Distinguish between greenfield FDI, mergers and acquisitions, and reinvested earnings as modes of foreign direct investment. How does the composition of FDI inflows affect technology transfer and industrial development in a developing economy like India?

Q. Distinguish between greenfield FDI, mergers and acquisitions, and reinvested earnings as modes of foreign direct investment. How does the composition of FDI inflows affect technology transfer and industrial development in a developing economy like India? (15 marks, 250-350 words)

In balance-of-payments accounting, net FDI equals gross inflows minus repatriation, disinvestment and outward investment by Indian firms [1]. India's gross inflows touched USD 81.04 billion in 2024-25 [2], yet net flows shrank sharply — showing that the mode through which foreign capital enters matters as much as its headline volume.

Distinguishing the three modes - Greenfield FDI — investment in new plant, machinery and facilities, mostly under the automatic route of the Consolidated FDI Policy [3]. It creates fresh productive capacity, and carries the highest technology and employment content. - Mergers and acquisitions — purchase of existing Indian firms. Ownership changes hands without new capacity; it inflates gross inflows and may displace domestic promoters. - Reinvested earnings — profits retained by foreign affiliates, recorded as an inflow in BoP statistics [1]. Impact is moderate and reversible, since the same profits can later exit as dividends.

Effect on technology transfer - Greenfield entry brings process know-how, R&D units and supplier upgrading; M&A frequently transfers only equity, with core technology retained by the parent. - Royalty and technical-fee payments turn into a repatriation channel, so technology is effectively rented rather than absorbed [4]. - Composition tilts away from deep technology: services (19%) and computer software (16%) led equity inflows in 2024-25, while manufacturing received USD 19.04 billion [2].

Effect on industrial development - Greenfield-led FDI deepens MSME supply chains, exports and formal employment — the very objectives of the 1991 industrial policy. - Rising repatriation and dividend outflows widen the current account deficit, though strong reserves keep the external position resilient [5]. - Volume-first inflows without capacity creation dilute Make in India and PLI outcomes.

Hence the developmental worth of FDI lies in its composition, not its size. India should monitor quality indicators — greenfield share, technology transfer and jobs per dollar — and align PLI incentives with a stable investment-treaty regime, restoring FDI's original role as a carrier of technology and exports rather than a mere financing flow.

(~335 words)

Sources: 1. Foreign direct investment, net inflows (BoP, current US$) — India, World Bank Data — BoP definition of net FDI; treatment of reinvested earnings and outflows 2. India Records USD 81.04 Billion FDI Inflow in FY 2024–25, PIB — gross inflows; services 19%, software 16%, manufacturing USD 19.04 billion 3. Consolidated FDI Policy Circular of 2020, DPIIT — automatic vs approval routes governing entry of FDI 4. India's Balance of Payments, Reserve Bank of India — profit, dividend and royalty repatriation as BoP outflow channels 5. India: 2025 Article IV Consultation, International Monetary Fund — external sector resilience despite widening current account pressures