Foreign Direct Investment Market Entry Modes

FOREIGN DIRECT INVESTMENT
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1.1 FOREIGN INVESTMENTS:

Foreign Investment means investment done by a foreign company in other
country or any other company outside its home country. Foreign markets exist
outside of your home nations political borders. Global markets introduce
increased populations that can be targeted for higher sales and profits. Overseas
markets also might offer a more accommodating sales environment because of
fewer entrenched competitors.
Foreign markets can be categorized into developed and emerging markets.
Industrialized nations, such as the United States, Germany and Japan, represent
mature markets, with relatively stable political regimes and commercial
environments. Emerging markets are identified by their higher profit potential
and heightened risk levels. For example, Nigeria is an emerging market where
portions of its abundant oil reserves are often shut out from the global economy
because of rebel warfare.
Larger businesses gain entry into foreign markets by establishing overseas
operations. Coca-Cola and McDonalds are examples of multinational
corporations that maintain formidable global presences. Multinational
companies can thrive overseas by making small cultural adjustments to their
current brand. For example, in the United States Nike focuses on football and
basketball advertisements, but it often rolls out expansive soccer advertising
campaigns in Europe.
Smaller investors can enter foreign markets through financial exchanges. These
savers can buy shares of stock in multinational firms such as Coca-Cola, or can
buy into global mutual fund shares for international exposure. It very much
important to have foreign investment in order to that particular country should
be called a developed country.
Foreign exchange facilitates global commerce. Foreign exchange describes the
process of trading domestic currency for international banknotes to make and
receive payments. Foreign exchange rates describe currency valuations, and
they calculate the amount of one currency that is required to trade for one unit
of a competing currency.
Advanced information technology and increasingly dependent commercial
relationships exposes the global economy to contagion risks. "Contagion"
describes the ability of one isolated economic event to make a transition to
regional and worldwide financial panic. Example: If there is slow down in
International Markets then it would affect each and every country in world

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1.2 VARIOUS TYPES OF FOREIGN INVESTMENT MODES?

Flows of capital from one nation to another in exchange for significant
ownership stakes in domestic companies or other domestic assets. Typically,
foreign investment denotes that foreigners take a somewhat active role in
management as a part of their investment. Foreign investment typically works
both ways, especially between countries of relatively equal economic stature.
Currently there is a trend toward globalization whereby large, multinational
firms often have investments in a great variety of countries. Many see foreign
investment in a country as a positive sign and as a source for future economic
growth. The U.S. Commerce Department encourages foreign investment
through its Invest in America initiative.
There are different types of foreign Investment Modes which a particular
company can put forth for entering in foreign markets or also called as global
markets. Foreign market entry modes differ in degree of risk they present, the
control and commitment of resources they require and the return on investment
they promise. The decision of how to enter a foreign market can have
significant impact on results of the companies. So for expanding their business
they follow various foreign investment modes.
There are two major types of entry modes: equity and non-equity modes. The
non-equity modes category includes export and contractual agreements. The
equity modes category includes: joint venture and wholly owned subsidiaries

The various types of foreign investment modes are as follows:

Exporting
Licensing
Franchising
Turnkey Projects
> Wholly owned subsidiaries (WOS)
> Joint Venture
> Strategic Alliance

Foreign Direct Investment (FDI)
Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors


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EXPORTING:

Exporting is the process of selling of goods and services produced in one
country to other countries. Exporting is the marketing and direct scale of
domestically-produced goods in another country. Exporting is a
traditional and well- established method of reaching foreign markets.
Since exporting does not require that the goods be produced in the target
country, no investment in foreign production facilities is required. Most
of the costs associated with exporting take the form of marketing
expenses.

Exporting commonly requires coordination of four players. They are
Importers, Exporters, Transport Provider and Government.

There are two types of exporting:

> Direct Exports
> Indirect Exports

Direct Exports:

Direct exports represent the most basic mode of exporting, capitalizing
on economies of scale in production concentrated in the home country
and affording better control over distribution. Direct export works the
best if the volumes are small. Large volumes of export may trigger
protectionism.

There are two types of Direct Exporting:

Sales representatives: This sales representatives includes the
foreign suppliers/manufacturers in their local markets for an
established commission on sales. Provide support services to a
manufacturer regarding local advertising, local sales presentations,
customs clearance formalities, legal requirements. Manufacturers of
highly technical services or products such as production machinery,
benefit the most form sales representation.


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Importing distributors purchase product in their own right and
resell it in their local markets to wholesalers, retailers, or both.
Importing distributors are a good market entry strategy for products
that are carried in inventory, such as toys, appliances, prepared food.

Indirect Exports:

Indirect exports are the process of exporting through domestically
based export intermediaries. The exporter has no control over its
products in the foreign market.

There are four types of Indirect Exports:

Export trading companies (ETCs) provide support services
of the entire export process for one or more suppliers. Attractive to
suppliers that are not familiar with exporting as ETCs usually perform
all the necessary work: locate overseas trading partners, present the
product, quote on specific enquiries, etc.

Export management companies (EMCs) are similar to
ETCs in the way that they usually export for producers. Unlike ETCs,
they rarely take on export credit risks and carry one type of product,
not representing competing ones. Usually, EMCs trade on behalf of
their suppliers as their export departments.

Export merchants are wholesale companies that buy
unpackaged products from suppliers/manufacturers for resale
overseas under their own brand names. The advantage of export
merchants is promotion. One of the disadvantages for using export
merchants result in presence of identical products under different
brand names and pricing on the market, meaning that export
merchants activities may hinder manufacturers exporting efforts.

Confirming houses are intermediate sellers that work for
foreign buyers. They receive the product requirements from their
clients, negotiate purchases, make delivery, and pay the
suppliers/manufacturers. An opportunity here arises in the fact that if
the client likes the product it may become a trade representative. A
potential disadvantage includes suppliers unawareness and lack of
control over what a confirming house does with their product.


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LICENSING:

An international licensing agreement allows foreign firms, either
exclusively or non-exclusively to manufacture a proprietors product for
a fixed term in a specific market.
Summarizing, in this foreign market entry mode, a licensor in the home
country makes limited rights or resources available to the licensee in the
host country. The rights or resources may include patents, trademarks,
managerial skills, technology, and others that can make it possible for
the licensee to manufacture and sell in the host country a similar
product to the one the licensor has already been producing and selling in
the home country without requiring the licensor to open a new operation
overseas. The licensor earnings usually take forms of one time
payments, technical fees and royalty payments usually calculated as a
percentage of sales.
As in this mode of entry the transference of knowledge between the
parental company and the licensee is strongly present, the decision of
making a international license agreement depend on the respect the host
government show for intellectual property and on the ability of the
licensor to choose the right partners and avoid them to compete in each
other market. Licensing is a relatively flexible work agreement that can
be customized to fit the needs and interests of both, licensor and
licensee.
For example, US business might obtain the rights to manufacture and
sell an India Ayurvedic medicine in the United States using the
particular formula and packing design. The US Company would be
responsible for promoting & distributing the product and it would pay
the Indian company a percentage of its income from sales in exchange
for the products rights.
Following are the main advantages and reasons to use an
international licensing for expanding internationally:
Obtain extra income for technical know-how and services
Reach new markets not accessible by export from existing facilities
Quickly expand without much risk and large capital investment
Pave the way for future investments in the market
Retain established markets closed by trade restrictions
Political risk is minimized as the licensee is usually 100% locally
owned


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FRANCHISING:

Franchising is a way of doing business and involves the use by a person
(Franchisee), pursuant to a license, of another persons (Franchisor)
business model, name, get-up, image and business identity along with
his confidential know-how to exploit his intangible assets in a particular
territory for a specified period with or without assured financial returns
to the Franchisor.
A typical franchising arrangement provides the Franchisor the benefit of
the Franchisees knowledge of the territory, access to local sales channels
and marketing expertise, minimum capital outlay, minimum government
approvals, lesser personnel problems, accelerated network growth and
probably, profitability.
There are three distinct models of franchising- Product Distribution
Franchising involving a co-operation for the distribution of goods, mostly
in retail business, Trade Name Franchising where the Franchisee uses the
trademark/business name of the Franchisor in order to sell its own
products or services and Business Format Franchising, a combination of
the other two types of franchising, using the Franchisors
trademark/business name in order to distribute the Franchisors goods or
services. Today, the Business Format is a preferred model with more than
1,150 national and international franchise systems in an India
Advantages of the international franchising mode:
Low political risk
Low cost
Allows simultaneous expansion into different regions of the world
Well selected partners bring financial investment as well as
managerial capabilities to the operation.

Disadvantages of the international franchising mode:
Franchisees may turn into future competitors.
Demand of franchisees may be scarce when starting to franchise a
company, which can lead to making agreements with the wrong
candidates
A wrong franchisee may ruin the companys name and reputation in
the market.


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TURNKEY PROJECTS:

A turnkey project refers to a project in which clients pay contractors to
design and construct new facilities and train personnel. A turnkey
project is way for a foreign company to export its process and
technology to other countries by building a plant in that country.
Industrial companies that specialize in complex production
technologies normally use turnkey projects as an entry strategy.
One of the major advantages of turnkey projects is the possibility for a
company to establish a plant and earn profits in a foreign country
especially in which foreign direct investment opportunities are limited
and lack of expertise in a specific area exists.
Potential disadvantages of a turnkey project for a company include
risk of revealing companies secrets to rivals, and takeover of their plant
by the host country. By entering a market with a turnkey project proves
that a company has no long-term interest in the country which can
become a disadvantage if the country proves to be the main market for
the output of the exported process.
Example: Turnkey project for Fruit and Vegetables As for tomato
paste processing and packaging whole line, through many years of
cooperation with Fenco, ITA of Italy, we have obtain domestic
unparalleled technology in the regards of pre-treatment, cold-break
techniques, multi-effect vacuum concentration, tube in tube
sterilization, aseptic filling and etc. Besides, our excellent and rich-
experienced engineers ensure the professional, perfect after-sales
service.
In Chinese mainland, we should be the No. 1 supplier for the tomato
paste processing line on turn-key basis. Nearly 95% machinery is made
in the factory in Shanghai Pudong is good & of modern techniques.
So far, we have completed at the least 30 whole processing lines for
tomato paste.
Turnkey Projects are divided into three types. They are as
follows:

Wholly Owned Subsidiaries (WOS)
Joint Ventures
Strategic Alliance


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Wholly Owned Subsidiaries (WOS):

An wholly owned subsidiary (WOS) includes two types of
strategies: Greenfield investment and Acquisitions. Greenfield
investment and acquisition include both advantages and
disadvantages. To decide which entry modes to use is depending on
situations.
Greenfield investment is the establishment of a new wholly owned
subsidiary. It is often complex and potentially costly, but it is able to
full control to the firm and has the most potential to provide above
average return. Wholly owned subsidiaries and expatriate staff are
preferred in service industries where close contact with end
customers and high levels of professional skills, specialized know
how, and customizations are required. Greenfield investment is
more likely preferred where physical capital intensive plants are
planned. This strategy is attractive if there are no competitors to buy
or the transfer competitive advantages that consists of embedded
competencies, skills, routines, and culture.
Greenfield investment is high risk due to the costs of establishing a
new business in a new country. A firm may need to acquire
knowledge and expertise of the existing market by third parties,
such consultant, competitors, or business partners. This entry
strategy takes much time due to the need of establishing new
operations, distribution networks, and the necessity to learn and
implement appropriate marketing strategies to compete with rivals
in a new market.
Acquisition has become a popular mode of entering foreign markets
mainly due to its quick access Acquisition strategy offers the fastest,
and the largest, initial international expansion of any of the
alternative. Acquisition has been increasing because it is a way to
achieve greater power. The market share usually is affected
by market power. Therefore, many multinational corporations apply
acquisitions to achieve their greater market power require buying a
competitor, a supplier, a distributor, or a business in highly related
industry to allow exercise of a core competency and
capture competitive advantage in the market.
Acquisition is lower risk than Greenfield investment because of the
outcomes of an acquisition can be estimated more easily and
accurately. In overall, acquisition is attractive if there are well
established firms already in operations.

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Joint Ventures:

There are five common objectives in a joint venture: market entry,
risk/reward sharing, technology sharing and joint product development,
and conforming to government regulations. Other benefits include
political connections and distributions channel access that may depend
on relationships. There are five common objectives in a joint venture:
market entry, risk/reward sharing, technology sharing and joint product
development, and conforming to government regulations. Other
benefits include political connections and distribution channel access
that may depend on relationships.

Such alliances often are favorable when:

The partners strategic goals coverage while their
competitive goals diverge.
The partners size, power, and resources are small compared
to the industry leaders.
Partners are able to learn from one another while limiting
access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control,
length of agreement, pricing, technology transfer, local firm
capabilities and resources, and government intentions.
Potential problems include:
Conflict over asymmetric new investments
Mistrust over proprietary knowledge
Performance ambiguity-how to split the pie
Lack of parent firm support
Cultural clashes
Joint Ventures have conflicting pressures to cooperate
and complete:
The partners want to maximize the advantage gained from
joint venture their competitive position.
The joint venture attempts to develop shared resources, but
each firm wants to develop and protect its own proprietary
resources
The joint venture is controlled through negotiations and
coordination processes, while each firm would like to have
hierarchical control.

