Contemporary Issue on Seminar A Study On

trends of FOREIGN DIRECT INVESTMENT

In The Partial Fulfillment of MBA Degree

2011-2012

Rajasthan Technical University, Kota

Submitted By: To: gaurav nimawat Ms.padma Sharma m.b.a iind sem dept

Submitted

faculty m.b.a

Acknowledgement
The beatitude, bliss and euphoria that accompany successful completion of any task would not be complete without the expression of appreciation of simple virtues to the people who made it possible. So, with reverence, veneration honor I acknowledge all those whose guidance and encouragement has made successful in winding up this. I take this opportunity to thank Ms.padma Sharma for her support and encouragement which helped me in the completion of this report. I extend my gratitude and thankfulness to arya college of eng &technology. Last but not the least Im also grateful to my parents for providing me the continuous support to motivate me to successfully complete my report.

Date: Place: Jaipur

Submitted By: GAURAV NIMAWAT

Preface
The underlying aim of the seminar on contemporary issue as an integral part of M.B.A programme is to give presentation by the students on the issue. The topic of my seminar is trends of foreign direct investment contains complete information about the foreign direct investment.. It contains the different views on fdi given by different schools of thoughts. As fdi has both the positive and negative aspects, neither it is good nor bad. It depends upon the situation. Study of fdi is useful for both person and professionals. It helps in understanding the different country investment and also the investment inflows and outwards ..

GAURAV NIMAWAT

FOREIGN DIRECT INVESTMENTS TRENDS IN INDIA REPORT

BY GAURAV NIMAWAT ROLL NO : CLASS: MBA 2 SEM

ND

Definition Of Foreign Direct Investment

Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country ( the host country) with the intent to manage the asset. FDI is the purchase or construction of tangible assets (land, factories, machines, buildings and enterprises) in one country by firms from another country. Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor.

Introduction
A country outflows of FDI means that it is exporting money to buy or build foreign productive capacity, whose ownership will remain in the first country's hands. For a country, attracting an inflow of FDI strengthen the connection to world trade networks and finance its development path. However, independent massive FDI to a country can make it dependent on the external pressure that foreign owners might exert on it. Since it is through FDI that a firm becomes a multinational, one could say that the it's the FDI process that generates MNC. firms that are already multinational generate the majority of FDI flow. According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago. The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country.

The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment.

FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy.

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan).But flows to non-industrialized countries are increasing sharply. Foreign direct investment (FDI) 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) .Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise).The lasting interest implie s the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

History

In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply

FDI in India
India is considered a stable country for investing in by corporate overseas. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy.FDI has helped India to achieve a certain degree of financial stability, growth and development. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. INDIA ranks second in the world in terms of financial attractiveness, people and skills availability and business environment. The countries financial stability in the current scenario of financial turbulence shows the world Indias position as an expanding investment destination. India has continually sought to attract FDI from the worlds major investors. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.FDI is allowed in financial services, including the growing credit card business India had displaced US as the second-most favored destination for (FDI) in the world after China in 2007 according to an A.T. Kearney's FDI. But recently in 2010 because of recession and the growing economic crisis U.S has overtaken India. A.T. Kearney is a global team of innovative, insightful and collaborative experts who deliver creative, meaningful and, above all, sustainable results. The Foreign Direct Investment Confidence Index is a regular survey of global executives conducted by A.T. Kearney. The Index provides a unique look at the present and future prospectsfor international investment flows. Companies participating in the survey account for more than $2 trillion in annual global revenue. The following table shows the top 20 countries with regards to the foreign direct investment confidence where China is the leading country. It shows data for the year 2010 and the year 2007.

Forbidden Territories:
FDI is not permitted in the following industrial sectors because entry in this sector would severely affect the countries growth and eoconomy. 1. 2. 3. 4. 5. Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds.

Forms of FDI

1) Purchase of assets
By purchasing the firms directly, the foreign company my benefit a lot because of their quick entry. As they are acquiring an established company they will have the local know-how and local financing may also be possible. Also as they are acquiring a company they are eliminating one of their competitors. The only problem is that they have to find a company that is willing to sell.

2) New investment
Foreign firms would look into setting up a new investment when no other local entity is available for sale or because of local financial incentives. Here they would have to start from scratch hence it would take them a long time to generate sales.

3) International joint venture This is when the foreign company enters into a joint venture with another foreign or domestic company. This would imply that costs and profits are shared between the partners. Not only these but also risks and losses would be suffered by both parties.

TYPES OF FDI

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: 1 2 Outward FDIs Inward FDIs

This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. Outward FDI: An outward-bound FDI is backed by the government against all types of associated

risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.' Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Other categorizations of FDI Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Horizontal FDI the MNE enters a foreign country to produce the same products product at home. Conglomerate FDI the MNE produces products not manufactured at home. Vertical FDI the MNE produces intermediate goods either forward or backward in the supply stream. Liability of foreignness the costs of doing business abroad resulting in a competitive disadvantage.

