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An investment made by a company based in one country, into a company based in another country.
Open economies with skilled workforces and good growth prospects tend to attract larger amounts
of foreign direct investment than closed, highly regulated economies.
Type of FDI:
Horizontal FDI arises when a firm duplicates its home country-based activities at the same
value chain stage in a host country through FDI.
Platform FDI Foreign direct investment from a source country into a destination country for
the purpose of exporting to a third country.
Vertical FDI takes place when a firm through FDI moves upstream or downstream in different
value chains i.e., when firms perform value-adding activities stage by stage in a vertical
fashion in a host country.
What are the major benefits of FDI:
(a) Improves market position of the country;
(b) Employment generation and increase in production;
(c) acts as a growth pole;
(d) Helps in transfer of new technologies, management skills, intellectual property
(e) Increases competition within the local market and this brings higher efficiencies
(f) Helps in increasing exports;
(g) Increases tax revenues
Disadvantages of FDI:
(a) Domestic companies fear that they may lose their ownership to overseas company
(b) Small enterprises fear that they may not be able to compete with world class large companies;
(c) Large giants of the world try to monopolise and take over the highly profitable sectors;
(d) Such foreign companies invest more in machinery and intellectual property than in wages of the
(e) Government has less control over the functioning of such companies as they usually work as
wholly owned subsidiary of an overseas company;
Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA),
driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister,
this has been one of his top political problems, even in the current times. India disallowed overseas
corporate bodies (OCB) to invest in India. India imposes cap on equity holding by foreign investors in
various sectors, current FDI limit in aviation sector is maximum 49%.
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the
second most important FDI destination (after China) for transnational corporations during
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2012. As per the data, the sectors that attracted higher inflows were services,
telecommunication, construction activities and computer software and hardware. Based on UNCTAD
data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.
During 2012-13, India attracted FDI worth US$ 22.42 billion. Hotels and tourism, pharmaceuticals,
services, chemicals and construction received the highest amount of FDI. The major contributors to
the Indian FDI were Singapore, Mauritius, the Netherlands and the US.…read more
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The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade and
payments. It was also formulated to promote the orderly development and maintenance of foreign
exchange market in India.
FEMA is applicable to all parts of India. The act is also applicable to all branches, offices and agencies
outside India owned or controlled by a person who is a resident of India.…read more