Definition of Foreign Direct Investment

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 investor's
country of origin.

A parent business enterprise and its foreign affiliate are the two sides of
the FDI relationship. Together they comprise an MNC. The parent
enterprise through its foreign direct investment
effort seeks to exercise substantial control over the foreign affiliate
company. 'Control' as defined by the UN, is ownership of greater than or
equal to 10% of ordinary shares or access to voting rights in an
incorporated firm. For an unincorporated firm
Since the mid-1980s, governments around the world have
pursued policies to encourage private sector participation in
the financing and delivery of infrastructure services. The natural
monopoly characteristics of infrastructure utilities mean,
however, that the privatization of these industries risks the
creation of private-sector monopolies. Therefore, governments
need to develop strong regulatory capabilities to police the
revenues and costs of the privatized utility firms, while, at the
same time, establishing regulatory credibility among investors.
This article provides an empirical examination of the
relationship between the quality of the regulatory framework
and foreign direct investment (FDI) in infrastructure in middle
and lower income developing countries during the period 1990
to 2002. The results confirm that FDI in infrastructure
responded positively to an effective domestic regulatory
framework. By implication, where regulatory institutions are
weak and vulnerable to “capture” by the government (or the
private sector), foreign investors may be more reluctant to make
a major commitment to large scale infrastructure projects in

developing countries.

7. Summary and conclusions

The 1990s saw an unprecedented increase in private
foreign investment in infrastructure projects in developing
countries. Much of this investment was in the
telecommunications and electricity industries. For the private
sector, infrastructure investment is associated with a sizeable
investor risk linked to the long-term sunk cost characteristics
of infrastructure projects. For the government, the involvement
of the private sector in “natural monopolies” raises new
challenges in designing regulatory structures that can control
anti-competitive or monopolistic behaviour, while at the same
time maintaining the attractiveness of the domestic economy to
potential foreign investors in the infrastructure industries.
The purpose of this article was to assess the impact of
regulatory governance on FDI in infrastructure projects in
middle and low income economies. Using a dataset on private
participation in infrastructure projects in developing countries
for the period 1990 to 2002 recently made available by the World
Bank, we constructed an econometric model that was used to
estimate the determinants of FDI in infrastructure. The
determinants were grouped into control variables for economic
policy and structural characteristics and infrastructure regulation
variables. The selection of control variables was motivated by
existing research on FDI, and our results are consistent with the
empirical evidence on the key determinants of FDI reported in
the literature. Three alternative measures of regulation quality
were used in our empirical analysis. All are positively signed
and statistically significant.
We interpret these results as confirmation of the basic
hypothesis that FDI in infrastructure responds positively to the
existence of an effective regulatory framework that provides

regulatory creditability to the private sector. By implication,

introduction
In developing countries, an essential requirement for
economic growth and sustainable development is the provision
of efficient, reliable and affordable infrastructure services, such
as water and sanitation, power, transport and
telecommunications. The availability of efficient infrastructure
services is an important determinant of the pace of market
development and output growth, and, in addition, access to
affordable infrastructure services for consumption purposes
serves to improve household welfare, particularly among the
poor. In most countries, however, the potential contribution of
infrastructure to economic growth and poverty reduction has
not been fully realized, and existing infrastructure stock and

services fall far short of the requirements.

2. FDI in infrastructure in developing countries
FDI has expanded steadily over the past three decades.
The growth in FDI accelerated in the 1990s, rising to $331 billion
in 1995 and $1.3 trillion in 2000 (UNCTAD, 2002). As a result,
developing countries experienced a sharp increase in the average
ratio of FDI to total investment during the 1990s. A principal
feature of the growth in FDI has been its rise in the services
sector, which is now the dominant sector in global FDI. For
developing countries, FDI in services increased at an annual
rate of 28% over the period 1988 to 1999, and by 1999,

