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Foreign Direct Investment

and
Indian Economy

WHAT IS FDI
Foreign Direct Investment(FDI) means
cross-border investment by a resident
entity in one economy with the objective
of obtaining a lasting interest in an
enterprise
resident
in
another
economy.
Or in simple terms - A foreign direct
investment is an investment in the form
of a controlling ownership in a business
in one country by a company or an
individual based in another country.
Host country means that country which
accept the FDI from other countries and use
this for its economic development
Home country means that country which
supply its abundance resources and widen its

TYPES OF FDI
-> Broadly there are three types
of FDI:
Horizontal FDI
Conglomerate
Vertical FDI

-> We can also classify FDI in


the following three types:
Brownfield FDI
Greenfield FDI

TYPES OF FDI
-> Horizontal FDI :- In case of horizontal FDI,
the company does all the same activities
abroad(i.e in host country) as at home. For
example, Toyota assembles motor cars in
Japan and the UK.
-> Conglomerate Investment :- In this type
of investment, the investment is made to
acquire an unrelated business abroad. It is
the most surprising form of FDI, as it
requires
overcoming
two
barriers
simultaneously one, entering a foreign
country and two, working in a new industry.

TYPES OF FDI
-> Vertical FDI :- In vertical assignments,
different types of activities are carried out
abroad. In case of forward vertical FDI, the FDI
brings the company nearer to a market (for
example, Toyota buying a car distributorship in
America). In case of backward Vertical FDI, the
international integration goes back towards
raw materials (for example, Toyota getting
majority stake in a tyre manufacturer or a
rubber
plantation).
-> Brown-field :- Brown-field investments
occur when a company or government
purchases an existing facility to begin new

TYPES OF FDI
-> Greenfield entry :- A green field
investment is a form of foreign direct
investment where a parent company builds
its operations in a foreign country from the
ground up. For example - as Honda did in the
UK.
-> Foreign Takeover :- Foreign takeover
means
acquiring
an
existing
foreign
company as Tatas acquisition of Jaguar
Land Rover. Foreign takeover is often called
mergers and acquisitions (M&A) but
internationally, mergers are absolutely

WHY IS FDI
IMPORTANT
-> FDI is an important source of externally
derived finance that offers countries with
limited amounts of capital get finance beyond
national borders from wealthier countries.
-> According to the World Bank, FDI is one of
the critical elements in developing the private
sector in lower-income economies(developing
countries) and thereby, in reducing poverty.
-> It provides opportunity for technological
transfer and up gradation.
-> It helps in broadening the market
accessibility for both host and home countries.

OBJECTIVES OF
THE STUDY
To know the historical growth of
FDI inflow into India.
To distinguish the flow of FDI pre
and post reform period.
To identify the flow of FDI from
across the countries and states.
To analyse the sector wise flow of
FDI.
To point out the findings and
policy suggestions.

REVIEW OF LITERATURE
The various studies
interrelated economic
growth and FDI in developing courtiers.
Lipsey (2002) identifies the effect of inward
FDI on the economic growth of host country.
FDI helps domestic firms to achieve higher
productivity.
Alfaro (2003) study concluded that FDI flows
into the different sectors of the economy
(namely
primary,
manufacturing,
and
services) exert different effects on economy.
Jiang et.al. (2010) concluded that FDI from
Japan and Singapore has a significantly
positive effect on the degree of in-group
collectivism.
Ramasamy and Yeung (2010) examined the
relation between FDI, wages and productivity
in china. It was found that FDI inflow
influenced the wage rates and has a positive
effect on productivity.
others

Historical Gross Inflow of FDI


to India from 1948 to 2014
Sl. N o.

1
2
3
4
5
6
7
8

Year
(End of
the
March)
1948
1964
1974
1980
1990
2000
2010
2014

Inflow of
FDI (Rs.
in
Crores)
256
565.5
916
933.2
2705
18486
123378
147518

Cumulativ
e increase

256
821.5
1737.5
2670.7
5375.7
23861.7
147239.7
294757.
7

Gross Inflow of FDI to


India from 1948 to
2014

Sl, No.

Years

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09 *
2009-10 #

20
21
22
23
24

2010-11 #
2011-12 # ^
2012-13 #
2013-14
2014-15 (Apr
- Jul, 2014)

FDI inflows Post Reform Period (Rs. in


Crores )
409
1094
2018
4312
6916
9654
13548
12343
10311
10,733
18,654
12,871
10,064
14,653
24,584
56,390
98,642
142,829
123,120
97,320
165,146
121,907
147,518
64,193

Post Reform FDI


inflow in India

Top Ten Country-wise FDI


Equity Inflows to India from
April, 2000 to July, 2014
S.No

Name of the
Country

Amount of FDI
Inflows (Rs. in
crore)

%age with total


FDI Inflows (+)

Mauritius

390691.18

35.88

Singapore

135784.52

11.88

United Kingdom

105795.83

9.46

Japan

85639.02

7.49

Netherlands

65256.29

5.57

U.S.A

57835.90

5.38

Cyprus

37349.33

3.38

Germany

33486.48

2.99

France

19398.74

1.75

10

Switzerland

13801.42

1.23

Inflow of FDI from Top


10 Countries in the
World

S.
No.

State-wise Inflows of FDI

Cumulative
%age to
FDI ( 2000 to total
Inflows
2014)