The Strategic Logic Behind FDI

Resources seeking looking for resources at a lower real cost. Market seeking secure market share and sales growth in target foreign market. Efficiency seeking seeks to establish efficient structure through useful factors,
cultures, policies, or markets.

Strategic asset seeking seeks to acquire assets in foreign firms that promote
corporate long term objectives.

Alternative Modes of Market Entry

1) Strategic Alliances (non-equity) Strategic alliances refer to alliances between the foreign and domestic country where one company could handle the production or the marketing of those particular firms goods. 2) Franchising Franchising is when the foreign company purchases a franchise of an already existing company. This would ensure that sales will be available. 3) Licensing Licensing is when the foreign company purchases the license to produce and sell a particular good belonging of another firm. Why FDI? FDI over exporting: - FDI is when we setup or acquire an existing firm. When we speak about exporting there are high transportation costs involved and also costs due to trade barriers. Hence it would be better to setup a new firm or takeover an existing one. FDI over licensing or franchising:-when a firm enters into licensing or franchising they lose their strategic control as they have to go according to the guidelines of the parent company. Instead of doing this if they invest directly into a new or existing firm then they can control their strategies and protect their technological know-how.

Investing Routes Of FDI

Automatic route The automatic route there is no requirement of any prior regulatory approval for investing but only post facto filing / intimation with the RBI as under:

Filing of an intimation with the RBI, in the prescribed format, within 30 days of receipt of investment money in India Filing of prescribed documents and particulars of issue of shares within 30 days of issue of shares to foreign investors

FDI by a Foreign Company/Investor in an Indian Company in most of the business/commercial sectors now falls under the Automatic Route and very few cases/transactions require prior Government/FIPB approval. In some cases If the FDI exceeds the ceiling (cap) fixed by the Government of India, then, the application for foreign Investment Approval needs to be submitted to Foreign Investment Promotion Board (FIPB).

Foreign Investment Promotion Board (FIPB) FDI in sectors/transactions requiring prior Government Approval is categorized as that falling under the Prior Approval Route. Such approval is granted by the Government of India, Ministry of Finance, the Foreign Investment Promotion Board (FIPB). FDI in the following activities/sectors generally requires prior approval of the Government:

Where more than 24 percent foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector All proposals falling outside notified sectorial caps or under sectors in which FDI is not permitted under the Automatic Route FDI policy

Difference Between Fdi And Fii

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country.FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDIs more than then FIIs. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs are long term.

FII INFLOW
1000000 800000 600000 400000 200000 0 -200000 Gross Purchases (a) (Rs.crore) Gross Sales (b) (Rs.crore) Net Investment (a-b) (Rs.crore)

Effects of FII in india when there is excess amount of inflow

Foreigners have bought a record $19.7 billion of Indian equities this year, with about one third of that entering the market since the start of September, putting upward pressure on rupee to appreciate. exporters complain that a rising rupee hurts competitiveness. There is excess amount of money supply in the market which is leading towards the inflation so RBI has also increased the interest rates to control the inflation. Which also affects the monetary policy in india. The huge amount of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created by the FIIs.

From above picture we can conclude that when more fii comes in our country it puts pressure on our Indian currency which leads to appreciation.

Why Fdi Is Better Than Fii

The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. FDI are also long term investments as compared to FII which is short term.

Benefits

Foreign direct investment helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. Foreign direct investment is one of the major external sources of financing for most of the countries that are growing in terms of economy. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.

Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. It also assists in the promotion of the competition within the local input market of a country.

The profits that are generated by the foreign direct investments that are made in the domestic country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. Foreign direct investment can also bring in advanced technology and skill set in a country

It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.

Disadvantages One of the 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.

Another disadvantage is where the host country has some sort of national secret something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.

It has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.

Foreign direct investment may entail high travel and communications expenses. To travel for board meetings or any other business between countries proves to be very costly. Even communication such as calling, video conferencing proves to be costly.

A major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.

At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.

Steps taken

Due to the FDI done by foreign countries in India, Indian economy and the environment suffers to a great extent. For this the FDI companies try adopt and use ethical ways to carry on business in India. Some of the multi-national companies in India have voluntarily adopted

Environmental protection work as most multinational companies cause lot of harm to the environment directly and indirectly. Social practices are adopted to see that they have a good relation and image within host country to carry on their business successfully. This social work done in return helps them, as they provide education, worker training, and infrastructure to increase domestic capacity. Later this leads to generate educated and skill employees, and the infrastructure. Governance: - companies use ethical ways and policies to run the company. They do not bring in policies that harm the culture of the community.

Practices are designed precisely to guard against abuse of the environment and the workforce when they invest in developing countries. They include incentives to upgrade productivity and to prevent exploitation of consumers and workers. They Promote education, worker training, and infrastructure to increase domestic capacity. They create a policy framework that encourages the adoption of appropriate social and environmental standards in corporate practices.

