Shri Chinai College Of Commerce and Economics Subject: commerce-2 Topic: FOREIGN DIRECT INVESTMENT S.Y.BAF ROLL NO.

42 SUBMItTEDTO:PROF. HUSAIN

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment (FDI) is normally defined as a form of investment made in order to gain unwavering and long-lasting interest in enterprises that are operated outside of the economy of the shareholder/ depositor. In FDI, there is a parent enterprise and a foreign associate, which unites to form a Multinational Corporation (MNC). In order to be deemed as a FDI, the investment must give the parent enterprise power and control over its foreign affiliate. Instead of investing in local businesses, putting money in a company functioning or incorporated in another country is foreign direct investment. For the country which is attracting the investment, the investor is a considered a foreign direct investor. The foreign direct investor can have influence in the management of the companies invested in. The foreign direct investor may have a varying amount of stake in the invested company stakes can be as low as 10% or may also cross 49% of the shares or stock ownership. Some countries may have caps on the amount of equity a foreign direct investor may hold. For example, the Reserve Bank of India allows foreign equity only up to 50% in investment in specific mining sector in India. The foreign direct investor seeks to have a controlling stake in the entity invested. This distinguishes it from an ordinary foreign investment.The flow of capital from the foreign investor to the company

invested in becomes an FDI inflow. FDI has three parts equity capital investment, reinvested earnings and intracompany loans.

Advantages of Foreign Direct Investment

In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation.

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. The advantages of foreign direct investment to the investor includes access to a larger market in the host country, ability to tap the potential of a cheap and skilled labour, making use of resources in the host country and pursuing growth goals by diversification and optimising costs.

Disadvantages of FDI?
1) Travel and communications increase your costs 2) Lack familiarity with local tax laws, businesses, and government regulations 3) Face numerous risks: currency, political, etc 4) Language barrier 5) Cultural differences

6) Must compensate your domestic employees going abroad to commence operations

Foreign Direct Investment in India

In India, Foreign Direct Investment Policy allows for investment only in case of the following form of investments:

Through financial alliance Through joint schemes and technical alliance Through capital markets, via Euro issues Through private placements or preferential allotments

Foreign Direct Investment in India is not allowed under the following industrial sectors:

Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc FDI In India Across Different Sectors Hotel & Tourism:Hotels include restaurants, beach resorts and business ventures providing accommodation and food facilities to tourist. Tourism would include

travel agencies, tour operators, transport facilities, leisure, entertainment, amusement, sports and health units.100 % FDI is permitted for this sector through the automatic route. Trading For trading companies 100 per cent FDI is allowed for Export Bulk Imports Cash and Carry wholesale trading. Power For business activities in power sector like electricity generation, transmission and distribution other than atomic plants the FDI allowed is up to 100 per cent. Drugs & Pharmaceuticals For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed, subject to the fact that the venture does not attract compulsory licensing, does not involve use of recombinant DNA technology. Private Banking FDI of 49 per cent is allowed in the Banking sector through the automatic route provided the investment adheres to guidelines issued by RBI. Insurance Sector For the Insurance sector FDI allowed is 26 per cent through the automatic route on condition of getting license from Insurance Regulatory and Development Authority (IRDA).

 Telecommunication For basic, cellular, value added services and mobile personal communications by satellite, FDI is 49 per cent. For ISPs with gateways, radio-paging and end to end bandwidth, FDI is allowed up to 74 per cent. But any FDI above 49 per cent would require government approval. Business Processing Outsourcing FDI of 100 per cent is permitted provided such investments satisfy certain prerequisites. NRI's And OCB's They can have direct investment in industry, trade and infrastructure Up to 100 per cent equity is allowed in the following sectors

34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing

Industries Reserved for Small Scale Sector

Impact of Foreign Direct Investment

Attracting foreign direct investment (FDI) has become a key part of national development strategies for many countries. They see such investments as bolstering domestic capital, productivity, and employment, all of which are crucial to jump-starting economic growth. While many highlight FDIs positive effects, others blame FDI for "crowding out" domestic investment and lowering certain regulatory standards. The effects of FDI can sometimes barely be perceived, while other times they can be absolutely transformative. While FDIs impact depends on many conditions, well-developed and implemented policies can help maximize its gains

Types
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

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 societal organisation; or any combination of the above.

Conclusion
As evidenced by analysis and data the concept and material significance of FDI has evolved from the shadows of shallow understanding to a proud show of force. The government while serious in its efforts to induce growth in the economy and country started with foreign investment in a haphazard manner. While it is accepted that the government was under compulsion to liberalize cautiously, the understanding of foreign investment was lacking. A sectoral analysis reveals that while FDI shows a gradual increase and has become a staple for success for India, FDI has become a game of numbers where the justification for growth and progress is the money that flows in and not the specific problems plaguing the individual sub sectors. In the comparative studies the notion of Infrastructure as a sector has undergone a definitional change. FDI in the sector is held up primarily by two sub sectors (telecommunications and Power) and is not evenly distributed. The three major industrial houses (CII, ASSOCHAM, FICCI), World Bank and the Planning Commission have similar recommendations for FDI and yet despite their concurrence, a comprehensive policy in this respect is still to be formulated after 15 years of Indias economic reforms. The Swadeshi alternative has receded in public policy debate.