Here is an essay on ‘Foreign Direct Investment (FDI) in India’ for class 10, 11 and 12. Find paragraphs, long and short essays on ‘Foreign Direct Investment (FDI) in India’ especially written for school and college students.
Essay on FDI
Essay # 1. Introduction to Foreign Direct Investment:
It is also known as ‘direct business investment’. Foreign direct investment (FDI), according to IMF manual on ‘Balance of payments’ is “an investment involving a long term relationship and reflecting a lasting interest and control of a residual entity in one economy in an enterprise resident in an economy other than that of the direct investor. Such investment involves both initial transaction between the two entities and all subsequent between them and among foreign affiliates”. Foreign affiliate means a subsidiary company or an associate in which investor owns a total of at least 10%, but not more than half of shareholders voting power or branches.
Types of FDI:
Looked at from the point of view of the investors, the FDI inflows can be classified into three groups:
(i) Market-Seeking:
These are attracted by the size of the local market which depends on the income of the country and its growth rate.
(ii) Efficiency-Seeking:
In developing countries where capital is relatively scarce the marginal efficiency of capital tends to be higher than in the developed world where it is abundant. Assuming that interest rates broadly reflect Marginal Efficiency of Capital (MEC), it follows that lending rates in Western financial centers are below MECs in developing countries. Hence, economic efficiency and commercial logic dictate that capital should flow from the relatively less-profitable developed world to the relatively more profitable developing countries.
(iii) Other Location Advantages:
These include the technological status of a country, brand name and goodwill enjoyed by the local firms, openness of economy, trade and macro policies pursued by the Government and intellectual property protection granted by the Government. Whatever form of FDI, in modern times, Multinational Corporations (MNCs) have become the major carriers of foreign capital and technical know-how.
Essay # 2. Features of FDI:
1. It is an investment made by a foreign company in a home country.
2. The foreign company may invest either by opening its branch or by having a subsidiary or foreign controlled company in home country. It may have wholly owned subsidiary or joint venture or may acquire a stake in the existing business.
3. Profit is the prime motive of such an investment. It may be in the form of a royalty and dividend payments.
4. Investor retains control over investment and management of the firm concerned. In FDI investor may obtain effective voice in the management through other means such as subcontracting, management contracts, franchising licensing trade-marks and patents and product sharing.
5. On the winding up of the firm, the assets may be repatriated to the country of origin.
According to Section 591 of the Indian Companies Act 1956, “a foreign company means any company incorporated outside India which established a place of business within India after or before 1.4.1956.”
The Reserve Bank of India has classified foreign companies into three types:
(a) Subsidiaries in which a single foreign company holds more than 50% of the equity share capital.
(b) Minority companies in which foreign company holdings are 50% or less.
(c) Purely technical collaboration companies which have no foreign equity participation. They have only technical collaboration agreements.
Foreign companies have also governed by Indian Income Tax Act 1961, MRTP Act 1969, Industrial Development and Regulation Act 1951, and Foreign Exchange Regulation Act, 1973.
FDI are governed by long term considerations because these investments cannot be easily liquidated. In aiming at investment decision, a foreign investor would have to be convicted that existing comparative ‘advantages are more than the comparative disadvantages in a country.
He will compare the improved investment climate in one country with investment markets in another country. There are many other factors that influence FDI decisions.
They are:
(a) Long-term political stability
(b) Government policy of a country
(c) Industrial and economic prospects
(d) Rules about repatriation of profits and disinvestments
(e) Treatment by officials in government departments
(f) Taxation laws.
The recipient country should he cautious at FDI may be harmful if the economy is highly protected and foreign investment takes place behind high tariff walls.
Essay # 3. Categories of Foreign Direct Investment:
There are three main categories of FDI:
(i) Equity Capital:
It is the value of the Multinational Corporations (MNCs) investment in shares of an enterprise in a foreign country. An equity capital stake of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise or its equivalent in an unincorporated enterprise is normally considered a threshold for the control of assets. This category includes both mergers and acquisitions, and green field investment (the creation of new facilities).
(ii) Reinvested Earnings:
These are the MNC’s share of affiliate earning not distributed as dividends or remitted to the MNCs. Such retained profits by affiliates are assumed to be reinvested in the affiliate.
(iii) Other Capital:
It refers to short-term or long-term borrowing and lending of funds between the MNCs and the affiliate.