A

Research Project Report

ON

ROLE OF FDI IN SME

TO BE SUBMITTED TO DR. APJ ABDUL KALAM

TECHNICAL UNIVERSITY, LUCKNOW
IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE DEGREE
OF

MASTER OF BUSINESS ADMINISTRATION

Batch 2014-16

Submitted to :
Dr. NEHA VERMA
Faculty of Management

Submitted By :
SAKSHI GARG
MBA-IV SEM
ROLL NO.1407470077

DEWAN INSTITUTE OF MANAGEMENT STUDIES

Meerut By-Pass Road, Partapur, Meerut.(U.P.) INDIA Pin-250 103
Ph.:91-121-2440315, 2440375, Fax: 91-121-2440337
Email:info@dewninstitutes.org,Web Site: www.dewaninstitutes.org

CONTENTS
1.

ACKNOWLEDGEMENT

2.
3.
4.

INTRODUCTION
FOREIGN DIRECT INVESTMENT
FOREIGN DIRECT INVESTMENT IN INDIA

5
8
14

5.

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT

IN INDIA

50

6.
7.
8.
9.
10.

OBJECTIVE OF THE STUDY

PURPOSE OF THIS STUDY
STATEMENT OF PROBLEM
RESEARCH METHODOLOGY
DATA ANALYSIS

59
60
61
64
70

11.

CONCLUSION

87

12.
13.

RECOMMENDATIONS
BIBLIOGRAPHY

91
94

FOREIGN DIRECT INVESTMENT

STUDENT DECLARATION

I undersign SAKSHI GARG student of MBA- IV here by declared that the

research report entitled ROLE OF FDI IN SME is completed and submitted
under the guidance of Dr. NEHA VERMA , Faculty of Management, DIMS
Meerut is my original work. The imperial finding in this report is based on the
data collected by me. I have not submitted this project report to MIT, Meerut or
any other University for the purpose of compliance of any requirement of any
examination or degree.

DATE:
SAKSHI GARG
PLACE:

Roll No. 1407470077

MBA IV Sem

ACKNOWLEDGEMENT
I express my sincerest gratitude and thanks to Dr. NEHA VERMA ,
Faculty of Management, DIMS Meerut , for whose kindness I had the precious

opportunity of attaining research. Under his brilliant untiring guidance I

could complete the project being undertaken on the ROLE OF FOREIGN
DIRECT INVESTMENT IN SME successfully in time. His meticulous
attention and invaluable suggestions have helped me in simplifying the
problem involved in the work.

SAKSHI GARG

INTRODUCTION
General Background
In the recent years, Foreign Direct Investment (FDI) policies has become one of the
central economic policies for the developing countries, learned from the experiences of
newly industrialised countries (NICs) like India, Singapore, Hong Kong and Taiwan
which promoted FDI as the catalyst of rapid economic growth in the early stages of their
economic development. Empirical studies on the impact of FDI on economic growth
have shown positive impact in the host countries. Hence, it has become an area of great
interest with empirical determinants of policy implications for enhanced FDI inflows and
the mechanism through which it facilitates growth and structural change in recipient
countries.

The role of FDI in economic growth in the developing countries is that FDI generate
more benefits to the recipient countries rather than just full filling the short-term capital
deficiency problems. Transfer of technologies and its spill over effect to the local firms
will make the local firms more competitive and high standards which is necessary to
compete with the foreign products. Another, spill over effect of MNEs is that MNEs may
provide training and labour management which may make them available to the economy
in general. The training to local suppliers by MNEs may increase the high standard
production and managerial standards.
The relationship between foreign direct investment and economic growth is one the well
studied subject in the field of development economics. Especially, after the advent of
endogenous growth model (Borenzteins, et al, 1995, Balasubramanyam, et al, 1996)

made this relationship more vital for long run economic growth. The research interest in
this field has increased after 1990s wave of globalisation and massively increased FDI
across the globe and economic growth of FDI receiving countries.

UNCTAD (2008) foreign direct investment has potential to generate employment, raise
productivity, transfer skills and technology, enhance export and continue to the long-term
economic development of the worlds developing countries. Multinational Companies
(MNEs) and Translational Corporations (TNCs) are important as their foreign affiliates,
some 64,000 Translational Corporations, generate 53 million jobs. FDI is also the largest
source of external financing for developing countries.

