The FDI or Foreign Direct Investment is a kind of investment made by a firm or an individual in one country into business interests of another country. Usually, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. This could be to start a new business.
CONCEPT
FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. Foreign Direct Investments are actively utilized in open markets rather than closed markets for investors. The origin of foreign direct investment does not impact the definition as and FDI; the investment may be made either 'inorganically' by a company in the target country or 'organically' by expanding the operations of an existing business in that country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.
FDI usually involves participation in management joint venture transfer technology and expertise. FDI is the sum of equity capital, long term capital and short term capital as shown in the Balance of payments who is the Bradley foreign direct investment includes mergers and acquisitions building new facilities reinvesting profits earned from overseas operation and intercompany loans. In a narrow sense foreign direct investment refers just to build new facility and a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor. The stock of FDI is the net cumulative FDI. If it is a subset of international factor movements and characterized by controlling ownership of a business enterprise in one country by an entity based in another country foreign direct investment is distinguished from foreign portfolio investment a passive investment in the securities of another country such as public stocks and bonds by the element of control.
TYPES OF FDI
There are different types of FDI which are horizontal platform and vertical. Horizontal FDI arises when a form duplicates is home country based activities at the same value chain stage in a host country through FDI. This is the most common type of FDI which primary ne revolves around investing funds in a foreign company belonging to the same industry as that owned or operated by the FDI investor. In this type aap a company invest in another company located in a different country wedding both the companies are producing similar goods. For example, the Spain-based company Zara may invest in for purchase the Indian Company FabIndia which also produces similar products as Zara does. Since both of the companies belong to the same industry of merchandise and apparel, the FDI is classified as horizontal FDI. Vertical FDI is another type of foreign investment. Vertical FDI takes place when a Farm through FDI moves upstream or downstream in different value a chain that is wind farms perform value adding activities stage by stage in vertical fashion in a host country. Vertical FDI occurs when an investment is made within a typical supply chain in a company, which may or may not necessarily belong to the same industry. As such when vertical FDI happens, a business invests in an overseas firm which may supply or sell products. Vertical FDI are further categorized as Mac word vertical integrations and forward vertical integration. For instance the Swiss coffee producer Nescafe may invest in coffee plantations in countries such as Brazil, Columbia, Vietnam etc. Since, the investing firm purchases, a supplier in the supply chain, this type of FDI is known as backward vertical integration. Inversely, forward vertical integration is said to occur when a company invests in another foreign company which is ranked higher in the supply chain, for instance, a coffee company in India may wished to invest in a French grocery brand. The third type of foreign direct investment is known as Conglomerate FDI. When investments are made in two completely different companies of different industries the transaction is known as conglomerate FDI. As such the FDI is not linked directly to the investor's business. For instance the US retailer Walmart may invest in Tata Motors the Indian automobile manufacturers. The last types of foreign direct investment is platform FDI in the case of platform FDI a business expands into a foreign country but the products manufactured are exported to another third country or instance the French perfume brand channel set up a manufacturing plant in the USA and export products to other countries in America Asia and other parts of Europe. If one is intend to invest by FDI he or she must know about the difference between the various types of FDI with examples with FDI the money invested can be used to start a new business in a foreign country or to invest in an already existing business in a foreign country.
ADVANTAGES AND DISADVANTAGES
In case of foreign direct investment, there are different advantages and disadvantages from various perspectives. FDI can be an effective way for a person to enter into a foreign market. Some countries may extremely limit foreign company access to their domestic markets. Acquiring or starting a business in the market means that one has gain the access. FDI is also an effective way for a person to acquire important natural resources such as precious metals and fossil fuels who is top Oil Companies for example of in make tremendous FDI is to develop oil fields. FDI is a something that can reduce the cost of production if the labor market is cheaper and regulations are less restrictive in the target foreign market. For example it's a well known fact that the show and clothing Industries have been able to drastically reduce their cost of production by moving operation two developing countries. FDI also offers some advantages for a foreign country. For starters, FDI offers a source of external capital and increased revenue. It can be a tremendous source of external capital for a developing country which can lead to economic development. For example if a large factory is constructed in a small developing country the country will typically have to utilize at least some local labor equipment and materials to construct. This will result in new jobs and foreign money being pumped into the economy. Once the factory is constructed the factory will have to hire local employees and will probably utilize at least some local materials and services. This will create for the jobs and maybe even some new businesses. These new jobs mean that locals have more money to spend, thereby creating even more jobs. Additional tax revenue is generated from the products and activities of the factory taxes imposed on factory employee income and purchases and Taxes on the income and purchase is now possible because of the added economic activity created by the factory. Lastly learning is an indirect advantage for foreign countries. FDI exposes national and local governments, local businesses; citizens to new business practices, management techniques, economic concepts and technology that will help them develop local business and industries.
Despite many advantages, the foreign direct investment has some disadvantages in other hand. The entry of large joints may lead to the displacement of local businesses in the foreign direct investment methods. This can be critical disadvantage for a company. The repatriation of profits, if the farms do not reinvest profits back into the host country is one of the prior disadvantages of foreign direct investment. This will lead to large capital outflows from the host country.
A foreign direct investor can acquire voting power of an enterprise in an economy through any kind of method. He or she can incorporate a wholly owned subsidiary company anywhere for foreign direct investment. The investor can acquire shares in an associated Enterprise. The investor can do FDI through a merger or an acquisition of an unrelated enterprise. The foreign direct investment can also be developed by participating in an equity joint venture with another investors or Enterprises.
- SHRUTI NAG
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