What is FDI?
Foreign direct investment is relevant when a company makes an investment by buying another company or diversifies business in a nation other than in which it is based. The investment made through FDI becomes a source of external finance which could strengthen the economy.
How do companies benefit?
Some of the advantages for companies who choose to invest in other countries are tax exemptions, lower cost of working capital, access to foreign markets and expansion of business.
What is the difference between a franchise (eg: Dominos, Pizza Hut) and an FDI module?
Many companies have established their franchised business in India so how is the FDI module different?
In a franchising arrangement, the franchisor usually does not make any contribution to the business in terms of equity. According to Franchise India, the franchisors contribution is in terms of grant of rights for the use of their intellectual property and business method. The equity is contributed by the Indian franchisee and the economic interest of the franchisor is limited to the franchisee fees that he receives from the franchisee. Whereas an FDI occurs when an investor, based in one country (the home country), acquires some asset in another country (the host country) with intent to manage the asset.
Some arguments in favour of FDI:
- FDI will generate employment in the country it invests
- It could benefit farmers by eliminating middlemen
- FDI gives consumers a wide variety of products to choose from at reasonable prices
- It can improve food distribution systems
- FDI can bring in better quality and standard products
- FDI can increase the standard of living through its goods and services
- It could raise the bar among other domestic companies in the same sector
- It contributes to the health of the economy
Some arguments against FDI:
- Allowing foreign players could destroy the livelihoods of millions of small store owners
- Market prices could be manipulated by foreign retail giants
- Local jobs could be at threat since the foreign players could purchase many products from abroad
- There is no established correlation between advent of FDI and improvement of a country’s infrastructure