FOREIGN DIRECT INVESTMENT

INDEX

SR. NO.

CONTENT

PG.NO.

1.

Introduction

2.

Types Of FDI

3-5

3.

Factors Influencing FDI

4.

Advantages Of FDI

7-8

5.

Limitations

6.

FDI vs FII

7.

FDI In INDIA

8.

Current Status Of FDI In INDIA

WHAT IS FDI?

Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investors country of origin.

It is the investment of foreign assets into domestic structures, equipments and organizations. It does not include foreign investment into the stock market.

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise.

For acquiring substantial controlling interest, generally, 10% or more equity is to be acquired in the foreign firm.

FDI plays a major role in the internationalization of business.

EXAMPLES OF FDI
1. NIKE: Nike is the worlds leading supplier of athletic shoes and apparel and a major manufacturer of sports equipment. It is headquartered in the U.S. and its brands include Nike, Umbro, Converse, etc. In 2009, Nike employed 34,300 people and its sales were $18.36 billion. Nike has contracted with more than 700 factories Nike is mainly engaged in off shoring. None of Nike sathletic shoes are produced in the U.S., and none are produced in a Nike-owned production facility. Nike subcontracts all of its footwear production toindependently owned and operated foreign companies. 2. McDonalds McDonalds is the worlds leading foodservice retailer. It is headquartered in the U.S. and its brands include McDonalds, Pret A Manger, etc. In 2009, McDonalds employed 400,000 people and its sales were $22.34 billion (McDonalds corporation only). There are more than 31,000 McDonalds restaurants located in 118 countries. McDonalds is mainly engaged in international franchising More than 75 percent of McDonalds restaurants worldwide are neither owned nor operated by the McDonalds corporation

TYPES OF FDI
By Direction Inward: Inward foreign direct investment is when foreign capital is invested in local resources. Outward: Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. By Target Greenfield investment: Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The benefits of green field investment for regional and national economies include increased employment investments in research and development and additional capital investments. Criticism of the green field investments include the loss of market share for competing domestic firms. Another criticism of green field investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy.

 Horizontal FDI: The investment is in the same industry abroad as a firm operates in at home. Ex: Toyota builds an auto manufacturing plant in the U.S. Vertical FDI : It occurs if a firm invests in a supplier industry abroad. Ex: Intel builds a chip assembly plant in Malaysia. Types of vertical FDI : 1) Backward Vertical FDI: Where an industry abroad provides inputs for a firm's domestic production process. 2) Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's domestic production.

Mergers and Acquisitions: Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Crossborder mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Crossborder acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI.

 By Motive: FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:

Resource-Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labour and natural resources). 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. FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.[3] This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980s y Accounting, Advertising and Law firms.

Efficiency-Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.[3]. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).

FACTORS INFLUENCING FDI

They are divided into 3 categories : Supply Factors : Firms invest capital in foreign countries due to lower cost of business in foreign countries. These factors includes the following : Production cost Logistics Availability of natural resources Availability of quality human resource at low cost Access to key technology

Demand Factors : FDI is selected by companies in order to increase the total demand for their products. These factors includes the following : Customer Access Marketing Advantages Exploitation of competitive advantage Customer mobility

Political Factors : Companies enter foreign market through FDI in order to overcome the trade barriers imposed by the host country and/or to avail the incentives offered by the host government. These factors includes the following : Avoidance of trade barriers Economic development incentives

ADVANTAGE TO HOME COUNTRY

Home country is the country in which the company established (own country ). Creates new employment : FDI benefits the home country with the creation of employment. It also assists in ensuring the workers are paid better salaries. This allows them to have an access to an improved lifestyle as well as more facilities. The manufacturing and production sector is greatly developed in the home country due to FDI investment. This increase in new industries is beneficial creating new employment.

New technology : Foreign direct investment benefits the host country through introducing advanced skill and technology New research will be conducted in that home country as the international organization looks for method of enhancing its services. This lead to better technology that can be applied in other parts of the nations for further development .

Improves export : The other vital advantage of FDI to the home country is that is enables these nations to enhance there export resources. Further more research shows that nations who get FDI from other international organization usually have lower interest rate this means that their exported products are much cheaper and thus enhance export. Increase income : Income generated through taxation is increased by FDI investment. Actually , FDI plays an important role with regards to the increased in productivity of home countries It improves the local economy and living standard as well as The short coming of FDI to the host nations is that is may cause pollution , particularly where the environmental laws have not been clearly defined .