accounted for 37% of total foreign investment inflows

3. Governance and FDI
There is long established and extensive literature on the
determinants of FDI flows to developing countries (Dunning,
1993; Moran, 1999). The focus of many of the early
contributions to this literature was on the economic determinants
of FDI inflows and they showed that TNCs were attracted to
invest in locations that allow the enterprise to exploit its
ownership specific advantages.
More recent contributions have examined the influence
of institutional factors in explaining cross-country differences
in foreign investment flows. Building on the insights of the new
institutional economics,1 it is increasingly recognized that
differences across countries in economic conditions provide only
a partial explanation of the location choices of TNCs and that
the quality of a country’s institutional framework can have a
significant impact on the perceived investment environment.
I4. Regulation and FDI in infrastructure in
developing countries
The role of economic regulation in the development
process has generated considerable interest among researchers
and practitioners in recent years. Economic regulation by
government is associated with righting “market failures”,
including ameliorating the adverse effects of private enterprise
activities. From the 1960s to the 1980s, the market failure
argument was used to legitimize direct government involvement
in productive activities in developing countries, such as
promoting industrialization through import substitution,
investing directly in industry and agriculture, and by extending
public ownership of enterprises. Since the early 1980s, policy
in developing countries has shifted from that of the
interventionist state to the current focus on the regulatory state
(Majone, 1997). The regulatory state model envisages leaving
production to the private sector where competitive markets work
well while using government regulation where significant market

failure exists (World Bank, 2001).

5. Modelling regulation and FDI in infrastructure

in developing countries
The basic question we seek to address is whether regulation
has influenced the flow of FDI to the infrastructure industries
in developing countries. More precisely, we examine whether
the perceived quality of the regulation framework has an impact
on the locational choice of TNCs when investing in infrastructure
projects in developing countries. With the move towards the
privatization of SOEs in utilities, which continues to have strong
natural monopoly characteristics, developing countries have
been encouraged to establish regulatory bodies that are intended
to operate independently of government. Economic regulation
attempts to “mimic” the economic welfare results of competition,
but it can do so only in a “second best” way because competitive
markets generate superior knowledge of consumer demands and
producer supply costs (Sidak and Spulber, 1997). Indeed,

government regulation can introduce important economic

Explain the techniques of appointing infrastructural fiancé.

India Infrastructure Finance: in the field of India Infrastructure Finance, both central and local government
have taken in initiatives to develop its infrastructure plans. Many Indian states have been using organized
financing techniques for an improvement in the infrastructure projects in India. Moreover, this will also help in
the diversification of India's domestic bond market. India Infrastructure Finance is shaped to meet the rapid
urbanization and to invest more in the basic infrastructure like water, sanitation, roads and solid waste
management.

Requirements to enhance Financial Infrastructure of India :

The states and urban local bodies to access domestic capital markets for their infrastructure projects, need to
make essential changes in their governance and financial position. These include-

• improvements in local budgeting

• revenue collection and accounting methods
• voter participation in project planning and approval
• policy coordination between levels of government
• increased financial transparency to regulators, rating agencies, investors, and public

Infrastructure Finance gives a broad view of trends and techniques in infrastructure financing
around the world today. The title considers a wide range of projects including transport, water
systems, power and toll road privatisation. Themes include the rising need for infrastructure
investment, the quality of country infrastructure, government budget limitations and benefits
and risks of investment.

Edited by Henry A. Davis with contributions from 57 specialist contributors which include:
bankers, lawyers, consultants, economists, academics, project developers, insurance
underwriters, investment analysts, credit rating analysts, government officials, and
multilateral agency officials.
Contents Overview
 Infrastructure needs worldwide
 Public Private Partnerships
 Government accounting issues
 Infrastructure financing techniques
 Sources of infrastructure financing
 Financing health care facilities
 Airport financing

Credit rating of infrastructure projects Infrastructure Finance gives a broad view of
trends and techniques in infrastructure financing around the world today. The title considers a
wide range of projects including transport, water systems, power and toll road privatisation.
Themes include the rising need for infrastructure investment, the quality of country
infrastructure, government budget limitations and benefits and risks of investment.

