FOREIGN DIRECT INVESTMENT
A foreign direct investment (FDI) is an investment made by a firm or individual in one
country into business interests located in another country. Generally, FDI takes place when
an investor establishes foreign business operations or acquires foreign business assets in a
foreign company. However, FDIs are distinguished from portfolio investments in which an
investor merely purchases equities of foreign-based companies.
Foreign direct investment frequently involves more than just a capital investment. It may
include provisions of management or technology as well. The key feature of foreign direct
investment is that it establishes either effective control of or at least substantial influence over
the decision-making of a foreign business.
There are many ways in which FDI benefits the recipient nation:
1. Increased Employment and Economic Growth
Creation of jobs is the most obvious advantage of FDI. It is also one of the most important
reasons why a nation, especially a developing one, looks to attract FDI. Increased FDI boosts
the manufacturing as well as the services sector. This in turn creates jobs, and helps reduce
unemployment among the educated youth - as well as skilled and unskilled labour - in the
country. Increased employment translates to increased incomes, and equips the population
with enhanced buying power. This boosts the economy of the country.
2. Human Resource Development
This is one of the less obvious advantages of FDI. Hence, it is often understated. Human
Capital refers to the knowledge and competence of the workforce. Skills gained and enhanced
through training and experience boost the education and human capital quotient of the
country. Once developed, human capital is mobile. It can train human resources in other
companies, thereby creating a ripple effect.
3. Development of Backward Areas
This is one of the most crucial benefits of FDI for a developing country. FDI enables the
transformation of backward areas in a country into industrial centres. This in turn provides a
boost to the social economy of the area. The Hyundai unit at Sriperumbudur, Tamil Nadu in
India exemplifies this process.
4. Provision of Finance & Technology
Recipient businesses get access to latest financing tools, technologies and operational
practices from across the world. Over time, the introduction of newer, enhanced technologies
and processes results in their diffusion into the local economy, resulting in enhanced
efficiency and effectiveness of the industry.
5. Increase in Exports
Not all goods produced through FDI are meant for domestic consumption. Many of these
products have global markets. The creation of 100% Export Oriented Units and Economic
Zones have further assisted FDI investors in boosting their exports from other countries.
6. Exchange Rate Stability
The constant flow of FDI into a country translates into a continuous flow of foreign
exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign
exchange. This in turn ensures stable exchange rates.
7. Stimulation of Economic Development
This is another very important advantage of FDI. FDI is a source of external capital and
higher revenues for a country. When factories are constructed, at least some local labour,
materials and equipment are utilised. Once the construction is complete, the factory will
employ some local employees and further use local materials and services. The people who
are employed by such factories thus have more money to spend. This creates more jobs.
These factories will also create additional tax revenue for the Government, that can be
infused into creating and improving physical and financial infrastructure.
8. Improved Capital Flow
Inflow of capital is particularly beneficial for countries with limited domestic resources, as
well as for nations with restricted opportunities to raise funds in global capital markets.
9. Creation of a Competitive Market
By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps
create a competitive environment, as well as break domestic monopolies. A healthy
competitive environment pushes firms to continuously enhance their processes and product
offerings, thereby fostering innovation. Consumers also gain access to a wider range of
competitively priced products.
FOREIGN INSTITUTIONAL INVESTORS
A foreign institutional investor (FII) is an investor or investment fund investing in a country
outside of the one in which it is registered or headquartered. The term foreign institutional
investor is probably most commonly used in India, where it refers to outside entities investing
in the nation's financial markets.
FIIs can include hedge funds, insurance companies, pension funds, investment banks, and
mutual funds. FIIs can be important sources of capital in developing economies, yet many
developing nations, such as India, have placed limits on the total value of assets an FII can
purchase and the number of equities shares it can buy, particularly in a single company. This
helps limit the influence of FIIs on individual companies and the nation's financial markets,
and the potential damage that might occur if FIIs fled en masse during a crisis.
Importance of Foreign Institutional Investors
Enhanced flow of capital
It increases the growth rate of the investment whereby development project, economic and
social infrastructure is built in which it boosts the production and employment and income of
the country.
Managing uncertainty and control
It helps in promoting a hedging instrument and also improve the competition in a financial
market also an alignment of assets which helps in stabilizing the market.
Improved corporate governance
The foreign institutional investors build professional bodies like a financial analyst who
through their contribution to better understanding and improves the firm’s operation and
corporate governance and solve the problem of an agent.
