What is Foreign Direct Investment?

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Foreign Direct Investment or FDI is a type of investment allows companies in a particular country to receive funding and investments from abroad. FDI plays a major role in global business and can provide a company with new customers, new marketing channels and access to new technology, skills and financing. For investors, it gives them management and decision-making rights in a company if they own 10% or more of ordinary shares in a company. FDIs are classified as inward FDI and outward FDI depending on the flow of money. Inward FDI occurs when foreign capital is invested in local resources while outward FDI includes direct investment abroad by local investors.

  • Allowing FDI in a country like India gives Indians the opportunity to benefit from access to modern products and technology, strengthening of infrastructure such as transport and power supply, and an increase in employment opportunities.
  • The foreign investor brings new products at improved quality.
  • The foreign investor provides additional resources to raise the level of domestic output.
  • The foreign investor provides new technologies, management techniques and quality control processes that allow the host nation to work more efficiently and offer better and cheaper products.
  • The new technologies also help the host nation undertake completely new product manufacturing processes.
  • The new and better quality products will allow the host nation to sell in new markets that had not been tapped into previously.

The issue of allowing FDI in the Indian retail sector has caused huge debates recently. In India, the retail sector is the second largest employer after agriculture and provides job opportunities to 33.1 million people. It is one of the five largest sectors of the Indian economy and contributes to around 35% of India's Gross Domestic Product (GDP), which is the total value of goods and services produced by the country in a year. The government has proposed plans to open up the retail sector to FDI and allow 51% FDI in the multi-brand retail sector. A multi-brand retail outlet is where products from different brands are sold under one roof. Indian multi-brand chains include Pantaloons, Reliance, Subhiksha and Shoppers Stop. Allowing 51% FDI means that foreign brands would own majority stake in the companies they set up. This would allow major retail brands like Wal-Mart and TESCO to enter India. However the Opposition parties have objected to this. According to the government, if FDI is allowed in the retail sector:
  • Huge investments will help increase employment opportunities in areas such as agro-processing, marketing, business management and front-end retail, which includes such jobs as sales staff.
  • At least 10 million jobs will be created in the next three years in the retail sector.
  • It will benefit farmers as they will be able to sell their products directly to big chains and not have to work through middlemen.
  • Foreign retail majors will help make the supply of food products more efficient.
  • Food, which often perishes due to storage facilities, will not be wasted.

On the other hand, the Opposition is basing its views on the experience of most countries which have allowed FDI in retail. It believes that if FDI is allowed in retail markets:

  • It will lead to large-scale job losses as supermarkets usually displace small shops retailers. In fact, in the US and Europe, where companies like Wal-Mart and TESCO are well-established, small shops and retailers have been almost wiped out.
  • The manufacturing sector will suffer because international retail chains will purchase goods internationally and not from domestic sources.
  • Existing markets, which include individuals buying goods from small, locally run shops, will be replaced by individuals commuting to centrally located large-scale retail outlets.
  • The Opposition also disagrees with the government’s point of view on creation of better supply chains. In fact, the Opposition believes that international retail players will only create cold storage facilities, which can and should be done by governments in India.
The effect of big retail on small stores is never instantaneous. In Britain, corner shops coexisted with big retail stores for decades. This helped cut prices, due to the competition between big and small stores. It also led to stores becoming more specialised so as to satisfy the demands of every type of customer. While all this benefits the end user, in the competition between big and small retail, smaller stores often find it tough to keep up with the technology and supply chain upgradations required to cut prices. As for the farmers, in the UK they benefitted significantly by selling directly to organised retailers instead of selling to middlemen, who don't usually pay market rates for the goods they procure. Additionally, with the creation of cold storage facilities that large international retailers can bring in, the loss of goods due to lack of storage facilities will be a thing of the past.