AMITY GLOBAL

BUSINESS SCHOOL

Ahmedabad

Foreign Capital
Kalika Bansal
Amity Global Business School,
Ahmedabad.

AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

Need for Foreign Capital

Sustaining

a high level of
investment
The technological gap
Exploitation of natural resources
Undertaking the initial risk
Development of basic economic
infrastructure
The foreign exchange gap
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BUSINESS SCHOOL

Ahmedabad

Components
Two

main forms

Private foreign investment

Direct
Portfolio

Foreign aid
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BUSINESS SCHOOL

Ahmedabad

Foreign Aid
Includes

all official grants and

concessional loans, which are broadly
aimed at transferring resources from
developed to less developed nations on
developmental or income distributional
grounds.
Lower r
Longer maturity period
Foreign Governments, IMF, World Bank
etc.
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AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

India policy towards Foreign

Capital
No

discrimination between
foreign and domestic capital

Full

opportunities to earn profits

AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

Reasons for sharp increase in

FDI
Among

the developing countries, India

has now emerged as the second most
preferred destination for FDI
Indias share (2.3% in 05 to 4.5% in 06)
Expansion in domestic activity
Positive investment climate
Progressive liberalisation of the FDI
policy
Simplification of procedures
Growth in financial services,
information technology etc.
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BUSINESS SCHOOL

Ahmedabad

Sectoral Composition
Largest

recipient- Electronic equipment

and computer software (17.54% = one
sixth)
Followed by services sector (12.69%)
Telecommunication (10.39%)
Transportation (9.31%)
Power and oil refinery (7.45%)
Chemicals (5.79%)
Food processing industry (3.12%)
Drugs and pharmaceuticals (2.19%)
Metallurgical industries (2.14%)

AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

Determinants of FDI
inflows:
market size (income levels and

population)
extent of urbanization
quality of infrastructure
policy factors such as
tax rates,
investment incentives,
performance requirements.
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BUSINESS SCHOOL

Ahmedabad

Impact of FDI inflows:

some issues
Generation

of Output
Employment Generation
Balanced Regional Development
Export Expansion
Technological spillovers
Augmenting Capital Stock
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BUSINESS SCHOOL

Ahmedabad

FDI

- Growth relationship is a two

way relationship
Some times FDI projects actually
crowd out domestic investment with
their well-known brand names and
other resources.
Indian evidence suggests that
regulations have prompted foreign
enterprises in undertaking exports.

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AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

India as a destination for

F.D.I.
Investors

are generally upbeat about

the country, but somewhat hesitant
to invest because of a perception
that India has done less than other
emerging markets to reduce
fundamental obstacles to
investment. Companies operating in
India continue to face serious
business constraints.
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BUSINESS SCHOOL
This

Ahmedabad

is partly because the government

has deliberately moved to liberalize
the economy at a measured pace.
FDI caps or restrictions continue to
apply in a few key sectors.
Meanwhile, a variety of other factors-such as
excessive red tape,
an opaque and complex tax system,
and
concerns about corruption--can
dampen investors' enthusiasm.
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BUSINESS SCHOOL

Ahmedabad

Other

types of regulations also

continue to hamper the flow of
investment.
For example, foreign companies are
required to obtain a "no-objection"
certificate from their existing jointventure partner if they wish to set
up a new venture in the same line
of business in India.
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AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

The

World Bank ranks India 121st out

of 181 countries as a place to start a
business.

However,

India's high level of

bureaucracy dampens interest from
companies, which like to respond
quickly to market forces, and slows
down the growth of the private sector
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AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

Besides

direct corporate income taxes,

firms are subject to indirect taxes such
as
excise duties and levies from individual
states and municipalities. The indirect
tax system is frighteningly complicated.
Corruption is another major deterrent.
India's plethora of red tape and slow
legal system create an environment
that fosters corruption.
India ranked 85th out of 180 countries
in Transparency International's
Corruption Perceptions Index 2008.
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BUSINESS SCHOOL

Ahmedabad

What is the government

doing about it?

Successive Indian governments have

repeatedly emphasised their
openness to foreign investment.
In 2008, the FDI limit in state-run
refineries has been increased;
the FDI cap in the mining sector has
been removed;
and foreign airlines have been given
permission to buy stakes in certain
domestic civil-aviation companies.
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AMITY GLOBAL
BUSINESS SCHOOL

Ahmedabad

raising

the upper limit on FDI in

private insurance companies from
26% to 49%.
The government is also currently
reviewing some aspects of FDI policy
to ease bureaucratic controls and to
define FDI rules more systematically.
Most foreign investment has been
brought under the automaticapproval facility.
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BUSINESS SCHOOL
This

Ahmedabad

means that companies need not

obtain permission from the government
or the central bank before investing;
they simply file documents ex post
facto with the central bank.
The government has promised to
decide on proposed FDI projects within
30 days.
The

dismantling of this "licence raj" and

the computerisation of certain services
have helped to decrease corruption by
reducing the number of interactions
required between the private sector
and the government.
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BUSINESS SCHOOL

Key issues?

Ahmedabad

Capital

Flows and Balance of

Payments

Displacement

of Indigenous

production
Extent

of technology transfer

Income

distribution
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