UNIT -3

PREMENDRA KUMAR SAHU

ASST. PROFESSOR

Foreign Direct Investment

A foreign direct investment is an investment in the
form of a controlling ownership in a business
enterprise in one country by an entity based in
another country. It is thus distinguished from
foreign portfolio investment by a notion of direct
control.

Why Countries Seek FDI ?

(a)Domestic capital is inadequate for purpose of economic
growth
(b)Foreigncapitalisusuallyessential,atleastasatemporary
measure, during the period when the capital market is in the
processofdevelopment;
(c) Foreign capital usually brings it with other scarce
productivefactorsliketechnicalknowhow,businessexpertise
andknowledge

Major Advantages of FDI :

(a)Improvesforexpositionofthecountry;
(b)Employmentgenerationandincreaseinproduction;
(c)Helpincapitalformationbybringingfreshcapital;
(d)Helpsintransferofnewtechnologies,managementskills,
intellectualproperty
(e)Increasescompetitionwithinthelocalmarketandthisbrings
higherefficiencies
(f)Helpsinincreasingexports;
(g)Increasestaxrevenues

Disadvantages of FDI :
a) Domestic companies fear that they may lose their ownership to
overseascompany
(

(b) Small enterprises fear that they may not be able to compete with
worldclasslargecompaniesandmayultimatelybeedgedoutofbusiness;
(c)Largegiantsoftheworldtrytomonopoliseandtakeoverthehighly
profitablesectors;
(d) Such foreign companies invest more in machinery and intellectual
propertythaninwagesofthelocalpeople;
(e)Governmenthaslesscontroloverthefunctioningofsuchcompanies
as they usually work as wholly owned subsidiary of an overseas
company;

TYPES OF INVESTORS
INDIVIDUAL:
Foreign Venture Capital Investor(FVCI)
Pension/Provident Fund
Financial Institutions
COMPANY:
Foreign Trust
Sovereign Wealth Funds
NRIs / PIOs
FOREIGN INSTITUTIONAL INVESTORS
Private Equity Funds
Partnership / Proprietorship Firm
Others

Procedure for Foreign Direct Investment

i. Automatic Route
FDI is allowed under the automatic route without prior approval
either of the Government or the Reserve Bank of India in all
activities/sectors as specified in the consolidated FDI Policy,
issued by the Government of India from time to time.
ii. Government Route
FDI in activities not covered under the automatic route requires
prior approval of the Government which are considered by the
Foreign Investment Promotion Board (FIPB), Department of
Economic Affairs, Ministry of Finance.

SECTORS REQUIRING CENTRAL GOVERNMENT APPROVAL

Trading SBRT Beyond 49% & Upto
100% (5.2.15.3)

Mining and mineral separation of titanium bearing

minerals and ores Upto 100% (5.2.3.3*)
Defence Beyond 49% & upto 100% (5.2.6)

Pharma Brownfield Beyond 74% &

Upto 100% (5.2.27.2)

Publishing/printing of scientific and technical

magazines/specialty journals/ periodicals Upto
100% (5.2.8.3)

Banking Private Sector Beyond 49%

& Upto 74% (5.2.18)

Publication of facsimile edition of foreign

newspapers Upto 100% (5.2.8.4)

Banking Public Sector Upto 20%

(5.2.19)

Print Media - Publishing of newspaper and

periodicals dealing with news and current affairs
Upto 26% (5.2.8.1)

Private Security Agencies Beyond 49%

& Upto 74% (5.2.13)

Print Media - Publication of Indian editions of foreign

magazines dealing with news and current affairs
Upto 26% (5.2.8.2)

Broadcasting Content Service

FM Radio Upto 49% (5.2.7.2.1)
Uplinking of News & Current Affairs TV
Channels Upto 49% (5.2.7.2.2)
Trading - MBRT Upto 51% (5.2.15.4)

Air Transport Service - Scheduled, and Regional Air

Transport Service Beyond 49% & Upto 100%
(5.2.9.2(1))
Investment by Foreign Airlines Upto 49% (5.2.9.2)
Satellites establishment and operation Upto
100% (5.2.12)
Telecom Services Beyond 49% & Upto 100%
(5.2.14)

