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PROJECT REPORT

ON
FOREIGN DIRECT INVESTMENT IN
INDIAN ECONOMY
A Project Report Submitted in Partial Fulfillment of the
Requirements for the degree of Master of Business Administration
of Sikkim Manipal University, India

UNDER THE GUIDANCE OF:


xxxxxxxxxxxxxxxxxxxxxxx
Institute of Management
New Delhi

SUBMITTED BY:
............
ROLL NO. xxxxxxxxxxx
CENTER CODE NO. 2005

SESSION:

CERTIFICATE

This is to certify that the project entitled Foreign Direct Investment


Indian Economy submitted by Prem Chand Bhashkar, to Guru Nanak
Dev University, Amritsar in partial fulfillment for the Degree of master of
Business Economics (MBE) is a Bonafide research work completed under
my guidance and supervision. This is an original piece of Work and has
not been submitted in part or full for any other degree to this or any
university /institute.

Place: Delhi
Dated:

Ms. TANU KATHURIA


(Faculty Guide)
New Delhi institute of Management.

ACKNOWLEDGEMNT

First, and foremost, I would like to extend my deepest gratitude to Dr.


M.K Bhatt and Ms Tanu Kathuria my academic and research advisor for
their valuable advice, time, guidance, and encouragement throughout the
course of this project.
Successful completion of the project and culmination of my efforts
reminds me for indebt ness towards Mr.M.K Bhatt and Ms.Tanu Kathuria
for their guidance throughout the Project.
I would also like to thank my Library Staff and Computer Staff members
for their valuable time and support throughout the completion of this
project.

Prem Chand Bhashkar


Roll No.-0470630

Table of Content
1.
2.
3.

4.

5.
6.
7.

Introduction 5-12
Scope of study .13-16
Literature reviews 17-24
Limitation of research report 24
Research approach .. 25-28
Type of Research..
25-26
Nature of the data.
.25
Data source.
.26
Tools of
analysis..27
Analysis and discussion-...29-54
Role of FDI in Indian Economy
FDI inflow Country wise34
FDI Inflow Sector wise. 52
FDI Inflow State wise.55
Conclusion & Summary... 56-57
Suggestions ....61-67
Annexure
Bibliography.... 68-75
List of Tables

1. INTRODUCTION
FDI is an important constituent of the globalization efforts of the world economy. FDI
flows constitute capital provided by foreign investors, directly or indirectly to
enterprises in another economy with an expectation of obtaining profits derived from
the capital participation in the management of the enterprise in which they invest.
The foreign investors acquire ownership of assets in the host country firms in
proportion to their equity holdings. FDI by definition is supposed to reflect a longterm commitment as it involves normally a stake of 10% or more in a host country
enterprise, together with managerial control. This is the empirical definition of FDI
adopted by many countries to distinguish it from portfolio flows.
Portfolio investments are also made by foreign investors but their main concern is the
appreciation of the value of their capital and the return that it can generate
regardless of any long-term relationship consideration or control of the enterprise.
Conceptually, the main difference between the FDI and the portfolio investment is in
the lasting interest expressed by the non-resident direct investor in the resident
enterprise of the domestic economy. The lasting interest underlines a firm desire on
the part of the non-resident investor to be associated with the long-term business
activities of the resident enterprise by exerting significant influence on the
management of the enterprise. With FDI, a foreign investor has greater risk compared
to exporting or licensing, but has considerably more managerial control over the
operation.

Role of FDI
The importance of FDI extends beyond the financial capital that flows into the
country. In addition, FDI inflows can be a tool for bringing knowledge, managerial
skills and capability, product design, quality characteristics, brand names, channels
for international marketing of products, etc. and consequent integration into global
production chains, which are the foundation of a successful exports strategy
(BlomStrom, Kokko and Zejan, 1994; Borensztein, De Gregorio and Lee, 1998; De
Mello, 1999; United Nations Conference on Trade and Development (UNCTAD)
1999; Lall, 2000; Organization for Economic Cooperation and Development (OECD)

2002, Lipsey, 1999). FDI could benefit both the domestic industry as well as the
consumer, by providing opportunities for technological transfer and upgradation,
access to global managerial skills and practices, optimal utilization of human
capabilities and natural resources, making industry internationally competitive,
opening up export markets, providing backward and forward linkages and access to
international quality goods and services and augmenting employment opportunities.
For all these reasons, FDI is regarded as an important vehicle for economic
development particularly for developing economies. FDI flows are usually preferred
over other forms of external finance because they are non-debt creating, nonvolatile19 and their returns depend on the performance of the projects financed by the
investors. In a world of increased competition and rapid technological change, their
complimentary and catalytic role can be very valuable.

Choice of Location of FDI


Dunnings ownership location internalization (OLI) paradigm indicates the demand
side determinants of FDI inflows to the host country in terms of the location
advantages that the foreign investor derives by making the FDI. The paradigm shows
that under certain conditions it becomes profitable for the investor to produce in the
foreign country rather than simply producing the good at home and exporting it to the
foreign market. Elements constituting location advantages include resource
endowments and also economic and social factors such as market size and structure,
prospects for market growth and degree of development, the cultural, legal, political
and institutional environment and government legislation and policies of the host
country. In terms of the demand-side factors, the hosts overall attractiveness to FDI
is determined by the location advantages it possesses. Because resource endowments
are not evenly distributed among countries and social and economic factors as well
as government policies are different among countries, the attractiveness of host
countries to FDI is different. Choice of location is motivated by a number of firmspecific variables that categorize FDI into several types, depending on the underlying
motivations -- resource-seeking, market-seeking, efficiency-seeking and strategicasset seeking (Dunning, 1998).
Investing firms make FDI with the goal and expectation of profits through attaining
competitive advantage over other firms that could be translated to tangible returns

above and beyond their original investment. Given the additional fixed costs involved
in operating in a foreign country and with a multitude of potential locations to choose
among, entrepreneurs in making the choice of locating the venue for FDI is
responsive to the relative incentives offered by different locations. However, in
attaining competitive advantage, the investing firms also have to take care of the costs
and uncertainties around the returns expected from FDI. These may be the
endogenous costs associated with coordination and control, administrative costs etc.
and also the exogenous costs arising from the various risks and uncertainties in the
business environment of the investing international companies in the destination
location.
The choice of location is thus an important strategic factor for the foreign investors in
FDI decision because a firm's location influences the distance and closeness of the
resources. It also influences the cost of transport and communication to the market.
The location also determines the kind of raw materials and knowledge that are
available to the firm. Available raw materials and knowledge in turn further defines
some of the firm's possibilities to gain competitive advantage. As long as a firm's
location cannot be imitated, this might give the firm advantages compared to its
competitors. From the knowledge perspective, a location with abundance of technical
knowledge might be a contribution for the firm to access labor with the appropriate
skills and knowledge.

Investment Climate
While most developing countries pursue regulations and restrictions on the economic
activities of MNCs operating within their territory, in view of the actual and potential
benefits of FDI, they are also increasingly offering incentives to attract FDI as a part
of the increasing competition amongst FDI-receiving countries. The strategic
importance of the choice of location of FDI in the perception of foreign investors is
also creating a competition among the FDI-seeking countries. As a part of the effort,
the host countries offer incentive schemes to the foreign investors. These incentives
that constitute some of the factors behind competitive advantage may be in terms of
lower cost for labor and/or physical resources, secure access to physical resources,
proximity to major markets with affluent customers, advantages of integration,
improved quality and increased market share. However, the realized level of FDI

flowing into different countries indicates that the attractiveness of all countries is not
the same.
In general, private investors (domestic or foreign) are guided by their expectation of
the potential return and risk of their investment, in choosing among alternative
opportunities. In other words, FDI is driven, among other factors, by expected
profitability, relative costs/prices, confidence in macroeconomic policy, political
stability, the quality of contracting and legal enforcement, e.g., contract law,
bankrupcy law, etc. These expectations of the investing foreign firms are shaped by a
host of institutional, regulatory and infrastructure-related factors and policies that
can be summarized as the 'investment climate' prevailing in the recipient economy.
A pre-condition to FDI inflows is the creation and sustenance of a well-designed
business environment. The new institutional economics literature with its emphasis on
transaction costs have focused on the creation of an appropriate business
environment or investment climate for the benefits of FDI 22 to be realized by a
developing economy (Fields and Pfeffermann, 2003). The quality of the investment
climate determines the success of the recipient firms in attracting significant FDI
inflows. A favorable investment climate implies the existence of no or minimum
transaction costs and hence a potentially competitive investment environment.

India is the seventh largest and second most populous country in the world.
A new spirit of economic freedom is now stirring in the country, bringing sweeping
changes in its wake. A series of ambitious economic reforms aimed at deregulating
the country and stimulating foreign investment has moved India firmly into the front
ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of
a complex and rapidly changing nation. India's process of economic reform is firmly
rooted in a political consensus that spans her diverse political parties. India's
democracy is a known and stable factor, which has taken deep roots over nearly half
a century. Importantly, India has no fundamental conflict between its political and
economic systems. Its political institutions have fostered an open society with strong
collective and individual rights and an environment supportive of free economic
enterprise.
India's time tested institutions offer foreign investors a transparent environment that

guarantees the security of their long-term investments. These include a free and
vibrant press, a judiciary that can and does overrule the government, a sophisticated
legal and accounting system and a user-friendly intellectual infrastructure. India's
dynamic and highly competitive private sector has long been the backbone of its
economic activity. It accounts for over 75% of its Gross Domestic Product and offers
considerable

scope

for

joint

ventures

and

collaborations.

Today, India is one of the most exciting emerging markets in the world. Skilled
managerial and technical manpower that match the best available in the world and a
middle class whose size exceeds the population of the USA or the European Union,
provide India with a distinct cutting edge in global competition.
Foreign direct investment (FDI) has emerged as the most important source of external
resource flows to developing countries over the 1990s and has become a significant
part of capital formation in the country despite their share in global distribution of
FDI continuing to remain small or even declining. FDI usually flows as a bundle of
resources including, besides capital, production technology, organizational and
managerial skills, marketing know-how, and even market access through the
marketing networks of multinational enterprises (MNEs) who undertake FDI. These
skills tend to spill over to domestic enterprises in the host country. Therefore, FDI can
be expected to contribute to growth more than proportionately compared to domestic
investments in the host country. There is now a body of literature that has analyzed
the effect of FDI on growth in inter-country framework and other analyzing
knowledge spillovers to domestic enterprises from MNEs (see e.g. De Melo 1997,
Kumar and Siddhartha 1997, and Saggi 2000, for recent reviews of literature).
However, the mixed findings reached by these studies on the role of FDI inflows in
host country growth and on knowledge spillovers from MNEs suggest that these
relationships are not unequivocal. The primary consideration for expecting a more
favourable effect of FDI on growth is externalities of MNE entry for domestic firms.
The externalities such as spillovers may not take place in some cases because of poor
linkages with the domestic enterprises or poor absorptive capacity, for instance. FDI
projects vary in terms of generation of linkages for domestic enterprises. There is also
a possibility of MNE entry affecting domestic enterprises adversely given the market
power of their proprietary assets such as superior technology, appeal of brand names
and aggressive marketing techniques. Therefore, FDI may crowd-out domestic

10

investment and may thus be immiserizing (Fry 1992, and Agosin and Mayer 2000).
The crowding out effect may be sharper when the technology gap between foreign and
domestic firms is very wide to be bridged. Furthermore, because FDI may be
attracted to a country by high growth rates, among other factors, the observed
relationships between FDI and growth rate may suffer from causality pro Another
problem which may have affected the existing studies is that they are all made in a
comparative static framework while effect of FDI on domestic investment and growth
could be of a dynamic nature. There may be two rounds of effect of MNE entry on
domestic investment. The initial round of effect may be felt by domestic firms in the
industry where the foreign entry has taken place. Because of superior asset bundle of
foreign entrant, domestic enterprises may be affected adversely as their market share
is eroded. The subsequent round of effect may be more favorable with domestic rivals
absorbing spillovers of knowledge (demonstration based learning) as well as
diffusion of knowledge through vertical linkages with domestic enterprises. The net
effect of FDI on domestic investments would depend on relative weights of these two
rounds of effects. Given the dynamic nature of the effect of FDI on domestic
investment and growth, analysis in a comparative static framework may yield biased
results.

