Let us learn: What is FDI and why is it important?We always hear about the flow of FDI during various discussion on economy of the country. So, we must learn about FDI and its importance in the country's economy. Let us discuss:
Foreign direct investment (FDI) is the investment made by a company or individual in business interests located in a different country. Foreign direct investments can be made in various ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a merger/joint venture with a foreign company.
For Indian economy, FDI is immensely important. Direct investment by a foreign entity provides capital and resources to develop the Indian company. It also helps to gain technical expertise in the particular field in which the company operates. Ultimately it helps the overall sector to develop and has positive impact of Gross Domestic Product (GDP) of the country ensuring economic prosperity. FDI in various sectors results in re-creating demands. So, in a nutshell, regular and increasing flow of FDI causes the economy of the country to flourish.
However, we have to remember that FDI may have some disadvantages also. Countries, especially the developing countries, should always monitor and, if necessary, limit foreign ownership of companies in strategically important industries. Excessive FDI can lower the comparative advantages of such developing countries. Moreover, sophisticated foreign investors might strip the business of its value instead of adding any. Moreover, the foreign investors can sell off the unprofitable portions of the company to the local, less sophisticated investors.