Foreign Direct Investment

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Foreign Direct Investment

Foreign Direct Investment


FM P Chidambaram dismisses downgrade talk; promises more reforms in next 2 years to convince S&P


ET Bureau & Agencies

Date published

October 12, 2012

Source of Article

Economic Times


Article focus is on the foreign direct investment and on India's grading situation.


Foreign direct investment (FDI) means that any company or organization can do direct investment into the production of another country. It can be through various ways; buying company on another country or by expanding business into another country. Expanding business means opening a new business unit of existing business or by opening a completely new business. There are many reasons behind doing foreign investment; it may be because of taking advantage of low wages of a country, privileges like tax exemption which are given by some countries as an incentive to take advantage of tariff-free access of the region or of a specific market. Foreign direct investment is the opposite of portfolio investment. In portfolio investment a company buys stocks and bonds of different companies located in different countries.

Foreign direct investment is the part of national accounts of the country. In the equation of calculating national income the foreign investment is included. The equation of national income is made up of various factors, the equation looks like; Y=C+I+G+(X-M). In the equation of national income I mean investment which includes local plus foreign investment. Foreign direct investment means both inflows and outflows of the investment. Inflows minus outflows are done to get the management interest of a company operating in the current country. Foreign direct investment is the sum of capital, long and short term capital which are seen in the balance of payment. In foreign investment there is involvement of management in doing joint venture, shifting if technology or expertise. There are some major types of foreign direct investment one is internal foreign direct investment and the other is external foreign direct investment. By this the result of net foreign investment is taken that whether the investment inflow is negative or positive and stock of foreign direct investment. Foreign direct investment is the increasing number of a specific period. Foreign direct investment does not include investments which are done by purchasing shares of another country. Foreign direct investment is also called as an example of international factor movements.


Types of Foreign Direct Investment

There are types of foreign direct investment; i) horizontal investment ii) platform investment and iii) vertical investment.

Horizontal foreign direct investment takes place when a company open exact same operation with all the same values of home based in host country through foreign direct investment. In platform foreign direct investment company provides the platform. Vertical foreign direct investment takes place when company does foreign direct investment and moves upward and downward stream of different value chains. For example if a firm is adding value in the host country step by step in vertical foreign direct investment. In horizontal foreign direct investment the international trade is decreased because the products are aimed at host ...
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