FOREIGN DIRECT INVESTMENT

MASTER IN MANAGEMENT STUDIES

SEMESTER –I
ACADEMIC YEAR 2010-2011

BY
AKSHI CHANDYOKE
ROLL NO: 10004

SAS INSTITUTE OF MANAGEMENT

STUDIES, BOISAR (W)

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 FOREIGN DIRECT INVESTMENT

MASTER IN MANAGEMENT STUDIES

SEMESTER –I
2010-2011

SUBMITTED TO
PROF.ARUN THANVI

SUBMITTED BY
AKSHI CHANDYOKE (04)

SMITA AVHAD (02)

DEEPALI AHIRRAO (01)
NEHA CHURI (05)
ROHIT BHOPTE (03)

SAS INSTITUTE OF MANAGEMENT

STUDIES, BOISAR (W)

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 INDEX
PAGE NO.

SR.NO. TOPICS

1-4
1 Introduction

Definition and Background 4-6

2
Different sectors from FDI
7-9
3

4 Foreign direct investor 9-10

Advantages and disadvantage

5 11-12

Types of foreign direct investment

6 14-15

7 Government approval for foreign company to doing 16-17

8 Steps to attract FDI 17-18

ACKNOWLEDGEMENT
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 We take this opportunity to express our deepest regards towards
those who have incorporated their valuable guidance and help in the
hour of need.

We specially and most sincerely acknowledge with deep sense

of gratitude to our Lecturer Prof. ARUN THANVI for his continuous
support, guidance and inspiration in all the phases of our project
work, without which we would have not assimilated so much and the
development of this project would have been a difficult task.

INTRODUCTION

FDI means Foreign Direct Investment. India Foreign Direct Investment includes investments
in the infrastructure development projects including construction of bridges and flyovers,
finance sector including banking and insurance services , real estate development , retail
sector etc. The foreign direct investment definition says the direct investments in any
productive assets in a country by any foreign company is called foreign direct investment or
FDI.

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.

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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. Direct investment
excludes investment through purchase of shares.

Foreign direct investment (FDI) , refers to long term capital investment such as the purchase
or construction of machinery, buildings or even whole manufacturing plants. If foreigners are
investing in a country, that is an inbound flow and counts as a surplus item on the capital
account. If a nations citizens are investing in foreign countries, that's an outbound flow that
will count as a deficit. After the initial investment, any yearly profits not re-invested will flow
in the opposite direction, but will be recorded in the current account rather than as capital.

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor.

FDIs require a business relationship between a parent company and its foreign subsidiary.
Foreign direct business relationships give rise to multinational corporations. For an
investment to be regarded as an FDI, the parent firm needs to have at least 10% of the
ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it
owns voting power in a business enterprise operating in a foreign country.

DEFINITION

FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts. Foreign direct investment is investment of foreign assets into domestic structures,
equipment, and organizations. It does not include foreign investment into the stock markets.
Foreign direct investment is thought to be more useful to a country than investments in the
equity of its companies because equity investments are potentially "hot money" which can
leave at the first sign of trouble, whereas FDI is durable and generally useful whether things
go well or badly.

Background

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The FDI story for India began in 1991 and announced the New Industrial Policy to open
doors for liberalization. Today India has been ranked third in global foreign direct
investments in 2009 and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations Conference on Trade and
Development.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative
amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million,
according to the data released by the Department of Industrial Policy and Promotion
(DIPP).Over the years we have witnessed tremendous development in the key sectors owing
to FDI infusion.

FDI & RETAIL SECTOR

Retail Sector in India is fragmented and contributes 10-14 % of the GDP. It accounts for
employment of 21 mn people i.e. 7% of the workforce and is suffering from constraints in
form of poor infrastructure and supply chain management. Unorganized retail sector accounts
for more than 90% business in India.

Benefits for Consumers

More investment in Supply Chain and logistics means that there will be less wastage and
more supply for the customers. Consumers will eventually gain as a result of cost reduction at
various levels of the supply chain. More benefits in terms of consumer finance, Discounts and
quality of service like standardization, consistency and pre-sale activities. The best part being
even the rural consumer will benefit as more and more companies are looking to tap rural
unexplored market

Benefits for Producers

Producers will benefit from reduced Costs in terms of minimized Inventory holding costs,
reduced response time to market. As seen in the markets where FDI is allowed in retail
sector, there will also be technology inflows and best practices for farmers as well as end
retailers. Eventually producers will reap benefits in form of increased demand for products
and better margins. Apart from that companies will also benefit from lower labor and
sourcing costs in India. Food processing sector may also benefit due to this decision.

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Note of Caution

One fundamental criticism that FDI attracts is regarding role of the foreign players.
According to the information the players tend to source globally rather than investing in local
production facility.

Other important concerns are that it will amount for elimination of large number of
middlemen and small and medium enterprise in unorganized sector which will need to be
taken care during implementation.

