Foreign Direct Investment (FDI) in India: What It Is and What Are Its Types?

I. Introduction

If you are a business professional willing to expand your business across borders or an economy enthusiast, curious to learn about FDI or Foreign Direct Investment, you’ve come to the right place. Today, we will discuss everything you need to know about Foreign Direct Investment: what it is, the types of FDI, and more.

A. A brief definition of Foreign Direct Investment (FDI)

By definition, the term Foreign Direct Investment or FDI refers to the ownership stake in a foreign project or company made by a government, company, or investors or another country. So, FDI refers to business decisions like buying a stake in a foreign company or acquiring a company outright in a foreign land to expand your business in a new landscape.

Read More: What is an acquisition?

B. Significance of FDI for India’s economic growth

But before we delve into some of the benefits or learn about the different types of FDI, you must first learn about its significance in India’s economic growth. Foreign Direct Investments, or FDI, play a pivotal role in India’s economic growth because this type of international economic integration creates long-term links between India and the world outside, expanding the market economy and increasing growth opportunities.

II. Historical perspective

Taking a historical perspective on the subject of Foreign Direct Investment in India is crucial to understanding how it works in the Indian market at present.

A. Evolution of FDI in India

Many experts trace the history of FDI in India to British colonial times. However, the economic liberalization of India in 1991 has been a major growth driver of foreign direct investments. During this period, the government opened up the economy to attract FDI. Since then, FDI has played a major role in the economic growth of India.

B. Key milestones and policy changes

Here are some key milestones and policy changes of FDI in India:

● Since economic liberalization in India, many business sectors have wholly or partially opened up to foreign investments.

● Presently, India is among the top 10 destinations of FDI globally. 

● India received a total of $49 billion in inflows, becoming one of the top 10 FDI receivers in 2019. 

● DPIIT allowed 100% FDI in insurance intermediaries in 2020. 

● In 2020, the government decided that Air India’s 100% stake would be opened for FDI.

III. The dynamics of FDI in India

Before reading about the types of FDI in India, it is crucial to understand the present dynamics of foreign direct investments in India.

A. Current FDI trends and statistics

Here are some current foreign direct investment trends and statistics in India:

● Total foreign direct investment inflows are $990.97 billion in the last 24 years (April 2000–April 2024).

● In the Financial Year 2023–2024, total FDI inflows in India are $70.95 billion. 

● In the same year, FDI equity inflows in India were $44.42 billion.

● Mauritius is the top country for equity inflows in India with 25% of the total FDI share.

B. Major sectors attracting FDI

The five major sectors that are currently attracting FDI inflows in India are:

● Service sectors: 16% (banking, finance, non-financial, insurance, R&D, outsourcing, testing and analysis, courier, and others)

●     Computer hardware and software: 15%

●     Telecommunication: 6%

●     Trading: 6%

●     Automobile industry: 6%

IV. Types of FDI

Foreign direct investments or FDI has several types based on the type of investments or business decisions that have taken place. Below, we will learn about the types of FDI in detail.

A. Vertical FDI

Vertical FDI or foreign direct investment is one of the popular types of FDI available in India. 

1. Definition

Vertical FDI or foreign direct investment refers to a company’s investment in a foreign company for a different stage of the production process. It can occur in any industry and sometimes across industries that have close links.

2. Example

An example of vertical FDI can be an Indian textile company’s investment in a US cotton farm to secure a source of raw material.

B. Horizontal FDI

Another popular type of FDI available in India is horizontal foreign direct investments or FDI

1. Definition 

Horizontal foreign direct investment refers to a business decision wherein a company expands its horizons to produce the same goods or services it serves on the domestic level in a different country.

2. Example 

An example of horizontal FDI can be an Indian smartphone company creating a company in China for smartphone manufacturing.

C. Conglomerate FDI

Conglomerate FDI is also a type of FDI or foreign direct investments that is widely used in India.

1. Definition 

Conglomerate FDI refers to a company’s investment in an unrelated company or business of a different country.

2. Example 

An example of conglomerate FDI can be an Indian automotive company’s investment in Australia’s chain of hotels.

D. Platform FDI

Lastly, there is platform FDI.

1. Definition 

Platform FDI refers to the FDI type where a company invests in another country for its products/services’ distribution or production.