Some of the principal components that India excluded from the IMF
definition while estimating actual FDI inflows were:
Reinvested earnings by foreign companies (which are part of foreign investor
profits that are not distributed to shareholders as dividends and are retained and
reinvested in the affiliates in the host country).
Proceeds of foreign equity listings and foreign subordinated loans to domestic
subsidiaries as part of inter-company (short and long-term) debt transactions.
Overseas commercial borrowings (financial leasing, trade credits, grants, bonds)
by foreign direct investors in foreign invested firms.
Equity well over 20 per cent in the form of American Depository Receipts (ADRs)
and Global Depository Receipts (GDRs) held by Foreign Institutional Investors
(FIIs).
Investment made by international bodies in Indian companies as venture capital
funds.
Grants given by the parent company to the subsidiaries in India.

11

Non-cash acquisition of equity, earnings data of indirectly held FDI enterprises, as


per IMF definition, which are normally included in other country statistics.
Control premium / non-competition fee, etc. paid by the foreigners.
The investment made by foreign investor/entity on swap basis.
Foreign currency convertible bonds.

12

13

SCOPE OF STUDY
India is the second largest country in the world, with a population of over 1 billion
peoples. As a developing country, Indias economy is characterized by wage rates that
are significantly lower than those in most developed countries. These two traits
combine to make India a natural destination for foreign direct investment (FDI). Until
recently, however, India has attracted only a small share of global FDI, primarily due
to government restrictions on foreign involvement in the economy. But beginning in
1991 and accelerating rapidly since 2000, India has liberalized its investment
regulations and actively encouraged new foreign Investment, a sharp reversal from
decades of discouraging economic integration with the Global economy.
Global investors have responded with enthusiasm. Total net foreign investment
inflows were $17.2 billion in 200506, of which net FDI was valued at $4.7 billion in
200506.1 Net FDI Inflows for the 200607 fiscal years were more than tripled to
$15.7 billion.2 India received Cumulative net FDI inflows of $48.2 billion between
August 1991 and December 2007.
India is the second largest country in the world, with a population of over 1 billion
people. As a developing country, Indias economy is characterized by wage rates that
are significantly lower than those in most developed countries. These two traits
combine to make India a natural destination for foreign direct investment (FDI). Until
recently, however, India has attracted only a small share of global FDI, primarily due
to government restrictions on foreign involvement in the economy. But beginning in
1991 and accelerating rapidly since 2000, India has liberalized its investment
regulations and actively encouraged new foreign investment, a sharp reversal from
decades of discouraging economic integration with the global economy.
Global investors have responded with enthusiasm. Total net foreign investment
inflows were $17.2 billion in 200506, of which net FDI was valued at $4.7 billion in
200506.1 Net FDI inflows for the 200607 fiscal year weremore than tripled to
$15.7 billion.2 India received cumulative net FDI inflows of $48.2 billion between
August 1991 and December 2006.3 The remainder of this chapter gives an overview
of FDI activity in India, particularly in the service sector (the largest target for FDI

14

in India to date), and discusses the data used in the study. The study then closely
examines trends related to FDI in India, including the principal country sources and
industry destinations of this capital, and the regional destinations of FDI within the
country. We also look at major multinational corporations invested in India today,
and the role of U.S. investors. The study goes on to examine Indias economic climate
for FDI, its regulatory environment, the incentives available to foreign investors
through Special Economic Zones (SEZs), and the effect of Indias international
economic agreements on inbound FDI trends. We present two case studies of
industries that hold special interest for foreign investors. The first examines FDI in
Indias passenger vehicle and components industry, illustrating global investors
active involvement in Indias manufacturing sector.
The remainder of this chapter gives an overview of FDI activity in India, (the largest
target for FDI in India to date), and discusses the data used in the study. The study
then closely examines trends related to FDI in India, including the principal country
sources and industry destinations of this capital, and the regional destinations of FDI
within the country. We also look at major multinational corporations invested in India
today, and the role of U.S. investors. The study goes on to examine Indias economic
climate for FDI, its regulatory environment, the incentives available to foreign
investors through Special Economic Zones (SEZs), and the effect of Indias
international economic agreements on inbound FDI trends.
Foreign investors have begun to take a more active role in the Indian economy in
recent years. By country, the largest direct investor in India is Mauritius, largely
because of the India-Mauritius double-taxation treaty.4 Firms based in Mauritius
invested $16.0 billion in India between 1991 and 2006, equal to 39 percent of total
FDI inflows. The second largest investor in India is the United States, with total
capital flows of $5.6 billion during the 19912006 period, followed by the United
Kingdom, the Netherlands, and Japan.5 Between 1991 and 2005, the United States
ranked first in terms of total FDI approvals, which amounted to $67.8 billion (24
percent of total FDI approvals).6 The largest shares of U.S. investment are directed to
the fuels, telecommunications, electrical equipment, food processing, and services
sectors.7 The warming of the political and economic relationship between the United
States and India is likely to further encourage U.S. investment there. An important
example of the closer relationship is the U.S.-India Civil Nuclear Cooperation

15

Initiative, passed into U.S. law in December 2006.8 The United States has also
reduced the use of export controls on exports to India. As of February 2007, only 1
percent of U.S. exports to India required a license, down from 24 percent in 1999 and
90 percent in previous years. In recognition of the improved relationship, the U.S.
Department of Commerce is in the process of establishing its new Trusted
Customer program, set to begin in 2007 with India as the first partner country. The
program is expected to encourage repeat exports of U.S. goods to India.9 This will
promote additional FDI by U.S. firms in India, as the Trusted Customer program will
make it easier for U.S.-based multinational corporations (MNCs) to ship goods to
their affiliates in India for manufacturing or additional processing.

Objective of the Research

To Understand what is FDI and Why it is Important for any country like
India?

To Know the Different modes of FDI in India.

To Analyse through yearly data of different sectors.

Limitation of FDI inflow in India.

Limitation of research report

Data used is taken from the source which may not be correctly predicted.

Lack of time to make the project, as such a project required lot of time for
analysis and because of the limitation of the time, project can not be analyzed
properly.

Theories which are used in the project may lack some proper concept which
can be one of its limitation.

16

Data used in the project is based on some selected economic survey which is
basically calculated by using some selected economic parameter

FDI in itself is a big concept and it is quite difficult to focus every part of it.

The data taken front the secondary source like internet, news paper, books
may lack some proper explanation or may be not correctly interpreted which
can be one of its main limitation.

17

18

2. LITERATURE REVIEW
India is a Union of States based on the framework of cooperative federalism. Within
the cooperative framework, there is also a requirement to develop competitive
strengths for the States so that they can excel at the national level and the global
level. Competitiveness helps in ensuring economic and managerial efficiency and to
be creative to meet new challenges. These are essential to survive and prosper in a
fast changing world of today. In addition, in order to strengthen democratic processes
and institution, we should all truly strive for substantive decentralization. Dr.

A.P.J. ABDUAL KALAM , NEW DELHI, 25 JULY 2002.


The relationships between FDI, growth and domestic investment for a sample of 107
developing countries for the 1980-99 period. A dynamic nature of the effect of FDI on
host country growth is posited covering an initial generally adverse competitive effect
and a subsequent usually more favorable effect through backward linkages with the
net effect depending on the quality of FDI. Panel data estimations in a production
function framework suggest a positive effect of FDI on growth. However, tests of
causality find that in a majority of cases the direction of causation is not pronounced
and in a substantial number of cases the direction of causation actually runs from
growth to FDI. Further estimations corroborate the proposition that FDI affects
domestic investments in a dynamic manner with a negative initial effect and the
subsequent positive effects for the panel data as well as for most of the countries
individually. Although FDI appears to crowd-out domestic investments in net terms,
in general, some countries have had favorable effect of FDI on domestic investments
in net terms suggesting a role for host country policies. It is concluded with a few
policy remarks including lessons for the on-going attempt to write rules on investment
in the WTO framework. NAGESH KUMAR, JAYA PRAKASH , 2002

Foreign Direct investment (FDI) limits were liberalized in India to allow more than
fifty-one percent ownership of private sector banks in February, 2002. Portfolios of
private sector and government owned banks posted significant and large value gains
surrounding the announcement, the gains by private sector banks being almost double

19

that by government banks. The analyses show that the price increase is higher for
smaller banks that have less debt, are less efficient, less productive, and burdened
with non-performing assets. We conclude the evidence is consistent with the
hypothesis that the valuation gains reflect the vulnerability to and B.V.PHANI ,

CHINMOY GHOSH IN 2004.

Thesecondmodeofservicesprovisioniscalledconsumptionabroad.Inthisinstance,
consumersmovetotheserviceproviders.Thishasimportantimplications forthe
productionoftheserviceandthelocationofthefactorsofproduction.Examplesof
thismodeofserviceprovisionincludetheeducationofstudentsincountriesother
than their home country, or tourism. Not many services employ this mode of
provision. The main restrictions on consumption abroad are controls on the
movementofcurrencyandpeople,forexample,limits ontheamountofcurrency
allowedtocrossbordersandvisasrequiredforstudentsortourists. SERVICE

SECTORLIBERALIZATION,200506,ARTICLE3.

Export growth in India has been much faster than GDP growth over the past few
decades.Several factors appear to have contributed to this phenomenon including
foreign direct investment (FDI). However, despite increasing inflows of FDI
especially in recent years there has not been any attempt to assess its contribution to
India's export performanceone of the channels through which FDI influences growth.
Using annual data for 1970-98 we investigate the determinants of export
performance in India in a simultaneous equation framework. Results suggest that
demand for Indian exports increases when its export prices fall in relation to world
prices. Furthermore, the real appreciation of the rupee adversely effects India's
exports. Export supply is positively related to the domestic relative price of exports
and higher domestic demand reduces export supply. Foreign investment appears to
have statistically no significant impact on export performance although the
coefficient of FDI has a positive sign.ECONOMICSTIMES,23FEB.2005.

