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Foreign Direct Investment By Abrar Ahmad Ansari MBA, IInd Sem.

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Definition:  FDI is equity funds invested in other nations.  Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin.

 It is a driver to step into foreign market through by acquiring or by lease of other firm in any other country. 2

Advantages:        

Own policies towards R & D Various benefits offered by the host governments Select the best location Latest models of the buildings It can avoid the cultural shock Economic growth of the world Utilization of world resources Opportunity and challenge to domestic business 3

Disadvantages:  Non-availability of land in the location of      

company Longer gestation period Need to follow the rules and regulations Leads to commercial and political colonialism Exploits human resource Leads under employment in host country National sovereignty at stake 4

Determinants:  Sustaining high level of investment  Technological development  Transportation costs  Market imperfection  Competition  Stage of the country  Location advantage  Product life cycle 5

Indian Government’s Policies Towards FDI:  No discrimination between foreign and Indian capital  Full opportunities to earn profits  Guarantee of compensation

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Types of Foreign Direct Investment 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.

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Inward FDIs  Here, investment of foreign capital occurs in local resources.  The factors propelling the growth of Inward FDI comprises,

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• Tax breaks, • Relaxation of existent regulations, • Loans on low rates of interest and specific grants. The idea behind this is that, the long run gains from such a funding far outweighs the disadvantage of the income loss incurred in the short run. Flow of Inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard. 8

Outward FDIs 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”. 9

Outward FDI faces restrictions under a host of factors as described below:

 Tax incentives or the lack of it for firms, which invest outside their country of origin or on profits, which are repatriated.

 Industries related to defense are often set outside the purview of outward FDI to retain government's control over the defense related industrial complex  Subsidy scheme targeted at local businesses  Lobby groups with vested interests possessing support from either inward FDI sector or state investment funding bodies  Government policies, which lend support to the phenomenon of industry nationalization

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Other categorizations of FDI Vertical Foreign Direct Investment  It 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. • •

Forward Vertical FDI and Backward Vertical FDI.

Horizontal foreign direct investments  It happen when a multinational company carries out a similar business operation in different nations.

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Foreign Direct Investment In Different Sectors  FDI IN HOTEL & TOURISM: 100% FDI is permissible in the sector on the automatic route.

 NON-BANKING FINANCIAL COMPANIES: 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

 INSURANCE SECTOR: FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)

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 TELECOMMUNICATION SECTOR:  

In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval.

 TRADING COMPANIES:  

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route 100% FDI is permitted.

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 POWER SECTOR: Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants.

 DRUGS & PHARMACEUTICALS: FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing

 SSI’s IN INDIA: Recently, India has allowed Foreign Direct Investment up to 100% in many manufacturing industries which were designated as Small Scale Industries. 14

 ROADS,HIGHWAYS,PORTS & HARBORS: FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads.

 POLLUTION CONTROL & MANAGEMENT: up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route.

 CALL CENTRES & BPO’s FDI up to 100% is allowed subject to certain conditions.

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Special Facilities & Rules For NRI’s & OCB’s

 NRI's and OCB's are allowed the following special facilities:  Direct investment in industry, trade, infrastructure etc.  Up to 100% equity with full repatriation facility for capital and dividends in the following sectors:             

34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries reserved for small scale sector.

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FDI & Infrastructure Development  One of the many areas in which foreign direct investment can benefit a country or any entity is development of infrastructure.

 All the various types of infrastructure a country like health or education, may be benefited by foreign direct investment.

 Technological infrastructure is one of the many areas in which foreign direct investment is meant to benefit a country.

 It plays a very crucial role in the economic development of a country as this technological advancement assists a country in upgrading its industries.

 Foreign direct investment is also capable of upgrading the health infrastructure of a particular country.

 Communication infrastructure is an important area where the foreign direct investment can come in handy.

 Foreign direct investment is also used for the purpose of educating the unskilled 18 labor force that is present in a country.

India Further Opens Up Key Sectors For Foreign Investment  FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities.

 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again.

 India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake.

 Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment.

 Also keeping India's civilian nuclear ambitions in mind, India has also

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allowed 100% FDI in mining of titanium, a mineral which is abundant in

Prohibited Sectors The extant policy does not permit FDI in the following cases:

• • • • •

Gambling and betting Lottery Business Atomic Energy Retail Trading Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations). 20