Name: MUHAMMAD SALIM

Enroll No. : 07217003909

Class: MBA (2nd semester)

Sub. : Management of Technology, Innovation and Change

Q. “India is a big attraction to foreign partners.” – Elaborate the statement.

Ans.

INDIA IS A BIG ATTRACTION TO FOREIGN PARTNERS

Reasons to attract………………………..

The first and second-generation reforms have created a conducive environment for
foreign investments in India. Market oriented policies are boosting economic activity, all
round development and GDP growth rate. Government procedures are constantly being
simplified and paper work minimized. As the Indian economy gears for competition in
the international market, overseas investors clearly see the potential for attractive
returns from investments in India, which is also evident from the many FDI success
stories already achieved.

Policy Framework

Industrial Policy

The Indian Government's market liberalization and economic policy reforms programme
aims at rapid and substantial economic growth and integration of the country's economy
with the global economy. The industrial policy reforms have eliminated the industrial
licensing requirements except for certain select sectors,

removed restrictions on investment and expansion and facilitated easy access to foreign
technology and direct investment.

The Industrial Policy Resolution of 1956 and the Statement on Industrial Policy of 1991
provide the basic framework for the Government's overall industrial policy. The
procedures for obtaining government approvals have been progressively simplified and
quickened. Normal FDI proposals are cleared within a month. Areas earlier reserved for
public sector have mostly been opened for private sector participation also
Industrial Licensing

All industrial undertakings are exempt from obtaining an industrial license to

manufacture, except for the following:

• Industries reserved for the Public Sector;

•Industries retained under compulsory licensing;

• Items of manufacture reserved for the small scale sector; and

• Any proposal attracting locational restriction.

Industrial undertakings exempt from obtaining an industrial license are required to file
an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial
Assistance (SIA), Department of Industrial Policy and Promotion.

Foreign Investment Policy

Foreign investment is permitted in virtually every sector, except those of strategic

concern such as defence (opened up recently to a limited extent) and rail transport.
Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior
approval from the exchange control authorities (RBI) is required, except for certain
specified activities. The investment should be in accordance with the prescribed
guidelines and the details of the investment should be filed with the authorities within
the prescribed time limit. This procedure is applicable only for fresh investments directly
in Indian companies and not for purchase of shares from the existing shareholders. This
investment procedure is commonly known as the "automatic approval route".

Foreign Investment Promotion Board (FIPB) of the Government of India is

constituted mainly to promote inflows of FDI into the country, as also to provide
appropriate institutional arrangements, transparent procedures and guidelines for
investment promotion and to consider and approve/recommend proposals for foreign
investment.

Regulation and procedures

Procedures for obtaining government approvals have been considerably simplified.

Approval procedures have been laid out for undertakings that are

• exempt from industrial licensing requirements (including existing units undertaking

substantial expansion);

• subject to compulsory industrial licensing; and

New ventures

All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas

Corporate Bodies (OCB) fall under the Automatic Route except those that expressly
require a prior Government approval.

An investor may, if so prefered, choose to make an application to the FIPB and not avail
of the automatic route.

Investment in Public Sector Units as also for units located in Export Oriented Units
(EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic
Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also
qualify for the Automatic Route. Investment under the Automatic

Route is governed by the notified sectoral policy and equity caps and RBI ensures
compliance of the same.

Any change in sectoral policy/sectoral equity cap is notified by the SIA in the
Department of Industrial Policy & Promotion.

Foreign Investment in the Small Scale Sector

Small Scale Undertakings (SSUs) are defined as units having investments in fixed
assets in plant and machinery of not more than INR 10 million. Under the small scale
industrial policy, equity holding by other units including foreign equity in a small scale
undertaking is permissible up to 24 per cent. However there is no bar on higher equity
holding for foreign investment if the unit is willing to give up its small scale status. In
case of foreign investment beyond 24 per cent in a small scale unit which manufactures
small scale reserved item(s), an industrial license carrying a mandatory export
obligation of 50 per cent must be obtained.

