FDI – Foreign Direct Investment

RAVI- IBA
 Foreign Investment - Introduction
• Foreign Investment refers to investments made by
residents of a country in financial assets and production
process of another country.
• It can affect the factor productivity of the recipient country
and can also affect the balance of payments.
• It can come in two forms: Foreign Direct Investment (FDI)
and Foreign Portfolio Investment (FPI).
• Foreign direct investment involves in the direct production
activity and also of medium to long-term nature.
• But the foreign portfolio investment is a short-term
investment mostly in the financial markets and it consists of
Foreign Institutional Investment (FII).
 Non-debt capital form
• The developing countries are looking forward to
steady flow of capital and are undergoing the
learning process of how to absorb them.
• As regard the attendant risks, the central bank of
the countries have to tackle them.
• There are many ways the inflow can come into
the country.
• Debt is a form of capital forms which are raised
from banks or from the markets.
• The non-debt creating flows includes Foreign
Direct Investment or Portfolio Investments.
 Paradigm Shift - INDIA
• India and the Indians have undergone a paradigm shift.
There have been fundamental and irreversible changes
in the economy, government policies, outlook of
business and industry, and in the mindset of the
Indians in general. From a shortage economy of food
and Foreign Exchange, India has now become a surplus
one.
• From an agro based economy it has emerged as a
service oriented one. From the low-growth of the past,
the economy has become a high growth one in the
long term. After having been an aid recipient, India is
now joining the aid givers club.
 Background : India Transformed !!
…Yesterday

 Slow rate of growth

 Bureaucratic
 Protected and slow
 Small consumer markets
 Weak infrastructure

…Today

 Strong macro economic fundamentals

 Encouraging foreign investment
 Outsourcing destination
 Growing consumerism
 Impetus on infrastructure development

India -- the largest Democracy - one of the fastest growing economies in the World!

5
 ADVANTAGES INDIA HAS TO OFFER
• Stable democratic environment over 60 years
of independence
• Large and growing market
• World class scientific, technical and managerial
manpower
• Cost-effective and skilled labour
• Abundance of natural resources
• Large English speaking population
• Well-established legal system with
independent judiciary
• Developed banking system and vibrant capital
market
• Well developed accountancy, legal, actuarial
and consultancy profession

6
• India has already marked its presence as one
of the fastest growing economies of the world.
It has been ranked among the top 3 attractive
destinations for inbound investments. Since
1991, the regulatory environment in terms of
foreign investment has been consistently
eased to make it investor-friendly.
 INTRODUCTION
 FDI means “cross-border investment by a resident entity
in one economy with the objective of obtaining a lasting
interest in an enterprise resident in another economy”.
 Or ‘capital inflows from abroad that is invested in or to
enhance the production capacity of the economy’.
 FDI is considered to be the life blood for developing
nations.
 It provides opportunity for technological transfer and up
gradation and others.
 It helps in broaden the market accessibility for both host
and home countries.
 It helps in invention and innovation of international
markets
 Foreign Direct Investment –
Introduction Contd.
Foreign direct investment (FDI): a firm
invests directly in foreign facilities
A firm that engages in FDI becomes a
multinational enterprise (MNE)
– Multinational = “more than one country”
Factors which influence FDI are related to
factors that stimulate trade
 Foreign Direct Investment

 Involves ownership of entity abroad for

– production
– Marketing/service
– R&D
– Access of raw materials or other resource
 Parent has direct managerial control
– Depending on its extent of ownership and
– On other contractual terms of the FDI
 No managerial involvement = portfolio investment
 Foreign Direct Investment

 Why is FDI increasing in the world economy?

 Why do firms often prefer FDI to other market
entry strategies?
 Why do firms imitate competitors with FDI
strategies?
 Why are certain locations favored for FDI?
 How does political ideology affect government
FDI policy?
 What are key FDI related costs and benefits for
receiving and source countries?
 What is the procedure for receiving Foreign
Direct Investment in an Indian company?
• An Indian company may receive Foreign Direct
Investment under the two routes as given
under:
• 1. Automatic Route
• 2. Government Route
 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.
 Govt. 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 (FIPB), Department of
Economic Affairs, Ministry of Finance.
• Under this route applications are considered by the Foreign
Investment Promotion Board (FIPB). Approval from Cabinet
Committee on Security is required for more than 49% FDI in
defence.
• The proposals involving investments of more than INR 30 billion are
considered by Cabinet committee on economic affairs.

• Application can be made in Form FC-IL, which can be downloaded

from http://www.dipp.gov.in. Plain paper applications carrying all
relevant details are also accepted. No fee is payable.
 What are the instruments for receiving Foreign Direct
Investment in an Indian company?

