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In the recent years, significance of Foreign Direct Investment has been increasing especially in the developing countries. These countries are trying their level best to attract more and more FDI. Viewing this trend, the objective of this paper is to study the role of Indian Government to attract FDI and to analyse the trend to FDI inflows in the Indian economy. The paper also highlights the effects of FDI on host country. Sugandh Mittal "Foreign Direct Investment: An Analysis of Indian Economy" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-2 | Issue-6 , October 2018, URL: http://www.ijtsrd.com/papers/ijtsrd18905.pdf
In the recent years, significance of Foreign Direct Investment has been increasing especially in the developing countries. These countries are trying their level best to attract more and more FDI. Viewing this trend, the objective of this paper is to study the role of Indian Government to attract FDI and to analyse the trend to FDI inflows in the Indian economy. The paper also highlights the effects of FDI on host country. Sugandh Mittal "Foreign Direct Investment: An Analysis of Indian Economy" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-2 | Issue-6 , October 2018, URL: http://www.ijtsrd.com/papers/ijtsrd18905.pdf
In the recent years, significance of Foreign Direct Investment has been increasing especially in the developing countries. These countries are trying their level best to attract more and more FDI. Viewing this trend, the objective of this paper is to study the role of Indian Government to attract FDI and to analyse the trend to FDI inflows in the Indian economy. The paper also highlights the effects of FDI on host country. Sugandh Mittal "Foreign Direct Investment: An Analysis of Indian Economy" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-2 | Issue-6 , October 2018, URL: http://www.ijtsrd.com/papers/ijtsrd18905.pdf
Foreign Direct Investment: An Analysis off Indian Economy
Sugandh Mittal Research Scholar Scholar, University of Delhi, New Delhi, India
ABSTRACT Literature Review
In the recent years, significance of Foreign Direct Dr. JasbirSingh, Ms. SumitaChadha, Sumita Dr. Investment has been increasing especially in the Anupama Sharma (2012) in their paper titled “Role developing countries. These countries are trying their of Foreign Direct Investment in India: An level best to attract more and more FDI. Viewing this Analytical Study” argued that the maximum trend, the objective of this paper is to study the role of international investment flows are attracted by Indian Government to attract FDI and to analyse the developed countries rather than developing countries trend to FDI inflows in the Indian economy. The and under developing countries. Foreign investment paper also highlights the effects of FDI on host flows complement scare domestic investment in country. developing countries, especially India. I They found that the highest amount of FDI went to the financing KEY WORDS: Foreign Direct Investment, Economic sector, insurance sector, real estate and business Growth, Government Policy, green fieldd investment services, representing 33.05 percent of the total cumulative inflow of FDI in India during the study INTRODUCTION period. They remarked that India should s welcome the Foreign direct investment takes place when a inflow of foreign investment in such a way that it company invests directly in the production or should be convenient and favorable to the Indian marketing of a product in a foreign country. FDI is economy and enable it to achieve goals, such as rapid defined as an investment involving a long - term economic development, the elimination of poverty relationship that reflects the long - term interest and and a favorable balance of payments. payments control of a resident entity in the host country (foreign direct investor or parent company). Foreign Singh S., Singh M. (2011) in their paper titled, companies are directly involved in daily operations in “Trends Trends and prospects of FDI in India” India the other country with FDI. This means that they do investigated the trend of FDI inflow to India, during not only bring money, but also knowledge, skills and 1970–2007 2007 using time series data. This paper aims to technology. chnology. The Economic Cooperation and study the reasons behind the fluctuations of FDI Development Organization (OECD) defines control as inflow in India and to investigate the cause of the owning 10% or more of the business. Businesses fluctuations in FDI trends. making direct foreign investments are often referred to as multinational corporations (MNCs) or Agarwal G., Khan M. A.. (2011),in (2011), their paper titled multinational companies (MNEs). A MNE can make a “Impact Impact of FDI on GDP: A Comparative Study of direct investment by creating a new foreign company China and India”, found that 1% increase in FDI called a green field investment or by acquiring an would result in 0.07% increase in GDP of China and foreign company called an acquisition or a brown 0.02% increase inn GDP of India. They concluded that field investment. The arguments supporting foreign growth in China was more affected by FDI than direct investment includes limitations mitations to exporting, growth in India. management control, limitation to licensing, diversification and on the other hand FDI is restricted Sarkar S., Lai Y. C. (2010), in their paper titled due to higher cost, political uncertainty, cultural “Foreign Direct Investment, Spillovers and Output differences and poor infrastructure facilities in the Dispersion - The Case of India”, India suggested that host countries foreign investment affects the firms‟ firms output positively