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Strategic Alliance:

A Strategic Alliance is a term used to describe a variety of
cooperative agreements between different firms, such as shared
research, formal joint ventures, or minority equity participation.
The modern form of strategic alliances is becoming
increasingly popular and has three distinguishing
characteristics:

They are frequently between firms in industrialized
nations.
The focus is often on creating new products and/or
technologies rather than distributing existing ones.
They are often only created for short term durations.

Advantages of Strategic Alliance:
Technology Exchange: This is a major objective for
many strategic alliances. The reason for this is that many
breakthroughs and major technological innovations are
based on interdisciplinary and/or inter-industrial advances.
Because of this, it is increasingly difficult for a single firm
to possess the necessary resources or capabilities to
conduct their own effective R&D efforts. This is also
perpetuated by shorter product life cycles and the need for
many companies to stay competitive through innovation.
Some industries that have become centers for extensive
cooperative agreements are: telecommunications,
Electronics, Pharmaceuticals, Information technology,
Specialty chemicals.

Global Competition: There is a growing perception
that global battles between corporations be fought
between teams of players aligned in strategic
partnerships. Strategic alliances will become key tools
for companies if they want to remain competitive in this
globalized environment, particularly in industries that
have dominant leaders, such as cell phone manufactures,
where smaller companies need to ally in order to remain
competitive.

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Disadvantages of Strategic Alliance:

The Risks of Competitive Collaboration
Some strategic alliances involve firms that are in fierce
competition outside the specific scope of the specific
scope of the alliance. This creates the risk that one or
both partners will try to use the alliance to create an
advantage over the other. The benefits of this alliance
may cause unbalance between the parties, there are
several factors that may cause this asymmetry: The
partnership may be forged to exchange resources and
capabilities such as technology. This may cause one
partner to obtain the desired technology and abandon the
other partner, effectively appropriating all the benefits of
the alliance. This is a situation where one partner makes
and keeps control of critical resources. This creates the
threat that the stronger partner may strip the other of the
necessary infrastructure.

THE CASE STUDY OF EURO-DISNEY

Different modes of entry may be more appropriate under different
circumstances, and the mode of entry is an important factor in the success of
the project. Walt Disney Co. faced challenge of building a theme park in
Europe. Disneys mode of entry in the Japan has been licensing. However, the
firm chose foreign direct investment in its European theme park, owning 49%
with the remaining 51% held publicly.
Besides the mode of entry, another important element in Disneys decision
was exactly where in Europe to locate. There are many factors in the site
selection decision and a company carefully must define and evaluate the
criteria for choosing a location. The problems with Euro Disney project
illustrate that even if a company has been successful in past as Disney had
been in California, Florida and Tokyo theme parks, future success is not
guaranteed, especially when moving into a different culture and country. The
appropriate adjustments for national differences should be made at very great
or fast speed.


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FOREIGN DIRECT INVESTMENT (FDI):

Foreign Direct Investment (FDI) is the direct ownership of facilities in
the target country. It involves the transfer of resources including capital,
technology and personnel. Direct foreign investment may be made
through the acquisition of an existing entity or the establishment of a
new enterprise.

Direct ownership provides a high degree of control in the operations and
the ability to better know the consumers and competitive environment.
However, it requires a high level of resources and a high degree of
commitment.

Foreign direct investment (FDI) or foreign investment refers to the net
inflows of investment to acquire a lasting management interest (10
percent or more of voting stock) in an enterprise operating in an
economy other than that of the investor. It is the sum of equity capital,
reinvestment of earnings, other long-term capital, and short-term
capital as shown in the balance of payments. It usually involves
participation in management, joint-venture, transfer of and expertise..

FOREIGN INSTITUTIONAL INVESTORS (FIIs):
Foreign Institutional Investors (FIIS) is also called as Foreign Portfolio
Investors (FPIs). These are organizations which as pool large sums of
money and invest those sums in securities, real property and other
investment assets. They can also include operating companies which
decide to invest its profits to some degree in these types of assets. They
invest stock market and book their profits. This investment is for short-
term purpose.
Institutional investors will have a lot of influence in the management
of corporations because they will be entitled to exercise the voting
rights in a company. They can actively engage in corporate
governance. Furthermore, because institutional investors have the
freedom to buy and sell shares, they can play a large part in which
companies stay solvent, and which go under. Influencing the conduct
of listed companies, and providing them with capital are all part of the
job of investment management


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2.1 WHAT IS FOREIGN DIRECT INVESTMENT (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.
The International Monetary Fund (IMF) defines Foreign Direct Investment
as an investment that is made to acquire a lasting interest in an enterprise
operating in an economy other than that of the investor, the investors purpose
being to have an effective voice in the management of the enterprise.
The United Nations2000 (UN) defines Foreign Direct Investment as an
investment involving a long-term relationship and reflecting a last interest and
control of a resident entity in one economy in an enterprise resident in an
economy other than that of foreign direct investor.
According to me, Foreign Direct Investment (FDI) is the investments that
provide real liquidity to the economy for sustainable development. Foreign
Direct Investment is Multinational Companies which invest in other countries or
buy stake in particular company or companies. This investment is for long- term
purpose.
FDI category refers to international investment in which the investor obtains a
lasting interest in an enterprise in another country. Mostly concretely, it may
take the form of buying or constructing a factory in a foreign country or adding
improvements to such a facility, in the form of property, plants or equipments.
FDI is calculated to include all kinds of capital contribution, such as the
purchases of stock, as well as the reinvestment earnings by a wholly owned
company incorporated aboard (subsidiary), and the lending of funds to a foreign
subsidiary or branch. The reinvestment of earnings and transfer of assets
between a parent company and its subsidiary often constitutes a significant part
of FDI calculations
According to United Nations Conference on Trade and Development
(UNCTAD), the global expansion of FDI is currently being driven by over
60,000 transnational corporations with more than 8,00,000 foreign affiliates.


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An Investors earnings on FDI take the form of profits such as dividends,
retained earnings, management fees and royalty payments.
FDI contributes to growth in national markets, permitting the willingness of
governments to allow foreign ownership, as well as the availability of markets
for the products, good transport and communications systems and trained or
trainable people in the host country. Most investors of foreign investment to
date have been attracted from the developed countries of the world, in industrial
sectors such as large, technology-intensive enterprises as well s in the service
sectors such as banking, insurance and lately call-centers
It should be noted that foreign investors are at a cost disadvantages when they
exit their own countries and cross national borders. Such as
The foreign investor has to establish local contacts for supplies and
distribution.
New rules and regulations on matters such as trading and manufacturing,
employment, environmental management and other apply.
It also becomes somewhat more difficult to co-ordinate and
communicates across geographic distances and cultural differences.
The investor also needs to properly manage the exposure of the mother-
company to exchange rate exposure and different taxation requirements.

This leads to the question of why enterprises do choose to enter foreign
countries and as such go abroad as investors. The answer this is simply that
such enterprises need to expand to stay ahead of the pack-to remains
competitive and increase production-to maintain growth and profitability.


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2.2 FDI DIFFERENT FROM PORTFOLIO INVESTMENT:

The common feature of this definition lies in terms like control and
controlling interest, which represent the most important feature, that
distinguish Foreign Direct Investment (FDI) from portfolio investment, since
portfolio investor does not seek control or lasting interest. There is no
agreement, however, on what constitutes a controlling interest, but most
commonly a minimum of 10 per cent shareholding is regarded as allowing the
foreign firm to exert a significant influence (potentially or actually exercised)
over the key policies of the underlying project.
For example, the US Department of Commerce regards a foreign business
enterprise as a US foreign affiliate if a single investor owns 10 per cent of the
voting securities or the equivalent. Both debt and equity financed capital
transfers to foreign affiliates are included in the US government, s estimated of
Foreign Direct Investment. Sometimes, another qualification is used to pinpoint
Foreign Direct Investment, which involves transferring capital from source
country to host country. For this purpose, investment activities abroad are
considered to be Foreign Direct Investment (FDI) when:
There is control through substantial equity shareholding.
There is shift of part of the companys assets, production or sales to the
host country
However this may not be the case, as a project may be financed totally by
borrowing in the host country.
Thus, the distinguishing feature of foreign direct investment, in comparison
with others forms of international investment, is the element of control over
management policy and decisions. Economist Razin argued that the element of
control gives the direct investors an informational advantage over foreign
portfolio investors and domestic savers. Many firms are unwilling to carry out
foreign investment unless they have one hundred per cent equity ownership and
control. Other refuses to make such investments unless they have at least
majority control that is 51 per cent stake. In recent years, however, there has
been a tendency for indulging in foreign direct investment (FDI) co-operative
arrangements, where several firms participate and no single party holds control.
For example: joint ventures.
But exactly control in definition of FDI means that some degree of discretionary
decision making by the investor is present in management policies and strategy.
For example this control may occur through the ability of the investor to elect or
select one or more members on the board of directors of foreign company

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2.3 DISTINGUISH BETWEEN FDI AND FIIs:

Foreign Direct Investment
(FDI)
Foreign Institutional
Investors (FIIs)

Duration FDI investment is more
enduring and has longer time
stability
FIIs are highly volatile.
Form FDI generally comes as
subsidiary or a joint venture.
FIIs comes mainly through stock
markets
Motive Motive behind FDI is to acquire
controlling interest in a foreign
entity or set up an entity with
controlling interest.
Motive behind FIIs is to make
(capital) gains from investments.
There is no intention to control
the entity.
Purpose Foreign direct investment is
made with core thought of
business philosophy of
diversification, integration,
consolidation, and expansion
and/or core business formation.
Calculation of gains is always
prime criteria but never the sole
criteria.
FIIs sole criteria and motive is
gains on investment.
Source FDI investment comes from
MNCs and corporate so as to
derive benefit of new market,
cheaper resources (labor),
efficiency and skills, strategic
asset seeking (oil fields) and
time geography (BPO-
Transcriptions)
FIIs investment come from
investors, mutual funds,
portfolio management
companies and corporate with
pure motive of investment gains.

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The Determinants of FDI include the following:

The determinants of FDI differ among countries and across economic
sectors. These factors include the policy framework, economic
determinants and the extent of business facilitation such as macro-
economic fundamentals and availability of infrastructure

Size of the Market: Large developing countries provide substantial
markets where the consumers demand for certain goods far exceed the
available supplies. This demand potential is a big draw for many foreign-
owned enterprises. In many cases, the establishment of a low-cost
marketing operation represents the first step by a multinational into the
market of the country. This establishes a presence in the market and
provides important insights into the ways of doing business and possible
opportunities in the country

Political Stability: In many countries, the institutions of government are
still evolving and there are unsettled political questions. Companies are
unwilling to contribute large amounts of capital into an environment
where some of the basics political questions have not yet been resolved.

Macro-economic Environment: Instability in the level of prices and
exchange rate enhance the level of uncertainty, making business planning
difficult. This increases the perceived risk of making investments and
therefore adversely affects the inflow of FDI

Legal and Regulatory Framework : The transition to a market economy
entails the establishment of a legal and regulatory framework that is
compatible with private sector activities and the operation of foreign
owned companies. The relevant areas in this field include protection of
property rights, ability to repatriate profits, and a free market for currency
exchange. It is important that these rules and their administrative
procedures are transparent and easily comprehensive.


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Access to Basic Inputs: Many developing countries have large reserves
of skilled and semi-skilled workers that available for employment at
wages significantly lower than in developed countries. This provides an
opportunity for foreign firms to make investments in these countries to
cater to the export market. Availability of natural resources such as oil
and gas, minerals and forestry products also determine the extent of FDI
Foreign Investment Restrictions: The government might feel that by
allowing foreign investor to invest in production facilities will mean the
outflow of capital from a country in the forms of profits. This approach
also constrains the flow of FDI into the country.

Corruption cum lack of Transparency: Corruption deters several
efficient players from investing as they are of the opinion that the
clearance of their proposal is not performance or reputation oriented but
under table dealing. Hence lack of transparency and bureaucracy deters
them in entering the markets.

Per Capita Income: The Per Capita income of the citizens plays a major
role, the higher the per capita income more will be the spending rate
assuming sound governance in the country, which will offer excellent
opportunities for expansion.

Infrastructural facilities: Infrastructural factors like railways and
telecommunications are a major determinant for a company to get
interested and invest on the host country, improvement in areas such as
these will definitely boost up investor confidence
Labor Force: Inexpensive labor face is also important in this regard, the
BPO revolution and the exponential growth of the IT sector in India is
primarily due to the availability of IT professional working at wages less
than global standards.


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4.1 ADVANTAGES OF FOREIGN DIRECT INVESTMENT:

Attracting foreign direct investment has become an integral part of the
economic development strategies for various countries across global. 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. FDI has been a booming factor that has
bolstered the economic life of India, but on the other hand it is also being
blamed for ousting domestic inflows. FDI is also claimed to have lowered few
regulatory standards in terms of investment patterns. The effects of FDI are by
and large transformative. The incorporation of a range of well-composed and
relevant policies will boost up the profit ratio from Foreign Direct Investment
higher. In the global economy today, we see many developing countries
competing for foreign direct investment. FDI is said to be an important factor
for spurring the development of a nation.
The advantages of foreign direct investment to the investor includes access to a
larger market in the host country, ability to tap the potential of a cheap and
skilled labor, making use of resources in the host country and pursuing growth
goals by diversification and optimizing costs.

