A developing country wants to become more global, hoping to increase the pace of its economic growth and improve the quality of life for its people. It wants to achieve this by attracting foreign...

What is FDI?
Foreign direct investments or FDI can be defined as the investments made by a corporate entity in a
country into an entity located in another country. This investments made can be either in the form of
setting up a subsidiary or associate company in the target country or by entering into a corporate
transaction such as a joint venture or merger. For example: Wal-Mart, world’s leading retailer has
entered into a joint venture with Bharti Enterprises of India to setup wholesale cash-and-carry stores
in India. This joint venture entity is called Bharti Wal-Mart Private Limited, where both Bharti and Wal-
Mart hold 50 percent stakes each.
Why FDI?
According to various economists, FDI or flow of capital across the national borders is beneficial to
both the parties as it allows the capital to generate the highest possible returns. Following are the
benefits of FDI or cross border investments:
 Diversification: Cross border investments allow the owners of capital to reduce their risk by
diversification of their investment portfolio
 Gaining expertise and increased market reach: While the investor gains from doing business
in an entirely new market, the borrower or the beneficiary of FDIs generally tend to benefit
from the experience of the investor in that particular sector.
 Flow of global investments can help in bringing the best practices in corporate governance,
accounting policies and legal practices
 Tends to increase employment opportunities in the target country, while contributing to
corporate tax revenues
 Benefits as described above can induce the government to adapt best practices and policies
FDI in India – An emerging economy
Evolution of FDI in India can be broadly classified into four phases as below:
 Phase 1 (1969 and 1991): This period was marked by the restrictive trade policies such as
the MRTP act of 1969 – that restricted the size of operations and pricing of foreign
companies, the FERA act of 1973 which capped the foreign...