Foreign direct investment (FDI) and Foreign portfolio investment (FPI)

Foreign portfolio investment (FPI) refers to the purchase of securities and other financial assets by investors from another country. ... Foreign direct investment (FDI) refers to investments made by an individual or firm in one country in a business located in another country.

Syllabus of UGC Net Commerce (Unit I)

Before proceeding to the topic let's see the relevance of this topic in the new syllabus of UGC Net Commerce examination issued by NTA.

Unit I – Business Environment and International Business 

  • Concepts and elements of business environment: Economic environment- Economic systems, Economic policies(Monetary and fiscal policies); Political environment, Role of government in business; Legal environment- Consumer Protection Act, FEMA; Socio-cultural factors and their influence on business; Corporate Social Responsibility (CSR)
  • Scope and importance of international business; Globalization and its drivers; Modes of entry into international business
  • Theories of international trade; Government intervention in international trade; Tariff and non-tariff barriers; India’s foreign trade policy
  • Foreign direct investment (FDI) and Foreign portfolio investment (FPI); Types of FDI, Costs and benefits of FDI to home and host countries; Trends in FDI; India’s FDI policy
  • Balance of payments (BOP): Importance and components of BOP
  • Regional Economic Integration: Levels of Regional Economic Integration; Trade creation and diversion effects; Regional Trade Agreements: European Union (EU), ASEAN, SAARC, NAFTA
  • International Economic institutions: IMF, World Bank, UNCTAD
  • World Trade Organisation (WTO): Functions and objectives of WTO; Agriculture Agreement; GATS; TRIPS; TRIMS
Check out complete syllabus of UGC Net Commerce - Click Here

International liquidity

International liquidity’ embraces all those assets which are internationally acceptable without loss of value in discharge of debts (on external accounts). In its simplest form, international liquidity comprises of all reserves that are available to the monetary authorities of different countries for meeting their international disbursement. In short, the term ‘international liquidity’ connotes the world supply of reserves of gold and currencies which are freely usable internationally, such as dollars and sterling.

Forex Reserves

The forex are reserve assets held by a central bank in foreign currencies. The components of India’s FOREX Reserves include Foreign currency assets (FCAs), Gold Reserves, Special Drawing Rights (SDRs) and RBI’s Reserve position with International Monetary Fund (IMF). FCAs constitute largest component of Indian Forex Reserves and are expressed in US dollar terms.

FDI (Foreign Direct Investment)

FDI refers to obtaining ownership in foreign business entity. It can also be attributed that FDI circulates capital across national boundaries. It can be defined as an investor based on one country (home country), acquires an asset in another country (host country), with the intention to manage it. Permission for Foreign Direct Investment (FDI) in India is not uniform for all sectors. Some sectors are opened up for 100% and in some sectors, it is allowed only upto 26%, 49% or 51%. Also, FDI is prohibited in sectors like lottery business, gambling, chit fund etc.

                         

  • Inward FDI - Foreign firms taking control over domestic assets is termed as inward FDI. From an Indian perspective, direct investments made by foreign firms such as Suzuki, Honda, LG, Samsung, General Motors, Electrolux etc come under inward FDI.
  • Outward FDI - Domestic firms investing overseas and taking control over foreign assets are known as Outward FDI. Such outward investment is also known as direct investments abroad. 
  • Horizontal FDI - It is the investment activities undertaken by a foreign firm in similar production activity as it is carried out in its home country. In other words, it signifies that an MNC assumes the same production process in two or more countries. A number of MNCs such as Kodak, HSBC, LG, Samsung etc expanded their business territory by way of horizontal FDI. 
  •  Vertical FDI - Under this, a firm assumes investment activities overseas, with the intention of supplying raw materials required for its domestic production, or to sell its domestically produced final products in a foreign country.
  • Backward Vertical FDI – Under this, a foreign firm enters the business scenario of another country with the intention of obtaining raw materials needed for carrying out its domestic production activities. Such FDI is historically common in extractive industries such as mining (Gold, Copper, Tin, Bauxite, petroleum etc). Companies like British Petroleum and Shell have expanded their international business by backward vertical FDI. · Forward Vertical FDI – Here a firm assumes FDI for selling out the products it domestically produced. Setting up a marketing network, assembly or mixing operations overseas are illustrations of forward vertical FDI.
  • Conglomerate FDI - Direct investment overseas aimed at manufacturing products not manufactured by the firm in the home country is termed as Conglomerate FDI. · 

Foreign Institutional Investment (FII)

.A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India and refers to outside companies investing in the financial markets of India. The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives.

 

Greenfield Investments

Greenfield investments are done primarily for creation of new facilities or expansion of existing facilities. Firms often enter international markets by way of Greenfield investments in industries where technological skills and production technology are the key factors. Example – Foreign company setting up a new project in India and constructing factories for it..

Brownfield Investments

 An investment is called Brownfield when a company or government entity purchases or leases existing production facilities to launch a new production activity. This is an alternative to Greenfield investments. Example – Foreign company rather than setting up a new factory decides to acquire the business of existing factory.

FDI Policy in India

The Department of Industrial Policy & Promotion is the nodal Department for formulation of the policy of the Government on Foreign Direct Investment (FDI). It is also responsible for maintenance and management of data on inward FDI into India, based upon the remittances reported by the Reserve Bank of India. The FDI policy is reviewed on an ongoing basis, with a view to making it more investor-friendly.

Foreign Direct Investment (FDI) is a major driver of economic growth and a source of non-debt finance for the economic development of the country. Government has put in place an investor friendly policy on FDI, under which FDI up to 100%, is permitted on the automatic route in most sectors/ activities. In the recent past, the Government has brought FDI policy reforms in a number of sectors viz. Defence, Construction Development, Insurance, Pension, Other Financial Services, Asset reconstruction Companies, Broadcasting, Civil Aviation, Pharmaceuticals, Trading etc.

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