From Local to Global: The Impact of Foreign Direct Investment

Foreign Direct Investments is one of the revolutionary concepts transforming the world landscape. United Nations, Canada, and Australia are the primary countries leveraging FDI for ages. 

Recently, there was a growing interest among European countries. However, they reduced the monopoly to influence the decisions owing to national security concerns. Many countries previously lacked a proper FDI regime and prospectus. 

COVID-19 proved as a breakthrough for FDI. With the world crippled with inflation blues and the Indian currency breathing last, Foreign Direct Investment emerged as a driving force.

Investors became active internationally and began investing in some of the most potential sectors. However, these countries face hardships in securing clearance to invest. 

India is increasingly encouraging foreign countries to contribute to development. 

According to the Economic Times report in July 2022, “India approved 80 FDI proposals. One of these countries is China.” India received 382 proposals after imposing restrictions on investment from countries where it shares a border. 

The government’s cautious stands reveal the reason behind slow approvals. India is currently focusing on approving proposals demanding minimal dominance. FDI in India is attracting worldwide attention in the e-commerce and manufacturing industries.

What do Foreign Direct Investments imply?  

Foreign Direct Investment is a business agreement between two countries. In this, one of the countries reveals interest in investing in the other country’s economy for development and advancement, and it proves beneficial for the country that welcomes investors worldwide. 

The Foreign Exchange Management Act of 1999 (FEMA) was the inspiration behind the move. RBI issues regulations in detail in this regard. 

Countries invest in expanding their business operations. In precise, an investment into a foreign land or company is FDI. If a country gains 10% of the voting power, it gains the interest of the country. 

According to the Indica News Bureau, “Silicon Valley Bank, California concluded India as the 5th in FDI inflows.” 

SVB praised India’s “Make in India” approach, and it held India in the top spot in ease of doing business criteria. 

Moreover, it also states, “India is the 6th largest economy all over the world with a CAGR (Compound Annual Growth Rate) of 5.4%.” 

The figures show that India is generating interest across the globe for diverse investment opportunities and potential for growth. 

Popular foreign direct investment types in India

FDI differs from direct investments in foreign countries in front of direct control. It is not just about transferring monetary funds but building lasting interest too. Here are 3 popular types of Foreign Direct Investments in India:  

1. Horizontal Investment  

In this, a country establishes its business in a foreign country without changing the core business policies. For example, McDonald’s operates in Asian countries to expand stores in a region. 

2. Vertical Investment  

In vertical investment, a country invests in another country from a resources point of view and in something complementary to the business. 

For example, “a U.S. manufacturer may invest in India for a particular raw material required for manufacturing.”  

3. Conglomerate investment  

Here, a country invests in a foreign business that does not share any link with its core business operations.  It eventually is a sort of joint venture.  
 
For example, “If a Chinese firm invests in the Indian Culture industry. In this, it hardly shares much knowledge regarding people’s preferences and economic interests.” 

India repeatedly emerges as a preferred investment destination for countries in 2022. It has risen by 23% post-COVID, according to a press release updated by the Indian government. 

Which sector attracted the maximum FDI in India in 2022?  

The manufacturing sector in India fetched the maximum FDI in 2022. It increased by 76% in FY22 to $21.34 billion. The numbers stand in clear contrast with $12.09 billion in a year. Economic Times concludes the fact.

What are some prohibited FDI sectors in India?  

While India welcomes foreign countries to invest in a diverse industrial portfolio of the economy, at the same time, it prohibits investing in specific industries: 

• Agriculture and Plantation Activities 

• Atomic Energy Generation  

• Chit fund investments 

• TDR trading 

• Housing and real estate 

• Lotteries 

• Gambling activities

Are foreign direct investments beneficial for a country’s economic growth?  

A coin has two sides. Likewise, Foreign direct investment brings benefits and drawbacks in the same way. 

Advantages of Foreign Direct Investments in India 

Here are some primary benefits of Foreign Direct Investments: 

• It proves beneficial for the economy in terms of reduced tariffs, excise duty, and tax breaks.  
• It creates a conducive atmosphere for both investors and countries invested in 
• It creates new job opportunities for people. It increases income and buying capacity. 
• The development of human capital resources increases competence and knowledge among the workforce. 
• The benefit of resource transfer.

Disadvantages of Foreign Direct Investments in India

• Hinders the growth pattern of a country’s economy 
• Political changes directly impact the growth prospects in the country it is investing in. 
• Too much intrusion in a country’s operations impacts foreign exchange policies  
• Increased expense than investing in domestic goods 
• Colonialism Threat for the Country Seeking FDI  

Conclusion:  

FDI may prove beneficial for the hosting countries. India made specific sectors 100% open to foreign investments, which can also help contribute significantly to the “MAKE IN INDIA” venture. 

Specifically, the Indian economy holds great potential for foreign direct investment. 

The country attracting foreign investors must channel a strict policy to limit intrusion and colonialism threats.