A SSU manufacturing small scale reserved item(s), on exceeding the small-scale

investment ceiling in plant and machinery by virtue of natural growth, needs to apply for
and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the
capacity for which the COB license is granted. However, if the unit expands its capacity
for the small scale reserved item(s) further, it needs to apply for and obtain a separate
industrial license.
Why India lags behind…………………….

India's economic reforms have not led to a surge in foreign direct investment. The usual
comparison with China is made to demonstrate that India is at least 10 years behind the
former in terms of attracting FDI.

This article examines China's success with FDI, India's track record over the last 10
years in the global context, the stumbling blocks and an action plan to invigorate FDI.

China's remarkable success in FDI is awesome. In 1979, FDI in China was non-existent
but within a span of 20 years, they were getting an annual FDI of $45 billion.

By offering substantial tax concessions, leasing of land and property, government

guarantees for investment and special arrangements regarding retention and
repatriation of foreign exchange, China has been able to attract FDI.

An important factor overlooked in comparing India to China is that 80 per cent of the FDI
to China comes from Hong Kong, Taiwan, Japan, Korea and Southeast Asian countries.

Most of the investment comes from overseas Chinese who are businessmen and are
shifting manufacturing operations to China.

Also, as the World Bank global development finance report points out, a substantial
portion of FDI may be round-tripping from China. Chinese residents move money to
offshore centres and bring it back as FDI to China.

In 2000, the US accounted for only 11 per cent of the total FDI flows to China, Japan 7
per cent, Germany 3 per cent and France 2 per cent.

However, the critical mass of FDI and economic growth have started attracting
multinationals which find a huge market in China.

Hitachi, one of the world's largest transnational corporations, is planning to invest $0.8
billion over the next five years and increase its production in China eightfold by 2005 to
$4 billion annually.

Ericsson, the Swedish telecommunications company, plans to double its investment in

China. Mexico is being threatened as some of the manufacturing units (Maquiladoras)
are shifting to low-cost China.

There is no gainsaying the fact that China is emerging as the manufacturing

powerhouse of the world.

The net FDI inflows to developing countries grew at an annual rate of 16.8 per cent per
year. FDI flows are expected to grow at the rate of 4 per cent per annum during the
period 2001-04.
India gets less than 5 per cent of the FDI flows to developing countries. The resilience
of FDI in the 1990s and India's glaring failure warrant introspection. This can change
over the next five years.

A very large component of FDI flows has been privatisation and cross-border mergers
and acquisitions. These activities will slow down in the future and greenfield investment
should pick up.

Given the global uncertainty, India's 5-6 per cent growth rate will attract attention and if
we create the right conditions, $15 billion annual FDI can be achieved.

The biggest stumbling block is India's bloated bureaucracy. Approximately only 20 per
cent of FDI approvals translate into actual investment. This implies that the initial
enthusiasm to invest peters out by the time companies actually go through the process.

Streamlining procedures for FDI approval, such as environmental clearances and legal
work, are still time-consuming.

Added to this, there is the political uncertainty at the central and the state levels, and of
the Centre-state relations. Infrastructure reforms are moving very slowly.

When Jack Welch inaugurated GE's Excellence centre in Bangalore, the power went off
five to six times. Such things do not inspire confidence. There is an urgent need to get
an action plan and jumpstart FDI.

Market India: TNCs have been wary of India as they have been waiting on the sidelines
and watching how India deals with Enron. At least now, it should be clear that Enron
was a mess which got messier in India.

A creative marketing campaign must be implemented to showcase GE's success in

India. Jack Welch has praised India in his recent book Straight from the Gut.

GE has been moving a lot of work to India and saving money. Pitching to the US-India
Business Council and Indo German Chamber of Commerce can be the starting points.

At the very least, this effort will neutralise the negative impression created by Enron.

Target services: Banks, insurance companies and mutual funds must be convinced to
shift their back-office work to India. The present conditions are ideal as financial
institutions scramble to cut costs.

