An Explainer: Foreign Direct Investment

A foreign direct investment (FDI) is an investment made by a corporation of a certain country into a corporation of another country.

PropGuide Explains Foreign Direct Investment

However, FDI is different form indirect investments. If a foreign investor passively invests in an Indian company by owning stocks or bonds, this will not be considered as FDI. But, if a foreign investor invests in an Indian company, and controls technology, management and other aspects, this will be considered as foreign direct investment.

In a portfolio flow, for example, a foreign institution invests in a company that is listed on a major stock exchange. However, such institutions do not control various aspects of management in the firms in which they invest in. For an investment to be considered FDI, the firm you invest in should be located in a foreign jurisdiction and control ownership to a degree. Often, it is the large firms that engage in FDI.

One of the biggest advantages of having a greater FDI is that there is a greater inflow of capital from abroad. When there is a greater capital investment, there would be a greater investment in machinery. When there is a greater investment in machinery, productivity would rise, and subsequently, wages will rise, too. In India, a policy on foreign direct investments was introduced in 1991 and the Foreign Exchange Management Act (FEMA) regulations govern the sector. The Department of Industrial Policy & Promotion (DIPP) recently reformed the norms governing FDI in many sectors, including the construction industry. India also became the most sought-after FDI destination in the world in 2015.

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