Foreign Direct Investment relates to the investment made by a resident or company in one economy in a business or enterprise in another economy. It can also be described as the investment a business in one country makes in a company located in another company. This is usually facilitated by expanding operations of existing businesses in the target country or buying a company in the same destination.

The Reason for FDI and why countries prefer it

Building blocks spelling tax, with calculator and paperwork

In most cases, foreign direct investment occurs when a company wishes to expand its base to overseas location. It is noted that many companies prefer FDIs owing to favorable factors like cheaper wages, tax exemptions and other investment privileges offered by the target destination.

Several countries on the other hand prefer FDIs in order to foster economic growth. In addition to giving access to productive factors like knowledge, business expertise and technical know-how, FDIs can keep the local economy afloat when domestic capital is inadequate or is still developing.

India’s Tryst with Foreign Direct Investments

touch screen graph on tablet in hands

India has been moving towards the path of growth and progress for quite some time now. With its domestic market already in place, the next most natural thing for the country to do would be to invite FDIs and make them a top priority. However, till date, India has remained hesitant to welcome FDIs in several sectors. Although it has welcomed them in sectors like telecommunications, construction and manufacturing, it shuts out FDIs when it comes to sectors like multi-brand retail.

The myriad regulations regarding FDIs in India allows companies to enjoy a minority investment. This is done to ensure that the control of sectors like insurance do not move into foreign hands and still remain within the boundaries of the domestic management.

What India stands to lose with less FDIs

ROI - Return on Investment

Although losing management control can sound daunting, it cannot be compared with the loss India is set to experience if it keeps shutting its doors to FDIs. The current rate at which the country is slated to grow requires large investments from multiple sources, with FDIs being the more reliable options for the same as well.

Countries like China have experienced tremendous growth over the last few decades simply because it started attracting more foreign investments to its shores. Hence, increasing the FDI cap can prove to be significantly beneficial for India in the long run.

What can FDI do for India?

businessman with financial symbols coming from hand

The burgeoning Indian economy is in need of long term capital for more growth and expansion. FDI can bring that in with ease in addition to bringing with it a whole lot of technical knowledge, managerial ability, product innovations, production techniques and administrative organization, etc.

It has been noted that even a 1% increase in FDI can have a significant increase in the country’s GDP (a 0.4% growth). So if India would need to boost its GDP growth by 2%, it would need a foreign direct investment equivalent to about 5% of the GDP. That would roughly translate to over $100 billion of FDI required to boost the current GDP level of $2 trillion by about 2%. For a 4% increase in GDP, about $200 billion worth of FDI would be required.

India has to take a stance and decide on allowing more FDI into the country. It has to take a lead from the book of all the other countries that have attracted FDI and were not harmed by the latter in any way. Global FDI inflows have reached over $15 trillion in the decade alone. And countries like China, Japan, South Korea, Brazil, Turkey and Mexico that have made use of thishave profited generously from the same. It is high time India started taking notice of the same and did something to join the FDI race.

India is all poised for growth in the coming years. However, if it wants this growth to be substantial, the country would need to open its doors to more foreign investments.