CHAPTER-1

INTRODUCTION
Foreign Direct Investment (FDI) has been viewed as a power affecting Economic Growth
(EG) directly and indirectly during the past few decades. This paper reviewed an amount of
researches examining the relationships between FDI and EG, especially the effects of FDI on
EG, from 2018 up to 2023. The results show that the main finding of the FDI-EG relation is
significantly positive, but in some cases it is negative or even null. And within the relation,
there exist several influencing factors such as the adequate levels of human capital, the well
developed financial markets, the complementarity between domestic and foreign investment
and the open trade regimes, etc.

1.1 BACKGROUND OF THE STUDY

FDI
These three letters stand for Foreign Direct Investment. The simplest explanation of
FDI would be a direct investment by a corporation in a commercial venture in another
country. A key to separating this action from involvement in other ventures in a
foreign country is that the business enterprise operates completely outside the
economy of the corporation's home country. The investing corporation must control
10 percent or more of the voting power of the new venture. The practice has grown
significantly in the last couple of decades, to the point that FDI has generated quite a
bit of opposition from groups such as labour unions. These organizations have
expressed concern that investing at such a level in another country eliminates jobs.
Legislation was introduced in the early 1970s that would have put an end to the tax
incentives of FDI. The definition of FDI originally meant that the investing
corporation gained a significant number of shares (10 percent or more) of the new
venture. In recent years, however, companies have been able to make a Foreign Direct
Investment that is actually long-term management control as opposed to direct
investment in buildings and equipment. FDI growth has been a key factor in the

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 "international" nature of business that many are familiar with in the 21st century. This
growth has been facilitated by changes in regulations both in the originating country
and in the country where the new installation is to be built. Corporations from some
of the countries that lead the world's economy have found fertile soil for FDI in
nations where commercial development was limited, if it existed at all. The dollars
invested in such developing-country projects increased 40 times over in less than 30
years. The financial strength of the investing corporations has sometimes meant
failure for smaller competitors in the target country.

1.2 NEED OF THE STUDY

 SUSTAINING HIGH LEVEL OF INVESTMENT :- as India is a

developing country , it need certain amount of saving to invest for its
development . This gap between investment and saving is filled by foreign
capital.

 TECHNOLOGICAL GAP :- India has lower level of technology as compare

to developed nations which is very necessary for industrial and other
development so it need technology transfer which comes with FDI when it
assumes the form of private foreign investment.

 EXPLOITATION OF NATURAL RESOURCES :- India is full with natural

resource but it has no required technical skill and expertise to exploit it so ,
India need foreign capital to undertake the exploitation of its mineral wealth.

 DEVELOPMENT OF ECONOMIC INFRASTRUCTURE :- Domestic

capital of developing countries like India is too low to build up its economic
infrastructure so it need some foreign capital to develop its economic
infrastructure.

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1.3 LITERATURE REVIEW

FDI is regarded as the ownership or control of 10 percent or more of an enterprise's

voting securities or the equivalent interest in an unincorporated business (Griffin &
Pustay, 2007). Farrell (2008) defined FDI as a package of capital, technology,
management, and entrepreneurship, which allows a firm to operate and provide goods
and services in a foreign market. From a theoretical viewpoint, FDI can be divided
into two categories: Horizontal and Vertical. Horizontal FDI (HFDI) is a type of
investment which is in the same industry operating abroad as a firm operate, or offers
the same services as it does at home, and tends to produce for local or original
markets only without exporting much output to host country (Maskus, 2002);

(Haile & Assefa, 2006). It seeks to take advantages of a new large market, which is
considered as traditional motive for FDI. It is widely used by Japanese MNE's in their
international expansion because they believe that this model will help to reduce the
risk and enable them to share experience, resources, and acknowledgment that already
have developed at home (Botrić & Škuflić (2006).

