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Foreign direct investment meaning example types and advantages

08 Feb 2024

Foreign Direct Investment, or FDI, serves as a key driver of the economic growth of a country. Simply put, when a company invests in a firm outside its geographical border, it’s said to be an FDI. FDI not only catalyses the economy but also plays an essential role in technology transfer and job creation. Read on to learn the various aspects of foreign direct investment.

Foreign direct investment meaning and example

FDI refers to an investment made by individuals, businesses or the government of one country into another country. It’s a type of cross-border investment. Let’s understand it with the help of an example. Suppose a company in the United Kingdom invests in a company in India to help it achieve its goals. The investment falls under the category of FDI. There are several forms of foreign investment, including:

  • Purchase of bonds, shares and other securities
  • Take over an existing business
  • Establishing a new business

Types of FDI

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There are various types of foreign direct investment, namely:

  • Horizontal FDI

It is one of the most common types of FDI. It involves putting money into a foreign company that operates in the same sector as the one owned or operated by the investor engaging in FDI. You can think of investing in the same business but in a different nation. It’s like a pizza place in the US opening a shop in India.

  • Vertical FDI

Another type of foreign investment is vertical FDI. In this type of FDI, a business forays into a foreign economy to strengthen its supply chain without making any significant changes in its business. For instance, if a fast food company in the US invests in a meat processing company in India to boost its meat supply chain, it’s a form of vertical FDI.

  • Conglomerate FDI

Conglomerate FDI is a type of foreign investment when a company invests in a foreign firm belonging to a different sector. For example, if a UK retail giant invests in a logistics company in India, it’s said to be conglomerate FDI. The idea behind this type of FDI is to commence a new business in a foreign territory or add more business niches.

  • Platform FDI

The last type of FDI is platform FDI. This type of FDI happens when a firm expands its base in a foreign territory. However, the output is exported to a third country. In this type of foreign investment, the investing company uses the foreign nation as a platform to produce its products, after which it exports items to other countries. For instance, if a French perfume brand sets up a manufacturing plant in India and exports products to other countries such as Bangladesh, Thailand, etc, it’s known as platform FDI.

Advantages of FDI

There are several advantages of FDI. These include:

  • Economic growth

FDI stimulates the country’s economic growth by providing additional capital for investment. This results in increased production, job creation and improved productivity.

  • Technology transfer

Foreign investors bring advanced technologies and best practices to the host country. This fosters innovation, boosts the capabilities of local industries and improves the economy’s overall competitiveness. 

  • Infrastructure development

This is another advantage of foreign investment. Foreign investors contribute to the development of the infrastructure of the host country. This not only benefits the host nation but also contributes to the overall economic development of the region.

  • Access to global markets

FDI can offer local companies access to global markets. This is possible through well-established distribution networks of foreign investors and their market presence. This can help local businesses expand their reach, increase exports and boost revenues.

FDI in India

Over the years, foreign investment in India has witnessed significant growth due to strong macroeconomic factors. There are three permissible FDI routes in India, namely:

  • Category 1

Under this category, 100% FDI is allowed in most sectors, barring a few sectors such as defence.

  • Category 2

Prior approvals from different ministries are required for FDIs under this category.

  • Category 3

Under this, up to a certain limit can be invested under the automatic route. Investment beyond it requires prior government approval.

In conclusion

In today’s interconnected world, FDI investment is pretty essential for a country’s economic growth. When managed effectively, it can go a long way in transforming economies and empowering local industries. 

 

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