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Foreign Direct Investment

The firms are motivated to invest overseas for a variety of

reasons such as access to factors of production, cheaper
factors of production, access to products, access to markets
and customers, present and future.
Foreign Direct Investment (FDI)
Direct investment represents acquisition of some amount of
permanent interest in the enterprise, implying a degree of
control over the management of the company in which the
investment is made. FDI involves the ownership and control of
a foreign company in a foreign country. In exchange, for this
ownership, the investing country usually transfers some of its
financial, technical, managerial trademark and other resources
to the foreign country.

Foreign Direct Investment (FDI) has been defined to include

investment in :
1. Indian companies which were subsidiaries of foreign companies.
2. Indian companies in which 40 percent or more of the equity
capital was held outside India in any one country.
3. Indian companies in which 25 percent or more of the equity
capital was held by a single investor abroad.
The objective criteria for identifying FDI from 1992 was fixed at
10 percent ownership of ordinary share capital for a single
investor in keeping with the IMF guidelines.
Portfolio investment is the most popular form of FDI in India.
This is followed by direct investment and foreign institutional
investment. This refers to the participation of a foreign
undertaking in the risk capital of a existing or a new
undertaking. The most common system of FDI flow is through
participation in risk capital and gaining control in management of the
host country enterprise.

Advantages of Foreign Direct Investment

1. Economic Development
2. Transfer of Technologies
3. Human Capital Resources
4. Employment Creation
5. Research & Development
6. Income Generation
7. Beneficial for SMEs (Small & Medium level Enterprises)

International Investment Theories

1. Ownership Advantage Theory

2. Internalisation Theory

3. Dunnings Electic Theory

4 .Product Life Cycle Theory

International Investment Theories

1. Ownership Advantage Theory
The firms having competitive advantage domestically derived
from its domain knowledge and valuable assets like
technology, brand names and large scale economies extend
their operations to foreign markets through FDI.
ex. Dr Reddys Lab, Caterpillar.
2. Internalisation Theory
ex. Licensing, franchising, exporting etc.
3. Dunnings Electic Theory
ex. Locational advantage, advantage from factors of
U.S software companies enjoy lower labour costs by locating
in india

4 .) Product life cycle theory

Factors influencing FDI

1. Supply factors
2. Demand factors
3. Political factors

Supply Factors
1. Production Costs
2. Logistics
3. Resource availability
4. Access to technology
Demand Factors
5. Customer access
6. Marketing advantage
7. Exploitation of competitive advantage
8. Customer mobility
Political Factors
9. Avoidance of trade barriers
10. Economic development incentives
3. Bureaucracy

International Business

Foreign Direct Investment

FDI occurs when an entity/investor from one country(home
country, e.g. USA) obtains or acquires the controlling interest
in an entity in another country (host country,e.g. India) and
then operates and manages that entity and its assets as part of
the multinational business of the investing entity.
Foreign Portfolio Investment (FPI)
FPI is a category of investment instruments that are more
easily traded, may be less permanent, and do not represent a
controlling stake in an enterprise. These include investment via
equity instruments (Stocks) or debt (Bonds) of a foreign
enterprise which does not necessarily represent a long-term

International Business

The difference between FDI & FPI


To acquire controlling interest in a foreign

entity or set up an entity with controlling

To make capital gains
from investments.
There is no intention
to control the entity.

Source FDI investments come from MNCs and

corporate so as to derive benefit of new
market, cheaper resources (labour),
efficiency and skills, strategic asset
seeking (oil fields) and time geography

FPI investment come

from investors,
mutual funds,
companies, and
corporate with pure
motive of investment


More enduring and has longer time


FPI is highly volatile.


Generally comes as subsidiary or joint


Comes mainly
through stock

International Business

FDI in India are approved through two routes:

1. Automatic approval by RBI:
The RBI accords automatic approval within a period of two
weeks (provided certain parameters are met) to all
proposals involving :
. Foreign equity up to 50% in 3 categories relating to mining
. Foreign equity up to 51% in 48 specified industries.
. Foreign equity up to 74% in 9 categories.
The category lists are comprehensive and cover most
industries of interest to foreign companies. Investments in high
priority industries or for trading companies primarily engaged in
exporting are given almost automatic approval by the RBI.

International Business

2. The Foreign Investment Promotion Board (FIPB) Route.

FIPB approves all other cases where the parameters of
automatic approval are not met. Normal processing time is 4 to
6 weeks. Its approach is liberal for all sectors and all types of
proposals, and rejections are few. It is not necessary for
foreign investors to have a local partner, even when the foreign
investor wishes to hold less than the entire equity of the
company. The portion of the equity not proposed to be held by
the foreign investor can be offered to general public.
FDI is permitted as under the following forms of investments:
1. Through financial collaborations.
2. Through joint ventures and technical collaborations.
3. Through capital markets via Euro issues.
4. Through private placements or preferential allotments.

International Business

Forbidden Territories:
FDI is not permitted in following industrial sectors:

Arms and ammunition

Atomic energy
Railway transport
Coal and lignite
Mining of iron, manganese, chrome, gypsum, sulphur, gold,
diamonds, copper, zinc.

Global Depository Receipts (GDRs)
A depository receipt is basically a negotiable certificate,
denominated in US dollars, that represents a non-US
companys publicly traded local currency (Indian Rupee) equity
shares. DRs are created when the local currency shares of an
Indian company, for example, are delivered to the depositorys
local custodian bank, against which the depository bank, such
as Bank of New York, issues DRs in US dollars. The
depository Receipts may trade freely in the overseas markets
like any other dollar denominated security, either on a foreign
stock exchange, or in the over-the-counter market, or among a
restricted group such as qualified institutional buyers.
Companys with good track record of three years may avail of
Euro-issues for approved purposes. According to the revised
guidelines issued in November 1995 companies investing in
infrastructure projects, including power, petroleum exploration
and refining, telecommunications, ports, roads and airports are

Exempted from the condition of three-year track record. It is

expected to help companies in above sectors to access cheap
overseas funds.