FOREIGN DIRECT

INVESTMENT

PRESENTED TO: PRESENTED BY:

PROF. K.K. JINDAL ANOOP RAJ- 05A
APURVA MUDGAL- 08A
INDER JOSHI- 17A
PARVESH GARG- 33B
SANCHIT SOMANI- 5RBA
 FOREIGN DIRECT INVESTMENT

• Foreign direct investment (FDI) occurs when a firm invests directly

in new facilities to produce and/or market in a foreign country. Once
a firm undertakes FDI it becomes a multinational enterprise

• FDI is undertaken by firms so that they can take advantage of

resources that are either unavailable in the home country or because
these resources are available at costs lower than those in their home
country.

• The firm has significant control of its foreign operation and can
affect managerial decisions of the foreign operation. It usually
involves participation in management, joint-venture, transfer of
technology and expertise.
 TYPES OF FDI

BY DIRECTION BY TARGET

1.INWARD FDI 1. GREENFIELD

INVESTMENT
2.OUTWARD FDI
2. MERGERS AND
ACQUISITIONS

3. JOINT
VENTURE
 Inward FDI:

Inward FDI for an economy can be defined as the capital provided

from a foreign direct investor residing in a country, to that
economy, which is residing in another country. Here, investment
of foreign capital occurs in local resources.

Flow of Inward FDI may face restrictions from factors like

restraint on ownership and disparity in the performance standard.

EXAMPLE: General Motors decides to open a factory in

Malaysia. They are going to invest some capital. That capital is
inward FDI for Malaysia.
 Outward FDI:
When investment is made by a domestic company in the foreign
country than there is outflow of FDI from domestic country to
foreign country. Foreign direct investment, which is outward, is also
referred to as “direct investment abroad”.

Outward FDI faces restrictions under a host of factors as described

below:

•Industries related to defence 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.
•Government policies, which lend support to the phenomenon of
industry nationalization
 FEMA Guidelines on Outward FDI
•Indian Companies can set up:-
•100% subsidiary abroad
•Joint venture abroad.

•How much investment:

• Max outward FDI restricted to 3 times of net worth as per
last audited balance sheet.
• Subscribe to share capital of foreign country
• Outward remittances to foreign country to subscribe to share
• Capital;or/&
• Export of machinery, manpower, management ;or/&
• Export of technical know how.

No restrictions on repatriation of profits

ECB can be raised for outward FDI
 FIPB
•FIPB is in Ministry of Commerce
•Commerce Ministry chairman is Chairman of FIPB
•Application on plain paper along with project report to be
submitted to FIPB
•FIPB powers of sanction upto Rs.600 crores
•Project of more than 600 crores will go to CCFI, “IMG”
 GREENFIELD INVESTMENT
•A form of foreign direct investment where a parent company starts a
new venture in a foreign country by constructing new operational
facilities from the ground up. In addition to building new facilities,
most parent companies also create new long-term jobs in the foreign
country by hiring new employees.

•Developing countries often offer prospective companies tax-breaks,

subsidies and other types of incentives to set up green field investments.
Governments often see that losing corporate tax revenue is a small price
to pay if jobs are created and knowledge and technology is gained to
boost the country's human capital.

•A related term to Greenfield Investment which is becoming popular is

Brownfield Investment, where a site previously used for a "dirty"
business purpose, such as a steel mill or oil refinery, is cleaned up and
used for a less polluting purpose, such as commercial office space or a
residential area.
 MERGERS AND ACQUISITIONS
1. Horizontal
• A merger in which two firms in the same industry combine.
• Often in an attempt to achieve economies of scale and/or
scope.
2. Vertical
• A merger in which one firm acquires a supplier or another firm
that is closer to its existing customers.
• Often in an attempt to control supply or distribution channels.
3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to ‘diversify’ the company by combining
uncorrelated assets and income streams
4. Cross-border (International) M&As
• A merger or acquisition involving a Indian and a foreign firm,
either the acquiring or target company.
 JOINT VENTURE
–A joint venture is here defined as shared ownership in a
foreign business
–Some advantages of a MNE working with a local joint venture
partner are:
•Better understanding of local customs, mores and
institutions of government
•Providing for capable mid-level management
•Some countries do not allow 100% foreign ownership
•Local partners have their own contacts and reputation
which aids in business.
However, joint ventures are not as common as 100%-owned
foreign subsidiaries as a result of potential conflicts or
difficulties
 IMPORTANCE OF FDI

•FDI provides ready resource for the growth of the economy. For
capital starved country, FDI could be a boon. Generating funds
internally may require much time and also FDI is motivated by
long term profit considerations of the investors.

•The enhanced money inflow from overseas means that the country
can import more goods that are basic to the building of the economy.
This is particularly important for developing country.

