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International
Environment

FDI
in
India

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International
Environment

Introduction

Most of the countries have been making use of foreign capital and
foreign technology to accelerate the pace of their economic growth. There is
hardly any advanced country the development of which was not assisted by
foreign capital or technology. India being a developing country, technology
transfer needs no emphasis.

Foreign investment has long been a subject of interest. This is evident

by the rapid growth in the global foreign investment flows in the 1980s.

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International
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Types of Foreign Investment

There are two types of foreign investment, namely:
1.

Foreign direct investment (FDI)

2.

Portfolio investment (PI)

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International
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Advantages And Disadvantages Of FDI

Foreign Direct Investment is preferred to portfolio

investment also because portfolio investment is more
volatile and has lesser commitments.
In the case of FDI, there is little risk involved for the
host country, as the foreign investor has to bring in his
capital and set up production or trading facilities in the
host countries.
The major advantage of direct foreign investment over
borrowings or portfolio investment is that the country in
which the investment is made incurs no fixed charges.
Cont.
This possibility has led some countries
to insist that

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International
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FDI in India
Foreign Direct Investment (FDI) is defined as an investment
made by an investor of one country to acquire an asset in
another country with the intent to manage that asset (IMF,
1993). The IMF definition of FDI includes as many as
following elements: equity, capital, reinvested earning of
foreign
including

companies,
short-term

inter-company
and

long

term

debt

transactions

loans,

overseas

commercial borrowings, non-cash acquisition of equity,

investment made by foreign venture capital investors,
earnings data of indirectly-held FDI enterprises, control

International
Theory ofEnvironment
Comparative Advantages and FDI
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One of the eternal principles propounded by classical
economies is Comparative Advantage, which is used to
denote a nations advantage over others with respect to
production technique, craftsman skills, physical resources
and mode of transportation.
According to David Ricardos principle of relative (or
comparative) advantage, a country may be better than
another country in producing many products but should only
produce what it produces best. Essentially, it should
concentrate on either a product with the greatest
comparative advantage or a product with the least
comparative disadvantage.
Ricardo pointed out that nations possess different
production endowments: Natural resources, labour,

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International
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Indias FDI Policy

Flow of substantial foreign investment began in India in the
1980s. At that time Suzuki entered India with a joint venture
with the Indian Government. The then prime minister Rajiv
Gandhi initiated the reforms and allowed FDI in certain
cases and because of these liberal policies Pepsi was able
to entered India.
Foreign direct investment is freely allowed in all sectors
(except railways and atomic energy) including the services
sector, except a few sectors where the existing and notified
sectoral policy does not permit FDI beyond a ceiling. FDI for
virtually all items/activities can be brought in through the

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International
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Foreign Direct Investment

1.

Automatic Routs

a.

New Ventures

b.

Existing Ventures

2.

Government Approval

3.
Issue and Valuation of Shares in Case of Existing
Companies
4.

Foreign Investment in the Small Scale Sector

5.

Foreign Investment Policy for Trading Activities

6.

Other Modes of Foreign Direct Investments

7.

Preference Shares

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Foreign Technology Agreements (FTA)

Foreign technology collaborations are permitted either
through the automatic route under delegated powers
exercised by the RBI, or by the government. FTAs are
allowed either through the automatic route or through prior
government approval.
Automatic Route
The Reserve Bank of India, through its regional offices,
accords automatic approval to all industries for foreign
technology collaboration agreements subject to (i) the lump
sum payments not exceeding US $2 million; (ii) royalty
payable being limited to 5% for domestic sales and 8% for
exports, subject to a total payment of 8% on sales over a 10
year period

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International
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100% Export Oriented Units/Export

Zones/Special Economic Zones

Processing

Automatic Approval
The Development Commissioners (DCs) of Export
Processing Zones (EPZs)/Free Trade Zones (FTZs) /Special
Economic Zones (SEZs) accord automatic approval to
projects where:
Activity proposed does not attract compulsory licensing
or falls in the services sector, except IT enabled services;

Location is in conformity with the prescribed

parameters;
Units undertake to achieve exports and Cont.
value addition

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International
Environment

Fdi Policy for 100% Eou/Epz Units

All proposals for FDI/NRI/OCB investments in EOU/EPZ units qualify for
approval through the automatic route, subject to sectoral norms. Proposals not
covered under the automatic route would be considered and approved by FIPB.
Fdi Policy for Units in Sez
FDI upto 100% is allowed through the automatic route for all manufacturing
activities in Special Economic Zones (SEZs), except if the activity proposed does
not attract compulsory licensing or falls in the services sector.
FDI limit for a few sectors is as follows (source: http://www.dipp.nic.in/):
Banking: FDI cap in Private Sector Banking has been increased to 74% from
49%.
Insurance: FDI of up to 26% in the insurance sector is allowed.