ADVANTAGES TO HOST COUNTRY

Host country means where the company of other country is established in our country Integration into global economy : A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market. Technology advancement : FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear deal between India and the United States would lead to transfer of nuclear energy know-how between the two countries and allow India to upgrade its civilian nuclear facilities. Increased competition : As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector. Improved human resources : Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills upgradation can enhance the value of the human resources of the host country.

LIMITATIONS OF FDI
FDI has adverse effects on competition. FDI will be make the host country lost the control over domestic policy. The economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country. Certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment disadvantageous for the ones who are making the investment themselves. Foreign direct investment may entail high travel and communications expenses. The company may lose out on its ownership to an overseas company. There is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor.

Inflation is increased Local market is affected badly

FDI IN INDIA
The FDI in India is currently witnessing a gradual shift with liberalized reforms over last few years and an attractive investment climate making a positive impact on the inflow. With a steady increase in volume of FDI, India has attracted more than 90 countries till 2010 (29 countries in 1991) across the globe to invest in India making it upstage US in the list of top investment destinations in the world in the UNCTAD WIP Report. There are certain factors which have played a pivotal role in taking India to the world. Demographics, suitable business climate, low man power costs along with availability of talented pool of resources are some of them. India also has certain advantages at the policy level. Collaboration with a local partner is not mandatory for making investment in India, repatriation of capital is easy and low cost, licenses granted can be used to operate from any part of the country. There is also better protection of IP rights simplification of laws and introduction of a uniform Goods and Service Tax and a soon to be introduce Direct Tax Code. Investment into India could mostly follow the automatic route with no licenses or permissions required Investment in sectors that have caps such as single brand retail, private banking, insurance, stock exchange needs to be approved by Foreign Investment Promotion Board. India is placed quite well to attract investments and key reforms have been initiated at the macro level. The need of the hour is to implement policy reforms both at the macro and micro level, prioritize sectors, focus on product-specific SEZs or multiproduct SEZs and synchronize FDI policy with export policy. In order to sustain its competitive advantage in being the top investment destination in the world India will also need to address other key issues like lack of infrastructure, restrictive labour laws, absence of Centre-state co-ordination. Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.

Foreign Direct Investment (FDI) is permitted as under the following forms of investments : Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments. FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Retail Trading (except single brand product retailing). Lottery Business Gambling and Betting Business of chit fund Nidhi Company Trading in Transferable Development Rights (TDRs). Activity/sector not opened to private sector investment.

FDI POLICY IN INDIA (SECTOR WISE)

SECTOR FDI CAP/EQUITY ENTRY ROUTE CONDITIONS I. AGRICULTURE:

1. Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aqua-culture and Cultivation of Vegetables & Mushrooms under controlled conditions and services related to agro and allied sectors 100 % Automatic No conditions 2. Tea sector (including tea plantation) 100 % FIPB Subject to divestment of 26% equity in favour of Indian partner/Indian public within 5 years and prior approval of State Government concerned in case of any change in future land use. INDUSTRY :

II.

IIA) MINING : 3. Mining covers exploration and mining of diamonds and precious stones, gold and silver and minerals 100 % Automatic Subject to Mines & Minerals (Development & Regulation) Act, 1957 www.mines.nic.in Press Note 18 (1998) and Press Note 1 (2005) are not applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and /or the particular mineral.

4. Coal and lignite mining for captive consumption by power projects and iron and steel, cement production and other eligible activities permitted under the coal mines (Nationalisation Act 1973) 100 % Automatic Subject to provisions of Coal Mines (Nationalization) Act, 1973 www.coal.nic.in 5. Mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities (Note : FDI will not be allowed in mining of prescribed substances listed in Government of India notification No. S.O. 61(E) dated. 18.1.2006 issued by the Department of Atomic Energy under the Atomic Energy Act, 1962) 100 % FIPB Subject to sectoral regulations and the Mines and Minerals (Development & Regulation) Act, 1957 and the following conditions : value addition facilities are set up within India along with transfer of technology; disposal of tailing during the mineral separation shall be carried out in accordance with regulations framed by the Atomic Energy Regulatory Board such Atomic Energy (Radiation Protection) Rules 2004 and the Atomic Energy (Safe Disposal of Radioactive Wastes) Rules 1987 II.B) MANUFACTURING : 6. Alcohol (distillation and brewing) 100 % Automatic Subject to license by appropriate authority 7. Cigars and cigarettes (manufacturing) 100 % FIPB Subject to industrial license under the Industries Act, 1951

