Commerce · Ch 11 — Multi-National Corporations (MNCs)
Foreign Direct Investment (FDI): Meaning and Basics
Foreign Direct Investment (FDI): Meaning and Basics
Multi-National Corporations usually enter a host country's economy through Foreign Direct Investment, so an understanding of FDI naturally follows the study of MNCs in the Andhra Pradesh Intermediate commerce syllabus. Foreign Direct Investment (FDI) refers to an investment made by a person, company or institution resident in one country into a business enterprise located in another country, made with the intention of gaining a lasting management interest and a significant degree of control or influence over that enterprise — typically through setting up a new venture, acquiring a controlling stake in an existing company, or expanding an existing foreign-owned business.
FDI is different from Foreign Portfolio Investment (FPI), which is investment by foreign individuals or institutions in the shares, bonds or other financial securities of a company purely for financial return, without any intention of taking part in the management or control of the business. The table below summarises the main points of difference.
| Basis | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Objective | Lasting management interest and control | Purely financial return |
| Nature | Investment in physical assets/ownership stake | Investment in shares, bonds, securities |
| Involvement in management | Direct, active involvement | No involvement in management |
| Stability | Relatively long-term and stable | Can be withdrawn quickly ("hot money") |
| Example | Setting up a factory or acquiring a controlling stake | Buying shares of a listed company on a stock exchange |
Routes of FDI into India. Foreign investment into India is generally permitted to enter through two broad routes:
| Route | Meaning |
|---|---|
| Automatic Route | Foreign investment does not require prior approval of the Government of India or the Reserve Bank of India; the investor only has to notify/report the investment as prescribed. |
| Government (Approval) Route | Foreign investment requires prior approval of the concerned government department/ministry before it can be made, usually applied to sectors considered sensitive. |
Why FDI matters to a developing economy such as India:
- It brings in capital that supplements domestic investment without creating repayable debt, unlike a foreign loan.
- It usually brings technology, managerial expertise and access to global markets along with the money itself.
- It tends to be more stable than portfolio investment, since a factory or a controlling stake cannot be withdrawn overnight the way shares can be sold. …