Analyze the rationale for encouraging FDI (Business Environment)

A term paper

Sector wise analysis of FDI flow in india

(managerial economics)

By

Shamsher Singh

Reg. No: 11001235

Roll no: R1003A1

Department: Lovely School of Business

Submitted to

Satinder sir
(Faculty of MBA)

BY: NADEEM YOUSUF Page 1

Analyze the rationale for encouraging FDI (Business Environment)

TABLE OF CONTENTS

S.No Particulars Page no.

1. Introduction 3-8

General introduction 3
Objectives of my study 3

Needs of FDI 4

Overview of FDI in India 5-7

Determinants of FDI 8
2. Review of related literature 9-14

3. Research Methodology 14

Research Design -

Data collection method -

4. Findings 14

5. Conclusions and Suggestions 15

6. Bibliography /Reference 15-18

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Analyze the rationale for encouraging FDI (Business Environment)

1. INTRODUCTION TO FDI
Foreign direct investment is that investment, which is made to serve the
business interests of the investor in a company, which is in a different nation
distinct from the investor's country of origin.

According to International Monetary Fund (IMF), FDI is

defined as investment that is made to acquire a lasting interest in an enterprise
operating in an economy other than that of investor. The investor’s purpose is to
have an effective voice in the management of an enterprise. The essence of FDI
is the transmission to the host country a package of capital, managerial skills
and technical knowledge.

A parent business enterprise and its foreign affiliate are the two sides of the
FDI relationship. Together they comprise an MNC. The parent enterprise
through its foreign direct investment effort seeks to exercise substantial control
over the foreign affiliate company. FDI can fill the gap between the desired
investment and locally mobilised savings. It supplies a package of needed
resources. A foreign direct investment is not an unmixed blessing. The
government in the developing countries have to be careful while deciding on the
magnitude, pattern and conditions of a private foreign investment.

Objectives of my study

• To list out the various factors that encourages foreign direct investment.

• To analyse India’s present scenario of FDI.

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Analyze the rationale for encouraging FDI (Business Environment)

Need for FDI

The need for FDI arises due to the following reasons:

• Raising the level of Investment:

Foreign investment can fill the gap between desired investment and
locally mobilized savings. It supplies a package of needed resources. It
helps a number of UDC’s to possess huge mineral resources.

• Upgradation of technology:

Foreign investment can supply a package of needed resources such as

management experience and organizational and technical skills.FDI with
it brings huge technology to the host country.

• Exploitation of resources:

A number of underdeveloped countries process huge mineral resources

which await exploitation. These countries do not possess the required
technical skill; therefore depend upon foreign countries to undertake the
exploitation of their mineral wealth.

• Development of basic economic infrastructure:

Underdeveloped n developing countries require a huge capital investment

for the development of basic economic structure as their domestic capital
is often too inadequate.

• Balance of payments position:

In case of an adverse BOP situation in the host country, an investment

presents a short run solution to the problem.

• Revenue to the govt:

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Analyze the rationale for encouraging FDI (Business Environment)

The profit generation by a foreign investment in the host country

contributes to the corporate tax revenue in the latter.

Overview of FDI in India

India has been ranked at the third place in global foreign direct investments in
2009 and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations Conference
on Trade and Development (UNCTAD) in a report on world investment
prospects titled, 'World Investment Prospects Survey 2009-2011' released in
July 2009.

The 2009 survey of the Japan Bank for International Cooperation released in
November 2009, conducted among Japanese investors continues to rank India as
the second most promising country for overseas business operations, after
China. A report released in February 2010 by Leeds University Business
School, commissioned by UK Trade & Investment (UKTI), ranks India among
the top three countries where British companies can do better business during
2012-14.

According to Ernst and Young's 2010 European Attractiveness Survey, India is

ranked as the 4th most attractive foreign direct investment (FDI) destination in
2010. However, it is ranked the 2nd most attractive destination following China
in the next three years.