In addition, ( Mariotti et al. (2003) stated that FDI inflows to advanced countries are usually
horizontal investments driven by market seeking strategies. And according to
(Botrić & Škuflić, 2006), HFDI replicates the whole production process of the home
country in a foreign country. Attracting inward investment has been a major policy
tool in the UK and elsewhere, and yet alarmingly little is known about the effects of
such investment on the regional economy. This volume presents a coherent
framework for such analysis, particularly in the context of the conflicting interests of
politicians, practitioners and the firms themselves. (Professor Nigel Driffeld, Aston
University, UK).

Nagrajan (2003) states that, as India’s trend shows the size of India’s domestic market
is relatively small, given the low levels of per capita income. After meeting the needs
of food and clothing (wage goods), income left for spending on products that most

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foreign firms offer seems small; their price- income ratio too high for Indian
consumers.

Kirthika et al. (2014) views about the relationship between FDI economic growths.
For this her studies were descriptive & analytical in nature also. They took the time
period of 10 years that is 2003-13. The author proved the hypothesis through Karl
Pearson correlation coefficient and also used the term CAGR. By using these, they
came to conclude that, in case of GDP with FDI, Coefficient of 0.87% which means
economic moves toward FDI inflows, with GNP also in same manner. But with BOP,
an increase in FDI inflow leads to decrease in overall BOP where the coefficient is
0.46.

Naveen (2015) opines that, “3d’s- democracy, demography and demand are the unique
traits of Indian economy and India is having superior marketplace at global level, the
government has launched , make in India”. Also suggesting India is far better on most
of the countries FDI inflows into the service sector increased from $ 2.22 billion in
2013-14 to $3.25 billion in 2014-15 i.e. Increase by 46 % , the growth rate has picked
up the pace, external account is better as foreign reserves are at record high, inflation
has been moderate and fiscal deficit is manageable. Thus for the acceleration of rate
of economic growth, India needs to augment FDI inflows by using simple statistical
tool like correlation and regression.

Shyam (2017) proposed in his journal, “FDI: future demand of India” mentioned that
“consumer are always hungry for modern ways of shopping, Indian retail &
employment potential is growing fast too. In his study it was mentioned about retail
scene that they are rethinking of best pricing system which e prudent to encourage
FDI in retail further.

Prerna et al. (2013) argued that, “FDI inflows rising but not enough because global
FDI inflows declined by 8% in the first half as the world economy which not compete
to other developed countries. Here author wants to give a long term lasting
relationship ideas to policy makers.”

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Vyas (2015), “An analytical study of FDI in India”. Here we tried to achieve the
objective the FDI inflows to India in sector, country and region wise and reached
conclusion that FDI creates jobs for skilled employee and plays vital role in
development of infrastructure and it has good further growth. In retailing & real
sector because relaxation of norms for foreign investment. In region wise, Mumbai
was top with 29% to total FDI. A country wise shows Mauritius in top followed by
Singapore, Japan, U.K. This study suggesting for flexible labour laws relook at sect
oral caps, geographical disparities of FDI should be removed result more and more
inflow of FDI into a country.

Renuka et al. (2013) highlights by focusing sector wise analysis FDI flow continuously
increasing mainly in service sector by using regression line and macro variable.

Anitha (2012) views that in his article “FDI & economic growth in India”, The FDI
inflows during pre-liberalization period was CAGR of 25.46% which very minimum
due to “INWARD LOOKING STRATEGY” & dependence of external borrowings.
And during post liberalization it was increased by 34.73%. She include 30 years from
1980-81 to 2009-10 by ARIMA model.

Rajalakhmi k.et al. (2011), “Impact of FDI in Indians automobile sector with
reference to passenger car segment”. The author had studied the foreign investment
flows through the automobile sector with special reference to passenger cars and
examining the trend and composition of FDI flow and effect of FDI on eco. Growth
and identifying the problem faced by India in FDI growth of automobile sector
through policy suggestion.

