Foreign direct investment

In developing nations like India, foreign direct investment (FDI) is one of the most significant sources of non-debt international investment flows. Following the introduction of the New Industrial Policy in 1991 and current liberalisation initiatives, India has seen an increase in the flow of foreign investment into the nation.

India’s Foreign Direct Investment (FDI) Policy

The Indian government has made a number of practical initiatives to streamline the country’s foreign direct investment policy. The Government of India’s Foreign Direct Investment Policy (FDI Policy) establishes a foreign investment ceiling in certain economic sectors. However, several activities have recently been shifted to unregulated areas where 100% Foreign Direct Investment is permissible. The industrial sectors are broadly classified as follows:

• Restricted
• Prohibited
• Sectors with No Restrictions

Unrestricted sectors include all sectors other than those listed below that are subject to FDI policy terms and restrictions, such as:

Exploration and mining (except Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities)

Commercial activity connected to manufacturing

Activities involving information technology

E-commerce is allowed in the marketplace model but not in the inventory model. It also only applies to business-to-business e-commerce, not consumer-to-business e-commerce.)

Since mid-1991, India’s government has been implementing massive economic reforms with the goal of integrating with the global economy and becoming a prominent actor in the globalisation process. The government deemed it obligatory to promote foreign direct investment as part of its economic reforms.

In most industries or activities, FDI up to 100% is authorised through the automatic route, as part of the current policy. Under the automatic method, FDI does not need previous clearance from the government or the Reserve Bank of India. Investors must only inform the RBI’s regional office within 30 days of receiving inward remittances and submit the relevant documentation with that office within 30 days of issuing shares to international investors.

The Department of Economic Affaires receives approvals for FDI applications from non-resident Indians and proposals for FDI in ‘Singh Brand’ goods retailing and Multi-Brand Retail Trading (MBRT) via the government approval procedure.

The Department of Industrial Policy and Promotion is receiving proposals for FDI in ‘Singh Brand’ goods retailing, MB, and by NRIs. The Foreign Investment Promotion Board (FIPB), which is based in the Department of Economic Affaires, then considers these bids.

Under the port-folio Investment plan, foreign investments in the equity capital of an Indian company are controlled by distinct RBI/Securities and Exchanges Board of India laws (SEBI). The FDI policy has been gradually liberalised, with the policy being reviewed on a regular basis and FDI being allowed in additional industries under the automatic method. In the years 2000, 2006, and 2007-08, three significant evaluations were conducted. In 2009, a crucial policy decision defining indirect foreign investment was made.

The Economic Impact of Foreign Direct Investment

Foreign Direct Investment (FDI) is critical to a country’s economic growth and development. It is especially critical when domestic savings are insufficient to support capital investment. It not only meets an economy’s investment needs, but it also introduces new technology, management experience, and increases foreign currency reserves.

Inflows of foreign direct investment benefit developing and emerging economies more than established economies. The International Monetary Fund (IMF) defines FDI as “a category of international investment that reflects the goal of a resident entity in one economy (direct investor or parent enterprise) obtaining a long-term interest and control in an enterprise resident in another economy (direct investment enterprise).”

Prior to the 1980s, economic theories did not devote much attention to issues such as foreign direct investment and multilateral corporations (MNEs). Almost all nations’ economic policies have been shaped by globalisation during the previous three decades. FDI inflows from home nations to host countries are an essential part of globalisation.

Though there is no universal rule defining developed and developing nations as home and host countries, FDI flows from developed to developing and emerging countries are the most common. In order to attract FDI, developing and rising nations are increasingly competing. In this aspect, India does not lag behind.

In the host nations, FDI is thought to have a significant influence. Based on the host country’s policies, investment environment, and other domestic macroeconomic variables, it has various impacts on different nations.

The first is that it serves as a capital supplement to domestic capital in order to meet investment demand. It delivers new, innovative technologies to the host nations in addition to finance. It also encourages local enterprises to compete to enhance their level of technology adoption in many nations.

To enhance their technology, they effectively spend more in research and development (R & D). More job possibilities are created as a result of greater investment as a complement to domestic capital. Foreign enterprises enhance their management competence as a result of their great interest in investee firms via FDI, which also develops managerial skills in the country through rivalry and diffusion of new ideas and skills.

Firms with increased technology and competition develop high-quality, exportable goods, increasing the volume of export and the degree of openness of the host nations. There are improved ties with importing corporations overseas for possible exportable home items when working with international partners. The foreign currency profits of the host nations increase as exports improve. Capital inflows from FDI and increased export profits may help host nations build up their foreign currency reserves.

The demand for home currency will increase as foreign exchange reserves increase. As a result, the host country’s native currency is projected to appreciate versus a basket of other currencies, primarily from trading partners.

FDI is also thought to boost the host country’s GDP by increasing output and competitiveness among indigenous enterprises. With increased output and employment, the country’s gross domestic capital formation (GDCF) will be able to meet the country’s growing need for domestic investment. Furthermore, with increased competition and technological advancements, the performance of the investee companies, as well as other domestic companies, might improve. As a result, it may have a beneficial effect on return on capital and, as a result, on stock prices.

With the above-mentioned relationships between inward FDI and other macroeconomic variables already established by some earlier researchers, this study attempts to empirically establish the relationship between FDI and other macroeconomic variables in the Indian context after reviewing some of the existing work in this area across economies.