81 Foreign Direct Investment
81.1 What is FDI?
Foreign Direct Investment (FDI) is an investment by a firm or individual in one country into business interests in another country, in the form of either establishing business operations or acquiring business assets, including controlling ownership (IMF / OECD definition).
The IMF Balance of Payments Manual threshold: an FDI relationship exists when an investor holds at least 10 per cent of the voting rights in a foreign enterprise. Below 10 per cent it is treated as Foreign Portfolio Investment (FPI).
| Feature | FDI | FPI |
|---|---|---|
| Threshold (India) | ≥ 10 per cent of voting shares | < 10 per cent |
| Form | Direct stake; often managerial control | Stocks and bonds; passive |
| Stability | Long-term, stable | Short-term, volatile |
| Examples | Subsidiary, JV, M&A | Foreign investor buying listed shares |
81.2 Types of FDI
| Basis | Categories |
|---|---|
| Direction | Inward FDI · Outward FDI |
| Strategy | Greenfield (new plant) · Brownfield (acquire existing) |
| Motive (Dunning) | Resource-seeking · Market-seeking · Efficiency-seeking · Strategic-asset-seeking |
| Relation | Horizontal (same industry) · Vertical (supplier / distributor) · Conglomerate |
81.3 Theories of FDI
| Theory | Author | Idea |
|---|---|---|
| Internalisation | Buckley & Casson, Rugman | Firms internalise market imperfections by setting up subsidiaries |
| OLI Eclectic Paradigm | John Dunning (1977) | Firm goes abroad when it has Ownership + Location + Internalisation advantages |
| Product Life-Cycle | Raymond Vernon | New products → developed economies → developing economies (covered in topic 80) |
| Investment Development Path | Dunning | Country’s net FDI position evolves with development |
81.3.1 Dunning’s OLI Eclectic Paradigm
The most-tested FDI framework (dunning1977?):
| Letter | Advantage | Example |
|---|---|---|
| O | Ownership | Brand, technology, scale |
| L | Location | Cheap labour, market access, raw materials |
| I | Internalisation | Better to do it in-house than license |
A firm undertakes FDI when it has all three — without O it has nothing to invest abroad with; without L it should serve through exports; without I it should license.
81.4 FDI Routes
| Route | Description |
|---|---|
| Automatic Route | No prior approval needed; only post-facto reporting |
| Government / Approval Route | Prior approval required from concerned ministry |
81.5 India’s FDI Policy
The Indian FDI policy is administered by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce & Industry, with FEMA / RBI as the foreign-exchange regulator.
| Sector | FDI cap | Route |
|---|---|---|
| Single-brand retail | 100 per cent | Automatic above 49% with sourcing conditions |
| Multi-brand retail | 51 per cent | Government, with conditions |
| Cash-and-carry / Wholesale | 100 per cent | Automatic |
| E-commerce — marketplace | 100 per cent | Automatic |
| E-commerce — inventory | Not allowed for FDI | — |
| Insurance | 74 per cent | Automatic (raised in 2021) |
| Telecom | 100 per cent | Automatic (raised in 2021) |
| Defence | Up to 74 per cent automatic; above approval | Mixed |
| Banking — private | Up to 74 per cent | Mixed |
| Banking — public-sector | Up to 20 per cent | Government |
| Pharmaceuticals — Greenfield | 100 per cent | Automatic |
| Pharmaceuticals — Brownfield | 74 per cent automatic; above approval | Mixed |
| Print media / News | 26 per cent | Government |
| Atomic energy, gambling, lottery | Prohibited | — |
The list changes frequently — the Consolidated FDI Policy Circular (DPIIT) is the authoritative source.
81.6 Benefits and Concerns of FDI
| Benefits | Concerns |
|---|---|
| Capital inflow | Sovereignty / autonomy |
| Technology transfer | Crowding out of domestic firms |
| Employment generation | Profit repatriation |
| Skill enhancement | Cultural / political backlash |
| Boost to exports / forex | Race-to-the-bottom on regulation |
| Linkages with global value chains | Volatility of capital flows |
81.7 India’s FDI Profile
| Trend | Description |
|---|---|
| Top-source countries | Mauritius, Singapore, USA, Netherlands, Japan |
| Top-recipient sectors | Services, computer software & hardware, telecom, trading, automobile |
| Cumulative inflows | Over US$ 700 billion since April 2000 |
| FDI inflows post-2014 | Sharp rise after Make in India (2014) |
| Outward FDI | Indian MNCs investing abroad — Tata, Mahindra, ONGC, Reliance |
81.8 Practice Questions
By the IMF / India definition, an investment is treated as FDI when the foreign investor holds at least:
View solution
Dunning's OLI Eclectic Paradigm states that a firm undertakes FDI when it has:
View solution
A foreign company setting up a new factory from scratch in India is engaged in:
View solution
In India's FDI policy, the "Automatic Route" means:
View solution
India's FDI policy is administered by:
View solution
Among India's top sources of cumulative FDI inflows are:
View solution
In India's FDI policy, e-commerce FDI is allowed:
View solution
An MNE locating in India to access its growing middle-class consumer market is best classified as:
View solution
- FDI threshold (IMF/India): ≥ 10 per cent of voting shares. Below = FPI.
- Types: inward / outward, greenfield / brownfield, horizontal / vertical / conglomerate, four Dunning motives (resource · market · efficiency · strategic-asset).
- Dunning’s OLI: Ownership · Location · Internalisation. Theories: Internalisation (Buckley-Casson), OLI, PLC (Vernon), Investment Development Path.
- India: two routes — Automatic vs Government / Approval. Administrator: DPIIT. Forex regulator: RBI under FEMA.
- Major caps: insurance 74%, telecom 100%, defence up to 74% auto, single-brand retail 100%, multi-brand 51%, e-commerce marketplace 100% but inventory model prohibited.
- Top FDI sources to India: Mauritius, Singapore, USA, Netherlands, Japan.
- Concerns: sovereignty, crowding out, repatriation, regulatory race-to-bottom.