According to Teli R.B (2014),” A critical analysis of FDI inflows in India”. In his
article he tried to find out or analyzing the growth & trends& pattern of FDI inflow in
India & to study the impact of FDI on growth over the period 1991-201. For this he
used collected data, statistical tool and least square, concluded that India’s decision to
allow 100% FDI in single brand retail as a revolution, textile in India & prospects that
in the next 5 years, the countries aim is to have $250 billion FDI coming to India

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about impact of FDI, the correlation analysis shows that there is a very high
correlation between the FDI & the economic growth and suggesting that the
regulatory policies should be made favourable and avoid uncertainties for boosting
FDI in India.

Sirisha et al. (2015), “A study in the changing trends in the flow of FDI” stated that, in
the content of country wise inflow the CAGR ranges from -19.53% of minimum &
maximum of 65.28%. There are Luxemburg, Singapore, Japan witnessed positive &
Mauritius, USA, Hongkong witnessed negative. In the context of sector analysis
CAGR ranged between-52.22 to 52.33 which witnessed highest FDI in communication
and lowest in trading industry. For this the author studied for 7 yr that is 2007-08 to
201415, by using the term AGR.

Zeheng P.(2013), “ The variation in Indian inward FDI patterns”, it provides

systematic & religious analysis, concluded that only market seeking FDI attracted
more in early stage later. Resource seeking and efficiency seeking become more
popular due to changed govt. Attitude towards policies also it is affected by
geographical location due to cheap labuor for efficiency purpose in developing
country & suggests that Indian FDI experience may provide a guideline for other
developing countries in formulating specific polices.

Jammu S. et al (2014) stated in “FDI in India” that foreign capital is a good servant,
but a bad master. Their main focus was to examine the sector wise, state wise FDI
inflow during 2000-2010, and also showing the trends in FDI & total foreign
investment by taking CGR and semi log trend model. In the context of state wise
analysis Maharashtra and suggests further that it is mainly concerned in south and
north further. The relationship between FDI and GDP, by using regression equation,
economic growth leads to more attraction of FDI and inverse relationship between
GDP & FDI.

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 1.4 OBJECTIVES OF THE STUDY

The main objective of the study is to analyse the FDI inflows in India with special reference to
Sector-wise inflows.

The other objectives of the study are :

• To identify the sectors attracting highest FDI inflows.
• To rank the sectors based upon FDI inflows.
• To explore the opportunities for FDI inflows into various sectors; and
• To find out the benefits of FDl inflows to the various sectors in the Indian Industry

1.5 METHODOLOGY

There are two types of method for researching –

(i) Primary
(ii) Secondary

Primary research consists of collection of primary data. It involves direct contact with the
companies and the people associated with it. Be it the owners, employees, suppliers,
customers or the government. Due to lack of time and obvious non-availability of the
personnel of the organization, primary data collection was not possible.

My study has been carried out on the basis of secondary data i.e. collection of data from internet,
magazines. journals, annual reports of the company, etc

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1.6 LIMITATION OF THE STUDY

The study is confined to sector-wise flows of FDI in India and top ten investing countries
in India .
The project has been completed on the basis of secondary data .

1.7 CHAPTER PLANNING

My Project has been divided into the following chapters :-

 INTRODUCTION
 CONCEPTUAL FRAMEWORK / NATIONAL AND
INTERNATIONAL SCENERIO
 PRESENTATION OF DATA , ANALYSIS AND FINDINGS
 CONCLUSION AND RECOMMENDATIONS

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 CHAPTER – 2
CONCEPTUAL FRAMEWORK/NATIONAL/INTERNATIONAL
SCENARIO

2.1 DEFINITION OF FDI

FDI stands for Foreign Direct Investment, a component of a country's national financial
accounts. Foreign Direct Investment is investment of foreign assets into domestic structures,
equipment, and organizations. It does not include foreign investment into the stock markets.
Foreign Direct Investment is thought to be more useful to a country than investments in the
equity of its companies because equity investments are potentially "hot money" which can
leave at the first sign of trouble, whereas FDI is durable and generally useful whether things
go well or badly.

