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Business firms are motivated to indulge in FDI with the following objectives: 1. Sales expansion 2. Resource acquisition 3.

Diversification 4. Competitive risk minimisation FDI may be distinguished into: 1. Horizontal Foreign Investment 2. Vertical Foreign Investment 1. Horizontal Foreign Investment (HFI): It refers to investment of a firm in a foreign country to produce the same product which produce in its home country. 1. Horizontal FDI implies that FDI is undertaken in the same industry by the firm as it operates in at home. For example, Electrolux - a Swedish firm - the manufacturing of household appliances (such as washing machines, refrigerators, dishwashers and so on) invested in Asia and Eastern Europe for producing similar household appliances is the case of horizontal FDI. HFI implies geographical/spatial diversification of the firm's product line. 2. It represents intra-enterprise product transfer in the process of integration in marketing. 2. Vertical Foreign Investment (VFI): It is meant for integration process in the production. There may be backward vertical investment or forward vertical integration. 1. Backward Vertical Integration (B VI) implies that the firms directly invest in a foreign country to produce intermediate goods that are meant to be used as inputs in its domestic production process. In extractive investment in petroleum or minerals usually there is BVI. 2. Forward Vertical Investment (FVI) implies that the firm invests in a foreign country in producing the final stage goods or assembly of the product to market it directly to the foreign buyers. FVI, thus, involves establishment of an assembly plant or sales branch for exports
1. Sustaining a high level of investment - Since the underdeveloped countries want to industrialized themselves within a short period of time, it becomes necessary to raise the level of investment substantially. This requires, in turn, a high level of savings.

However, because of general poverty of masses, the savings are often very low. Hence emerges a resource gap between investment and savings. This gap has to be filled through foreign capital. 2. Technological gap - The under developed countries have very low level of technology as compared to the advanced countries. However they possess strong urge for industrialization to develop their economies and to wriggle out of the low level equilibrium trap in which they are caught.

This raises the necessity for importing technology from advanced countries. Such technology usually comes with foreign capital when it assumes the form of private foreign investment or foreign collaboration. In the Indian case technical assistance received from abroad has helped in filling the technological gap through the following three ways: (a) Provision for expert services (b) Training of Indian personnel (c) Education research and training institution in the country

3. Exploitation of natural resources - A number of underdeveloped countries possess huge mineral resources, which await exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. As a consequence, they have to depend upon foreign capital to undertake the exploitation of their mineral wealth.

4. Undertaking the initial risk - Many under developed countries suffer from acute private entrepreneurs. This creates obstacles in the programs of industrialization. An argument advanced in favour of the foreign capital is that it undertakes the risk of investment in host countries and thus provides the much-needed impetus to the process of industrialization.

Once the programme of industrialization gets started with the initiative of foreign capital, domestic industrial activity starts picking up as more and more of the host country enter the industrial field.

5. Development of basic economic infrastructure - It has been observed that the domestic capital of the under developed countries is often too inadequate to build up the economic infra structure of its own. Thus these countries require the assistance of foreign capital to undertake this task.

In the latter half of the 20th century, especially during the last 3-4 decades, international financial institutions and many governments of advanced countries have made substantial capital available to the under developed countries to develop their system of transport and communications, generation and distribution of electricity, development of irrigation facilities, etc. 6. Improvement in balance of payments position - In the initial phase of the economic development, the under developed countries need much larger imports (in the form of machinery, capital goods, industrial raw materials, spares and components), then they can possibly export. As a result, the balance of payments generally turns adverse. This creates a gap between the earnings and foreign exchange FDI-Sectoral analysis: FDI inflows are welcomed currently in 63 sectors as compared to 16 sectors in 1991. The sectors receiving the largest share of FDI inflows upto 2010 were the service sector and computer software and hardware sectors, each accounting for 22.14 per cent and 9.48 per cent respectively. There were followed by the telecom, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing, information; and professional, scientific and technical services.

Infrastructure sector received 28.62% of total FDI inflows from 1991-2008

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Services sector received 19.34% of total FDI inflows from 1991-2008. Trading sector received 1.67% of total FDI inflows from 1991-2008. Consultancy Sector received 1.14% of total inflows from 2000-2008 Education sector received US $308.28 million of FDI inflows from 2004-2008. Housing and Real Estate Sector accounts for 5.78% of total FDI inflows during 2000-2008. Construction Activities Sector received 6.15% of the total inflows during 2000 to Dec. 2008. Automobile Industry received US $3.2 billion of total FDI inflows to the country during 2000 to 2008. Computer Software and Hardware sector received US $8.9 billion of total FDI inflows during 2000 to Dec. 2007.

Telecommunications Sector received an inflow of US $8.2 billion during 1991 to 2008. The list of investing countries to India reached to maximum number of 120 in 2008 as compared to 15 in 1991. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries. Mauritius is the major investing country in India during 1991-2008. Nearly 40per cent of FDI inflows came from Mauritius alone. The other major investing countries are USA, Singapore, UK, Netherlands, Japan, Germany, Cypress, France and Switzerland. An analysis of last eighteen years of FDI inflows in the country shows that nearly 66per cent of FDI inflows came from only five countries viz. Mauritius, USA, Singapore, UK, and Netherlands. Mauritius and United states are the two major countries holding first and the second position in the investors list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows that there is huge difference in the volume of FDI received from Mauritius and the US. It is found that FDI inflows from Mauritius are more than double from that of US. Top 10 FDI investing countries in India are Mauritius, Singapore, United States, UK, Netherlands, Japan, Cyprus, Germany, France and UAE.


a. Automatic Route FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require approval of the government:

Activities/items that require an Industrial Licence Proposals in which the foreign collaborator has an existing venture/tie up in India in the same field Proposals for acquisition of shares in an existing Indian company in some cases All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted

b. Government Approval Route All activities which are not covered under the automatic route, require prior Government approval. Areas/sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise notified by Government.