Some of the biggest advantages of FDI enjoyed by the countries
have been listed as under:

Integration into global economy: A developing country, which invites
FDI, can gain a greater foothold in the world economy by getting access to a
wider global market.

Technology advancement: FDI can introduce world-level technology and
technical know-how and processes to developing countries. Foreign expertise
can be an important factor in upgrading the existing technical processes in a
host country. For example, the civilian nuclear deal between India and the
United States would lead to transfer of nuclear energy know-how between the
two countries and allow India to upgrade its civilian nuclear facilities.

Increased competition: As FDI brings in advances in technology and
processes, it increases the competition in the domestic economy of the
developing country, which has attracted the FDI. Other companies will also
have to improve their processes and products in order to stay competitive in the

~ 20 ~

market. Overall, FDI improves the quality of a products and processes in a
particular sector.

Improved human resources: Employees of a host country in which there
is an FDI get exposure to globally valued skills. The training and skills up
gradation can enhance the value of the human resources of the host country.

Raising the Level of Investment: Foreign investment can fill the gap
between desired investment and locally mobilized savings. Local capital
markets are often not well developed. Thus, they cannot meet the capital
requirements for large investment projects. Besides, access to the hard currency
needed to purchase investment goods not available locally can be difficult. FDI
solves both these problems at once as it a direct sources of external capital. It
can fill the gap between desired foreign exchange requirements and those
derived from net export earnings.

Improvement in Export Competitiveness: FDI can help the host country
improve its export performance. By raising the level of efficiency and the
standards of product qualit y, FDI makes a positive impact on the
host countrys export competitiveness. Further, because of the international
linkages of MNCs, FDI provides to the host country better access to foreign
markets. Enhanced export possibility contributes to the growth of the host
economies by relaxing demand side constraint son growth. This is important
for those countries which have small domestic market and must increase
exports vigorously to maintain their tempo of economic growth.

Benefits to Consumers: Consumers in developing countries stand to gain
from FDI through new products, and improved quality of goods at competitive
prices.

Revenue to Government: Profits generated by foreign direct investment
contribute to corporate tax revenues in the host country.


~ 21 ~

4.2 DISADVANTAGES OF FOREIGN DIRECT INVESTMENT:

The disadvantages of foreign direct investment occur mostly in case of matters
related to operation, distribution of the profits made on the investment and the
personnel. One of the most indirect 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 situations in countries like Ireland, Singapore, Chile and China corroborate
such an opinion. It is normally the responsibility of the host country to limit the
extent of impact that may be made by the foreign direct investment. They
should be making sure that the entities that are making the foreign direct
investment in their country adhere to the environmental, governance and social
regulations that have been laid down in the country.
FDI is not an unmixed blessing. Governments in developing countries have to
be very careful while deciding the magnitude, pattern and conditions of private
foreign investment.

Possible adverse implications of foreign investment are the
following:

When foreign investment is competitive with home investment, profits in
domestic industries fall, leading to fall in domestic savings.

Contribution of foreign firms to public revenue through corporate taxes is
comparatively less because of liberal tax concessions, investment allowances,
and disguised public subsidies and tariff protection provided by host country.

Foreign firms reinforce dualistic socio-economic structure and increase
income inequalities. They create a small number of highly paid modern sector
executives. They divert resources away from priority sectors to the
manufacture of sophisticated products for the consumption of the local elite. As
they are located in urban areas, they create imbalances between rural and urban
opportunities, accelerating flow of rural population to urban areas.
Foreign firms stimulate inappropriate consumption patterns through
excessive advertising and monopolistic market power. The products made
by multinationals for the domestic market are not necessarily lowing price and

~ 22 ~

high in quality. Their technology is generally capital-intensive which does not
suit the needs of a labor-surplus economy

Foreign firms able to extract sizeable economic and political concessions
from competing governments of developing countries. Consequently,
private profits of these companies may exceed social benefits.

Continual outflow of profits is too large in many cases, putting pressure on
foreign exchange reserves. Foreign investors are very particular about profit
repatriation facilities.

Foreign firms may influence political decisions in developing countries. In
view of their large size and power, national sovereignty and control over
economic policies may be jeopardized. In extreme cases, foreign firms may
bribe public officials at the highest levels to secure undue favors. Similarly,
they may contribute to friendly political parties and subvert the political
process of the host country.

Major disadvantage of foreign direct investment is that there is a chance that
a company may lose out on its ownership to an overseas company. This has
often caused many companies to approach foreign direct investment with a
certain amount of caution.

Foreign direct investment may entail high travel and communications
expenses. 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.

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.


~ 23 ~

5.1 HISTORY OF FOREIGN DIRECT INVESTMENT:

In the nineteenth century, foreign investment was prominent, but it mainly took
form of lending by Britain to finance economic development in other countries
as well as ownership of financial assets. There are different types cases of
foreign direct investment (FDI) in British manufacturing industry prior to 1890,
and shows that from 1890 onwards bulk of foreign direct investment was in
industrial goods sector. The investors in Britain prior to 1890 were primarily in
the consumers goods sector, and that they mostly failed because they were
narrowly focused and driven entirely by concern about enhancing British
market. One exception was the Singer Manufacturing Company. As a result of
its enthusiastic commitment to foreign direct investment, the company emerged
as the world, s first modern multinational company (MNC) and was one of the
largest firms in the world by 1990
In the years after the Second World War global FDI was dominated by the
United States, as much of the world recovered from the destruction brought by
the conflict. The US accounted for around three-quarters of new FDI (including
reinvested profits) between 1945 and 1960. Since that time FDI has spread to
become a truly global phenomenon, no longer the exclusive preserve of OECD
countries. FDI has grown in importance in the global economy with FDI stocks
now constituting over 20 percent of global GDP.
In the interwar period of the twentieth century, foreign investment declined, but
the investment rose to about quarter of the total. Another important
development that took place in the interwar period was that Britain lost its status
as the major world creditor, and the United States of America (USA) emerged
as the major economic and financial power. In the post-Second World War
period, Foreign Direct Investment started to grow for two reasons. Those are as
follows:
Technological: This technology advancing lead to Foreign Direct
Investment increased. There was a lot of improvement in transport and
communications which made it possible to exercise control from distance.

Finance needed: The European countries and Japan needed United States
(US) capital to finance reconstruction following the damage that caused
in the war. Moreover, there were US laws that were in very much favored
Foreign Direct Investment (FDI).
By the 1960s, all these factors were weakening to the extent that they gave rise
to a reversal trend towards growth in foreign direct investment. First, various
host countries show resistance to the United States ownership and control of
local industry, which led to a slowdown of outflows from the United States of

~ 24 ~

America (USA). Second the host countries started to very much recover,
initiating foreign direct investment in USA, and leading to decline in the net
outflow from the USA. The 1970s witnessed lower FDI flows, but Britain
emerged as a major player in this game as result of North Sea oil surpluses &
the abolition of foreign exchange controls in the abolition of foreign exchange
controls in 1979.
The 1980 witnessed two major changes and saw very much increase in the
foreign direct investment.

First change was that the United States of America became net debtor
country and a major recipient of foreign direct investment (FDI) with a
negative net international investment position. One of the reasons for this
development was the low saving rate in the US economy, that make it
impossible to finance the widening budget deficit with the
Help of resorting to the domestic capital market and giving rise to the
need for foreign capital, which came primarily from Japan and also from
Germany. Another reason was the restrictive trade policy which was
adopted by the United States of America.
The other major change in the 1980s was the emergence of a Japan as a
major supplier of Foreign Direct Investment to USA and Europe.
Motivated by the desire to reduce the labor cost, Japanese Direct
Investment also expanded in South East Asia.
The increase in Foreign Direct Investment in 1980s is attributed to the
globalization of the business. Now there was concern over the emergence of the
managed trade. Moreover, it was argued that FDI benefits both the MNC and
host country, and this is why there is tolerance towards FDI. Another reason for
the surge of Foreign Direct Investment (FDI) was the increase in the FDI
inflows to the USA as a result these inflows started deprecation of US dollar in
the second half of the 1980s. The sum of outflows of FDI from industrial
countries more than quadrupled between 1984 -1990.
In the period 1990-92, foreign direct investment flows fell as growth in the
industrial countries slowed, but a strong rebound subsequently took place. This
rebound is attributed to three main reasons. They are as follows:
Foreign Direct Investment was no longer confined to large firms, as an
increasing number of smaller firms became multinational.
The sect oral diversity of Foreign Direct Investment broadened, with the
share of the service sector rising sharply.

~ 25 ~

The number of countries that were outward investors or host of FDI rose
considerably.
Moreover, the 1990s brought considerable improvements & changes in the
investment climate, triggered in part by the recognition of the benefits of the
foreign direct investment. The change in attitude by countries, in turn led to
removal of direct obstacles to FDI and to increase in the use of FDI incentives.
Continued removal of the domestic impediments through the deregulation and
privatization was also widespread.
This image shows us the foreign direct investment in percentage
during 1980:

Through FDI, foreign investors benefit from utilizing their assets and resources
efficiently,
while FDI recipients benefit from acquiring technologies and from getting
involved in international production and trade networks. While global FDI
flows increased by 24 per cent during 1991-2000, developing countries as a
group show an FDI increase of 20 per cent

~ 26 ~

at constant prices . FDI flows to poor countries increased to almost 3 per cent of
GDP. However, after reaching a peak in 2000, global FDI flows declined
sharply in 2001. Inflows fell by 51 per cent and outflows by 55 per cent (World
Investment Report, 2002). This was the first drop in inflows since 1991 and in
outflows since 1992. More than 12 countries including the worlds three largest
economies fell into recession in 2001. This slowdown in the world economy
was the major factor to decrease FDI in 2001. Although, global FDI flows
marked drastic fall, net FDI flow to developing countries remain almost
unchanged in this year.
FDI flows of the developing and developed countries over the last two decades
can be depicted in. According to the, FDI flows in the world has increased
unprecedented level in the recent past. Within the developed world, the
European Union, the United States and Japan accounted for 71 per cent of world
inflows and 82 per cent of outflows in 2000.Inward and outward FDI stocks as a
percentage of gross domestic products in the selected regions is given in
Foreign Direct Investment flows to the developing countries of Asia and the
Pacific fell from $134 billion in 2000 to $ 102 billion in 2001. This decline was
due to an over 60 per cent drop in flows to Hong Kong, China from a record
level of $ 62 billion in 2000. Excluding Hong Kong, China, inflows in2001
reached the same level as in the peak years of the 1990s. FDI flows to South
Asia started to pick up in the mid-1990s largely as a result of progressive
liberalization. However, South Asia has not been generally a large recipient of
FDI. In the 1980s, the average annual flow of FDI was around 2 million dollars
per annum for Bangladesh, 50 million dollars for India, around 42 million
dollars for Pakistan and 41 million dollars for Sri Lanka. These figures are very
low when compared to other economies of the developing world, especially of
East Asia. Among South Asian neighbors Indias position is undisputable, not
just because of the potential of its market but because of the level of local
industrial skills and experience in the industrial production. Because of these
circumstances, India could become a major destination for FDI, one of the
largest in the developing world
FDI provides much needed resources to developing countries such as capital,
technology, managerial skills, entrepreneurial ability, brands, and access to
markets. These are essential for developing countries to industrialize, develop,
and create jobs attacking the poverty situation in their countries. As a result,
most developing countries recognize the potential value of FDI and have
liberalized their investment regimes and engaged in investment promotion
activities to attract various countries. However, FDI flows to developing
countries started to pick up in the mid-1990slargely as a result of progressive
liberalization of FDI policies in most of these countries and the adoption of
generally more outward- oriented policies. The recent trends of foreign direct
investment would be mentioned in nest chapter.

