DEVSTHALI VIDYAPEETH, COLLEGE OF MANAGEMENT STUDIES

DISSERTATION REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN MANAGEMENT

FDI
SUBMITTED BY: SHAILJA BORA
MBA (2010-2012) Roll No. : _________________

INDUSTRY GUIDE (With proper title and designation ___________________ _______________

FACULTY GUIDE _________________ __________________

TABLE OF CONTENTS
(Minor Variations are possible)
(Research Based) Chapter No. Subject Ch.# 1.0 Ch.# 2.0 1.1 1.2 1.3 1.4 1.5 1.6 Ch.# 3.0 Ch.# 4.0 4.1 4.2 Ch.# 5.0 5.1 5.2 5.3 Ch.# 6.0 Ch.# 7.0 Ch.# 8.0 Ch.# 9.0 9.1 9.2 Ch.# 10.0 Ch# 11.0 Page No.

Executive Summary. Research Methodology Primary Objective(s). Hypothesis Research Design Sample Design.. Scope of the Study. Limitations. Critical Review of Literature.. Company Profile . Industry Profile.. Swot Analysis. Data.. Collection Primary Data Secondary Data... Findings & Analysis. Recommendations Bibliography. Annexure.. Tables. Graphs Case Study (minimum 10 pages)..... synopsis of the project (150-200 words)

CHAPTER NO. 1 INTRODUCTION

Executive summary Objectives of project Scope/Importance of report Research Hypothesis Limitations of study

During last twenty year there has been a tremendous growth in global foreign direct investment. In 1980 the total stock of FDI equaled only 6.6% of the world gross domestic product (GDP) while in 2010 the share has increased to close % this dramatic development has taken place simultaneously with a substantial growth in international trade. The growth in international flows of goods and capital implies that geographically distant parts of the global economy are becoming increasingly interconnected as economic activity is extended across boundaries. FDI is an important factor in the globalization process as it intensifies the interaction between states, regions and firms. Growing international flows of portfolio and direct investment, international trade information and migration are all part of this process. The large increase in volume past FDI during the past two decades provides a strong incentive for research on this phenomenon.

DEFINITION OF FDI

There is no specific definition of FDI owing to the presence of many authorities like the OEC,IMF,IBRD, and UNCTAD. All these bodies attempt to illustrate the nature of FDI with certain measuring methodologies. Generally speaking FDI refers to capital flows from abroad that invest in the production capacity of the economy and are usually preferred over forms of external finance because they are non debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. It was also described as a source of economic development, modernization and employment generation, whereby the overall benefits triggers technology spillover, assist human capital formation, contributes competitive business environment, enhance enterprise development, increase total factor productivity and improves efficiency of resources use.

According to IMF FDI is the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest and control in and enterprise resident in another economy. Last interest indicates

The existence of a long term relationship between the direct investor and the enterprise. The significant degree of influence that gives the direct investor and effective voice in the management of the enterprise

The concept of lasting interest is not defined by IMF in terms of specific time frame, and the more pertinent criterion adopted is that of the degree of ownership in an enterprise. The IMF threshold is 10% ownership of the ordinary shares or voting power or the equivalent for unincorporated enterprises. If the criteria are met then the concept of FDI includes the following organizational bodies SUBSIDIARIES: ( in which the non- resident investor owns more than 50%) ASSOCIATES : (in which the non-resident investor owns between 10%50%) BRANCHES: (unincorporated enterprises, jointly or wholly owned by the non-resident investor

COMPONENTS OF FDI

The components of direct investment constitute direct investment income, direct investment transaction and direct investment position.FDI flows are the sum of three basic components. Equity capital Reinvested earning Other direct investment capital

FDI ACCOUNTING IN INDIA FDI statistics in India are monitored and published by two officials sources. Reserve Bank of India(RBI) and Secretariat of Industrial assistance (SIA) in the ministry of commerce and industry.

FDI DEFINITION IN INDIAN CONTEXT

In the Indian context till the end of March 1991. FDI was defined to include investment in: Indian companies which were subsidiaries of foreign companies.\ Indian companies in which 40% or more of the equity capital was held outside India in one country. Indian companies in which 25% or more equity capital was held by a single investor abroad. A committee was constituted by the department of industrial policy and promotion in May 2002 to bring the reporting system of FDI data in India into alignment with international best practices. Accordingly, the RBI has recently revised data on FDI flows from the year 2001 onward by adopting the new definition of FDI.

TYPES OF FDI
INWARD FOREIGN DIRECT INVESTMENT:It refers to long term capital inflow other than aid, portfolio investment or a repayable debt. It is done by an entity outside the host country in the home country.

OUTWARD FOREIGN DIRECT INVESTMENT:It refers to a long term capital outflow from a country other than aid, portfolio investment or a debt repayable.

HORIZENTAL FOREIGN DIRECT INVESTMENT:This refers to a multi plant firm producing the same line of goods from plants located in different countries.

VERTICAL FOREIGN DIRECT INVESTMENT:If the production process divided into upstream and downstream stages and only the latter stage is transferred abroad, then the newly established assembly plants demand parts and components can be met by export from home country suppliers. This is what vertical FDI is.

