Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest

(10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1] It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movement.

Foreign direct investment in India

Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI in 2010 was $24.2 billion, a significant decrease from both 2008 and 2009.[9] Foreign direct investment in August 2010 dipped by about 60% to aprox. $34 billion, the lowest in 2010 fiscal, industry department data released showed.[10] In the first two months of 201011 fiscal, FDI inflow into India was at an all-time high of $7.78 billion up 77% from $4.4 billion during the corresponding period in the previous year. The worlds largest retailer WalMart has termed Indias decision to allow 51% FDI in multibrand retail as a first important step and said it will study the finer details of the new policy to determine the impact on its ability to do business in India.However this decision of the government is currently under suspension due to opposition from multiple political quarters.

Five Different Types of Foreign Direct Investment (FDI)

According to Chryssochoidis, Millar & Clegg, 1997 there are five different types of foreign direct investment (FDI). The first type of FDI is taken to gain access to specific factors of production, e.g. resources, technical knowledge, material know-how, patent or brand names, owned by a company in the host country. If such factors of production are not available in the home economy of the foreign company, and are not easy to transfer, then the foreign firm must invest locally in order to secure access. The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis. According to this model the company shall invest in order to gain access to cheaper factors of production, e.g. low-cost labour. The government of the host country may encourage this type of FDI if it is pursuing an export-oriented development strategy. Since it may provide some form of

investment incentive to the foreign company, in form of subsidies, grants and tax concessions. If the government is using an import-substitution policy instead, foreign companies may only be allowed to participate in the host economy if they possess technical or managerial know-how that is not available to domestic industry. Such know-how may be transferred through licensing. It can also result in a joint venture with a local partner. The third type of FDI involves international competitors undertaking mutual investment in one another, e.g. through cross-shareholdings or through establishment of joint venture, in order to gain access to each other's product ranges. As a result of increased competition among similar products and R&D-induced specialisation this type of FDI emerged. Both companies often find it difficult to compete in each other's home market or in third-country markets for each other's products. If none of the products gain the dominant advantage, the two companies can invest in each other's area of knowledge and promote sub-product specialisation in production. The fourth type of FDI concerns the access to customers in the host country market. In this type of FDI there are not observed any underlying shift in comparative advantage either to or from the host country. Export from the companies' home base may be impossible, e.g. certain services, or the capability to request immediate design modifications. The limited tradability of many services has been an important factor explaining the growth of FDI in these sectors. The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type occurs when there are location advantages for foreign companies in their home country but the existence of tariffs or other barriers of trade prevent the companies from exporting to the host country. The foreign companies therefore jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence need only be sufficient to circumvent the trade barriers, since the foreign company wants to maintain as much of the value-added in its home economy.

INTRODUCTION Consistent economic growth, de-regulation, liberal investment rules, and operational flexibility are all the factors that help increase the inflow ofForeign direct investment or FDI.FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country. Types of Foreign Direct Investment: An Overview FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as "direct investments abroad." Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. Other categorizations of FDI exist as well. Vertical Foreign Direct Investment Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called "market-seeking FDIs." "Resourceseeking FDIs" are aimed at factors of production which have more operational efficiency than those available in the home country of the investor. Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as "efficiency-seeking." Benefits of Foreign Direct Investment * * * * Growth of capital stock Incorporated technologies Possibilities to gain managerial and labor skills Higher incomes and economic development. (Taxation for public sector) - Finance education - Finance health - Finance infrastructure development, etc. - Resource -transfer - Employment - Balance-of-payment (BOP) * Import substitution * Source of export increase

Costs of Foreign Direct Investment * Adverse effects on the BOP - Capital inflow followed by capital outflow + profits - Production input importation * Threat to national sovereignty and autonomy - Loss of economic independence Advantages Economic development

Foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships. An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95. Transfer of technologies Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country. Human capital resources The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country. Job opportunity Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country. Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken. Income generation Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits. Export/Import It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises. Foreign direct investment leads to increase in profits within different industries as well as tax cuts and expanded marketability for singularly differing industries. Often times procurement of properties, buildings, and labor can be obtained at a fraction of the cost in host countries than would be the case within the company's home country. While this may seem unfair, it is a good idea to keep in mind the host countries economy and market. Companies are often forced to abide by local regulations rather than the regulations of their home country. On the other side of the coin, the host country benefits due to the increase in jobs it produces in the regional labor market to which the investment companies reach out to. Often times dying economies can be revived in the process of becoming a host for certain industries or markets in which that industry or market had not previously been. This is especially the case with third world countries that are trying to catch up to industrial nations or who need a boost due to changes in regional climates or in the advent of recovery from the aftermath of civil or world war. Foreign direct investment (FDI) in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. [1] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The IMF defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment[2]. HISTORY In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting 28 percent of global GDP. US International Direct Investment Flows
Period 1960-69 1970-79 1980-89 1990-99 2000-07 Total FDI Outflow $ 42.18 bn $ 122.72 bn $ 206.27 bn $ 950.47 bn $ 1,629.05 bn $ 2,950.69 bn FDI Inflows $ 5.13 bn $ 40.79 bn $ 329.23 bn $ 907.34 bn $ 1,421.31 bn $ 2,703.81 bn Net + $ 37.04 bn + $ 81.93 bn - $ 122.96 bn + $ 43.13 bn + $ 207.74 bn + $ 246.88 bn

