Types of FDI

India's economy is experiencing rapid growth, with significant demand across various sectors, offering promising prospects for businesses. Foreign investors recognise this potential and have been investing substantial sums to capitalise on current and anticipated demand in India.

Consequently, foreign direct investment (FDI) has seen notable increases in recent years, with the potential for further growth in the future. Now there are different types of FDI in India.

What is Foreign Direct Investment (FDI)?

Foreign direct investment (FDI) occurs when an entity from one country acquires controlling ownership of a business located in another country. This typically involves a foreign company or organisation purchasing a significant stake in a listed company in the host country, such as India.

FDI contributes to the liquidity of the company, fosters growth within the sector, and generates numerous job opportunities. The different types of FDI bring out uniqueness and exclusivity.

India's foreign direct investment (FDI) policy has undergone significant changes in recent years. Previously characterised by limited FDI, India has opened various sectors to 100% foreign ownership. These sectors include e-commerce, broadcasting, agriculture, and animal husbandry.

How Does FDI Function?

Foreign Direct Investment (FDI) serves as a crucial catalyst for economic growth and advancement in India. It involves international investors injecting capital directly into Indian businesses or projects, encompassing various forms such as equity, joint ventures, or wholly owned subsidiaries.

These investments span sectors like manufacturing, services, and infrastructure, aiming to generate profits.

India has actively pursued FDI by implementing liberalised policies and easing regulatory restrictions, creating a conducive investment environment. The government regularly revises and updates these policies to ensure competitiveness in the global market.

FDI yields numerous benefits for India, including the infusion of foreign expertise, technology, and job opportunities. Moreover, it helps narrow the trade deficit and contributes to overall economic expansion. For investors, FDI offers access to a vast market, a skilled workforce, and the potential for high returns on investment.

Furthermore, FDI facilitates global company control, eliminating monopolistic operations across various business sectors. It also provides a buffer against significant business activity declines, stabilising the markets. To understand its functioning, the types of FDI need to be explored.

Types of FDI

Foreign Direct Investment in India can take different forms. Each form has unique features. Their implications are more exclusive in many ways. The primary types of FDI are:-

• Equity FDI
• Platform FDI
• Autonomous Subsidiaries
• Convertible Instruments
• FDI in Real Estate
• Horizontal FDI
• Vertical FDI
• Conglomerate FDI

Equity FDI

In this scenario, a foreign investor acquires a substantial stake in an Indian company through equity Foreign Direct Investment (FDI). Equity FDI can take various forms, including common shares, preferred shares, or convertible debentures. Investing in equity gives the foreign investor ownership rights and a voice in the company's management decisions.

Platform FDI

India's Platform Foreign Direct Investment (FDI) embodies a collaborative strategy wherein foreign and local entities unite to create joint platforms or alliances. This approach seeks to leverage combined strengths, foster innovative advancements, and facilitate mutual progress by integrating the capabilities of diverse organisations.

Autonomous Subsidiaries

Here, a foreign company sets up a subsidiary in India. This is wholly owned and controlled by the foreign entity. This arrangement grants complete autonomy to the foreign investor, enabling them to implement their business strategies independently.

Convertible FDI

Foreign investors have the option to inject capital into Indian companies through instruments such as convertible preference shares or convertible debentures. Initially structured as debt, these instruments offer the flexibility to convert into equity at a later date, providing investors with versatility in their investment strategies.

FDI in Real Estate

Foreign investors have the opportunity to invest in India's real estate sector either directly by acquiring properties or indirectly through tools such as Real Estate Investment Trusts (REITs) or Real Estate Mutual Funds (REMFs).

Horizontal FDI

Horizontal Foreign Direct Investment (FDI) entails a strategy in which a foreign investor extends its operations in India within the same industry or production stage. The objective is to replicate or complement existing business activities, thereby stimulating market growth and enhancing competitiveness.

