Basics explained: What exactly is FDI?

India relaxed foreign direct investment (FDI) rules on Tuesday in a wide range of industries including telecoms, single brand retail and oil and gas in a bid to attract capital inflows, rein in the rupee slide and trigger economic growth. (Here are the highlights of the announcement.)

That brings us to a very basic question. What exactly is FDI? How is it different from the already existing foreign business models in the country. Why is FDI important and what are the threats it poses? We simplify the facts for you below.

What is Foreign Direct Investment or 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.

Which are India's top FDI destinations?(Click on the slideshow below)

Bangalore

Bangalore has become a global hub for service sector investment in IT, engineering and biotech. Bangalore’s Millennium IT Policy and the Millennium Biotech Policy, which offer a variety of ... more 

Bangalore

Bangalore has become a global hub for service sector investment in IT, engineering and biotech. Bangalore’s Millennium IT Policy and the Millennium Biotech Policy, which offer a variety of incentives, make it attractive for technology companies. Since 2007, the city has attracted 474 investment projects creating more than 110,140 jobs from FDI, mostly due to its educated workforce and high-quality infrastructure. (photo credit: ThinkStock) less 
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Yahoo Finance India
Tue 11 Sep, 2012 3:30 PM IST

How do companies benefit from FDI?

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.

Slideshow: The major sectors currently attracting FDI for India

Infrastructure


The number of FDI projects in the Infrastructure sector grew by 90 percent in 2011 in India. The sector contributed 4 percent to the total number of FDI projects and 9 percent to the

... more 

Infrastructure


The number of FDI projects in the Infrastructure sector grew by 90 percent in 2011 in India. The sector contributed 4 percent to the total number of FDI projects and 9 percent to the total jobs created. Development in the country’s infrastructure is poised to accelerate as the Government of India plans to double its infrastructure spending from US$500 billion to US$1 trillion during FY2012–17.

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Yahoo Finance India
Thu 13 Sep, 2012 3:30 PM IST

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.

Slideshow: How FDI investors view India

Investors show strong confidence in India to maintain performance. In the longer run, only 11 percent of the respondents of the survey see India as being surpassed by competition from other dynamic ... more 
Investors show strong confidence in India to maintain performance. In the longer run, only 11 percent of the respondents of the survey see India as being surpassed by competition from other dynamic countries like Brazil, China, Germany, Korea, Russia, United Kingdom and United States. less 
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Yahoo Finance India
Mon 17 Sep, 2012 2:30 PM IST

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

    Slideshow: Jobs opportunities created by FDI in India

    Infrastructure sector

    Value of FDI (US$ million): $2,877.3 million FDI in 2010 and $3,110.8 million in 2011.

    No of jobs created by FDI in the sector: 18,347 in 2010 and 22,137 in 2011.

    ... more 

    Infrastructure sector

    Value of FDI (US$ million): $2,877.3 million FDI in 2010 and $3,110.8 million in 2011.

    No of jobs created by FDI in the sector: 18,347 in 2010 and 22,137 in 2011.

    less 
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    Yahoo Finance India
    Mon 17 Sep, 2012 1:30 PM IST


    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

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