This article describes the Meaning and features and type of Foreign Direct Investment. It is helpful for the students and professional.

1. MEANING AND TYPES
FOREIGN DIRECT INVESTMENTS
Presented by,
Prof. Tushar Ranjan Barik
Assistant Professor of Commerce
NIIS Institute of Business Administration

2. Foreign Direct Investment (FDI)
FDI is an investment made by a company or individual who us an
entity in one country, in the form of controlling ownership
in business interests in another country.
FDI could be in the form of –
either establishing business operations or
by entering into joint ventures,
by mergers and acquisitions,
building new facilities etc.
According to Organization for Economic Co-operation and Development
(OECD), an investment of 10% or above from overseas is considered as FDI.
In India, foreign direct investment policy is regulated under the
Foreign Exchange Management Act (FEMA), 2000

3. Some of the important characteristics of Foreign Direct Investments (FDI) are as follows:
 PROFIT MOTIVE: The prime motive behind FDI is profit. Profit can be in form
of royalty (in case of intellectual property) or in form of dividend payout.
 INVESTMENT IN HOME COUNTRY: FDI is a capital investment made by a
foreign company in ‘home country’.
 UTILIZED IN OPEN MARKET :FDIs are actively utilized in open markets rather
than closed markets for investors.
 TRANSFER OF PROPRTY: On decease of firm, the invested foreign capital
and assets in the holding company can be repatriated to source country or
country of origin.
Point out the Key features of Foreign Direct investments (FDI)

4.  CONTROL OF MANAGEEMT: FDI investors control management and investments in
different ways such as management contracts and memorandums, turnkey arrangements,
product pricing, franchising & contracting, licensing, patents, trade marks and controlling
other intellectual property, product sharing and subcontracting.
 DIFFERENT WAYS OF INVESTMENT : Foreign investors can enter home country by making
investments in different ways, such as opening branches, setting up subsidiary (wholly owned or joint
venture), foreign controlled company or acquire stake in exiting businesses.
Point out the Key features of Foreign Direct investments (FDI)

5. TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT
Although there are no strictly defined classes of FDI, the below-mentioned are
the popular ones based on different parameters for theoretical purposes. I shall
explain them in some detail with practical examples in the Indian economic
context:
A. FDI based on requirement of approval
Automatic Route:- FDI in sectors where approval from Foreign Investment
Promotion Board (FIBP) is not required comes under the automatic route. Barring any
special conditions to be fulfilled, RBI gives automatic approval within two weeks. Most
sectors (especially the ones which have 100% investment is permitted) come under
this route. These are high growth sectors like manufacturing, petroleum
biotechnology, etc.
Eg:- Cairn India(Cain Energy + Vedanta PLC)
Approval of Government Route:-FDI in sectors which don’t come under
automatic route (or automatic route is allowed only up to a limit above which approval
is required) comes under this category. The approval is processed by FIBP and other
sectoral regulators and normally takes around four to six weeks. Sectoral regulators
include Telecom Regulatory Authority of India (TRAI) for the telecom sector,
Insurance Regulatory Authority(IRDA) for insurance sector et al.
Eg:- Bajaj Allianz(Bajaj Finserv Limited + Allianz SE)
FIBP:- Foreign Investment Promotion Board Continue……..

6. TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT
B. FDI Based on Entry Structures
Incorporation of a company: FDI in companies (private and public) is most popular.
Other corporate structures have to undergo a lot of scrutiny before being incorporated. The
foreign investor can register as the following types of company under the 2013 Companies Act:
 Wholly Owned Subsidiary (WOS): A 100% ownership company by the foreign entity in India.
Eg:- Facebook India Online Services Pvt Ltd
Subsidiary: A majority stake owned by the foreign investor.
Eg:-Hindustan Unilever Ltd.
Joint Venture (JV): Collaboration with an Indian corporate entity in the minimum ratio 51:49
with the Indian entity having the majority share. The JV should be preferably a company although
LLP/partnership is possible.
Eg:- Arvind OG Pvt. Ltd.(Arvind Ltd. + OG Corporation)
Associate company: A minority stake owned by the foreign investor. Thus, a JV incorporated as
a company will be an associate company.
Eg:- Arvind OG Pvt. Ltd.(Arvind Ltd. + OG Corporation(Japan);74:26)
Continue……………..

