The Indian startup ecosystem has burgeoned tremendously in the last decade and witnessed a high growth in terms of number of startups and their expansion. This growth has been largely aided by Foreign Direct Investment (FDI) and government initiatives. Moreover, the development of new ideas and creativity among individuals has attracted large number of Foreign Venture Capital Investors (FVCI) to invest in our startups.
Also, the treacherous path of funding that startups have to go through has been made easier by FDI and government initiatives. The government of India has come up with a number of schemes to help new startups thrive. Out of the many schemes by the government, the latest one is ‘Startup India Seed Fund Scheme’ (SISFS) launched on 16th January, 2021. The scheme will be operational from April 1, 2021 to 2025 and its implementation would be done by Department for Promotion of Industry and Internal Trade (DPIIT). The government under this scheme seeks to boost the ecosystem of startups and provide crucial capital for young companies.
The Situation in 2021
But the fillip provided by mere government initiatives is not enough to spur the growth of startups. Unlike the government initiatives, VCs not only provide the startups with sufficient capital to grow but also give them hand-holding in terms of mentorship and management for efficient and smooth working. Therefore, in today’s world the importance of FDI through Foreign Venture Capital Investors is increasing.
In the global scenario of trade and commerce, the tide of offshore investment is at hike. Due to the liberalization and expansion of companies such as Facebook, Apple and Microsoft in and around the world, countries are getting motivated to invest in startups to boost efficient trade and communication relations and enhance their own country’s economy.
Foreign Direct Investment (FDI) is the investment of funds by an individual or an organization from one country into another. This investment could be to start a new company or invest in an existing foreign owned business. For example: Mr. A from Germany wants to invest $ 2 million and wants to commence a new footwear brand in France. He injects the money in the business idea thereby opening his new company in France. Moreover, if Mr. A from Germany wants to invest that $2 million in an existing Indian Startup, this too would be classified under FDI.
If you are thinking that FDI is restricted only to movement of capital from one country to another, then you might be wrong. The definition of FDI also encompasses international movement of elements that are compatible to capital, such as technology, skills and management.
We Need FDIs!
There are a number of ways in which FDI benefits the startups that receive it and the nations in which FDI is done:
- Development of Human Resource
This is one of the understated benefits of FDI. You might be thinking how is it made possible. Here’s how: we know that human capital refers to knowledge, skills and experience possessed by an individual or by a workforce in general. As we’ve discussed earlier that FDI not only refers to the capital investment in monetary terms but also includes skills and management. Therefore, through FDI, people will acquire new skills and experience which will in turn act as a mobile resource to be used by any other sector or company.
- Helps in creating a competitive market
With the emerging trend of FDI among countries, development of a competitive market has now become an easy task. FDI has helped in breaking the existing monopolies in the market thereby creating an environment of healthy competition and fostering innovation.
- Benefit of latest technology and financing tools
The businesses that receive FDI are at a much advantageous position than the ones that do not receive it. They get access to the latest and most advanced version of technology, operational practices and financing tools used in and around the world. Over time, the use of these latest financing tools and technology will make it a common practice among other local businesses which will in turn help them grow in terms of technology and expand their business.
- Job Creation and Economic Development
This is one of the most important advantages of FDI. As we know that FDI is an investment made by one foreign country into another. This investment results in increased revenues and high growth opportunities. While resources such as offices and factories are constructed, some amount of local labour is definitely used. Once the outlet of the company or the factory is made, there would be utilisation of local material and services, employees and labour. Thus, by giving more money to the people, FDI indirectly helps in creating jobs. Furthermore, it helps in creating massive tax revenue for the government.
- Increased Exports
Goods produced through FDI are not only meant for domestic consumption but also exported to other countries. Much of the FDI produced goods have colossal global demands due to which they are exported in other countries in large volume. The introduction of Export Oriented Units (EOU) and Economic Zones in early 1981 has helped FDI investors in increasing the exports.
The Road Ahead
For Indian startups, FDI acts as a medium to access new technology and advancement and a market for consumption and production. Also, FDI enables small startups and firms in lowering their cost of production by directly acting as a manufacturer of raw material rather than delegating their work to third parties. So, FDI has helped and is continuing to help startups realize their true potential by acting as a holding hand to them.