Foreign Direct Investment is directly linked to the international trade of the country
which provides the opportunities to integrate the local economy with the world economy.
Enormous literatures on significance of FDI has shown positive role in the economic
growth (Borenztein, et al 1995, De Mello, 1996 and Balasubramanyam, 1996). However,
there are controversies as some academics argue that the relationship between FDI and
growth is non-linear. This is a complex issue whether FDI cause growth or growth causes
the increase of FDI. Multinational companies go across the world with the objectives
maximizing profits. Hence, countries are providing most suitable investment environment
to MNEs to attract the investment. Policy reforms, political stability, domestic growths,
increased domestic entrepreneurial skills might cause to grow the FDI in host countries.

Inflows of FDI can be important vehicle for technological change and human capital.
Blomstrom et al (1994, 1996) emphasized FDI that induced human capital augmentation
and economic growth by the help of the technology transfer, accumulation of human
capital and knowledge spill over in the FDI receiving countries.
There are two ways to deliver goods and services to foreign markets: international
production and trade. This means that there should be some interrelationship between the
two. This is confirmed by the positive correlation between world Foreign Direct
Investment (FDI) and world exports. Thus, economic growth and trade and investments
are interconnected.

FOREIGN DIRECT INVESTMENT

History
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets,
such as factories, mines and land. Increasing foreign investment can be used as one
measure of growing economic globalization. Maps below show net inflows of foreign
direct investment as a percentage of gross domestic product (GDP). The largest flows of
foreign investment occur between the industrialized countries (North America, Western
Europe and Japan). But flows to non-industrialized countries are increasing sharply.
US International Direct Investment Flows:[1]
Period
1960-69
1970-79
1980-89
1990-99
2000-07
Total

FDI Outflow FDI Inflows Net

$ 42.18 bn
$ 5.13 bn
+ $ 37.04 bn
$ 122.72 bn $ 40.79 bn + $ 81.93 bn
$ 206.27 bn $ 329.23 bn - $ 122.96 bn
$ 950.47 bn $ 907.34 bn + $ 43.13 bn
$ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
$ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of the economy and could be
any one of the following:[citation needed]

an individual;

a group of related individuals;

an incorporated or unincorporated entity;

a public company or private company;

9

a group of related enterprises;

a government body;

an estate (law), trust or other societal organisation; or

any combination of the above.

10

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company

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 enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

11

Debates about the benefits of FDI for low-income countries

Some countries have put restrictions on FDI in certain sectors. India, with its restriction
on FDI in the retail sector is a good example.In a country like India, the walmartization
of the country could have significant negative effects on the overall economy by reducing
the number of people employed in the retail sector (currently the second largest
employment sector nationally) and depressing the income of people involved in the
agriculture sector (currently the largest employment sector nationally).

12

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment (FDI) is normally defined as a form of investment made in
order to gain unwavering and long-lasting interest in enterprises that are operated outside
of the economy of the shareholder/ depositor. In FDI, there is a parent enterprise and a
foreign associate, which unites to form a Multinational Corporation (MNC). In order to
be deemed as a FDI, the investment must give the parent enterprise power and control
over its foreign affiliate.

Foreign Direct Investment in India

In India, Foreign Direct Investment Policy allows for investment only in case of the
following form of investments:

Through financial alliance

Through joint schemes and technical alliance

Through capital markets, via Euro issues

Through private placements or preferential allotments

13

Foreign Direct Investment in India is not allowed under the following industrial
sectors:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds,
copper, zinc

14

FOREIGN DIRECT INVESTMENT IN INDIA

Introduction

Since 1991-92 India has been trying to attract foreign capital to bridge the gap
between intended investment and actual saving of the country. To increase the rate of
growth of GDP in the range of 7 per cent, the rate of net capital formation should be
increased in the vicinity of 28 to 30%. The savings of the country has been hanging
around 24%. There is a gap and this gap is to be bridged by (a) Portfolio investment by
foreign financial institutions (b) lending by foreign banks and other institutions and (c)
Foreign Direct Investment. Of these three routes, developing countries prefer the third
that is Foreign Direct Investment, as this gives certain advantages to the host country.
The advantages of foreign direct investment (FDI) are:

i)

It increases capital for investment automatically.