SECTORS UNDER AUTOMATIC ROUTE

Maintenance and Repair organizations; flying training
institutes; and technical training institutions
100% (5.2.9.3 (2))
Construction Development 100% (5.2.10)

Agriculture 100% (5.2.1*)

Plantation Sector 100% (5.2.2)
Mining of metal and non-metal ores 100% (5.2.3.1)
Mining Coal & Lignite 100% (5.2.3.2)

Industrial Parks new and existing 100% (5.2.11)

Manufacturing 100% (5.2.5)

Trading Wholesale 100% (5.2.15.1)

Food Product Retail Trading 100% (5.2.5)

Trading B2B E-commerce 100% (5.2.15.2)

Broadcasting Carriage Services ( Teleports, DTH, Cable

Networks, Mobile TV, HITS) 100% (5.2.7.1)

Duty Free Shops 100% (5.2.15.5)

Asset Reconstruction Companies 100% (5.2.17)

Broadcasting Content Service - Up-linking of Non-News &

Current Affairs TV Channels/ Down-linking of TV
Channels 100% (5.2.7.2.3)

Credit Information Companies 100% (5.2.20)

Airports Greenfield 100% (5.2.9.1 (a))

White Label ATM Operations 100% (5.2.25)

Airports Brownfield 100% (5.2.9.1 (b))

Non-Banking Finance Companies 100% (5.2.26)

Air Transport Service Non-Scheduled 100% (5.2.9.2

(2))

Railway Infrastructure** 100% (5.2.16)

Pharma Greenfield 100% (5.2.27.1)

Petroleum & Natural Gas - Exploration activities of oil
and natural gas fields 100% (5.2.4.1)

Air Transport Service Helicopter Services/ Seaplane

Services 100% (5.2.9.2 (3))
Ground Handling Services 100% (5.2.9.3 (1))

Problems of Indian firms in a International market

1)Global economic slowdown
2)Increasing competition
3)Talent crunch
4)Global firms need global management
5) challenges in overseas staff postings

Prospects in International market for Indian

1) Access to the Global Markets

2) Huge Cash Reserves
3) Natural Resources
4) Distribution Networks of Foreign Companies
5) Foreign Technologies
6) Strategic Assets like Brand Names</li></ul>Major Factors<br />
7) Strong Financial System
8) Good Credit Rating
9) Stronger Balance Sheets
10) Confidence shown by Global Business Communication
11) Competitive Business Environment
12) Larger Fund Supply
13) Favorable Regulatory Environment
14) Higher Margins, profits and revenues

World Trade Organization:

WTO was formed in 1995 to replace the General
Agreement on Tariffs and Trade (GATT), which was
started in 1948. GATT was replaced by WTO
because GATT was biased in favor of developed
countries.
WTO was formed as a global international
organization dealing with the rules of international
trade among countries.

The main objectives of WTO

1) Raising the standard of living of people,
2) Promoting full employment,
3) Expanding production and trade,
4) Utilizing the worlds resources optimally
5) Ensuring that developing and less developed countries
have better share of growth in the world trade
6) Introducing sustainable development in which balanced
growth of trade and environment goes together

The main functions of WTO

a. Setting the framework for trade policies
b. Reviewing the trade policies of different countries
c. Providing technical cooperation to less developed and developing countries
d. Setting a forum for addressing trade-related disputes among different
countries
e. Reducing the barriers to international trade
f. Facilitating the implementation, administration, and operation of agreements
g. Setting a negotiation forum for multilateral trade agreements
h. Cooperating with the international institutions, such as IMF and World Bank
for making global economic policies
i. Ensuring the transparency of trade policies
j. Conducting economic research and analysis

WTO has the following

advantages:
(a) Promoting peace within nations:
(b) Handling the disputes constructively:
(c) Helping consumers by providing choices:
(d) Encouraging good governance:
(e) Stimulating economic growth:

International Monetary Fund

IMF, established in 1945, consists of 187
member countries. It works to secure financial
stability, develop global monetary cooperation,
facilitate international trade, and reduce
poverty and maintain sustainable economic
growth around the world. Its headquarters are
in Washington, D.C., United States.