FDI & EDUCATION SECTOR

Education sector is an ideally placed for FDI infusion with low literacy rates and large
population size in India. Foreign Direct Investment (FDI) in education is allowed in India
under the automatic route, without any sectoral cap, since February, 2000. There is no
offshore campus of any foreign university in India. In India there are more than 125
institutions running technical programmes in collaboration with foreign universities and
institutions.

Opportunity

There are only 10.5 million students enrolled in all higher education institutions in India that
is just 11 per cent of the relevant age group (17 to 23) population. According to 2004-05
survey 80,466 Indian students were enrolled in USA universities and 15,000 Indian students
were enrolled in the UK universities.

For FDI

India is suffering problem of Brain Drain since years, it can be controlled to certain extent by
providing world class education here. Local institutions will be compelled to improve their
curriculum as foreign players bring new methods and practices and degrees awarded here will
become internationally accepted and recognized. The most important point being
establishment of new education institution and infrastructure and also generate employment.

Against FDI

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FDI in education sector may raise alarm for domestic institution as they might attract best
faculty and teachers by providing them best packages. Financially better off students may
also be tapped by them as the first motive is to earn profit. Besides, large population in India
cannot afford expensive education and may not benefit from the entry of foreign players.
When foreign players charge exorbitant fees, the local institutions may also retort to same
and completely ignore the poor class and result in urban rural divide.

Note of Caution

While allowing FDI in education sector, Government should put some restrictions in terms of
commercialisation of the sector. Besides the accreditation norms should be kept more
stringent and specific. Care should also be taken not to dilute the quality of education in
wake of commercialization.

FDI & INSURANCE Sector

The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance
market, and growing at a rapid pace of 32-34 per cent annually, according to the Life
Insurance Council.

Foreign equity up to 26% is allowed in the insurance sector. The entry of foreign partners has
resulted in the sector attracting FDI of US 543 million as on 31st March, 2007. On account of
competition from private insurance players, the market share of state owned insurance
companies like GIC, LIC and others have come down to 70% in last 4-5 years from over
97%.

However, the reach of industry is only around 15% according to IRDA which poses
tremendous opportunities for new companies. The foreign players may look to partner with
domestic players for local knowledge and in turn share best practices. It is also impossible to
cater to the large population without more players pumping in the money. Bringing in more
players may also create opportunity for other business like IT and other related service
providers.

Opportunities

General Insurance

This business of General Insurance sector has picked up off late. Public sector players posted
13.85 per cent growth in gross premium in 2009-10. At the same time, private players

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recorded a 12.82 per cent increase in gross premium till March 2010. Further nearly 30mn
vehicles policies were issued and total premium of US$ 1.83 billion was collected.

Health Insurance

Health insurance is lucrative consideration for both existing as well as new players and
according to a forecast by private research firm as it is expected to grow at compounded
annual growth rate of 25% and total premium between April and December 2009 was US$
1.35 billion, up from US$ 1.12 billion, an increase of 20 per cent, as per figures released by
the regulator. This means that there is enough room for new players.

Products like Banc assurance has also found fancy of many private firms. It is forecasted that
banc assurance will play a crucial role in the overall development of the Indian insurance
sector with the channel expected to generate 40 per cent of private insurer’s premium income
by 2012.

Foreign Direct investor

A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:

• an individual;

• a group of related individuals;

• an incorporated or unincorporated entity;

• a public company or private company;

• a group of related enterprises;

• a government body;

• an estate (law), trust or other social institution; or

• any combination of the above.

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 ADVANTAGES OF FDI

1.Helps in economic growth:- The inflow of foreign direct investment helps in the
economic growth of a country.

2. Brings employment opportunities:- FDI inflow results in an increase in the number of

employment opportunities for people living in that country. New industrial units are set
up affording employment to people from the top level to the working groups like factory
workers.

3 . Aids in transfer of technology and knowledge:- The inflow of FDI aids in the transfer
of technology and knowledge from one country to another. For instance, the people of
Asian countries like India had vast knowledge related to IT sector which was later used
by many other non Asian countries of the world. Thus, FDI helps in the transfer of
knowledge across the world.

4. Benefits to the government:- Foreign direct investment helps in increasing the sources
of government income. With the increased flow of FDI the income generated through
taxation increases thus, bringing higher revenues to the government.

5.Improves productivity:- FDI plays an important role in enhancing the overall

productivity in the host countries.

6. Benefits for the investors:- FDI is also quite beneficial for countries that make
investments in other countries. Their companies get opportunities for exploring new
global markets, thereby generating higher incomes and profits.

7. Benefits to businesses:-Business entities get easy loans at low rates of interest. These
facilities are extremely beneficial for small and medium-sized businesses that otherwise
face many problems in getting loans.

