What is Foreign Direct Investment

You must be reading a lot about India’s popularity as most preferred FDI destination in the world. Let’s discuss what is FDI and how is it different from other investments.

Foreign direct investment (FDI) is an investment made by an investor [a company, partnership or individual(s)] in one country in business interests in another country. Such investment can be made either in establishing new business operations by incorporating a new entity or acquiring existing business assets in the other country, such as ownership or controlling interest in a foreign company.

Foreign direct investments are different from portfolio investments – in the latter case, an investor merely purchases securities (shares, debentures, and other financial instruments) of foreign-based companies. The objective is to make financial returns without any commitment of duration, management, resources, technology, etc. to the investee company.

On the other hand, the most important feature of foreign direct investment is that by such investment, the investor intends to establish either full or partial control of and influence over the decision making in a foreign business entity. Not only finance, an investor may also commit managerial expertise, technology, raw materials or other support to the investee company.

Investors are attracted by foreign economies which offer a good volume of skilled workforce, a good growth rate, a stable government, certainty of law and good consumer base. They invest in ventures in such countries to expand their global footprint and enhance their market.

We will discuss the benefits of FDI for the investors and the recipient economy in next articles. 

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About the author :

Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. He can be reached at bhumesh.verma@corpcommlegal.com.