WHAT IS FOREIGN INVESTMENT?

Any investment flowing from one country to another country is foreign investment. The Management of a business enterprise in a foreign country is foreign investment. Indian Government classifies foreign investment in the following form:

Foreign direct investment (FDI) Foreign institutional investment (FII)

Non-resident Indian (NRI) investment

Foreign direct investment

Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country.

Include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

 Usually preferred over other forms of external finance because

they are 1) Non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. 2) FDI also facilitates international trade and transfer of knowledge, skills and technology.

Management: in all business areas and organizational activities

and are the acts of getting people together to accomplish desired goals and objectives.

Joint Venture: is a legal entity formed between two or more

parties to undertake an economic activity together. The JV parties agree to create, for a finite time, a new entity and new assets by sharing resources, revenue, etc.

Transfer of Technology: is a process of sharing of skills,

knowledge, technologies, methods of manufacturing, to ensure that technological and scientific developments are accessible to wider range of users who can further use them to create new products.

WHAT WAS THE CRITERIA FOR FDI

Some time in 1991-92, the then Finance Minister and present Prime Minister Dr. Manmohan Singh referred to certain criteria for allowing Foreign Direct Investment. These were :
1.

Establishment of basic industries requiring huge capital and advanced sophisticated technology. Infrastructure projects like electricity generation road building etc. Projects which would generate employment

2.

3.

TRENDS IN FDI
In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
* Businesses fear protectionist pressures * FDI is seen a way of circumventing trade barriers * Dramatic political and economic changes in many parts of the world * Globalization of the world economy has raised the vision of firms who now see the entire world as their market

The FII (Foreign Institutional Investor) which chases the stocks in the market place. It is not exactly brick and mortar money (Like FDI), but in the long run it may translate into brick and mortar. Sudden influx of this drives the stock market up.

 FDI is a bit of a permanent nature while the FII flies away

at the shortest political or economical disturbance.

Once this money leaves, it leaves ruined economy and

ruined lives behind. Hence FII is to be welcomed with strict political and economical discipline.

e.g. China receives mainly the FDI. They do not have

instruments to receive the FII i.e. laws, institutions and political and judicial framework.

 In 1991 India opened its economy.

It allowed foreign players to invest in number of sectors. Tax rate applicable on Foreign companies have come down

progressively. The FDI limits in number of sectors have been progressively increased. FDI up to 100% is allowed in number of sectors except for in Media, Banking, Aviation, Insurance, Retail

 2nd most attractive investment destination among the Transnational

Corporations (TNCs) - UNCTADs World Investment Report, 2005 3rd most attractive investment destination AT Kearney Business Confidence Index, 2004 Up from 6th most attractive destination in 2003 and 15th in 2002 2nd Most attractive destination for manufacturing Among the top 3 investment hot spots for the next 4 years UNCTAD & Corporate Location April 2004 Most preferred destination for services - AT Kearneys 2005 Global Services Location Index (previously Offshore Location Attractiveness Index)

an individual a group of related individuals a public or a private company a group of related enterprises a government body any combination of the above

Domestic Competition Market Opportunity Profit Locational advantages Reputation

Inward and Outward FDI

Inward FDI: investment of foreign capital occurs in local resources Outward FDI: in this case it is the local capital, which is being invested in some foreign resource.

Horizontal and vertical FDI

Horizontal FDI: where multi-plant firms duplicate roughly the same activities in multiple countries. Vertical FDI: where firms locate different stages of production in different countries.

Resource Seeking
i. ii.

To seek and secure natural resources e.g. minerals, raw materials, or lower labor costs for the investing company For example, a German company opening a plant in Poland to produce and re-export to Germany

Market Seeking
i.