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor. FDIs require a business
relationship between a parent company and its foreign subsidiary. Foreign direct business
relationships give rise to multinational corporations. For an investment to be regarded as an
FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates.
The investing firm may also qualify for an FDI if it owns voting power in a business
enterprise operating in a foreign country.

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2.2 TYPES OF FDI
• HORIZONTAL FDI: Under this type of FDI, a business expands its inland operations
to another country. The business undertakes the same activities but in a foreign country.
• VERTICAL FDI: In this case, a business expands into another country by moving to a
different level of the supply chain. Thus business undertakes different activities overseas
but these activities are related to the main business.
• CONGLOMERATE: Under this type of FDI, a business undertakes unrelated business
activities in a foreign country. this type is uncommon as it involves the difficulty of
penetrating a new country and an entirely new market.

2.3 FDI POLICY IN INDIA

FOREIGN DIRECT INVESTMENT POLICY

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are
taken. Change in sectoral policy/sectoral equity cap is notified from time to time through
Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial
Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes
are available at the website of Department of Industrial Policy & Promotion. 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 and will have to file the required documents with
that office within 30 days after issue of shares to foreign investors.

 The Foreign Direct Investment scheme and strategy depends on the respective FDI
norms and policies in India. The FDI policy of India has imposed certain Foreign
Direct Investment regulations as per the FDI theory of the Government of India .
These include FDI limits in India for example: Foreign Direct Investment in India in
infrastructure development projects excluding arms and ammunitions, atomic energy
sector, railways system, extraction of coal and lignite and mining industry is allowed
upto 100% equity participation with the capping amount as Rs. 1500 crores.

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  FDI figures in equity contribution in the finance sector cannot exceed more than 40%
in banking services including credit card operations and in insurance sector only in
joint ventures with local insurance companies

 FDI limit of maximum 49% in telecom industry especially in the GSM services

Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or Investment Routes
for Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has
been formulated with a view to invite and encourage FDI in India. The Reserve Bank of India
has prescribed the administrative and compliance aspects of FDI. A foreign company
planning to set up business operations in India has the following options :

 Investment under automatic route; and

 Investment through prior approval of Government

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any
prior approval either by the Government or RBI. The investors are only required to notify the
Regional office concerned of RBI within 30 days of receipt of inward remittances and file the
required documents with that office within 30 days of issue of shares to foreign investors.

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List of activities or items for which automatic route for foreign investment is not
available include:
 Banking
 NBFC's Activities in Financial Services Sector
 Civil Aviation
 Petroleum Including Exploration/Refinery/Marketing

2.4 BARRIERS TO FDI IN INDIA

The existing barriers to FDI are:

 Restrictive FDI regime : The FDI regime in India is still quite restrictive. As a
consequence, with regard to cross border ventures, India ranks 57th in the GCR
1999. Foreign ownership of between 51 and 100 percent of equity still requires a
long procedure of governmental approval. In our view, there does not seem to be
any justification for continuing with this rule.

 Lack of clear cut and transparent sectoral policies for FDI : Expeditious
translation of approved FDI into actual investment would require more transparent
sectoral policies, and a drastic reduction in time-consuming red-tapism.

 High tariff rates by international standards : India’s tariff rates are still among
the highest in the world, and continue to block India’s attractiveness as an export
platform for labour-intensive manufacturing production. On tariffs and quotas,
India is ranked 52nd in the 1999 GCR, and on average tariff rate, India is ranked
59th out of 59 countries being ranked.

 Lack of decision-making authority with the state governments : The reform

process so far has mainly concentrated at the central level. India has yet to free up
its state governments sufficiently so that they can add much greater dynamism to
the reforms. In most key infrastructure areas, the central government remains in

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 control, or at least with veto over state actions. Greater freedom to the states will
help foster greater competition among themselves.

 No liberalization in exit barriers : While the reforms implemented so far have

helped remove the entry barriers, the liberalization of exit barriers has yet to take
place

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