• Foreign investment is reckoned as FDI only if

the investment is made in equity shares, fully
and mandatorily convertible preference shares
and fully and mandatorily convertible
debentures with the pricing being decided
upfront as a figure or based on the formula
that is decided upfront.
 What are the instruments for receiving Foreign Direct
Investment in an Indian company?

• Partly paid equity shares and warrants issued

by an Indian company in accordance with the
provision of the Companies Act, 2013 and the
SEBI guidelines, as applicable, shall be treated
as eligible FDI instruments w.e.f. July 8, 2014
subject to compliance with FDI scheme.
 Are the investments and profits
earned in India repatriable?
All foreign investments are freely repatriable (net of
applicable taxes) except in cases where:
i) the foreign investment is in a sector like
Construction and Development Projects and
Defence wherein the foreign investment is subject
to a lock-in-period; and
ii) NRIs choose to invest specifically under non-
repatriable schemes.
Further, dividends (net of applicable taxes) declared
on foreign investments can be remitted freely
through an Authorised Dealer bank.
 Forms of FDI

 FDI forms
– Purchase of assets: why? why not?
• Quick entry, local market know-how, local financing may be possible,
eliminate competitor, buying problems
– New investment: why? why not?
• No local entity is available for sale, local financial incentives, no
inherited problems, long lead time to generation of sales
– International joint-venture
• Shared ownership with local and/or other non-local partner
• Shared risk
BENEFITS OF FDI FOR HOST COUNTRIES
• Both host country and home get benefit from
FDI
• Host country means that country which accept
the FDI from other countries and use this for
its economic development
• Home country means that country which
supply its abundance resources and widen its
market.
 BENEFITS OF FDI FOR HOST COUNTRIES
1. Policy framework for FDI
• Economic, political, and social stability
• Rules regarding entry and operations
• Standards of treatment of foreign affiliates
• Policies on functioning and structure of markets (especially
competition and policies governing mergers and
acquisitions)
• International agreements on FDI
• Privatization policy
• Trade policy (tariffs and nontariff barriers) and coherence
of FDI and trade policies
• Tax policy
 BENEFITS OF FDI FOR HOST COUNTRIES
2. Economic determinants & Business
facilitation
• Investment promotion
• Investment incentives
• Hassle costs (related to corruption and
administrative efficiency)
• Social amenities
 BENEFITS OF FDI FOR HOST COUNTRIES
3.Market-seeking
• Market size and per capita income
• Market growth
• Access to regional and global markets
• Country-specific consumer preferences
• Structure of markets
4.Resource/asset-seeking
• Raw materials
• Low-cost unskilled labor
• Skilled labor
• Technological, innovative, and other created assets (for example,
brand names), including as embodied in individuals, firms, and
clusters
• Physical infrastructure (ports, roads, power, telecommunications)
BENEFITS OF FDI FOR HOST COUNTRIES
5. Efficiency seeking
• Cost of resources and assets listed above,
adjusted for labor productivity
• Other input costs, such as transport and
communication costs to/from and within host
economy and other intermediate products
• Membership of a regional integration
agreement conducive to the establishment of
regional corporate networks
 Government Policy and FDI
 The radical view: inbound FDI harmful; MNEs
– Are imperialist dominators
– Exploit host to the advantage of home country
– Extract profits from host country; give nothing back
– Keep LDCs backward and dependent for investment,
technology and jobs
 The free market view: FDI should be encouraged
– Adam Smith, Ricardo, et al: international production
should be distributed per national comparative
advantage
– An MNE increases the world economy efficiency
• Brings to bear unique ownership advantages
• Adds to local economy’s comparative advantages
 Host Country Effects of FDI
Benefits
–Resource -transfer
–Employment
–Balance-of-payment (BOP)
• Import substitution
• Source of export increase
Costs
–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
 Government Policy and FDI
Home country
– Outward FDI encouragement
• Risk reduction policies (financing, insurance, tax incentives)
– Outward FDI restrictions
• National security, BOP
Host country
– Inward FDI encouragement
• Investment incentives
• Job creation incentives
– Inward FDI restrictions
• Ownership extent restrictions (national security; local nationals
can safeguard host country’s interests
 Decision Framework for FDI
Are transportation costs Import
No No Export
high? Barriers?
Ye
Ye s
s
Is know-how easy to No FDI
license?
Ye
s
Tight control over foreign Yes FDI
ops required?
No