Oct 2018 Page: 1603 International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470 2456 and significantly and Domestic companies are less vary. It is reasonable to assume that the industry and productive in sectors with more foreign investment policy environment of the host country are important than in sectors with relatively small foreign direct determinants of the net benefits of FDI. investment. M.K. Dutta, G.K. Sarma in their paper titled Kulwindar Singh (2005) in his paper titled “Foreign “Foreign Foreign Direct Investment in India since 1991: Direct Investment in India: A Critical Analysis of Trends, Challenges and Prospects” said that FDI from 1991-2005”analysed analysed that the government ongoing initiatives, such as further simplification of began haphazardly with the foreign direct investment rules and regulations, infrastructure improvements are in order to stimulate growth in the economy. expected to provide the necessary necessa impetus for the Although, government was forced to liberalize future increase of FDI inflows. FDI inflows depend cautiously, the understanding of foreign investment on domestic economic conditions, global economic was lacking .A sectoral analysis reveals that while trends and global investor strategies. Government is FDI is gradually increasing and has become a key to fully committed to creating strong economic India's success, progress is vague. So the impact of fundamentals and a proactive FDI policy regime. India's reforms on policy icy environment is mixed. Although FDI inflow to India has increased, regional Industrial reforms have gone far, but they need to be distribution is found to be more unfair. To ensure a supplemented with more infrastructure reforms, which more equitable regional distribution of such flows, the is a crucial missing link central and state governments should adopt a concerted strategy for improving infrastructure infrastr and Jennifer Tobin, Susan Rose-Ackerman Ackerman (2005) in creating a sound economic and political environment. their paper titled “Foreign Direct Investment and After all, a more transparent investment system will the he Business Environment in Developing benefit India and ensure the future prospect of FDI Countries: the Impact of Bilateral Investment inflows. Treaties” concluded that the relationship between bilateral investment treaties (BIT) and FDI is weak. Despite of the several studies conducted on FDI, BITs appear to have little impact on FDI in general. In analysis from the perspective perspecti of Indian economy addition, BITss have a positive effect on FDI flows in has not been done in depth. Hence, the gap for countries with an already stable business environment research is pertinent. rather than encouraging greater FDI in riskier environments. Overall, BITs appear to have little Objectives: positive effect on foreign investment or on the To understand the concept of Foreign Direct perception by foreign reign investors of the investment Investment environment in low-and medium-income income countries countries. To determine the trends of FDI inflow in India and to analyse the reasons behind such trends. Maria Carkovic and Ross Levine (2002) in their To analyse the effect of FDI on host country. paper titled “Does Foreign Direct Investment To understand the role of government in Accelerate Economic Growth?” concluded that FDI promoting FDI. inflows have no independent impact on economic growth. Thus, while sound economic policies can Data collection &Research esearch methodology stimulate both growth and the FDI, the results are Research methodology is a way to systematically inconsistent with the FDI’s view of growth that is study and solve the research problems. The secondary independent of other growth determinants sources is used for the proposed research .Exiting literature is studied carefully to understand and Magnus Blomström, Ari Kokko (1996) in their analyse the research problem .Different books, paper titled “The Impact of Foreign Investment on journals, ls, newspapers and relevant websites are Host Countries: A Review of the Empirical consulted in order to make the study an effective one. Evidence” quoted that foreign oreign direct investment can The study attempts to examine the Foreign Direct promote economic development in their host countries Investment from Indian perspective. by contributing to productivity growth and exports. However, the exact ct nature of the relationship between foreign MNCs and their host economies seems to
Oct 2018 Page: 1604 International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470 2456 Trends of FDI Inflow: Table 1: India'ss Global FDI Inflow trend, 1980- 1980 India today receives large FDI inflows due to its 2016 robust domestic economic performance. India's India’s FDI India’s Share in attraction can be seen from the increase in FDI Year In flows Global FDI inflows to India as shown in Table 1 from 1980 to (in US$ Billion) Inflows 2016. India's FDI inflows during the 1980s were very 1980 0.08 0.15 low –about about $ 0.08 billion. Some of the main reasons 1981 0.09 0.13 behind this were the complex legal and constitutional 1982 0.07 0.12 framework, restrictive and close door FDI policy. FDI was permitted only in selected sectors subject to 1983 0.01 0.01 different conditions, such as domestic equity 1984 0.02 0.03 participation, local content requirements, export 1985 0.11 0.19 obligations ns and local R&D promotion. Such 1986 0.12 0.14 restrictive policies did not provide the FDI 1987 0.21 0.16 environment in India. Only a few foreign countries like the United States (US), the United Kingdom 1988 0.09 0.06 (UK), Japan and Germany have therefore invested in 1989 0.25 0.13 India. With the opening of the he Indian economy in 1990 0.24 0.12 1991, FDI politics underwent a significant change as 1991 0.08 0.05 part of the wider process of economic reforms. 