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FOREIGN DIRECT INVESTMENT (FDI)

• FDI occurs when a firm invests directly in facilities to produce and/or


market a product in a foreign country.
– Once a firm undertakes FDI, it becomes a multinational enterprise
(multinational = more than one country).

• FDI takes two forms:


– Greed-field investment: establishing a wholly new operation in a
foreign country.
– Acquiring or merging with an existing firm in the foreign country.

• Investing in foreign financial instruments (Portfolio Investment) IS


NOT FDI.
FDI and FII
FDI FII
• When a company situated in one • Means an institution established or
country makes an investment in a incorporated outside India which
company situated abroad. proposes to make investment in
securities in India.
• They are registered as FIIs with SEBI
• FDI is Foreign Direct Investment: It is regulations.
the investment made by Foreign
Multinational companies in India. • FII is Foreign Institutional Investment: It
is investment made by foreign Mutual
• FDI brings long term capital. Funds in the Indian Market.

• FIIs associated with the short term


• Entry and exit is difficult in case of FDI. investment.
• Direct investment excludes investment
through purchase of shares.FDI is one • FIIs invest its fund in capital of India
example of international factor market, securities market, and foreign
movements. exchanges.
• Entry and exit is very easy in FII
•  Investment in physical assets 
• Investment in financial assets

• Aim is to increase enterprise capacity or productivity


or change management control • increase capital availability. FII
results in only capital inflows
• FDI flows into the primary market

• FII flows into the secondary


• FDI increases job opportunities, infrastructural
development in the investee country and thus leads market.
to economic growth.

• FDI obtains management control in the company.  FDI


flows into the primary market

•  However FDI is preferred over FII because


it not only brings capital but also brings the
latest technology, better infrastructure,
better management and job opportunities.
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
Investing in India – Entry Routes
Investing in India

Prior Permission
Automatic Route
(FIPB)

General rule By exception


No prior permission Prior Government
required Approval needed
Only information to the
Reserve Bank of India Decision generally
within 30 days of inflow/ Within 4-6 weeks
Issue of shares
TYPES OF FDI, BY DIRECTION , BY MOTIVE BY TARGET BY
ENTRY MODES
• HORIZONTAL FDI :- investment in the same industry abroad as a firm operates in at home

• When a firm invests in abroad in similar production activities as carried out in the home
country. MNE’s such as pepsi, coke kodak, HSBC, LG etc expanded internationally by a
way horizontal FDI.
• or
• Where the company carries out the same activities abroad as at home (for example toyota
assembling cars in both japan and u.k)

• Vertical Foreign Direct Investment:


• Backward Vertical - Industry abroad provides inputs for a firm's domestic production
process

• Forward Vertical - Industry abroad sells the outputs of a firm's domestic production


BY DIRECTION : INWARD FDI & OUTWARD FDI:-

Inward FDI:
• An inward investment involves an foreign entity either investing in or purchasing the goods
of a local company

• Example: Foreign firms taking control over domestic assets is termed as Inward FDI. From
an Indian perspective% direct investments made by foreign firms such as “Suzuki, Honda,
LG, Samsung GM etc.% in India are the examples of inward FDI

• Outward FDI:

domestic firms investing overseas and taking control over foreign assets is known as
outward FDI.From an Indian point of view direct investments overseas by Indian frms such
as Tata Motors, Infosys videocon ONGC etc are examples of FDI.

• An outward investment is a business strategy where a domestic firm expands its operations
to a foreign country either via acquisition or expansion of an existing foreign facility.
BY ENTRY MODES 
•  GREENFIELD INVESTMENT:- Greenfield investment
is the investment in a manufacturing ,office, etc.

• MERGERS AND ACQUISITIONS:- merger is a


combination of two companies to form a new
company, while an acquisition is the purchase of
one company by another company in which a new
company is formed.
FDI
• FDI is a major source of non-debt financial
resource for the economic development of a
country.
• FDI helps in achieving technical know-how and
generating employment.
• The Indian government has taken many
initiatives in recent years such as relaxing FDI
norms across sectors such as defence, telecom
etc. which has resulted in very good inflow of
FDI.
Cont…
 important strategic component of investment for sustained
economic growth and development through creation of jobs,
expansion of existing manufacturing industries etc

 according to The Economic Survey 2008-09- most attractive type of


capital flow for emerging economies.

