FOREIGN DIRECT INVESTMENT

INTRODUCTION

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) or foreign investment refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period.

ADVANTAGES

Foreign Direct Investment plays a pivotal role in the development of India's economy. It is an integral part of the global economic system. Advantages of FDI can be enjoyed to full extent through various national policies and international investment architecture. Both the factors contribute enormously to the maximum FDI inflows in India, which stimulates the economic development of the country.

Economic growth

Trade

Employment and skill levels

DISADVANTAGES

v FDIhas and adverse effects on competition. v v FDI will be make the host country lost the control over domestic policy.

v One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. v v It has been observed that the defense of a

v v v Another disadvantage of foreigndirectinvestmentis that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused manycompaniesto approach foreign direct investment with a certain amount of caution.

v Foreign direct investment disadvantageous for the ones who are making the themselves.

v Foreign direct investment may entail high travel and communications expenses.

v Inflationis increased local market is affected badly

Why is FDI important for any consideration of going global?

v Avoiding foreign government pressure for local production.

v Circumventing trade barriers, hidden and otherwise. v v Making the move from domestic export sales to a locally based national sales office.

v Capability to increase total production capacity. v v Opportunities for co-production, joint ventures with local v partners, joint marketing arrangements, licensing, etc.

METHODS OF FDI

The various alternatives are:

vA joint venture vMergers and acquisitions/cross border acquisitions vLicensing vfranchising

FDI POLICIES IN INDIA

The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India (GoI). These include FDI limits in India for example: Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining industry is allowed up to 100% equity participation with the capping amount

FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies. FDI limit of maximum 49% in telecom industry especially in the GSM services

FDI TRENDS IN INDIA

Steps have been taken by the government to impart technical FDI education so as to improvise the FDI database of the country. FDI and trade go hand in hand as both works in a symbiotic situation. FDI has also create more employment opportunities as FDI trends have increased the basic infrastructure of any organization thus demanding growth in terms of organizational structure as well. The foreign direct investment news in India shows the FDI notations being adopted by India, the foreign direct investment strategies, and the FDI guidelines regulating the inflow of foreign funds in India.

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN INDIA

v Hotel & Tourism: FDI in Hotel & Tourism sector in India 100% FDI is permissible in the sector on the automatic route.

v Private Sector Banking: Non-Banking Financial Companies (NBFC) 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

Insurance Sector: FDI in Insurance sector in India FDI up to 26% in the Insurance sector is allowed on the automatic Route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)

Telecommunication: FDI up to 100% is allowed for the following activities in the telecom sector

Call Centers in India / Call Centers in India FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India FDI up to 100% is allowed subject to certain

Trading: FDI in Tra d in g Co m p a n ie s in In d ia Tra d in g is p e rm it t e d u n d e r a u t o m a t ic ro u t e wit h FDI u p t o 5 1 % p ro vid e d it is p rim a rily e xp o rt a c t ivit ie s , a n d t h e u n d e rt a kin g is a n e xp o rt h o u s e /t ra d in g h o u s e /s u p e r t ra d in g h o u s e /s t a r t ra d in g h o u s e .. FDI u p t o 1 0 0 % p e rm it t e d fo r e -c o m m e rc e a c t ivit ie s Power: FDI In Po we r Se c t o r in In d ia Up t o 1 0 0 % FDI a llo we d in re s p e c t o f p ro je c t s re la t in g t o e le c t ric it y g e n e ra t io n , t ra n s m is s io n a n d d is t rib u t io n , o t h e r t h a n a t o m ic re a c t o r p o we r p la n t s . Th e re is n o lim it o n t h e p ro je c t c o s t a n d q u a n t u m o f fo re ig n d ire c t in ve s t m e n t .

Drugs & Pharmaceuticals FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical

Roads, Highways, Ports and Harbors FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

Foreign Direct Investment in Small Scale Industries (SSI's) in India

Question-1
It is being argued by researchers that the nature of FII flows to India has been significantly different before and after the Asian crisis. In this context, outline the nature and determinants of FII flows to India?

Determinants of FII flows to India

Expanding market Skilled manpower Capabilities of knowledge management Properly placed financial system Fundamentally robust economy A democratic political set up.

Question-2
Discuss the motives for direct foreign investment by MNCs?

 Attract new sources of demand Enter new markets where excessive profits are possible Use foreign factors of production Use foreign technology Diversify internationally React to foreign currencys changing value.

The motives for direct foreign investment by MNCs

Question-3
Do you think the Asian crisis altered several of the ground rules of international portfolio investment around the world? Elucidate with example.

 Yes After the East Asian Crisis the portfolio investment inflows in emerging markets dropped sharply and the Indian economy has recorded the lowest volume of portfolio investment in 2001-02, since 1993-94.

Thank You

AN EFFORT BY
NEHA MISHRA SACHIN AWASTHI FARHAN