7.  Incorporation as an LLP:
Although LLP has less compliance requirement than companies, FDI in LLP has
more regulations for FDI than a company. 100% FDI is permitted in LLP.
 Extension of the foreign entity:
 Liaison office:- It acts as a connecting link between the foreign corporate
office and the domestic body corporate. It’s not allowed to generate income.
It can only gather data and help disseminate technical knowledge.
 Branch office:- It is suited for foreign entities involved in
manufacturing/trading. It is ideally involved in research, consultancy, aiding
in technical help et al.
 Project office:- It is like branch office except much more specific in function
and time bound. It is set up to execute certain projects and after execution
of the objective is usually wound up.
 Trust: Only venture capital funds registered with SEBI are permitted for FDI
as trusts. They usually require approval and have a lot of regulations. They
are also subject to provisions of ‘Foreign Contribution Regulation Act.’
TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT

8. TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT
C. FDI Based on Investors Target
 Greenfield Investment:-Here, FDI is made in new/nascent/upcoming facilities. They
are the main area of interest for the host nation as it boosts expansion, economy, jobs and
technological advances. A common criticism is the positive effects happen at the peril of local
small industries losing market share as they have to compete against cheap products in bulk due
to technology.
Eg:- Walmart opening retail stores in India.
 Merger and Acquisition:-
This is the most common type of FDI where the domestic company merges with the foreign body
corporate to become a new corporate entity, usually a company. This across-the-border merger does
not have long duration benefits of helping the domestic economy because the payment for owners of
a domestic entity is made in stocks rather than cash.
Eg:-Vodafone-Hutchison-Essar

9.  Horizontal FDI:
FDI in the same horizontal or business as the one in which the foreign investor operates back in its
own country
 Vertical FDI:-
FDI in the vertical segment of the business as the one in which foreign investor operates back in its own country.
This is of two types based on the position of the domestic production of foreign entity in the vertical:
• Forward vertical FDI:- FDI into a body corporate which distributes foreign entity’s business product
back in its home country.
• Backwards vertical FDI:- FDI into a body corporate which provides the raw material for foreign entity’s
business back in its home.
 Conglomerate: a business acquires an unrelated business in a foreign country. This is uncommon, as
it requires overcoming two barriers to entry: entering a foreign country and entering a new industry or
market. An example of this would be if Virgin Group, which is based in the United Kingdom, acquired a
clothing line in France.
 Platform: a business expands into a foreign country but the output from the foreign operations is
exported to a third country. This is also referred to as export-platform FDI. Platform FDI commonly happens
in low-cost locations inside free-trade areas. For example, if Ford purchased manufacturing plants in Ireland
with the primary purpose of exporting cars to other countries in the EU.
TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT

10. TYPES AND EXAMPLES OF FOREIGN DIRECT INVESTMENT
D. Based on investors motive
 Resource seeking FDI:- Such an FDI is made where primary concerns are
abundance/availability of a particular mineral and natural resources (oil, coal, etc.) or cheap labour.
Such efficiencies of resource and scale in production is not found in the home country of a foreign
entity which makes them seek business opportunities in countries having them in abundance
(usually Middle East, Africa, South East Asia). The business here is generally involved in export of
its products. Eg:- IT companies are investing in companies in India for its cheap wages/income.
 Market-seeking FDI:- As the name suggests this FDI seeks entities in countries which
have a sizeable target market for its products. It’s usually supplying companies which indulge in
such investment to cater to overseas market(existing and/or upcoming). It’s generally seen that
such FDI is usually done out of fear of losing markets than exploring new ones. Eg:- Amazon India
 Efficiency-seeking FDI:- As the name suggests such an FDI seeks entities in countries
which can help increase/integrate its already existing business back home and thus, taken over a
common geographic area, help achieves increase efficiency and economy on a wider scale than
before. Eg:- Samsung, manufacturing individual components in China/Taiwan and setting shop in
India to easily import the components, assemble them and sell the smartphones as value added
digital products.