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Basics explained: What exactly is FDI?

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)

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

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

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

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

    How are the stock markets reacting to India's latest FDI move?

    Click here to check the latest on the market reactions