Decoding Foreign Direct Investment

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Foreign Direct Investment (FDI) is one of those buzzwords you will hear in different snatches of conversation.

What is it? When a foreign or international company decides to invest in a country in order to set up or do business there, they are investing in the country. This could involve setting up stores to sell its products, setting up distribution systems so that its products can be sold around the country, setting up factories to manufacture goods in that country, and many more options.

FDI is a term used around the world. It is very important for all countries to show they are an attractive investment destination.

Let’s talk about FDI in India: In the olden days (read that as before the 1990s!), industry in India was tightly controlled by the government. Foreign investment was not really allowed, and the Indian government decided how much of what would be produced and controlled prices and who could be in the market.

Liberalisation: Starting in 1991, there has been a huge effort to ‘liberalise’ India, to encourage growth in industries, and to encourage foreign investment. However the amount that foreign companies can invest in India is decided by the government. In some industries, foreign companies are allowed to set up their own shop here in India, in an effort that is 100% owned by them (100% FDI). The government is protecting other industries, where it is allowing foreign companies to invest, but with a minority ownership – they can own upto 49% of the company, but cannot own the majority of the company. For example, the airline industry has been tightly controlled, with 49% FDI just recently being allowed.

So if a foreign company wants to come into India and open an airline, they can’t. But they can form a partnership or ‘joint venture’ with an Indian company, such that the Indian company owns 51% and the foreign company owns 49% of this venture.

Why does this make sense? Indians can retain control over the company. That means that Indian jobs will be protected. The ‘intellectual capital’ or knowledge will remain within India and the country will continue to build champions in industry.

Is this something peculiar to India? Not at all. China has operated in a similar way.

The retail industry is a fun one for us to talk about because you can relate to it. Retail is basically stuff that you can buy – in a shop, online, wherever. Retail includes clothes, toys, electronics, and categories like that.

The Government of India allowed 100% Foreign Direct Investment in single brand retail – think of shops that sell all products under one brand. Like Zara or H&M.

H&M came into India by itself. It put in the investment and can reap all the profits for itself. However, the government put in a clause that said that if a company comes into India by itself, it MUST source 30% of its raw materials from India. Basically trying to protect the Indian companies and industries from going out of business. These raw materials for H&M could be some fabric or shoes or something like that, which would go into making its products.

Zara decided to come into India through a Joint Venture with the Tata Group. Why would one choose to do that? They control their product. The Indian partner can help with setting up the distribution, the local sourcing, and things that they may not want to get involved with. But Zara has to share the profits with the Tata Group.

Starbucks did the same thing. They came into India through a Joint Venture with the Tata Group.

 

What about Apple? How come there is no Apple Store here? They wanted to retain control over their product. They don’t want to set up a factory here or start sourcing different materials from India. Fingers crossed that they figure this out!

Why are we talking about FDI in India? It is a growth opportunity for International companies. They get access to the Indian market where people are starting to be able to afford more products. This also means that the landscape in India is changing. Indian companies have opportunities for growth, but they also face competition from these International brands. Hopefully that means more choice for us customers!


Written by: Shruti Divecha, Biyash Choksey and Sunaina Murthy

 

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