GREEN FIELD FOREIGN DIRECT INVESTMENT:Greenfield FDI is a form of investment where the MNC constructs new facilities in the host country.

BROWNFEILD FOREIGN DIRECT INVESTMENT:It implies the MNC of an affiliate of the MNC merges with or acquire an already existing firm in the host country in a new MNC affiliate.

BENEFITS OF FDI

1. FDI is less volatile than other private flows and provides a stable source of financing to meet capital needs.

2. FDI is an important and probably dominant channel of international transfer of technology. MNCs the main driver of FDI are powerful and effective vehicles for disseminating technology from developed nations to developing nations and often the only source of new and innovative technology which is not available in the arms length market.

3. The technology disseminated through FDI generally comes as a package including the capital, skills and managerial knowhow needed to appropriate technology properly.

OBJECTIVE
In order to appreciate the importance of FDI flows for the Indian economy, it would be pertinent to examine the changes in the global FDI flows and the place of India within. In respect the following issues shall be studied.

1. Study the trends and patterns of flow of FDI. 2. Evaluation of the impact of FDI on Indian economy.

HYPOTHESES

The study has been taken up for the period of pre reform and post reform era. 1. Flow of FDI shows a positive trend over the period of 2. FDI has a positive impact on economic growth of the country.

RESEARCH METHODOLOGY

DATA COLLECTION

This study is based on secondary data. The required data have been collected from various world investment reports, Asian development bank reports, various Bulletins of RBI, publication from Ministry of Commerce, Government of India and also from some books like international financial management by V Sharan and others Conclusions are also made upon on these reports, publication and books. This study builds on existing research studies and methodologies, to test the determinants trend and patterns of India. A process of gradual relaxation of controls and regulations with a view to attract large inflows of foreign investments was dissembled from the year 1981. In a limited and phased manner market forces were allowed to govern the foreign investment flow during this period was selected

IMPORTANCE OF THE STUDY

It is clear that FDI is a predominant and vital factor in influencing the contemporary process of global economic development. The attempt to analyze the important dimensions of FDI in India. The study work out the trends and patterns and investment flow in India for the period of 1991- . The period under study is important for variety of reasons. First of all it was during July 1991 India opened its door to private sector and liberalized its economy. Secondly the experiences of South-East Asian countries by liberalizing their economies in 1980s became stars of economic growth and development in early 1990s. Thirdly, Indias experience with first generation economic reforms and the countrys economic growth performance were considered safe havens for Fid which led to second generation of economic reforms in India in first decade of this century. Fourthly there is considerable change in both the developing and developed countries towards FDI. They both consider FDI as the most suitable form of external finance. Fifthly. Increase in competition for FDI inflows particularly among the developing nations

LIMITATION OF THE STUDY

All the economic/ scientific studies are faced with various limitations and this study is no exception to the phenomena. The various limitation of the study is

At various stages, the basic objective of the study is suffered due to inadequacy of time series data from related agencies. There has also been a problem of sufficient homogenous data from different sources

The assumption that FDI is the only cause for development of Indian economy in the post liberalized period is debatable. No proper methods were available to segregate the effect of FDI to support the validity of this assumption.

CHAPTER NO. 2 MAIN STUDY

Trends and Pattern

TRENDS AND PATTERNS OF FDI

Located in South Asia, India is the 7th largest, and the 2nd most populated country in the world. India has long been known for the diversity of its culture, for the inclusiveness of its people and for the convergence of geography. Today, the worlds largest democracy has come to the forefront as a global resource for industry in manufacturing and services. Its pool of technical skills, its base of an English speaking populace with an increasing disposable income and its burgeoning market has all combined to enable India emerge as a viable partner to global industry. Recently, investment opportunities in India are at a peak. The liberalization of trade, capital market, breaking of business barriers, technological advancement, and the growing internationalization of goods, services, or ideas over the past two decades make the world economies the globalised one. Consequently, with large domestic market. One of the most prominent and striking feature of todays globalised world is the exponential growth of FDI in both developed and developing countries. In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. Developing countries, in particular, considered FDI as the safest type of external finance as it not only supplement domestic savings, foreign reserves but promotes growth even more through spillovers of technology, skills, increased innovative capacity, and domestic competition. Now days, FDI has become an instrument of international economic integration.

TRENDS AND PATTERNS OF FDI FLOW IN THE WORLD

Trends in World FDI flows depict that developing countries makes their presence felt by receiving a considerable chunk of FDI inflows. Developing economies share in total FDI inflows rose from 26% in 1980 to 40% in 1997.