Yes FDI
Is know-how valuable and
is protection possible?
No License
Alternative Modes of Market Entry
FDI
– FDI - 100% ownership
– FDI < 100% ownership, International Joint
Venture
Strategic Alliances (non-equity)
Franchising
Licensing
Exports: Direct vs Indirect
 Sector Specific Conditions on FDI –
Prohibited Sectors
Prohibited Sectors : FDI is prohibited in:
a) Lottery Business including Government/private lottery, online
lotteries, etc.
b) Gambling and Betting including casinos etc.
c) Chit funds
d) Nidhi company
e) Trading in Transferable Development Rights (TDRs)
f) Real Estate Business or Construction of Farm Houses
g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of
tobacco or of tobacco substitutes
h) Activities/sectors not open to private sector investment e.g. (I)
Atomic Energy and (II) Railway operations(other than permitted
activities)
 Sector Specific Conditions on FDI
Foreign technology collaboration in any form
including licensing for franchise, trademark,
brand name, management contract is also
prohibited for Lottery Business and Gambling
and Betting activities.
 Permitted Sectors
• FDI is permitted up to 100% on the automatic
route, subject to applicable laws/regulations;
security and other conditionalities.
 Key statics

- India received FDI worth US $1.47 billion in july 2012 with

cumulative inflow for April 2012-13 Stood at $5.9billion.

- The sector which attracted huge FDI inflows during the April 2012-
13 are service $1.65 million pharmaticals $428 million, construction
$421 million, metallurgical industries (US$ 334 million), power
(US$ 237 million) and automobile (US$ 234 million)
 Facts
• At least 10% shares of company need to quality as FDI.

• Mauritian has been the largest direct investor.

• New Delhi And Mumbai are two major cities where

FDI inflows is heavily concentrated.

• Retailing is the single largest component of the services

sector in terms of contribution of GDP.
- Mauritius infused highest inflows worth US$ 1.97 billion, followed
by Singapore (US$ 886 million), Netherlands (US$ 616 million), the
UK (US$ 421 million), Japan (US$ 417 million) and Germany (US$
276 million)

- Foreign exchange reserves stood at US$ 294.81 billion for the week
ended September 28, 2012 where in the value of gold reserves was
recorded at US$ 28.133 billion
 Advantages of FDI
 Inflow of equipment and technology
 Competitive advantages and innovation
 Finance resource for expansive
 Employment generation
 Contribution to export growth
 Improved consumer welfare through reduced cost,
wider choice & improved quality.
 Provide access to global markets for Indian
producer.
 Disadvantages of FDI
• Crowing of local industry
• Conflict of laws
• Loss of control
• Effect on notional environment
• Effect on culture
 FDI in Retail Sectors
Indian retailers have made steady progress in the past
decade, their efforts fall short in matching global norms in a
sector estimated to be worth more than $450 billion.
Consequently organised retail has barely more than 4 per
cent market share.
Some stakeholders speculate that millions of jobs
would be lost due to FDI in retail. Actually, it will be the
other way around. With the entry of modern retailers, the
market will expand, creating millions of additional jobs in
retail and other tertiary sectors market share in India.
 FDI Boon in Retail
• Inflow of investments and funds
• Generates more employment
• Increased local sourcing
• Provide better value to end consumers
• Growth of infrastructure
• Cost reduction
• Improvement in supply chain and warehousing
 FDI BANE IN RETAIL

• Cutthroat competition

• Creating monopoly

• Increase in real estate prices

 FDI in Insurance Sector
The Indian Cabinet Committee on Economic Affairs
(CCEA) is strongly expected to raise the FDI ceiling in the
Insurance and Pension sectors.

FDI threshold to 49% in the Insurance sector from the

existing limit of 26%, has been submitted to the cabinet for
proper approval in the quickest possible period.
 Continues…
Increment in the FDI ceiling in the insurance
sector of India, will certainly be highly and greatly
appreciated by domestic and foreign insurance
companies, for the purpose of expanding and enriching
their insurance and re-insurance businesses
 Pension
The proposal to allow foreign direct investment, or
FDI, in the pension space has to clear the parliamentary
hurdle before pension funds become a reality in the country
where more and more people are working in private sector
enterprises that do not offer a pension after retirement.

"What the pension reforms will do is attract more

money and help the companies sustain their businesses over
a long period of time, which is key for the sector.
 FDI in Aviation

• The latest visionary decision of the Government of India

to allow FDI up to 49% in India's domestic aviation, is
expected to heal the cash-strapped aviation industry of
India, and attract massive foreign direct investment in the
aviation sector of India, in short and long future.

• The aviation sector of India has been serving about 100

million aviation travellers every year, both international
and domestic markets, in the recent years.
 Continues….

