Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two important ways of
international investment that influence the global and national economy. Here's a detailed yet easy
explanation, focusing on the UGC NET Commerce perspective:
Foreign Direct Investment (FDI)
FDI refers to an investment made by a company or individual in one country into business interests
located in another country.
Key Features of FDI:
o Involves significant control and influence over the business.
o Long-term investment in physical assets like factories, land, or machinery.
Examples: A multinational company like Amazon setting up warehouses or offices in India.
Foreign Portfolio Investment (FPI)
FPI is an investment in financial assets, such as stocks and bonds, in another country without
significant control or management.
Key Features of FPI:
o Passive investment aimed at earning returns.
o Easier to liquidate compared to FDI.
Examples: A foreign investor buying shares of Indian companies listed on the stock market.
Types of FDI
1. Horizontal FDI: Investment in the same business operations abroad as in the home country.
o Example: An automobile company manufacturing cars in both the home and host
countries.
2. Vertical FDI: Investment in different stages of the supply chain.
o Example: A clothing brand from the home country investing in textile factories in the
host country.
3. Conglomerate FDI: Investment in an unrelated business in another country.
o Example: A tech company investing in agriculture abroad.
4. Greenfield Investment: Establishing new facilities or operations in the host country.
o Example: Building a new factory or office.
5. Brownfield Investment: Acquiring or leasing existing facilities in the host country.
o Example: Taking over a local business or factory.
Costs and Benefits of FDI
To the Home Country:
Benefits:
Earn higher returns on capital.
Access to international markets and resources.
Strengthening diplomatic and economic ties.
Costs:
Loss of domestic jobs if companies relocate operations.
Risk of losing control over sensitive technologies.
To the Host Country:
Benefits:
Employment generation.
Improved infrastructure and technology transfer.
Boost to GDP and economic growth.
Costs:
Risk of exploitation of natural resources.
Dependence on foreign companies.
Cultural and social changes.
India's Foreign Direct Investment (FDI) Policy is designed to attract foreign investors and promote
economic growth while ensuring national security and equitable development. It is governed by the
Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce
and Industry. Here's a detailed explanation:
Key Features of India's FDI Policy
1. Liberalization:
o India has progressively opened up various sectors for FDI, allowing increased foreign
participation.
o Most sectors allow 100% FDI under the automatic route, which does not require
prior government approval.
2. Two Routes for FDI Entry:
o Automatic Route:
Investment does not need government approval.
Example: IT, manufacturing, single-brand retail.
o Government Approval Route:
Requires prior approval from the relevant ministry or department.
Example: Defense, telecom, media.
3. Sector-Specific Caps and Conditions:
o FDI is allowed up to a certain percentage in many sectors.
o Example:
100% FDI in single-brand retail under the automatic route.
74% FDI in private banks under the automatic route; beyond this,
government approval is required.
4. Prohibited Sectors:
FDI is not allowed in the following areas:
o Gambling and betting.
o Lottery businesses.
o Atomic energy.
o Tobacco products.
5. Reforms to Attract Investment:
o Introduction of Production-Linked Incentive (PLI) schemes to boost manufacturing.
o Relaxation of FDI norms in sectors like insurance (raised to 74%), defense (raised to
74% under automatic route), and aviation.
Recent Developments in India’s FDI Policy
1. Increased FDI Limits in Key Sectors:
o Insurance: FDI limit raised from 49% to 74%.
o Defense: FDI through the automatic route increased to 74%, with up to 100%
allowed under the government route for specific cases.
2. E-Commerce:
o 100% FDI allowed in marketplace models like Amazon and Flipkart.
o FDI is not permitted in inventory-based models of e-commerce.
3. Single-Brand and Multi-Brand Retail:
o 100% FDI permitted in single-brand retail under the automatic route, subject to
sourcing norms.
o Up to 51% FDI in multi-brand retail with government approval.
4. Real Estate and Construction:
o 100% FDI allowed in construction development, including townships, housing, and
built-up infrastructure.
o Restrictions on real estate business activities like trading in transferable
development rights (TDRs).
5. FDI Monitoring:
o Investments from countries sharing land borders with India (like China) require
government approval to address security concerns.
Advantages of India’s FDI Policy
1. Boost to Economic Growth:
o FDI inflows enhance GDP and create job opportunities.
2. Technology Transfer:
o Helps in the transfer of advanced technology and expertise.
3. Infrastructure Development:
o Encourages investment in physical and social infrastructure.
4. Global Competitiveness:
o Helps Indian businesses integrate into global value chains.
5. Reduction of Trade Deficit:
o FDI in manufacturing reduces dependency on imports.
FDI Statistics and Trends in India
1. Top Sectors Attracting FDI (2022-2023):
o Computer software and hardware.
o Telecommunications.
o Trading.
o Services sector.
2. Top FDI Contributors:
o Singapore, USA, Mauritius, UAE, and Japan are the largest contributors to FDI in
India.
3. Regions Attracting the Most FDI:
o States like Maharashtra, Karnataka, Gujarat, and Delhi receive the highest FDI
inflows.
Challenges in India’s FDI Policy
1. Regulatory Hurdles:
o Complex compliance requirements in some sectors.
2. Infrastructure Gaps:
o Inadequate infrastructure may deter potential investors.
3. Political and Social Factors:
o Land acquisition issues, labor laws, and policy uncertainty can pose challenges.
4. Competition from Other Countries:
o Other emerging economies like Vietnam and Indonesia are also becoming attractive
FDI destinations.
Conclusion
India's FDI policy is a critical driver of its economic growth. The government continues to liberalize
policies, simplify procedures, and promote initiatives like Make in India and Digital India to enhance
FDI inflows. These efforts aim to position India as a global hub for manufacturing, services, and
innovation.