8. Coffee and rubber processing and warehousing 100 % Automatic No conditions 9. Defence production 26 % FIPB Subject to licensing under Industries (Development & Regulation) Act, 1951 and guidelines on FDI in production of arms & ammunition. 10. Hazardous chemicals, hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanate & diisocyantes of hydrocarbon. 100 % Automatic Subject to industrial license under the Industries (Development & Regulation) Act, 1951 and other sectoral regulations. 11. Industrial explosives (manufacture) 100 % Automatic Subject to industrial license under Industries (Development & Regulation) Act, 1951 and regulations under Explosives Act, 1898 12. Drugs & Pharmaceuticals including those involving use of recombinant DNA technology 100 % Automatic No conditions II C) POWER : 13. Power including generation (except atomic energy) transmission, distribution and power trading 100 %

 Automatic Subject to provisions of the Electricity Act, 2003 14. Aviation sector i) Greenfield and existing projects 100 % Automatic and FIPB beyond 74% respectively Subject to sectoral regulations notified by Ministry of Civil Aviation ii) Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services a) Scheduled / Domestic : 49% - FDI and 100 % - NRI investment Automatic b) Non scheduled / chartered / cargo : 74 % - FDI and 100 % - NRI investment Automatic Subject to no direct or indirect participation by foreign airlines and sectoral regulations c) Helicopter / sea plane services : 100 % Automatic Also subject to sectoral regulations.

15. Asset reconstruction companies 49 % (only FDI) FIPB Where any individual investment exceeds 10% of the equity, provisions of Section 3(3)(f) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 should be complied with

16. Banking private sector: 74% (FDI+FII) Automatic Subject to guidelines for setting up branches / subsidiaries of foreign banks issued by RBI. 17. Broadcasting: a. FM Radio FDI+FII investment up to 20% FIPB Subject to guidelines notified by ministry of information & broadcasting. b. Cable Network 49% (FDI+FII) FIPB Subject to Cable Television Network Rule (1994) notified by ministry of information & broadcasting. c. Direct-To-Home 49% (FDI + FII). Within this limit FDI component not to exceed 20% FIPB Subject to guidelines issued by ministry of information & broadcasting. d. Setting up hardware facilities such as up-linking, HUB etc. 49% (FDI + FII). FIPB Subject to up-linking policy notified by ministry of information & broadcasting. e. Up- linking a News & Current Affairs TV Channels 26% (FDI+FII) FIPB

 Subject to guidelines issued by ministry of information & broadcasting. f. Up- linking a Non -news & Current Affairs TV Channels 100% FIPB Subject to guidelines issued by ministry of information & broadcasting. 18. Commodity Exchange: 49% (FDI+FII).Investment by Registered FII under PIS will be limited to 23% and Investment under FDI Scheme limited to 26%. FIPB No foreign investor/entity, including persons acting in concert, will hold more than 5% of the equity in these companies. 19. Construction Development projects: Housing, Commercial premises, resorts, educational institutions, recreational facilities, city & regional level infrastructure, townships. 100% Automatic Subject to conditions notified vide Press Note 2 (2005 Series) 20. Courier Services: It is require for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898. 100% FIPB Subject to existing laws 21. Credit Information Company: 49%(FDI+FII). Investment by Registered FII under PIS will be limited to 24% only in the CICs listed at the Stock Exchanges within the overall limit of

49% foreign investment. FIPB Foreign Investment in CIC will be subject to Credit Information Companies (Regulation) Act, 2005. 22. Industrial Parks both setting up & in established Industrial Parks: 100% Automatic Conditions in Press Note 2(2005) applicable for construction development projects would not apply 23. Insurance: 26% Automatic Subject to licensing by the Insurance Regulatory & Development Authority. 24. Investing Companies in infrastructure / services sector (except telecom sector): 100% FIPB The foreign direct investment in such investing company does not exceed 49% and the management of the investing company is with the Indian owners. 25. Non Banking Finance Company: Merchant Banking, Underwriting Portfolio Management, Investment Advisory Services, Financial Consultancy, Stock Broking, Venture Capital, Financial Leasing & Hire Purchase, Housing Finance, Credit card Business, Micro credit, Rural credit. 100% and Automatic