~ 27 ~

5.2 RECENT TRENDS OF FOREIGN DIRECT INVESTMENT:

o Global FDI-the rocky road to recovery:
Global flows of foreign direct investment (FDI) have halved in the last two
years, and in the process emerging markets have edged ahead of developed
markets as the major destination. As higher-growth economies, emerging
markets have proven better than developed markets at attracting FDI during the
global downturn--with the notable exception of Eastern Europe, which
continues to suffer. Surveys underline that, for developed-market companies,
FDI tends to pay off handsomely. Global FDI flows are forecast to grow again
this year, with emerging Asia in the vanguard, but the volume is unlikely to
match 2007s US$2trn level until 2014.
The global economic and financial crisis in 2008-09 had a major impact on
foreign direct investment (FDI) flows. After declining in 2008 by 17% to
US$1.72trn from US$2.08trn in 2007--the high point of a four-year long boom
in cross-border mergers and acquisitions (M&A) and FDI flows--global FDI
inflows plunged by an estimated 41% to US$1trn in 2009. The fall reflected the
sharp reduction in the availability of credit, the deep recession in the developed
world and many emerging markets and a large-scale retreat from risk.
Flows to emerging markets initially proved resilient to the impact of the global
crisis. Inflows into the developed world declined by one third in 2008, whereas
flows to emerging markets increased by 11%. In 2009, FDI flows to emerging
markets also declined considerably--by 36%, to an estimated US$532bn. This
was by less than the drop in FDI flows to the developed world--by 45% to an
estimated US$488bn. Thus in 2009 for the first time ever, emerging markets
attracted more FDI than developed countries. Admittedly, the definition of what
constitutes an emerging market, or the dividing line between developed
countries and emerging markets, is rather arbitrary and the classifications used
by the Economist Intelligence Unit, IMF, World Bank and UNCTAD all differ.

o Structural shift in global FDI :
The decline in global FDI flows in 2009 was accompanied by a distinct shift in
the pattern of FDI. Economic theory tells us that capital should flow from
capital-abundant rich countries to capital-scarce poor countries. In practice, that
has not been the case as developed countries have consistently attracted the bulk
of global FDI flows. High risk in many emerging markets, the benefits of

~ 28 ~

advanced institutions and infrastructure and a superior overall business
environment in developed countries have tended to outweigh the attractions of
greater market dynamism and lower costs in emerging markets.
The share of emerging markets in global FDI has tended to rise during
recessions as slumps in M&A have hit the developed world disproportionately.
Despite the steadily increasing share in recent years of emerging markets in
cross-border M&A, this still remains mainly a developed country phenomenon.
In 2008 some 80% of cross-border M&A sales were still in developed states.
However, the influence of the M&A factor has been reinforced by other
developments which pushed the share of emerging markets in global FDI
inflows to a record level in 2009.
FDI flows to emerging markets have held up better because their overall
economic performance has been much better than in the developed world which
has experienced its worst recession since the Second World War. Primarily this
is due to the continued high growth of China and India. However, even
if China and India are taken out of the equation, most emerging markets
outperformed the developed world in 2009. The notable exception is eastern
Europe which has suffered very badly--its average output contracted by almost
6% in 2009.
Other factors are also apparent. Numerous studies have shown that both push
and pull factors determine FDI flows to emerging markets, even during
recessions. The trend of improving business environments in many emerging
markets in recent years has strengthened the pull factor and has helped limit
the recession-induced decline in FDI flows. Globalisation and increasing
competitive pressure on companies have increased the opportunity cost of not
seizing opportunities in more dynamic and lower-cost destinations.
A September 2009 Economist Intelligence Unit global survey of 548 companies
provided evidence of a link between investing in emerging markets and
corporate financial success.Among surveyed companies from developed
countries that derive less than 5% of their revenue from activities in emerging
markets, only 24% reported their financial performance as being better than that
of their peers. By contrast, for developed country companies that derived more
than 5% of their revenue from emerging markets, the share reporting better
performance than their peers was just under 40%.
Finally, the increased share of emerging markets in outward investment is also
increasing the share of emerging markets in inward flows because a
disproportionate share of outward investment by emerging markets goes to
other emerging markets.

~ 29 ~

o The Outlook :
Despite the big drop in 2009, there are still some reasons to be cautiously
optimistic about the medium-term prospects for FDI, especially into leading
emerging markets. Some of the factors mentioned above to explain relative FDI
trends in the developed and emerging markets worlds will persist, including the
search for competitively-priced skills and sharper global competition pushing
companies to seek lower-cost destinations. Above all, the global economy is
growing again, although there will be no return any time soon to the pre-crisis
trend rate of growth. And emerging markets are recovering more rapidly than
developed economies.
Global FDI flows are set to return to growth in 2010, in line with the global
recovery in output. However, the relatively weak global recovery and
continuing financial sector problems mean that the recovery in FDI will be
gradual and we are unlikely to see a new surge in FDI any time soon. According
to Economist Intelligence Unit forecasts, global FDI inflows in 2014 will still,
in US$ terms, be slightly below the peak reached in 2007.
Even with an expected recovery in cross-border M&A, which will favor FDI
flows into the developed world, the net result of the various forces shaping FDI
trends suggests that the growth rates of FDI into the developed world and
emerging markets will be similar over the medium term so that their shares in
global FDI inflows are unlikely to change significantly from 2009, that is they
are project to on average reflect approximately a 50-50% split in 2010-14.
The results of business surveys also underpin a positive medium-term
assessment of FDI prospects in emerging markets. In the aforementioned
Economist Intelligence Unit September 2009 survey, just under 60% of
companies expected to derive more than 20% of their total revenue in emerging
markets in five years' time--almost double the present proportion of 31%. In
another Economist Intelligence Unit survey, conducted for MIGA inmid-2009,
a large proportion of surveyed investors (43%) said that they were planning to
shift their investments from the developed world to emerging markets over the
next three years.
However, in addition to the effect of relatively subdued growth in the developed
world, other factors will dampen the pace of recovery of FDI flows, including to
emerging markets. The boom in global FDI flows before the financial crisis
partly reflected a surge in debt financing: the value of cross-border syndicated
bank borrowing and international bond issuance for the purpose of acquisitions.

~ 30 ~

Given the severity of the crisis in 2009, the global financial systems ability to
provide ample credit is likely to be impaired for an extended period of time,
although FDI should be affected less than other forms of capital inflows
FDI flows US$ billons
2008 2009 2010 2011 2012 2013 2014
World
total
1,718.4 1,019.7 1,302.5 1,519.0 1,709.4 1,871.2 2,009.0
% change -17.4 -40.7 27.7 16.6 12.5 9.5 7.4
Developed
countries
894.3 488.1 619.9 734.8 837.8 931.7 996.7
% change -33.2 -45.4 27.0 18.5 14.0 11.2 7.0
Emerging
markets
824.1 531.6 682.6 784.2 871.7 939.4 1,012.3
% change 11.0 -35.5 28.4 14.9 11.1 7.8 7.8

Sub-
Saharan
Africa
46.4 28.6 36.6 39.0 45.1 45.4 46.7
% change

22.7 -38.3 27.9 6.6 15.6 0.6 2.9
Middle
East &
North
Africa
98.7 62.6 77.0 87.3 91.6 98.7 105.6

% change
25.2 -36.6 23.0 13.4 5.0 7.7 7.1

Developing
Asia
331.2 246.4 319.6 372.0 414.8 457.6 496.7
% change 8.2 -25.6 29.7 16.4 11.5 10.3 8.5

Latin
America &
Caribbean
144.3 88.2 114.0 127.6 138.3 149.1 160.0
% change 12.0 -38.9 29.2 12.0 8.4 7.8 7.3

Eastern
Europe
180.6 95.9 122.7 143.1 150.1 155.6 164.0
% change 9.5 -46.9 27.9 16.7 4.9 3.7 5.4

%
share
developed
countries
52.0 47.9 47.6 48.4 49.0 49.8 49.6

~ 31 ~

As a result of the various factors that are expected to be at work, global FDI
inflows as Proportion of GDP are expected to decline from highs of about 3% of
global GDP to an Average of 2.5% in 2010-14. FDI inflows into emerging
markets are projected to decline from recent peaks of 4% of emerging markets'
GDP to an average of about 3% of their GDP in 2010-14.
In the Economist Intelligence Unit's model of FDI determination, FDI inflows
are dependent on a measure of the business environment, market size, real GDP
growth, unit labor costs, distance from markets, and the use of the English
language and natural resource endowments. The model can be used to estimate
the negative medium-term impact of the effects of the 2009 crisis on FDI
inflows. Based on the model, global FDI inflows in 2010-14 will be some 25%
lower compared with what they would have been if the average business
conditions and growth in 2004-08 had also pertained in 2010-14.

% share
emerging
markets
48.0 52.1 52.4 51.6 51.0 50.2 50.4

% of GDP
World 2.9 1.8 2.1 2.4 2.5 2.5 2.5
Developed
countries
2.2 1.3 1.6 1.8 2.0 2.1 2.1
Emerging
markets


~ 32 ~

There are different types of Foreign Direct Investment (FDI).
They are divided into four different types. They are as follows:

TYPES OF FDI
BY
DIRECTION
BY TARGET
MNC, S
BY
MOTIVE
> Inward
> Outward
> Greenfield investment
> Mergers & Acquisitions
> Horizontal FDI
> Vertical FDI

> Resource-Seeking
> Market-Seeking
> Efficiency-Seeking
> Strategic-Asset-Seeking


~ 33 ~

6.1 BY DIRECTION:

Inward Investment :

Foreign Direct Investment which is inward is the typical form of what
is termed as inward investment. Here the investment of the foreign
capital occurs in local resources.

The factors propelling the growth of Inward FDI comprises tax breaks,
relaxation of existent regulations, loans on low rates of interest and
specific grants. The idea behind this is that, the long run gains from
such a funding far outweighs the disadvantage of the income loss
incurred in the short run. Flow of Inward FDI may face restrictions
from factors like restraint on ownership and disparity in the
performance standard.

To have inward foreign direct investment is very important for a
particular country. This type of FDI brings foreign exchange to the
country, modern technology and new innovations. Good flow of
inward FDI means countrys economy is stable and will grow. Inward
FDI is restricted by: Ownership restraints or limits, Differential
performance requirements.
EXAMPLES:

o Japanese engineering major company, Toshiba plans to put up a
boiler plant at Ennore, north of Chennai with an initial investment
of around US$ 232.91 million.

o Intel Corp will invest US$ 40 billion in partnership with Indian IT
companies to create an end-to-end IT solution for the health sector
in the country

o Another Japanese company, T S Tech Company will invest US$
3.50 million to set up a joint venture firm to manufacture seats and
interior of doors for cars. Cairn India, the Indian arm of British oil
and gas company Cairn Energy, will invest about US$ 2 billion
over the next 18 months for the development of oil fields and
building a pipeline.

~ 34 ~

Outward Investment:

Foreign direct investment, which is outward, is also referred to as
direct investment abroad. In this case it is the local capital, which is
being invested in some foreign resource. Outward FDI may also find use
in the import and export dealings with a foreign country. Outward FDI
flourishes under government backed insurance at risk coverage.
There some restrictions face by Outward FDI. They are as
follows:

Tax incentives or the lack of it for firms, which invest outside their
country of origin or on profits, which are repatriated.
Industries related to defense 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.
Lobby groups with vested interests possessing support from either
inward FDI sector or state investment funding bodies.
Government policies, which lend support to the phenomenon of
industry nationalization

EXAMPLES:
o Tech Mahindra is planning to buy Brazil IT Park by 2012.They
already said they are focusing on software development in Latin
America and that is what Brazil does well.

o Max India to buy stake of 16.75% in Warburg Pincus Group.

o Many Indian companies are setting up there business in the
African countries for their future growth. Example Tata Steel,
ONGC etc.


~ 35 ~

6.2 BY TARGET:

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 short & long term jobs in the
foreign country by hiring new set of employees.
Greenfield investments occur when multinational corporations enter
into the developing countries to build new factories and stores.
Developing countries often offer prospective companies tax-breaks,
subsidies and other types and several of incentives to get set up green
filed investments. Government 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 countrys human capital and also to
help the country.
Direct investment in new facilities or the expansion of existing
facilities. Greenfield investments are the primary target of a host
nations promotional efforts because they create new production
capacity and jobs, transfer technology and know-how, and can lead to
linkages to the global marketplace. The Organization for International
Investment cites the benefits of Greenfield investment (or in sourcing)
for regional and national economies to include increased employment
(often at higher wages than domestic firms); investments in research
and development; and additional capital investments. Criticisms of the
efficiencies obtained from Greenfield investments include the loss of
market share for competing domestic firms. Another criticism of
Greenfield investment is that profits are perceived to bypass local
economies, and instead flow back entirely to the multinational's home
economy. Critics contrast this to local industries whose profits are
seen to flow back entirely into the domestic economy.
This is opposite to a brown field investment.
What is brown field investment ?
When a company or government entity purchases or leases existing
production facilities to launch a new production activity. This is one
strategy used in foreign-direct investment.

~ 36 ~

The alternative to this is a green field investment where the new pant
of that particular company is constructed.
Example:
Maccaferri Environmental Solutions plans Rs200crores. Brownfield
investment in India in the beginning of 2012.
Direct investment in new facilities or the expansion of existing
facilities. Greenfield investments are the primary target of a host
nations promotional efforts because they create new production
capacity and jobs, transfer technology and know-how, and can lead to
linkages to the global marketplace. The Organization for International
Investment cites the benefits of Greenfield investment (for regional
and national economies to include increased employment;
investments in research and development; and additional capital
investments. Criticism of the efficiencies obtained from Greenfield
investments includes the loss of market share for competing domestic
firms. Another criticism of Greenfield investment is that profits are
perceived to bypass local economies, and instead flow back entirely
to the multinational's home economy. Critics contrast this to local
industries whose profits are seen to flow back entirely into the
domestic economy

EXAMPLE:

Hyundai plans major Greenfield investment:

Hyundai Motor Company goes ahead with a major Greenfield
investment in Noovice in the Moravia-Silesia region of the Czech
Republic. The company plans to open a new manufacturing plant,
which should begin operations in October 2008 and employ 3,000
people. It is expected that a further 13,000 people will find work
within the supply industry and in services. Both the Czech
government and Hyundai will sign an agreement outlining the
conditions of this investment
Other examples of Greenfield investment could be coca cola who
came in India around 1990s and constructed there company in India
and produced soft drinks, and also Acme a billion dollar public MNE
that is incorporated in US. The Acme CEO is establishing various
plants to set up plants in India as he know Indias market is growing
very fast.