Edited by Henry A. Davis with contributions from 57 specialist contributors which include:
bankers, lawyers, consultants, economists, academics, project developers, insurance
underwriters, investment analysts, credit rating analysts, government officials, and
multilateral agency officials.
Contents Overview
 Infrastructure needs worldwide
 Public Private Partnerships
 Government accounting issues
 Infrastructure financing techniques
 Sources of infrastructure financing
 Financing health care facilities
 Airport financing
 Credit rating of infrastructure projects


ndia Infrastructure Finance: in the field of India Infrastructure Finance, both central and local government
have taken in initiatives to develop its infrastructure plans. Many Indian states have been using organized
financing techniques for an improvement in the infrastructure projects in India. Moreover, this will also help in
the diversification of India's domestic bond market. India Infrastructure Finance is shaped to meet the rapid
urbanization and to invest more in the basic infrastructure like water, sanitation, roads and solid waste
management.

Requirements to enhance Financial Infrastructure of India :

The states and urban local bodies to access domestic capital markets for their infrastructure projects, need to
make essential changes in their governance and financial position. These include-

• improvements in local budgeting

• revenue collection and accounting methods
• voter participation in project planning and approval
• policy coordination between levels of government
• increased financial transparency to regulators, rating agencies, investors, and public

Highlights in India Infrastructure Finance:

The Department of Telecommunications has welcomed nearly 74 per cent of foreign direct investment
The port expansion project of the Adani Group-owned Mundra Port and Special Economic Zone Limited
For irrigation and power projects Haryana needs about Rs 40 billion to upgrade and Rs 30 billion for modernizing
its distribution system
The Indian Railway Finance Corporation has raised Rs 2.50 billion in the form of a five-year term loan from a
public sector bank
The National Highways Authority of India has increased market borrowings and private participation, and started
negotiating directly with multilateral agencies
Yes Bank plans to raise $50 million through a mix of upper and lower Tier-II bonds to fund loan growth and the
bank's expansion plans
The government is set to launch an initial public offer (IPO) for National Hydroelectric Power Corporation
India Infrastructure Finance gets the most support from the international financial agencies like the World
Bank.

HIRE PURCHASE CREDIT

Standard provisions
To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out
the following information in a print that all can read without effort:

1. a clear description of the goods

2. the cash price for the goods
3. the HP price, i.e., the total sum that must be paid to hire and then purchase the goods
4. the deposit
5. the monthly installments (most states require that the applicable interest rate is
disclosed and regulate the rates and charges that can be applied in HP transactions) and
6. a reasonably comprehensive statement of the parties' rights (sometimes including the
right to cancel the agreement during a "cooling-off" period).
7. The right of the hirer to terminate the contract when he feels like doing so with a valid
reason.
8. n business, credit that is granted on condition of its repayment at regular intervals, or installments, over
a specified period of time until paid in full. Installment credit is the means by which most durable
goods such as automobiles and large home appliances are bought by individuals. Installment credit
involves the extension of credit from a seller (and lender) to a purchaser; the purchaser gets physical
possession and use of the goods he has bought, but the seller retains legal title to them until every
installment has been paid. The purchaser usually is advanced the goods after making an initial fractional
payment called a down payment. If the purchaser defaults on his payments at some point, all previous
payments are forfeited to the seller, who may also take possession of the goods.
9. The appeal of installment buying is that it allows prospective purchasers to enjoy the advantages of
owning a relatively expensive good while paying for it gradually out of their future income, instead of
having to save the necessary purchase price out of their income first. Installment credit can thus greatly
expand the purchasing power of ordinary consumers. Installment credit for the purchase of
durable consumer goods first appeared in the furniture industry of theUnited States in the 19th
century. But such credit arrangements only acquired great economic importance around the time
of World War I, when they were adopted in the United States on a wide scale in the purchase of
automobiles. Installment credit now accounts for the majority of purchases of automobiles, expensive
home appliances, and furniture, among other consumer goods

LEASE FINANCE

A finance lease or capital lease is a type of lease. It is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle,

software);
• the lessor (finance company) will purchase that asset;
• the lessee will have use of that asset during the lease;
• the lessee will pay a series of rentals or installments for the use of that
asset;
• the lessor will recover a large part or all of the cost of the asset plus earn
interest from the rentals paid by the lessee;
 • the lessee has the option to acquire ownership of the asset (e.g. paying
the last rental, or bargain option purchase price);

The finance company is the legal owner of the asset during duration of the lease.

