PRESENTATION ON:-

Cdl.•pt•••• a
I

HUSSAIN
 Foreign direct i n vestment (FDI) is a key clement in inteniational econom ic
integration because i t creates stable and long-lasti ng li n ks between econom i cs. FDI
is a category of cross-border i n vestment in wh ich an in vestor resident i n
one economy establishes a lasting interest in and a significant degree of influence over
an enterprise resident in another economy. Ownersh i p or 10 percent or more of the
voti ng power i n an enterprise (also known as establishing lasting interest ) in one
economy by an i n vestor i n another economy is evidence of such a relationsh i p. FDI
is an important channel for the transfer of technology between countries. promotes
internat ional trade through access to foreign markets. and can be an important
vehicle for econmnic development.
In simple words, any investment from an individual or firm that is located i n a foreign
country into a country (where the individual or finn gets the right to

intervene ) is called Forei gn Direct Investment.

• General ly. FOi i s when a foreign entity acquires ownership or controlling stake in the
shares of a con1pany in one country, or establishes businesses there.
• It i s different from foreign port folio investmen t where the foreign entity 111crely bu
ys equ ity shares or a eo1npany.
• In FOi. the foreign entity has a say in the day-to-day operations of the company.
• FDI i s not just the inflow of money. but al so the i n flow of technology, knowledge.
skills and experti se/know-how.
•I t is a major sou rce of non-debt financial resources for the econom ic devclopn1ent of a
coun try.
•FDI genera lly takes pl ace in an cconon1y wh ich has the prospect of growth and also a ski I
led \vork force.
•The detenninants of FOi in host countries arc: Pol icy framework
Ru l es with respect to entry and opcrat ions.lfunctioni ng (mergers/acquisi t ions and
compet ition)
Pol i t ical. cconon1ic and soci a l stability

Treat ment sta nd ards of foreign am liates

g
Trade policy (tariff and non-tari ff ba rriers)
Privatization -
International pol
a recn1ents
icy
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Foreign d i rect i n vestment offers advantages to bot h the investor and the foreign host
count ry. These incentives encourage both parties to engage i n and allow FDI. Below arc
some of the benefits for bu sinesses:
• i'vlarket diversification
• Tax inccnti\
cs
• Lower
1
labor costs
• Preferential tari ffs
• Subsid i
es
The following arc some of t he benefits for the host coumry:
• Economic st imulation
• Development of human capital
• Increase in employment
• Access to management expertise, skills. and technology

For busi nesses. most of t hese benefits arc based on cost-cutt ing and loweri ng risk. For host
countries, the benefits arc mainly economic.
Typical ly, there arc two ma i n types of FDI : horizonta l and ve11ical FDI.
•Horizon lal: a business expands i ts domest ic operations to a foreign country. In th is case. the
business conducts the same activit ies but in a foreign country. For example. McDonald
's open ing restaurants i n Japan wou ld be considered horizonta l FDI.
•Vertical: a bu siness expands into a foreign country by movi ng to a di!Terent level of the
supply chain. I n other words. a finn conducts different act i vit ies abroad but these act
ivities arc still related to the ma i n busi ness. U sing the same example. 1\·lcDonald 's
could purchase a large-sca l e fann in Canada lo produce mea t for their restaurants.
I lowever. two other forms of FDI have also been observed: conglomerate and platform FDI.
•Conglom erate: a busi ness acquires an unrelated busi ness in a forei gn country. This is
uncommon. as it requires overcoming two barriers to entry: entering a foreign country and
enteri ng a new industry or market. An example of th i s would be if Virgin Group. which
is based in the United K ingdom. acqu ired a clothing line i n France.
•Platform: a business expands into a foreign country but the output from the foreign
operations is exported to a thi rd country.This is also rcforred lo as export-platform FDI.
Platfonn FDI common l y happens in low-cost locations inside free-trade areas. For
example, i f Ford purchased manu facturi ng pl anls in Ireland with the pri mary purpose of
export ing cars to other countries i n the EU.
 Foreign Direct Investment

Home Country Host Country

Backward Vertical R aw Material

FOi Supplier

Man ufacturer Horl ontal FOi Manufacturer ]

[
......

