Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Horizon FDI

Platform FDI

Vertical FDI

Horizon FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.

Foreign direct investment from a source country into a host country for the purpose of exporting to a third country.

Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country

Increase investment level and thereby income & employmentIncrease tax revenue of governmentFacilitates transfer of technologyEncourage managerial revolution through professional managementIncrease exports and reduce import requirementsIncrease competition and break domestic monopoliesImproves quality and reduces cost of inputsBetter employment opportunitiesBetter per capita income.

Advantages of FDI

Flow to high profit areas rather than main concern areasThrough their power and flexibility, MNC can undermine economic autonomy and controlSometimes interferes in the national politicsSometimes engage in unfair and unethical trade practicesSometimes result in minimizing / eliminating competition and create monopolies or oligopolistic structuresIt affects small vendors.(Recent walmart issue)(Domestic market suffers)Risk(because you don't understand the underlying intentions of the country or firm making the investment)

Limitations of FDI

Profitability: Attract where return on investment is higher

Costs of production: Encouraged by lower costs of production like raw materials, labour .

Economic Conditions: Market potential, infrastructure, size of population, income level etc

Government policies: Policies like foreign investment, foreign collaboration, remittances, profits, taxation, foreign exchange control, tariffs etc.

Political factors: Political stability, nature of important political parties and relations with other countries.

Factors affecting FDI

FDI in India

Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political issue.

Starting from a baseline of less than $1 billion in 1990, a

recent UNCTAD(United Nations Conference on Trade and Development) survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012.

On 14 September 2012,Government of India allowed FDI in:Aviation up to 49%,Broadcast sector up to 74%,Multi brand retail up to 51%, Single-brand retail up to 100%.The choice of allowing FDI in multi-brand retail up to 51% has been left to each state.

FDI 2012 reforms

FDI voting in Lok sabha

2012

FDI voting in Rajya

sabha 2012

White House data reported in June 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce.

FDI in USA

FDI in China

FDI in China has increased considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment and topping the United States which had $57.4 billion of FDI.

FDI – developed vs developing

countries