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International
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FDI in India
In the recent few years, the outlook of India as an
investment destination has been growing. This is indicated
by surveys of different consultancy groups on the outlook of
different countries as a host to FDI, which are consistently
upgrading the rank of India.
In JBIC surveys India has moved up with its rank increasing
from 7th in 1996 to 5th in 2001. India is ahead of countries
like Vietnam, Taiwan, South Korea, Malaysia and Singapore
Cont.
as promising destinations for FDI over the medium term but

lagging behind countries such as China, US, Thailand, and

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present figures on FDI actual inflows of foreign direct investment from 1992-932003-04. The actual flow shows fluctuating trends in different years. It an peaked
at US $ 4700 million in 2002-03 and was its lowest at US $ 279.5 million in 199293. The trend shows an upward direction which is very significant for the country.
FDI Inflow in India (year wise )
Year

Amount in Million US $

Share of total Inflow

1992-93

279.50

1.06

1993-94

369.00

1.41

1994-95

872.10

3.32

1995-96

1418.00

5.40

1996-97

1091.60

4.16

1997-98

3560.00

13.56

1998-99

2000.00

7.62

1999-00

2160.00

8.23

2000-01

2340.00

8.91

2001-02

3900.00

14.85

2002-03

4700.00

17.90

2003-04

3570.00

13.59

26260.20

100.00

Total

Cont.

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During the post liberalization period, Mauritius and the USA are the largest
sources of FDI for India. Mauritius being the tax heaven companies route their
FDI through Mauritius. A part from Mauritius and USA, Japan U.K. and
Netherland respectively were major contributors of FDI during 2002-03.
Country
Mauritius
USA

Rs. in Crore

Share in Total Investment

33820.73
15409.92

40.68
18.54

Japan
U.K.
Netherland

7430.64
6648.56
5969.43

8.94
7.80
7.18

Germany
France
South Korea
Singapore

4512.30.
2656.57
2489.66
2348.04

5.43
3.20
2.99
2.82

Switzerland

1842.79

2.22

83128.64

100.00

Total

Source: Economic Survey 2003-04

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International
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Determinants of FDI
Liberalization is not the sole reason to attract FDI. There are
many other determinant of FDI, India may lagging there. As
at Kearneys FDI Confidence Audit: India, February 2001
said India gains in attractiveness because of its market size
and its potential is diminished by negative assessment of its
regulatory environment. Other important determinant are
rule of law, competitive wages, labour skill, infrastructure
and well developed financial institutions . Determinants of
FDI can be better understood by the Porters diamond
model of international competitiveness, which has identified
Cont.
four major determinants:
1.

Factor Conditions (i.e. factor of production)

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International
Environment

Michael Porters International Competitiveness Model

Firm Strategy, Structure, & Rivalry

Factor Endowment

Local Demand Condition

Relating and Supporting Industries

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International
Environment

Impact of FDI
FDI has a wide spread impact on an country not only
economically but also socially. Foreign investment is always
accompanied by superior technology and transfer of
technical knows how. It has an impact on local industry as it
provides them both opportunity and threat. It gives
consumers a wide choice that too at reasonable price. FDI
increases not only GDP but also

exports and therefore

results in higher per capita income and large forex reserves.

Impact on Local Industry

Impact on Employment

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Total Foreign Investment, FDI and FII flows (net): 1995-96 to 2004-05

Cont.

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FDI Inflows
FDIInflow
Inflowss
FDI

94-95
94-95

586
586

(A
(Apr.-Sep.)
pr.-Sep.)

95-96
95-96

1,314
1,314

96-97
96-97

2,144
2,144

97-98
97-98

3,557
3,557
2,462
2,462

98-99
98-99

2,155
2,155

99-00
99-00

2,339
2,339

00-01
00-01
1,653
1,653

2-Jan
2-Jan
00

1,000
1,000

2,000
2,000

3,000
3,000

4,000
4,000
Cont.

Source: Economic Survey 2002

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Industry-Wise FDI Inflows

Cont.

Source: Economic Servey 2002