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Foreign direct investment (FDI) is direct investment into production or business in a country by a company in another country, either by buying

a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages or for special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI refers to the net inflows of investment(inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1] It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movements.

Foreign Direct Investment in India

The fast and steadily growing economy of India in majority of its sectors, has made India one of the most famous and popular destinations in the whole world, for Foreign Direct Investment. India's ever-expanding markets, liberalization of trade policies, development in technology and telecommunication, and loosening of diverse foreign investment restrictions, have further collectively made India, the apple of investors' eye, for most productive, profitable, and secure foreign investment. According to a recent survey by the United Nations Conference on Trade and Development (UNCTAD), India has conspicuously emerged out as the second most popular and preferable destination in the entire world, after China, for highly profitable foreign direct investment.

In recent years, bulk of the foreign direct investment in indian business sectors of infrastructure, telecommunication, information technology, computer hardware and software, and hospitality services, have been made by investors of countries like US, UK, Mauritius, Singapore, and many others. Global Jurix, one of the leading full-fledged legal organizations of India with global repute, has been helping companies, business corporations, organizations, and other potential investors of countries all around the world, in making foreign direct investment in indian business sectors, in various ways described in the section below.

Foreign Direct Investment (FDI) is considered to be the lifeblood of economic development especially for the developing and underdeveloped countries. Multinational companies (MNCs) capitalise on foreign business opportunities by engaging in FDI, which is investment in real assets (such as land, buildings, or existing plants) in foreign countries. MNCs engage in joint ventures with foreign firms, acquire foreign firms, and form new foreign subsidiaries. It plays an important role in the long-term development of a country not only as a source of capital but also for enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity and generating new employment opportunities (Deutsche Bundesbank, 2003). MNCs are interested in boosting revenues through FDI by attracting new sources of demand, entering into profitable markets and exploiting monopolistic advantages. Currently these corporations are increasingly establishing overseas plants or acquiring existing overseas plants to learn the technology of foreign countries. In India, FDI is considered as a developmental tool, which can help in achieving self-reliance in various sectors of the economy. With the announcement of Industrial Policy in 1991, huge incentives and concessions were granted for the flow of foreign capital to India. India is a growing country which has large space for consumer as well as capital goods. Indias abundant and diversified natural resources, its sound economic policy, good market conditions and highly skilled human resources, make it a proper destination for foreign direct investments. As per the recent survey done by the United National Conference on Trade and Development (UNCTAD), India will emerge as the third largest recipient of foreign direct investment (FDI) for the three-year period ending 2012 (World Investment Report 2010). As per the study, the sectors which attracted highest FDI were services, telecommunications, construction activities, and computer software and hardware. In 1991, India liberalised its highly regulated FDI regime. Along with the virtual abolition of the industrial licensing system, controls over foreign trade and FDI were considerably relaxed. The reforms did result in increased inflows of FDI during the post reform period. The volume of FDI in India is relatively low compared with that in most other developing countries.

Merits of FDI

FDI has lot to advantages to its favour which can be summarized as below

1) More consumer savings

One of the biggest advantage of FDI is that it will increase the savings of Indian consumer as he will get good quality products at much cheaper rates. Consumer savings are likely to increase 5 to 10% from FDI.

2) Higher remuneration for farmers

Another advantage of FDI is that it will help a lot in improving the miserable condition of Indian farmers who are committing suicides on daily basis because of lesser return from their agricultural produce. But FDI will certain help a lot in improving their conditions as the farmers are going to get 10 to 30 %higher remuneration because of FDI.

3) Increase in employment opportunities

FDI is certainly going to increase the employment opportunities in India by providing around 3 to 4 million new jobs. Not only this another 4 to 6 million jobs will be created in logistics, labour etc. because of FDI.

4) Increase in government revenue

Government revenues are certainly going to increase a lot because of FDI. Government revenues will increase by 25 to 30 billion dollars which is a really big amount. This government revenue can help a lot in the development of Indian economy.

Demerits of FDI

Although FDI brings with it lot of advantages but it is not free from disadvantages as well. Following are some of its demerits

1) Destruction of small entrepreneurs

The biggest fear from FDI is that it is likely to destroy the small entrepreneurs or small kirana shops as they will not be able to withstand the tough competition of big entrepreneurs as these entrepreneurs are going to provide all the goods to the consumers at much lesser prices.

2) Shrinking of jobs

Many critics of FDI are of the view that entry of big foreign chains like Wal-Mart, Carrefour etc. are not going to generate any jobs in reality in India. At best the jobs will move from unorganized sector to organized sector while their number will remain the same or lesser but not more.

3) No real benefit to farmers

Critics of FDI are also of the view that it is a fallacy that the farmers are going to benefit in

any way because of the entry of foreign chains in India rather it will make the Indian farmers a slave of these big chains & the farmers will entirely be on their mercy. Thus, FDI is only going to deteriorate the already miserable conditions of Indian farmers.

After taking into consideration both pros & cons of FDI one can safely say that although there are certain apprehensions about FDI in India but all these fears are unfounded. There is hardly any truth in the fact that it would destroy the small entrepreneurs in India rather it will be beneficial for both the consumers & farmers of India. So, the future of India lies in FDI & the government must proceed in that direction if it wants to make the Indian economy a developed economy.

Foreign direct investment has many advantages for both the investor and the recipient. One of the primary benefits is that it allows money to freely go to whatever business has the best prospects for growth anywhere in the world. That's because investors aggressively seek the best return for their money with the least risk. This motive is color-blind, doesn't care about religion or form of government. This gives well-run businesses -- regardless of race, color or creed -- a competitive advantage. It reduces (but, of course, doesn't eliminate) the effects of politics, cronyism and bribery. As a result, the smartest money goes to the best businesses all over the world, bringing these goods and services to market faster than if unrestricted FDI weren't available. Investors receive additional benefits. Their risk is reduced because they can diversify their holdings outside of a specific country, industry or political system. Diversification always increases return without increasing risk. Businesses benefit by receiving management, accounting or legal guidance in keeping with the best practices practiced by their lenders. They can also incorporate the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of. By adopting these practices, they enhance their employees' lifestyles, helping to create a better standard of living for the recipient country. In addition, since the best companies get rewarded with these benefits, local governments have less influence, and aren't as able to pursue poor economic policies. The standard of living in the recipient country is also improved by higher tax revenue from the company that received the foreign direct investment. However, sometimes countries neutralize that increased revenue by offering tax incentives to attract the FDI in the first place. Another advantage of FDI is that it can offset the volatility created by "hot money." Shortterm lenders and currency traders can create an asset bubble in a country by investing lots of money in a short period of time, then selling their investments just as quickly. This can create a boom-bust cycle that can wreak economies and political regimes. Foreign direct investment takes longer to set up, and has a more permanent footprint in a country.

Disadvantages of Foreign Direct Investment Too much foreign ownership of companies can be a concern, especially in industries that are strategically important. Second, sophisticated foreign investors can use their skills to strip the company of its value without adding any. They can sell off unprofitable portions of the company to local, less sophisticated investors. Or, they can borrow against the company's collateral locally, and lend the funds back to the parent company. (Source: IMF, Finance and Development Magazine, Prakash Loungani and Assaf Razin, How Beneficial Is Foreign Direct Investment for Developing Countries?, June 2001)