MAHARASHTRA, DADRA & NAGAR HAVELI, DAMAN


& DIU
DELHI, PART OF UP AND HARYANA
TAMIL NADU, PONDICHERRY
KARNATAKA
GUJARAT
ANDHRA PRADESH
WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR
ISLANDS
CHANDIGARH, PUNJAB, HARYANA, HIMACHAL
PRADESH
RAJASTHAN
MADHYA PRADESH, CHATTISGARH
KERALA, LAKSHADWEEP
GOA
UTTAR PRADESH, UTTRANCHAL
ORISSA
ASSAM, ARUNACHAL PRADESH, MANIPUR,
MEGHALAYA, MIZORAM, NAGALAND, TRIPURA
BIHAR, JHARKHAND
JAMMU & KASHMIR
REGIONS NOT INDICATED#
TOTAL

328,166

30

216,274
71,017
63,294
45,627
45,160
13,584

19
6
6
4
4
1

6,227

0.6

6,623
6,095
4,893
3,710
1,965
1,926
352

0.5
0.5
0.4
0.4
0.2
0.2
0

247
26
292,906
1,108,091

0
0
26.06
100

2
3
4
5
6
7
8
9
10.
11
12
13
14
15
16
17
18
19

Sector-wise FDI Equity


Inflow from April, 2000
to
July,
2014
Sl. No
Sectors
FDI Inflow (Rs. In
Percentages of
Crores)

Total FDI Inflow

Service

191752.15

17.73

Construction

111127.49

10.40

Telecommunication

80608.47

7.23

61707.07

5.76

Computer Software &


Hardware
Drugs &Pharmaceuticals

61340.03

5.47

Automobile Industry

49678.09

4.41

47538.99

4.40

Chemicals (Other than


Fertilizers)
Power

44667.08

4.05

Metallurgical Industry

39225.17

3.60

10

Hotel & Tourism

38030.37

3.25

Sector-wise inflow of
FDI
(Rs. in Crores)

FINDINGS
India is one of the most important countries in the
world to attract FDI.
The FDI inflow to India was not new one, because it
was prevailed way back during the colonial period.
Since introduction of New Economic Policy 1991, FDI
inflow got greater scope. This is because of open
market conditions.
Service sector, construction, telecommunication etc
tertiary sector attracting more FDI then agricultural
and small scale industries. Because we need more
fund the primary sector but they are deprived from
the investment.
Sectors which are deprived from the FDI are those
where large market potential is present but these are
ignored by the policy makers & poor infrastructure as
well as due to high concentration on priority sectors
also contributed to the cause.

FINDINGS
State- wise FDI inflows show that Maharashtra,
New Delhi, Karnataka, Gujarat and Tamil Nadu
received major investment from investors because
of the infrastructural facilities and favourable
business environment provided by these states.
It is observed that major investment in the above
sectors came from Mauritius and investments in
these sectors in India are primarily concentrated in
Mumbai and New Delhi.
It is also observed that the realisation of approved
FDI into actual disbursement is quite low.

POLICY
PRESCRIPTIONS
The FDI is one of the important components
for economic development of our country.
Our economic growth has maintained higher
level. Still government should take some
important steps for further attracting and
utilization of FDI. Following are suggestions
for further impartment in FDI inflow
The policy makers should design policies
where foreign investment can be utilised as
means of enhancing domestic production,
savings, and exports; as medium of
technological
learning
and
technology
diffusion and also in providing access to the
external market.
It is suggested that the government should
push for the speedy improvement of
infrastructure sectors requirements which
are important for diversification of business
activities.

POLICY PRESCRIPTIONS
Government should ensure the equitable
distribution of FDI inflows among states.
Government must target at attracting
specific types of FDI that are able to
generate spillovers effects in the overall
economy.
The government must promote policies
which allow development process starts from
within (i.e. through productive capacity and
by absorptive capacity)..
Government must pay attention to the
emerging Asian continent as the new
economic power house of business
transaction.

CONCLUSIONS OF
STUDY
A large number of changes were introduced
in the country after LPG era after 1991.
India
brought
about
a
structural
breakthrough in the volume of the FDI
inflows into the economy maintained a
fluctuating and unsteady trend during
reform period. It might be interest to note
that more than 50 per cent of the total FDI
inflows received in India come 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 then telecommunication sector.

RECENT CHANGES
IN FDI POLICY
-> The government has allowed FDI upto
74 per cent in pharmaceuticals through
automatic route and beyond that under
government approval.
-> In private security agencies, FDI limit
was raised to 74 per cent from 49 per cent
earlier.
-> To attract investment in the defence
sector, the government has removed the
condition of state-of-art technology,
besides permitting foreign investment in
manufacturing
of
small
arms
and

RECENT CHANGES
IN FDI POLICY
-> The government has permitted 100 per
cent FDI through automatic route in
broadcasting
carriage
services
like
teleports, direct-to-home and mobile TV.
-> The government has allowed 100 per
cent FDI in airlines and relaxed norms for
overseas
investments
in
brownfield
airports.
-> The government has also relaxed the
norms in animal husbandry sector. FDI into
the country grew by 29 per cent to USD 40
billion in 2015-16.

Thank you
For giving us such a
wonderful opportunity