Foreign Investment: Meaning, Types & Importance

Foreign Investments are investments made by individuals, corporations, or institutions of one country in enterprises, assets or financial products of another country. It is one of the major sources of funding for developing countries. This is important in terms of creating infrastructure, development of technology, generation of employment opportunities and growth of the economy.

Foreign investments include both foreign direct investments (FDI), which implies having some form of stake or influence in the business organization, and foreign portfolio investments (FPI). These are investments in the form of securities such as stocks and bonds. In India, the policies regarding foreign investments seek to strike a balance between foreign capital and national interests.

They are of mainly the following three types:

• 1. Foreign Direct Investment (FDI)
• 2. Foreign Portfolio Investment (FPI)
• 3. External Commercial Borrowing (ECB)

Each of them is explained in the sections that follow.

Foreign Direct Investment (FDI) refers to the type of investment wherein residents of one country (the home country) acquire ownership of assets of a firm in another country (the host country) to control production, distribution, etc.

Read our detailed article on Foreign Direct Investment (FDI).

• Foreign Portfolio Investment (FPI) refers to investment made in an economy through the purchase of financial assets, such as bonds, stocks, etc, in a foreign country.
• Unlike Foreign Direct Investment (FDI), which involves direct ownership and control of business enterprises, FPI is characterised by passive holdings without any active management or control over the entities in which investments are made.

Read our detailed article on Foreign Portfolio Investment (FPI).

• External Commercial Borrowing (ECB) refers to a loan availed by an Indian entity from non-resident lenders with a minimum average maturity.
• External Commercial Borrowings (ECBs) encompass various forms of credit, including commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments like floating rate notes and fixed rate bonds, as well as credit from official export credit agencies.
  • They also include commercial borrowings from the private sector branches of multilateral financial institutions such as the Asian Development Bank (ADB), International Finance Corporation (IFC), etc.

Read our detailed article on External Commercial Borrowing (ECB).

• Capital Inflow: Provides additional capital that can be used for development and growth.
• Job Creation: By fueling growth and development, they help create new jobs and reduce unemployment.
• Technological Advancements: They are often associated with the introduction of new technologies and business practices.
• Skill Development: Foreign investors often provide training to the local workers. This helps in skill development.
• Access to International Markets: Association with foreign investors helps domestic firms to expand into global markets. This, in turn, helps them increase their business activities.
• Increased Exports: It can boost a country’s export capacity. This helps the country’s foreign exchange earnings.

• Dependency: Excessive use of such investments may cause the dependence of a country on external capital. As a consequence of this, the capacity of that country may remain undeveloped.
• Fear of External Factors: Such investments, depending on external economic factors, may cause the receiving economy to become susceptible to external economic factors.
• Repatriation of Profits: The profits of foreign investors are often repatriated, resulting in capital flight from the investing countries.
• Regulations: The negative aspects of such investments need to be controlled through strict regulations.
• Policy Uncertainties: Inconsistent or uncertain policy frameworks may hinder investment.
• Labour Exploitation: Possibility of exploiting local labour force due to lack of regulations.