Learning Value
1. Meaning and correct trends of Foreign Direct Investment
2. Benefits to host countries through Foreign Direct Investment
3. Destinations of Foreign Direct Investment flow
4. Criteria for attracting Foreign Direct Investment
5. Major challenges for Foreign Direct Investment in various countries
FDI is an activity by which an investor, who is a resident in one country, obtains a lasting
interest in, and is a significant influence on, the management of an entity in another
country. This may involve either creating an entirely new enterprise, a so-called
"Greenfield" investment, or more typically, changing the ownership of existing
enterprises via mergers and acquisitions. Other types of financial transactions between
related enterprises, such as reinvesting the earnings of the FDI enterprises or other capital
transfers, are also defined as foreign direct investment.
Investment Patterns
Diagram Missing
The American Motor Company (AMC) invested in the Shanghai Motor Company in
China. All others, including Japanese and South Korean companies besides other
American. companies made a beeline for investing in China.
• Assured return on investment - R&D centres and futuristic projects enable the
investor to achieve great successes through high revenues. Roseh products invests huge
amounts of money in Genentech in California to get innovative products to their outlets
around the world.
More than two thousand multinationals from the U.S.A. and Europe have invested in
Chinese Special Economies Zones and Export Processing Zones. Indonesia, Thailand, the
Philippines, and Malaysia have now also become attractive destinations. Latin America,
Brazil, Argentina, and Columbia are also beginning to attract huge investments. Malta,
Cyprus, Panama, Mans Island, and Mauritius are growing only through Foreign Direct
Investment, in manufacturing, trading, and other forms. The reputation of such
destinations depends on their ability to attract investments through their policies and
hassle-free industrial climates.
• Market access: Investors can provide access to export markets. The growth of
exports themselves offers benefits, such as technological learning and competitive
stimuli. They can transform normal customers into intellectual customers.
• Export promotion: It seems that FDI could be related to export trade in goods, and
the host country can benefit from an FDI-led export growth.
• Generating employment: FDI leads to the generation of both direct and indirect
employment opportunities in the host country.
• Infrastructure: In order to facilitate and enable investors to perform well, the host
country studies other competitive destinations and enhances the level of infrastructure in
selected areas to match the requirements of the investors. India's Silver Valley in
Bangalore, Hitech City in Hyderabad, and Tidel Park in Chennai have revolutionized the
areas through connectivity.
• Social effects: Countries with closed economies have started to liberalize their
economies through market reforms that are favourable to foreign investors through
privatization, property rights, and liberal labour policies. Society at large benefits as
employment, infrastructure, literacy, and health care are bound to improve as an impact
of FDI inflow.
• Spin-offs: Statistical evidence exists across the world to prove that FDIs have a
number of spin-offs. Business history is replete with examples where individuals who
trained with companies started their own ventures and became successful leaders in their
respective fields. Silicon Valley in the U.S. provides many examples of such spin-offs.
Intel is a spin-off of Fairchild. The main competitor to Intel today is its own spin-off.
Even in India, the machine tool industries of Ludhiana and Bangalore are spin-offs of
yesteryears' popular companies, such as SKF, Bosch and MICO
.
Costs for the Host Country
• The investing companies may not serve the host country's interests.
• There is an outflow of earnings as they are repatriated 'to their home country.
• There is an import of substantial inputs from the investor's country.
• Companies will hire expatriate managers for management positions.
• The investing country has controlling technologies, for which it charges a huge
technology fee.
• FDI can even wipe out local firms. Infant industries and other home industries
may suffer if they cannot compete. Home-country producers do not have money
power or the technology to withstand the onslaught of investors.
Generally, it is advisable to set up operations through the. second option - using an Indian
arm - especially if the investment is large. A foreign' company is one that has been
incorporated outside of India and conducts business in India. These companies are
required to comply with the provisions of the Indian Companies Act, 1956. As far as
Indian operations are concerned foreign companies can set up their operations in India by
opening liaison offices, project offices and branch offices. Companies that wish to set up
operation directly must register themselves with the Registrar of Companies in New
Delhi within 30 days of setting up business in India.
Branch Office
The Government has allowed foreign companies engaged in manufacturing and trading
activities abroad to set up branch offices in India for the following purposes:
Permission for setting up branch offices is granted by the Reserve Bank of India on a
case-to-case basis. To grant approval, the RBI normally considers the operating history of
the applicant in a worldwide context, as well as its proposed activities in India.
As an Indian company
A foreign company can commence operations in India through the incorporation of a
company under the provisions of the Indian Companies Act, 1956. Foreign equity in such
Indian companies can be up to 100% depending on the business plan of the foreign
investor, subject to the prevailing investment policies of the Government and the receipt
of the requisite approvals. For registration and incorporation as an Indian company, an
application has to be filed with the Registrar of Companies. Once a company has been
duly registered and incorporated as an Indian company, it will be subject to the same
Indian laws and regulations that are applicable to other domestic Indian companies.
Foreign investors who set up units in the above categories do not need mandatory
permission from the Foreign Investment Promotion Board of the Reserve Bank of India.
This is referred to as an automatic route. Such units can enjoy 100% profit repatriation to
their home countries.
Restrictions
Investments in stock markets and real estate, however, are not permitted. Companies may
retain the proceeds a1?road or may remit the funds into India in anticipation of the use of
the funds for approved end-uses. Any investment from a foreign firm into India requires
the prior approval of the Government of India.
.
FDI POLICY:
The Government has put in place a liberal, transparent, and investor-friendly FDI policy,
wherein FDI up to 100% is allowed on the automatic route in most of the sectors, except
in:
• Activities that attract industrial licensing.
• Proposals where the foreign collaborator has previous/existing ventures in India.
• Proposals for the acquisition of shares in an existing Indian company in favour of
Non-residents.
• Activities where the automatic route is not available under the notified sectoral
policy.
Even though developed and developing countries are extending schemes of tax
holidays and many other incentives, very few countries are capable of attracting FDIs.
Still, China is an attractive destination because it ranks on a higher scale as compared to
others on all of the aforementioned parameters. India was unable to attract an expected
investment in the last decade and early portion. of the current decade; however, the
scenario is now changing gradually.
The reasons are: