Foreign Direct Investment

INTRODUCTION TO FOREIGN DIRECT INVESTMENT:

INVESTMENT: Before we go to the main topic, we need to know what is investment.

 Investment is the purchase of the assets with the hope that they will generate income and will appreciate in future. An investment is not purchased for the current consumption. It is acquired in order to create wealth.

FOREIGN INVESTMENT: The flow of capital from one nation to another is foreign investment. It is when the foreigners take active part in the management due to the capital invested by them in the economy other than their own.

The foreign investment is of two types:

·        Direct foreign investment

·        Indirect foreign investment

FOREIGNINDIRECT INVESTMENT:

Indirect investment is the investment in the real estate without actually investing in the property.

It can be done in many ways, such as investment in the securities, funds, private equity etc.

FOREIGN DIRECT INVESTMENT:

The net inflow of investment to acquire a lasting interest in an enterprise, operating in an economy other than that of the investor.

EXPLANATION:

Lasting management interest implies the existence of long term relationship between the direct investor and the enterprise and a significant degree of the influence on the management of the enterprise.

FDI is the measure of the foreign ownership of the productive assets such as the factories, mines and land etc. It is one of the most important measure of the growing economic globalization.

It may include:

·        Management

·        Joint Venture

·        Transfer of technology

·        Expertise

TYPES OF FDI:

FDI is of two types:

·        Inward FDI

·        Outward FDI

INWARD FDI:

When the capital is provided by the foreign direct investor residing in the country, to that economy, which is residing in another country.

OUTWARD FDI:

It is when a domestic firm expands its operation in the foreign country via merger, acquisition of the foreign existing facility, Green fielkd investment. This type of outward expansion is done when the firm feels the saturation ofthe business in the domestic market.

CATALYSTS FOR FOREIGN DIRECT INVESTMENT

The means by which the country can enhance the direct investment by the foreigners are:

·        Trade policy

·        Tariff Liberalization

·        Easing the restriction on the foreign investment

·        Deregulation

·        Privatization

CLASSIFICATION OF FOREIGN DIRECT INVESTOR

·        Individuals

·        A group of related individuals

·        Incorporated and un-incorporated entity

·        A public and private company

·        A group of related enterprise

·        Government body

·        An estate(law), trust or social institution

·        A combination of above

METHODS OF FOREIGN DIRECT INVESTMENT

Following methods can be adopted for foreign direct investment:

·        By incorporating a wholly owned subsidiary or a company

·        By acquiring shares in an associated enterprise

·        The merger or acquisition of an unrelated enterprise

·        Participating in the joint venture

DIRECT INVESTMENT ENTERPRISE

It is an incorporated or un-incorporated enterprise in which a foreign direct investor owns 10% or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an un –incorporated enterprise.

The investor having 10% or more of the shares in the enterprise show the direct investment relationship which implies that he can participate in the management of the enterprise even though he does not have full control over it.

FDI SPECIAL TRANSACTION

v ACQUISITION

·        Direct investment flow includes shares and loans acquired from the third party or sold to the third party by the investor as well as the issuance of the new shares and the redemption.

·        Any organization taken over by the foreign investor from the local investor or from some other foreign investor.

·        When the inventor already holds the portfolio investment and further acquires shares.

v LOAN GUARANTEE

·        Direct investor may borrow the funds from the subsidiary’s bank and on lends them to the subsidiary.

·        A subsidiary may borrow the funds which are guaranteed by the foreign investor. Though it is not included in the direct foreign investment but when the guarantee is invoked and the subsidiary is at default, there is a flow from direct investor to the lender.

v LEASING

In case of leasing if the arrangement is such that the foreign investor is a lessor and the subsidiary or the branch or an associate is the lessee, then the loan is considered as the direct investment.

v CONSTRUCTION

The construction of the plant, building etc by one investor to the other economy is also a direct investment. If the machinery and the equipment is installed in some country, then it is also a part of FDI.

v  EXPLORATION OF THE NATURAL RESOURCES

Where the direct investment enterprise is set up in a foreign country, in order to explore the natural resources, capital expenditure incurred is treated as fixed capital.