FDI INFLOWS IN THE WORLD

Amount in US Billion

Year/ Country
World FDI

1990- 96 95

97

98

99

2000 2001

2002

2003

2004

2005

2006

225.3 386.1 478.1 694.5 1088.3 1492 735.1 716.1 632.6 648.1 958.7 1411

Developed 64.4 Economies Share in FDI Developing 33 Economies Share in FDI

57.1

56

69.7

77.1

82.2

68.4

76.5

69.9

58.6

63.8

66.7

39.5

39.9

27

20.7

15.9

27.9

21.7

26.3

36

33

29.3

However, the share during 1998 to 2003 fell considerably but rose in 2004, again in 2006 and 2007 it reduces to 29% to 27% due to global economic meltdown. Specifically, developing Asia received 16 %, Latin America and the Caribbean 8.7 %, and Africa 2 %. On the other hand, developed economies show an increasing upward trend of FDI inflows, while developing economies show a downward trend of FDI inflow

120

100

80 developed developing 40

60

20

0 90-95 96 97 98 99 2000 2001 2002 2003 2004 2005 2006

However, India shows a steady pattern of FDI inflows during 19912007.The annual growth rate of developed economies was 33%, developing economies was 21% and India was 17% in 2007 over 2006. During 1991-2007 the compound annual growth rate registered by developed economies was 16%, developing economies was merely 2%, and that of India was 41%.

MOST ATTRACTIVE LOCATION OF GLOBAL FDI

It is a well-known fact that due to infrastructural facilities, less bureaucratic structure and conducive business environment China tops the chart of major emerging destination ofglobal FDI inflows. The other most preferred destinations of global FDI flows apart from China are Brazil, Mexico, Russia, and India. The annual growth rate registered by China was 15%, Brazil was 84%, Mexico was 28%, Russia was 62%, and India was 17% in 2007 over 2006. During 1991-2007 the compound annual growth rate registered by China was 20%, Brazil was 24%, Mexico was 11%, Russia was 41% (from 1994), and India was 41%. Indias FDI need is stood at US$ 15 bn per year in order to make the country on a 9% growth trajectory (as projected by the Finance Minister of India in the current Budget74). Such massive FDI is needed by India in order to achieve the objectives of its second generation economic reforms and to maintain the present growth rate of the economy. Although, Indias share in world FDI inflows has increased from 0.3% to 1.3% from 1990-95 to 2007. Though, this is not an attractive share when it is compared with China and other major emerging destinations of global FDI inflows.

SHARE OF INDIA IN WORLD FDI

Amount in US$ Billion

Year/country 9596 96 97 98 99 2000 2001 2002 2003 2004 2005 2006

World FDI Indias share

225.3 386.1 478.1 694.5 1088 0.3. 0.7 0.8 0.4 0.2

1492 0.2

735 0.5

716.1 632.6 648.1 958.7 1411 0.5 0.7 0.8 0.8 1.4

INDIA'S SHARE IN WORLD FDI

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 95 96 97 98 99 2000 2001 2002 2003 2004 2005 2006 indiashare's

It reveals that during the period under review FDI inflow in India has increasedfrom 11% to 69%. But when it is compared with China, Indias FDI inflows stand nowhere. And when it is compared with rest of the major emerging destinations of global FDI India is found at the bottom of the ladder.

EMERGING ECONOMY OF THE WORLD

Amount in US$ billion
Year/country 1990-99 2000-07 China Brazil 148.5 483 89.4 169 Mexico 56.4 147.4 Russia 15 126.2 India 11.4 69

500 450 400 350 300 250 200 150 100 50 0 china Brazil Mexico russia India 1990-99 2000-07

The reason could be bureaucratic hurdles, infrastructural problems, business environment, or government stability. India has to consider the five point strategy as put forward by the World Bank for India, if India wants to be an attractive location of global FDI in the coming years.

TRENDS AND PATTERNS OF FDI FLOW IN INDIA

Economic reforms taken by Indian government in 1991 makes the country as one of the prominent performer of global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market based system from a closed economy characterized by extensive regulation, protectionism, public ownership which leads to pervasive corruption and slow growth from 1950s until 1990s. In fact, Indias economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus per cent growth. The exports in 2008 were $175.7 bn and imports were $287.5 bn. Indias export has been consistently rising, covering 81.3% of its imports in 2008, up from 66.2% in 1990-91. Since independence, Indias BOP on its current account has been negative. Since 1996-97, its overall BOP hasbeen positive, largely on account of increased FDI and deposits from Non Resident Indians (NRIs), and commercial borrowings. The fiscal deficit has come down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and revenue deficit from 3.6 per cent to 1.1 per cent in 200708. As a result, Indias foreign exchange reserves shot up 55 per cent in 2007-08 to close at US $309.16 billion an increase of nearly US $110 billion from US $199.18 billion at the end of 2006-07. Domestic saving ratio to GDP shot up from 29.8% in 2004-05 to37.7% in 2007-08. For the first time Indias GDP crossed one trillion dollars mark in 2007. As a consequence of policy measures (taken way back in 1991) FDI in India has increased manifold since 1991 irrespective of the ruling party over the years, as there is a growing consensus and commitments among political parties to follow liberal foreign investment policy that invite steady flow of FDI in India so that sustained economic growth can be achieved. Further, in order to study the impact of economic reforms and FDI policy on the magnitude of FDI inflows, quantitative information is needed on broad dimension of FDI and its distribution across setors and region.

TRENDS IN FDI INFLOW

60 50 40 30 20 10 0 91 92 93 94 95 96 97 98 99 0 -10 1 2 3 4 5 6 7 8

actual line trend line