1992 0.25 0.15 Foreign investment in most sectors was permitted in a 1993 0.53 0.24 gradual manner and restrictive conditions were relaxed. These measures motivated foreign investors 1994 0.97 0.38 from all corners of the world to India; and at that time 1995 2.15 0.63 the country became a strong economic player. From 1996 2.53 0.65 1992 to 1997, FDI inflows in India continued to rise 1997 3.62 0.75 and peaked at $ 3, 62 billion in 1997. The FDI shows 1998 2.63 0.38 the cyclic trend in 1998 and 1999 because of several factors. These include the mild recession in the US 1999 2.17 0.20 and the global economy, the South - East Asia 2000 3.59 0.26 financial crisis, political instability and poor domestic 2001 5.48 0.80 industrial environment. The introduction of the 2002 5.63 0.95 Foreign Exchange Management ent Act (FEMA) in 1999 2003 4.32 0.78 and the recovery from the South - East Asian crisis caused FDI inflows to increase. FDI inflows increased 2004 5.78 0.84 again to $ 5.48 billion in 2001 and reached $ 25.35 2005 7.62 0.80 billion in 2007. Well-developed developed financial sector, 2006 20.33 1.45 strong industrial base andd critical mass of well well- 2007 25.35 1.33 educated workers raised India's FDI inflows at $ 2008 47.10 3.14 47.10 billion in 2008 to the highest level. Although 2009 35.63 3.02 the adverse effects of the US financial crisis in late 2008, India's FDI inflows declined in 2009 and 2010, 2010 27.42 1.97 India succeeded in inviting iting significant inflows in 2011 36.19 2.31 2011. With Modi's entry in 2014, which took another 2012 24.20 1.60 phase of FDI policy reforms, the confidence of 2013 28.20 1.98 foreign investors in India is revived. FDI inflows 2014 34.58 2.61 reached the highest level by the end of 20162016–$ 44.49 billion. 2015 44.06 2.48 2016 44.49 2.55 Source:http://unctadstat.unctad.org/wds/ReportFolder http://unctadstat.unctad.org/wds/ReportFolder s/reportFolders.aspx
Oct 2018 Page: 1605 International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470 2456 India has now done well in global FDI inflows. India's Employment effect: share of global FDI inflows has steadily increased. In FDI faciliates the creation of jobs for directly and thee 1980s India had a small share of approximately indirectly and.. Direct employment is the result of 0.15 per cent of global FDI inflows, in 1997 it foreign transnational companies creating jobs for local increased to 0.75 per cent; in 2008 it reached 3.14 per population as a result of increased investment. investment cent and in 2016 it reached 2.55 per cent (see Table 1 Indirect employment arise as a result of increased increase above). The government has implemented several investment which is the result of increased reforms eforms in recent years to attract more FDIs. These consumption expenditure include improving infrastructure, revising the law on land acquisition, reforming labor law and Balance of payment Effect: Effect rationalizing the process of obtaining environmental FDI has four important BOPOP effects for host country clearances. The new government has instructed establishment .The establishment of a foreign various ministries nistries to cooperate and meetings are often subsidiary result in one time capital inflow in the held at central government level. However, it remains economy balance of payment account .If the FDI is a difficult for foreign investors to navigate India's substitute for import of goods and services ,it bureaucratic controls and procedures to obtain the improves current account balance .When the necessary clearances and approvals. It is therefore transnational company uses ofo foreign subsidiary to essential sential to improve the coordination of projects export goods and services to other countries, it between States and the Central Government. The improves current account balance of host country Indian Government should create a better .FDI also leads to the repartition of profit and infrastructure environment with an appropriate dividend ,adding to the income of the home h country institutional framework, such as the dispute resolution subsidiary mechanism, the independent dependent regulatory authority, etc. India should work to increase FDI caps in FDI Competition and economic econom growth: potential sectors and allow more sectors to undergo The existences of competition among producers result the automatic route to minimize investment hurdles in in the efficient functioning of market. FDI in the form India. of green field investment results in creation of new enterprise, increasing the number of players in Effects of Foreign Direct Investment: competition in domestic market and the th long-term Financial resources: results include increase productivity, product and Many large transnational companies have access to process innovation and great economic growth financial resources which supplement the domestic capital available and help to spur pur the rate of Role of Indian Government overnment in Promoting Foreign investment. It is good for countries where saving date Direct Investment: is low. To promote Foreign Direct Investment (FDI), the Government has put in place an investment inv - friendly Technology: policy in which, except for a small negative list, most FDI often carries with it the benefits efits of technology, sectors are open under the Automatic Road for 100 which is crucial in economic development percent FDI. In addition, the FDI policy is reviewed .Technology, may be incorporated either in on a continuous basis to ensure that India remains an production process itself or in the product product. This is a attractive