Foreign Investment In INDIA

An Overview

2/9/2012

Foreign Direct Investment (FDI)

2/9/2012

What is FDI Why we need FDI Process of the Inflow of FDI Benefits Types Advantages and disadvantages FII Diff between FII and FDI Sectors attracting FDI. Country attracting maximum FDI.
2

FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise FDI is undertaken by firms so that they can take advantage of resources that are either unavailable in the home country or because these resources are available at costs lower than those in their home country. The firm has significant control of its foreign operation and can affect managerial decisions of the foreign operation. It usually involves participation in management, joint-venture, transfer of technology and expertise.

TYPES OF FDI

BY DIRECTION

BY TARGET

1.INWARD FDI 2.OUTWARD FDI

1. GREENFIELD INVESTMENT 2. MERGERS AND ACQUISITIONS 3. JOINT VENTURE

Inward FDI:

Inward FDI for an economy can be defined as the capital provided from a foreign direct investor residing in a country, to that economy, which is residing in another country. Here, investment of foreign capital occurs in local resources. Flow of Inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard. EXAMPLE: General Motors decides to open a factory in Malaysia. They are going to invest some capital. That capital is inward FDI for Malaysia.

Outward FDI:
When investment is made by a domestic company in the foreign country than there is outflow of FDI from domestic country to foreign country. Foreign direct investment, which is outward, is also referred to as direct investment abroad . Outward FDI faces restrictions under a host of factors as described below: Industries related to defence are often set outside the purview of outward FDI to retain government's control over the defense related industrial complex. Subsidy scheme targeted at local businesses. Government policies, which lend support to the phenomenon of industry nationalization

MERGERS AND ACQUISITIONS

1. Horizontal A merger in which two firms in the same industry combine. Often in an attempt to achieve economies of scale and/or scope. 2. Vertical A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. Often in an attempt to control supply or distribution channels. 3. Conglomerate A merger in which two firms in unrelated businesses combine. Purpose is often to diversify the company by combining uncorrelated assets and income streams 4. Cross-border (International) M&As Cross A merger or acquisition involving a Indian and a foreign firm, either the acquiring or target company.

JOINT VENTURE

A joint venture is here defined as shared ownership in a foreign business Some advantages of a MNE working with a local joint venture partner are: Better understanding of local customs, mores and institutions of government Providing for capable mid-level management Some countries do not allow 100% foreign ownership Local partners have their own contacts and reputation which aids in business. However, joint ventures are not as common as 100%-owned foreign subsidiaries as a result of potential conflicts or difficulties

Why FDI
To fill the gaps in domestic saving and other resources. MNCs act as an agent of growth in developing countries. MNCs pose healthy competition to firms in recipient countries. Locational advantages attract FDI Poor countries need much more FDI than others

Why India?
Liberal, largest democracy, Political Stability Second largest emerging market (US$ 2.4 trillion) Skilled and competitive labors force highest rates of return on investment one hundred of the Fortune 500 have R & D facilities in India Second largest group of software developers after the U.S. lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more)
2/9/2012 10

Why India (cont.)

World's fourth largest economy & second largest pharmaceutical industry growth over the past few years averaging 8% has a middle class estimated at 300 million out of a total population of 1 billion Destination for business process outsourcing, Knowledge processing etc. Second largest English-speaking, scientific, technical and executive manpower Low costs & Tax exemptions in SEZ Tax incentives for IT , business process outsourcing and KPO companies
2/9/2012 11

nvesting in India Entry Routes

Investing in India

Automatic Route
General rule No prior permission required
Only information to the Reserve Bank of India within 30 days of inflow/ Issue of shares

Prior Permission (FIPB)

By exception Prior Government Approval needed Decision generally Within 4-6 weeks

2/9/2012

12

TRENDS IN FDI There has been a marked increase in both the flow and stock of FDI in the world economy over the last 30 years. FDI has grown more rapidly than world trade and world output because: The general shift toward democratic political institutions and free market economies has encouraged FDI The globalization of the world economy is having a Positive impact on the volume of FDI as firms undertake FDI

FDI Investment Sectors

Prohibited activities Atomic energy Arms and ammunition Lottery business Betting and Gambling Aircraft and warships Coal lignite
Fully permitted Activities  Cigar and cigarettes of tobacco  Coal, Roads & Highways  Diamond, Gold, Silver , Minerals  Atomic minerals  Electricity  Hotel, hospitals

2/9/2012

14

SECTORS ATTRACTING HIGHEST FDI INFLOWS

SHARE OF TOP INVESTING COUNTRIES

Benefits of FDI
Economic development of the host Transfer of technology Development of human capital resources Creation of jobs Opening export window / Trade Development of HR of an organization. Provides finance.

Disadvantages of FDI
Company may lose ownership. Difference in language and culture . Policies adapted may not be appreciated /lack of control. Adverse effects on competition. Local market is affected badly. Technological disadvantage.

FDI AND ECONOMIC DEVELOPMENT

Foreign direct investment (FDI) is considered to be the lifeblood and an important vehicle for economic development as far as the developing nations are concerned. The important effect of FDI is its contribution to the growth of the economy. FDI has an impact on country's trade balance, increasing labour standards and skills, transfer of new technology and innovative ideas, improving infrastructure, skills and the general business climate. FDI also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services.

FDI AND FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.