Vertical FDI

Vertical Foreign Direct Investment (FDI) encompasses investment across various stages of the production process in India. This may involve backward integration, such as investing in suppliers, or forward integration, such as investing in distributors. The overarching aim is to establish a comprehensive and integrated supply chain presence.

Conglomerate FDI

Conglomerate Foreign Direct Investment (FDI) represents a diversified approach whereby foreign investors enter unrelated industries or sectors in the Indian market. This strategic approach enables the investor to expand their portfolio, mitigating risks associated with dependence on a single sector, and leveraging diverse business opportunities.

Significance of FDI

1. Growth of Economy

FDI drives economic growth by infusing capital into the host country, thereby boosting production, consumption, and overall economic activity.

2. Transferring Technology

Foreign investors frequently introduce advanced technologies and managerial practices, thus fostering technological progress and innovation within the host country.

3. Developing the Infrastructure

FDI frequently results in the development of infrastructure projects, including roads, ports, and utilities, which enhance residents' overall business environment and quality of life.

4. Diversified Industries

Foreign investment aids in diversifying the industrial base of a country, diminishing reliance on specific sectors, and fostering a more resilient and robust economy.

5. Employment Opportunities

FDI introduces new businesses, industries, and projects, thereby generating employment opportunities, lowering unemployment rates, and elevating living standards.

6. Improve a Country’s Balance of Payments

Inflows of foreign capital via FDI contribute to the improvement of a country’s balance of payments. This happens by offsetting the trade deficits. This bolsters the nation's overall financial stability.

7. Access to Global Markets

FDI allows access to international markets. Often, foreign investors use the host country as a strategic base for exporting goods. This helps them reach a broader customer base.

8. Transfer of Knowledge and Expertise

FDI frequently entails the transfer of skills, knowledge, and expertise, which benefits the local workforce and enhances the capabilities of domestic industries.

Examples of FDI

Stating some examples of types of FDI in India:

1. Expansion of Amazon

Amazon has consistently augmented its Foreign Direct Investment (FDI) in India. In 2020, the e-commerce behemoth unveiled a $1 billion commitment. This aimed to facilitate the expansion of small and medium-sized enterprises (SMEs) in India through online product retailing. This initiative builds upon substantial investments made in previous years.

2. Walmart Bought Flipkart

In 2018, Walmart secured a majority share of Flipkart. It is a prominent e-commerce platform in India worth $16 billion. This strategic acquisition by Walmart enabled it to fortify its position within India's burgeoning online retail landscape.

3. Google Invested in Jio Platforms

Jio Platforms is a subsidiary of Reliance Industries. In 2020, Google revealed a $4.5 billion infusion into Jio Platforms. This investment enhanced India's digital economy. This widens the accessibility of cost-effective smartphones and internet services.

4. Facebook’s Investment in Jio Platforms

In 2020, Facebook invested $5.7 billion into Jio Platforms. This highlighted the immense potential of India's digital market. This partnership was established to offer digital solutions to small businesses. This way, it enhances internet connectivity across the nation.

Disadvantages of FDI

The main disadvantages are-

1. This might Hurt Local Investors

Foreign Direct Investment (FDI) often triggers competition between local investors and global corporations. While fostering innovation and benefiting companies and consumers, it can also shift decision-making power outside the country.

When foreign investors acquire a controlling interest in a business, they exert significant influence over its operations, potentially conflicting with the company's and its consumers' interests in India.

2. This might Cause Economic Colonisation

Given India's historical experience with colonisation, numerous stakeholders harbour concerns that FDI may pave the way for a contemporary iteration of such dominance.

By granting foreign entities substantial ownership stakes in Indian businesses, FDI could empower them to assert dominance and expand their influence, possibly even gaining political leverage within the country.

Conclusion

The diverse array of types of FDI offers companies strategic avenues to penetrate foreign markets and foster international integration. Each type necessitates balancing control, risk, costs, and the speed of market entry. 

Consequently, companies opt for the type that aligns most closely with their objectives, capabilities, and prevailing circumstances. In aggregate, FDI is a pivotal driver of international trade, competition, and economic expansion