Foreign Investment

Foreign investment occurs when foreign companies invest in domestic companies and seek active participation in their day-to-day operations and key strategic expansion. For example, if an American company invests in an Indian company, it will be a foreign investment.

Very often, large global multinational companies try to expand their opportunities and gain market share by collaborating or investing in another country’s businesses. It might be done directly or indirectly and might lead to control of business ownership or assets of the target company. The process helps both the countries and companies to expand and grow.

Key Takeaways                                                               

• Foreign investment is a process through which international companies invest in another country, gain stakes, increases employment in that country, and manifest globalization by trade expansion.
• Foreign investments can be of two types, Foreign Direct Investment and Foreign Indirect Investment. FDI is when a company invests in a business in India, owning more than 10% of its stake. However, FII is when a company invests in a business in India by buying its shares/stocks, which can't cross over 10% stakes. 
• The two strategies for foreign investments are greenfield investments and brownfield investments. Greenfield investments mean companies start their business operations in another country from scratch. In comparison, companies choose to invest through mergers and acquisitions in a brownfield investment. 

Foreign investment refers to investment from another country. Since it comes from cross-border, more rules and regulations are required. It is beneficial for developing countries because it helps build infrastructure, create employment, share knowledge, and increase purchasing power. At the same time, it is also required in a developed nation for business expansion.

In globalization, foreign investment policy plays a vital role in business expansion. It helps the foreign investor to gain advantage of the cheap labor, raw material or geographical facilities to expand the business. But on the other hand, it harms small and domestic businesses because they have insufficient funds to compete against giant corporations. It also encourages steady movement of cash flows within nations.

However, there is also the risk of foreign investment enterprise taking control of the business operations of the domestic company. If the stake is very high, the foreign company will be able to influence the day-to-day working of the domestic company.

There are two types of foreign investment policy–

#1 - Foreign Direct Investment (FDI)

When a company, financial institution, or individual invests in foreign countries and owns more than 10% of a company's stake, it is referred to as a foreign direct investment. It gives the investor controlling power and influence over the companies' operations and processes. Another way of gaining foreign direct investments is opening plants, factories, and offices in another country.

There are two types of foreign direct investment:

1 – Horizontal Investment

When an investor establishes a similar type of business in a foreign country or when two companies of the same industry (operating in different countries) merge, it is known as horizontal investment. A company pursues this kind of investment to gain market share and become a global leader.

2 – Vertical Investment

It refers to when a company of one country acquires or merges with a firm in another country, irrespective of their business fields. For example, a manufacturing business of one country acquiring the supplier of raw materials for production of another country. A company indulges in this type of investment to remove the dependency on others and achieve economies of scale.

#2 - Foreign Indirect Investment

When a foreign investment enterprise, financial institution, or an individual invests in another country by buying stocks of companies trading in the foreign stock exchange, it is known as foreign indirect investment. However, the said investment should not cross over 10% of the stock in a single company.

There are two methods or strategies for this investment:

1. Greenfield Investment: – In this strategy, the company starts its business operation in another country from scratch. For example, Domino's and McDonald's are US-based companies that started their business in India from zero. Currently, they are leading in their segments.
2. Brownfield Investment: – In this strategy, the company does not create its business from scratch. Instead, they choose mergers or acquisitions. Recently, another US-based company, Walmart Inc acquired Flipkart, an Indian company, thus acquiring all its assets and liabilities. 

Below are the two routes of acquiring foreign investment funds–

1. Automatic route: In the automatic course, foreign companies/institutions do not require any approval of the government or any agencies for investing in another country.
2. Approval route:- In the approval route, foreign companies/institutions require approval from government or any specified body of the country where they want to invest.

Note: A nation's government decides which business investment can come via the automatic or approval route. Generally, if a country's government wishes to boost its economy, they allow direct foreign investment funds.

Let us assume that Blueline Industries, an US based pharmaceutical company is trying to expand its business globally. Thus, has purchased stakes in Cloud Pharma, which has a chain of hospitals in the Asian countries like India, Singapore, Hong Kong, Thailand, etc. This collaboration will help them to sell their own products like medicines and surgical equipments, to these countries through Cloud Pharma and also understand the market and analyse the types of products that are rising in demand or the business opportunities that have not yet been explored in these countries.

From the above example, we see that Blueline Industries is a foreign company investing in the domestic company in the above mentioned countries and making use of the opportunity to expand its business.

Let us look at the importance of foreign investment.

• Employment creation is a significant advantage of foreign investment as it increases manufacturing activities and improves the service sector.
• It provides exclusive market access in another nation.
• It enhances a country's infrastructure and helps develop the backward area by setting up industries or plants.
• It also helps in improving the technologies and operational practices by sharing knowledge.
• When manufacturing is boosted by foreign investment, exports rise. 
• An increase in income and job opportunities occurs. Furthermore, an increase in wages enhances a nation's per capita income.

Apart from the importance of foreign investment, there are some disadvantages also as given below.

• It poses a risk or causes a hindrance to domestic investments.
• Fluctuation in exchange rates can make foreign investment risky.
• It depends on the political environment, foreign policies and regulations that keep changing in a country.
• The domestic company can lose its control over business and the profit earned.
• The motive of gaining market share through foreign investments may cause domestic and small traders to incur massive losses. 

• Foreign investment has the capacity to generate higher paid jobs with better facilities than the domestic investment.
• The former gives the domestic economy asccess to intenational market.
• Investment of foreign companies enhance and maximise the use of resources and benefits that the domestic investment market creates in an economy.
• Entry of foreign companies in the domestic economy helps developing countries in getting a better and more advanced industrial base and achieve a competitive level in exports.