The objectives of IMF

a. Helping in increasing employment and real income of people
b. Solving the international monetary problems that distort the
economic development of different nations
c. Maintaining stability in the international exchange rates
d. Strengthening the economic integrity of the nations
e. Providing funds to the member nations as and when required
f. Monitoring the financial and economic policies of member
nations
g. Assisting low developed countries in effectively managing
their economies

FUNCTIONS OF IMF
1. Merchant Of Currencies
2. Helpful For The Debtor Countries
3. Declared Of Scarce Currency :.1. Purchasing
2. Borrowing
3. Permission
4. To promote exchange stability
5. Temporary aid for the devalued currency
6. To avoid exchange depreciation

United Nations Conference on

Trade and Development:
UNCTAD, established in 1964, is the principal organ of United
Nations General Assembly. It provides a forum where the
developing countries can discuss the problems related to economic
development. UNCTAD is headquartered in Geneva, Switzerland
and has 193 member countries.
The conference of these member countries is held after every four
years. UNCTAD was created because the existing institutions,
such as GATT, IMF, and World Bank were not concerned with the
problem of developing countries. UNCTADs main objective is to
formulate the policies related to areas of development, such as
trade, finance, transport, and technology.

The main objectives of UNCTAD

are as follows:
a. Eliminating trade barriers that act as constraints for
developing countries
b. Promoting international trade for speeding up the
economic development
c. Formulating principles
international trade

and

policies

related

to

d. Negotiating the multinational trade agreements

e. Providing technical assistance to developing countries
specially low developed countries

The main Functions of the

UNCTAD
(i) To promote international trade between developed and
developing countries with a view to accelerate economic
development.
(ii) To formulate principles and policies on international trade
and related problems of economic development.
(iii) To make proposals for putting its principles and policies
into effect, (iv) To negotiate trade agreements.
(iv) To review and facilitate the coordination of activities of
the other U.N. institutions in the field of international trade.
(v) To function as a centre for a harmonious trade and
related documents in development policies of governments.

General Agreement on. Tariffs

and Trade (GATT),
In 1995 GAIT was transformed into the World
Trade Organisation (WTO). The WTO
embodies the main provisions of GATT, but its
role was extended to include a mechanism
intended to improve GATTs process for
resolving trade disputes among member
nations. We may now discuss, to start with,
the operation of the original GATT system.

General Agreement on. Tariffs

and Trade (GATT),
Partly due to trade disruptions during the Great
Depression, the USA and some of its allies sought
to impose order on trade flows after World War II.
The first major post-war step toward liberalisation
of world trade was the General Agreement on.
Tariffs and Trade (GATT), signed in 1947. GATT
was essentially an agreement among trading
nations to decrease trade barriers and to place all
nations on an equal footing in trading relationships.

GATT was based on three basic

principles:
1. Non-Discrimination:
2. Reciprocity:
3. Consultation among Nations in Solving

Objectives:

1. To encourage full employment and large and steadily

growing volume of real income and effective demand.
2. To improve the world production and exchange of
goods.
3. To ensure the full use of world resources.
4. To ensure a steady improvement in the living
standards of people in member countries.
5. To settle the disputes through consultation within the
framework of GATT.

The World Bank:

The World Bank is an international, intergov
ernmental institution for providing long-term
loans
on
easy
terms
for
specific
developmental projects. Recently it has been
issuing loans for structural adjustment
purposes to heavily indebted countries. Its
capital stock is entirely owned by the 181strong member Governments.

Objectives of the Bank

i. Helping the poorest people in poor countries by investing in
health and education.
ii. Running projects on social development
iii. Helping the Governments to improve the quality of services.
iv. Protecting the environment.
v. Encouraging private business enterprise
vi. Promoting macro-economic reforms to create a stable
environment for investment and long-term planning.

Functions of the World Bank:

1. Providing loan services to member Governments
2. Providing development loans on soft terms to poor
member nations
3. Providing support to private or joint sector projects
4. Providing insurance guarantees to foreign investors
5. Setting investment-related disputes