Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment.
According to the Ministry of Commerce & Industry, "FDI is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB)."
Reasons for FDI inflows
- Resource-seeking investors; are mainly attracted by the availability of cheap raw materials.
- Efficiency-seeking investors; main concern is the cost of labor or environmental resources and assets, adjusted for productivity, or other input costs such as transport and communications.
- Market-seeking investors; are market size and per capita income, market growth potential, including access to regional and global markets, country-specific consumer preferences and the structure of the markets.
One of the
advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for developing economies.
Reasons why India can’t benefit form FDI
- Corruption
- Exchange rate
- Inflation
- Political Instability
- Infrastructure to taxes & regulations
- Functioning of the organized crime
- High taxes
- Fire regulations
- Environmental regulations
- Labour regulations
- Customs regulations
- Business regulations
FDI has a
beneficial impact on developing host countries. But recent work also points to some
potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country's total capital inflows may reflect its institutions' weakness rather than their strength.