Foreign Direct Investment (FDI)

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment (FDI) is an investment from an investor in one country into a business or corporation of another country to establish a long-lasting relationship. In other words, the investor, company or government from one country will acquire an ownership stake in a company or project of a foreign country. 
FDI is different from Foreign Portfolio Investment (FPI), where the investor buys only the equity shares of a foreign company. While in FDI, the foreign entity is involved in the day-to-day operations of the company. Therefore, FDI is not just an inflow of money but also the inflow of technology, knowledge, skills and expertise. 

Types of Foreign Direct Investment (FDI)

The following are the different types of FDI – 

• Horizontal FDI: This is the most common type of Foreign Direct Investment where the business expands its domestic operations to a foreign country. Here the business conducts the same activities but in a foreign country. For instance, McDonald’s may start investing in Asian countries to increase the number of stores in the region. 
• Vertical FDI: A business expands into a foreign country to strengthen a part of its supply chain. In other words, the business conducts different activities abroad, but these activities are related to the main business activities. For instance, McDonald’s may purchase a large-scale farm to produce meat for their restaurants in Canada. 
• Conglomerate FDI: A business acquires a different business that is unrelated to a foreign country. This is uncommon because it requires overcoming two barriers to entry – entering a foreign country and entering a new market or industry. The objective is to add more business niches in other countries. For instance, Virgin Group, based in the United Kingdom, may acquire a clothing line in France. 
• Platform FDI: The business expands its operations into a foreign country, but the output from the foreign country is exported to the third country. This is also known as the export platform FDI. This mainly happens in low-cost locations inside free trade areas. For instance, French perfume brand CHANEL sets up a manufacturing plant in the USA but exports its products to other countries like Asia, America or other parts of Europe. 

How Does FDI Work in India?

Foreign Direct Investment occur in India via two routes, namely the automatic route, and the government route – 

• Automatic Route: The Indian company or non-resident does not require prior permission from RBI or the central government to conduct foreign investments in India. 
• Government Route: Here, the FDIs occur through the government route where prior permission and approval are required compulsorily. The FDI investor can get approval by filing and submitting the application form through the Foreign Investment Facilitation Portal. The application is forwarded to the respective ministry or department. It will be approved or rejected based on consultation with the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce. After approval, the DPIIT will issue the Standard Operating Procedure (SOP) for processing applications under the FDI policy. 

Permissible Sectors for FDI in India 

The following are the permissible sectors for Foreign Direct Investment in India

Automatic Route
Sector	(%) Allowed	Sector	(%) Allowed
Agriculture & Animal Husbandry	100%	Medical devices	upto 100%
Air-Transport Services	100%	Thermal Power	upto 100%
Food Processing	100%	Insurance	upto 49%
Healthcare	100%	Infrastructure company in the securities market	upto 49%
Automobiles	100%	Ports and shipping	upto 100%
Biotechnology	100%	Railway infrastructure	upto 100%
Petroleum & Natural gas	100%	Pension	upto 49%
Chemicals	100%	Power exchanges	upto 49%
IT	100%	Petroleum Refining	upto 49%
Financial Services	100%
Tourism & Hospitality	100%
Textiles & Garments	100%
Mining	100%

Government Route
Sectors	(%) Allowed
Banking & Public Sector	20%
Broadcasting Content Services	49%
Core Investment Company	100%
Food Products Retail Trading	100%
Mining & Minerals separations of titanium-bearing minerals and ores	100%
Multi-Brand Retail Trading	51%
Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers)	100%
Print Media (publishing of newspapers, periodicals and Indian editions of foreign magazines dealing in news & current affairs)	26%
Satellite (Establishment and operations)	100%

Prohibited Sectors under Foreign Direct Investment

The following are the sectors that are strictly prohibited under any FDI route – 

• Agricultural or Plantation Activities (excluding animal husbandry, fisheries, tea plantations, horticulture, and pisciculture)
• Housing and Real Estate (excluding townships, commercial projects, etc.)
• Atomic Energy Generation
• Any Gambling or Betting businesses
• Lotteries (online, private, government, etc.)
• Investment in Chit Funds
• Nidhi Company
• Trading in TDR’s
• Cigars, Cigarettes, or any related tobacco industry

Advantages and Disadvantages of FDI in India

Advantages

The following are the advantages for the investor/business in FDI in India – 

• Market diversification
• Tax incentives
• Lower labour costs
• Preferential tariffs
• Subsidies

The following are the advantages for the host country –

• Economic stimulation
• Development of human capital
• Increase in employment
• Access to management expertise, skills and technology

Simply put, the major benefits for businesses are cost-cutting and lowering risk. For host countries, the benefits are majorly economic. 

Disadvantages

The following are the disadvantages of FPI – 

• The local businesses may lose out because the big corporations may take over.
• There is a risk of profit repatriation which means that any profit generated in India will not enter the domestic economy. This may lead to large capital outflows from the host country. 

Recent FDI Investments and Developments

The following are some recent FDI developments in India – 

• As per the new FDI policy, the entity of a country that shares the border with India or the beneficial owner of investment into India is situated in, or a citizen of any such country can invest only through the government route. 
• Any transfer of ownership in an FDI deal that can benefit the country which shares a border with India will also need government approval. 
• Investors from other countries which are not covered by the new policy have to inform RBI after the transaction rather than asking for prior permission from the relevant government department. 
• The earlier FDI policy was limited to allowing countries like Bangladesh and Pakistan through the government route in all sectors. Later, the revised policy brought new companies from China under the government route. 

Future of Foreign Direct Investment in India

In developing countries like India, FDIs play an essential role in pumping businesses. The Government of India has taken several measures to ensure that large chunks of investments pour into our country across different sectors. This ensures a robust and easily accessible FDI regime. 

Also, FDI has the potential to become the major driver for economic development in India because it is an important source of non-debt financial resources. Furthermore, economic growth in the post-pandemic period and India’s larger potential markets shall continue to attract investments into the country.