Foreign Direct Investment (FDI) is the investment made by a foreign company or an individual in another country to acquire business assets with the intent of a lasting relationship. In India, a foreign investment is categorized as a foreign direct investment if it is meant to acquire at least a 10% stake in a company.
Foreign direct investment can be made in Greenfield projects, where a foreign investor sets up new business facilities, by way of partnerships or joint ventures with local partners, or through cross-border mergers and acquisitions. However, foreign investment in Indian company is subject to certain norms, the most important of which is the cap on maximum permissible investment. This cap ranges from 26% to 100% across different industries and sectors.
Countries need foreign investment to accelerate their growth, especially the developing nations. Governments provide various incentives to foreign companies to attract FDI. India has seen healthy growth in FDI over the last decade, barring 2018. India has embarked upon its goal of becoming a $5 trillion economy in the next five years, and to achieve that it is trying to attract increased FDI by offering various incentives and benefits to foreign investors. In this article here, we will discuss some benefits of foreign direct investment in India.
Capital Flow Improvement
FDI improves capital flow into the country. Developing countries do not have the funds to invest in developmental activities to fuel growth. There is always a shortage of funds needed to accomplish its growth targets. FDI helps in bridging this gap between capital requirements and the investable funds available locally. Development of the core sectors, such as infrastructure is necessary to achieve the overall economic growth of the country, and foreign direct investment helps in raising capital for deployment in this sector. Countries that do not have easy access to the global capital markets benefit immensely from FDI inflows.
Employment Opportunities and Human Resource Development
The most significant impact of FDI is that it creates more jobs. FDI inflows provide stimulus to both, the manufacturing and the service sectors. With increased economic activity, manpower requirements shoot up creating more jobs for all, skilled, semi-skilled and unskilled workers which ultimately results in reduced unemployment levels among the youth. An increase in employment means more income in the hands of the citizens giving them more buying power leading to increased consumption which further boosts the economy.
With FDI, comes new technologies and expertise that enhances the knowledge and skills of the domestic workforce. Knowledge and skills gained through on the job training and experience results in improved efficiency that ultimately translates into better productivity. Though it is less obvious, human resource development is an important outcome of foreign direct investment.
Exports, Current Account Deficit, and Foreign Exchange
Foreign investment in the Indian company through FDI gives fillip to the production of more goods and services that translate into increased exports. Also, creation of Special Economic Zones and incentivizing investment in export-oriented units has led to more FDI in the country. Foreign direct investments have a very positive impact on exports, and that results in an improved balance of payments situation of the country. More and more goods and services are being exported from India which has significantly reduced the current account deficit.
Also, with more dollar inflows through FDI and increased exports, the exchange rates remain more or less stable. Constant FDI inflow is crucial for maintaining exchange rate stability and foreign exchange reserves. India has a comfortable foreign exchange reserve of more than $450 billion.
Technology and Financial Services
With FDI India gets access to new and latest technologies which are critical for the rapid growth of the economy. In earlier days India lagged behind because poor and outdated technologies were being used, but now the complete environment has changed. Advanced technology means improved efficiency and productivity which results in fast GDP growth.
FDI has a very positive effect on financial services in the country. Insurance, banking, capital markets, etc., have seen an influx of FDI. It has helped strengthen the financial sector by bringing in new technologies and best practices into the system. The digitalization of financial services has brought in more transparency and security in the system.
One of the major advantages of foreign direct investment is that it fosters healthy competition in the market. FDI has facilitated the entry of many multinational corporations into the country. This meant that many new players have come up across industries and sectors. It has led to the shattering of the monopolies of many domestic companies. With the introduction of new technologies and better products, it has given rise to a healthy competition among the existing players and the new entrants. Everybody is investing in research and development to remain competitive in the market, both product-wise and price-wise. This has led to many innovations and new products.
Foreign investment in an Indian company is critical for the growth of the economy as, apart from capital infusion, it brings with it new technologies that is crucial in increasing efficiency and productivity.
Hi, I am Amy Johnes, a legal expert, and blogger at Ahlawat & Associates – Outside general counsel services provider and top legal firms in India.