20

Net foreign direct investment (FDI) flows into India reached $15.7 billion in Indias
200607 fiscal year, more than triple the $4.7 billion recorded during 200506, with
the largest share of FDI flows from Mauritius, followed by the United States and the
United Kingdom. This study examines FDI in India, in the context of the Indian
economic and regulatory environment. We present FDI trends in India, by country
and by industry, using official government data from India, the United States, and
international organizations. To supplement the official data, the study also discusses
specific investment activities of multinational companies in India, representing a wide
range of countries and industries. To illustrate the driving forces behind these trends,
the study also discusses the investment climate in India, Indian government incentives
to foreign investors, particularly Special Economic Zones, the Indian regulatory
environment as it affects investment, and the effect of Indias global, regional, and
bilateral trade agreements on investment from the United States and other countries.
Finally, the study presents two case studies. The first examines global FDI in Indias
automobile industry. The second analyzes the effects of Indias 2005,Patent Law on
FDI in the pharmaceutical industry. BUSINESS STANDRED,25 AUG, 2005

The Indian economy opened up in 1991 within the framework of liberal economic
reforms. FDI inflows were stimulated in industry and services, so benefiting from the
many comparative advantages of the country (human resources, emerging market). In
2004, FDI inflows officially amounted to $ 5.3 billion. They mainly came from the
United States and Mauritius and concerned industrial sectors.
In parallel, some Indian firms started to grow in importance and to invest abroad:
they had the financial means, experience, and ambition to acquire international
recognition and they were encouraged by the Indian government. FDI issued by
Indian firms amounted to more than $2 billion in 2004; it was principally addressed
to developing countries and to Russia, however the share of industrialized countries
was on the rise, and manufacturing and non financial sectors accounted for the bulk
of it .BY INDIAN ECONOMY, K.M.P. SHRIVASTAWA

21

Between 1991 and 2005, FDI received by India was mainly related to manufacturing,
notably sectors such as electrical equipment (including computer software and
electronics) which received 22.5% of FDI inflows, transportation industry (14.4%),
telecommunications (13.2%), fuels (11.6%), and chemicals (8.7%). Services
accounted for 13.4%. In recent years, some sectors such as electrical equipment,
services, drugs and pharmaceuticals, cement and gypsum products, metallurgical
industries have had the wind behind them insofar as more than the half of FDI
regarding them was made after 2002, compared to an average of 39.4% for all
sectors. ANNUAL REPORT (GOVT, OF INDIA 2006)

Although it may seem natural to argue that foreign direct investment (FDI) can
convey great advantages to host countries, this paper shows that the benefits of FDI
vary greatly across sectors by examining the effect of foreign direct investment on
growth in the primary, manufacturing, and services sectors. An empirical analysis
using cross-country data for the period 1981-1999 suggests that total FDI exerts an
ambiguous effect on growth. Foreign direct investments in the primary sector,
however, tend to have a negative effect on growth, while investment in manufacturing
a positive one. Evidence from the service sector is ambiguous. TIMES OF INDIA

30 MARCH 2005
Strong and consistent emphasis on self-reliance in its economic development
programmes over the years by the Government of India have enabled India to build
up a huge and versatile cadre of professionals with expertise and skills across a vast
and wide-ranging spectrum of disciplines like Health Care, Tourism, Education,
Engineering, Communications, Transportation, Information Technology, Banking,
Finance, Management and a host of others. A sizeable part of this workforce of
professionals makes up the countrys growing consultancy sector which is offering its
accumulated experience and expertise at home and abroad.
A noteworthy feature of Indias consultancy professionals is their capability and
capacity to provide expertise especially suitable for developing countries, in addition

22

to offering consultancy in sophisticated areas (information technology, advanced


financial and banking services etc.) in developed countries like the USA, UK, France,
West Germany and Australia, Russia and

CIS

countries , etc.

FIEO is one of the important service organization for helping the Indian consultancy
firms engaged in exports. Most of FIEOs member consultancy organizations are also
registered with international and national consultancy organizations, reflecting the
global acceptance of their high credentials. FEDRATION OF INDIAN

EXPORT ORGANIZATION, NEW DELHI, INDIA,2005

The liberal investment regime, rapid growth of the economy, strong macro economic
fundamentals, progressive de-licensing of sectors and the ease in doing business has
attracted global corporations to invest in India
And consequent to policy changes and procedural simplifications, FDI equity inflows
have registered a phenomenal upswing. FDI inflows have recorded over five-fold
increase in the last three years, from US$ 2.2 billion in 2003-04 to US$ 15.7 billion in
2006-07. Simultaneously, FDI share in India's GDP has increased from 0.77 per cent
to 2.31 per cent. Significantly, FDI has come to play an increasing role in the
economic growth of the country. The share of FDI in total investment has more than
doubled from 2.55 per cent in 2003-04 to 6.42 2006-07.
Destination India According to the AT Kearney FDI Confidence Index 2007, India
continues to be the second most preferred destination for attracting global FDI
inflows, a position it has held since 2005. Similarly, UNCTAD's World Investment
Report, 2005 considers India the 2nd most attractive investment destination among
the Transnational Corporations (TNCs).
Clearly, India is in the reckoning. And the figures appear to be improving by the day.
FDI equity inflows which totaled US$ 5.5 billion in 2005-06 grew by almost three
times to US$ 15.7 billion in 2006-07. In fact, going by the international best practices
for calculating FDI would place India's total FDI at US$ 19.5 billion in 2006-07
against US$ 7.72 billion in 2005-06, representing a whopping 153 per cent growth
rate. This huge inflow of FDI has in turn reversed the past trend, with FDI inflows
overtaking the portfolio investment inflows by almost US$ 5.6 billion in 2006-07,

23

according to the RBI's report on International Investment Position. THE TIMES

OF INDIA. 26 DEC. 2005


Foreign direct investment (FDI) has the potential to generate employment, raise
productivity, transfer skills and technology, enhance exports and contribute to the
long-term economic development of the worlds developing countries. More than ever,
countries at all levels of development seek to leverage FDI for development.
To increase understanding of issues related to FDI and enhance its benefits for
developing countries, particularly the least developed countries (LDCs), UNCTAD
analyses FDI trends and their impact on development; compiles data on FDI;
provides advisory services and training on international investment issues; helps
developing countries improve policies and institutions that deal with FDI; and helps
these countries participate in international negotiations on investment.
Foreign affiliates of some 64,000 transnational corporations (TNCs) generate 53
million jobs. FDI is the largest source of external finance for developing countries.
Developing countries inward stock of FDI amounted to about one third of their GDP,
compared to just 10 per cent in 1980. UNCAD (United Nation s Conference

on trade and devlopmeant), 2004


For small and medium sized companies, FDI represents an opportunity to become
more actively involved in international business activities. In the past 15 years, the
classic definition of FDI as noted above has changed considerably. This notion of a
change in the classic definition, however, must be kept in the proper context. Very
clearly, over 2/3 of direct foreign investment is still made in the form of fixtures,
machinery, equipment and buildings. Moreover, larger multinational corporations
and conglomerates still make the overwhelming percentage of FDI. But, with the
advent of the Internet, the increasing role of technology, loosening of direct
investment restrictions in many markets and decreasing communication costs means
that newer, non-traditional forms of investment will play an important role in the
future. Many governments, especially in industrialized and developed nations, pay
very close attention to foreign direct investment because the investment flows into and
out of their economies can and does have a significant impact. In the United States,
the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is

24

responsible for collecting economic data about the economy including information
about foreign direct investment flows. Monitoring this data is very helpful in trying to
determine the impact of such investments on the overall economy, but is especially
helpful in evaluating industry segments. State and local governments watch closely
because they want to track their foreign investment attraction programs for successful
outcomes. ECONOMICS TIMES , 13 APRIL , 2006.

25

26

3. RESEARCH METODOLOGY
Research is a human activity based on intellectual investigation and is aimed at
discovering, interpreting, and revising human knowledge different aspects of the
world. Research can use the scientific method, but need not do so. Research is defined
as the systematic and objective process of gathering recording and analyzing data for
aid in making business decisions. To know the answers to the questions like who,
what, where, why and how, a proper strategy is adopted to get the fruitful results.
o Type of Research
It refers to framework to test the specificity of the hypotheses. It involves use of
various techniques or functions. It includes the sources of collecting the data, the
ways to analyze the data, the length and depth of such a research. Following research
techniques are adopted. The goal of the research process is to produce new
knowledge, which takes three main forms:

Exploratory research- which structures and identifies solutions to different


research problems.

Constructive research-which develops solutions to a problem.

Empirical research-which tests the feasibility of a solution using empirical


evidence,

In this project empirical research is basically used

Exploratory research: The chief purpose of exploratory research is to reach a


better understanding of the research problem. This includes helping to identify the
variables which should be measured within the study. When there is little
understanding of the topic it is impossible to formulate hypotheses without some
exploratory studies. For example, crop residues such a straw are high in lignin (a
wood-like substance) and low in nutrients. This makes them a poor animal feed since
the lignin acts against digestibility and the low nutrient content means poor food
value. However, if treated in a strong alkali, plus a little heat, the lignin breaks down

27

and the nutrient content increases. A company was established to exploit this
technology and did so successfully for 4 seasons. After this period sales began to slow
down. Three other manufacturers had entered the market by this time. The company,
Animal Feed Systems, did not know whether the whole industry had slowed down or if
only their product was suffering. Nor did they know if the problem was temporary in
that perhaps the market comprised of "early adopters" had been saturated but it was
only a matter of time before other farmers began to buy their systems when they saw
how well they worked. It was also possible that if a problem did exist it could lie in
any one of a number of areas: animal populations might be declining, distributors
may not be promoting the product aggressively, customers may be experiencing
difficulties in getting the chemicals, and so on and on.
This is a good example of a situation where insufficient knowledge prevented the
development of clear objectives, since the problem could not be articulated with any
precision and therefore research of an exploratory nature was required. Such research
can take the form of literature searches, informal personal interviews with
distributors and users/non-users of the product and/or focus group interviews with
farmers and/or distributors.
Exploratory research is intended to help researchers formulate a problem in such a
way that it can be researched and suggest testable hypotheses.
o Nature of the data

Secondary datait is defined as the situation in which Information is collected from


secondary sources, i.e., not directly compiled by the analyst; may include published
or unpublished work based on research that relies on primary sources of any material
other than primary sources used to prepare a written work. Secondary data has been
gathered by others for their own purposes, but the data could be useful in the analysis
of a wide range of real property. In general, secondary data exists in published
sources. . Secondary data is generated by means of primary data gathering
techniques.
In this project Secondary data is collected from various sources and analyzed

28

o Data source
Various Internet sites.
Text Books.
News papers.
Magazines.

o Tools of analysis

Pie-Charts
Tables
Graphs
Diagram.

29

30

4. ANALYSIS AND DISCUSSION


Independent Indias economic development program has been based on the key
objectives of self-reliance and social equity. Till the eighties, Indias industrial policy
created Indias industrial base under a system of licensing, strict foreign exchange
controls and excessive protection from imports, which protected even inefficient and
internationally non-competitive enterprises.
Following as series of economic reform measures since 1991, India has responded
positively to the dramatic changes that have been introduced over the last decade.
India is the worlds fourth largest economy (based on PPP) and rated as one of the
fastest growing. It is estimated that the economy shall grow at 6 % in FY 03, despite
the gloomy economic climate in the world.
Indias present economic status reveals the following profile:
A Gross Domestic Product of $ 445 Billion
The 4th largest economy in terms of Purchasing Power Parity (PPP), with a
GNP of US$ 1.8 Billion
Sixth fastest growing economy, projected to be 7-15% larger than Japans by
2010
A strong agriculture sector accounting for nearly 25% of national output and
15% of exports, with self sufficiency in all important crops except oilseeds
A diverse industrial base with self reliance in all core industries and a wide
range of engineering products, but domestically weak in electronic hardware
technology
A robust services sector accounting for 49% of national product, and growing
by 7% annually

31

Mature financial sector and capital market with over 9000 listed companies
and market capitalization equivalent to US $ 2 trillion, with the Banking and
finance sector growing by 7.5%

The Changing Face of the Economy


In 1991 the Central Government embarked on a program of economic liberalization.
This included, among others removal of governmental control, rationalization of
regulation, attracting Foreign Investment. The government has also identified the
infrastructure sector (Power, Telecommunications, and Transportation) as a key
target and is taking steps to attract investments in the area.

Source: ABN AMRO 2002

32

Encouraged by economic developments over the past decade, the government is


committed score a GDP growth rate 9% by the year 2005. the fact is that the Indian
economy is growing faster than ever before. Between 1992-93 and 1997-98, India's
GDP at 1980-81 prices has recorded a trend growth rate of 5.4 per cent. Never once
has the growth rate fallen below 5 per cent since 1991-92 when it grew by only 1 per
cent and when the economic liberalization process started.

