Foreign Direct Investment means investment made by a multinational company in the foreign country. FDI route is adopted by firms to make their business global. A transnational firm goes for FDI either through establishing a completely new business or by acquiring business assets in another country. An investment is called direct investment only if a company has significant control over the business operation of a foreign entity. Making direct investment in the overseas market is very risky due to the active involvement of political parties and foreign exchange volatile movements.
Features of FDI
(1) Control over Management – Companies moving towards FDI route like to have overall or substantial control over the business operations of the foreign company.
(2) Time horizon – FDI is a very long time period as it is a very complex, costly and irreversible decision, therefore companies adopt this route only if it is made for a very long period.
(3) Minimum Capital Acquisition – An investment is called FDI when it involves the acquisition of atleast 10 per cent of the paid up capital of the target company.
(4) Fresh Issue of Capital – In case of FDI, multinational companies may come up with an IPO in the overseas market and uses those funds for the business operation in the same country only.
(5) Expansion of business – FDI helps multinational companies to access new markets which supports them in the expansion of their business operations.
(6) Economic Growth – FDI route opens up new business operations in the overseas market which increases country ‘ s GDP and also generates employment opportunities for the masses.
Advantages of FDI
(1) Increase in Demand – By the help of FDI, a company can make its product available in its own and overseas country. Capturing more than one market helps companies in raising demand for their product.
(2) Economies of Scale – FDI route is very beneficial for those firms which face large amount of fixed cost in their production process. Fixed cost can be reduced if large amount of production and selling is done by the firms that can be achieved by expanding their business overseas.
(3) Cost Reduction – FDI route helps companies in setting up their production plants in those countries where production cost ( in terms of labor, raw material etc. ) is low. This helps companies in selling their products to those countries where raw materials are expensive and also makes their product available at a relatively lower price.
(4) Diversification – The concept of diversification relies on the principle of “ Don ‘ t keep your all eggs in a single Basket ” because if your basket falls, all your eggs are destroyed. Similarly, if companies sell their product in one nation then their revenue completely depends upon the economic condition of the same nation only whereas if the similar product is sold in two or more than two nations ; the variation in their revenue can be reduced to some extent. FDI route minimizes the revenue variability by neutralising the impact of unperformed nation ( in terms of sale ) with the good performance of another nation.
(5) Improved Quality – Sometimes, MNCs adopt FDI route to understand new and improved technology of foreign countries. Acquisition of latest and improved technology improves their product quality.
(6) Other Benefits – Foreign countries ‘ policies such as liberal rules and regulation, tax exemptions etc. can be enjoyed by MNCs by setting up their business operations through direct investment