and investor-friendly friendly destination. The policy significant advantage for less developed countries and changes are made after intensive consultations with which lacks the research and development rresources stakeholders, including apex industry chambers, and skills required to develop their own indigenous associations, industry / group representatives and product and process technology other organizations, taking into account their views / comments. The FDI policy applies across the industry Management skills: and applies equally to the SME sector. Foreign Foreign managerial skills aquired through hrough FDI may investment in various sectors brings international best also produce benefits. Foreign managers train trained in the practices and technology leading to economic growth latest mamagement technique can often he help to in India and provides much needed impetus for the improve the efficiency of operations in the host manufacturing sector ector and job creation in India. In line country with the policy of boosting the manufacturing sector
Oct 2018 Page: 1606 International Journal of Trend in Scientific Research and Development (IJTSRD) ISSN: 2456-6470 2456 and giving impetus to the' Make in India ' initiative, inflows nflows has been rising continuously and it has the Government has allowed a manufacturer to sell its reached the peak of $44.49 billion by the end of product via wholesale and/or retail, including throug through 2016.The factors contributing to such inflows automated e - commerce. The Government has issued includes Make in India projects, investment friendly guidelines for foreign investment in the sector to environment, providing required infrastructure provide clarity to the e - commerce sector. In the e - facilities, promoting e-commerce commerce and implementing commerce market model, 100% FDI is allowed under ease of doing business facilities. However, India still automatic route. needs to work on its policies to overcome its FDI hurdles and to provide a transparent working Some provisions have been provided ed for FDI in the environment. retail trade sector to address the interests of the Indian SME sector. For retail trading of single brand References products, in respect of proposals involving foreign 1. (n.d.). Retrieved from investment beyond 51 percent, sourcing of 30 percent http://www.thedialogue.co/trends-fdi-inflows- http://www.thedialogue.co/trends of the value of goods purchased, ased, has been mandated india/ to be done from India, preferably from MSMEs, 2. Blomström , M., & Kokko , A. (1996, December). village and cottage industries, artisans and craftsmen, The Impact of Foreign Investment on Host in all sectors. With a view to benefit farmers, give Countries: A Review of the Empirical Evidence. impetus to food processing industry and create vast Retrieved from https://ssrn.com/abstract=620572 https://ssrn.com/abstract=6205 employment opportunities, 100 percent FDI under Government route for trading, including through e - 3. Dutta, M., & Sarma, G. (2008, January). Foreign commerce, has been permitted in respect of food Direct Investment in India since 1991: Trends, products manufactured and/or produced in India. Challenges and Prospects. Retrieved from Some plantation activities including coffee, rubber, http://ssrn.com/abstract=1443577 cardamom, palm oil and olive oill plantations have 4. Markusen, J. R. (2000, April). FOREIGN been opened under automatic route for 100% foreign DIRECT INVESTMENT AND TRADE. Center investment. Additionally, 100 percent FDI is for International rnational Economics Studies. Studies Retrieved permitted under automatic route in completed projects from https://ssrn.com/abstract=231202 for the operation and management of townships, malls / shopping complexes and business centers. Also, 5. Misra, S. (2011, November). Study ofImplications foreign investment up to 49 percent in the defense of FDI onIndianEconomy. Retrieved from sector has been permitted under automatic road https://ssrn.com/abstract=1971243 conditions. Additional portfolio investments and 6. Nisa , S. (2007). FDI in Indian Retail Industry. investments by FVCIs were allowed up to the Retrieved ved from https://ssrn.com/abstract=983711 authorized automatic road level of 49 percent. Foreign investment of moree than 49 percent has been allowed 7. Nonnenberg , M. J., & Mendonça , M. J. (2004, by government approval in cases leading to access to January). THE DETERMINANTS OF DIRECT modern technology in the country or for other FOREIGN INVESTMENT IN DEVELOPING reasons. Furthermore, the FDI limit for the defense COUNTRIES. Retrieved from sector was also applied for the manufacture of small https://ssrn.com/abstract=525462 arms and munitionss covered by the 1959 Arms Act. 8. Singh , K. (2015, August). Foreign Direct Di Investment in India: A Critical Analysis of FDI Conclusion: from 1991-2005. 2005. Retrieved from Foreign direct investment (FDI) plays an important https://ssrn.com/abstract=822584 role in economic growth and development. It not only 9. Carkovic, M., & Levine, R. (2002, June). Does complements an economy's investment requirements, Foreign Direct Investment Accelerate Economic but also brings new technology, management Growth. Retrieved from expertise and foreign exchange reserves. FDI helped https://papers.ssrn.com/sol3/papers.cfm?abstract_i /sol3/papers.cfm?abstract_i India achieve financial stability and economic growth d=314924 by investing in various sectors. FDI has boosted the economic life of India. After liberalization of Trade 10. Denisia, V. (2010, December). Foreign Direct policies in India, we can observe that the trend of FDI Investment Theories: An Overview of the Main
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