Write a brief note on foreign direct investment also explain sources of FDI
20/June/2025 01:38
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Here is a brief but informative note on Foreign Direct Investment (FDI) along with its sources:
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Foreign Direct Investment (FDI) – Brief Note
Definition:
Foreign Direct Investment (FDI) refers to investment made by a company or individual from one country into business interests or assets located in another country, with the intention of establishing a lasting interest and significant control (usually 10% or more equity) in the foreign enterprise.
Unlike Foreign Portfolio Investment (FPI), which is passive investment in securities, FDI involves active participation in management, production, and operations.
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Characteristics of FDI:
1. Long-Term Investment:
Aimed at creating a lasting interest in the host country’s economy.
2. Management Control:
FDI usually gives the foreign investor ownership and influence over business decisions.
3. Cross-Border Flow of Capital and Technology:
Includes money, skills, technology, and managerial know-how.
4. Types of Entry:
Establishing a new subsidiary or office (Greenfield investment)
Acquiring or merging with an existing company (Brownfield investment)
Entering into joint ventures or partnerships
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Sources of FDI
FDI can enter a country through various channels and from different sources:
1. Foreign Companies:
Multinational corporations (MNCs) investing directly in infrastructure, manufacturing, or services.
Example: Amazon, Apple, Hyundai, Nestlé, etc.
2. Non-Resident Individuals:
High-net-worth individuals (NRIs, OCIs, PIOs) investing in Indian businesses or startups.
3. Foreign Governments and Sovereign Wealth Funds:
State-owned investment funds investing in infrastructure, bonds, or public-private partnerships.
4. Institutional Investors:
Investment from foreign pension funds, insurance companies, or private equity.
5. International Organizations:
Financial support from entities like the World Bank, IMF, ADB (Asian Development Bank) in the form of equity or loan-based investments.
6. FDI Routes in India (As per policy):
Automatic Route: No prior government approval required (allowed in most sectors like manufacturing, telecom, etc.).
Government Route: Requires approval from the relevant ministry (e.g., defence, media, etc.).
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Conclusion:
FDI plays a crucial role in a country’s economic development, bringing in capital, advanced technology, employment, and global market access. Countries like India have progressively liberalized their FDI policies to attract diverse sources of foreign investment, helping boost GDP growth and infrastructure development.
