Types of Foreign Direct Investments

Key Highlights

• Foreign direct investment or FDI is an important and lasting investment made by a company or government in foreign affairs.
• Foreign direct investment holders typically take a controlling interest in domestic companies or joint ventures and are actively involved in their management.
• Investment may consist of acquiring raw materials, expanding a firm's footprint, or establishing an international presence.

There are various types of foreign direct investment. For a better understanding of foreign direct investment types and their examples, read this guide below.

Understanding Foreign Direct Investment

Foreign direct investment is a category of cross-border investment in which an investor residing in one economy has an ongoing interest and has a significant influence over a company residing in another economy. For example, a company in the United States could help a new firm set up in India achieve its goals by investing there.

Such a relationship is illustrated by the fact that an investor residing in another country owns 10% or more voting rights in a company in one economy. Foreign direct investment is an important component of international economic integration, which creates stable and lasting links between economies.

A major tool for transferring technologies between countries is foreign direct investment. With access to foreign markets, it creates opportunities for trade around the world. This is an essential tool in the area of economic development. This group shall include indicators such as the in and out values of equity, flows, and income, broken down by partner country and sector, with FDI limits.

Foreign Direct Investment types

There are various types of FDI in India. Below are various types of foreign direct investment

1. Horizontal foreign direct investment

Horizontal direct investment, which primarily involves investments in foreign companies belonging to the same sector as those owned or operated by an FDI investor, is the most frequent type of foreign direct investment. In this case, the company is investing in another company located in another country that produces similar goods.

2. Conglomerate FDI

A transaction is called a conglomerate foreign direct investment if it involves investments in two completely different undertakings in entirely different sectors. As a result, foreign direct investment is not directly linked to the business of investors.

3. Vertical FDI

Another type of foreign direct investment is vertical FDI. Vertical FDI refers to investment that takes place in an established supply chain of a business that may or may not be part of one particular industry. In this way, when a vertical foreign direct investment occurs, the company invests in an overseas firm that could be supplying or selling products. Horizontal FDIs are further classified as backward and forward horizontal integrations.

4. Platform foreign direct investment

Platforms are the last type of FDI. In the case of platform foreign direct investment, a company expands into a foreign country, but its products are exported to a different, third country.

How does Foreign Direct Investment work?

In order to attract skilled workers and offer positive growth prospects, companies, and governments are focusing their FDI on projects in countries that have better economies than they do. FDI brings not only equity inflows but also management expertise and technical know-how, new opportunities for employment, improved infrastructure, and new technologies into the economy. Foreign investors can use either of these two routes for investments in India: automatic or government.

There is no requirement for prior government approval of automated routes. The rules and regulations on the government routes are a little more stringent compared to those of the automatics. There can be confusion about how to find a good investor for your business in India. It's a lot of work and time, and it's an expensive commodity. Contacting a foreign direct investment agency is the best solution in this case.

Examples of Foreign Direct Investment

Let us go into some real examples now that we know the meaning and types of foreign direct investment.

1. Fab India, an Indian company producing products similar to Zara, could be bought or invested in by Spain's Zara. Since the two companies are both members of the same industry in goods and clothing, their FDI classification is classified as horizontal FDI.

2. As a conglomerate foreign direct investment, US retailer Walmart can invest in India's Tata Motors.

3. Chanel, a French perfume company, has set up production facilities in the United States and exports its products to the United States, Asia, and the rest of Europe under the framework of the FDI scheme.

4. In countries such as Brazil, Colombia, and Vietnam, a coffee producer in Switzerland called Nescafé can make investments in plantations. The term 'backward vertical integration' is used for that type of FDI because an investor buys suppliers in its supply chain. In contrast, it is referred to as horizontal vertical integration when a company invests in another firm that exceeds its supply chain position. For instance, a coffee company from India is interested in investing in Thailand's food brand.

Conclusion

You need to know the different types of foreign direct investment, with examples, if you are going to invest through FDI. Within the framework of FDI, capital can be utilized to set up a new business in another country or to invest in an already established one within that country. You can easily consult the stock advisors at Kotak Securities regarding different share market terms..