~ 37 ~

Mergers and Acquisitions:

Mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with
the buying, selling, dividing and combining of
different companies and similar entities that can aid, finance, or help
an enterprise grow rapidly in its sector or location of origin or a new
field or new location without creating a subsidiary, other child entity
or using a joint venture.
Transfers of existing assets from local firms to foreign firms takes
place; the primary type of FDI. Cross-border mergers occur when the
assets and operation of firms from different countries are combined to
establish a new legal entity. Cross-border acquisitions occur when the
control of assets and operations is transferred from a local to a foreign
company, with the local company becoming an affiliate of the foreign
company. Unlike greenfield investment, acquisitions provide no long
term benefits to the local economy-- even in most deals the owners of
the local firm are paid in stock from the acquiring firm, meaning that
the money from the sale could never reach the local economy.
Nevertheless, mergers and acquisitions are a significant form of FDI
and until around 1997, accounted for nearly 90% of the FDI flow into
the United States. Mergers are the most common way for
multinational corporations (MNC) to foreign direct investment (FDI).

Distinction between mergers and acquisitions:

Although often used synonymously, the merger and acquisition
mean slightly different things. When one company takes over
another and clearly establishes itself as the new owner, the buys or
purchase is called an acquisition. From legal point of view, the target
company ceases to exist, the buyer swallows the business and the
buyers stock continues to be traded.
In the pure sense of the term, a merger happens when two firms agree
to go forward as a single new company rather than remain separately
owned and operated. This kind of action is more precisely referred to
as a "merger of equals". The firms are often of about the same size.
Both companies' stocks are surrendered and new company stock is
issued in its place. For example, in the 1999 merger of Glaxo

~ 38 ~

Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, was created.
Transfers of existing assets from local firms to foreign firms takes
place; the primary type of FDI. Cross-border mergers occur when the
assets and operation of firms from different countries are combined to
establish a new legal entity. Cross-border acquisitions occur when the
control of assets and operations is transferred from a local to a foreign
company, with the local company becoming an affiliate of the foreign
company. Unlike Greenfield investment, acquisitions provide no long
term benefits to the local economy-- even in most deals the owners of
the local firm are paid in stock from the acquiring firm, meaning that
the money from the sale could never reach the local economy.
Nevertheless, mergers and acquisitions are a significant form of FDI
and until around 1997, accounted for nearly 90% of the FDI flow into
the United States. Mergers are the most common way for
multinationals to do FDI.

EXAMPLE:

Merger: The Government of India, on 1 March 2007, approved the
merger of Air India and Indian Airlines. Consequent to the above, a
new Company viz National Aviation Company of India Limited
(NACIL) was incorporated under the Companies Act, 1956 on 30
March 2007 with its Registered Office at Airlines House, 113
Gurudwara Rakabganj Road, New Delhi. The Certificate to
Commence Business was obtained on 14 May 2007.

Some other example of merger is Centurion Bank and Bank of Punjab.
Worth $82.1 million (Rs. 3.6 billion in Indian currency), this merger
led to the creation of the Centurion Bank of Punjab with 235 branches
in different regions of India.

Acquisition: Tata Corus deal is a good example for acquisition
done by an Indian company up to date. Tata Steel acquired Corus
ltd on 2
nd
April 2007. This deal was of US $ 12.11 billion. On 17
th

October, 2006 TATAs bidded at 455 pence per share and the
share price was 390 pence at that time. TATA Steel, the winner of
the auction for CORUS declares a bid of 608 pence per share.
Other example are Tata Motors acquiring Land Rover and Jaguar.

~ 39 ~

Horizontal Foreign Direct Investment:

Horizontal FDI is an investment made by multinational companies
different nations. The investment is made for conducting the similar
business operations as already operated by the company. For
example, if a soft drink manufacturing company makes its plant
outside its national borders then it is horizontal FDI. Horizontal FDI
results in expansion of the parent company and brings FDI in the
other economy. It is considered as risky also because the
multinational companies coming have to start from scrap and also to
get used to the culture of the particular country very soon.
Investment in the same industry abroad as a firm operates in at
home.

There are five factors which come under horizontal FDI:

> Transportation Costs: Transportation costs vary greatly with the
type of product. When transportation costs are added to production
costs it becomes unprofitable to ship low value-to-weight products
such as cement and beverages over long distances. That makes
exporting far less attractive than licensing or FDI. On the other
hand, high value-to-weight products such as computer hardware and
software, and medical equipment have little impact on the relative
attractiveness of exporting, licensing, or FDI.

> Market Imperfections: There is lot of imperfection in the market
like nothing is proper, there is lot of volatility, corruption and other
factors which affect market to a greater extent. This all problem
creates problem for multinational companies coming to a particular.

> Competition: Coming of FDI in particular country increases lot
of competition or race to become number 1.The domestic
companies which there in that particular country for long time and
the companies which foreign companies which come face a lot of
competition from domestic companies. Some these companies
dont last for longer period of time or some companies prefer
merger or partnership with other well known companies.


~ 40 ~

> The Product Life Cycle: This are succession strategies use by
a business management or companies to launch their particular
product in the market. There are four stages in this cycle: Market
Introduction Stage, Growth Stage, Maturity Stage, Saturation and
decline stage.These companies have to follow these stages to
launch or start a product. If these steps go perfectly then only this
companies are making a mark otherwise they fail. These
companies come up with these new products and the mass of that
country finds it very difficult to adjust the new product so early.
They remain loyal to only one product these cause trouble to the
companies how to sell their products. But if good marketing
strategies are used by the companies and also get connect with the
masses this would help to established as well to earn profits.

> Location Specific Advantages: Location is an important factor
in setting up a particular company or business, if the location is
proper then companies will get benefits of it and also
can run properly. But the good location which requires for
company to set up is already taken by domestic countries therefore
the foreign companies have a tough task of finding the proper
location. The advantages of this location must be there must
proper natural resources like water etc, cheap labor free space etc.
Therefore pale were the companies set up must have specific
advantages.

EXAMPLES:

o Toyota: Toyota is the worlds leading auto maker. It situated
in Japan and its brands include Toyota, Lexus, and Scion etc. It has
factories in 140 countries around the world. In the 2011 its sales
were $20.529 trillion. Toyota mainly engaged in horizontal FDI. Its
production system relies on fully-owned assembly plants, which
obtain components and parts largely from external suppliers.

o McDonalds: McDonalds is the worlds leading food service
retailer. Its headquartered is in US and its brands are McDonald
Pret A Manger etc. It has more than 50,000 restaurants in 115
countries. It is mainly engaged in horizontal FDI. More than 75%
of McDonalds worldwide are neither owned nor operated by the
McDonald Corporation. It has horizontally fragmented its process.

~ 41 ~

Vertical Foreign Direct Investment:

Foreign direct investment by a firm to establish manufacturing
facilities in multiple countries, each producing a different input to,
or stage of, the firms production process. Contrast with horizontal
FDI.

In other words, Vertical FDI is FDI in associated industries in the
chain of vertical integration. Vertical integration is the expansion
of a firm into a stage of the production process other than that of
the original business. A company such as BHP Billiton which
makes steel can integrate vertically by expanding its activities
upstream, or backward, toward the source of raw materials such as
iron, coal and limestone production, or by expanding downstream,
or forward, toward the sale of the end product as BHP Billiton
does with its subsidiary Australian Iron and Steel.
EXAMPLE:

o Intel: Intel is the worlds semiconductor company. It is
headquartered in USA; its products include motherboards,
chipsets, micro processors etc. Intel is mainly engaged in
vertical foreign direct investment. While the skilled-labor-
intensive (water purification) part of production process is
located in developed countries, the unskilled labor-intensive
(assembling & testing) is located in developing countries.
All production facilities are fully owned by Intel.

Vertical Foreign Direct Investment is divided into two types:

Backward Vertical Foreign Direct Investment

Forward Vertical Foreign Direct Investment


~ 42 ~

Backward Vertical Foreign Direct Investment :

Backward Vertical Foreign Direct Investment means where an
industry abroad provides inputs for a firm's domestic production
process.
Historically most backward vertical foreign direct investment has
been in extractive industries like oil extraction, bauxite mining, tin
mining and copper mining. The objective has been to provide
inputs into a firms downstream operations for example oil
refining, aluminum smelting and fabrication. Firms such as Royal
Dutch/Shell, British Petroleum, RTZ and Alcoa are among the
classic examples of such vertically integrated multinational
companies.
Backward vertical foreign direct investment is investing in an
industry which supplies your firm at home. Buying or building a
supplier. For example, if Ford builds an engine production facility
in Mexico which ships engines to it manufacturing site in Texas.
This would be called backward vertical Foreign Direct Investment

EXAMPLE:
British Petroleum (BP) to buy stake in Reliance Industries:
BP plans to buy 30% stake in 23 oil and gas blocks of Reliance
Industries, including the eastern offshore Krishna Godavari basin
KG-D6 fields. The deal may increase to USD 20 billion with
future performance payments & investment will give RIL access
to BPs expertise in deep-water drilling & accelerate development
& production at its fields particularly the under-performing KG-
D6.The CCEA approved sale of stake for only 21 blocks as status
in the two remaining blocks was in dispute. Indias cabinet
committee approved British Petroleum deal with Reliance $7.2
billion deal. This deal investment is the largest example of
foreign direct investment since India began opening up its
economy two decades ago. This transaction is part of British
petroleum strategy of creating long term value through alliances
with strong national partners, taking material positions in
significant hydrocarbon basin increasing the exposure in the
growing market.

~ 43 ~

Forward Vertical Foreign Direct Investment:

Forward Vertical Foreign Direct Investment means where an
industry abroad sells the outputs of a firms domestic production.

The second type of the foreign direct investment included forward
vertical foreign direct investment in which an industry abroad sells
the outputs of a firm's domestic production process. Forward
vertical foreign direct investment is less common than backward
vertical foreign direct investment. For example when Volkswagen
entered the United States market it acquired a large number of
dealers rather than distribute its cars through independent United
States dealers.

Forward Vertical; takes place when a firm invests in facilities that
will consume the output of the mother company in the home
country. Different economic factors encourage inward FDIs. These
include interest loans, tax breaks, grants, subsidies, and the
removal of restrictions and limitations. This is usually done in
search for markets

EXAMPLES:

Assume that the before-mentioned American car manufacturer
wants to sell its cars in the Japanese auto market. Since many
Japanese auto dealers do not wish to carry foreign brand vehicles,
the American car manufacturer may have a very difficult
time finding a distributor. In this case, the manufacturer would
build its own distribution network in Japan to fulfill this niche.

Apart from Volkswagen, Coco-Cola also followed the footsteps of
Volkswagen, when it entered Indian market it acquired large
number of dealers rather than distribute its soft drinks through
independent Indian dealers.

There also another examples such as Nokia, Pepsi etc


~ 44 ~

6.3 Multinational Companies (MNCS):

Multinationals Companies are defined as firms that engage in some form
of international business. Firms continually enact strategies to improve
cash flows and therefore enhance shareholders wealth. Some strategies
involve the penetration of foreign markets. Since foreign markets can be
distinctly different from local markets, they create opportunities for
improving the firms cash flows. Many barriers to entry into foreign
markets have been reduced or removed recently, thereby encouraging
firms to pursue international business (producing and / or selling goods in
foreign countries). Consequently, many firms have evolved into
multinational corporations. The Dutch East India Company was the first
multinational corporation in the world and the first company to
issue stock. It was also arguably the world's first mega corporation,
possessing quasi-governmental powers, including the ability to wage war,
negotiate treaties, coin money, and establish colonies

Multinational corporations are giant enterprises with their
headquarters located in one country, mostly developed capitalist
country, and with a variety of business operations in several other
countries.

They are also sometimes referred to as Transnational Corporations

Features of Multinational Companies (MNCs):

They are huge business enterprises operating in many countries
with huge resources and potentially.
They are commercial organizations having management,
production, marketing and holdings extended to several countries.
They have centralized ownership and control.
They have multinational stock ownership.
MNC is similar to Joint Stock Company & its formed or
registered under company Act of respective country.
MNC are able to raise huge capital by issuing share to general
public within in or outside the country.
It mainly employees highly qualified & professional persons.
They are appointed on basis of merit.

~ 45 ~

MNC carry out multiple operations such as manufacturing,
marketing, finance, advertisement and research etc.
MNC contribute to better standard of living in two ways :
> By providing employment
> By providing quality of product at low cost.
MNC helps to transfer the resources such as modern technology
skilled and professionals person, raw material etc from advance
country to those countries which they operate their activities.
A MNC has to compete on world level therefore has to pay special
attention on the quality.
MNC acts as an important factor for growth of a particular
country.

Initially, firms may merely attempt to export products to a particular country or
import supplies from a foreign manufacturer. Over time, however, many of
them recognize additional foreign opportunities and eventually establish
subsidiaries in foreign countries. Some business, such as Dow Chemical,
Exxon, American Brands and Colgate- Palmolive, commonly generate more
than half their sales n foreign countries. A prime example is the Coca-Cola
Company, which distributes its products in more than 160 countries and uses 40
different currencies. Over 60 percent of its total annual operating income
typically generated outside the United States.
An understanding of international financial management is crucial to not only
the large MNCs with numerous foreign subsidiaries but also to the small firms
that conduct international business.
International business is even important to companies that have no intention of
engaging in international business, since these companies must recognize how
their foreign competition will be affected by movement in exchange rates
foreign interest rates, labor costs, and inflation. Such economic characteristics
can affect the foreign competitors cost of production and pricing policy.
Companies must also recognize how domestic competitors that obtain foreign
financing will be affected by economic conditions in foreign countries. If
these domestic competitors are able to reduce their costs by capitalizing on
opportunities in international markets, they may be able to reduce their prices
without reducing their profit margins. This could allow them to increase market
share at the expense of the purely domestic companies.
The social environment must be healthy so that MNCs can grow with great
speed and with prosperity.