•FDI acts as the nucleus around which other businesses can grow. For
example, toyota motors have established their automobile plants in
India and they source fraction of parts from local firms.
 ADVANTAGES OF FDI

•Foreign Direct Investment plays a pivotal role in the development

of India's economy. It is an integral part of the global economic
system.

•FDI ensures a huge amount of domestic capital, production level,

and employment opportunities in the developing countries, which is
a major step towards the economic growth of the country.

•Foreign Direct Investments have opened a wide spectrum of

opportunities in the trading of goods and services in India both in
terms of import and export production.

•FDI has also ensured a number of employment opportunities by

aiding the setting up of industrial units in various corners of India.
 DISADVANTAGES OF FDI
•One of the most important disadvantages of foreign direct
investment is that the economically backward section of the host
country is always inconvenienced when the stream of foreign direct
investment is negatively affected.

• The differences of language and culture that exist between the

country of the investor and the host country could also pose
problems in case of foreign direct investment.

•Adverse effects on the balance of payments, when a foreign

subsidiary imports a substantial number of its inputs from abroad,
there is a debit on the current account of the host country’s balance
of payments.
 TRENDS IN FDI

There has been a marked increase in both the flow and stock of FDI
in the world economy over the last 30 years.
FDI has grown more rapidly than world trade and world output
because:
• The general shift toward democratic political institutions and free
market economies has encouraged FDI
• The globalization of the world economy is having a Positive
impact on the volume of FDI as firms undertake FDI
 FDI AND ECONOMIC DEVELOPMENT
Foreign direct investment (FDI) is considered to be the lifeblood and
an important vehicle for economic development as far as the
developing nations are concerned. The important effect of FDI is its
contribution to the growth of the economy.

FDI has an impact on country's trade balance, increasing labour

standards and skills, transfer of new technology and innovative ideas,
improving infrastructure, skills and the general business climate.

FDI also provides opportunity for technological transfer and up

gradation, access to global managerial skills and practices, optimal
utilization of human capabilities and natural resources, making
industry internationally competitive, opening up export markets,
providing backward and forward linkages and access to international
quality goods and services.
 THEORIES OF FDI

1. Firm Specific Advantage approach:

A firm can capture foreign market by its assets such as brand

name, superior technology, or its skills in management. The
returns will be much higher that that obtainable in home
country.

Example: kellogs and pizza hut had moved into large markets of
developing countries by having FDI in those countries.

However this approach does not explains as to why a firm gets into
FDI rather than exporting the same products to those developing
countries.
2. Product Life Cycle Theory:

The product cycle theory is a theory made of few steps that

follow each other:
• Firm creates product to accommodate local demand.
• Firm exports product to accommodate foreign demand.
• Firm establishes foreign subsidiary to establish presence in
foreign country to minimize cost
• Firm differentiates product from competitors and/or
expands product line in foreign country.
• Firm's Foreign business declines as its competitive
advantages are eliminated.

Example: 1. Intel latest chip is available all over the world.

2. All the new models of personal computers of IBM are
now available in all the countries.
3. The OLI Paradigm:

• Also known as ‘Eclectic Theory of FDI’

• According to this theory a firm would go for FDI when all the
following three types of advantages are present:

1. Ownership advantage ie overall knowledge of the firm specific

advantages.
2. Location advantage ie knowledge of foreign country’s economic,
social and political factors.
3. Internalization advantage ie a firm may have a joint venture or a
wholly owned subsidiary in the foreign country. Hence it would
have internalization advantage.
 FDI INCENTIVES

Why FDI Incentives?

• To attract FDI
• To steer the FDI into favoured industries or regions of the country
For instance, India may desire FDI in infrastructure development.
• Influence the type of incoming FDI. For instance, China may want
technology-intensive investment.

Types of FDI Incentives

• Fiscal Incentives - to reduce tax burden of foreign investors.
• Financial Incentives - grants given by government
• Other Incentives - like subsidized infrastructure, market preference,
preferential foreign exchange rates.
 FDI AND FII
Both FDI and FII is related to investment in a foreign country. FDI or
Foreign Direct Investment is an investment that a parent company
makes in a foreign country. On the contrary, FII or Foreign
Institutional Investor is an investment made by an investor in the
markets of a foreign nation.

In FII, the companies only need to get registered in the stock exchange
to make investments. But FDI is quite different from it as they invest
in a foreign nation.

The Foreign Institutional Investor is also known as hot money as the

investors have the liberty to sell it and take it back. But in Foreign
Direct Investment, this is not possible. The Foreign Direct Investment
is considered to be more stable than Foreign Institutional Investor.
FDI POLICY IN
INDIA
• Foreign direct investment (FDI) has become an integral part of
national development strategies for almost all the countries globally.
Its global popularity and positive output in augmenting of domestic
capital, productivity and employment; has made it an indispensable
tool for initiating economic growth for nations.