However the lessee has control over the asset providing them the benefits and risks of
(economic) ownership[1].

Contents
[hide]

• 1 Comparison with operating lease

• 2 Treatment in the United States
o 2.1 Special Case: Finance Leases under UCC Article
2A
• 3 International Financial Reporting Standards
• 4 Treatment in Australia
• 5 Impact on accounting
• 6 See also
• 7 External links

• 8 References

[edit] Comparison with operating lease

A finance lease differs from an operating lease in that:

• in a finance lease the lessee has use of the asset over most of its
economic life and beyond (generally by making small 'peppercorn'
payments at the end of the lease term).

In an operating lease the lessee only uses the asset for some of the asset's life.

• in a finance lease the lessor will recover all or most of the cost of the
equipment from the rentals paid by the lessee.

In an operating lease the lessor will have a substantial investment or residual value on
completion of the lease.

• in a finance lease the lessee has the benefits and risks of economic
ownership of the asset (e.g. risk of obsolescence, paying for maintenance,
claiming capital allowances/depreciation).

In an operating lease the lessor has the benefits and risks of owning the asset[2].

The U.S. Financial Accounting Standards Board and the International Accounting Standards
Board announced in 2006 a joint project to comprehensively review lease accounting
standards. In July 2008, the boards decided to defer any changes to lessor accounting, while
continuing with the projects for lessee accounting, with the stated intention to recognize an
asset and obligation for all lessee leases (in essence, making all leases finance leases). The
projected completion of the project is now 2011. [3] [4]

[edit] Treatment in the United States

Under US accounting standards, a finance (capital) lease is a lease which meets at least one
of the following criteria:

• ownership of the asset is transferred to the lessee at the end of the lease
term;
• the lease contains a bargain purchase option to buy the equipment at less
than fair market value;
• the lease term equals or exceeds 75% of the asset's estimated useful life;
• the present value of the lease payments equals or exceeds 90% of the
total original cost of the equipment.

Following the GAAP accounting point of view, such a lease is classified as essentially
equivalent to a purchase by the lessee and is capitalized on the lessee's balance sheet. See
Statement of Financial Accounting Standards No. 13 (FAS 13) for more details of
classification and accounting.

[edit] Special Case: Finance Leases under UCC Article 2A

The term sometimes means a special case of lease defined by Article 2A of the Uniform
Commercial Code (specifically, Sec. 2A-103(1) (g)). Such a finance lease recognizes that
some lessors are financial institutions or other business organizations that lease the goods in
question purely as a financial accommodation and do not want to have the warranty and other
entanglements that are usually associated with leases by companies that are manufacturers or
merchants of such goods. Under a UCC 2A finance lease, the lessee pays the payments to the
lessor (and indeed must do so, regardless of any defect in the leased goods – this obligation
usually being contained in a "hell or high water" clause), but any claims related to defects in
the leased goods may be brought only against the actual supplier of the goods. UCC 2A
finance leases are usually easy to identify because they commonly contain a clause
specifically declaring that the lease is to be considered a finance lease under UCC 2A.

