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    International Business

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    Foreign direct investment (FDI) refers to investment made by a company in new facilities in a foreign country. There are several forms of FDI, including purchasing existing assets, new investments, joint ventures, and transferring assets in exchange for equity. Factors influencing FDI include supply costs, demand access, and political incentives. FDI provides benefits like increased sales and access to new markets, but also costs like loss of domestic industry and dependence on foreign ownership.

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    International Business

    Uploaded by

    Aishu
    17 views10 pages
    Foreign direct investment (FDI) refers to investment made by a company in new facilities in a foreign country. There are several forms of FDI, including purchasing existing assets, new investments, joint ventures, and transferring assets in exchange for equity. Factors influencing FDI include supply costs, demand access, and political incentives. FDI provides benefits like increased sales and access to new markets, but also costs like loss of domestic industry and dependence on foreign ownership.

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    Foreign direct investment (FDI) refers to investment made by a company in new facilities in a foreign country. There are several forms of FDI, including purchasing existing assets, new investments, joint ventures, and transferring assets in exchange for equity. Factors influencing FDI include supply costs, demand access, and political incentives. FDI provides benefits like increased sales and access to new markets, but also costs like loss of domestic industry and dependence on foreign ownership.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    17 views10 pages

    International Business

    Uploaded by

    Aishu
    Foreign direct investment (FDI) refers to investment made by a company in new facilities in a foreign country. There are several forms of FDI, including purchasing existing assets, new investments, joint ventures, and transferring assets in exchange for equity. Factors influencing FDI include supply costs, demand access, and political incentives. FDI provides benefits like increased sales and access to new markets, but also costs like loss of domestic industry and dependence on foreign ownership.

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    of 10

    INTERNATIONAL BUSINESS

    Module IV :
    FOREIGN DIRECT INVESTMENT
    ( FDI )
     
    DEFINITION :

    The investment made by a company in new manufacturing and/or marketing


    facilities in a foreign country is referred to as ‘Foreign Direct Investment’.
    The investment made by a company in a foreign country over a given
    period(e.g., one year) is called Flow of Foreign Direct Investment.
    The total of investment made by a company in a foreign country up to a
    given time is called ‘The stock of Foreign Direct Investment.

    FORMS OF FDI

    • Purchase of existing assets in a foreign country.


    • New investment in property, plant, equipment.
    • Participation in a joint venture with local partner
    • Transfer of many types of assets like human resources, systems, technological knowhow
    in exchange for equity in foreign companies.
    • Export of goods for equity. This method may not be used in the initial stage of the
    establishment of a company
    • Through Trading in Equity. Companies also invest in the equity of foreign companies by
    purchasing the equity shares of a foreign company.
    FACTORS INFLUENCING FDI

    Factors influencing FDI are of three categories, viz.,

    • Supply Factors
    Production costs
    Logistics
    Resource availability
    Access to technology

    • Demand Factors
    Customer access
    Marketing advantages
    Exploitation of competitive advantages
    Customer mobility

    • Political factors
    Avoidance of trade barriers
    Economic development incentives
    REASONS FOR FDI

    FDI is the ownership and control over assets held in foreign countries.
    There are number of reasons for FDI. These reasons are;

    • To increase the sales and profit


    • To enter Fast Growing Markets
    • To consolidate Trade Blocs
    • To protect Domestic Markets
    • To Acquire technological and managerial knowhow
    COSTS AND BENEFITS OF FDI 

    FDI has its costs and benefits to the home country as well as host country .

    Benefits of FDI to the Home Country


    • Inflow of foreign currencies in the form of dividend, interests, etc.
    • FDI increases export of machinery, equipment, technology, etc., from home country to
    host country. This in turn enhances the industrial activity of the home country.
    • The increased industrial activity in the home country enhances the employment
    opportunities in the home country.
    • The firm and other home country firms can learn skills from its exposure to the host
    country and transfer those skills to the industry in the home country.

    Costs/Disadvantages of FDI to the Home Country


    • Home country’s industry and employment position are at stake when the firms enter
    foreign markets due to low labour costs.
    • Current account position of the home country suffers as FDI is a substitute for direct
    exports.
    CONITNUED ..

    Benefits of FDI to the Host Country

    • Resource transfer effects:


    Resources which are scarce in host country are transferred from the foreign country.

    • Employment Effects:
    The FDI contributes for the establishment of new industries and business directly and
    for the employment of existing economic activity. FDI helps for the developing of
    ancillary industries. These developments invariably increase employment
    opportunities for the people of the host country.

    • Balance of Payments Effects:


    FDI provides for the production of a number of goods and services domestically. This
    in turn reduces the imports and thereby improves the current account position of the
    host country’s balance of payments.
    Costs/Disadvantages of FDI to the host country

    • Intensifying competition:
    Foreign MNCs have more competitive abilities in view of their large size,
    resource base and widespread operations than that of the domestic companies.
    Hence, they pose severe competition and threat to the domestic companies.
    • Negative Effects on the Balance of Payments:
    The foreign companies affect the balance of the host country in three ways;
    • Foreign companies repatriate the dividend to their home country that affect
    the current account
    • The MNC in the host country imports the goods from its subsidiaries from
    other countries. These imports result in a debit on the current account of the
    balance of payments of the host country.
    • National Sovereignty and Autonomy:
    Some of the host governments fear FDI as it affects the sovereignty and
    autonomy of the country
    IMPLICATIONSOF FDI FOR BUSINESS

    The following are the implications of FDI for business

    • Location-specific advantages argument indicates the flow of FDI in order


    to take the advantages of mineral and other resources in foreign countries.
    • If the costs of transportation and trade barriers are significant, it would be
    preferable to go for FDI.
    • If the costs of transportation are minimum, it would be preferable for the
    companies to export.
    • The firm can go for licensing if the know-how is not available.
    • If the company’s skills and capabilities are not available licensing, better
    the company go for FDI.
    FOREIGN DIRECT INVESTMENT IN INDIA

    • The policy of the government of India towards the Foreign direct


    investment has been positive due to the shortage of domestic capital. This
    is evident from various industrial policy resolutions and declarations issued
    by the Government from time-to-time.
    • The Government of India with regard to FDI announces significant
    measures since 1991 include:
    • Granting of automatic permission for equity participation up to 51 percent
    in high technology and high-investment priority industries.
    • Allowing foreign equity participation up to 51 percent in international
    trading companies, hotel industry and tourist industry.
    • Constitution of a Specialised Empowered Board in order to attract FDI by
    negotiating with multinational corporations.
    • Dispersing with the bureaucratic rules and regulations which caused delays
    and created hurdles for the FDI.
    • Allowing the MNC to use their trade marks in India with effect from 14th
    May. 1992.
    CONTINUED ..

    • Allowing 100 percent foreign equity for setting up of power plants with free
    repatriation of profits.
    • Allowing 100 percent equity contribution by NRIs and the corporate bodies owned
    by NRIs in high priority industries
    • Foreign investors can disinvest at market rates on stock exchanges from
    September 15,1992.
    • Foreign companies can use their trade marks in India w.e.f. May 14,1992.
    • According to the Finance Minister, FII portfolio investments are not subject to the
    sectoral limits for foreign direct investment except in specialised sectors.
    • The holding non-banking financial companies can hold foreign equity up to 100%.
    • Foreign investors are allowed to establish 100% operating subsidiaries and should
    bring at least US $ 50 million for this purpose.
    • Private sector firms can have FDI up to 49% in automatic route subject to
    conformity to RBI guidelines.
    • 100% FDI is permitted in business to business(B2B) e-commerce, power sector
    and oil refining.

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