If we compare this with the

acquisition route, we see that foreign capital replaces the domestic capital by a
take over or purchase. The released domestic capital may be invested in some
other sectors of the economy.
ii)

FDI in green field ventures brings new technology and modern management
technique. In these areas, developing countries are lagging behind.

iii)

Foreign capital inflow through FDI route creates a permanent stake of foreign
capital in the domestic economy. This may be beneficial for the host country in
the sense that it brings a stabilizing force in the economy.

15

The world investment report 2000 reveals that in the line of countries receiving
foreign direct investment, India ranks 17th that means that 16 countries are ahead of India
regarding their ability to attract FDI. Countries like Vietnam are also ahead of India.
India's share of total FDI inflow into developing countries for the period 1997 to 2000 is
1.4% only. There is no point of comparison with China and this is for two reasons.

1)

China could attract about 25% of total FDI inflow into the developing countries.
The next country in the line, that is, Brazil could attract only 10%.

The

predominant position of China in attracting FDI from 1995 onwards cannot be

explained by normal economic parameters.
2)

Second, some economists point out huge amount of capital flight from China that
is very high compared to countries of the similar situations. This reminds one the
revolving door situations of some countries suffering from capital flight.

16

The country's largest retailersFuture Group, Spencer's Retail and Shoppers Stophave
lined up investments of at least US$ 128.56 million for 2010 and trade analysts are of the
opinion that the year will see a number of retailers increasing their presence in key Tier-II
cities.
Tokyo-based Eisai Co Ltd, which focuses on the manufacturing and marketing of
chemicals, food additives as well as machinery and equipment for pharmaceutical
production, has invested US$ 53.65 million for setting up a pharmaceutical
manufacturing plant in Vizag, Andhra Pradesh.
Ahmedabad-based venture capital company, GVFL, has made its second major buy worth
US$ 2.38 million in Bangalore-based iNurture Education Solutions Limited from its SME
Technology Fund.
Policy Initiatives
The government has promised to bring out an updated FDI policy every six months as
stated in a comprehensive press note consolidating the entire regime for foreign
investments in one place for easy reference.
The proposals to improve investment environment in the country in the Union Budget for
2010-11 announced by the Union Finance Minister, Mr Pranab Mukherjee, in Parliament
on February 26, 2010 include:

Number of steps taken to simplify the FDI regime

17

Methodology for calculation of indirect foreign investment in Indian companies

has been clearly defined.

Complete liberalisation of pricing and payment of technology transfer fee and

trademark, brand name and royalty payments.

Furthermore, the government has allowed the Foreign Investment Promotion Board
(FIPB), under the Ministry of Commerce and Industry, to clear FDI proposals of up to
US$ 358.3 million. Earlier all project proposals that involved investment of above US$
129.16 million were put up before the Cabinet Committee of Economic Affairs (CCEA)
for approval. The relaxation would expedite FDI inflow, according to the Union Home
Minister, Mr P Chidambaram.
In a move to fast track mobile television (TV) technology services, the government has
accepted the recommendations of the Telecom Regulatory Authority of India (TRAI) for
a composite foreign investment limit of 74 percent in mobile TV services.
The government has allowed 100 per cent FDI in the renewable energy sector and has put
in place a conducive policy to attract foreign companies, as announced by Minister for
New and Renewable Energy, Mr Farooq Abdullah.

18

APPROACH TOWARDS FDI IN INDIA

The exact position of FDI in India will be put up first at three levels; at the level
of the State, at the level of the sector and at the level of the industry. The objective of
doing this is to examine several hypotheses like the role of infrastructure in attracting
FDI, the role of labor situation, the role of law and order etc. We are to see also whether
the inflow of FDI in India has certain favourable destination - region wise or sector wise.

A broad explanation of the above will enable us to zero in to certain areas that
could be explored further to ascertain the causes of a slow inflow of FDI. It can facilitate
the drawing of our conclusion.

Role of Infrastructure

There is a popular perception that Foreign Direct Investment flows to the region
where infrastructure is better. But state of infrastructure in a particular region covers
many aspects. Broadly infrastructure can be placed under two categories.

a)

Physical infrastructure, which may be called as social capital. This category

includes roads, railways and other communication system, the availability of
power and other viable inputs.

b)

The second category includes those aspects which are non-physical in nature like
law and order system, availability of efficient work force, education system, work

19

culture and a common growth oriented human psychology. In many developing

countries the work culture may be not conducive to modern age industrial society.
Also the over all impression regarding the work culture on the mind of the
potential investors is important.

