In simple terms, FDI means acquiring a complete or partial ownership in an overseas business entity or firm. It is the movement of absolute capital across national boundaries, which gives the investor control over all his assets and investments acquired. FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it. The act of an Indian company such as Ola opening another headquarters in Sydney, Australia will be considered as bringing FDI into Australia.
FDI plays a crucial role in the development process of economies of the nation. It also has a significant role in enhancing exports of the host country. It is estimated that the sales from foreign-owned facilities are about double the value of world trade which pays off a high net value for the country having more FDI’s.
FDI frequently involves more than just capital investments and include provisions of management and technology as well. There are various benefits of FDI to the host countries. Creation of jobs is a primary advantage and is often the leading reason why developing countries look more into FDI, boosting the manufacturing and services sector. Various areas are cultivated and made into industrial areas helping the nation boost its economy. The country is also introduced to the latest financing tools, technologies and processes. This indirectly increases the export of the host nation for the global market.
The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign exchange. By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a healthy competitive environment, as well as break domestic monopolies. A competitive environment fosters innovation and increases their product offerings.
For decades India and China were imagined to be future economic co-giants of the “Asian Century”. The ongoing pandemic has compelled India to put forth certain decisions regarding the flow of FDI from China. If a Chinese company invests in an entity overseas that has in turn invested in India, it will need a government approval. Private equity investors and venture capital funds having investments from China will also need prior approval before they make any investment.
The government in New Delhi is examining ways to reinforce foreign investments and are clearing applications of companies in pharmaceutical companies that are pushing their attention in India with the US relocating from China. The entire FDI model is being examined in ways to boost the investments in pharmaceutical sectors. Development expects global FDI to shrink 30 40% in FY21 due to the Covid-19 pandemic. India’s FDI inflows fell 1.44% on year to $10.67 billion in the October-December period of FY20. But not all Chinese investments are a threat to national security. China’s investments in the automobile sector is less of a risk when compared to the technology sector like infrastructure of 5G and other software applications.
The future of finance could be molding into a “gated” globalisation where economic relation of countries is purely based on political trust and procedures. This gives globalisation a broader definition and creates a path for divergence. Chinese investors have a staggering stake in 18 of the 23 unicorns and was the 18th largest investor in India as of December. India would be looking forward for the advantage from this. Political familiarity with the enormous trading blocks like Europe, USA and Japan could increase safer investments and make better economic partners than China!