Source: ABN AMRO 2002


Overview of FDI Activity in India

Country Sources of FDI


Foreign investors have begun to take a more active role in the Indian economy in
recent years. By country, the largest direct investor in India is Mauritius, largely
because of the India-Mauritius double-taxation treaty.4 Firms based in Mauritius
invested $16.0 billion in India between 1991 and 2006, equal to 39 percent of total
FDI inflows. The second largest investor in India is the United States, with total
capital flows of $5.6 billion during the 19912006 period, followed by the United
Kingdom, the Netherlands, and Japan.5 Between 1991 and 2005, the United States
ranked first in terms of total FDI approvals, which amounted to $67.8 billion (24
percent of total FDI approvals).6 The largest shares of U.S. investment are directed to
the fuels, telecommunications, electrical equipment, food processing, and services
sectors.
The warming of the political and economic relationship between the United States
and India is likely to further encourage U.S. investment there. An important example
of the closer relationship is the U.S.-India Civil Nuclear Cooperation Initiative,
passed into U.S. law in December 2006.8 The United States has also reduced the use
of export controls on exports to India. As of February 2007, only 1 percent of U.S.
exports to India required a license, down from 24 percent in 1999 and 90 percent in
previous years. In recognition of the improved relationship, the U.S. Department of
Commerce is in the process of establishing its new Trusted Customer program, set
to begin in 2007 with India as the first partner country. The program is expected to
encourage repeat exports of U.S. goods to India.9 This will promote additional FDI
by U.S. firms in India, as the Trusted Customer program will make it easier for U.S.based multinational corporations (MNCs) to ship goods to their affiliates in India for
manufacturing or additional processing.

33

Post-Adjustment FDI Inflows Data in India


The RBI in mid-2003 revised the data on FDI from the financial year 2000-01
onwards by adopting a new definition of FDI in accordance with IMF norms. The
earlier estimates were based only on equity investment by foreign companies. The
revised data on FDI now include all items indicated under equity capital (except noncash acquisitions). The equity capital of unincorporated entities includes the equity
capital of foreign banks branches in India. The new method of accounting also
includes reinvested earnings and other capital as two additional categories of
investments made by these foreign companies. While reinvested earnings refer to
retained earnings of FDI companies, other capital covers inter-corporate debt
transactions between related entities. All items under the reinvested earnings have
been included except reinvested earnings of indirectly held direct investment
enterprises. Data under other capital relate to short-term and long-term inter
corporate debt, trade credit (more than 180 days), suppliers credit (more than 180
days), and financial leasing. The inclusion of re-invested earnings and intercorporate debt marks a change in the FDI definition in accordance with International
Monetary Fund norms.
In this exercise, thus, out of the fourteen items mentioned by the IMF in Table 10, the
following six items are not included in the revised Indian FDI inflow data. These are
(i) non-cash acquisitions, (ii) reinvested earnings of indirectly held direct investment
enterprises, (iii) short-term trade credit, (iv) financial derivatives, (v) debt securities
and (vi) land & buildings. The government is exploring the feasibility of including
these items in future. Adjusted FDI data for these three years are presented in Table
12. It is evident that, the present coverage is significantly wider than the earlier
practice of disseminating FDI data covering the equity capital only.
The earlier estimates were based only on equity investment by foreign companies. The
new method of accounting includes reinvested earnings and other capital as two
additional categories of investments made by these foreign companies. As a result, the
FDI estimate has shot up. While reinvested earnings refer to retained earnings of FDI
companies, other capital covers inter-corporate debt transactions between related
entities. Short-term and long-term inter-corporate debt, trade credit, suppliers credit,
financial leasing have been included in under the other capital head.

34

For the year 2000-01, the FDI into India has been pegged at $4.03 billion instead
of the pre-adjustment data indicating $2.34 billion. This hike of 72 percent is
accounted for by the newly included items -- reinvested earnings ($1.35 billion), other
capital ($2.8 billion) and the banking capital of $ 0.06 billion. Similarly, the revised
FDI inflow figures for 2001-02 has also been increased by 57 percent. The revised
aggregate FDI inflows declined by US 1.47 billion in 2002-03 (24 percent) compared
to 2001-02. This was principally due to a sharp drop in fresh equity inflows, which
might be indicative of a commensurate decline in fresh investment projects. Yet,
compared to the pre-revision data, there has been a rise of the amount of about 73%.

FDI in Indias Service Sector


The service sector has been the primary destination of FDI in India since 1991. As
identified by Indias Ministry of Commerce & Industry, the service sector accounted
for 17 percent of total FDI inflows to India between August 1991 and December
2006. Another 17 percent of FDI inflows is invested in the telecommunications and
transportation industries, which generally involve both equipment and services.10
From the mid-1990s, India has been an important destination for investment in off
shoring services such as software, call centres, and other business process
outsourcing (BPO).11 According to one recent estimate, Indias information
technology (IT) off shoring market will be valued in excess of $200 billion by 2008,
with more than one-fourth of the world IT off shoring market cantered in India.
Revenue from offshore services is predicted to equal 7 percent of Indias GDP by
2008, and account for one-third of foreign exchange flows into the country.12 This
flow of capital relies on Indias well-educated, English-speaking, and relatively lowpaid workers.13 India has offered substantial incentives to attract FDI in IT and
BPO-related services off shoring, up to an estimated $6,000 per full-time equivalent
worker (FTE) in the IT services area, and $2,000 per FTE in the BPO area.
According to some reports, however, increasing competition is making it more
difficult for Indian firms to attract and keep BPO employees with the necessary skills,
leading to increasing wages. IBM, for example, increased its Indian staff by 36
percent in 2006, to 53,000 workers, and has plans to invest a further $6 billion in
India over the next 3 years, for an expected total of 120,000 employees in the country
by 2008.15 Hiring difficulties are among the factors that have encouraged some
India-based BPO firms to engage in outbound FDI by establishing facilities outside

35

of India. Infosys Technologies, for instance, reportedly has plans to employ 6,000
workers in China, and Satyam Computer Services has 500 people based in China,
with more to come, along with 2,500 workers each in Malaysia, Egypt, and Saudi
Arabia. Most Indian industries have been fully opened to FDI, with foreigners
permitted to own up to 100 percent of equity in Indian companies. However, India
continues to limit FDI in a number of industries by enforcing overall caps on total
foreign-owned equity shares, with the caps changing as Indias liberalization process
continues. Permitted equity limits for foreign investors vary for different industries.
The level of FDI activity following each change in regulations testifies to foreign
investors interest in the Indian market, particularly in key service sectors. Equity
limits for foreign investment in most types of telecommunications companies were
raised from 49 percent to 74 percent in November 2005, resulting in a wave of new
FDI primarily focused on Indias cellular telecommunications industry. Cumulative
FDI inflows in telecommunications from August 1991 to December 2006 were $3.9
billion, and annual inflows jumped from $588 million in 200405 to $3.0 billion in
200506.17 The value of reported mergers and acquisitions (M&A) in
telecommunications rose from $105 million in 2003 to $1.2 billion in 2004, $4.1
billion in 2006, and $11.4 billion in just the first 3 months of 2007, primarily on the
strength of Vodafone Groups $11.1 billion acquisition of Hutchison Essar Telecom,
which was approved in April 2007.
Indias stock exchanges have also been recently opened to foreign investment, with a
26 percent foreign equity cap, limited to 5 percent for any single foreign investor.
Foreign investors reached the 26 percent cap in the National Stock Exchange of India
in March 2007. As of the same date, the Singapore Exchange and Deutsche Borse
each controlled 5 percent of the Bombay Stock Exchange. Other industries which
maintain significant barriers to FDI include the insurance sector and newspaper
publishing, where foreign equity is limited to 26 percent, and the retail sector, where
foreign firms are permitted to invest up to 51 percent equity, but only in single-brand
distribution outlets. Foreign investors have also expressed interest in investing in
these sectors, as Indias government debates whether to lift the limits. In the retail
sector, Wal- Mart announced a joint venture with India-based Bharti in November
2006, under which Bharti would invest $2.5 billion in a new chain of retail stores that
would be 100 percent owned by the Indian firm. Wal-Mart would provide logistics
and wholesale supply services through a 50:50 joint venture with Bharti. The deal is

36

widely seen as a way for Wal-Mart to enter the growing Indian retail market despite
the FDI restrictions.21 In the insurance industry, foreign investment was first
permitted in 2000, with the lifting of the Indian state-owned insurance companys
monopoly, allowing competition from both domestic and foreign-owned private firms.
During the 200001 fiscal year, 16 privately owned firms entered the Indian market,
most as 26 percent joint ventures between globally competitive foreign insurers and
Indian firms.22 Amid expectations that the government would raise the foreign equity
limit to 49 percent, at least six insurance joint ventures concluded agreements that
would allow the foreign partner to raise its share to that level once government
regulations have changed, but as of April 2007, the equity limit for foreign insurance
investors remains at 26 percent.

37

1.

Cumulative amount
of FDI inflows
(from August 1991 to
March 2007)
Amount of FDI
inflows during 20072008
(from April 2007 to
December 2007)
Cumulative amount
of FDI inflows
(updated up to
December 2007)

2.

3.

Rs. 2,32,041
crore

US$ 54,628
million

Rs. 51,243
crore

US$ 12,699
million

Rs. 2,83,284
crore

US$ 67,327
million

FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI)


From AUGUST 1991 to DECEMBER 2007
(up dated up to December 2007)

I. FDI EQUITY INFLOWS:


A. CUMULATIVE FDI EQUITY INFLOWS (equity capital components only):
Note : FDI inflows include amount received on account of advances pending for issue of shares for the years 1999 to 2004.

TREND OF FDI INFLOW TO ALL THE WORLD OUT OF 334.3 BILLION US$

38

1.

Cumulative amount
Rs. 2,22,680
of FDI inflows
crore
(from April 2000 to
December 2007)
B. FDI EQUITY INFLOWS (WITH COMPANY-WISE) AVAILABLE 2000-2007:

US$ 50,62
million

C. FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2007-2008:


Financial Year 2007-2008
(April-March)

1 April 2007
.
2 May 2007
.
3 June 2007
.
4 July 2007
.
5 August 2007
.
6 September 2007
.
7 October 2007
.
8 November 2007
.
9 December 2007
.
2007-2008 (up to December 2007)
2006-2007 (up to December 2006)
%age growth over last year

Amount of FDI inflows


(In Rs. crore)

(In
US$
mn)

6,927

1,643

8,642

2,120

5,048

1,238

2,849

705

3,394

831

2,876

713

8,008

2,027

7,353

1,864

6,146

1,558

51,243
42,138
(+) 22 %

12,699
9,273
(+) 37 %

39

D. FDI EQUITY INFLOWS DURING CALENDAR YEAR 2007


Calendar Year 2007
(January-December)
In Cr

Amount of fdi inflow


In US $

1.

January 2007
February 2007
3.
March 2007 *
4.
April 2007
5.
May 2007
6.
June 2007
7.
July 2007
8.
August 2007
9.
September 2007
10.
October 2007
11.
November 2007
12.
December 2007
Year 2007 (upto December 2007)
Year 2006 (upto December 2006)
%age growth over last year

8,515
3,081
16,896
6,928
8,642
5,048
2,849
3,394
2,876
8,008
7,353
6,146
79,736
50,357
(+) 58 %

2.

1,921
698
3,838
1,643
2,120
1,238
705
831
713
2,027
1,864
1,558
19,156
11,122
(+) 72 %

E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial


year-wise):
Ranks

Country

2004-05
(AprilMarch)

2005-06
(AprilMarch)

2006-07
(AprilMarch)

2007-08
(AprilDec.)

5,141
(1,129)

11,441
(2,570)

28,759
(6,363)

Cumulative
Inflows

%age with total


Inflows

(from April.
2000 to
Dec. 2007)

(in terms of
rupees)

22,435
(5,564)

88,325
(20,104)

44.46 %

1.

MAURITIUS

2.

U.S.A.

3,055
(669)

2,210
(502)

3,861
(856)

2,540
(627)

18.121
(4,070)

9.12 %

3.

U.K.

