Information on Foreign Investment

Firstly, FDI or Foreign direct investment. Foreign direct investment refers to making a physical investment for building a factor in a foreign country. This definition can be changed a little bit to include even investments outside of the investor’s economy.

The relation ship between the company at home and the one in a foreign land is just like one between a parent chain and a franchise. Both of these together form, maybe one of the most successful business strategies, Multi-national companies or MNC’s. For being categorized into FDI it is necessary for the parent company to have control over the foreign venture.

In the age of economic globalization, FDI has become a strong trend. FDI includes productive assets, like property, mines, factories etc. FDI inflows and outflows strongly determine the Gross Domestic product (GDP). Although the largest amount of inflows and outflows occurs between developed nations, nations like India and China are fast picking up.

To be known as a multi – national company, the parent company needs to have, at the least 10% stake in the foreign entity. If the parent co. has the voting power in the foreign entity, then also, it can be called foreign direct investment.

There can be two kinds of FDI;

• Outward FD
• Inward FDI

These are differentiated on the basis of the kinds of restrictions that are imposed, and the requirements for these kinds of investments.

The government of a country mostly backs an outward foreign direct investment against risks present for such a venture. The govt. grants subsidies to local firms trying to set shop outside, also known as ‘direct investment abroad’.

On the other hand, things are different for inward foreign direct investment; they get privileges such as grants, subsidies, low interest rate, tax breaks and relaxation in rules and regulations. . Still, there are factors which restrict growth of MNC’s.These include different patterns of ownership and factors relating to differential performance.

Other types of foreign direct investment are:

• Vertical Foreign direct investment.
• Horizontal Foreign direct investment.

A vertical FDI is that in which the foreign entity uses output produced by the parent company or gives out input to the parent company. In such a case, the parent company owns some shares of the foreign entity also.

A horizontal FDI is that in which this process takes place in many countries.

FDI is directed by many factors, including different goals. Foreign direct investment is a boon for the market as it considerably strengthens the structure of the market. FDI explore new avenues available for the market. Resource seeking FDI’s are guided to find better operational efficiency than the domestic territory of the parent company.

Anyway you see it FDI’s are a boon that should be carefully and fully utilized.