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 DISADVANTAGES OF FDI

The FDI theories listing the FDI disadvantages include the increased liquidity and
consequent inflation due to excessive FDI inflow in India. In order to absorb the FDI entering
the Indian economy, the rupee is being pressurized. However the FDI benefits include better
efficiency in funds management in India and thus improvisations in the quality standard.
There is a chance that a company may lose out on its ownership to an overseas company.
Government has less control over the functioning of the company that is functioning as the
wholly owned subsidiary of an overseas company. They are unreliable. Foreign-owned
projects are capital-intensive and labor-efficient. They invest in machinery and intellectual
property, not in wages.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in
an economy through any of the following methods:

• by incorporating a wholly owned subsidiary or company

• by acquiring shares in an associated enterprise

• through a merger or an acquisition of an unrelated enterprise

• participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

• low corporate tax and income tax rates

• tax holidays

• other types of tax concessions

• preferential tariffs

• special economic zones

• investment financial subsidies

• soft loan or loan guarantees

• free land or land subsidies

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• relocation & expatriation subsidies

• job training & employment subsidies

• infrastructure subsidies

• R&D support

• derogation from regulations (usually for very large projects)

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 Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:

1 Outward FDIs
2 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.

Foreign Direct Investment in India

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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 is not allowed under the following industrial sectors:

• Arms and ammunition

• Atomic Energy

• Rail Transport

• Mining of metals

Up to 100 per cent equity is allowed in the following sectors

• Export Trading Companies

• Hotels and Tourism

• Hospitals

• Shipping

• Deep Sea Fishing

• Oil Exploration

• Power

• Housing and Real Estate

• Highways, Bridges and Ports

Other Sectors

Drugs & Pharmaceuticals - FDI of 100 per cent is allowed.

Private Banking - FDI of 74 per cent is allowed.
Insurance Sector - For the Insurance sector FDI allowed is 26 per cent through automatic
route.
Telecommunication - FDI is 49 per cent.

Top 5 Sectors Attracting FDI – (2009-10) $ mn

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 SECTOR INVESTMENT

Service Sector 4392

Construction 2868
Housing and real Estate 2844
Power 1437
Automobile 1177

FDI brings in following benefits -

• Employment
• Technological Knowhow
• Joint ventures, Collaborations

India should look forward to tap the opportunity to attract inflows at times when other
destinations look vulnerable. Increasing FDI limits in some sectors can unleash the potential
and support growth process in a balanced manner as many sectors are facing constraints.

Top 5 countries investing In India ($ Mn)

Country Investment
Mauritius 10376
Singapore 2379
US 1943
Cyprus 1623
Japan 1183

Many sectors present opportunities in India but this article will concentrate on Retail,
Education and Insurance Sectors which are ripe for accepting FDI.

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 Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or Investment

Routes for Investing in India, Entry Strategies for Foreign Investors India's foreign trade
policy has been formulated with a view to invite and encourage FDI in India. The Reserve
Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign
company planning to set up business operations in India has the following options:

• Investment under automatic route; and

• Investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any
prior approval either by the Government or RBI. The investors are only required to notify the
Regional office concerned of RBI within 30 days of receipt of inward remittances and file the
required documents with that office within 30 days of issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not available,
include the following:

• Banking

• NBFC's Activities in Financial Services Sector

• Civil Aviation

• Petroleum Including Exploration/Refinery/Marketing

• Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs.

• Venture Capital Fund and Venture Capital Company

• Investing Companies in Infrastructure & Service Sector

• Atomic Energy & Related Projects

• Defense and Strategic Industries

• Agriculture (Including Plantation)

• Print Media

• Broadcasting

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 • Postal 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 created 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.

FDI IN INDIA–POLICYINITIATIVES

The Indian government has assured to release an improvised FDI policy in every six months.
The offers announced by Union Finance Minister, Pranab Mukherjee, in Union Budget 2010-
11, to enhance investment ambiance in India on February 26, 2010 entail:

• Measures implemented to un-complicate the FDI system

• System for computation of indirect foreign investment in Indian firms has been
comprehensively classified.

• Entire liberalization of costing and imbursement of technology transmit charges and

trademark, and royalty expenses.

Additionally, the Indian government has permitted the Foreign Investment Promotion Board
(FIPB), to sanction FDI tenders of up to US$ 358.3 million. Previously all the tenders that
entailed foreign direct investment of more than US$ 129.16 million were presented in front of
Cabinet Committee of Economic Affairs (CCEA) for authorization. As the Union Home
Minister, Mr P Chidambaram, the exemption would accelerate foreign direct investment
inflow.

India has been ranked at the second place in global foreign direct investments in 2010 and
will continue to remain among the top five attractive destinations for international investors
during 2010-12 period, according to United Nations Conference on Trade and Development

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(UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects
Survey 2009-2012'.

Foreign Portfolio Investment in India

Another form of foreign investment besides FDI is FPI or foreign portfolio investment that is
a more easily traded form of foreign investment and less permanent. In FPI investment is
made through stocks and bonds in a foreign enterprise without long-term financial
relationship plans.

STEPS TO ATTRACT FDI

✔ Political stability and a strong policy to protect investors

✔ Safety and security

✔ Investment protection through legal provisions

✔ Proactive government policies

✔ Continuous infrastructural development

✔ Banking system with updated technology

✔ High productivity of the labour force

✔ Availability of raw material, components and consumables

✔ Ample potential opportunities for products in the neighboring countries.

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