458
(101)

1,164
(266)

8,389
(1,878)

1,103
(274)

15,478
(3,461)

7.79 %

4.

SINGAPOR
E

822
(184)

1,218
(275)

2,662
(578)

5,632
(1,411)

11,438
(2,695)

5.76 %

5.

NETHERLA
NDS

1,217
(267)

340
(76)

2,905
(644)

2,101
(525)

11,243
(2,535)

5.66 %

6.

JAPAN

575
(126)

925
(208)

382
(85)

8,629
(1,948)

4.34 %

(637)

2,630

7.

GERMANY

663
(145)

1,345
(303)

540
(120)

1,195
(293)

5,859
(1,323)

2.95 %

8.

FRANCE

537
(117)

82
(18)

528
(117)

358
(89)

3,159
(705)

1.59 %

9.

CYPRUS

12
(3)

310
(70)

266
(58)

2,192
(534)

2,874
(685)

1.45 %

10.

SWITZERL
AND

353
(77)

426
(96)

257
(56)

861
(211)

2,792
(634)

1.41 %

17,138
(3,754)

24,613
(5,546)

70,630
(15,726)

51,243
(12,699)

2,22,680
(50,628)

TOTAL FDI INFLOWS *

40

Note: (i) *Includes inflows under NRI Schemes of RBI, stock swapped and advances pending for
issue of
shares.
(ii) Cumulative country-wise FDI inflows (from April 2000 to December 2007) Annex-A.
(iii) %age worked out in rupees terms & FDI inflows received through FIPB/SIA+ RBIs
Automatic Route+ acquisition of existing shares only.

The United States and the European Union are the largest acquirers of Indian
companies, measured by both value and number of deals . For the number of M&A
deals with a reported value, the U.S. and the EU together accounted for over $8
billion, or roughly 67 percent of the total value in the Indian M&A market between
2000 and 2006. Indian government statistics do not present information on the
industry distribution of FDI inflows from each source country. However, an analysis
of M&A and greenfield FDI project data sheds light on the industry destinations for
the major countries. Manufacturing is the leading industry destination, followed by
information (including telecommunications services) and professional, scientific, and
technical services (including business services such as data processing and telephone
call centres).

Mauritius
According to Indian government statistics, Mauritius accounts for the largest share of
cumulative FDI inflows to India from 1991 to 2006, nearly 40 percent .It is
Unlikely, given the small size of the Mauritian economy, that much of the capital
destined for India originated in Mauritius. According to Loco Monitor data, only four
Greenfield FDI projects (all from 2002) list Mauritius as the source country.33 Many
companies based outside of India utilize Mauritian holding companies to take
advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA).
The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow
some India-based firms to avoid paying certain taxes through a process known as
round tripping

41

The extent of round tripping by Indian companies through Mauritius is unknown.


However, the Indian government is concerned enough about this problem to have
asked the government of Mauritius to set up a joint monitoring mechanism to study
these investment flows. The potential loss of tax revenue is of particular concern to
the Indian government.
The existence of the treaty makes it difficult to clearly understand the pattern of FDI
flows, and likely leads to reduced tax revenues collected by the Indian government.

United States
The United States is the second largest source of FDI in India (13 percent of the
total), valued at $5.6 billion in cumulative inflows between August 1991 and
December 2006. According to the Indian government, the top sectors attracting FDI
from the United States to India during 19912004 (latest available) are fuel (36
percent), telecommunications (11 percent), electrical equipment (10 percent), food
processing (9 percent), and services (8 percent).
According to the available M&A data, the two top sectors attracting FDI inflows from
the United States are computer systems design and programming and manufacturing.
These data roughly correspond to the overall FDI sectoral breakdown with the
exception of fuel (including power generation and oil refineries). Given Indias

42

general lack of existing power infrastructure, operations involved with power


generation and oil refineries may be better suited to Greenfield investments. U.S.
companies that are actively pursuing or have recently completed M&A deals in the
Indian telecommunications, electrical equipment, and service sectors include Oracle,
Intel, IBM, HP, and Electronic Data Systems (EDS).
Ford, Parker-Hannifin, Sara Lee, SC Johnson, and Caterpillar have been actively
investing in the manufacturing sector. According to Indian government statistics, FDI
inflows from the United States accounted for 13 percent of total FDI inflows between
August 1991 and December 2006. According to Loco Monitor data for 200206, U.S.
Greenfield investment has averaged 44 percent of the total number of projects listed
and 18 percent of the total reported value for projects. The industry receiving the
largest share of U.S. Greenfield FDI has been followed by electronics and business
services . Among the announced ICT projects that have value data reported, Googles
$1 billion investment in internet infrastructure in Andhra Pradesh is the largest. The
internet search engine company intends to open a server farm (a collection of
computer servers) to enhance its internet and data storage services in Asia.39 Most of
the other U.S.-funded ICT projects are for software development.
Reported Greenfield FDI projects by U.S. companies have been generally smaller by
value (about one-third the size, on average) than projects financed by non-U.S.
companies. Some of this disparity in size may be explained by the much greater
emphasis on R&D activities, including software development, by U.S. firms than by
non-U.S. firms investing in India. Over one-half of all listed R&D projects were
funded by U.S. companies, and research facilities tend to require considerably less
capital than manufacturing facilities. Since 2002, many of the major U.S. software
and computer brands, such as Microsoft, Honeywell, Cisco Systems, Adobe Systems,
McAfee, and Intel have established R&D operations in India, primarily in Hyderabad
or Bangalore. The majority of U.S. electronics companies that have announced
Greenfield projects in India are concentrated in the semiconductor sector. By far the
largest such project is AMDs chip manufacturing facility in Hyderabad, Andhra
Pradesh. This $3 billion site will produce about 30,000 wafers per month, with each
wafer containing between 100 and 1,000 chips. Intel plans to invest close to $1 billion
in India, primarily expanding the companys R&D center in Bangalore, over a multiyear period.

43

Official data on FDI flows and stocks is compiled on a balance of payments (BOP)
basis, and reflects the total capital that crosses borders. These data are one indicator
of the level of FDI in a given country, and generally the indicator that is most widely
available. An alternate indicator of FDI activity is the extent of operations by foreignowned affiliates in a given economy. These data are not available for all countries.
For the United States, however, there is a substantial amount of available
information, including data on sales and assets of U.S.owned affiliates in India, employment by those affiliates, and R&D performed by
U.S. owned Firms in India assets of U.S.-owned affiliates in India, employment by
those affiliates, and R&D performed In 2004 (latest available), there were 577
affiliates of U.S. firms in India, of which 198 were majority-owned by U.S. firms
(table 2-6). U.S. majority-owned affiliates (MOFAs) employed a total of 165,600
workers in India. The largest share (36 percent) was found in the manufacturing
sector, most prominently in the machinery, chemicals, and transportation equipment
manufacturing segments. Other important categories of employment are professional,
scientific, and technical services; and wholesale trade, with 29 percent and 18
percent of U.S. affiliate employment, respectively. While manufacturing remains the
largest sector for U.S. employment, the latter two sectors have accounted for an
increasing share of employment by U.S.-owned affiliates in recent years .U.S.-owned
manufacturing affiliates also reported larger assets than affiliates in other sectors in
2004, followed by finance and insurance, and utilities affiliates.
The top four sectors in terms of value-added by U.S.-owned affiliates in India were,
Respectively, manufacturing; wholesale trade; professional, scientific, and technical
services; and information services (primarily telecommunications, most likely).
Within the manufacturing sector, the largest industries were chemicals and machinery
manufacturing.
In 2003, U.S. MOFAs reported R&D-related expenditures of $81 million in India. Of
this total, 43 percent was in the manufacturing sector, with most of the remainder
likely in the area of professional, scientific, and technical services. Given the sharp
increase in overall FDI in India since 2003, and the individual projects noted above,
R&D-related expenditures by U.S. MOFAs have also likely increased.

European Union

44

Within the European Union, the largest country investors were the United Kingdom
and the Netherlands, with $3.7 billion and $2.5 billion, respectively, of cumulative
FDI inflows between 1991 and 2006. The United Kingdom, the Netherlands, and
Germany together accounted for almost 75 percent of all FDI flows from the EU to
India . All EU countries together accounted for approximately 25 percent of all FDI
inflows to India between August 1991 and December 2006. FDI from the EU to India
is

primarily

concentrated

in

the

power/energy,

telecommunications,

and

transportation sectors.
The available M&A data shows that the top sectors attracting FDI from the European
Union are similar to FDI from the United States. Manufacturing; information
services; and professional, scientific, and technical services have attracted the largest
shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group,
P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in
India by means of mergers and acquisitions.
European companies accounted for 31 percent of the total number and 43 percent of
the total value for all reported Greenfield FDI projects. The number of EU Greenfield
projects was distributed among four major clusters: ICT (17 percent), heavy industry
(16 percent), business and financial services (15 percent), and transport (11 percent).
However, the heavy industry cluster accounted for the majority (68 percent) of the
total value of these projects.

Japan
Japan was the fourth largest source of cumulative FDI inflows in India between 1991
and 2006, but the recent trend of FDI inflows from Japan differs from those of other
source countries. FDI inflows to India from most other principal source countries
have steadily increased since 2000, but inflows from Japan to India have decreased
during this time period . There does not appear to be a single factor that explains the
recent decline in FDI inflows from Japan to India. India is, however, one of the
largest recipients of Japanese Official Development Assistance (ODA), through which
Japan has assisted India in building infrastructure, including electricity generation,
transportation, and water supply.

45

It is possible that this Japanese government assistance may crowd out some private
sector Japanese investment. The top sectors attracting FDI inflows from Japan to
India (January 2000 to November 2006) are transportation (54 percent), electrical
equipment , telecommunications, and services (3 percent). The available M&A data
corresponds with the overall FDI trends in sectors attracting inflows from Japan to
India. Companies dealing in the transportation industry, specifically automobiles,
and the auto component/peripheral industries dominate M&A activity from Japan to
India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi
Heavy Industries Ltd. Japanese companies have also invested in an estimated 148
greenfield FDI projects valued at least at $3.7 billion between 2002 and 2006.
Japanese companies accounted for a relatively small share of greenfield FDI in
India: 5 percent of the projects and 4 percent of the value. The transport equipment
cluster received the largest share (34 percent) of Japanese Greenfield FDI projects
and 79 percent of Japanese greenfield FDI value. The largest project in the cluster is
Nissans $1.5 billion; exportoriented passenger car plant in Manesar, Orissa.The ICT
and electronics clusters each garnered 17 percent of the projects, but only small
amounts of value. The only other cluster to receive more than a 10 percent share of
Japanese capital was the chemical, plastics, and rubber industry. In one prominent
example, Mitsubishi Chemical is investing $368 million to expand its existing basic
organic chemicals production in Haldia, West Bengal. In April 2007, Japanese and
Indian officials announced a major new collaboration between the two countries to
build a new Delhi-Mumbai industrial corridor, to be funded through a public-private
partnership and private-sector FDI, primarily from Japanese companies. The
project is expected to begin in January 2008 with initial investment of $2 billion from
the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area
inhabited by 180 million people. At completion in 2015, the corridor is expected to
include total FDI of $4550 billion. A large share of that total is destined for
infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with
additional connections to existing ports. Private investment is expected to fund 10-12
new industrial zones, upgrade 56 existing airports, and set up 10 logistics parks.
The Indian government expects that by 2020, the industrial corridor will contribute to
employment growth of 15 percent in the region, 28 percent growth in industrial
output, and 38 percent growth in exports
.

