Foreign direct investment (FDI): An individual or a firm is located in a foreign country and decides to make an investment in another country.
Foreign direct investment (FDI) is considered a keystone that impacts the economic development of a country. Moreover, its non-debt financial resource nature influences all key aspects of an economy, like foreign exchange, workforce development, capital inflows, etc.
Now, let’s understand the benefits of foreign direct investment and its influence on different industries.
What Is Foreign Direct Investment or FDI?
In the simplest term, Foreign Direct Investment (FDI) involves cross-border investment where a foreign company takes ownership of a company’s day-to-day activities operational in another country. This type of international investment is one of the pivotal financial sources for the economic development of a nation.
FDI usually involves a foreign investor establishing business operations or taking over any company’s business assets in other countries. It also includes taking part directly in the ownership control or acquiring a portion of the interest of a foreign business.
What Are the Advantages of Foreign Direct Investment (FDI)?
Here are some of the top advantages of FDI from the nation’s perspective:
Developing the Backward Industries
One of the essential advantages of FDI is that it boosts a business or niche that is backward. Investors with future perspectives directly invest in sectors that they estimate will show massive development in the recent future. This is possible after lots of speculation and forecasting.
Elevate Employment Opportunities
Foreign direct investment (FDI) boosts the nation’s employment rate to a great extent. Moreover, with the growing investment opportunity available in the market, various sectors, including both manufacturing and service sectors, are evolving and coming up with new ventures.
The development of these new business sectors will create new employment opportunities, eventually reducing the unemployment rate of percentage among the youth – in both skilled and unskilled groups.
Boosts Economic Growth
As FDI attracts external capital and tremendous revenue for the country, it directly impacts a nation’s economic growth. With the capital gained from FDI, the construction of factories and manufacturing hubs for some sectors occurs. This further creates an opportunity for fast movement of labour, materials and machinery required for production.
A new factory will create employment opportunities, and others will incur other operational costs, which will again influence the money movement in an industry. In addition, the operation of these factories will generate revenues for the government in terms of tax that one directly uses for public development.
Another significant benefit of FDI is that it helps develop a resourceful workforce for various industries. Therefore, any investment in a sector will lead to job opportunities, directly increasing the quality of human capital.
In other words, the knowledge and competence level of the workforce will increase through proper training and education about specific jobs. This will develop the workforce and train the nation’s human resources for all job roles and challenges.
Increase in Export Level
Foreign investors invest their capital in products or services used for domestic and foreign consumption. Therefore, a lot of time, products are exported to other countries as it consists of a global consumption market. Moreover, the lucrative government allowance and 100% Export Oriented Units and Economic Zones attract global investors to boost exports, thus developing them into a powerful industry.
Improvement in Capital Flow in the Economy
The rate of foreign direct investment or FDI will directly impact the capital flow in an economy. In addition, this inflow of capital helps the nation in economic development, which has domestically limited resources. Better cash reserves support any kind of development within the nation, which benefits business sectors as well as the general population.
Improvisation of Financial Tools and Provisions
The FDI initiative has bolstered the development of different financial tools and technologies. In addition, apart from international, domestic companies are also coming forward to strengthen the growth of the said industry by creating a hassle-free mode of financial tools and platforms.
For example, RazorpayX helps an enterprise better manage and control financial transactions or reports with the facility of accessing the same at any part of the world.
Effect of Foreign Direct Investment on Different Industries
The Indian government has introduced many policies to support FDI equity inflow in India. For example, 100% FDI is allowed in B2B eCommerce. This has further given a boost to the mode of funding.
When India Brand Equity Foundation calculated the inflow of India’s FDI, it showed a boost of 20x from 2000-01 to 2021-22. While the computer hardware and software industry was the top sector to attract the highest FDI equity inflow (USD 14.46 billion), others also took advantage like:
- Trading: USD 4.53 billion
- Constructive Activities: USD 3.37 billion
- Automobile: USD 6.99 billion
Apart from this, it has also helped Software-as-a-service (SaaS) start-ups to raise a fund of USD 15 million through FDI. Thus, getting started with one’s business has become relatively easy.
- One-stop banking solutions platforms like RazorpayX allows business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort.
- It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
- With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.
FDI helps create a competitive market by removing domestic monopolies and creating massive opportunities. This healthy competitive economic market pushes companies to explore innovation and motivates them to improve their processes and offerings.
Frequently Asked Questions
How is the banking sector affected by foreign direct investment?
The initiation of FDI in the banking sector has bolstered different arenas like mobile and internet banking. It has improved the availability and quality of banking services, intensified competition and made technology faster and easier.
Which capital instruments can receive foreign direct investment in an Indian company?
Capital instruments which have permission to receive FDI in an Indian company include equity shares and debentures. This also provides share warrants and preference shares issued by an Indian company.
What is Foreign Portfolio Investment?
Foreign Portfolio Investment (FPI) is a popular investment method in foreign securities and financial assets, mostly in overseas economies. The liquid nature of FPI depends on the market’s volatility and forms a significant part of the capital account.
Why is foreign direct investment necessary for an economy?
FDI plays a vital role in developing a country’s economic aspects by creating new jobs. It also initiates quality human resource training and helps build new companies or factories in different sectors.
How has foreign direct investment affected the Indian market?
According to the India Brand Equity Foundation, FDI inflows in India have increased almost 20 times in the past two decades. This has significantly strengthened major industries like defence manufacturing, pharmaceuticals, e-commerce, information technology, banking, etc.