According to RNCOS Report, India is one among the

top ten largest markets of the world, in respect of
aviation, and is growing tremendously.

The domestic aviation market of India will emerge out

as the third biggest domestic aviation market in the
entire world by 2020 with over 450 million domestic
passengers.
 FDI in Broadcasting Sector

Liberalize the Broadcasting sector of India to foreign direct

investment, the Indian Cabinet Committee on Economic
Affairs (CCEA) raised the FDI cap from 49% to 74% many
fields of the Broadcasting sector . CCEA opted to retain the
existing cap of 26% in the fields of TV News Channels and
the FM Radio.
 Continues…
The recent governmental decision will be applied to
the following Broadcast Carriage Service Providers.

• Teleports (Up-linking HUBs/Teleports)

• Direct-to Home (DTH)
• Head-end in the Sky (HITS)
• Cable Networks (Multi-Service Operators who undertake
up-gradation of networks for digitalization and
addressability)
• Mobile TVs
 FDI Growth in the World Economy

 FDI Outflow: $35 billion in ‘75 to $1.3 trillion in ‘00 to $653

billion in ‘03
 FDI Flow (from all countries): from ‘92 to ‘02 up 292%,
compared to trade up 69% and world output up 28%
 FDI Stock: $3.5 trillion by ‘97 to > $7 trillion in ‘02
 In ‘02:
– 64,000 MNEs had:
• 850,000 foreign affiliates
• 53 million employees
• $17.7 trillion in sales
– $8 trillions global exports
 Conclusion:
FDI flow growing faster than world trade and world output
Historical Gross Inflow of FDI to India
from 1948 to 2014
Sl. N o. Year (End of Inflow of FDI Cumulative
the March) (Rs. in increase
Crores)
1 1948 256 256
2 1964 565.5 821.5
3 1974 916 1737.5
4 1980 933.2 2670.7
5 1990 2705 5375.7
6 2000 18486 23861.7
7 2010 123378 147239.7
Gross Inflow of FDI to India from 1948
to 2014
160000
140000
120000
100000
80000
60000
40000
20000
0
1 2 3 4 5 6 7 8
Year (End of the March) Inflow of FDI (Rs. in Crores)
Sl, No. Years FDI inflows Post Reform Period (Rs. in Crores )
1 1991-92 409
2 1992-93 1094
3 1993-94 2018
4 1994-95 4312
5 1995-96 6916
6 1996-97 9654
7 1997-98 13548
8 1998-99 12343
9 1999-00 10311
10 2000-01 10,733
11 2001-02 18,654
12 2002-03 12,871
13 2003-04 10,064
14 2004-05 14,653
15 2005-06 24,584
16 2006-07 56,390
17 2007-08 98,642
18 2008-09 ‘*’ 142,829
19 2009-10 # 123,120
20 2010-11 # 97,320
21 2011-12 # ^ 165,146
22 2012-13 # 121,907
23 2013-14 147,518
24 2014-15 (Apr - 64,193
Jul, 2014)
 Inflow of FDI

20000
60000
100000
140000
160000
180000

40000
80000
120000

0
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01

Years
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09 ‘*’
2009-10 #
2010-11 #
Post Reform FDI inflow in India

2011-12 # ^
2012-13 #
2013-14
Top Ten Country-wise FDI Equity Inflows to India from
April, 2000 to July, 2014

S.No Name of the Amount of FDI %age with total

Country Inflows (Rs. in FDI Inflows (+)
crore)
1 Mauritius 390691.18 35.88
2 Singapore 135784.52 11.88
3 United Kingdom 105795.83 9.46
4 Japan 85639.02 7.49
5 Netherlands 65256.29 5.57
6 U.S.A 57835.90 5.38
7 Cyprus 37349.33 3.38
8 Germany 33486.48 2.99
9 France 19398.74 1.75
10 Switzerland 13801.42 1.23
 Inflow of FDI from Top 10 Countries in
the World
450000
400000
350000
Amount of FDI Inflow

