Full Form of FDI :
Foreign Direct Investment
FDI Full Form is Foreign Direct Investment. This term refers to the investment that is made by a company in one country into a company that is based in another country. There a huge difference between FDI and indirect investments like portfolio flows. Here, the institutions overseas, invest in NSE equities. However, companies or entities those make direct investments, have significant influence over the company in which they invest.
It is common for open economies equipped with high growth prospects and skilled workforce to attract huge FDI that highly regulated and closed economies. The investing entity may set up an associate company or subsidiary in the foreign land. This is done by acquiring shares through a joint venture.
FDI Full Form – Additional Information
Foreign Direct Investment, which will hereinafter be referred to as FDI throughout the article, refers to the controlling ownership by an entity situated outside the nation concerned. Investment for the purposes of FDI can be made either organically, which is done by means of expansion of operations of a present business in that nation, or inorganically, which happens by means of purchase of an enterprise operating in the target nation.
FDI is every essential for economies of the world, particularly in underdeveloped and developing economies. There have been many reports that indicate dramatic improvements in the developing countries and thus, FDI is integral in the economic system of the country. There are many facets in the concept of FDI, which need to be deliberated upon. So, here are five things everyone must know about FDI:
Definition of FDI
In a broad context, FDI is inclusive of acquisitions or mergers, reinvestment of profits generated from foreign operations, intra-company loans, new facilities development, etc. In a narrow context, FDI is basically the development of the new facility and management interest in a business enterprise that is operational in an economy, which is other than the investor enterprise. FDI is understood as the sum total of equity capital, short-term capital and long-term capital that is shown in the form of balance of payments.
It generally engages participation in the joint venture, management, expertise, and transfer of technology. Direct investment does not involve Investment through Purchase of Shares. FDI is a concept that is a part of the International factor movements. The concept of FDI is different from that of Portfolio Foreign Investment (abbreviated as PFI), which is basically a passive investment done in the securities of a nation for example public stocks, bonds and is inclusive of control.
Neoclassical Economics explain the concept of Multinational Corporation and FDI on the basis of principles of macroeconomics. These theories rely on the principle that there exists a difference between the costs of production of two nations and because of the differences the foreign entity aims to reduce the cost of production. However, it was only when Stephen Hymer came up with his explanation on FDI that the concept was given clearer contours. He explained the reasons behind FDI and criticized older theories on the same for being insufficient.
Stephen Hymer attempted to fill gaps relating to international investment. Hymer states that there exists a difference between capital investment, which is also known as portfolio investment, as well as direct investment. He states that neoclassical theories fail to explain international production. Hymer has made an immense contribution in the areas relating to FDI and International Business. He came up with explanations relating to behind the rise of Multinational Enterprises (abbreviated as MNE).
There are few methods by which an investor enterprise can obtain voting power in the target enterprise, which are as follows:
- By incorporation of the wholly owned company or subsidiary.
- By acquisition of shares in an enterprise associated with it.
- By means of acquisition or merger of an enterprise unrelated to it.
- By participation in equity joint venture.
Incentives related to FDI
There are different forms of FDI incentives, which have been mentioned below:
- Tax holidays
- Special Economic ones
- Bonded warehouses
- Research & Development support
- Export Processing Zones (abbreviated as EPZ)
- Preferential tariffs
- Deviation from regulations
- Investment Financial Subsidies
- Exclusion of internal investment for obtaining a profited downstream.
There has been the implementation of several marketing strategies by the Government Investment Promotion Agencies (abbreviated as IPAs) for the purposes of attracting a greater inflow of FDI, which includes Diaspora marketing.
Barriers and importance of FDI
The developing countries have opened up to the idea of FDI. There has been marked the growth in the developing economies during the 1990s, with improvements in Gross Domestic product (abbreviated as GDP), etc. Host countries aim at attracting FDI for the development of new infrastructures and other related projects to help grow the economy.
If there are many prospective investors then there are greater productivity gains, which ultimately increase the efficiency of the economy. In many instances of FDI, the investor enterprise is only making a transfer of production capacity and machinery, which nevertheless appeals the host country because it does not have the advanced technological know-how. In the year 2010, a meta-analysis was conducted on the effects of FDI was done and it was found that inflow of FDI has dramatically improved the local productivity of the economies.
FDI policies of developed nations have been ranked development-friendliness by the Commitment to Development Index. In China, FDI is known as Renminbi Foreign Direct Investment. Currently, China receives largest FDI and outranks the United States of America. In the year 2010, the investments fell, however, in the following year it picked up pace. India opened itself to foreign investment in the year 1991. Under the Foreign Exchange Management Act (abbreviated as FEMA) gave an official introduction to FDI in the country. Ever since then, India has seen an impressive amount of foreign investments.
In the United States of America, there has always been an open economy system, which has placed very low barriers to foreign investments. It is one of the biggest recipients of FDI in the world. A similar framework exists in the United Kingdom, which has an open market system. Just like the United States of America, the United Kingdom has placed minimum restrictions upon FDI policies. Statistics Canada tracks FDI by every nation and by every enterprise and all the information related to FDI inflows and outflows are calculated by it.
Russia was initially not open to the idea of FDI however in the year 1991, Russia made steps towards FDI inflows. By the year 1997, Russia started enacting policies and laws for attracting particular enterprises to invest in the Russian economy. In Russia, there are three ways for foreign investment, namely: Direct investment, Portfolio investment and other investments in the form of international assistance etc.
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