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FDI And Its Impact On The Startup Ecosystem

Availability of expanding markets along with digital innovations are helping India to attract a record FDI of $ 81.72 billion during FY 2020-21

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FDI (Foreign Direct Investment) plays a significant role in the economic development of any country as the capital inflow of foreign investors supports strengthening the infrastructure, increasing productivity and creating employment opportunities. India attracted a total infl­ow of $72.12 billion during April-January (2020-21), including reinvested earnings, the highest ever for the first ten months of a financial year, according to data released by the Department For Promotion Of Industry And Internal Trade (DPIIT). In the financial year 2020, Singapore had the highest FDI equity inflow to India, which was valued at over 1036 billion Indian rupees, followed by Mauritius valued at over 577 billion Indian rupees.

Data for 2020-21 indicates that the computer software and hardware sector attracted the highest FDI equity inflows of US $ 24.39 billion, followed by the construction activities (US$ 7.15 billion), service sector (US$ 3.86 billion), and trading (US$ 2.14 billion). Indian-origin blockchain technology company Polygon receives an unclosed investment from US-based tech billionaire and serial startup investor Mark Cuban, who is the owner of NBA’s Dallas Mavericks and one of the main ‘shark’ investors on the American reality TV show, ‘Shark Tank’.

“Measures taken by the government on the fronts of FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country. The trends in India’s FDI are an endorsement of its status as a preferred investment destination amongst global investors,” the commerce and industry ministry has said in a statement.

Gujarat has bagged the top spot in terms of the highest FDI for the fourth consecutive year now. With a 37 per cent share, Gujarat received a total FDI of $30.23 billion in 2020-21. Maharashtra managed to rake in Rs 1.53 lakh crore FDI, while Karnataka stood third with an investment worth Rs 78,160 crore. Delhi bagged fourth place and attracted foreign direct investment worth Rs 59,830 crore during the April-December period.

Growth of FDI
FDIs are directed towards India due to its liberal foreign direct investment policies like tax redemption. In March 2021, the parliament also approved a bill to increase foreign direct investment (FDI) in the insurance sector from 49 per cent to 74 per cent, and Shripad Naik, Minister of State for Defence stated that a total of 44 Indian companies, including public sector units, received approvals related to FDI for joint production of defence items with foreign organisations. 100 per cent FDI in the DTH broadcasting services market was also enabled.

The availability of large, expanding markets and low-wage workers due to the increasing population, digital revolution, and the latest innovations in the start-up hub also act as strong attractions for FDI, making investors overlook barriers like illiberal exit barriers and lack of decision-making authority with the state governments.

Impact of FDI

Sequoia Capital India, Nexus Venture Partners, SAIF,  India Angel Network, and Intel Capital India are a few of the most prominent venture capitalist firms in India who are faced with FDI competition along with private equity firms like The Everstone Group.

The FDIs increase exports, the dynamicity of lifestyle and technology, and help stabilise the exchange rates in the country. They help in the inflow of cash into India which in turn are utilised to develop the rural and backward areas. Investment is the major factor that contributes to the growth of GDP. An increase in the level of investment leads to the multiplier impact on increasing the levels of employment and income. There is a significant role of foreign investment in open economies, directly or indirectly.

Though FDIs act as an economic benefactor, the Indian venture capitalists are faced with immense competition as these firms are likely to be forced to lower their criteria and valuation while dealing with companies to remain in the game. However, the fact that the new start-ups prefer Indian investors stands as Indian venture capitalist firms have an edge over FDI in knowing the local strategies to survive in the market. This resonates with Indian start-ups and gives them a familiar guideline, support and structure.

Even though FDIs have a promising global expansion characteristic, startups often depend on Indian investors to guide them into local expansion in order to strengthen their national grip on the company.

The roadmap ahead for FDIs suggests that India is expected to attract FDI of US$ 120-160 billion per year by 2025; over the past 10 years, the country witnessed a 6.8 per cent rise in GDP with FDI increasing to 1.8 per cent. In terms of attractiveness, investors ranked India in the third position as 80 per cent of investors have plans to invest in India in the next 2-3 years suggesting that India holds a secure relationship with foreign direct investments.

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fdi policy startup ecosystem magazine 16 Aug 2021