 NMCC specified that: FDI brings better technology and management,


access to marketing networks and offers competition.
 However, much attention given to FDI under the Make in India
scheme.
 allowing 100% FDI in most sectors/activities.
 MII -first major programme of the new government which was
initiated in September 2014
 transform India into a global manufacturing hub.
Cont..
 India’s image as a preferred destination for foreign investment,

 significant  jump in India’s ‘ease of doing business’ World Bank ranking since
2015. 

 as part of a wider set of nation-building initiatives under which various


sectors have been opened-up for FDI

 focus of Make in India programme was on 25 sectors.

 focus on removing unemployment by job creation, skill enhancement,


nurturing innovation and development in the industrial sector.

 Significant increase in FDI in India following the implementation of recent


(GOI) initiatives, “Make in India” campaign and the continuing liberalisation
of the FDI regime across a wide range of sectors.
For FDI:
- causes a flow of money into the economy which stimulates
economic activity/economic growth
- Employment & skill will increase
- Long run aggregate supply will shift outwards
-Aggregate demand will also shift outwards as investment is
a component of aggregate demand
- it may give domestic producers an incentive to become
more efficient
- the government of the country experiencing increasing
levels of FDI will have a greater voice at international
summits as their country will have more stakeholders in it .
- Trade
Advantages of FDI
•  Technology diffusion and knowledge transfer
•  Linkages and spillover to domestic firms
• Improved technology.
• Management expertise.
•  Access to international markets
• -Import export -Growth in economy
• -Competition
• Global Exposer
• Global Relationship
FDI inflows Trends: 1991-1992 to 2019-20

FDI
400000

350000

300000

250000

200000 FDI

150000

100000

50000

0
2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0
1-9 2-9 3-9 4-9 5-9 6-9 7-9 8-9 9-0 0-0 1-0 2-0 3-0 4-0 5-0 6-0 7-0 8-0 9-1 0-1 1-1 2-1 3-1 4-1 5-1 6-1 7-1 8-1 9-2
9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1
19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
The sectoral
trends of FDI flows to India from 1991-92 to 2019-20 ( pre & post MII )

 Impact of FDI on Indian economy is assessed by analyzing the performance of important


sectors where FDI has been permitted.

 service sector has the highest FDI inflows attracting 17% share followed by
Telecommunication and computer software attracts 8% and construction sectors is 7%.

 Country – wise inflows of FDI from 2000 to 2018: MAURITIUS country has the highest
foreign investor in India with 35%. After Mauritius, Singapore and Japan invest the
highest FDI in India with 17% and 7% respectively.

 The region wise FDI flows: Mumbai has registered largest FDI inflow amounting to 31%
of total inflow received in last 18 years.

 New Delhi is the second preferred region for FDI inflow with 20% and

 Chennai is the third preferred cities which are attracting FDI with 8% in India.
 State wise FDI inflows show that Maharashtra, Delhi, Tamil Nadu Karnataka, Gujarat and
together accounted major percent of inflows because of the infrastructural facilities and
favourable business environment provided by these states.
Government policies
• Automatic Route:
• Fdi is allowed under the automatic route without prior
approval either of the Government or the Reserve bank
of India in all activities/sectors as specified in the
consolidated Fdi policy, issued by the government of
India from time to time.

• Prior Permission (FIPB): Government route:- Fdi in


activities not covered under the automatic route
requires prior approval of the government which are
considered by the foreign investment promotion board
department of economic affairs ministry of finance.
• This policy focused attention on the need for  promoting competition in
the domestic market, technological up gradation and modernization .

• The policy laid the foundation for an increasingly competitive export


based and for encouraging foreign investment in high-technology areas.
• These policies created a climate for rapid industrial growth in the country.

• A high degree of self-reliance in a large number of items - raw materials,


intermediates, finished goods - had been achieved.

• New growth centre of industrial activity had


emerged, as well as a new generation of entrepreneurs.

• A large number of engineers, technicians and


skilled workers had also been trained.
Factors Affecting FDI

• Financial incentives (Funds from local Government)


• Fiscal incentives (Exemption from import duties)
• Indirect incentives (Provides land and
• Political stability
• Market potential & accessibility
• Large economy
• Market size
Why India?
• Liberal, largest democracy, Political Stability
• Second largest emerging market (US$ 2.4 trillion)
• Skilled and competitive labors force
• highest rates of return on investment
• one hundred of the Fortune 500 have R & D
facilities in India
• Second largest group of software developers
after the U.S.
• lists 6,500 companies on the Bombay Stock
Exchange (only the NYSE has more)
Why India (cont.)
• World's fourth largest economy & second largest
pharmaceutical industry
• growth over the past few years averaging 8%
• has a middle class estimated at 300 million out of a total
population of 1 billion
• Destination for business process outsourcing, Knowledge
processing etc.
• Second largest English-speaking, scientific, technical and
executive manpower
• Low costs & Tax exemptions in SEZ
• Tax incentives for IT , business process outsourcing and KPO
companies