Historically, FDI has been directed at developing nations as firms from advanced economies invested in other markets, with the US capturing most of the FDI inflows. While developed countries still account for the largest share of FDI inflows, data shows that the stock and flow of FDI has increased and is moving towards developing nations, especially in the emerging economies around the world.

FDIs not only provide foreign capital and funds, but also equip domestic countries with advanced commercial skill sets (due to transfer of technology and knowledge), information and expertise, job opportunities and improved productivity levels.

FDI is attracted into a country for different reasons. At a general level, in order for a country to be more attractive to investors, there is a need to create a conducive environment by reducing the so called hassle costs. An enabling environment for FDI has several components. First of all, political and macroeconomic stabilities are an absolute pre-requisite for any kind of private investment, including FDI. Numerous studies have amply demonstrated that political and ecqnomic stabilities, along with the prospect of growth, are the most important determinants for FDI. Only in extreme cases, such as the existence of crucial natural resources, would a foreign investor go to a war zone or where there is rampant inflation. Secondly, a sound policy and regulatory framework and efficient supporting institutions to enforce the relevant laws and regulations are imperative for FDI to enter and thrive.

Especially in a globalised competitive market, the difference between countries in how conducive their investment climate may be, including how an investor is received, how many administrative and regulatory obstacles an investor has to overcome to enter and operate, and how commercial disputes are handled through the judiciary system have a huge impact on where the investor will go and how much contribution the investment will make to the host economy. Finally, an adequate physical and social infrastructure complements a good policy and regulatory framework to create the necessary environment for attracting FDI. These include the quantity and quality of roads and communication systems, skilled labour, as well as the efficiency with which public services are delivered. They are also important if the full potential benefits of FDI presence are to be realized.

There are mainly three major modes through which firms undertake foreign direct investment (FDI) – merger and acquisition , joint venture , new plant. Mostly, the investment is into production by either buying a company in the target country or by expanding operations of an existing business into that country.

FDI was introduced in India in 1991 under the Foreign Exchange Management Act(FEMA) as a part of the new economic policy. An Indian company may receive Foreign Direct Investment under the two routes namely Automatic route OR Government route. In automatic route, FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. Whereas in the Government route, FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

The Indian government undertook a series of steps to open and thereby enlarge the scope of investments through FDI. In 1997 , FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route; In 2006 , FDI in cash and carry (wholesale) was brought under automatic approval route, upto 51% investment in single brand retail outlet permitted, subject to Press Note3 (2006 series). In 2011 100% FDI in Single Brand Retail allowed’. In 2012 government approved, the allowance of 51 percent foreign investment in multi-brand retail, [It also relaxed FDI norms for civil aviation and broadcasting sectors].

Foreign Direct Investment Essay Word Meanings for Simple Understanding

• Entity – a thing with distinct and independent existence.
• Equip – supply with the necessary items for a particular purpose.
• Expertise – expert skill or knowledge in a particular field.
• Conducive – making a certain situation or outcome likely or possible.
• Hassle – irritating inconvenience
• Acquisition – an asset or object bought or obtained
• Consolidation – to bring together (separate parts) into a single or unified whole
• Contention – heated disagreement.
• Pulverised – to reduce to nothing
• Instituted – established