“To know is to know that you know nothing. That is the meaning of true knowledge”. This saying by Socrates holds even true today. This series called “Aarthik Saksharta” is aimed to provide basic financial knowledge and impact you no matter how little but in a meaningful way. If this is able to invoke even a little spark of financial curiosity in you my job here is done.
Finance minister Nirmala Sitharaman announced in the Budget yesterday that the government will look at relaxing FDI norms for sectors like Aviation, Media and Single-brand retail.
But what exactly is FDI?
Foreign capital may flow into an economy in diﬀerent ways, such as foreign aid, grants, borrowings, deposits from non-resident Indians, investments in the form of Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI)
Foreign direct investment is as a process whereby the resident of one country acquires ownership of an asset in another country (i.e. the host country) and such movement of capital involves ownership, control as well as management of the asset in the host country.
Direct investments are real investments in factories, assets, land, inventories etc. and have three components, viz., equity capital reinvested earnings and other direct capital in the form of intra-company loans. FDI may be categorized as horizontal, vertical or conglomerate.
Foreign portfolio investment is the flow of ‘financial capital’ with a stake in a firm at below 10 per cent and does not involve the manufacture of goods or provision of services, ownership management or control of the asset on the part of the investor
Foreign direct investment takes place through
♦ Mergers and acquisitions (M&A)
♦ Opening of a subsidiary or associate company
♦ Equity injection
♦ The joint venture, acquiring a controlling interest
The main reasons for foreign direct investment are
♦ Higher rate of return
♦ Possible economies of a large-scale operation
♦ Risk diversification
♦ Retention of trade patents
♦ The capture of emerging markets
♦ Lower host country environmental and labour standards,
♦ Bypassing of non-tariﬀ and tariﬀ barriers
♦ Cost–eﬀective availability of needed inputs and tax and investment incentives.
Though FDI has its benefits, it has to be controlled as excessive FDI may lead to exchange crisis, cultural erosion, inflation and trade deficits.