Economy / Foreign Direct Investment / Definition and components of FDI
Definition and components of FDI
Introduction:
In the context of a growing economy like India, which boasts a large domestic market and significant export potential, the infusion of capital becomes crucial for sustained development. Foreign Direct Investment (FDI) serves as a vital source of external capital, contributing to the realization of economic goals, including the ambitious target of achieving a $5 trillion economy. FDI involves multinational corporations (MNCs) acquiring a stake of 10 per cent or more in a foreign company, providing them with influence over management, operations, and policies.
Key Points:
- Ownership Threshold:
- FDI is defined by the ownership threshold, with 10 per cent or more indicating a significant, lasting interest in the foreign company. This level of ownership allows the investing MNC to play a role in long-term production decisions.
- Control and Influence:
- While a 10 per cent ownership does not confer controlling interest, it grants influence over crucial aspects of the foreign company's functioning.
- Foreign Portfolio Investment (FPI):
- Ownership of less than 10 per cent is categorized as Foreign Portfolio Investment (FPI), involving financial assets such as shares. FPI is more focused on buying and selling financial assets rather than actively participating in the production of goods and services.
- Routes of FDI:
- FDI can take two primary routes:
- Greenfield Investment: Involves establishing a completely new project.
- Brownfield Investment: Involves acquiring an existing company, as seen in examples like Tata Motors' acquisition of Jaguar Land Rover in the UK.
- Inward and Outward FDI:
- Inward FDI occurs when foreign nationals invest in India, contributing to the domestic economy.
- Outward FDI happens when Indian nationals invest abroad, expanding their production capabilities internationally.