Moreover, according to the Asian Investment Intentions survey released by the

Asia Pacific Foundation in Canada, more and more Canadian firms are now
focussing on India as an investment destination. From 8 per cent in 2005, the

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Analyze the rationale for encouraging FDI (Business Environment)

percentage of Canadian companies showing interest in India has gone up to 13.4

per cent in 2010.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The
cumulative amount of FDI equity inflows from August 1991 to April 2010 stood
at US$ 134,642 million, according to the data released by the Department of
Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21

per cent of the total FDI equity inflow into India, with FDI worth US$ 4.4
billion during April-March 2009-10, while construction activities including
roadways and highways attracted second largest amount of FDI worth US$ 2.9
billion during the same period. Housing and real estate was the third highest
sector attracting FDI worth US$ 2.8 billion followed by telecommunications,
which garnered US$ 2.5 billion during the financial year 2009-10. The
automobile industry received FDI worth US$ 1.2 billion while power attracted
FDI worth US$ 1.4 billion. During April-March 2009-10, according to data
released by DIPP.

In April 2010, the telecommunication sector attracted the highest amount of FDI
worth US$ 430 million, followed by services sector at US$ 355 million and
computer hardware and software at US$ 172 million, according to data released
by DIPP. During the financial year 2009-10, Mauritius has led investors into
India with US$ 10.4 billion worth of FDI comprising 43 per cent of the total
FDI equity inflows into the country. The FDI equity inflows in Mauritius is
followed by Singapore at US$ 2.4 billion and the US with US$ 2 billion,
according to data released by DIPP.

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Analyze the rationale for encouraging FDI (Business Environment)

During April 2010, Mauritius invested US$ 568 million in India, followed by
Singapore which invested US$ 434 million and Japan that invested US$ 327
million, according to latest data released by DIPP.

Investment Scenario

In May 2010, the government cleared 24 foreign investment proposals, worth

US$ 304.7 million. These include:

• Asia net’s proposal worth US$ 91.7 million to undertake the business of
broadcasting non-news and current affairs television channels.
• Global media magnate Rupert Murdoch-controlled Star India holdings'
investment of US$ 70 million to acquire shares of direct-to-home (DTH)
provider Tata Sky.
• AIP Power will set up power plants either directly or indirectly by
promotion of joint ventures at an investment of US$ 24.4 million.

Policy Initiatives

• The Government of India has released a comprehensive FDI policy

document effective from April 1, 2010. The Circular 1 of 2010
consolidates into one document all the prior policies/regulations on FDI
which are contained in FEMA, 1999; RBI Regulations under FEMA,
1999 and Press Notes/Press Releases/Clarifications issued by DIPP and
reflect the current 'policy framework' on FDI.
• Furthermore, the government has allowed the Foreign Investment
Promotion Board (FIPB), under the Ministry of Commerce and Industry,

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Analyze the rationale for encouraging FDI (Business Environment)

to clear FDI proposals of up to US$ 258.3 million. Earlier all project

proposals that involved investment of above US$ 129.2 million were put
up before the Cabinet Committee of Economic Affairs (CCEA) for
approval. The relaxation would expedite FDI inflow, according to Mr P
Chidambaram, Union Home Minister.
• Exchange rate used: 1 USD = 47.07 INR (as on July 2010).

DETERMINANTS OF FOREIGN INVESTMENT

The factors influencing the determination of foreign direct investment in the

host country are explained as follows:

• Political stability:

Foreign institutional investors are generally reluctant to invest in

countries where political situations are unstable.

• Legal and Regulatory framework:

The relevant rules and regulations of the host country that are governing
the FDI decide the quantum of the later. The rules and regulations and
administrative procedures of the host country regarding foreign
investment must be transparent.

• Size of market:

Large developing countries provide substantial markets where the

consumer demands for certain goods far exceed the available suppliers.
This demand potential is a big draw for many foreign owned enterprises.

• Price and Exchange rates:

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Price level and exchange rate of the host country determine the foreign
direct investment in a country. The instability in prices and exchange
rates affect the inflow of FDI.

• Access to basic inputs:

The availability and access of basic inputs such as oil and gas, minerals,
skilled and unskilled labour force and so on determine the extent of
foreign direct investment in the country.

