• Alok Tyagi

QUESTION

Discuss the significance of foreign direct investment for a developing country like India? Why India has failed to attract more FDI despite being a democratic country?

WHAT IS FOREIGN DIRECT INVESTMENT?

MEANING:

These three letters stand for direct investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to escaping this action from investment in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporation’s home country. The investing corporation must control 10 percent or more of the voting power of the new venture.

According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago.

The practise has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to introducing FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country.

The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment.

Foreign Direct Investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply. Foreign direct investment (FDI) refers to long-term participation by country A into country B.

It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow(positive or negative). Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one country (‘direct investor’) in an entity resident in an economy other than that of the investor (‘direct investment enterprise’).

• Foreign Direct Investment – when a firm invests directly in production or other facilities, over which it has effective control, in a foreign country.
• Manufacturing FDI requires the establishment of production facilities.
• Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities.
• Foreign subsidiaries – overseas units or entities
• Host country – the country in which a foreign subsidiary operates.
• Flow of FDI – the amount of FDI undertaken over a given time.
• Stock of FDI – total accumulated value of foreign-owned assets
• Differs from FDI, which is the investment in physical assets.