What are the 3 Types of Foreign Direct Investment?

What are the 3 types of Foreign Direct Investment?

As the name suggests, Foreign Direct Investment commonly referred to as FDI is an investment that is made by a company or an individual belonging to a country in a business venture located in another country. Foreign Direct Investment generally comes into action when the foreign business operations are established or when foreign assets are acquired in the other country. 

Talking specifically about India, FDI in India is when a person or firm residing in another country for example the United States, invests in a company in India. It is very important for the GDP of the country being invested in and is therefore given high importance when it comes to establishing business and reaching out to different parts of the world. 

• Deep diving into Foreign Direct Investment

FDI India is generally undertaken when a company wants to expand its business such that its coverage increases in addition to being able to enjoy a long-lasting interest in the revenue of another company. Lasting interest here refers to as the voting power that an individual or company enjoys when they hold an ownership of 10 percent or more in a business based out of India.

• Ways of becoming a part of the FDI league

There are numerous ways in which one can indulge in foreign direct investment as part of which one can open a subsidiary in a foreign country, become part of a merger or hold a major interest in the existing foreign country. With the growing awareness about the features of Foreign Direct Investment, FDI India has been on an increasing scale.

• Key benefits of Foreign Direct Investment

As you must have understood by now, FDI in India offers numerous benefits to the investor along with the foreign host country that is being invested in including:

• Business level

On the business level, some of the benefits include tax incentives, subsidies, preferential tariffs, and lower labour costs. The benefits in this case are mainly related to cutting cost as well lowering the risk of the business.

• Host country

For the host country, some benefits include an up-rise in the economic situation of the country, enhanced human capital, an increase in the employment rate, and ability to access expertise, technology, and skills. The benefits in this case are mainly related to the economic status.

• The different kinds of Foreign Direct Investment

With the world becoming increasingly aware about the various investment options prevalent, there is a variety of options available to cater to everyone’s needs. There are four kinds of foreign type investment options that a person/entity can become a part of. These include:

• Horizontal Foreign Direct Investment: As part of this technique, the business carries out its regular activities as is but in a different country (FDI India). In simpler words, the business expands all its domestic operations over to the foreign country that it is investing in. A classic example of this kind of investment would be McDonalds opening various restaurants in India. 

• Vertical Foreign Direct Investment: Before we understand what this type of investment contains, let us understand the meaning of supply chain. Supply chain as a system involving production as well as delivery of the product or any kind of service end-to-end meaning from the stage where it begins i.e., from the raw materials to the final finishing of the product. Vertical FDI is an arrangement as part of which a business moves to a different level of the supply chain and then expands its operations into another foreign country. This means that though the firm is carrying out different activities abroad, these activities are in some way related to the main business itself. For example – McDonalds takes over a large farm in India in order to get production of veggies for its restaurants. 

• Conglomerate Foreign Direct Investment: In this type of investment, a business takes over a business in a foreign country that is completely unrelated to its own. This is generally not a preferred form of investment since it involves overcoming two major barriers to the entry in a new market including entering a foreign country and entering a new market. Virgin Group based out of the United Kingdom acquiring a clothing line in India would be a great example to understand this kind of investment.

• Greenfield Investment: In this scenario, the investment is made in the new upcoming facilities. Due to this type of investment, the host nation benefits a lot due to the growth in economy, jobs, and all the technological advancements. However, it poses a danger for the small businesses which have to compete with cheap prices in bulk due to the advanced technology that their competitor possesses. Walmart opening retail stores in India would be a suitable example to help explain this concept better.