
Increased competition - FDI increases the level of competition in the host
country. Other companies will also have to improve on their processes and
services in order to stay in the market. FDI enhanced the quality of
products, services and regulates a particular sector. Linkages and spillover to
domestic firms- Various foreign firms are now occupying a position in the Indian
market through Joint Ventures and collaboration concerns. The maximum
amount of the profits gained by the foreign firms through these joint ventures is
spent on the Indian market.
Employment - FDI has also ensured a number of employment opportunities by
aiding the setting up of industrial units in various corners of India.
DISADVANTAGES OF FDI
Industrial Sector Dominance in the Domestic
if there is a lot of FDI into one industry e.g. the
automotive industry then a country can become
too dependent on it and it may turn into a risk
Increase corruption in political sector .
FDI leads to income inequalities.
Foreign firms reinforce dualistic socio-economic structure and
increase income inequalities. They divert resources away from
priority sectors to the manufacture of sophisticated products for
the consumption of the local elite. As they are located in urban
areas, they create imbalances between rural and urban
opportunities, accelerating flow of rural population to urban
Can stimulate wrong consumption pattern-
Foreign firms stimulate inappropriate consumption patterns
through excessive advertising and monopolistic market
power. The products made by multinationals for the domestic
market are not necessarily low in price and high in quality.
Their technology is generally capital-intensive which does not
suit the needs of a labor-surplus economy