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FDI

Presented by
: Vaishali Sharma
Lecturer MBA- IBE
Defination of FDI
Foreign direct investment (FDI) occurs when an investor

based in one country (the home country) acquires an


asset in another country ( the host country) with the
intent to manage the asset.

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Types of FDI
 FDI Types

◦ Purchase of existing assets


 Quick entry, local market know-how, local financing
may be possible, eliminate competitor, buying
problems

◦ New investment
No local entity exists or is available for sale,
local financial incentives may encourage, no
inherited problems, long lead time to generation
of sales or other desired outcome

◦ Participation in an international joint-venture
Shared ownership with local and/or other non-local
partner

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Which factors encourages
FDI?

• Financial incentives (Funds from local
Government)


• Fiscal incentives (Exemption from import
duties)


• Indirect incentives (Provides land and
infrastructures at less commercial prices)

4
Which factors
• encourages FDI?




•Political stability

•Mar ket potential &
accessibility

•Lar ge economy

•Mar ket size
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Don’t Be Confused
Between
FDI & FII
 FII - is Foreign Institutional Investors, i.e, foreign
Investment Bankers like Goldman sachs, Merrill lynch,
Lehman bros etc...investing in indian markets in other
words buying indian stocks.FII's generally buy in large
volumes which has an impact on the stock markets...

FDI - is Foreign Direct Investments i.e. a foreign


company having a stake in a public sector undertaking
in a country for a long period and that company is
called Multinational Enterprise.

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The Direction of FDI

 Historically, most FDI has been directed at the developed


nations of the world as firms based in advanced countries
invested in other markets
◦ The US has been the favorite target for FDI inflows

 While developed nations still account for the largest share


of FDI inflows, FDI into developing nations has increased

◦ Most recent inflows into developing nations have been


targeted at the emerging economies of South, East,
and Southeast Asia

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Modes of FDI

 1) By Direction
 * Inward
 *Outward
 2) By Target
 * Mergers and Acquisitions
 * Horizontal FDI
 * Vertical FDI
 (a) Backward Vertical FDI
 (b) Forward Vertical FDI
 3 )By Motive
 * Resource-Seeking
 * Market-Seeking
 * Efficiency-Seeking
 * Strategic-Asset-Seeking

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BY TARGET
 Mergers and Acquisitions

 Transfers of existing assets from local firms to foreign firms
takes place;

 Horizontal FDI

 Investment in the same industry abroad as a firm operates


in at home.

 Vertical FDI

 *Backward Vertical FDI
 Where an industry abroad provides inputs for a firm's
domestic production process.

 *Forward Vertical FDI
 Where an industry abroad sells the outputs of a firm's
domestic production.

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BY MOTIVE
 Resource-Seeking
 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..

 Efficiency-Seeking
 It is suggest ed t hat t his t ype of FDI com es wit h t he expect at ion
t hat it furt her increases t he profit abilit y of t he firm . Typically,
t his t ype of FDI is m ost ly widely pract iced bet ween developed
econom ies; especially t hose wit hin closely int egrat ed m arket s
(e.g. t he EU)..

 Strategic-Asset-Seeking
 A tactical investment to prevent the loss of resource to a
competitor. Easily compared to that of the oil producers, whom
may not need the oil at present, but look to prevent their
competitors from having it.
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INDIA AN IDEAL
INVESTMENT DESTINATION

 World’s largest democracy

Second largest emerging market (US$ 2.4


trillion)

 Liberal Foreign Investment Regime

 Skilled and competitive labour force

 Amongst the highest rates of return on


investment

 Large domestic market
 11
FDI Approval Procedure
Automatic Route Government Route
in most for few
Sector sectors

RBI FIPB

No permission required, only to


Approval is granted
notify RBI within 30 days of
generally in 30
issue of shares to foreign
days
investors
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FDI Inflows….Robust Growth

9000
(Only
7722 7404 Equity)
8000

7000
6130

6000
5035 6051
US $ m

5000

4322
4000 4029

3000

2000

1000

0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 Apr - Nov

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2500

FDI Inflows- Sector -wise


2000

Electrical equipment including


software moves to over all 2nd position
in Nov 2006.
Services sector shows spurt in growth
1500 and the top sector attracting FDI –
moving up from the third position.
US $ m

Spurt in FDI in Real Estate causes the


construction sector to the third position
in Nov 2006.
1000

500

0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 April Nov

Electrical Equipment (including Software) Telecommunications Transportation


Chemicals (other than Fert.) Services Sector Fuels (Power & Oil Refinery)
Construction Activities

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FDI Policy …. Prohibited activities

•Retail except single brand retailing allowed upto


51% with
FIPB approval

•Atomic energy

•Lottery business

•Betting and Gambling

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FDI Policy for Industry Sector…Fully
permitted

Manufacturing
•100% FDI permitted in all activities under automatic
route except:

–Cigar and cigarettes of tobacco - FIPB

–Products reserved for Small Scale Sector
•FDI less than 24% under automatic route
•FDI beyond 24% - FIPB subject to export
obligation

–Defence products
•FDI upto 26% - FIPB subject to licensing of Arms
and Ammunitions

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FDI Policy for Industry Sector…. Fully
permitted

Mining
•Coal – FDI upto 100% as per Coal Mines (Nationalization) Act
1977
•Diamond, Gold, Silver , Minerals – upto 100% under automatic
route as MMRD Act
•Atomic minerals – upto 74% in JV with PSUs – FIPB


Electricity
•FDI upto 100% under automatic route in Generation,
Transmission, Distribution and Power Trading as per
Electricity Act 2003

17
FDI Policy for Service Sector…. Largely
permitted

 FM Broadcasting (20%) - FIPB


Upto 26 %  Uplinking News and CATV Channel - FIPB
 Print Media – News Papers & Periodicals -
FIPB
 Insurance - Automatic

•Broadcasting - Cable Network, DTH,


Upto 49 % Setting up hardware - FIPB
•Stock Exchanges - FIPB
•Air Transport Services - Automatic

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FDI Policy for Service Sector…. Largely
permitted

Telecommunication - FIPB
Upto 74 % (Beyond 49%)
Private sector banks -
Automatic

•Development of existing airports - FIPB


Upto 100 % (Beyond 74%)
•Publishing scientific magazines - FIPB
•Courier services -
FIPB

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Political Ideology & FDI

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Advantages of FDI
 Infrastructure and technology
transfer

 Increased Productive efficiency
due to competition from
multinational subsidiaries

21
Advantages of FDI
 Fastergrowth of output and
employment
 Consumer Benefits

 Price
 Quality
 Varieties
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Advantages of FDI
 Increase in Exports

 Increase in savings and


Investment

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Costs of FDI

 Detriment of the growth of domestic producer
and the national economy

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Costs of FDI
 Enviroment and natural resource costs

 Abuse of local culture and traditions Ex


FDI Tourism Abuse

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Costs of FDI
 Facilitate hegemony by the dominant US and the
western cultures.


 Pr int TV Ent e r t a inm e nt

 Political Influence (News)

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