• India is evolving as one of the ‘most favored destination’ for FDI in

Asia and the Pacific (APAC). It has displaced US as the second-most
favored destination for foreign direct investment (FDI) in the world
after China.

• FDI in India has contributed effectively to the overall growth of the

economy in the recent times. FDI inflow has an impact on India's
transfer of new technology and innovative ideas; improving
infrastructure, a competitive business environment.
 FDI POLICY:
India has among most liberal and transparent policy on FDI among
the emerging economies. FDI upto 100% is allowed under the
automatic route in all sectors except the following which require
prior approval of government:

• Manufacturing of tobacco products and its substitutes.

• Manufacturing of electronic aerospace and defence
equipments.
• Manufacturing of item exclusively meant for small scale
industries with more than 24% FDI.
• Proposals in which the foreign collaborator has an existing
joint venture, technology transfer, trade mark in India in same
field.
 FDI Policy contd:
An ongoing review of the FDI policy is carried out so as to initiate
more liberalization. Change in sectoral policy/sectoral equity cap is
notified from time to time through Press Notes. This is done by the
Secretariat for Industrial Assistance (SIA) in the Department of
Industrial Policy & Promotion. Policy announcement by SIA are
subsequently notified by RBI under FEMA.
• FDI Policy permits FDI up to 100 % from foreign/NRI investor
without prior approval in most of the sectors including the
services sector under automatic route.
• FDI in sectors/activities under automatic route does not require
any prior approval either by the Government or the RBI.
• The investors are required to notify the Regional office
concerned of RBI of receipt of inward remittances within 30 days
of such receipt. They will have to file the required documents
with that office within 30 days after issue of shares to foreign
investors.
 PROHIBITED SECTOR UNDER FDI

FDI is not permissible in the following cases:

• Gambling and Betting.

• Lottery Business.
• Business of chit fund.
• Housing and Real Estate business.
• Atomic Energy.
• Agricultural or plantation activities and plantations(other than
Tea plantations).
• Retail Sector
 INDUSTRIAL LICENSING POLICY

Industrial Licenses are regulated under the Industries (Development

& Regulation) Act, 1951. The requirements of Industrial license has
been progressively reduced. At present industrial license for
manufacturing is required only for the following:

• Industries retained under compulsory licensing.

• Items reserved for small scale sector.

-> An industrial undertaking is defined as a small-scale unit if the

capital investment in plant and machinery does not exceed Rs 10
million. A small scale unit can not have more than 24 per cent
equity in its paid up capital from any industrial undertaking, either
foreign or domestic.
A foreign company planning to set up business operations in India
has the following options:

As incorporated Entity:
i) By incorporating a company under the Companies Act,1956
through:
• Joint Ventures.
• Wholly Owned Subsidiaries.
Foreign equity in such Indian companies can be up to 100%
depending on the requirements of the investor, subject to equity
caps in respect of the area of activities under the Foreign Direct
Investment (FDI) policy.

As an Unincorporated Entity:
ii)As a foreign Company through
• Liaison Office/Representative Office
• Project Office
• Branch Office
TAX INCENTIVES
General Tax Incentives for Industries:
Tax holidays in the form of deductions are
available for various types of investments.
Theseinclude incentives to priority sectors
and incentives to industries located in
special area/regions.

Infrastructure Sectors:
Tax incentives available for those engage
in development of infrastructure are listed
below:
->Development or operation and
maintenance of ports, airports, roads,
highways, bridges,rail systems, irrigation
projects, sanitation and sewage projects.
 SECTORAL CAP
Advertising and films:
Advertising sector FDI up to 100% allowed on the automatic route
Film sector (film production, exhibition and distribution including
related services/products) FDI up to 100% allowed on the automatic
route with no entry level condition.

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

Power:
Up to 100% FDI allowed in respect of projects relating to
electricity generation, transmission and distribution, other than
atomic reactor power plants. There is no limit on the project cost
and quantum of foreign direct investment.
Trading:
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.

Information Technology:
100% FDI is permitted for setting up call centers. However, certain
procedures are required to be followed for setting up a call center/BPO.

->FDI up to 100% permitted for E-Commerce activities subject to the

condition that such companies would divest 26% of their equity in
favor of the Indian public in five years, if these companies are listed
in other parts of the world. Such companies would engage only in
business to business (B2B) E-commerce and not in retail trading FDI
is not permitted in retail trading activity.
FDI STATISTICS IN INDIA
FDI INFLOWS MONTH WISE DURING YEAR
2010
SECTORS ATTRACTING HIGHEST FDI
INFLOWS
SHARE OF TOP INVESTING COUNTRIES