Foreign direct investment (FDI) is an integral part of an open and effective International economic system and a major catalyst to development. Yet, the benefits of FDI do not

accrue automatically and evenly across countries, sectors and local communities. National policies and the international investment architecture matter for attracting FDI to a larger number of developing countries and for reaping the full benefits of FDI for development. The challenges primarily address host countries, which need to establish a transparent, broad and effective enabling policy environment for investment and to build the human and institutional capacities to implement them. IN India

Title UNCTAD Country FDI Fact Sheets (2008) - India (Oct-10-2008) Main Economic Indicators (Oct-07-2008) Taking a holistic approach to planning and developing hydropower (August 2008) (Oct-06-2008) Title Kerala Project Opportunities (Sep 24, 2008)

Type Business: FDI trends Business: Economic overviews Business: Public-Private Partnerships Type Opportunities: Existing private ventures

Sector Non-sector Specific Non-sector Specific Energy Utilities Sector Non-sector Specific Trade & Commerce Wood, Paper & Pulp Property

Opportunity for Long Term Commercial Site Leasing - Opportunities: New projects India (Apr 11, 2008) Infrastructure Sector Profile- India Opportunities: Sectors (Feb 13, 2008)

Telecommunications Transport

India Will Achieve its FDI Target This Year Even as liquidity in the Indian economy is drying up, the government has assured the people that enough money is flowing in. Kamal nath, India's commerce and industry minister, announced that while export grew to 30 percent in October, FDI will rise above US$35 billion by the end of this year, meeting the governments target. Earlier he had mentioned that during April-August this year, India had already received US$14.6 billion in FDI. "The huge growth in FDI in India despite global economic slowdown shows how sound and resilient our economy is," Kamal Nath said, adding there was nothing to worry at all. "In August, FDI growth was 124 % and 219% in July this fiscal, which is an indicator to the fact that India with its strong fundamentals can tide over global financial crisis, "he told the Times of India, hinting that India is still an attractive investments destination. Mr Nath

told the Economic Times that FDI increase must be seen as a positive sign in the context of global slowdown. The manufacturing sector received US$5 bn during April-August, an yearon-year rise of 41 percent. Major investments this year involved the Royal bank of Scotland buying shares in Reliance Ports and Terminals for US$382 million and DE Shaw Composite Investment pouring in US$384 million in DLF Assets.

The Advantages of Foreign Direct Investment The party making the investment is usually known as the parent enterprise, and the party invested in can be referred to as the foreign affiliate. Together, these enterprises form what is known as a Transnational Corporation (TNC), and here are some of the advantages of such an arrangement.
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Many countries still have several import tariffs in place, so reaching these countries through international trade is difficult. There are certain industries that require to be present in international markets in order to succeed, and they are the ones who then provide FDI to industries in such countries, so that they can increase their sales presence there. Many parent enterprises provide FDI because of the tax incentives that they get. Governments of certain countries invite FDI because they get additional expertise, technology and products. So to welcome these benefits they provide great tax incentives for foreign investors, which ultimately suits all parties. Foreign investment reduces the disparity that exists between costs and revenues, especially when they are calculated in different currencies. By controlling an enterprise in a foreign country, a company is ensuring that the costs of production are incurred in the same market where the goods will ultimately be sold. Different international markets have different tastes, different preferences and different requirements. By investing in a company in such a country, an enterprise ensures that its business practices and products match the needs of the market in that country specifically. Though this is not such a big factor, some markets prefer locally produced goods due to a strong sense of patriotism and nationalism, making it very hard for international enterprises to penetrate such a market. FDI helps enterprises enter such markets and gain a foothold there. From the foreign affiliate's point of view, FDI is beneficial because they get advanced resources and additional capital at their disposal. Something like this is always welcome, and it also helps strengthen the political relationships between various nations.

The Disadvantages of Foreign Direct Investment While all these advantages are well and good, the fact is that there are certain cons that come along with them as well. Every industry, and every country, deals with these cons differently,

and are also affected in varying degrees, so they are not meant to discourage foreign investors in any way. But every parent enterprise should mandatorily be aware of these points.
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Foreign investments are always risky because the political situation in some countries can change in an instant. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. In certain cases, political changes could lead to a situation of 'Expropriation'. This refers to a scenario where the government can take control of a firm's property and assets, if it feels that the enterprise is a threat to national security. Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to the advantages and disadvantages of globalization as well. Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases. From the point of view of foreign affiliates, FDI is ill-advised because they lose their national identity. They have to deal with interference from a group of people who do not understand the history of the company. They have unreal expectations placed on them, and they have to handle several cultural clashes at the same time.

Enterprises go down this path after carefully studying the advantages and disadvantages of foreign direct investment, so they are always well prepared for the worst. When handled properly, FDI can prove to be beneficial to both the parties, and the economies of both the party's countries as well. But if it goes wrong, then things can get very ugly for everyone involved as well. So this is a double-edged sword that needs to be handled with lots of caution.