~ 46 ~

EXAMPLES:

Tata Motors sells its passenger-car Indicia in the UK through
marketing alliance with Rover and has acquired a Daewoo
Commercial Vehicles unit giving it access to markets in Korea and
China.

Infosys is India second largest IT Company. It has 25,634 employees
including 600 from 33 nationalities other than Indian. It has 30
marketing offices across the world and 26 global software
development centers in the US, Canada, Australia, the UK and Japan.

Dr Reddys Laboratories became the first Asia Pacific
pharmaceutical company outside Japan to list on the New York Stock
Exchange in 2001.

Ranbaxy is the ninth largest generics company in the world. An
impressive 76 percent of its revenues come from overseas.

Small auto components company Bharat Forge is now the worlds
second largest forgings maker. It became the worlds second largest
forgings manufacturer after acquiring Carl Dan Peddinghaus a
German forgings company last year. Its workforce includes Japanese,
German, American and Chinese.

Google Inc. is an American multinational public corporation invested
in Internet search, cloud computing, and advertising technologies.
Google hosts and develops a number of Internet-based services and
products,
]
and generates profit primarily from advertising through
its Ad Words program. The company was founded by Larry
Page and Sergey Brin, often dubbed the "Google Guys,

Microsoft Corporation is an American public multinational
corporation headquartered in Redmond, Washington, USA that
develops, manufactures, licenses, and supports a wide range of
products and services predominantly related to computing through its
various product divisions. Established on April 4, 1975 to develop and
sell BASIC interpreters for the Altair 8800, Microsoft rose to
dominate the home computer operating system market with in the
mid-1980s, followed by the Microsoft Windows line of operating
systems.


~ 47 ~

6.4 BY MOTIVE:

Resource - Seeking :

Investments which seek to acquire factors of production that is more
efficient than those obtainable in the home economy of the firm. In
some cases, these resources may not be available in the home
economy at all (e.g. cheap labor and natural resources). This typifies
FDI into developing countries, for example seeking natural resources
in the Middle East and Africa, or cheap labor in Southeast Asia and
Eastern Europe.

Resource seeking FDI is investment focused on extracting or refining
natural resources such as petroleum, natural gas, or timber. The
investment is seeking access to existing resources, such as Exxon
Mobil investing in oil production in the North Sea.

EXAMPLES:

o Mali: The main FDI inflows originated from Libya (86 percent),
South Africa, China and United States. In 2009, 173 605 hectares of
land were known to be demanded by foreign investors, where the
dominant investment purposes were food production (rice, millet, corn,
sorghum, cotton, sugar and mango) and, to a lesser extent, biofuel
production. Projects are mainly implemented in the irrigable zone of
the Niger Basin Authority Area and involve the leasing of land on a 50-
year contractual basis, extendable to a 99-year long-term lease. The
most prominent examples of FDI in agriculture include the Malibya-
Agriculture project and the Markala Sugar project. While the former is
based on an investment agreement between Libya and Mali, the latter
is covered by a private-public partnership agreement.

o Egypt: In Egypt, foreign investment in the agricultural processing,
food and inputs industries has increased significantly, rising from
some US$577 million in 2000 to US$3 680 million in 2008. Land
reclamation and agricultural production attract 38.3 percent of foreign
investments, with a predominance of poultry production projects. The
food processing industry ranks second in terms of international
investment, especially the processing of agricultural crops (8.9
percent of investment) and prepared food projects (4.96 percent).

~ 48 ~

Market - Seeking:

Investments which aim at either penetrating new markets or
maintaining existing ones. FDI of this kind may also be employed as
defensive strategy; it is argued that businesses are more likely to be
pushed towards this type of investment out of fear of losing a market
rather than discovering a new one. This type of FDI can be
characterized by the foreign Mergers and Acquisitions in the 1980s y
Accounting, Advertising and Law firm. To identify and exploit new
markets for the firms` finished products. Unique possibility for some
type of services for which production and distribution have to be
contemporaneous (telecom, water supply, energy supply)

Market seeking FDI is driven by access to local or regional markets.
Investing locally can be driven by regulations or to save on
operational costs such as transportation. General Motors investment
in China is market seeking because the cars built in China are sold in
China.

EXAMPLE:

General Motors to enter light commercial vehicle market:

US automaker General Motors is preparing to enter India's booming
commercial vehicle market, seeking to rebuild its revenue and profit
growth by focusing on this hugely important segment of the industry.
Next month, General Motors India will set up a new business unit to
drive the commercial vehicle segment locally. GM India president
and MD Karl Slym discusses the company's plans for the passenger
and commercial vehicle segments, the fallout of the collapse of the
technology tie-up with electric carmaker Reva and his company's
strategy for the fast growing small car segment. The small
commercial vehicle market is expected to grow at 25% annually.
There is a huge market of 8, 00,000 per year and we want to bring in
a pick-up van and mini truck as this segment is growing faster. We
also plan to set up a new business unit called commercial vehicle
business unit starting 1 August, 2010. We will treat it separately to
avoid any bifurcation of people's focus on the passenger car business.
That group will be involved in finalizing product development and to
make changes in commercial vehicles to ensure that they are suitable
for the Indian market.

~ 49 ~

Efficiency- Seeking:

Investments which firms hope will increase their efficiency by
exploiting the benefits of economies of scale and scope, and also
those of common ownership. It is suggested that this type of FDI
comes after either resource or market seeking investments have been
realized, with the expectation that it further increases the profitability
of the firm. Typically, this type of FDI is mostly widely practiced
between developed economies; especially those within closely
integrated markets (e.g. the EU).

Efficiency seeking FDI is commonly described as off shoring, or
investing in foreign markets to take advantage of a lower cost
structure investors are continuously exploring ways to optimize their
current footprint of facilities by shifting activities to new locations
that offer increased efficiency, hence lower cost levels.
However, selecting locations providing lower labor costs only can
result in a very costly mistake. If the production process is capital and
knowledge intensive, and the main markets for high value added
goods and services are United States, Canada or Mexico, then an
integrated financial model must prove the feasibility of the offshore
business case compared to keeping the production in the US.
EXAMPLE:

A credit card company opening a call center in India and China to
serve U.S. customers is a form of efficiency seeking foreign direct
investment. The US Credit Card Company knows labor available in
both the countries is very cheap and goods or services would
available very easily. They know that this market is growing and will
become very strong in coming years.
Foreign Direct Investment in Africa is another example of efficiency
seeking foreign direct investment. Companies know that African
countries as great chance of development and services, labor are very
cheaply available. Most of the companies know this region is not so
developed and would be definitely developed in upcoming years.
Establishing our business in this country could be a good investment.
We can take example of Indian companies who as establish various
plants there using their resources benefiting them and also the
country. Tata Steel Ltd is one of the example of Indian companies.

~ 50 ~

Strategic-Asset-Seeking:

A tactical investment to prevent the loss of resource to a competitor.
Easily compared to that of the oil producers, whom may not need the
oil at present, but look to prevent their competitors from having it.
Multinational corporations (MNCs) as well as small and medium sized
enterprises engaging in strategic asset seeking FDI are motivated mainly
by the quest for strategic resources and capabilities.
The underlying rationale for such asset-seeking FDI is strategic needs.
The United States have a distinct competitive advantage over emerging
economies in terms of developed industries, number of specialized
suppliers, and clusters of supporting industries. These are unique selling
points to potential investors that cannot be imitated in the short to
medium term by other countries.

EXAMPLE

MRPL jumps 20% on buzz of Reliance entry in 2003:
Investors are flocking to buy shares of the troubled refinery, Mangalore
refinery & petrochemicals, driving its share price up by 20 per cent on
Friday. The buzz is that reliance group, which is looking to expand its
refining capacity, is negotiating to buy a majority stake in MRPL and
gain a presence in the southern market. MRPL shares jumped to Rs
10.19 on the BSE on Friday, up from Rs 8.50 the previous day. The
stock clocked volumes of over eight lakh shares on both BSE and the
NSE. The shares have risen steadily from Rs 6.50 in early February to
Rs 8 towards the end of the month. The market believes that reliance
industries, which recently announced that it is merging reliance
petroleum with itself, is interested in acquiring a stake in the 9-million-
tonne refinery and is negotiating with the Aditya Birla group and HPCL.
but top officials in both reliance and the Aditya Birla group denied that
there was any truth in the rumors. "we are not in talks to buy MRPL. It
is not a hugely strategic asset for us," Anil Ambani,


~ 51 ~

There are different areas were effects of foreign direct investment
can be noticed, they are follows:

7.1 EFFECT OF FDI ON WAGES:

There is a large empirical literature on multinational wage premia until recently,
there was a consensus that foreign firms tend to provide better pay to workers
than their domestic counterparts, particularly in developing countries. In an
early study for Mexico, the US and Venezuela, Aitken compare average wages
between domestic and foreign-owned firms. They show that average wages in
foreign-owned plants tend to be about 30% higher than in domestic plants.
Moreover, these wage differences persist once one controls for size, geographic
location, skill mix and capital intensity in Mexico and Venezuela, but not in the
United States. This suggests that foreign-owned firms pay higher wages than
their local competitors in developing countries. However, this does not
necessarily mean that foreign ownership improves employment conditions as
the workforces in domestic and foreign firms may be qualitatively different.
In order to address the possibility that average wage differences between foreign
and domestic firms merely reflect differences in the composition of the
workforce, a number of studies have analyzed to what extent foreign wage
premia persist after controlling for observable differences in worker quality.
For example, Lipsey and Sjholm use a plant-level dataset for Indonesia with
detailed information on the composition of workers across educational
categories. They find that, while differences in average labour quality account
for a significant part of the raw foreign wage premium, it remains large. Wages
in foreign-owned plants are 12% higher for production workers and 20% for
non-production workers. Morrissey and Te Velde present similar findings for
five Sub-Saharan African countries.
An alternative approach to control for differences in the composition of the
workforce is to focus on changes in firm ownership due to cross-border
takeovers. Studies that focus on cross-border M&A also suggest that FDI has
the potential to increase significantly the number and quality of jobs in foreign-
owned firms, particularly in developing countries. For example, Girma and
Grg find for the UK that foreign takeovers of domestic firms tend to increase
wages, but the effects are relatively small. For Indonesia, Lipsey and Sjholm
find that after controlling for firm fixed effects, foreign takeovers raise
production-worker wages by 17% and nonproduction-worker wages by 33%.

~ 52 ~

7.2 EFFECTOF FDI ON LINKAGES & TECHNOLOGY:

A basic tenet of the theory of the multinational firm is that such firms rely
heavily on intangible assets, such as superior technology and well established
brand names to successfully compete with local firms that are better acquainted
with the host country environment. Thus, multinational firms can potentially
play a crucial role in the international diffusion of technology.
Casual evidence supports the view that multinationals are intimately involved in
international technology transfer (ITT): for example, in 1995, over 80 percent of
global royalty payments for international transfers of technology were made
from subsidiaries to their parent firms Furthermore, the intra-firm share of
technology flows has increased over time. Of course, royalty payments only
record the explicit sale of technology and do not capture the full magnitude of
technology transfer through FDI relative to technology transfer via imitation,
trade in goods, and other channels.
By encouraging inward FDI, developing countries hope not only to import more
efficient foreign technologies, but also to improve in productivity of local firms
via technological spillovers to them. Not surprisingly, there exists a large
literature that tries to determine whether host countries enjoy spillovers (i.e.
positive externalities) from FDI. Measurement of spillovers is a difficult task
because, by definition, externalities are not taken into account by markets and
therefore leave no paper trail. Nevertheless, several studies have attempted the
difficult task of quantifying spillovers. Before turning to the evidence, it is
useful to be clear about the potential channels through which such spillovers
may arise. Any discussion of spillovers from FDI needs to tackle the difficult
question of whether it is reasonable to even expect such spillovers to occur:
multinationals have much to gain from preventing the diffusion of their
technologies to local firms and one would expect them to take actions that help
preserve their technological superiority. Of course, this argument does not apply
when their technologies diffuse vertically to potential suppliers of inputs or
buyers of goods and services sold by multinationals (see more on this below).
In general, however, a skeptical a priori position on spillovers from
multinationals to their local competitors seems appropriate.
Local firms may adopt technologies introduced by multinational firms through
imitation or reverse engineering; Labor turnover: Workers trained or previously
employed by the multinational may transfer important information to local firms
by switching employers, or may contribute to technology diffusion by starting
their own firms.

