FOREIGN DIRECT INVESTMENT

Description :
A foreign direct investment (FDI) is a controlling ownership in
a business enterprise in one country by an entity based in
another country.
Foreign direct investment is distinguished from portfolio foreign
investment, a passive investment in the securities of another
country such as public stocks and bonds, by the element of
"control". According to the Financial Times, "Standard
definitions of control use the internationally agreed 10 percent
threshold of voting shares, but this is a grey area as often a
smaller block of shares will give control in widely held
companies. Moreover, control of technology, management, even
crucial inputs can confer de facto control."
The origin of the investment does not impact the definition as an
FDI, i.e., the investment may be made either "inorganically" by
buying a company in the target country or "organically" by
expanding operations of an existing business in that country.

Definitions:
Broadly, foreign direct investment includes "mergers and
acquisitions, building new facilities, reinvesting profits earned
from overseas operations and intra company loans". In a narrow
sense, foreign direct investment refers just to building new
facilities. The numerical FDI figures based on varied definitions
are not easily comparable. As a part of the national accounts of a
country, and in regard to the GDP equation Y=C+I+G+(X-M)
[Consumption + gross Investment + Government spending +
(exports - imports)], where I is domestic investment plus foreign
investment, FDI is defined as the net inflows of investment
(inflow minus outflow) 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. FDI is the sum of
equity capital, other long-term capital, and short-term capital as
shown the balance of payments. FDI usually involves
participation in management, joint-venture, transfer of
technology and expertise. Stock of FDI is the net (i.e., inward
FDI minus outward FDI) cumulative FDI for any given period.
Direct investment excludes investment through purchase of
shares. FDI is one example of international factor movements

Foreign direct investment in India :

Into India As the third-largest economy in the world in PPP

terms, India has attracted foreign direct investment; During the
year 2011, FDI inflow into India stood at $36.5 billion, 51.1%
higher than 2010 figure of $24.15 billion. India has strengths in
telecommunication, information technology and other
significant areas such as auto components, chemicals, apparels,
pharmaceuticals, and jewellery. Despite a surge in foreign
investments, rigid FDI policies were a significant hindrance.
Over time, India has adopted a number of FDI reforms. India
has a large pool of skilled managerial and technical expertise.
The size of the middle-class population stands at 300 million
and represents a growing consumer market.
India's liberalized its FDI policy in 2005, allowing up to a 100%
FDI stake in ventures. Industrial policy reforms have
substantially reduced industrial licensing requirements, removed
restrictions on expansion and facilitated easy access to foreign
technology and foreign direct investment FDI. The upward
moving growth curve of the real-estate sector owes some credit
to a booming economy and liberalized FDI regime. In March
2005, the government amended the rules to allow 100% FDI in
the construction sector, including built-up infrastructure and
construction development projects comprising housing,
commercial premises, hospitals, educational institutions,
recreational facilities, and city- and regional-level infrastructure.
Over 2012-14, India extended these reforms to defense, telecom,
oil, retail, aviation and a number of other sectors.

During 200010, the country attracted $178 billion as FDI. The

inordinately high investment from Mauritius is due to routing of
international funds through the country given significant tax
advantages; double taxation is avoided due to a tax treaty
between India and Mauritius, and Mauritius is a capital gains tax
haven, effectively creating a zero-taxation FDI channel.
From India Since 2000, Indian companies have expanded
overseas, investing FDI and creating jobs outside India. Over the
2006-2010 period, FDI by Indian companies outside India
amounted to 1.34 per cent of its GDP. Indian companies have
deployed FDI and started operations in the United States, while
others have expanded in Europe and Africa. The Indian
company Tata is United Kingdom's largest manufacturer and
private sector employer.

