FDI refers to investment in a foreign country where the investor retains control full or partial over the use of investment . Direct investment and management of thr firm concerned normally go together.
According to UNCTAD's World Investment Reports FDI as an investment involving a long - term relationship and reflecting a lasting interest and control by a resident entity in one economy in an enterprise resident in an economy other than that of the foreign direct investor( FDI enterprise or affilate enterprise or foreign affilate). FDI may be undertaken by individuals as well as business entities.
According to the World Bank .FDI is net inflow of investment to acquire a lasting management interest ( 10 percent or more of voting stock ) is an enterprise operating is an economy other than that of the investor.It is the sum of equity capital , reinvestment of earning ,other long term capital,and short term capital ,as shown in the balance of payments.
Advantages of FDI
FDI have a number of socio Economic and political advantages
1.It helps increase the investment level and thereby the income and employment in the host country.
2 .FDI may increase the tax revenue of the government.
3. FDI facilities transfer of technology and thereby benefit enterprises and the recipient country.
4. Foreign capital may enable the country to increase its exports and reduce import requirements.
5. Foreign investment may also help increase competition and break domestic monopolies.
6. Several FDIs have production linkage and support the growth and upgradation of enterprise.
7. Invigoration of enterprise by foreign collaboration may help international business.
8. Apart from potential gains through technology transfer FDI has generated large employment opportunities in a number of countries.
Disadvantage of FDI
1. Foreign capital sometimes interferes in the national politics.
2. Foreign investors sometimes engage in unfair and unethical trade practices.
3. FDI can also potentially display domestic producer by pre empting their investment opportunity.
4.Private foreign capital tends to flow to the high profit areas rather than to the priority sectors.
5. Sometimes foreign investment can result in the dangerous situation of minimising eliminating competition and the creation of monopolies or oligipolistic structure.
Types of FDI
1. Horizontal direct investment
With a horizontal direct investment a company established the same type of business operation in a foreign country as it operates in its home country a US based call phone provider buying a chaine of phone store in china is an example.
2.Vertical Investment
In a vertical Investment a business enquires a complementary business in another country . For example , a manufacturer might acquire an interest in foreign company that supplies it with the raw material it needs.
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