FOREIGN DIRECT INVESTMENT

 FOREIGN DIRECT INVESTMENT (FDI )

• When we talk about international investments, we should first of all distinguish between two types of investments namely, Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Foreign direct investment is defined as a process whereby the resident of one country (i.e. home 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. 
• Foreign direct investment (FDI), according to IMF manual on 'Balance of payments' is "all investments involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy in an enterprise resident in an economy other than that of the direct investor”. This typically occurs through acquisition of more than 10 percent of the shares of the target asset. Direct investment comprises not only the initial transaction establishing the relationship between the investor and the enterprise, but also all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated.
• According to the IMF and OECD definitions, the acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by non- resident investors makes it eligible to be categorized as foreign direct investment (FDI). India also follows the same pattern of classification. FDI has three components, viz., equity capital, reinvested earnings and other direct capital in the form of intra-company loans between direct investors (parent enterprises) and affiliate enterprises.
• Foreign direct investors may be individuals, incorporated or unincorporated private or public enterprises, associated groups of individuals or enterprises, governments or government agencies, estates, trusts, or other organizations or any combination of the above mentioned entities. The main forms of direct investments are: the opening of overseas companies, including the establishment of subsidiaries or branches, creation of joint ventures on a contract basis, joint development of natural resources and purchase or annexation of companies in the country receiving foreign capital.

Direct investments are real investments in factories, assets, land, inventories etc. and involve foreign ownership of production facilities. The investor retains control over the use of the invested capital and also seeks the power to exercise control over decision making to the extent of its equity participation. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise.
Based on the nature of foreign investments, FDI may be categorized as horizontal, vertical or conglomerate.

i) A horizontal direct investment is said to take place when the investor establishes the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone service provider based in the United States moving to India to provide the same service.

ii) A vertical investment is one under which the investor establishes or acquires a business activity in a foreign country which is different from the investor’s main business activity yet in some way supplements its major activity. For example; an automobile manufacturing company may acquire an interest in a foreign company that supplies parts or raw materials required for the company.

iii) A conglomerate type of foreign direct investment is one where an investor makes a foreign investment in a business that is unrelated to its existing business in its home country. This is often in the form of a joint venture with a foreign firm already operating in the industry as the investor has no previous experience.

Yet another category of investments is ‘two- way direct foreign investments’ which are reciprocal investments between countries that occur when some industries are more advanced in one nation (for example, the computer industry in the United States), while other industries are more efficient in other nations (such as the automobile industry in Japan).