To identify and exploit new markets for the firms` finished products

Major Players are:

NOKIA

Vodafone
General Motors Suzuki

Major Players are:

Ranbaxy
Tata Group Wipro

Infro Systems

Large Size of Economy Rich resource base Cheap Labour Price stability Removal of Barriers to foreign trade Abundant supply of Manpower

Tight bureaucratic control and delays in clearance of FDI proposals. Corruption Rigid Labor laws especially Contract Labor laws Political Hostility of Left Parties. Poor infrastructure. Exit policies not clear. Tax rate higher than other countries

FDI POLICY OVERVIEW

EVOLUTION OF FDI POLICY

2000-05

More sectors opened ; Equity caps raised in many other sectors Procedures simplified Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors FDI up to 51% allowed under the Automatic route in 35 Priority sectors Allowed selectively up to 40%

2000

1997

1991

Pre 1991

Entry Routes
Foreign Direct Investment in India is approved

through the following routes :1) Automatic Route - No Prior permission needed to be taken from any regulatory authority but the RBI has to be notified within 1 month.

Entry Routes
2) FIPB Approval the foreign investment promotion board approves investment proposals : - Where the proposed shareholding is above the prescribed sector caps. - Where the activity belongs to small list of sectors where FDI is either not allowed or where it is mandatory that proposals be routed through the FIPB (e.g. the sectors that require industrial licensing.)

Sector Caps - Infrastructure

Sector Caps - Infrastructure

Sector Caps - Infrastructure

Sector Caps - Services

Sector Caps - Services

Sector Caps - Services

Sector Caps - Services

Sector Caps - Manufacturing

Sector Caps Resource based

Sector Caps Knowledge based

Restricted List of Sectors

Multi brand Retail
Atomic Energy Lottery Business Gambling and Betting Agriculture Railway Transport Defense services

Ranking of Sector wise FDI inflows

SERVICE SECTOR Computer Software and Hardware Telecommunication Housing and Real Estate Construction Activities Power Automobile Industry Metallurgical Industry Petroleum and Natural Gas Chemicals

Top Ten sectors attracting FDI inflows since April 2000-Dec 2009

Sector wise FDI inflows in India (2000-2009)

Automobiles
Suzuki, Toyota, Honda Japan
Volkswagen, DaimlerChrysler, BMW Germany Ford, General Motors(Chevrolet) USA Yamaha Japan Fiat Italy Hyundai South Korea Bosch - Germany

Electronic Products
Sony, Toshiba, Sansui, Hitachi, Panasonic Japan
Samsung, LG South Korea Philips Netherlands

Whirlpool, Motorola USA

Dell, Hewlett Packard USA Nokia Finland

Canon, Nikon Japan

Telecommunication
Ericsson Sweden
Vodafone United kingdom Siemens Germany ZTE, Huawei China

Computer Software and Semiconductors

Microsoft, Cognizant, Oracle USA
IBM, Aricent USA Accenture Ireland Intel USA Texas - USA

Financial Services
Citibank, Morgan Stanley USA
HSBC , Barclays United Kingdom Deutsche Germany BNP Paribas France Metlife Insurance, Max New York life Insurance,

Merrill Lynch USA Allianz Germany

Consumer Products
Amway, PepsiCo USA
Johnson and Johnson USA Procter and Gamble, Colgate-Palmolive USA Nestle Switzerland Unilever UK Kraft foods (Cadbury) UK

Single Brand retail

McDonalds, Pizza Hut USA
KFC, Dominos USA Nike USA Reebok USA Adidas Germany Puma Germany Fila South Korea

Regional FDI flow in India

 It helps in the economic development of the particular

country where the investment is being made. This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.

 Foreign direct investment also permits the transfer of

technologies. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resourses It also assists in the promotion of the competition within the local input market of a country.

The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country.
Foreign direct investment helps in the creation of new jobs in a particular country. It helps in also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life

DIASADVANTAGES OF FDI

 The various disadvantages of foreign direct investment are

understood where the host country has some sort of national secret something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country. At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves.
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.

RETAIL INDUSTRY

Types of retail FDI

Single Branding
Cash and Carry Multi Branding