Foreign

Direct
Investment
PRESENTED BY :-
CHINMAYA RANJAN RAY
PRIYANSH ACHARYA
SHIMONA SIWATCH
MAYANK SINHA
ISHA GUPTA
ACHAL DUGAR 1
 An Overview
• What is FDI ????
• Why we need FDI ????
• What is the process of the
Inflow of FDI ????
• What are the benefits and
costs????

2
Defination of FDI
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.

3
Types of FDI
• FDI Types
– Purchase of existing assets
• Quick entry, local market know-how, local financing may
be possible, eliminate competitor, buying problems
– New investment
• No local entity exists or is available for sale, local financial
incentives may encourage, no inherited problems, long
lead time to generation of sales or other desired outcome
– Participation in an international joint-venture
• Shared ownership with local and/or other non-local partner

4
Which factors
encourages FDI?

• Financial incentives (Funds from local

Government)

• Fiscal incentives (Exemption from

import duties)

• Indirect incentives (Provides land and

infrastructures at less commercial 5
 Which factors
encourages FDI?

•Political stability

•Market potential & accessibility

•Large economy

•Market size

•External debt discourages FDI 6

Don’t Be Confused Between
FDI & FII
• FII - is Foreign Institutional Investors, i.e, foreign
Investment Bankers like Goldman sachs, Merrill
lynch, Lehman bros etc...investing in indian
markets......in other words buying indian
stocks.....FII's generally buy in large volumes which
has an impact on the stock markets...

FDI - is Foreign Direct Investments i.e. a

foreign company having a stake in a public
sector undertaking in a country for a long
period and that company is called
Multinational Enterprise.
7
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 8
Modes of FDI

• 1) By Direction
• * Inward
• *Outward
• 2) By Target
• * Mergers and Acquisitions
• * Horizontal FDI
• * Vertical FDI
• (a) Backward Vertical FDI
• (b) Forward Vertical FDI
• 3 )By Motive
• * Resource-Seeking
• * Market-Seeking
• * Efficiency-Seeking
• * Strategic-Asset-Seeking
9
BY TARGET
• Mergers and Acquisitions

• Transfers of existing assets from local firms to

foreign firms takes place;
• Horizontal FDI
• Investment in the same industry abroad as a firm
operates in at home.

• Vertical FDI
• *Backward Vertical FDI
• Where an industry abroad provides inputs for a firm's
domestic production process.
• *Forward Vertical FDI
• Where an industry abroad sells the outputs of a
firm's domestic production. 10
 BY MOTIVE
Resource-Seeking
This typifies FDI into developing countries, for example seeking natural
resources in the Middle East and Africa, or cheap labor in Southeast Asia
and Eastern Europe.

Market-Seeking
Investments which aim at either penetrating new markets or maintaining
existing ones..

Efficiency-Seeking
It is suggested that this type of FDI comes with the expectation that it further
increases the profitability of the firm. Typically, this type of FDI is mostly
widely practiced between developed economies; especially those within
closely integrated markets (e.g. the EU)..

Strategic-Asset-Seeking
A tactical investment to prevent the loss of resource to a competitor. Easily
compared to that of the oil producers, whom may not need the oil at
present, but look to prevent their competitors from having it. 11
 INDIA
AN IDEAL INVESTMENT DESTINATION

 World’s largest democracy

 Second largest emerging market (US$ 2.4 trillion)

 Liberal Foreign Investment Regime

 Skilled and competitive labour force

 Amongst the highest rates of return on

investment

 Large domestic market 12

 FDI Approval Procedure

Automatic Route in most Government Route for few

Sector sectors

RBI FIPB

No permission required, only Approval is

to notify RBI within 30 days of granted generally
issue of shares to foreign in 30 days 13
investors
FDI Inflows….Robust Growth

9000
(Only
Equity)
7722
8000 7404

7000
6130

6000
5035 6051
US $ m

5000

4322
4000 4029

3000

2000

1000

0 14
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 Apr - Nov
 2500

FDI Inflows- Sector -wise

2000
Electrical equipment including software moves to
over all 2nd position in Nov 2006.

Services sector shows spurt in growth and the top

sector attracting FDI – moving up from the third
position.
1500
Spurt in FDI in Real Estate causes the construction
sector to the third position in Nov 2006.
US $ m

1000

500

0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 April Nov

Electrical Equipment (including Software) Telecommunications Transportation

Chemicals (other than Fert.) Services Sector Fuels (Power & Oil Refinery) 15
Construction Activities
16
FDI Policy …. Prohibited activities

• Retail except single brand retailing allowed upto 51% with

FIPB approval

• Atomic energy

• Lottery business

• Betting and Gambling

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FDI Policy for Industry Sector…Fully permitted

Manufacturing
• 100% FDI permitted in all activities under automatic route
except:

– Cigar and cigarettes of tobacco - FIPB

– Products reserved for Small Scale Sector

• FDI less than 24% under automatic route
• FDI beyond 24% - FIPB subject to export obligation

– Defence products
• FDI upto 26% - FIPB subject to licensing of Arms and Ammunitions

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FDI Policy for Industry Sector…. Fully permitted

Mining
• Coal – FDI upto 100% as per Coal Mines (Nationalization) Act 1977
• Diamond, Gold, Silver , Minerals – upto 100% under automatic route as
MMRD Act
• Atomic minerals – upto 74% in JV with PSUs – FIPB

Electricity
• FDI upto 100% under automatic route in Generation, Transmission,
Distribution and Power Trading as per Electricity Act 2003

19
FDI Policy for Service Sector…. Largely permitted

• FM Broadcasting (20%) - FIPB

Upto 26% • Uplinking News and CATV Channel - FIPB
• Print Media – News Papers & Periodicals - FIPB
• Insurance - Automatic

• Broadcasting - Cable Network, DTH,

Upto 49% Setting up hardware - FIPB
• Stock Exchanges - FIPB
• Air Transport Services - Automatic

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FDI Policy for Service Sector…. Largely permitted

• Telecommunication - FIPB (Beyond 49%)

Upto 74% • Private sector banks - Automatic

• Development of existing airports - FIPB (Beyond 74%)

Upto 100%
• Publishing scientific magazines - FIPB
• Courier services - FIPB

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Political Ideology & FDI

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Advantages of FDI
• Infrastructure and
technology transfer

• Increased Productive
efficiency due to
competition from
multinational subsidiaries
23
Advantages of FDI
• Faster growth of output
and employment
• Consumer Benefits

Price
Quality
Varieties 24
Advantages of FDI
• Increase in Exports

• Increase in savings and

Investment

25
 Costs of FDI

• Detriment of the growth

of domestic producer and
the national economy

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 Costs of FDI
• Enviroment and natural
resource costs

• Abuse of local culture and

traditions Ex

FDI Tourism Abuse

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 Costs of FDI
• Facilitate hegemony by the
dominant US and the western
cultures.

Print TV Entertainments

• Political Influence (News)

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Wish u a merry x-mas and a
happy new year!!!

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