~ 53 ~

7.3 FDI EFFECT ON EMPLOYMENT:

Since the trough in 1982, the growth of real foreign direct investment (FDI)
outflows and inflows for the OECD countries has been very high, far outpacing
that of foreign trade and real GDP. While such flows are likely to have
increased the efficiency with which global capital is being used, they have also
led to concerns that outflows from the industrial countries serve as an
instrument for exporting jobs to low-wage countries. The purpose of this paper
is to look for evidence regarding the precise relationship between FDI outflows
and employment in the source countries. The empirical evidence mostly relies
on estimated relationships between FDI flows and various components of
demand but is derived from time-series analyses for individual countries as well
as from panel regressions. All in all, we find only limited evidence that FDI
outflows lead to job losses in the source countries. While it is true that domestic
investment tends to decline in response to FDI outflows, emerging market
economies receive only a small, albeit growing, share of global outflows. It also
appears that high labor costs encourage outflows and that exchange rate
movements may exacerbate such effects. However, the principal determinants
of FDI flows are prior trade patterns, IT-related investments and the scope for
cross-border mergers and acquisitions. Moreover, there is clear evidence that,
by improving distribution and sales channels, FDI outflows complement rather
than substitute for exports and thus help protect rather than destroy jobs in the
source countries.
When U.S. firms such as Xerox, Staples, and Cendant establish a customer-
service call center in Canada, they do so to capitalize on that countrys abundant
and less expensive workforce.2 While this enhances employment in Canada, the
emphasis of most host governments today is placed on jobs requiring
knowledge and high added value. Host governments are especially keen on
attracting firms that will augment high-end employment, and home
governments are especially worried about losing such jobs. One consequence of
the increased diversity of functional areas for FDI is frequent criticism of FDI
as a deployment of the less desirable segments of the production process abroad
while retaining the most attractive portions, especially R&D, at home. Still,
developed countries like the United States are concerned about the loss of those
jobs and the resulting downward pressure on domestic wages.
.Foreign direct investment leads to increase in employment in country.
Multinational corporations setup their plants here, they want local people to
work in there company as they know conditions well. They are also paid good
wages plus also given other services. Therefore in effect of FDI in employment
is going at great speed.


~ 54 ~

7.4 EFFECT OF FDI ON TRADE FLOWS:

There is a relationship between the involvement of countries in FDI and their
involvement in trade, based on economic history of four countries UK,
Germany, Japan and USA. There was lot of concerns of FDI effecting trade
flows. Although it appears that MNCs are trade intensive firms, this is more a
reflection of the activities in which they are indulge rather than their own
behavior. The FDI directed into developing countries affect their trade flows as
well as the exchange rate. There are also some evidence that the subsidiaries
tend to import parts and capital equipments to the parent MNCs, located in the
home country. Hence it seems that by indulging FDI, MNC affect size and
directions of trade flows.
The most critical issue about the relationship between FDI and trade is whether
they are complements or substitutes. In other words to what extend do
production and sales by subsidiaries in foreign markets replace or help to
exports to the same market? One reason we should believe that FDI and trade
substitutes is that they are two alternatives modes of entry, as we have seen.
However, there are reasons to believe that FDI does not replace exports, but
rather stimulates them. One reason for this is that FDI enables the firms to
establish on larger distribution base thus enlarging the line of products sold in
the foreign markets over and above what could be achieved via exports.
Moreover, production in the foreign country invariably requires the import of
intermediate products from the home country. This argument also applies
import by home country. If a foreign subsidiary can produce more cheaply
abroad and export them to the home country, this is obviously means that FDI
leads to increasing exports by home country.
There is now a consensus whether trade and FDI are complements or substitutes
depend upon whether FDI is horizontal or vertical. Whether horizontal or
vertical depends on various characteristics different countries. For example if
countries have significantly different factor endowments, then vertical FDI
dominates. On the other hand horizontal FDI dominates if the countries are
similar in size and relative endowments, and if trade costs are moderate to high
There are many reasons why foreign direct investment (FDI) has become a
much-discussed topic. One is the dramatic increase in the annual
global flow between 1985 and 2010, from around $60 billion to an estimated
$315 billion and the resulting rise in its relative importance as a source of
investment funds for a number of countries. Stocks of FDI, in turn, have been
growing and estimates suggest that the sales of foreign affiliates of
multinational corporations (MNCs) exceed the value of world trade in goods

~ 55 ~

and services (the latter was $6,100 billion in 1995), that intra-firm trade among
MNCs accounts for about one-third of world trade, and that MNC exports to
non-affiliates account for another third of world trade, with the remaining one-
third accounted for by trade among national (non-MNC) firms.
The keen interest in FDI is also part of a broader interest in the forces propelling
the ongoing integration of the world economy, or what is popularly described as
globalization. Together with the more or less steady rise in the world's trade-
to-GDP ratio, the increased importance of foreign-owned production and
distribution facilities in most countries is cited as tangible evidence of
globalization.
Foreign direct investment is also viewed as a way of increasing the efficiency
with which the world's scarce resources are used. A recent and specific example
is the perceived role of FDI in efforts to stimulate economic growth in many of
the world's poorest countries. Partly this is because of the expected continued
decline in the role of development assistance (on which these countries have
traditionally relied heavily), and the resulting search for alternative sources of
foreign capital. More importantly, FDI, very little of which currently flows to
the poorest countries, can be a source not just of badly needed capital, but also
of new technology and intangibles such as organizational and managerial skills,
and marketing networks. FDI can also provide a stimulus to competition,
innovation, savings and capital formation, and through these effects, to job
creation and economic growth. Along with major reforms in domestic policies
and practices in the poorest countries, this is precisely what is needed to turn-
around an otherwise pessimistic outlook.
At an institutional level, the growing importance of FDI, coupled with the
absence of binding multilateral rules on national policies toward FDI, has
created what in many quarters is viewed as an obstacle that could slowdown the
pace of further integration of the world economy. The perceived need for
multilateral rules on investment is not new - indeed, the Havana Charter for the
stillborn International Trade Organization (origin of the GATT and spiritual
ancestor of the WTO) contained provisions on foreign investment - but
attempts to reach a comprehensive multilateral agreement with binding rules
have thus far not been successful.
Renewed interest in FDI within the trade community has been stimulated by the
perception that trade and FDI are simply two ways - sometimes alternatives, but
increasingly complementary - of servicing foreign markets, and that they are
already interlinked in a variety of ways. The 27 OECD countries (plus the EC
Commission) are negotiating an investment agreement, scheduled to be
completed in time for the 1997 OECD Ministerial meeting. On a multilateral

~ 56 ~

level the WTO's General Agreement on Trade in Services, by including rules on
commercial presence, recognizes that FDI is a prerequisite for exporting
many services (there are no corresponding rules on commercial presence in the
General Agreement on Tariffs and Trade, which governs trade in goods).
It is important to recognize that not everyone is enthusiastic about these
developments. Critics are concerned about the possible negative effects of FDI.
In home countries (where the outflow of capital originates), there are claims
that FDI exports jobs and puts downward pressure on wages. In host countries
(which receive the FDI), there are worries about the medium-term impact on the
balance of payments, about potential monopolization of the domestic market,
and more generally about the impact of FDI on the government's ability to
manage the economy. Critics are also worried about the implications of having
a multilateral agreement that lays down common standards for national FDI
rules and requires each signatory to bind its rules under the agreement. Having
to bind national FDI policies under a multilateral agreement would be viewed
by critics as going even further in pre-empting a country's right to manage
inflows of FDI.
The annual outflow of FDI from OECD countries to all destinations (including
one another) had doubled from around $25 billion to nearly $60 billion (the
OECD countries currently are host to 73 per cent, and home to 92 per cent of
the world's stock of FDI). These are nominal figures, however, and recalling
that the OECD countries went through two periods of double-digit inflation in
the 1970s, it is clear that in inflation-adjusted real terms there was little or no
increase in the annual outflow. After declining sharply in the early 1980s, it
began once again to increase. During the years 1986 to 1989 annual FDI flows
increased at a phenomenal rate, multiplying fourfold in four years. In the second
half of this four-year burst of activity, the global total was given a further boost,
albeit a minor one, by a tripling (from a very low base) of FDI outflows from
non-OECD economies, in particular from Hong Kong. More specifically, the
share of non-OECD countries in worldwide outflows of FDI increased from
5 per cent in 1983-87 to 15 per cent in 1995.
In the OECD countries, this period of high growth for FDI was followed by five
years (1990-94) of stagnant or declining annual outflows, no doubt reflecting in
part the widespread economic slowdown. Then, in 1995, there was another
dramatic turn-around, with outflows of FDI from the OECD area estimated to
have increased by 40 per cent.
In 2011 trade flows would be around 2,456 billion dollars and likely to go
above 3,000 billion dollars in upcoming years.


~ 57 ~

7.5 EFFECT OF FDI ON ECONOMIC GROWTH:

Economic growth is an increase (or decrease) in the number of goods and
services that an economy produces over time. An increase in the capacity of an
economy to produce goods and services, compared from one period of time to
another. Economic growth can be measured in nominal terms, which include
inflation, or in real terms, which are adjusted for inflation. For comparing one
country's economic growth to another, GDP or GNP per capita should be used
as these take into account population differences between countries.

Economic growth is usually associated with technological changes. An example
is the large growth in the U.S. economy during the introduction of the Internet
and the technology that it brought to U.S. industry as a whole. The growth of an
economy is thought of not only as an increase in productive capacity but also as
an improvement in the quality of life to the people of that economy. A measure
of economic growth from one period to another in percentage terms. This
measure does not adjust for inflation; it is expressed in nominal terms. Gross
national product economy is heavily dependent on foreign earnings.

Over the past two decades, many countries around the world have experienced
substantial growth in their economies, with even faster growth in international
transactions, especially in the form of foreign direct investment (FDI). The
share of net FDI in world GDP has grown five-fold through the eighties and the
nineties, making the causes and consequences of FDI and economic growth a
subject of ever-growing interest. This paper attempts to make a contribution in
this context, by analyzing the existence and nature of causalities, if any,
between FDI and economic growth. It uses as its focal point of the whole
region across the world where growth of economic activities and Foreign Direct
Investment has been one of the most pronounced.
The literature on FDI and economic growth generally points to a positive
relationship between the two variables, and offers several, standard explanations
for it. In principle, economic growth may induce FDI inflow when FDI is
seeking consumer markets, or when growth leads to greater economies of scale
and, hence, increased cost efficiency. On the other hand, FDI may affect
economic growth, through its impact on capital stock, technology transfer, skill
acquisition, or market competition. FDI and growth may also exhibit a negative
relationship, particularly if the inflow of FDI leads to increased monopolization
of local industries, thus compromising efficiency and growth dynamics.
Empirically, the positive effect of economic growth on FDI and also the
positive and negative effects of FDI on economic growth have been identified in

~ 58 ~

the literature. However, very few studies attempt to directly test for causality
between FDI and growth. Two studies that do so include. Both find that FDI-
to-growth causality is more likely to exist in more open economies. In addition,
an earlier study by Ericsson and Irandoust explores the causal relationship
between FDI and total factor productivity growth in Norway and Sweden, and
finds the two to be causally related in the long run.
This paper extends the line of work mentioned above, and provides a direct test
of causality between FDI and economic growth in one of the most dynamic
regions of the world: South and Southeast Asia. Using Granger causality tests,
the analysis reveals substantial variation in the FDI-growth causal relationship
across countries, implying that generalization of any causality between the two
variables can be problematic. To better understand the cross-country variation,
the paper extends the analysis using regression techniques, and identifies
institutional variables that affect the FDI-growth relationship. The importance
of institutions to economic dynamics is now well recognized, and given the
widespread but varying institutional reforms across countries through the
eighties and the nineties, the inclusion of institutional factors is indispensable
for the analysis at hand. To identify their relevance to the FDI-growth
relationship, separate from their direct effects on FDI or growth alone, the
analysis focuses on interaction effects involving the explanatory variables. The
results show that FDI-to-growth causality is reinforced by greater trade
openness, more limited rule of law, lower receipts of bilateral aid, and lower
income level in the host country. Growth-to-FDI causality, on the other hand, is
reinforced by greater political rights and more limited rule of law.
The remainder of the paper is structured as follows. Section II discusses the
background literature on the determinants of and relationship between FDI and
economic growth. It also describes the sample used in the present analysis.
Section III carries out the Granger causality tests and establishes the cross-
country variation in FDI-growth causality. Section IV extends the analysis
using regression techniques and identifies the economic and institutional factors
that help to explain the cross-country variation in the FDI-growth causal
relationship.
Standard economic theory points to a direct, causal relationship between
economic growth and FDI that can run in either direction. On the one hand,
FDI flows can be induced by host country economic growth if the host country
offers a sizeable consumer market, in which case FDI serves as a substitute for
commodity trade or if growth leads to greater economies of scale and cost
efficiency in the host country. On the other hand, FDI itself may contribute to
host country economic growth, by augmenting the countrys capital stock,
introducing complementary inputs, inducing technology transfer and skill

~ 59 ~

acquisition, or increasing competition in the local industry. Of course, FDI may
also inhibit competition and thus hamper growth, especially if the host country
government affords extra protection to foreign investors in the process of
attracting their capital.
Empirically, the positive effect of host country economic growth on FDI inflow
has been confirmed by various studies. Generally, the positive growth effects of
FDI have been more likely when FDI is drawn into competitive markets,
whereas negative effects on growth have been more likely when FDI is drawn
into heavily protected industries. Overall, though, FDI turns out to be
associated with greater domestic investment, not smaller. Moreover, this
positive association between FDI and domestic investment tends to be greater
than that between foreign portfolio investment and domestic investment study a
panel of 23 developing countries from Asia, Africa, Europe and Latin America,
and find the causal relationship between GDP growth and FDI to run both ways
in more open economies, and in only one directionfrom GDP growth to
FDIin more closed economies. Trevino and find a comparable result based
on their study of five developing countries in Asia, that the positive impact of
FDI on economic growth is greater in more open economies. Whether other
factors, especially institutional ones that directly affect FDI or economic
growth, also influence FDI-growth relationship remains an open question.
Generally speaking, FDI decisions depend on a variety of characteristics of the
host economy, in addition to its market size. These include the general wage
level, level of education, institutional environment, tax laws, and overall
macroeconomic and political environment. The impact of host country wage
level or education level on FDI depends on the skill intensity of the particular
production process in question and, hence, may vary from case to case. The
impact of institutional quality, physical infrastructure, import tariffs,
macroeconomic stability, and political stability on FDI inflow is usually
positive. Turning to economic growth, the standard determinants include the
rate of capital accumulation and variables that raise total factor productivity,
such as education level, institutional quality, macroeconomic stability, political
environment, and, potentially, trade openness
The choice of this sample was driven by our attempt to include an economically
diverse set of countries in a region that has been characterized by relatively high
rates of economic growth and FDI over the past two decades. Collectively, the
sample countries have featured higher rates of foreign investments, foreign aid,
and commodity trade relative to their GDP than has the rest of world. They also
experienced significantly greater growth rates in GDP, foreign investments, and
commodity trade, compared to the rest of the world.
.

