Foreign Direct Investment, or FDI, is one of the most important conduits for direct investment between countries.
Unlike Foreign Portfolio Investments (FPIs), an investor in one nation might own a majority share in any business or organization in the foreign country that accepts the investment. FDI is also an important and useful indication of a country’s political and socioeconomic stability.
This essentially means that a country that receives significant investments from foreign businesses on a regular basis is more likely to have a dynamic and healthy economy.
How Does FDI Work?
Foreign investments can be ‘organic’ or ‘inorganic’. A foreign investor will make organic investments to expand and accelerate the growth of existing firms.
Inorganic investments occur when an investing entity buys out a business in its target country.
In developing and emerging economies such as India and other regions of South-East Asia, FDIs provide a much-needed boost to enterprises that are struggling financially.
The Indian government has taken many steps to ensure that larger investments flow into the country in industries like as defense manufacture, telecommunications, PSU oil refineries, and information technology.
Foreign Direct Investment, as a non-debt financial resource, has the potential to be a key engine of economic development in India.
Globalization and internationalization are two reasons that facilitated FDI. However, the famed Canadian economist Stephen Hymer, called the ‘Father of International Business’, argued in the 1960s that foreign investments would continue to rise fast because—
- It granted control over international corporations.
- It enabled certain business sectors defeat monopolistic tactics.
- Most significantly, because market inefficiencies will always exist, such investments offer organizations with a buffer against a sharp and unforeseen decrease in commercial activity.