2. Example 

For instance, an Indian e-commerce company is establishing warehouses and logistics in the US to expand user reach.

V. Government policies and initiatives

Several government policies and initiatives have been taken to promote the future of FDIs in India. Below we will discuss these government policies and initiatives in detail.

A. An overview of India’s FDI policies

India has changed and upgraded its investment policies to make the most out of FDI. It has widened its horizons and made policies more transparent and clear.

B. Recent reforms to encourage foreign investments

• According to the new FDI policy, where a new entry sharing a land border with India or beneficial owner of an investment into India is a citizen of a different country or situated in any such other country, can only invest under the government route.
• Also, a transfer of FDI ownership that benefits any country that shares borders with India must need India’s approval.
• Countries that are not covered by the new policy only have to inform the RBI after a transaction and do not require prior permission.
• Earlier the country route policy only allowed Bangladesh and Pakistan into the Indian sectors but now the government route filter includes countries like China.

Read More: What is the difference between FPI and FDI?

VI. Success stories

As you have already read about different types of FDI in India, let us talk about success stories of FDI ventures in India.

A. Case studies of successful FDI ventures in India

Below are some case studies of successful FDI ventures in India:

● Expansion of Amazon: Amazon, one of the largest international e-commerce companies, announced a $1 billion FDI investment in India in 2020 to help small and medium-scale businesses sell their products online.

● Facebook investing in Jio platforms: Facebook decided to invest $5.7 billion in the Jio platforms. The primary aim of this collaboration is to improve internet connectivity in the country and also to help small businesses access digital solutions.

● QIA  invested in Reliance in Retail: Qatar Investment Authority (QIA) funded $994.39 million in Reliance Retail Ventures Limited (RRVL) in August 2023 to acquire an equity share of 0.99%.

B. Positive outcomes and contributions to the economy

FDIs have a crucial role to play in the economic growth of a country. This is because they help local businesses create more job opportunities. It also increases export and exchange rates positively impacting a country’s economy.

VII. Challenges and risks

FDIs can come with several challenges. Some of them are discussed below.

A. Potential hurdles for foreign investors

Below we will discuss some of the common risks and challenges faced by FDI investors in India:

• The complexity of the bureaucratic procedures
• Higher spanning of taxation
• Intricate and sensitive foreign investment policies
• Transportation charges

B. Mitigation strategies and government efforts

Several measurements and government policies have been taken to mitigate risks. To name a few:

• Tax exemption
• Duty-free imports of certain sections
• Creating a special economic zone with preferential treatment associated with taxation.
• Other regulatory compliances to support FDI investments.

VIII. Future prospects

The prospects for FDI in India are quite bright. Below, we will discuss these prospects in detail.

A. Emerging trends in FDI for India

● The amendment in government FDI policy in 2019 permits 100% FDI under the automatic route in coal mining, which increases activities in FDI inflow.

● Government plans, like production-linked initiatives, or PLI, in 2020 for electronic manufacturing, have been pursued to attract foreign investments.

● Foreign companies have shown interest in the government allowing private train and airport bid-out initiatives.

● Also, the defence manufacturing industry where the government increased automatic routes from 49% to 74% in 2020 is expected to gain larger investment in the future.

B. Anticipated impacts on economic development

The changes in government initiatives in the FDI sector will have long-lasting impacts on the country’s economy. FDI is a major driver of India’s economic growth. It offers a non-debt source of earnings in the country and great prospects for the company’s growth.

With the post-pandemic economy structure, India’s large market will continue to attract future FDI investment into the country.

IX. Conclusion

FDI is when a company buys a stake in a subsidiary company in a foreign land or purchases a company in a foreign country to expand its business horizons. Investing in a foreign company share alone is not considered as FDI. 

Types of FDI include horizontal, vertical, platform, and conglomerate FDI. These investment plans contain both pros and cons. However, continuous government policies and efforts create great scope for FDI in India.

FDI has a great future in India. It is primarily due to increased interest in foreign countries as well as continuous government policies and initiatives encouraging FDI inflow. On the other hand, you must not forget the challenges faced by FDI investments in India. You can also consult with experts before entering the field and try to delve into the benefits of FDI.

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