When an investor living in one country invests in a business based in another country, it is termed as Foreign Direct Investment. FDI policy in India is regulated under the Foreign Exchange Management Act (FEMA) 2000 administered by the Reserve Bank of India (RBI).
Under FDI, the foreign investor owns a fixed per cent of the company where the investment is being made. If the investor owns less than the fixed per cent, the International Monetary Fund (IMF) defines it as part of their stock portfolio. As the investor only owns some part of the company, it does not give the investor complete control. But it is enough to influence the company’s management, operations, and policies. This ensures the investor to develop a lasting interest in the business.
Here are a few benefits of FDI:
1. Increased Economic Growth
Private investment helps in growing jobs and wages and promotes economic growth. When an investor establishes a business in India, it creates job opportunities for the people. Foreign Direct Investments help boost different sectors like manufacturing, technology, and services, thus reducing unemployment and fostering the growth of the economy. Foreign direct investment is significant for developing economies where companies need funding and expertise to expand their sales.
2. Development of Rural Areas
Most of the industries are established in rural areas, due to the availability of resources like large areas. They utilize local labour, materials, and equipment for constructions FDI helps turn these areas into industrial sectors, providing employment to the locals and boosting the economy.
3. Provision of Finance & Technology
Foreign establishments enable access to the latest tools, technologies, and operational practices from different parts of the world. This results in their distribution into the local economy, enhancing the efficiency of the economy.
4. Increased Exports
FDI produced goods have global markets, resulting in a boost in exports to other countries.
5. Exchange Rate Stability
FDI enables a continuous flow of foreign exchange. This helps the country’s Central Bank to maintain a reserve of foreign exchange, ensuring stable exchange rates.
6. Creation of a Competitive Market
FDI helps create a competitive environment by involving foreign entities and breaks domestic monopolies. As the buyers have access to a broader range of stocks, it creates a healthy competitive environment. The firms are needed to enhance their processes to be innovative to attract investors.