46

United Arab Emirates (UAE)


The UAE ranked fourteenth in FDI stock in India in 2006, but the two countries are in
the process of signing several economic and political cooperation agreements which
will likely lead to increased UAE investment in India. The March 2007 visit to India
by officials from Dubai has already produced commitments for cross border
investments of over $30 billion over the next two years. Sectors attracting interest
from the UAE include ports, infrastructure, and hotel construction. One notable
recent agreement involves a 50:50 joint venture between Dubai-based Nakheel and
Indian real estate developer DLF. The company plans to develop 40,000 acres for
housing with an initial investment of $10 billion. Greenfield FDI projects in India
from UAE-based investors are valued at more than $2 billion in each of the last two
years, many of which are aimed at infrastructure and real estate development. The
three clusters with the largest number of UAE-funded greenfield FDI projects during
200206 are light industry; property, tourism, and leisure; and logistics. The light
industry projects, concentrated in textiles and building materials, are typically less
capital intensive. Conversely, heavy industry had only one UAE-funded greenfield
FDI project, but it was valued at $1.1 billion: Dubai Aluminum is setting up a mine,
refinery, and smelter in Orissa.55 Dubai Ports World has been the most active UAE
investor in Indias logistics cluster, with plans to establish container port operations
in numerous Indian ports. The extensive network is, in fact, leading to questions about
whether the company is gaining too large a share of the market with its control of 50
percent of Indias container shipping traffic. UAE investors claim that one reason for
their increased interest in India is related to the U.S. response to the September 11,
2001 terrorist attacks on the United States. The U.S. market is perceived to be less
welcoming to foreign ownership, particularly from the Gulf states, so investors are
looking for other markets to absorb their investment dollars.

F. SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS:


Amount Rupees in crore (US$ in million)

47

Ranks

Sector

1.

SERVICES SECTOR
(financial & nonfinancial)
COMPUTER
SOFTWARE &
HARDWARE
TELECOMMUNICA
TIONS
(radio paging, cellular
mobile, basic telephone
services)
CONSTRUCTION
ACTIVITIES
(including roads &
highways)
AUTOMOBILE
INDUSTRY
HOUSING $ REAL
ESTATE
POWER

2.
3.

4.

5.
6.
7.
8.
9.
10.

CHEMICALS
(other than fertilizers)
DRUGS &
PHARMACEUTICA
LS
METALLURGICAL
INDUSTRIES

2004-05
(AprilMarch)

2005-06
(AprilMarch)

2006-07
(AprilMarch)

2007-08
(AprilDec.)

1,986
(444)

2,399
(543)

21,047
(4,664)

10,313
(2,532)

Cumulativ
e
Inflows
(April
2000 to
Dec.
2007)
39,421
(8,974)

2,441
(539)

6,172
(1,375)

11,786
(2,614)

4,539
(1,136)

31,083
(7,004)

15.65 %

570
(125)

2,776
(624)

2,155
(478)

4,232
(1,043)

15,877
(3,623)

7.99 %

696
(152)

667
(151)

4,424
(985)

4,214
(1,045)

10,609
(2,465)

5.34 %

559
(122)
0
(0)
241
(53)
909
(198)
1,343
(292)

630
(143)
171
(38)
386
(87)
1,731
(390)
760
(172)

1,254
(276)
2,121
(467)
713
(157)
930
(205)
970
(215)

1,325
(330)
1,486
(149)
907
(228)
761
(189)
886
(223)

8,484
(1,892)
8,387
(2,018)
6,659
(1,465)
5,983
(1,345)
5,166
(1,165)

4.27 %

836
(182)

6,540
(147)

7,866
(173)

1,910
(481)

4,572
(1,067)

2.30

Note: Cumulative Sector- wise FDI inflows (from April 2000 to December 2007) - Annex-B.

Distribution of FDI within India


FDI inflows within India are heavily concentrated around two major cities, Mumbai
and New Delhi, with Chennai, Bangalore, Hyderabad and Ahmedabad also drawing
significant shares of FDI inflows). For statistical purposes, Indias Department of
Industrial Policy and Promotion (DIPP) divides the country into 16 regional offices.
As illustrated in , the top 6 regions account for two-thirds of all FDI inflows to India
between 2000 and 2007, with the Mumbai and New Delhi regions together
accounting for just under onehalf of the total.16 This is consistent with greenfield FDI
data, which shows that the 5 Indian states that received the largest number of

48

% age
with total
Inflows
(In terms
of rupees)
19.84 %

4.22 %
3.35 %
3.01 %
2.60 %

greenfield FDI projects in 2006, based on the total number of projects reported, were
Maharashtra (20 percent, includes the city of Mumbai),
G. STATEMENT ON RBIS REGIONAL OFFICE-WISE (WITH STATE COVERED)
FDI EQUITY INFLOWS1 (from April 2000 to December 2007):
Ranks

RBIs - Regional Office2

1.

MUMBAI

2.

NEW DELHI

3.
4.

BANGALORE
CHENNAI

5.

HYDERABA
D
AHMEDABA
D
KOLKATA

%age with
FDI inflows
(in rupee terms)

State covered
Rupees in crore

6.
7.

8.

CHANDIGAR
H`

9.
10.

PANAJI
KOCHI

11.

BHOPAL

12.
13.
14.

BHUBANESH
WAR
JAIPUR
KANPUR

15.

GUWAHATI

US$ in million

51,444.96

11,811.2

25.90

45,182.99

10,302.3

22.74

14,089.75
13,021.12

3,225.0
2,925.0

7.09
6.55

8,400.33

1,932.1

4.23

GUJARAT

5,608.80

1,258.9

2.82

WEST
BENGAL,
SIKKIM,
ANDAMAN &
NICOBAR
ISLANDS
CHANDIGAR
H, PUNJAB,
HARYANA,
HIMACHAL
PRADESH
GOA

3,136.63

742.0

1.58

1,754.72

384.2

0.88

854.90
486.07

186.5
110.4

0.43
0.24

442.86

101.7

0.22

395.52

88.7

0.20

326.32
71.66

73.4
16.4

0.16
0.04

52.38

11.7

0.03

MAHARASHT
RA, DADRA &
NAGAR
HAVELI,
DAMAN &
DIU
DELHI, PART
OF UP AND
HARYANA
KARNATAKA
TAMIL NADU,
PONDICHERR
Y
ANDHRA
PRADESH

KERALA,
LAKSHADWE
EP
MADHYA
PRADESH,
CHATTISGAR
H
ORISSA
RAJASTHAN
UTTAR
PRADESH,
UTTRANCHA
L
ASSAM,
ARUNACHAL
PRADESH,
MANIPUR,
MEGHALAYA,
MIZORAM,
NAGALAND,
TRIPURA

49

16.
17.
SUB. TOTAL
18.
19.

PATNA

BIHAR,
JHARKHAN
D
RBIS REGIONS NOT
INDICATED3
Stock Swapped
Advance of Inflows
(from 2000 to 2004)
RBIs-NRI Schemes

20.
GRAND TOTAL
(from April 2000 to December 2007)

1.78

0.4

0.00

53,388.45

12,078.4

26.87

14,525.44

198,659.24
3,295.8
8,962.22

45,248.3
1,962.8

533.06
222,679.96

121.3
50,628.2

Includes equity capital components only.


The Region-wise FDI inflows are classified as per RBIs - Region-wise inflows, furnished by RBI,
Mumbai.
3
Represents inflows through acquisition of existing shares by transfer from residents. For this,
Region- wise information is not provided by Reserve Bank of India.
2

Karnataka (15 percent, includes the city of Bangalore), Tamil Nadu (13 percent,
includes thecity of Chennai), Delhi (9 percent, includes the city of New Delhi), and
Andhra Pradesh (8percent, includes the city of Hyderabad).The key industries
attracting FDI to the Maharashtra region are energy, transportation, services,
telecommunications, and electrical equipment. Maharashtras transportation industry
holds a particular concentration of MNC affiliates in auto components
manufacturing. Prominent examples include INR Spicer India, owned by U.S.-based
Dana Corp.; Kalyani Lemmerz Ltd., owned by U.S.-based Hayes Lemmerz
International; Schrader Duncan, an affiliate of British-based Tomkins plc; and Fiat
India, an auto parts subsidiary of the Italian auto manufacturer. In the services area,
leading firms include Standard Chartered Bank, an affiliate of the British-based
bank; I-Flex Solutions, owned by U.S.-based Oracle Corp.; Citicorp Finance and EServe International, both affiliates of U.S.-based Citigroup; and South East Asia
Marine Engineering and Construction, owned by Technip Offshore International,
based in France.
The key sectors attracting FDI inflows to Delhi are similar: telecommunications,
transportation, electrical equipment (including software), and services. Delhi ranks
second in total FDI inflows behind Maharashtra. U.S.-owned IBM is not only the
largest computer services company in India, but is also the MNC with the largest
number of employees in India (approximately 53,000), second only to IBMs work
force in the United States. In addition to Delhi, IBM also has facilities in Bangalore,

50

Chennai, Kolkata, Pune, Gurgaon, and Hyderabad. Goodyear, one of the largest
global tire manufacturers, has built two manufacturing facilities near Delhi, entering
into a joint venture with Indian company Ceat Ltd. and acquiring India-based South
Asia Tyres. Goodyear has made an initial investment of $12.3 million to redesign 300
retail outlets to better adapt to Indian consumer preferences.
The states of Uttar Pradesh and Haryana are also contained in the New Delhi region,
as identified by Indias statistical agencies. The geographic proximity of both states to
New Delhi helps them to attract FDI. Due to its abundance of natural resources,
Uttar Pradesh attracts FDI in chemicals, pharmaceuticals, and mining and minerals.
Haryana attracts FDI in the electrical equipment, transportation, and food
processing sectors. Japan-based Honda Motor Co. has a large presence throughout
India, including Hondas joint venture with Hero Cycles, which has grown into the
worlds largest motorcycle company since its inception in1984. The companys
presence in Haryana includes an R&D centre that supports two manufacturing
facilities which together produce over 3 million motorcycles annually. U.S based Dow
Corning and U.K.-based GlaxoSmithKline have invested in the states chemical and
pharmaceutical industries, respectively.
Automotive and auto components are the largest sectors attracting FDI into Tamil
Nadu. Ford, Hyundai, and Mitsubushi all have multi-million dollar investments in
Tamil Nadu. The state capital, Chennai, is sometimes called the Detroit of India.
Other sectors attracting FDI include port infrastructure, ICT, and electronics. The
bulk of projects in Andhra Pradesh, which includes the city of Hyderabad, are
associated with software and, to a lesser extent, hardware for computers and
telecommunications. The same is true of projects in Karnataka, where Bangalore is
located; Karnataka also has a large number of projects in the automotive sector.
Indias more rural areas have attracted a smaller number of high-value projects.
Large Greenfield FDI projects in Orissa include bauxite mining and associated
aluminium smelting operations as well as steel and automotive facilities. Pohang Iron
and Steel Co.s (POSCO -Korea) planned steel mill in Orissa is expected to be the
largest FDI project in India, and will ultimately involve $12 billion in total FDI on
4000 acres, with an annual steel making capacity of 12 million tons by 2020. As of
May 2007, however, the POSCO project was generating intense local opposition by
farmers worried about the loss of their land, and its future was uncertain.
Luxembourg-based Arcelor-Mittal, the worlds largest steel maker, has also signed a

51

memorandum of understanding with the Orissa state government to build an $8.7


billion steel mill, but faces similar opposition to its plans. Other companies investing
in greenfield metals production and auto projects in Orissa include Russian
Aluminum, Vedanta Resources (United Kingdom), Dubai Aluminum, and Nissan
(Japan). The state of Orissa accounted for 15 and 30 percent, respectively, of the total
value of greenfield FDI reported in 2004 and 2005. As of April 2007, Arcelor-Mittal
was also considering investing in a second large steel mill in India, in the state of
Jharkhand

II. FDI INFLOWS FINANCIAL YEAR-WISE DATA:


A. AS PER INTERNATIONAL BEST PRACTICES:
(Amount US$ million)
S. No.

Financia
l Year
(AprilMarch)

Equity

FIPB
Route/
Acquisiti
on Route

1991-2000 (from August 1991 to


March 2000)

Reinvested
earnings
+

Other
capital
+

Total
FDI Inflows

%a
grow
o
previo
ye

RBIs Automatic
Route/ Equity
capital of
unincorporated
bodies #

15,483

- -

15,483

1.