2. REVIEW OF RELATED LIERATURE

REVIEW 1

The second research is that done by Over Sea Development Institute in

September 1997. The research was done on whether to find out that FDI
flows to low income or high income countries. In the research they have
taken few countries in like China, India, Nigeria, Vietnam, Bangladesh
and Ghana and checked out the inflows of these countries with the help of
statistical data. With the help of this data they came to a conclusion that
over the last 25 years FDI in low income countries has been highly
concentrated. They came to a conclusion that large market size, low
labour cost and high returns are the major determinants in the decision to
invest in these countries.
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Analyze the rationale for encouraging FDI (Business Environment)

REVIEW 2

The third research is done by a Committee from Mumbai in 2002 which

involved three members namely M.R Rangaachari, I.Srinivas and R.K
Pattnaik. The research was done to analyse and make the appropriate
recommendations to put FDI system in allignment with international
reporting practices. The objective of this research was not only to suggest
detailed operational and conceptional definition of FDI but also to
determine what should be ideal coverage of the data i.e. Retained
earnings, venture capital, ADR. GDR and other capital. They came up
with a conclusion that recording a comprehensive and up to date statistics
on FDI is a crucial pre requisite for economic analysis and policy making.

REVIEW 3
The seventh research is done by Bishwanath and Rashmi Banga. The
research is done to analyze the impact of trade liberalization on FDI in
Indian industries. They estimated an econometric model to explain inter
industrial and inter temporal variations in the extent of foreign investment
in manufacturing industries using panel data for the post reform period.
The result of the research indicated trade liberalization and globalization
(particularly lowering the tariff rates) had a favourable effect to foreign
direct investment in Indian industries. The results showed that trade
liberalization had a favourable effect on foreign direct investment flows.

REVIEW 4
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Analyze the rationale for encouraging FDI (Business Environment)

The eighth research was done by HENRY LOEWENDAHL. The research

was done to analyse role of investment promotion to attract foreign direct
investment. He developed a particular framework for providing insights
into different elements of successful investment promotion. The research
highlighted the importance of promotion for attracting inward investment.
The results of the research were as:

i. Promotion strategy should be based on coherent objective set.

ii. Effective facilitation.

iii. A coordinated and professional approach to project handling is

essential to compete successfully for international projects.

REVIEW 5

This research is done by KEITH E MASKUS in 1997 who was a

professor of economics in University of Colorado. His research was to
analyze the role of intellectual property rights in encouraging FDI and
technology transfer. The conclusion of the research is that there are
indications that strengthening intellectual property rights can be an
effective means of inducing additional inward FDI. Emerging economies
should recognize the strong complementary among IPR’s market
liberalization and deregulation and compliancy regimes. Considerable
attention should be given to achieve net gains from stronger IPR’s and
additional IPR’s licensing over time.

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Analyze the rationale for encouraging FDI (Business Environment)

3. RESEARCH METHODOLOGY

The research methodology includes the following:

• Research design

This research design applied is basically exploratory research. This

research is also called as formulative research. The objective of this
research is to gain familiarity with a phenomenon or to achieve new
insights into it

• Data collection method

In this research data is mainly collected through secondary data.

Secondary data are like books, newspaper, journals, magazines and internet.

4. FINDINGS

Some of the findings of the research were as:

• Investment promotion needs to be done to increase the foreign

direct investment flows.

• The countries with low income have a high foreign direct

investment flow.

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Analyze the rationale for encouraging FDI (Business Environment)

• The infrastructure of the country is to be developed to increase

FDI.

• The FDI inflow in India is increasing year by year.

• India is becoming the most attractive FDI destination because of its

cheap labour cost and large market size.

• FDI flows need to be properly maintained to make the economy

grow.

5. CONCLUSION AND SUGGESTIONS

The conclusion of the above research is that India is going well from the point
of view of the inflow of FDI and needs to increase the inflow of FDI to
overcome china that is presently the top most attractive country for foreign
direct investment. The research also shows that the main reason for the
increasing foreign direct investment inflow in India is because of its huge
domestic market, it’s cheap labour cost and high returns.

In order to increase the flow of FDI in India, it needs to develop its

infrastructure so that more and more countries come to invest in our country. It
should also adopt a policy of trade liberalization to increase the flow of FDI. It
should also try to exploit all its resources as much as it can to make the
economy grow at a rapid rate.

6. REFERENCES/ BIBLIOGRAPHY

Various references used for the research were in the form of websites and
books. Some of them are given below:

I. WEBSITES:

1. www.google.com
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Analyze the rationale for encouraging FDI (Business Environment)

2. www.proquest.com

3. www.scribd.com

4. www.docstoc.com

5. www.businessdictionary.com

6. www.ecohost.com

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