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What is Direct Investment and its Types?

Direct investment, often known as a foreign direct investment (FDI), is a long-term investment by a foreign party in a foreign company. One can make a foreign direct investment by buying a long-term interest or expanding their business abroad.

  • 4,598 Views | Updated on: Dec 28, 2023

Direct investment, also known as Foreign Direct Investment (FDI), is an investment made by a party in one nation into a business or corporation in another country to develop a long-term stake. Foreign Direct Investment is distinct from foreign portfolio investments,, in which investors passively hold foreign securities. Instead, one can make a foreign direct investment by acquiring a long-term interest or extending their firm into a foreign nation.​

What is Direct Investment?

Direct investment refers to acquiring a controlling stake in a foreign business firm through an investment. Without purchasing average shares of a company’s stock, the direct investment gives cash funding in return for an ownership interest. The goal of FDI is to acquire a significant stake in a firm to assume control.

In certain circumstances, it entails a firm from one nation launching its commercial activities in another country. Direct investment entails obtaining ownership of a company’s assets already functioning in a foreign nation. It can acquire either a majority or minority stake in a firm, but regardless of the stake obtained, the investor has effective control over the company.

Direct investment is distinguished from portfolio investment, which is the acquisition of common or preferred shares of a foreign firm, principally by the degree of control sought. Control can originate from sources other than an investment of cash; nonetheless, control over assets such as technology is regarded as just a necessary input.

In reality, FDI is not a straightforward monetary transfer of ownership or controlling interest but might contain supplementary aspects such as organizational and management methods or technology. Direct investments can be made by individuals, although they are typically undertaken by corporations seeking to establish a corporate presence in a foreign nation.

Types of Direct Investment

Direct Investment (DI), or Foreign Direct Investment, refers to a corporation’s investment in another company located in a foreign country. The investing market is a vast expanse. Individual individuals and giant corporations can invest in domestic and international businesses. Foreign Direct Investment, or FDI, refers to when one firm invests in another company’s business in a foreign country.

Four distinct types of direct investment exist. They are as follows.

Horizontal Direct Investment

Horizontal DI is the most prevalent kind of FDI, which typically involves investing funds in a foreign firm operating in the same industry as the FDI investor’s company. In this case, one corporation invests in another company situated in a different nation that produces identical items.

For instance, the foreign corporation may invest in or acquire the Indian company, which manufactures comparable items, such as both firms participating are of goods and garment industry, the FDI is horizontal.

Vertical Direct Investment

Another sort of investment is vertical direct investment. Vertical foreign direct investment happens when an investment is made inside a typical supply chain in a firm that may or may not be in the same sector. Backward vertical integrations and forward vertical integrations are subcategories of vertical FDI. Forward vertical integration occurs when a firm invests in a foreign company ranked higher in the supply chain, such as a coffee company in India investing in a French supermarket brand.

Conglomerate Direct Investment

When investments are made in two firms from wholly different industries, the transaction is known as a conglomerate foreign direct investment. Therefore, FDI is not directly related to the investor’s company.

Platform Direct Investment

Platform FDI is the last category of direct investment. In platform FDI, a company extends into a foreign nation, but the manufactured goods are exported to a third nation. For example, the overseas-based perfume company established a production facility and exported its products to other nations.

Did You Know?

You can achieve influence through means other than capital investment, but managing assets, such as technology, is a crucial input. In reality, FDI is frequently not a straightforward monetary transfer of ownership or control. It may incorporate organizational and managerial systems as well as technology.

Conclusion

If you want to invest via Direct Investment, you must understand what Direct Investment is and the many forms of direct investment. Direct investment, often known as a foreign direct investment (FDI), is a long-term investment,, in a foreign firm by a foreign party. For example, a Foreign Direct Investment might be made by purchasing a long-term interest or developing a firm abroad.

    Key Takeaways

    Different types of Direct Investment are as follows

    1. Horizontal Direct Investment

    2. Vertical Direct Investment

    3. Conglomerate Direct Investment

    4. Platform Direct Investment

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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