[edit] International Financial Reporting Standards

In the over 100 countries that govern accounting using International Financial Reporting
Standards, the controlling standard is IAS 17, "Leases". While similar in many respects to
FAS 13, IAS 17 avoids the "bright line" tests (specifying an exact percentage as a limit) on
the lease term and present value of the rents. Instead, IAS 17 has the following five tests. If
any of these tests are met, the lease is considered a finance lease:

• ownership of the asset is transferred to the lessee at the end of the lease
term;
• the lease contains a bargain purchase option to buy the equipment at less
than fair market value;
• the lease term is for the major part of the economic life of the asset even
if title is not transferred;
 • at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset.
• the leased assets are of a specialised nature such that only the lessee can
use them without major modifications being made.

Mutual benefit financial companies

The primary form of financial business set up as a mutual company in the United States has
been mutual insurance. Some insurance companies are set up as stock companies and then
mutualized, their ownership passing to their policy owners. Under this idea, what would have
been profits are instead rebated to the clients in the form of dividend distributions or reduced
future premiums. This could be seen as a competitive advantage to such companies — the
idea of owning a piece of the company could be more attractive to some potential clients than
the idea of being a source of profits for investors.

However, the mutual form of ownership also has many disadvantages. The chief of them is
that mutual companies must generate capital for growth internally — they have no shares to
sell and hence no access to equity markets. Another shortcoming is the tendency of the
management of such companies to act as if they were themselves the ultimate owners. While
major decisions are technically subject to the vote of members, in fact very few members are
cognizant of the daily operations of the company as would be outside investor groups such as
mutual funds or pension funds. Further, without large shareholders exerting pressure to
maximize profits, management has little incentive to control costs.

At one time, most major U.S. life insurers were mutual companies. For many years, the tax
status of such organizations was open to dispute, as they were technically nonprofit
organizations. Eventually, it was agreed that federal taxation would be based on their share of
business: for instance, in years in which mutual companies represented half of the business,
they would be responsible for half of the taxes paid by the industry.

Many savings and loan associations were also mutual companies, owned by their depositors.

As a form of corporate ownership the mutual has fallen out of favor in the U.S. since the
1980s. Savings and loan industry deregulation and the late 1980s S&L crisis led many to
change to stock ownership, or in some cases into banks. Many large U.S.-based insurance
companies, such as the Prudential Insurance Company of America and the Metropolitan Life
Insurance Company have demutualized, with shares of stock being distributed to their
policyholders to represent the ownership interest they formerly had in the form of their
interest as mutual policyholders.

The Mutual of Omaha Insurance Company has also investigated demutualization, even
though its form of ownership is embedded in its name. It is noted that other formerly mutual
companies such as Washington Mutual, a former savings and loan association, have been
allowed to demutualize and yet retain their names.

The approximate British equivalent of the Saving and Loan is the building society. Building
societies also went through an era of demutualisation in the 1980s and 1990s, leaving only
one large national building society and currently 52 (Jan 2010) smaller regional and local
ones. Significant demutualisation also occurred in Australia in the same era.
Cooperatives are very similar to mutual companies. They tend to deal in primarily tangible
goods and services such as agricultural commodities or utilities rather than intangible
products such as financial services. Nevertheless, banking institutions with close ties to the
cooperative movement are usually known as credit unions or cooperative banks rather than
mutuals.

A mutual, mutual organization, or mutual society is an organization (which is often, but

not always, a company or business) based on the principle of mutuality. Unlike a true
cooperative, members usually do not contribute to the capital of the company by direct
investment, but derive their right to profits and votes through their customer relationship.
[dubious – discuss]
A mutual organization or society is often simply referred to as a mutual.

A mutual exists with the purpose of raising funds from its membership or customers
(collectively called its members), which can then be used to provide common services to all
members of the organization or society. A mutual is therefore owned by, and run for the
benefit of, its members - it has no external shareholders to pay in the form of dividends, and
as such does not usually seek to maximize and make large profits or capital gains. Mutuals
exist for the members to benefit from the services they provide and often do not pay income
tax.[1]

Profits made will usually be re-invested in the mutual for the benefit of the members,
although some profit may also be necessary in the case of mutuals for internal financing to
sustain or grow the organization, and to make sure it remains safe and secure.