MANISH MAHAJAN SRS2011PGDM19F004 DIV-A-PGDM

INTRODUCTION
International Trade and Foreign Direct Investment are the

two most important international economic activities integrating the world economy. Due to increase in the mobility of factors of production across countries, FDI has become an integral part of a firms strategy to expand international business. FDI is the largest source of external finance for developing countries. FDI not only serves as a source of capital inflow but also helps to enhance the competitiveness of domestic economy through transfering technology, raising productivity and generating new employment opportunities.

WHY FDI IS SUPERIOR TO OTHER TYPES OF CAPITAL INFLOWS ?

The following are the reasons why FDI is superior. They are: FDI flows are less volatile and easier to sustain at the time of economic crisis. FDI is more likely to be used to improve productivity. As FDI provides more than just capital by offering access to internationally available technologies, management know-how and marketing skills.

CONCEPT OF FDI
FDI means acquiring ownership in an overseas business

entity. It is a movement of capital across national frontier which gives control to investor over the assets acquired. FDI occurs when an investor in one country acquires an asset in another country with the intent to manage. A firms become an MNC by way of FDI as its operations extend to multiple countries.

DEFINITION:
FDI can be defined as It is an investment involving a long term relationship and reflecting a lasting interest and control by a resident enterprise in one economy in an enterprise resident in an economy other than that of the foreign direct investor.

BENEFITS OF FDI:
Access to superior technology:-

Here foreign firms bring superior technology to the host countries while investing. The extend of benefits depends upon the technology spillover to other firms based in the host country.
Increased competition:-

The investing foreign firm increases industry output resulting in overall reduction in domestic prices, improved products or services quality and greater availability. This intensifies competition in host economies resulting in net improvement in consumer welfare.

 Increase in domestic investment:-

It is found that capital inflows in the form of FDI increase domestic investment so as to survive and effectively respond to the increased competition.
Bridging host countries foreign exchange gap:-

In most developing countries the levels of domestic savings are often insufficient to support capital accumulation to achieve growth targets. Besides the level of foreign exchange may be insufficient to purchase imported inputs. Thus FDI helps in making available foreign exchange for imports.

NEGATIVE IMPACT OF FDI:

Market monopoly:MNCs are far more advanced than domestic companies owing to their large size and financial power. This enterprise have ability to operate at a large scale and invest heavily in marketing, advertising and R&D activities as a result their product would be different than domestic company product as a result more people will buy new advances product. Corruption:Large foreign investors often bribe government officials and distort market forces.

 Technology dependence:-

MNCs often function in a way that doesnt result in technology sharing or technology transfer thereby making local firms technologically dependent or technologically less self reliant.
Profit outflow:-

Foreign investors import their inputs and use the host country as a processing base with little value added earning in the host country. A large proportion of their profits may be repatriated.

TYPES OF FDI:
FDI may be classified under various heads depending upon the criteria used. Major types of FDI are discussed here in a detailed manner. On the basis of direction of investment:INWARD FDI:- Foreign firms taking control over domestic asset is termed as inward FDI. From an Indian perspective direct investment made by foreign firms such as Suzuki , Honda, LG etc in India are examples of inward FDI.

OUTWARD FDI:- Domestic firms investing in foreign countries taking control over the foreign assets is known as outward FDI. This is also known as Direct Investment Abroad(DIA). Tata Motors , Infosys , Videocon etc are examples for outward FDI.
On the basis of types of activity:-

HORIZONTAL FDI:- When a firm invest in a foreign country in similar production activity as carried out in home country is a horizontal FDI. This occurs when the multinational undertakes the same production activities in multiple countries. A number of MNCs such as coke, LG etc expanded internationally by way of horizontal FDI.

VERTICAL FDI:- Direct investment in industries abroad so as either provide inputs for the firms domestic operations or sell its domestic outputs overseas is termd as vertical FDI. BACKWARD VERTICAL FDI:- Direct investment overseas aimed at providing inputs for the firms production processes in the home country is termed as backward vertical FDI. This type of FDI is common in extractive industries like mining and petroleum extraction. Companies like Shell and British Petroleum expanded their international business by backward vertical FDI.

FORWARD VERTICAL FDI:- Direct investment in a foreign country aimed to sell the output of the firms domestic production processes is referred to as forward vertical FDI. Setting up a marketing network , assembly or mixing operations overseas are illustrations of forward vertical FDI. CONGLOMERATE FDI:- Direct investment overseas aimed at manufacturing products not manufactured by the firm in the home country is termed as conglomerate FDI.

 On the basis of entry modes:

GREENFIELD INVESTMENT:- Investing in creation of new facilities or expansion of existing facilities is termed as Greenfield investment. The selection FDI mode is influenced by1. Institutional Factors 2. Cultural Factors 3. Transactional factors MERGERS AND ACQUISITIONS:- For establishing overseas production facilities mergers and acquisition are crucial tool for a firms internationalization strategy. It is estimated that 70%-80% of FDI are in the form of MERGERS AND ACQUISITIONS.

 On the basis of sector:-

INDUSTRIAL FDI:- Investment by foreign firms in the manufacturing sector is termed as industrial FDI. Major objectives of FDI in the manufacturing sector include are1. To achieve cost efficiency by way of talking advantage of availability of raw material inputs and manpower at cheaper costs. 2. To bypass trade barriers such as high import tariffs and other import restrictions. 3. To be closer to the markets and serve them more efficiently. 4. To have physical presence due to strategic reasons.

NON INDUSTRIAL FDI:- Investment by a foreign firm in services sector is termed as non industrial FDI. The major reasons for this are1. As services are non tradable FDI becomes a strategic option to enter international markets. 2. To overcome regulatory obstacle. 3. To create regular contact with the customer.

PROMOTION OF FDI IN INDIA: INSTITUTIONAL FRAMEWORK:-

The Department of Industrial policy and Promotion is responsible for promoting FDI inflows in India. 2. This department advices to potential investors about investment policies, procedures and opportunities. 3. It also helps in resolving the problems faced by foreign investors in the implementation of their projects through Foreign Investment Implementation Authority which interacts directly with investor.
1.

 POLICY FRAME WORK:1. The policy framework of FDI in India evolved in a

phased manner from the strategy of import substitution soon after independence to progressive liberalization that begin in early 1990s. 2. FDI inflows in the development of infrastructure , setting up of Special Economic Zones and technological upgradation of Indian industry through Greenfield operation investments in manufacturing and in projects with high employment potentials are encouraged.

FDI PROHIBITED: Retail Trading.

Atomic Energy.
Lottery Business. Gambling and Betting sector.

Business of Chit Funds.

Plantation except Tea. Activity/sector not opened to private sector investment.

THANK Q