Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control. Firms which source FDI are known as ‘multinational enterprises’ (MNEs). In this case control is defined as owning 10% or greater of the ordinary shares of an incorporated firm , having 10% or more of the voting power for an unincorporated firm or development of a greenfield branch plant that is a permanent establishment of the originating firm.
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction wrought by the conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20% of global GDP.
World Investment Directory (UNCTAD) (http://www.unctad.org/Templates/Page.asp?intItemID=2980&lang=1)
FDI: A lead driver for Sustainable Development? (Earth Summit 2002) (http://www.earthsummit2002.org/es/issues/FDI/fdi.PDF)
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There was no discussion of why FDI has been showing less interest in greenfield investment (the establishment of new industrial and service units) than in using the merger and acquisition (M and A) route to establish or increase its presence in the Indian market.
As far as the volume of FDI is concerned, it is clearly not the presence or absence of FDI caps in each sector that matter as much as the environment for investment.
The fundamental problem with FDI in India today is that while before 1991 all of it went into greenfield investment, it now appears to be increasingly concentrated in the M and A route.
FDI stock grows over time, and is defined to include all retained earnings of foreign-owned firms, which can be held in cash and or investments by the company.
Inward FDI to developing countries increased from $8.4 billion in 1980 to $37.6 billion in 1990, to $204.8 billion in 2001.
Thus FDI is said to be much less likely than debt capital to exacerbate a crisis situation, as happened in the Asian crisis in the late 90's.
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