The full form of FDI is Foreign Direct Investment.
FDI is a process of direct investing by a firm/individual/company/organization of a country into a physical asset of a firm/company/organization of another country.
Suppose anybody wants to start or grow their own business, but due to shortage of capital, he can’t do it unless and until borrow from someone else or takes a loan from a bank.
Similarly, the host company gets capital from foreign investors to run or grow their business appropriately, while the investor acquires the ownership and profit share of the company.
For example, Pharmaceuticals, E-commerce, Electronic, Information technology are the major sectors where investors invest in a domestic company.
Purpose of FDI
- Foreign investors invest in various sectors like the automobile sector, agriculture sector, mining sector, etc., which creates job opportunities and small businesses for domestic citizens.
- The more investment comes to the domestic country, the more tax revenue it generates.
- To build good relationships by doing partnerships with the organization between foreign and domestic countries.
Different Limitations on FDI
Limitation of FDI in India varies from sector to sector –
|2.||Insurance, Infrastructure Company in the Securities Market, Broadcasting Content Services||49%|
|3.||Multi Brand Retail Trading||51%|
|4.||Private Securities Agencies||74%|
|5.||Agriculture and Animal Husbandry, Plantation, Mining, Petroleum, and Natural Gas||100%|
|6.||Chit Fund, Gambling, and Lottery business.||It is completely banned.|
Types of FDI
Green-Field Investment: When a foreign country invest in the physical assets (industry, plant, etc.) of the domestic country, such investment comes under green-field investment.
Foreign Portfolio Investment: When a foreign country invests in a liquid asset like the stock market of the domestic country, such investment comes under foreign portfolio investment.
Advantages and Disadvantages of FDI
- Creates an opportunity for employment by setting up different types of industries or plants.
- Parent company brings new technology along with investment that helps in making the domestic country more advanced.
- The domestic company improves itself a lot to face competition from foreign investors.
- Local shops and businesses(MSMEs) get affected in front of large-scale industries.
- Low tax rates are designed to attract MNCs and result in a tax loss for the government.