CURRENT STATUS OF FDI IN INDIA

Govt says figures indicate that the trend of high FDI equity inflows, since the start of the financial year, is maintained. FDI inflows rise 133% to $13.44 bn in April-June 2011, from $5.77 bn a year ago. Foreign direct investment into India jumps to $5.66 bn in June 2010 from $1.38 bn a year ago As per the latest FDI policy steps have been taken to evaluate certain sectors having limited or no access to foreign investment. Discussion papers on FDI in multi brand retail trading was released which proposed to increase FDI in Single brand retail to 100% from current 51% and to allow FDI in Multi Brand retail, which will improve the growth rate in organized retail currently one of the lowest in the world at 4%. Consolidated FDI policy in now issued every 6 months, online filing for FIPB application, methodology for calculation of indirect foreign investments in Indian companies now clearly defined. Project Offices are now permitted to open one or more non interest bearing foreign currency accounts for projects to be executed in India, which will give greater flexibility for Project offices to operate.

TRADERS BANDH : A nationwide bandh called by traders on Thursday against foreign direct investment in the retail sector, which has hobbled the winter session of parliament thanks to the Opposition's onslaught, did not elicit the same response from traders across the country, with some states reacting with ambivalence to the Confederation of All India Traders' call for strike and others responding with gusto. The bandh was partial in Delhi, Andhra Pradesh, and Assam. In Oppositionruled Gujarat and Bihar, too, the bandh was partial. However, in Punjab, Bengal, Uttarakhand, Uttar Pradesh and Maharashtra, the strike was total.

There were reports of sporadic violence in some cities. Shopkeepers in many cities took out marches demanding a rollback of the government move. Traders' bodies said the decision will create lopsided conditions, tilted towards multinational companies that will hurt traders and consumers. Shops and commercial establishments in many cities across the country have downed their shutters to protest government's decision to allow foreign direct investment (FDI) in retail. In Shimla, the capital of Himachal Pradesh, over 6000 traders have kept their shops closed as a part of this general strike. In Maharashtra, round 35 lakh small and medium traders have kept their shops shut in response to the bandh. COLLATERAL DAMAGE: RETAIL ROW HITS FDI IN AVIATION: The political crisis over foreign direct investment in multi-brand retail is likely to delay a proposal to permit foreign carriers to invest in the debtstruck civil aviation sector where private airlines as well as the state carrier are struggling to remain airborne. The parliamentary standoff following the FDI in retail decision has made the civil aviation ministry cautious about moving on a proposal to liberalise the sector as it is felt that this can add fuel to the opposition protests against entry of retail chains. The government allows 49% investment by foreign institutional investors and changed the rules in June, 2008 when the norms were altered for domestic airlines and airports. Private airlines have sought a change in policy and there is no significant opposition with BJP making it clear that its reservations over FDI are limited to the retail case where it feels its core supporters like traders are apprehending that they will feel the pinch. Despite the Kingfisher crisis providing a fresh impetus to the moves to liberalise investment norms, the government is yet to get going even as it remains reluctant to consider reduction in taxes or facilitation of fresh loans.

 WAL-MART IN INDIA : Wal-Mart is seeking to open its own retail chain throughout India. India's $250 billion retail business is the eighth largest in the world and has the potential to grow 7 per cent by 2011. [McKinsey Report] For a company already dominating the world markets, this is an un-passable opportunity. The owners of Wal-Mart stand to gain enormous profits from this move while Indias economy will suffer and its workers will be subjugated to the unfair work practices of this Multinational Behemoth. Wal-Marts entry to the Indian retail sector is sure to produce a flood of cheap Chinese-made goods. Wal-Mart retail stores would have a negative impact on small businesses in India, and could force many small shops and traders to close. Wal-Marts Dependence on China Wal-Mart emphasizes its contribution to exports in India, yet in 2004 Wal-Mart sourced only $1.2 billion worth of goods from India, not even one-fifteenth of the amount Wal-Mart purchased from China in the same year.3 The total amount that Wal-Mart sources from India every year amounts to only a little more than a dollar per person in India.4 And, if allowed to open retail stores, Wal-Mart could upset the import balance by importing massively from China rather than using local production