Foreign Direct Investment can be described as investment made by a foreign entity in the equity of a domestic company (Target Company) with the intention of participating in the management of the enterprise.
Features of FDI are as follows:-
- In all such transactions there is a basic intention to participate in the management of the target company.
- In most cases it involves a long term commitment, that is, there is no intention to seek quick capital gains.
- By convention an investment is considered as FDI when it involves acquisition of a minimum of 10% of the paid up equity of the target company.
- Generally all such investments are accompanied by technology transfers and access to newer markets therefore the partnership involves access to raw materials for the foreign entity and access to technology for the target company.
- Such investments involve creation of physical assets which generally increase the productive capacity of the target company. This generates employment and consequently economic growth in the host country.
- Investment by the foreign entity may involve fresh issue of capital or sale of shares held by promoters in the target company. Therefore such transactions are essentially primary market operations. In most cases there would be an effect on the balance
sheet of the company.