The Direction of FDI

Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets. The US has been the favorite target for FDI inflows. While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased. Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia. The table below shows that the direction of FDIs was towards developed countries as there is a vast difference between developed and developing countries. But in the year 2004 it can be seen that the difference between developed and developing countries. This is because the flow of FDI is shifting from developed countries to developing countries. FDI stocks now constitute 28% of the global GDP.

Balance-of-payment effects
Benefits o Import substitution when foreign companies enter into india they start producing their goods within the country and start exporting the same goods. hence goods which were once imported are now being exported. o Source of export increase Additional gain is achieved through exporting surplus of goods produced

Costs

o Capital inflow followed by capital outflow + profits There is inflow of funds but as the parent company is foreign in nature the capital outflow and profit flows out of the country o Production input importation raw materials have to be imported hence imports increase to a large quantity to satisfy all multi-national companies. Hence product input importation increases.

Trends Of Foreign Direct Investment

Globalization is an inevitable and irreversible process, and dealing with the imperatives of globalization capitalizing on its positive aspects and mitigating the negative ones is perhaps the most important challenge for the new millennium. Globalization has enhanced the opportunities for success, but it has also posed new risks to developing countries. Globalization has many faces; however, globalization is first and foremost comprehended in economic and financial terms. In this sense, it may be defined as the broadening and deepening linkages of national economies into a worldwide market for goods, services and especially capital. As a result of a revolution in telecommunications and information technologies, the last 15 years have witnessed dramatic increases in trade linkages and cross-border capital flows, as well as radical changes in the form, structure.

Foreign direct investment (FDI) has been one of the core features of globalization and the world economy over the past two decades. It has grown at an unprecedented pace for more than a decade, with only a slight interruption during the recession of the early 1990s.

Most developing countries were starting to look to FDI as a source of capital when flows of official development assistance (ODA) declined sharply in the 1990s. FDI usually represented a long-term commitment to the host country and contributed significantly to gross fixed capital formation in developing countries.

SECTOR WISE FDI INFLOW IN INDIA

According to sector wise analysis of india, In service sector the fdi is more and it is increasing at faster rate which is currently 21%. Because of increasing tourism industry , IT services industry and in service sector IT industry ig growing rapidly because of English speaking population of india, improved tecchonology and today india is considered as IT hub. Followed computer software and hardware 9% and others. All this sectors contributes towards GDP and helps in countries economic development.

Investment trend sector wise for the year 09 to 10

Above Picture specifies that industry from 09 to 10 it has increased by 7% . agriculture sector has decreased in the year 2010 by 5%. Non food credit has increased slightly by 1%.service sectors has increased by 6% and also personal loans sector has increase by 3%.

Current statistics: Indian has been attracting foreign direct investment for a long period.As per the fact sheet on FDI, there was Rs. 6,30,336 crore FDI equity inflows between the period of August 1991 to January 2011. The trend of declining FDI tells us very little about statistics of FDI as it refers to FDI equity inflows. Though, equity inflow is a better indicator of portfolio investment (also known as FII inflows) than of FDI. All studies stated that the presence of foreign companies which positively impacts productivity of domestic firms through learning the use of new technologies. This is really important than obtaining technology through purchases of drawings and designs. If we accept this, then a better indicator of FDI interest is the long term trends of FDI in India.

There is an upward trend or Fdi is increasing

Fdi is increasing in india because of following reasons:

India has emerged as the preferred destination for many foreign international enterprises due to constructive factors such as high economic growth, fast population growth, English speaking people, and lower costs for workers. large GDP and market potential skilled work-force low labour cost and wages low taxation lower environmental protection high tariff protection. favourable laws and public incentive

Indias fdi inward (inflow) increasing or highest compare to other countries so it helps our Indian economy to grow and contributed towards GDP.

2010 trends for foreign direct investment into India

The overseas Indian investors would find it simpler to access nodal bodies and invest in India. However, a note of caution: the Reserve Bank of India too is attempting to regularize certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to invest in India. Its contention is that NRIs tend to invest much more than the cap allowed in the sectors through these other routes, thereby exceeding allowed limits for FDI. The government may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc. In the discussion stage the government intends to bring out concrete policies in this direction. Proposals can also be sent to DIPP online. This facility will enable all overseas investors to speed up their investment proposals. Significantly, as per the latest FDI estimates released by Department of Industrial Policy and Promotion (DIPP), the government nodal agency, the non-resident Indians (NRIs) have contributed FDI inflows worth about US$ 41.78 million in December 2009 through the automatic route, almost 2.71 per cent of the total FDI inflows in the same month. Total NRI FDI inflows through the period April-December 2009-10 stood at US$ 320.05 million.

analytical study of foreign direct investment

Objective of the study:

To know the flow of investment in India To know how can India Grow by Investment . To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India To know which country s safe to invest . To know how much to invest in a developed country or in a developing. To know Which sector is good for investment . To know which country in investing in which country To know the reason for investment in India Influence of FII on movement of Indian stock exchange To understand the FII & FDI policy in India.

CONCLUSION
A large number of changes that were introduced in the countrys regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore and the USA. The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market.

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