Fdi

FOREIGN DIRECT INVESTMENT

INVESTMENT  Investment is “the flow of funds from one destination to another” for any activity.

 Thus, an investment is carried on with some purpose.

 The purpose can be varied.

 For Example: Manufacturing, infrastructure, R & D 01

INVESTMENT OUTFLOW

INVESTOR

RECEIVER

(HOME COUNTRY)

(FOREIGN COUNTRY)

INVESTMENT INFLOW

RECEIVER

INVESTOR

(HOME COUNTRY)

(FOREIGN COUNTRY) 02

FOREIGN DIRECT INVESTMENT (FDI)  Foreign Direct Investment (FDI) means a company or any other entity in one country making a physical investment in other country.  FDI includes investments made to acquire a lasting interest in enterprises that are operating outside the economy & national borders of an investor.  FDI (for a country) represents foreign assets in domestic structures, equipments & organizations.  FDI does not include foreign investments in stock markets. 03

 For Example: British company investing directly in Indian healthcare sector, is considered as FDI.  Companies engaged in FDI may be involved in the functional areas such as: Production, Marketing and R & D.  In order to qualify as FDI, the investment must give an investor some control over its foreign affiliate.  The United Nations defines control as owning 10% or more of ordinary shares or voting power in an incorporated firm or its equivalent.

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TYPES OF FDI

BY DIRECTION

INWARD

BY

BY

TARGET

MOTIVE

GREENFIELD INVESTMENT

OUTWARD

HORIZONTAL FDI VERTICAL FDI

RESOURCE SEEKING MARKET SEEKING EFFICIENCY SEEKING 05

BY DIRECTION  INWARD: Inward FDI or Inbound FDI is a form of inward investment where foreign capital is invested in local resources of home country.

 OUTWARD: Outward FDI or direct investment abroad is when local capital is invested in foreign resources.

BY TARGET  GREENFIELD INVESTMENT: Investments in new facilities or expansion of existing facilities. Results are: New jobs, new technology & know-how, enhanced R&D, etc.

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 HORIZONTAL FDI: It occurs when a multinational company makes investments in other countries but in the same industry to which it belongs.

 VERTICAL FDI: It occurs when a MNC acquires a stake in a foreign company that either uses its output or provides it the inputs. The foreign company can be a supplier or a customer.

BY MOTIVE  RESOURCE SEEKING: It occurs when the investments seek to acquire factors of production that are more efficient than those available in the home country of the investor.

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In some cases, the resources may not be available in the home economy at all. Example: Cheap labor, oil, etc.

 MARKET SEEKING: It includes investments that aims at penetrating new markets or maintaining existing markets. FDI with this motive is common among MNCs.

 EFFICIENCY SEEKING: It includes the investors who invest with the hope of exploiting the benefits of economies of scale, cost effectiveness & profit maximization. 08

BENEFTS OF FDI  INFLOW OF CAPITAL IN HOME COUNTRY  REPATRIATION OF PROFITS BY INVESTOR  TECHNOLOGY DEVELOPMENT & TRANSFER  TRANSFER OF KNOWLEDGE  ACCESS TO NEW MARKETS  FDI LED EXPORT GROWTH  EMPLOYMENT GENERATION  INFRASTRUCTURE DEVELOPMENT IN HOME COUNTRY  LEADS TO LIBERALIZATION & GLOBALIZATION 09

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STRATEGIES FOR FOREIGN INVESTORS TO INVEST IN INDIA  LIAISON OFFICE / REPRESENTATIVE OFFICE  A foreign company can set up liaison office in India to test the Indian market.  Once it is convinced of the potentiality of Indian market, it can then bring in greater investment.  A liaison office is not allowed to undertake any business activities in India & therefore cannot earn any income in India.  The Foreign Investment Promotion Board (FIPB) of RBI is the regulatory body.

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 PROJECT OFFICE  Foreign companies planning to execute specific projects in India can set up temporary project offices.  Special approval from RBI is required for setting up a project office.  A project office can be set up only till the completion of project.

 BRANCH OFFICE  GOI has allowed foreign companies engaged in manufacturing & trading activities to set up branch offices in India for purposes like trading activities, research work, import & export activities. 13

 OTHER STRATEGIES

 As an Indian company

 Joint Venture with an Indian partner

 Wholly – owned subsidiary companies

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FDI POLICY IN INDIA The Government of India has put in place a liberal, transparent and investor – friendly FDI Policy, wherein FDI up to 100% is allowed on the automatic route in most of the sectors, except in:

 Activities that attract industrial licensing  Proposals where foreign investors have existing ventures in India  Proposals for acquisition of shares in an existing Indian company by a non-resident investor  Activities where automated route is not available 15

CRITERIA CONSIDERED BY INVESTORS FOR FDI  Political stability & strong policy to protect investors  Safety & security of life, money & output  Investment protection through legal provisions  Continuous infrastructure development  A banking system with up – to – date technology  A highly productive labor & smooth working conditions  Clear & simple tax procedures  Availability of raw materials & other components  The demand for the products that investors manufactures 16

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