2000-01

2,339

61

1,350

279

4,029

2.

2001-02

3,904

191

1,645

390

6,130

(+) 52 %

3.

2002-03

2,574

190

1,833

438

5,035

(-) 18 %

4.

2003-04

2,197

32

1,460

633

4,322

(-) 14 %

5.

2004-05

3,250

528

1,904

369

6,051

(+) 40 %

6.

2005-06

15,483

897

5,540

506

8,961

(+) 28 %

7.

2006-07 (P)
*

4,029

334

15,585

254

22,079

8.

2007-08 (P)
+(April-

12,699

334

2,054

254

15,341

December
2007

52

(+) 153

SUBTOTAL (from April


2000 to December 2007)

48,088

2,668

18,097

3,095

71,948

CUMLICATIVE TOTAL(from
August 1991 to December
2007)

63,571

2,668

18,097

3,095

87,431

(1) RBIs Bulletin February 2008 dt: 13.02.2008 (Table No. 46 FOREIGN INVESTMENT INFLOWS).
(Ii) # Figures for equity capital of unincorporated bodies for 2006-07& 2007-08 are estimates.
(Iii) + Data in respect of Re-invested earnings & Other capital for the year 2005-2006 & 2006-2007 are
estimated as average of previous two years.
(iv) (P) All figures are provisional.
(v) Updated by RBI up to December 2007.
(vi) * Include Swap of Shares US$ 3.1 billion.
(vii) Data on FDI have been revised since 2000-01 with expend coverage to approach international best
practices.
(viii) Monthly data on components of FDI as per expend coverage are not available.
(ix) +RBI has included the amount of US$ 92 million for the month of April 2007 during this Bulletin.

B. FINANCIAL YEAR-WISE DIPPS FDI EQUITY INFLOWS:


(Equity capital components only):
S
NO.

Financial Year
(April March)

(A)

1991-2000
(August 1991-March 2000)
2000-2001
2001-2002
2002-2003

1
2
3
4
5
6
7
8
B

2003-2004
2004-2005
2005-2006
2006-2007*
2007-2008 (April-Dec.
2007)
Sub total (1to 8)
(from april 2000- Dec.2007)
Cumulative total (a) + (b)
(from august 1991 to Dec.
2007

Amount of
FDI Inflows
(Including advance)
In rupees In US$
crores
million
60,605
16,698

Amount of
FDI Inflows
(excluding advance)
In rupees In US$
crores
million
59,698
16,484

%AGE
over
Previous
year
-

12,646
19,361
14,932

2,908
4,222
3,134

10,733
18,654
12,955

2,463
4,065
2,722

(+) 65%
(-)33%

12,117
17,138
24,613
70,630
51,243

2,634
3,759
5,546
15,726
12,699

10,237
14,653
24,613
70,630
51,243

2,225
3,219
5,546
15,726
12,699

(-)18%
(+) 45%
(+)72%
(+)184%
-

222,680

50,628

213,718

48,665

283,284

67,326

273,416

65,149

Note: (i) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar
applied, on the basis of monthly average rate provided by RBI (DEAP), Mumbai.
(ii) * Includs Stock Swap of Shares US$ 3.2 billion for the year 2006-2007.

53

III. FOREIGN TECHNOLOGY TRANSFER:


(From August 1991 to December 2007)
A. NUMBER OF CUMULATIVE FTC APPROVALS
No. Of comullcative FTC approval(from August 1991 to December 2007)

7,941
No. Of comullcative FTC approval(from April 2006 to March 2007)
No. of FTC approvals during 2007-08 (from April 2007 to December 2007)

81
95

B. COUNTRY-WISE TECHNOLOGY TRANSFER APPROVALS:


Country

No. of Technical Collaborations


approved
1,772

%age with total tech. approvals


22.31

USA

1,106

13.93

GERMANY

868

10.93

JAPAN

860

10.83

UK

484

6.09

ITALY

2,851

35.91

OTHERS

B. SECTORS-WISE TECHNOLOGY TRANSFER APPROVALS


RANKS

SECTOR

Electric Equipments (including


computer software & electronics)
Chemicals(other than Fertilizer)

3
Industrial Machinery
4
Transportation Industry
5
Mismatch. Engineering industry
6
Other Sector
TOTAL OF ALL SECTORS

NO. OF
TECHNICAL
COLLABOATION
APPROVED
1,255

%AGE WITH
TOTAL
TECH
APPROVALS
15.80

886

11.16

896
742
442
3,747
7,941

10.94
9.34
5.57
47.19
100.00

54

Ran

The sectors receiving the largest shares of total FDI inflows between August 1991 an
December 2007 were the electrical equipment sector and the services sector, each
accounting for 17 percent. These were followed by the telecommunications,
transportation, fuels, and chemicals sectors. The top sectors attracting FDI into India
via M&A activity were manufacturing; information; and professional, scientific, and
technical services.59 These sectors correspond closely with the sectors identified by
the Indian government as attracting the largest shares of FDI inflows overall.
ICT and electronics have been the largest industry recipients of Greenfield FDI into
India in recent years, but have seen the number of new Greenfield projects plateau
since 2004. These data do not signify that Greenfield investment in these sectors has
stagnated. Rather, the size of the projects in these industries has increased
substantially. For example, global semiconductor manufacturers Advanced Micro
Devices (AMD - United States) and Flextronics (Singapore) have entered into
separate joint ventures with SemIndia to build semiconductor manufacturing facilities
in Hyderabad. The $3 billion AMD-SemIndia joint venture will produce
semiconductor chips which can then be used to manufacture
Electronic products in the Flextronics-SemIndia $3 billion joint venture. The chip
fabrication facility will manufacture chips for cell phones, set-top boxes, personal
computers, and similar products. SemIndia is attempting to capitalize on Indias
domestic demand for semiconductors, predicted to grow from $3.3 billion in 2006 to
$40 billion in 2016. The heavy industry and transport equipment sectors together
attracted over $30 billion in Greenfield FDI projects in 2006. The cluster with the
highest reported value during 200206 is heavy industry. Projects in this sector tend
to be highly capital intensive, with single projects frequently requiring upwards of $6
billion in start-up investment costs. The largest recent examples include the POSCO
and Arcelor-Mittal Steel projects noted above, and Vedanta Resources (United
Kingdom) aluminum smelter project, all planned for the state of Orissa. Reported
greenfield FDI in the transport equipment sector exceeded $11 billion in 2006.
Another major recipient sector was property, tourism and leisure, with over $6.1
billion in 2006. This level of investment was well above the annual average for this
sector, although still below the high of $9.2 billion in 2004. The Asian tsunami on
December 26, 2004, may have dampened enthusiasm for such investment, as
investment plunged to just over $100 million in 2005 before rebounding to $6.1
billion in 2006. The industry is expected to continue to attract substantial FDI. At

55

least 50 non-Indian hotel chains planned to enter the market as of April 2007,
targeting Indias low level of hotel penetration around the country.
In particular, Royal Indian Raj International Corp. has signed a contract with Choice
Hotels to build 15,000 hotel rooms around the country, with an estimated FDI value
of $6 billion. FDI projects have become more widely distributed across industries
over time. In 2002, FDI projects were concentrated in the ICT industry, followed by
business and financial services; and electronics. By 2006, the distribution of the
projects among the clusters was more uniform, although the ICT cluster still was the
largest. . Even if an industrys share of the total pie decreased between 2002 and
2006, that industry may still have significantly increased
its total Greenfield FDI. The ICT sector is a case in point, down 12 percent by
relative share from 2002 to 2006, but recording increased FDI of more than $4.1
billion.

C. STATE-WISE TECHNOLOGY TRANSFER APPROVALS:

RANKS

STATE

1
2
3
4

Maharastra
Tamilnadu
Gujrat
Haryana

NO.OF
TECHNICALS
COLLABORATION
APPROVED
1,371
660
608
356

%AGE WITH TOTAL


TECH APPROVALS

Delhi

315

3.97

Other states
Total of all states

4,331
7,941

58.32
100.00

17.26
8.31
7.66
4.48

56

57

5.CONCLUSION:Opening and FDI have really created new opportunities for Indias development and
boosted the performances of local firms as well as the globalization of some of them.
Such a trend has undeniably raised Indians stature among developing countries.
However, the potential of the country to catch up the levels of the leading economies
in the coming decades, often touched on, is not quite guaranteed. India has an
extremely hard job to perpetuate its advantages, to achieve further productivity gains
and to ensure that all segments of its population participate in the income growth.
The challenge that India has to take up is, in many regards, close to that of China.
What is sure it is that, because of their size, of their capabilities and of their
ambitions both of these emerging countries have the possibility to alter the
international economic landscape over the coming generation.
BY Research I able to find out answer of these question:# To Understand what is FDI and Why it is Important for any country like India?
#Modes of FDI in India.
# Analysis through yearly data of different sectors.
# Limitation of FDI inflow in India.

58

SUMMARY:Indias recent liberalization of its foreign investment regulations has generated strong
interest by foreign investors, turning India into one of the fastest growing destinations
for global foreign direct investment (FDI) inflows. Foreign firms are setting up joint
ventures and wholly owned enterprises in services such as computer software,
telecommunications, financial services, and tourism, and manufactured goods
including

transportation

equipment,

chemicals,

pharmaceuticals,

and

food

processing. This study examines FDI flows into India, by country and by industry,
supplemented by a discussion of major foreign acquisitions of Indian companies, and
greenfield FDI by foreign firms. The study also examines Indias investment
environment, special economic zones

Principal findings regarding FDI in India include:


Net FDI in India was valued at $4.7 billion in the 200506 Indian fiscal year, and
more than tripled, to $15.7 billion, in the 200607 fiscal year. Almost one-half of
all FDI is invested in the Mumbai and New Delhi regions.
By country, the largest investors in India are Mauritius, the United States, and the
United Kingdom. Investors based in many countries have taken advantage of the
India-Mauritius bilateral tax treaty to set up holding companies in Mauritius which
subsequently invest in India, thus reducing their tax obligations. By industry, the
largest destinations for FDI are electrical equipment (including computer software

59

and electronics), services, telecommunications, and transportation.


India offers both positive and negative incentives for foreign investors. Positives
include strong economic growth leading to increased buying power by the middle
class, low wages compared to OECD countries, and an educated work force.
Negatives include inadequate infrastructure, rising salaries for key jobs, and
bureaucratic delays in obtaining necessary permits and licenses.
Indias Special Economic Zones (SEZs) attract foreign investment by providing tax
incentives, assistance with bureaucratic and administrative problems, and access to
reliable infrastructure. Investment-related regulations outside the SEZs have been
increasingly liberalized since 1991, with important improvements in intellectual
property regulation.
U.S., European, and Japanese automakers and auto component manufacturers all
have significant investments in India. Most FDI in the automotive industry has been
focused on sales to the domestic market, but more foreign investors are now
producing autos and components in India for export.
Indias 2005 changes to its Patent Law have motivated substantial new FDI in the
pharmaceutical industry, but global pharmaceutical firms are waiting to see how the
new law is interpreted before further expanding product patenting and
commercialization activities in India.