~ 60 ~

7.6 EFFECT OF FDI ON MARKET STRUCTURE:

Theinterconnected characteristics ofa market,suchasthenumber and relativestren
gth of buyers and sellers anddegree of collusion among them, level and forms of
competition, extent of product differentiation, and ease of entry into
and exit from the market

Four basic types of market structure are (1) Perfect competition: many buyers
and sellers, none being able to influence prices. (2) Oligopoly: several large
sellers who have some control over the prices. (3) Monopoly: single seller with
considerable control over supply and prices. (4)Monophony: single buyer with
considerable control over demand and prices.
FDI is likely to affect the structure of industries it is directed towards. It may be
responsible for improving the competitive forces or worsening the monopolistic
or oligopolistic elements in the host economy. The entry of foreign subsidiary
into a local market can force more active rivalry and improvement in
performance than would a domestic entry at the same sale. This is because FDI
is thought of as a vehicle for disseminating the transfer of technology, including
a higher level of technical efficiency. On whether or this will materialize
depends the actual practice of MNCs and this is what has promoted the OCED
to issue some relevant guidelines for MNCs, with the aim of encouraging
behavior that is conducive to boosting competition. According to these
guidelines MNCs should follow the points given below:
Refrain from entering into or carrying out anti-competitive agreements
such as price fixing.
Conduct their activities in a manner that is consistent with local
competition laws.
Co-operate with the competition authorities. This competition should be
healthy and fair

On the grounds of allocative efficiency it is agreeable that FDI can provide a
significant increase in competition in the host country. The main impact of FDI
is widening the scope for competition. This is because it is typical that foreign
subsidiaries, backed up by strong parents, can compete effectively with logical
oligopolistic and to break the latters grip on the local market. By reducing
monopolistic/oligopolistic distortions, FDI can improve allocation of resources
in the host country.
The preceding presupposes the existence of large local firms dominating local
markets that can only challenged by equally powerful rivals. If small firms

~ 61 ~

cannot provide rivalry then MNCs will act as catalyst for more competitive
behavior. Thus the market structure will be highly competitive; if a firm doesnt
come up with new strategies then it would be difficult to survive. So these
companies have to be active all the time.

The most important determining factor or the determinants for foreign direct
investment (FDI) in an economy is the size and growth prospects of the
economy based on presumptions that a big market in a country will definitely
boost up sales and growth prospects of the company in the foreign land.
To understand the scale and direction of FDI flows, it is necessary to identify
their major determinants. The relative importance of FDI determinants varies
not only between countries but also between different types of FDI.


~ 62 ~

There are various documents required for Foreign Direct Investment (FDI).
Foreign direct investment (FDI) precisely means a long-term investment made
by a foreign direct investor in an organization except the one in which the
foreign direct investor is based. Foreign Direct Investment (FDI) usually
comprise of a parent enterprise or Head Company and a foreign affiliated
concern in domestic market, which jointly forms a Transnational Corporation
(TNC).

To acquire Foreign Direct Investments, the primary document required is 10
percent or more of the ordinary shares of an incorporated enterprise.

This means, the enterprise seeking FDI must have a control of the foreign parent
organization over its affiliated firm in India. Ever since the Second World War,
United States of America has been a major contributor in FDI. Between 1945
and 1960, United States accounted for around three-quarters of new FDI. FDI
has become a booming phenomenon in global economy especially with FDI
stocks occupying around 20 percent of global GDP. In the last few years, India
and China have been the most flourishing destinations to receive the maximum
of Foreign Direct Investments.

Documents Required for Foreign Direct Investments:

Application Form.

Detailed information on the foreign investor or collaborators stating their
parent enterprises and affiliated firms.

Copies of the memorandum of collaborations made by the foreign
investors.

Detailed information on the Joint Venture firms or technical collaborators
along with information on their parent enterprise, promoters, and
affiliated firms.

Companies aiming at establishing multi sect oral activities must present
their details on the already existent activities with four digit NIC code.

~ 63 ~

In case of any investments being carried out in a holding company,
information about downstream investments is to be presented.

Copies of the earlier approved proposals by FIPB or SIA or RBI
connected with the current one.

The board resolution of the investor company and the approval of
transferred shareholder while transferring the existent equity.

Before and after investments, the detailed information on shareholders of
the investor concern.

In case of indirect foreign investments, the details of the indirect route
and the names of the foreign companies along with their shareholders.

Justification for higher payments in terms of payments for technology or
trademark or brand name which require FIPB approval under automatic
route.

Declaration from the investors stating their details.

Detailed information on the existing ventures or enterprises.

Remarks from Indian partners in case of the collaborations or the Joint
ventures.

This is the some of the documents required by Multinational
Corporations (MNCs) to enter India.

There are different documents and rules & regulations for
different countries for foreign direct investment (FDI).


~ 64 ~

There are various sectors globally were foreign direct investment (FDI) are
attracted. There huge amount of foreign invested it every day.

9.1 The sectors were foreign direct investment are attracted are
as follows:

Electrical Equipments (Including Computer Software & Electronic)

Telecommunications (radio paging, cellular mobile, basic telephone
service)

Transportation Industry ( Automobile)

Services Sector (financial & non-financial)

Fuels (Power + Oil Refinery)

Chemical (other than fertilizers)

Food Processing Industries

Drugs & Pharmaceuticals

Cement and Gypsum Products

Metallurgical Industries

Housing and Real Estates

Construction


~ 65 ~

SECTORS ATTRACTING HIGHEST FDI INFLOWS:
(From April 2000 to March 2011):

DIFFERENT SECTORS

Amount of FDI Inflows
% age of
total FDI
Inflows
(in US$
terms)

2007-08
(April-
March)

2008-09
(April-
March)

2009-10
(April-
March)

Cumulati
ve
Inflows
(from
April
2000 to
March
2011)

1
.
SERVICES SECTOR
(financial & non-financial)

265,892.
7

285,161.0

207,763.5

1,052,294
.5

21 %

2
.

COMPUTER SOFTWARE
& HARDWARE

56,233.0

73,285.4

43,509.4

438,467.5

9 %

3
.
TELECOMMUNICATIOS

51,026.1

117,268.7

123,383.2

407,057.3

8 %

4
.

HOUSING & REAL
ESTATE

87,493.4

126,212.4

135,864.1

373,692.4

8 %

5.

CONSTRUCTION

69,893.5

87,918.9

135,159.0

356,928.2

7 %

6.

POWER

38,774.7

43,818.4

69,081.8

209,194.7

4 %

7
.
AUTOMOBILE INDUSTRY

26,969.6

52,116.5

57,543.9

208,218.6

4 %

8
.
METALLURGICAL
INDUSTRIES

46,859.8

41,567.1

19,352.8

134,404.0

3 %

~ 66 ~

9.2 Some Forbidden Sectors for Foreign Direct Investment (FDI)
are as follows:

Arms and Ammunition

Atomic Energy

Railway Transport

Coal and Lignite

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds,
copper, zinc

These are some of the sectors in India which forbidden to foreign
direct investment (FDI). There different sectors can be forbidden
in different countries across the world. For example In China
agriculture sector is forbidden to foreign direct investment.

9
.

PETROLEUM &
NATURAL GAS

57,290.5

19,312.2

13,275.6

115,044.5

2 %

1
0
.

CHEMICALS

9,175.6

34,271.4

17,071.3

112,744.3

2 %

~ 67 ~

FOREIGN DIRECT INVESTMENT CASE STUDY-
COCA COLA

The Coca-Cola Company (NYSE: KO) is an American multinational beverage
corporation of manufacturer, retailer and marketer of non-alcoholic beverage
concentrates and syrups. The Coca-Cola formula and brand was bought in 1889
by Asa Candler who incorporated The Coca-Cola Company in 1892. Besides its
namesake Coca-Cola beverage, Coca-Cola currently offers more than 500
brands in over 200 countries or territories and serves over 1.6 billion servings
each day. Its current chairman and chief executive is Muhtar Kent.

COCA-COLA ENTERING INDIA:

RBI,s moves on Foreign Equity Regulation: In 1974, Multinationals
operating in low priority areas like consumer goods were asked by RBI to
step down equity to 40% either through equity dilution or through equity
sale.

Non-strategic category of Foreign Companies: Coke, which operated
in India through branch office, submitted its plan for stepping down
equity to the RBI. It offered to hold 40% equity in its bottling and
distribution units, but refused step down equity in its technical and
administrative units.

Coke at logger heads with Indian Government: Since this was not in
line with FERA which permitted not more than a 40% holding in all
operations, Coke was asked to comply properly with the new norms.
Coke decided to wind up its operations in India but quit making
allegations that the India Government was forcing it to share its secret
formula for making concentration.

Blame Game in a Bad Blood: The India government slapped its counter
charges and accused the parent of bleeding profits & repatriating large
sums of funds abroad even when the Indian operations posting loss,
Further there were allegations of Coke abusing import licenses against
which it imported licenses against which it imported the concentrate all of
which resulted in bad blood between the two parties.

~ 68 ~

Coke exits India: In 1977, Coke left India and did not return for nearly
two decades. By which time, the economic situation had undergone a
major transformation. The most importantly the particular provision in
FERA had been diluted completely.

Coke re-enters India: Coke factored in all these issues at the time of its
re-entry. In its application to Indias Foreign Investment Promotion Board
(FIPB) in 1997 it voluntary offered to divest 49% in favor of Indian
public through IPO at the end of 3 years. This was despite the fact that the
FDI norms for the soft drink sector did not require mandatory divestment
of stake & nobody was forcing it to do so.


~ 69 ~

FOREIGN DIRECT INVETMENT CASE STUDY- IBM
International Business Machines (IBM)) is a multinational technology and
consulting firm headquartered in Armonk, New York. IBM manufactures and
sells computer hardware & software and it offers infrastructure, hosting and
consulting services in areas ranging from mainframe computers to
nanotechnology. The company was founded in 1911.Its distinctive culture and
product branding has given it the nickname Big Blue. In 2011, Fortune ranked
IBM the 18th largest firm in the U.S., as well as the 7th most profitable.
Globally, the company was ranked the 31st largest firm by Forbes for 2011.
IBM ENTERING INDIA:

IBM at loggerheads with Indian government: IBM believed that
government regulation which mandated 60% domestic ownership of
IBM, s Indian operations was unreasonable. However according to some
Indian views, IBM was asked to leave because Big Blue charged to much
money, brought outdated equipment and was not interested in negotiating
better terms.

IBM pulls out of India: IBM closed its Indian subsidiaries in 1977-78
leaving behind host of Indian ex-IBMers looking for something to do.

IBM discontent with FERA regulation provisions: IBM took this step
in response to the FERA regulation, which limited MNCs to a maximum
of 40% ownership stake in their Indian subsidiaries & specified policies
for access to foreign exchange for imports used of foreign exchange
earned through exports.

Exit in bad temper: MNCs had to either choose between reducing their
stake to this level by selling their shares to Indian public or leave the
country. Many MNCs dilute their shares, while IBM decided to quit
India.

A new beginning in India: Under the Industrial policy 1991 liberalizing
FDI flow into India, IBM reported its operations in India in 1992 and
became country largest country operations outside IBMs US base as part
global emerging markets.


~ 70 ~

IBM sets up an Indian subsidiary- India on high: IBMs proposal to set
up a wholly owned subsidiary in India through its Hong-Kong based
subsidiary IBM products. AP Ltd for undertaking trading activities
involving FDI worth Rs 66 crore declared by FIPB in May 2005, IBM
plans to triple its investments in India over next coming years by
pumping $6 billion FDI in India operations


~ 71 ~

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