300000
250000
200000
150000
100000
50000
0

Countries
S. State-wise Inflows of FDI Cumulative %age to
No. FDI ( 2000 to total
2014) Inflows
1 MAHARASHTRA, DADRA & NAGAR HAVELI, 328,166 30
DAMAN & DIU
2 DELHI, PART OF UP AND HARYANA 216,274 19
3 TAMIL NADU, PONDICHERRY 71,017 6
4 KARNATAKA 63,294 6
5 GUJARAT 45,627 4
6 ANDHRA PRADESH 45,160 4
7 WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR 13,584 1
ISLANDS
8 CHANDIGARH, PUNJAB, HARYANA, HIMACHAL 6,227 0.6
PRADESH
9 RAJASTHAN 6,623 0.5
10. MADHYA PRADESH, CHATTISGARH 6,095 0.5
11 KERALA, LAKSHADWEEP 4,893 0.4
12 GOA 3,710 0.4
13 UTTAR PRADESH, UTTRANCHAL 1,965 0.2
14 ORISSA 1,926 0.2
15 ASSAM, ARUNACHAL PRADESH, MANIPUR, 352 0
MEGHALAYA, MIZORAM, NAGALAND, TRIPURA
16 BIHAR, JHARKHAND 247 0
17 JAMMU & KASHMIR 26 0
18 REGIONS NOT INDICATED# 292,906 26.06
19 TOTAL 1,108,091 100
 FINDINGS
• India is one of the most important countries in the world to
attract FDI.
• The FDI inflow to India was not new one, because it was
prevailed way back during the colonial period.
• Since introduction of New Economic Policy 1991, FDI inflow
got greater scope. This is because of open market
conditions.
• Service sector, construction, telecommunication etc tertiary
sector attracting more FDI then agricultural and small scale
industries. Because we need more fund the primary sector
but they are deprived from the investment.
• Sectors which are deprived from the FDI are those where
large market potential is present but these are ignored by
the policy makers & poor infrastructure as well as due to
high concentration on priority sectors also contributed to
the cause.
 FINDINGS
• State- wise FDI inflows show that Maharashtra,
New Delhi, Karnataka, Gujarat and Tamil Nadu
received major investment from investors because
of the infrastructural facilities and favourable
business environment provided by these states.
• It is observed that major investment in the above
sectors came from Mauritius and investments in
these sectors in India are primarily concentrated in
Mumbai and New Delhi.
• It is also observed that the realisation of approved
FDI into actual disbursement is quite low.
 POLICY PRESCRIPTIONS
• The FDI is one of the important components for economic
development of our country. Our economic growth has
maintained higher level. Still government should take some
important steps for further attracting and utilization of FDI.
Following are suggestions for further impartment in FDI
inflow
• The policy makers should design policies where foreign
investment can be utilised as means of enhancing domestic
production, savings, and exports; as medium of
technological learning and technology diffusion and also in
providing access to the external market.
• It is suggested that the government should push for the
speedy improvement of infrastructure sector’s
requirements which are important for diversification of
business activities.
 POLICY PRESCRIPTIONS
• Government should ensure the equitable distribution of FDI
inflows among states.
• Government must target at attracting specific types of FDI
that are able to generate spillovers effects in the overall
economy.
• The government must promote policies which allow
development process starts from within (i.e. through
productive capacity and by absorptive capacity)..
• Government must pay attention to the emerging Asian
continent as the new economic power – house of business
transaction.
• It is suggested that the policy makers should ensure optimum
utilization of funds and timely implementation of projects.
 Sector-wise FDI Equity Inflow from
April, 2000 to July, 2014
Sl. No Sectors FDI Inflow (Rs. In Percentages of
Crores) Total FDI Inflow
1 Service 191752.15 17.73
2 Construction 111127.49 10.40
3 Telecommunication 80608.47 7.23
4 Computer Software & 61707.07 5.76
Hardware
5 Drugs &Pharmaceuticals 61340.03 5.47
6 Automobile Industry 49678.09 4.41
7 Chemicals (Other than 47538.99 4.40
Fertilizers)
8 Power 44667.08 4.05
9 Metallurgical Industry 39225.17 3.60
10 Hotel & Tourism 38030.37 3.25
 Sector-wise inflow of FDI
(Rs. in Crores)
Hotel & Tourism,
Metallurgical 38030.37
Industry, 39225.17
Service,
Power, 44667.08 191752.15

Chemicals ,
47538.99

Automobile
Industry, 49678.09
Drugs
&Pharmaceuticals Construction ,
, 61340.03 111127.49
Computer
Software &
Hardware, Telecommunicatio
61707.07 n , 80608.47
 CONCLUSIONS
• A large number of changes were introduced in
the country after LPG era after 1991. India
brought about a structural breakthrough in the
volume of the FDI inflows into the economy
maintained a fluctuating and unsteady trend
during reform period.
• It might be interest to note that more than 50
per cent of the total FDI inflows received in India
come from Mauritius, Singapore and the USA.
 CONCLUSIONS
• The main reason for higher levels of investment
from Mauritius was that the fact that India
entered into a double taxation avoidance
agreement (DTAA) with Mauritius were
protected from taxation in India.
• Among the different sectors, the service sector
had received the larger proportion followed by
computer software and hardware sector and
then telecommunication sector