Currency

The RBI's new headquarters in Mumbai

Indian per US$
(average annual)
1975
8.4058
1980
7.8800
1985
12.3640
1990
17.4992
1995
32.4198
2000
44.9401
2005
44.1000
2010
45.7393
2013
58.5515
2014
61.4000
The Indian rupee ( ) is the only legal tender in India, and is also
accepted as legal tender in the neighboring Nepal and Bhutan,
both of which peg their currency to that of the Indian rupee. The
rupee is divided into 100 paise. The highest-denomination
banknote is the 1,000 note; the lowest-denomination coin in
circulation is the 50 paise coin; with effect from 30 June 2011 all
denominations below 50 paise have ceased to be legal currency.
India's monetary system is managed by the Reserve Bank of
India (RBI), the country's central bank. Established on 1 April
1935 and nationalised in 1949, the RBI serves as the nation's
monetary authority, regulator and supervisor of the monetary
system, banker to the government, custodian of foreign
exchange reserves, and as an issuer of currency. It is governed
by a central board of directors, headed by a governor who is
appointed by the Government of India.
Year

The rupee was linked to the British pound from 1927 to 1946
and then the U.S. dollar till 1975 through a fixed exchange rate.
It was devalued in September 1975 and the system of fixed par
rate was replaced with a basket of four major international
currencies the British pound, the U.S. dollar, the Japanese yen
and the Deutsche mark. In 1991, after the collapse of its largest
trading partner Soviet Union, India faced the major foreign
exchange crisis and the rupee was devalued by around 19% in
two stages on 1 and 2 July. In 1992 a Liberalized Exchange Rate
Mechanism LERMS- was introduced. Under LERMS
exporters had to surrender 40 percent of their foreign exchange
earnings to the RBI at the RBI determined exchange rate. The
balance 60% was allowed to be converted at the market
determined exchange rate. In 1994 the rupee was convertible on
the current account, with some capital controls.
After the sharp devaluation in 1991 and transition to current
account convertibility in 1994, the value of the rupee is largely
determined by the market forces. The rupee has been fairly
stable during the decade 2000 to 2010. In September 2013, the
rupee touched an all time low 68.27 to the U.S. dollar.

Types of FDI:

1. Horizontal FDI arises when a firm duplicates its home

country-based activities at the same value chain stage in a
host country through FDI.
2. Platform FDI Foreign direct investment from a source
country into a destination country for the purpose of
exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves
upstream or downstream in different value chains i.e., when
firms perform value-adding activities stage by stage in a
vertical fashion in a host country.

Methods:
The foreign direct investor may acquire voting power of an
enterprise in an economy through any of the following methods:
by incorporating a wholly owned subsidiary or company
anywhere
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated
enterprise
participating in an equity joint venture with another
investor or enterpris

Importance and barriers to FDI:

The rapid growth of world population since 1950 has occurred
mostly in developing countries.] This growth has been matched
by more rapid increases in gross domestic product, and thus
income per capita has increased in most countries around the
world since 1950. While the quality of the data from 1950 may
be of question, taking the average across a range of estimates
confirms this. Only war-torn and countries with other serious
external problems, such as Haiti, Somalia, and Niger have not
registered substantial increases in GDP per capita. The data
available to confirm this are freely available.
An increase in FDI may be associated with improved economic
growth due to the influx of capital and increased tax revenues
for the host country. Host countries often try to channel FDI
investment into new infrastructure and other projects to boost
development. Greater competition from new companies can lead
to productivity gains and greater efficiency in the host country
and it has been suggested that the application of a foreign
entitys policies to a domestic subsidiary may improve corporate
governance standards. Furthermore, foreign investment can
result in the transfer of soft skills through training and job
creation, the availability of more advanced technology for the
domestic market and access to research and development

resources. The local population may be able to benefit from the

employment opportunities created by new businesses.

Economic trends and issues :

With 1.2 billion people and the worlds fourth-largest economy,
Indias recent growth and development has been one of the most
significant achievements of our times. Over the six and half
decades since independence, the country has brought about a
landmark agricultural revolution that has transformed the nation
from chronic dependence on grain imports into a global
agricultural powerhouse that is now a net exporter of food. Life
expectancy has more than doubled, literacy rates have
quadrupled, health conditions have improved. India will soon
have the largest and youngest workforce the world has ever
seen. At the same time, the country is in the midst of a massive
wave of urbanization as some 10 million people move to towns
and cities each year in search of jobs and opportunity. It is the
largest rural-urban migration of this century. Massive
investments will be needed to create the jobs, housing, and
infrastructure to meet soaring aspirations and make towns and
cities more livable and green.
World Bank: "India Country Overview 2013"