The role of Government in the development of the economy is important factor in

the second category of infrastructure. While Government as a facilitator is appreciated
everywhere as it helps rapid economic development, too much Government control, and
particularly bureaucratic red-tapism is not liked by foreign investors.

In spite of planned economic development in India during the last five decades,
the development of infrastructure has not been uniform in 28 States/Regions of the
country. One study places the situation of infrastructure in the form of an index. Taking
the average India situation as a hundred, the study shows the index of Delhi 730, Kerala
162, Punjab 172 ,Tamil Nadu 195, while Gujarat is 105 West Bengal 102. States like
Rajasthan, Meghalaya, Manipur are lagging behind as their index is far below 100. When
we place the flow of FDI in different States in contrast to the indices of infrastructure of
different states, we find that while the states successfully attracting FDI are generally the
states that have good infrastructure, but the converse is not true. The States having good
infrastructure index have not been able to attract FDI.

20

This is the usage side of FDI. We are to see also the source side. So far FDI
inflow into India is concerned, the USA and the European Indian provides the lion's share
of FDI to India. Japan comes next in importance of source. For some years Mauritius
became important and the role of Non-Residents Indians (NRI) is a bit complex. Some
people argue that many NRI's are taking advantage of the Mauritius route regarding the
supply side of FDI. There is another problem and this is the widening gap between the
approval and actual inflow of FDI. If we see the international situation, we find that there
is normally a gap of 30% between the approval and the actual inflow. But, in India the
gap is much wider and sometimes it becomes difficult to give explanation for that gap.

There have been some studies on the determinants of FDI inflow into the host
countries in the literature.

The economic parameters often mention as explanatory

variables are : Growth rate of GDP, state of infrastructure, exchange rate stability,
equitable value of the exchange rate, openness of the economy, legal structure of the host
country and the attitude of the Government. The models, which are implicit in the study
of these variables, are based on a market economy framework. In India the paradigm
shift occurred from 1991-92, that is, the Indian think-tank became accustomed to explore
the role of market mechanism in explaining the movement of economic variables. This
happened from 1991-92 onwards.

A broad section of people - executives in the

corporate, officials of foreign Embassies, academicians, independent consultants and

industrialists - often express the opinion that India has a great problem regarding the
mind set, that is, a popular belief is that foreign capital inflow leads to the exploitation of
the domestic economy by the owners of foreign capital. There is another popular belief

21

that India suffers from "too much government Syndrome". The latter means that the role
of government in India is spread everywhere, but ironically the governance is weak in
areas where it is called for. The latter are areas of external security, true safeguards of the
downtrodden people, preservation of the environment and a true reform in the financial
sector. The perception is partly qualitative in nature. The extent to which this perception
exists can be measured only by a survey method, and this is beyond the scope of this
chapter

22

INDUSTRIES RESERVED FOR SMALL AND MEDIUM

ENTERPRISES
Technology Transfer, Capital formation and International Trade

Foreign Trade Investment is associated with large multinational Corporations

(MNCs). Economic theory explains how Foreign Direct Investment (FDI) induces
the firms for international operations. For this, the relationship between FDI and
MNCs is very strong. In the context of FDI, the overseas expansion of a firm is
determined by three factors and these are -

ownership advantages, location

advantages and internalization of incentives. A firm wishing to operate abroad should

possess adequate advantages so that it can offset the handicap of working in an alien
atmosphere and also cover for higher risk.

The advantages mentioned in the

beginning come from the ownership of proprietary intangible assets possessed by the
firm and this can be employed abroad in an efficient manner. These intangible assets
include brand goodwill, technology management skills, access to cheaper sources of
raw materials and capital etc. The firm may exploit these advantages through exports
from the home base in the initial stage. Later production facility is created abroad to
cater to the foreign market. This practice is to exploit other advantages like tariffs
and quantitative restrictions imposed by host countries, transport and communication
cost and cheaper input prices.

Many factors like imperfect market, licensing of intangible assets and also
internalization of incentives available on local production led to the inflow of FDI in
23

1970s. The nature of FDI flows changed with the improvement of communication
and advance of information technology. Whenever cost of market transactions of
intangible assets become very high, firms tend to avoid these costs by internalizing
the transactions of the intangible assets. This is done through

Foreign Direct

Investment also.

