FDI

Definition
Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

About FDI
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intercompany loans. As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.

Forms of FDI
Foreign direct investment incentives may take the following forms: low corporate tax and individual income tax rates other types of tax concessions Preferential tariffs Special Economic Zone Export Processing Zones Bonded Warehouse investment financial subsidies loan guarantees free land or land subsidies relocation infrastructure subsidies R&D support

Types 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/ Export platform FDI arises from a source country into a host 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. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.

FDI- India
Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Finance minister Manmohan Singh. India disallowed overseas corporate bodies (OCB) to invest in India. India has been ranked at the second place after China in global foreign direct investments in 2010 -12 and will continue to remain among the top five attractive destinations for international investors during 2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012'.

Arguments against FDI

It will hurt small traders (Kirana store). Millions of people will become unemployed as small stores will not be able to compete with multinational giants Farmers will also suffer as these big firms will exploit them in the name of corporate/captive farming and will force farmers to sell at a less price than the market price India will become a country of sales boys and sales girls as foreign firms will create only such type of employment opportunities for our youth The Indian consumer will be forced to buy cheap products as these foreign firms will outsource their purchase from countries like China and dump it here. This will also hurt our domestic producers as they will not be able to compete with their foreign counterparts Foreign companies will come here only for profits, which will be siphoned back to their parent company

Arguments in Favour of FDI

The government has given the following potential benefits of FDI in multi brand retail: Farmers will get a fair and just price for their produce as FDI will eliminate the role of middleman Reduction in wastage, especially of perishable products like fruits and vegetables, as foreign investors will invest in backend infrastructure like cold storage facility and improved supply chain management Benefit to consumers as foreign retailers will give more variety at a lesser price Boost to domestic industries, especially small and medium enterprises, as retailers will partly source their supply from them It will increase competition. With the introduction of foreign retailers in the domestic economy, it will lead to competition as well as force the rest of them to improve their quality and service delivery mechanism FDI in retail will lead to creation of millions of jobs in retail and ancillary sectors. It will be helpful in controlling inflation as FDI in retail will solve the supply side bottleneck. Incidentally, we should remember that the recent inflationary pressure in the Indian economy has come from the food sector only This decision will also be useful in controlling current account deficit (CAD) as FDI will bring precious foreign currency. We should not forget that FDI is, by definition, a long term investment. The money is here to stay in the Indian economy