60

61

6.SUGGESTION:Possible Directions of Improvement in FDI Inflows for India


The paper indicates that FDI has been playing an increasingly important role in the
Indian economy since the reforms were undertaken a decade ago. Since the initiation
of economic reforms by the Indian government in 1991 (ten years after China's open
door policy), attracting FDI has been an important area. However, India continues to
be at the lower end with respect to the global competition for FDI, in spite of opening
up of significant market opportunities. The previous Government had targeted FDI of
$10 billion by 1997 but, even as late as 2003, less than half of the target has been
achieved. India would need to overcome both domestic as well as external economic
challenges to take advantage of these opportunities. The likely strategies that
policymakers would need to adopt in the light of these challenges therefore, have to
be multi-pronged, with focus on both the domestic as well as the global market. In
order to be competitive with China, India needs to give greater orientation towards
export-driven FDI in manufacturing. For this, India needs to have focussed
development of export processing zones and SEZs comparable in size and intensity
with those of China. It also needs to provide appropriate incentives in the form of
good infrastructure and tax reliefs to the investors so as to attract quality FDI
inflows. Another major point that is to be noted for India is that it should reduce the
procedural hassles at the implementation stage of FDI. This is a bureaucratic
problem and it needs to be taken care of at the institutional level. Finally, India
should gear up its overall business environment conditions so as to attract the FDI
inflows that could have been routed towards India but parks elsewhere because of

62

certain unfavorable elements in the investment climate fabric of India. In particular,


India would need to focus on certain strategies in order to improve its quality of FDI
and correspondingly its global competitiveness, growth prospects, and the
attractiveness to FDI inflows. These are as follows:

1. Adopt an Export Oriented FDI Policy


It is well-recognized that export-oriented FDI is an important means of expanding
manufactured exports for developing countries, as it helps improve the quality and
competitiveness of manufacturing industries. It is well documented that in the 1970s
and 1980s, FDI played a crucial role in the rapid export growth achieved by East
Asia's newly industrialized economies.
Export-orientation in China
China has been successful in attracting huge export oriented FDI inflows in recent
years. Table 22 shows that over the late 1990s till 2001, the share of foreign funded
enterprises in Chinese exports have consistently remained over 40% during this
period and has exceeded 50% in 2001. China has pushed up the MNC share in
exports from 17 per cent in 1991 to over 45 per cent in 1999 to around 50 per cent in
2001 as compared to a mere 3 per cent of exports by MNC affiliates in India.
China invited in foreign direct investors to provide the capital and the expertise to
achieve export competitiveness in a wide range of sectors, including electronics,
apparel, plastic toys, stuffed animals, ceramics, and many other labor-intensive
sectors. In each sector, the key was to link foreign investor capital and expertise with
a large and low-cost Chinese labor force. The foreign investors brought in the
product design, specialized machine tools and capital goods, key intermediate
products, and knowledge of world marketing channels. The Chinese assured these
foreign investors certain key conditions for profitability, such as low taxes, reliable
infrastructure, physical security, adequate power, decent logistics for the import and
export of goods, and so forth. confirms that the contribution of services in Chinas
exports is negligible. We observe that the manufactured exports as a percentage of
total exports have always demonstrated a rising trend reaching around 90% in 2001.

63

Within the manufacturing exports, about 57% was by the chemicals, light & textile
industrial products, machinery and transport equipment, minerals and metallurgical
products, rubber products etc. over 1991-2001. Presumably, a substantial percentage
of these exports especially in the mechanical and electrical products sector was
contributed by the MNCs72.
Export-Orientation in India
Focus of FDI in India is mainly on sectors such as infrastructure, power, capital
goods and food processing, none of which fall under export-oriented units. Only onefourth of total approvals were directed towards major exporting sectors like textiles,
chemicals & pharmaceuticals, leather goods, transport, metallurgical industries and
food processing industries. Of Indias export basket of software products and services,
gems and jewelry, minerals, and agricultural products, FDI is allowed only in
software products. India needs a larger export market for manufactured goods where
FDI could flow in. For example, the handicraft sector has consistently made the
largest contribution to exports over the 1990s. But since this sector falls under the
reserved small-scale category, FDI is practically non-existent in this area.
Recommendations for India
Perhaps with the opening up of the small-scale industries, MNCs could be attracted
and export-oriented FDI could get a significant boost. Also, comparing Table 24
(machinery and transport equipment in China) with Table 25 (engineering figures in
India), we observe that India lags very much behind China in the export of machinery
and electronics goods. This can be mitigated if India adopts competent incentive
measures like tax break to attract FDI from the MNCs in these capital-intensive
industries.

2. Generate and Expand SEZs in India


Export-oriented industries can be fostered through the creation of different types of
special economic zones (SEZs). Virtually all of the East and South-east Asian
countries have utilized export-processing zones (EPZs) or other SEZs to help attract
foreign investment and to initiate the process of manufacturing export-led growth.
These zones have attempted to carve out a geographical zone in which exportbusinesses can conduct profitable export-oriented activities, exempt from costly
regulations, tax laws, and labor standards that apply more generally within the

64

country. More generally, the relatively successful industrial policies have had a few
common characteristics. First, they have aimed to promote exports, rather than to
protect the domestic market; second, they have provided subsidies on the basis of
successful performance (for example, the growth of exports) rather than to cover
losses; and third, they have been temporary rather than permanent subsidies (for
example, a five-year tax holiday for new export firms).
SEZs provide three types of incentives for enterprises to locate their business
operations in India. First, the SEZs provide tax, tariff, and financial incentives, by
defining SEZs as free trade enclaves. Second, the zones improve on the general
bureaucratic and administrative situation that many businesses face when
establishing in India. Third, SEZs provide reliable infrastructure that is not always
available elsewhere in India. All of these incentives are applied equally to both Indian
and foreign firms.
Tax and financial incentives for potential investors include substantial income tax
deductions for the first 10 years of operations. For the first five years after operations
begin, firms pay no income tax at all. For the next two years they receive a tax
reduction of 50 percent. During years 8-10, the firm can debit up to 50 percent of its
profits from the previous year to a Special Economic Zone Re-investment Allowance
Reserve Account. This value can then be used within three years of when the
account was established for future reof the SEZs, India's average tariff rates are still
among the highest in the world. This makes India a much less attractive destination
for export-oriented firms that depend on imported inputs. However, tariff incentives
exempt firms in SEZs from all customs duties on imported goods, so long as they are
re-exported, which creates a beneficial environment for export oriented firms who
need inexpensive and easy access to manufacturing inputs. Other financial incentives
include the reimbursement of duties paid on furnace oil and exemptions from state
and central sales taxes paid on domestic purchases. SEZ units can also borrow up
to $500 million per year through recognized banking channels without maturity
restrictions.
SEZs allow investors to avoid many bureaucratic and administrative barriers as well.
First, the limits on foreign equity ownership that apply to certain sectors in India are
eliminated in SEZs. Second, all investments in SEZs are administered through the
automatic route, which empowers the Reserve Bank of India (RBI) to automatically
approve the investment within a period of two weeks.6 Third, firms operating in SEZs

65

do not need a license to import goods. Unlike in Indias previous generation of Export
Processing Zones (EPZs), customs inspections are kept to a minimum in order to
eliminate delays in product availability. These factors provide incentives for
investment by improving manufacturers ability to access production inputs. Other
administrative barriers have been eliminated as well. In general, separate
documentation is no longer required for customs and the administration of the
Export-Import Policy. Firms in SEZs also have an exemption from industrial licensing
a requirement that is normally only provided to small scale industries and sectors.7
The clarification of these administrative procedures makes the investment process
much simpler in SEZs compared to other areas of India.
One of the most important incentives that SEZs provide is reliable infrastructure. The
US India CEO Forum, composed of 20 chief executives representing a broad
spectrum of industrial sectors from both countries, has identified Indias poor
infrastructure as a key area of needed economic cooperation and a major impediment
to new U.S. investment. The Forum recognized that Indias infrastructure needs
exceed its domestic funding capacity and one of its recommendations was to
continue setting up large scale SEZs that comprise world-class infrastructure with
integrated real estate, power, and transportation facilities.
Outside of the SEZs, with a population of just over 1 billion, India spends just $35
billion a year on infrastructure,10 and investors frequently encounter difficulties
related to infrastructure.
Adequate infrastructure is a prerequisite for an area to be approved as an SEZ. All of
Indias SEZs have uninterrupted water and power supplies, guaranteed by state
governments; power is distributed through sub-stations that are dedicated to
distributing power only to a specific SEZ. Additional infrastructure facilities include
developed plots, built-up space, and telecommunication lines, as well as supportive
services, such as in-house customs facilities, post offices, banks, canteens, courier
services, travel agents, medical services, shopping, food services, and worker
housing. Most importantly, however, the SEZs provide reliable access to trade
opportunities through well integrated transportation facilities. The majority of the
zones are within 25 km of a major metropolitan area that provide ports and airports,
and other transportation services essential to international merchandise trade. Even
though ports and airport facilities are often not available within or directly adjacent
to the zone, each SEZ provides access to these facilities through both railways and

66

highways. Many Indian highways are narrow and congested, with poor surface
quality and the rail system also faces severe capacity constraints with very high rail
freight costs.12 By contrast, most SEZs have newly built, high quality rail and
highway systems that reduce congestion and transportation costs investments
in the business, such as machinery and plant improvements. Outside

3. Improve the Investment Climate


the different major factors determining the investment climate of India towards the
beginning of this decade and compares them with that of China. Apart from the items
covered by the table, there are certain other lacuna in the institutional structure of
India that requires attention. One major problem in India is that there is a lack of
harmonization of government policies in India. Two events, which occurred in 1995,
illustrate this lack of coordination and often-contradictory government policy and
damaged India as an investor-friendly country. First, Enron's project with the
Maharashtra State government was scrapped after it had been approved by the
government. Furthermore, Kentucky Fried Chicken's license in New Delhi, India's
capital city was revoked as the company was accused of using ingredients that were
harmful

4. Reduction in Poverty level.


Even with its strong economic growth in recent years, India remains a developing
country,with many of its people enjoying little benefit from the countrys economic
growth. An estimated 25 percent of the population lives below the poverty line,10 and
the GNP per capita was only $620 in 2004.11 Seventy percent of the Indian
population lives in rural areas, which are often difficult to access because of poor
roads.12 This poverty and poor infrastructure make it harder for foreign firms to
establish and expand their presence in much of the Indian market
.

5. Educated Work Force


Indias educational system is vast, educates millions, and turns out thousands of welltrained and skilled workers. India has an extensive system of schools, including
primary and upper primary schools, high schools, colleges for general education,

67

colleges for professional education (engineering, technology, medical, and teacher


education), and universities/institutes.39 In 200304, there were approximately 9,400
colleges for general education, 2,750 colleges for professional education, and 300
universities/institutes.40 India has the third largest number of students in higher
education in the world, trailing only the United States and China. English is the
primary language of instruction in these schools, which means that most educated
Indian workers speak at least some English.41 In India, there are more than 200,000
engineering graduates annually, more than 300,000 post graduates from nonengineering colleges, 2.1 million other graduates, and about 9,000 PhDs.
Many foreign investors have established R&D centers in India and have made it an
important location for software development. Indeed, 20 percent of the Fortune 500
companies have R&D facilities in India, drawn in large part by this vast pool of
scientific and technical expertise.

6. Bureaucracy and Corruption


Excessive bureaucracy and corruption discourage FDI by distorting the efficient
allocation of resources, increasing the cost of doing business, and breeding mistrust
of government officials. Although India has taken steps in recent years to open up
more sectors of its economy to FDI and to streamline the investment process, FDI
into the country remains hindered by government bureaucracy and corruption.
Foreign businesses report instances where investment decisions and approval by
Indian government ministries drag on for lengthy periods of time for no apparent
reason. The Indian government procurement system for certain areas of business has
been plagued by instances of corruption; a number of government officials have been
convicted under Indian anti-corruption laws in the past several years. Recently, the
World bank suspended funding for some health care projects in India due to
allegations of fraud and corruption in the procurement of medicines. In a survey of
business executives, respondents indicated that inefficient government bureaucracy
and corruption were the second and fourth most problematic factors, respectively, for
doing business in India.

68

69

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