Foreign Direct Investment (FDI)

Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC).

Foreign direct investment (FDI) has become a key battleground for emerging markets and some developed countries.

Type of Foreign Direct Investors
A foreign direct investor may be classified in any sector of the economy and could be any one of the following
• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other societal organization; or
• any combination of the above.
FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments.

Outward-Bound FDI

An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.

Inward-Bound FDI

Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Other categorizations of FDI

Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations.

Methods of Foreign Direct Investments
The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:
• by incorporating a wholly owned subsidiary or company
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives
• low corporate tax and income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies
• job training & employment subsidies
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)


FDI Policies

The foreign direct investment policies are the various rules and regulations that have been laid down by the various countries in order to regulate the overseas investment that is being made in a country.

The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types.

Government-level policies are needed to enable FDI inflows and maximize their returns for both investors and recipient countries. Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world.
Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology.

When policies are effective, significant FDI investments are injected into countries that help the domestic economy to grow. Different countries and regions offer various kinds of fiscal incentives, with a related variance in the level of FDI investments attracted.


Industrial Sectors that doesn’t permit FDI
1. Arms and ammunition.
2. Atomic Energy.
3. Railway Transport.
4. Coal and lignite.
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Conclusion
FDIs are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called 'market-seeking FDIs.' 'Resource-seeking FDIs' are aimed at factors of production which have more operational efficiency than those available in the home country of the investor. FDI activities may be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as 'efficiency-seeking.' The formation of human capital is vital for the continued growth of FDI inflows. To enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are necessary. Governments must therefore enact policies to provide training and skills upgrading to develop their workforce and meet the employment needs of foreign investors.

Keywords:

Multinational corporation, subsidiary, merger, acquisition, joint venture ,corporate tax, income tax , tax holidays ,economic zones, soft loan,