Forward Vertical Distributor

FOi
Any investment from an ind ividua l or firm that is located in a foreign country into a
count ry (where the indiv idual or lirm gets the right to inrervcnc) is called Foreign
Direct Investment. Amazon opening a new headquarters in Vancouver. Canada would be
an example of this.
Reinvesting profits from overseas operations as well as intra-company loans lo overseas
subsidiaries arc also considered foreign direct investments.
There arc mu ltiple methods for a domestic investor 10 acqu ire vot ing power in a foreign
company. Below arc some examples:
• Acquiring voti ng stock in a foreign company
• tvlcrgcrs and acquisitions
• Join t ventures with foreign corporations
• Starting a subsid iary of a domestic lin11 in a foreign coumry
Retai l is very innucm in I nd ia. Although. most of thc Indian retail market comes under
unorganized sector.still it is one of ihe world 's biggest reta i l industry.
The I nd ian retai l market is said lo be worth USO 600 bi llion. It comes in the top-fi ve retail
markets worldw ide by economic value.
In terms of economy. retai l is one of the pi llars of the Ind ian economy with the sector
cont ributing to about 12% of the Gross Domest ic Product (GDP).
The central govc1111ncnt has approved I 00°/o FOi in single-brand retai l and 51% FDI
in mu lt i-brand reta i l.
I ndia i s expected to attract USD 100 bi llion foreign direct investment (FDI) i n 2022-23
on the back of economic rcfonns and case of doing business in recent years. It also sa id the
cuncnt financial year is expected to anain a GDP growth of 1norc than 8 per cent.
 Fill in rl'tail -,\ch anta<>l'S and
hl'nl•fits
• Growth i n the econon1y - when foreign companies come in. new infrastn1cture wi ll
be bui l t. Sectors like real estate and bank ing wi l l sec growth. Also. i'vlNCs wi ll pay
a lot of taxes to the Indian government which again can be used to bui l d in frast
ructure.
• Employment generat ion - f DI in retail wi ll create a lot of jobs i n the organized
retai l sector.
• Foreign companies can bring i n better technology.management best pract ices. and
more learning for I nd ian players.
• Benefits for consumers - FDI i n reta i l implies low prices and better and more variety
of products for consumers to choose from. They "i ll also get access 10 internationa l
brands.
 Fill in rtlail - l >isach antaol•s. and a >
>rl'hl·nsions
• FDl may drain out the coumry's revenue share to lorcign cou ntries which can ham1 the
nat ion's overal I economy.
• The domest ic retail players might not be able to withstand the compel it ion from MNCs
and may be wiped out from the market or at least absorbed by the bigger players.
• Prices may be brought down i nit ially. but once the !VlNCs get a stronghold in the
market. t hey can cause price rise and may also form cai1cls harming the consumers.
• The predatory pricing policies of these big retai lers w i l l harm small and medium
players in the sector.
The investment climate in Ind i a has improved tremendously 1991 when the
since govcn11ncnt opened up the economy and i n itiaccd the LPG
strategics.
• The improvement in this regard is common ly attributed to the casing of FDI norms.
•iv' lany sectors have opened up tor foreign investment partia lly or wholly since the
econom ic libera lization of the country.
• Cu1Tently. India ranks i n the l ist of the lop I 00 countries i n ease of doing business.
•FOi received in the fi rst 5 months of 2020-21 (USO 35.73 bi llion ) i s 13% h igher as
compared to the first live tnonths of 2019-20 (USO 3t.60 bi llion). This estimate keeps
increasi ng with the current estimates of reaching 100 bi ll ion USD in 2022-23.
 .\11to111a tir l{o11l Fl)I
'
In the automat ic route, the foreign ent i ty does not require the prior approva of the
govcn11ncnt or the l
RBI.
Examples:-
• i\lcd ical devices: up to I 00%
• Then11al power:up to I 00%
• Services under Civil Aviation Services such as Maintenance & Repa i r Organizations
• Insurance: up to 49%
• In frastructu re company i n the securities market: up to 49%
• Ports and shipping
• Rai lway i n
frastructure
• Pension: up to 49%
• Power exchanges: up to 49%
• Petroleum Refining (By PSUs): up to 49%
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Under the goYernment route. the foreign entity should compu l sorily ta ke the approval of
the govcn1mcnt. It should file an application through the Foreign Investment
Facilitation Portal, which facil i tates single-window clearance. This application is then
forwarded to the respective ·ministry or department , wh ich then approves or rejects the
application after cons_u hatio with the DPll T (Department for Promotion of Indu stry
and I nternal Trade).,
Examples:
Broadcasting Content Services:49%
• - .

•Banking & Publ ic setor: 20%

.
• Food Products Retai
- '.
l Trading:
' .
I 00%
- _.. .
• Core Investment Company: I 00%
• i'vluhi-Brand
' - Retai l Trad in....
g : .. ' ' ·-
-
'·
.
5lo/o
• i'vl i n ing & Minerals separat ions of.titan ium bearing m i era l s and ores:
• 100%
Prim Media (publications/prim ing of scientific and technica l
mag<1zines/special1y jounials/pcriodica l s and a facsim ile edit ion of foreign newspapers):
• 100%
Satellite (Establ ishment and operations): 100%
• Print i\1cd ia (publishing of newspaper. periodicals and Indian edit o n
magazines dealing with news & curre n t affairs): 26% ions
r foreig
 Sl'l'lors "hl'l"l' Fill is
prohihitl'd
There arc some sectors where any FDI i s compktcl y prohibi ted. They arc:
• Agricu l tural or Plantation Act i vit ies (although there arc many like
exceptions horticu lture. fisheries, tea plantations. pisciculture. anima l husbandry,
• etc.)
Atom ic Energy Generat ion
• N idhi Company(a type of company i n the Indian non-ban king finance sector. also
known as mutual benelit company )
• Lotteries (online, pri vate.gove111mcnt. etc.)
• Investment in Chit Funds
• Trading in TOR 's
• A ny Gambl ing or Bett ing businesses
• Cigars. Cigarettes. or any related tobacco industry
• I lousing and Real Estate (except townsh i ps, commercial projects. etc.)
 Government schemes like product ion-linked incentive (PLI) scheme in 2020
for
electron ics manu factu ring have been noti fied to attract foreign
invesunents.
In 2019, the amendment of FDI Pol icy 2017 by the govcrmncnt. to pennit I OOo/o
, FDI
FDI in manufacturing was already under the 100% automat ic route. however. i n
under the
2019. government
automatic route inclari
coal fied thatactiv
m ining in vestments i n Indian
i t ies enhanced FDI cn1i1ics engaged
in comract manu facturing is also pennitted under the I OO'Yo automatic route
inllow.
provided i t is undertaken 1hrough a lcgi l imatc contract.
1 Further. the governmen t penn i tted 26% FDI i n d igital sectors. The sector
has particu larly high re111111 capabi l ities in India as favorable demographics.
subslantia l mobi le and internet penetration. massi ve consumption along
technology uptake prov ides great market opport unity for a foreign invcs1or.