Home > Topics > Business Environment and Policy > Foreign Direct Investment (FDI) – Policy, Trends & Types
← PreviousNext →

Foreign Direct Investment (FDI) – Policy, Trends & Types

FDI is an important source of foreign capital, technology and management for developing countries like India.

1. Meaning / Definition of FDI

Foreign Direct Investment (FDI) is an investment made by a foreign entity (individual or company) in the business of another country with the objective of long-term interest, control and management.

Key ideas:

  • Involves ownership stake (usually 10% or more of equity).
  • Investor participates in management and decision-making.
  • Different from Foreign Portfolio Investment (FPI), which is mainly for short‑term financial returns.
FDI vs FPI (Exam Hint)
FDI = long-term, control, management.
FPI = short-term, no control, just buying shares/bonds.

2. Types / Forms of FDI

  1. Greenfield Investment

    • Foreign company sets up new facilities from scratch (new plant, new office).
    • Example: Car MNC setting up new factory in India.

  2. Brownfield Investment

    • Foreign investor buys or leases existing facilities (through mergers, acquisitions, joint ventures).

  3. Horizontal FDI

    • Investor produces same product in foreign country as in home country.

  4. Vertical FDI

    • Investor controls different stages of production across countries (components in one country, assembly in another).

3. Key Features of India’s FDI Policy (Exam‑Oriented)

Only main points needed (4–6 bullet style):

  1. Automatic vs Government Route

    • In many sectors, FDI allowed up to a certain limit under automatic route (no prior govt. approval, only RBI filing).
    • Some sensitive sectors require government approval.

  2. Sector‑specific Caps

    • Different maximum FDI limits for sectors (e.g., insurance, banking, defence, retail).
    • Exact percentages change, so students should quote textbook/updated values.

  3. Prohibited Sectors

    • FDI not permitted in a few sectors (e.g., atomic energy, railway operations – as per policy at given time).

  4. Encouragement to Priority Sectors

    • Infrastructure, technology, export‑oriented units get liberal FDI norms.

Loading diagram…

4. Trends in FDI in India (Conceptual)

Instead of numbers (which change), focus on patterns:

  • Significant increase in FDI inflows since 1991 reforms.
  • Major investing countries: USA, UK, Japan, Singapore, Mauritius, etc.
  • Important recipient sectors: services, telecom, computer software, construction, automobile, manufacturing.

Loading stats…

5. Advantages and Disadvantages of FDI

Advantages (for Host Country)

  • Capital formation – supplements domestic savings.
  • Technology transfer – modern technology, managerial skills.
  • Employment generation and training of workers.
  • Boosts exports and foreign exchange earnings.

Disadvantages / Concerns

  • Possible repatriation of high profits abroad.
  • Risk of domination by large MNCs over domestic firms.
  • Uneven regional benefits if FDI flows mainly to developed states.

Loading comparison…

6. Quick Revision / Exam Pointers

When writing an answer:

  • Start with clear definition of FDI.
  • Mention 2–3 types (greenfield, brownfield) with one‑line examples.
  • Quote 4–5 key FDI policy features (automatic vs govt route, caps, prohibited sectors).
  • End with balanced view on advantages and concerns.

7. Quiz Time 🎯

Loading quiz…

← PreviousNext →