WHAT IS FDI?

Foreign Direct Investment shortly known as FDI refers to

the investment in which foreign funds are brought into a
company based in a differentcountry from the investor
companys country. In general the investment is made to
gain a long lasting interest in the investee enterprise. It is
termed as direct investment because the investor
company looks for a substantial amount of management
control or influence over the foreign company.
FDI is the considered as one of the primary means of
acquiring external assistance. The countries where the
availability of finance is quite low can get finance from
developed countries having good financial condition.
There are a number of ways through which a foreign
investor can get controllingownership like by way of
merger or acquisition, by purchasing shares, by
participating in a joint venture or by incorporating a wholly
owned subsidiary.
 WHAT IS FII
FII is an abbreviation used for Foreign Institutional
Investor, are the investors that pool their money to
invest in the assets of the country situated abroad. It
is a tool for making quick money for the investors.
Institutional investors are companies that invest
money in the financial markets in thecountry based
outside the investor country. It needs to get itself
registered with the securities exchange board of the
respective country for makinginvestment. It includes
banks, mutual funds, insurance companies, hedge
funds etc.
FII plays a very crucial role in any countrys economy.
Market trend moves upward when any foreign
company invests or buys securities and similarlyit
goes down if it withdraws the investment made by it.
 BASIS FOR COMPARISON FDI FII

Meaning When a company situated in FII is when foreign companies

one country makes an make investments in the stock
investment in a company market of a country.
situated abroad, it is known as
FDI.

Entry and Exit Difficult Easy

What it brings? Long term capital Long/Short term capital

Transfer of Funds, resources, technology, Funds only.

strategies, know-how etc.

Economic Growth Yes No

Consequences Increase in country's Gross Increase in capital of the
Domestic Product (GDP). country.

Target Specific Company No such target, investment

flows into the financial market.

Control over a company Yes No

 FII: HOW TO IMPACT INDIAN ECONOMY

1. FII leads to appreciation of the currency: FII need to

maintain an account with RBI fro all transaction. to
understand the implication of FII on the exchange rate we
have to understand how the value of one currency
appreciate or depreciate against the other currency
What is currency appreciation: for example if the current
foreign exchange rate is 1 USD = 50 INR (Indian rupees) but
after some time the exchange rate fluctuate to 1 USD = 40
INR. This means Indian rupees appreciate over the US
dollar. The logic is very simple.
e.g. if Indian customer want buy one quantity of ice cream
from USA market ( suppose price of 1 ice cream is 1 USD )
he will have to pay 50 INR which is equal to 1 USD. But
when exchange rate changes he will have to pay 40 INR
instead of INR which is equal to 1 USD.
In short purchasing power of Indian customer have rise now
they will have to pay less amount to buy ice cream or they
can buy more quantity of ice cream at same price .
 Depreciation: suppose forex rate is USD = 40 INR, after some time Its 1 USD
= 50 INR that means INR have depreciate over the USD.
Reason is same.
We take one example.
Suppose India import ice cream from USA. First quote is 1 USD = 40 INR. And
price of one quantity of ice cream is 1 USD.
This means Indian customer will have to pay equivalent to 1 USD that is 40
INR> but if forex rate is 1 USD = 50 INR. In this way Indian customer will have
to pay 50 INR which is equal o 1 USD.
Now I come to point how domestic current appreciate or depreciate if there if
FII inflow or FII outflow.
When FII come in India they creates rupees demand and by demand and
supply rule the price of INR appreciates.
Similarly if FII withdraw the capital from the domestic market or we can say
when they sell their share it creates the demand for US dollar and that time
demand for dollar will be more and resulted INR will depreciate.
I would like to take one more example. In 2008 our forex rate over the US
dollar was USD = 39 INR. This is just because of FII was net buyer (FII inflow
was more in Indian market ) but now you will see 1 USD = 48 INR . This is
because of FII out flow from Indian market is more and they are net seller.
This FII inflow makes the currency of the country invested in appreciate. (E.g.
FII investing in India may lead to rupees appreciating over other currencies)
and their selling and disinvestment may lead to depreciation.
 THEORY OF COMPETITIVE ADVANTAGE
Michael porter ,professor at harward,is of the
opinion that classical trade theories on comparative
advantage
fail to explain adequately why trade takes place
across countries.He studies 100 companies in 10
developed countries to learn how a firm can
become competitive.A company which enjoys
competitive advantage is in a stronger position to
trade with firms in other countries.According to
porter ,a firmss competitive advantage stems from
:-
Factor conditions
Demand conditions
Strategy & rivalry
Related & supporting industries
Porter represents these elements as the four corners of a
diamond as shown below.these four factors are posited in
a diamond shaped diagram,hence the name porters
diamond.
FACTOR CONDITIONS

STRATEGY
&RIVALRY
DEMAND
CONDITIONS

RELATED &SUPPORTING INDUSTRIES

 FACTOR CONDITIONS-factor
conditions include land
,labourmnatural resources and
infrastructure.these factors will give
initial competitive advantage to a
nation.but a sustained competitive
advantage comes from ,what porter
calls,advance or specialised
factors.such advanced factors
include skilled,labour,capital &
infrastructure.these are created but
not inherited.a firm having these
factors enjoys competitive advantage
 DEMAND CONDITIONS-demand
conditions in a country include the
size & sophistication of its market
and the appropriateness of product
standards.sophisticated local
customers enhance the countrys
competitiveness by providing firms
with insight into emerging customer
needs.
RELATED & SUPPORTING
INDUSTRIES-these enhance
competitive advantage of a firm
through close working
 FIRM STRATEGY ,STRUCTURE
AND RIVARLY-The ability of a firm to
compete successfully in global
markets depends on its strategy,its
structure and domestic
rivalry.Vigourous domestic
competition compels the firm to
become vibrant and proactive .It
constantly seeks to reduce cost
,improve quality and come out with
innovative ideas and products.