Foreign direct investment (FDI) is direct investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive for investment or to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.
It is commonly known that capital flows in developing economies like India have risen sharply and has, therefore become a self propelling and dynamic factor in the accelerated growth of economies. The impassioned advocacy of increased FDI flows is based on the well worn arguments that FDI is a rich source of technology and know how; it can stimulate the labor oriented export industries of India, promote technological change in the industries and put India on a higher growth path. The excitement of FDI needs to be based on analytical review of India’s needs, requirements and potential to participate in huge investment flows.
The study takes a closer look at the structure of Foreign Direct Investments into India. It traces the development of India’s economic policy regarding FDI and the resulting changes. The expansion of FDI in India has been followed by a rapid economic growth and an increasing openness to the rest of the world. The primary objective of this study is to review why India has been a preferred destination for FDI and study the impact of FDI on the Indian economy. The sub objectives of the study are to review the major reasons for attracting FDI; to analyze the investment strategies in selecting the right investment projects; to study if the FDI investments have contributed to the positive growth in the standard of living and; to study the impact of FDI investments on the culture of the country.