Again, several of these firms are already doing business in India. The effort must be to
convince select global names such as Citibank in banking, New York Life in insurance
and Fidelity in fund management to shift their back-offices to India.
India's most valuable resource, its technologically capable English-speaking workforce,
can position India as the services hub of the world.

Promote agro-based export industries: While the focus on services will develop
urban and semi-urban areas, unless rural areas are modernised, India will be eternally
poor with rising inequality.

India's parallel economy, which has also stashed money abroad, must be convinced to
invest in India. Tax advantages and repatriation benefits should be provided and fully
protected from political interference and bureaucratic hassles. Unless we get investment
in rural areas, job creation will be difficult.

Create a result-oriented bureaucracy: The bureaucracy of India needs to shift from a

stifling mode to a serving one. Hiring accomplished business managers and providing
appropriate incentives to accomplish results will better serve the cause of promoting
FDI.

A new approach would be to put such managers in charge of dealing with foreign
investors and be responsible for facilitating their investment. The Foreign Investment
Promotion Board, and the Foreign Investment Implementation Authority should be
abolished.

The creation of a flat investor-friendly organisation of 50 managers who directly report to

the minister would signal India's renewed commitment to attract FDI.

Accelerate privatisation efforts: Despite global uncertainty, privatisation efforts are

moving well. Approximately, one-third of the world trade is accounted for by
multinationals, who provide the bulk of the FDI flows.

As the public sector is privatised, multinationals can acquire existing firms and expand
operations to serve the local market and export to the global market. The mergers and
acquisitions process must be streamlined.

Infrastructure investment: FDI augments domestic investment and cannot substitute

it. The golden quadrilateral project indicates world-class infrastructure can be built in
India as long as it is economically viable.

A few successful high-profile projects in power, ports, transportation can bring in more
FDI.

India has an opportunity to attract FDI of over $15 billion a year over the next five years.
The Economist Intelligence Unit, evaluating business environment in 60 countries for
the period 2002-2006, has ranked India 41st, ahead of China at 42nd.

More importantly, India has moved up five notches from its rank in the earlier period
(1997-2001), while China has remained at 42. But leveraging this calls for leadership
and vision to rise above parochial political interests to work across party lines, serving
broader national interests.

However, status quo would mean that China would emerge as the services hub as well,
diminishing India's prospects.

Foreign Investment In India

Foreign Investment in India or more precisely Foreign Direct Investment (FDI) in

India is one of the most talked about issues in the entire world economy in recent times.
Rated among the top emerging nations, India's liberalization policies are paying rich
dividends to the economy as a whole.

Foreign Direct Investment (FDI) is defined as "investment made to acquire lasting

interest in enterprises operating outside of the economy of the investor." The FDI
relationship, consists of a parent enterprise and a foreign affiliate which together form a
Trans-National Corporation (TNC).

India, post liberalization, has not only opened its doors to foreign investors but also
made investing easier for them by implementing the following measures:

 Foreign exchange controls have been eased on the account of trade.

 Companies can raise funds from overseas securities markets and now have
considerable freedom to invest abroad for expanding global operations.
 Foreign investors can remit earnings from Indian operations.
 Foreign trade is largely free from regulations, and tariff levels have come down
sharply in the last two years.
 While most Foreign Investments in India (up to 51 %) are allowed in most industries,
foreign equity up to 100 % is encouraged in export-oriented units, depending on the
merit of the proposal. In certain specified industries reserved for the small scale sector,
foreign equity up to 24 % is being permitted now.

As the industry progresses, opportunities abound in India, which has the world's largest
middle class population of over 300 million, is attracting foreign investors by assuring
them good returns. The scope for foreign investment in India is unlimited. India offers
to foreign investors a well balanced package of fiscal incentives for exports and
industrial investments that includes:
 Complete tax exemptions.
 Investment incentives are offered by both the Central Government and the
Government of the State in which the unit is located.
 India has tax treaties with 40 countries.

Moreover, the support of the common man regarding FDI is clearly from the sharp hike
in India's gross expenditure in the past few years.

Thus the Indian economy is proving itself highly conducive to Foreign Investment.