Literature also reveals that exporting commodities directly from the home base and
production of the same in foreign countries to serve the foreign markets either
through licensing or Foreign Direct Investment are two alternative modes of overseas
operations. From this angle it becomes obvious that if trade liberalization becomes
extreme, the location advantage of the country for the local market may be lost.

Inter-Industry Variation in FDI

The hypothesis that some industries in the host country could contract more FDI
than others has been tested empirically in the literature. These studies have ignored
the possibility of discrimination in licensing and have concentrated on behaviour of
FDI regarding its destination to particular industries. The common elements of the
study include FDI intensity to vary positively with the intensity of advertisement,
skill intensity, R&D expenditure, capital output ratio and certain other factors. Also
in the absence of any particular strong policy factor, the choice between FDI and
licensing will be determined by the transaction cost. Since transaction cost are quite
high for branded consumer goods, there a pronounced tendency that FDI will be

24

concentrate in those industries. This finding has one implication and this is as
follows:

A developing country with the desire to contract more FDI should follow a
liberalization policy in such a way that it makes the affects of intangible asset and
internalization incentives to be more pronounced.

FDI and Economic Growth: There is a common hypothesis in the literature that
higher rate of Gross Domestic Product needs to a higher inflow of FDI. The literature
also compares the relative productivity of FDI vis--vis domestic capital. So far as
FDI increases the availability of capital, this should increase the rate of growth of
GDP. Thus we have a circularity and it is whether higher growth rate leads to higher
inflow of FDI, or higher inflow FDI leads to higher growth rate. This is a standard
causality problem in econometrics literature. Many studies have empirically tried to
see the direction of causality and result is a mixed one.

25

Indian Economy and Foreign Capital

The domination of foreign capital in the Indian industrial scene just before
independence was the result of history. Foreign capital in general and British capital
in particular, played a crucial role in the development of jute textiles and engineering
industries in the Indian sub-continent. The philosophy of economic development to be
pursued in post independent India had changed radically and it was thought that least
importance should be attached to the role of foreign capital in Indias economic
growth. The result was a socialist pattern of industrial development based on selfsufficiency.
The import-substitution and inward looking industrialization led to minimum role of
foreign capital and the paucity of foreign exchanges induced the authority to enact the
stringent law like Foreign Exchange Regulation Act ( FERA), 1973. The strictness of
this piece of legislation had been responsible for much of capital flight from India in
the seventies and eighties. Indian planners were so much immersed with self-delusion
that they could not believe the reality of capital flight until the national coffer became
almost empty in 1990. The gravity of the situation changed the whole perspective and
the paradigm shift happened. This led to the attempt of economic reforms.

26

Foreign Direct Investment and Development

The political economy of the role of FDI in the development process of an

economy is full of controversy. The arguments are on both sides.

Those who

advocate a more liberal regime claim that FDI will provide the much-needed
resources and foreign exchange for reviving Indian industry, improve the crumbling
infrastructure, and allow India to modernize its technological base. Also greater
competition in Indian manufacturing will benefit the Indian consumer. On the other
hand, critics point to the poor record of multinational corporations in India, their
excessive profitability. Also they argue about the adverse impact of profit remittances
on India's balance of payments.

Does foreign investment contribute to growth? Empirical investigation

does not offer any clear answer. Countries like China have experienced large FDI
inflows and high growth in recent years, while India grew rapidly without significant
levels of foreign capital. In Latin America, many countries have periods of slow
growth despite openness to foreign capital.

Even if we did find some positive

correlation between FDI and growth, the issue of causality remains unresolved

27

Technology: Policy and Reality

Host country governments often encourage foreign investment in the hope of

improving the productivity of domestic firms. Foreign direct investment potentially
brings new technologies to the host economy. Technology inflows can also improve
the productivity of domestic firms through 'spillovers', as better production and
management techniques diffuse in the host economy. In some situations foreign
investment can be a catalyst for growth. The literature isolates two channels for this
spillover process. The more disembodies aspects of superior technologies used by
foreign firms can spread to domestic firms through the mobility of trained workers
and managers, and through technical guidance provided

FDI : A Segmented Analysis

In the following paragraphs we will explain the current position of FDI in India in
different parts. This method of analysis will help us to have an in depth analysis of
dynamics of the flow of FDI in different sectors of the economy.

A Macro View
The source countries from which FDI flows into Indian economy are large in number
but the major partners are the USA, The European Union countries and couple of
countries in Asia like Japan,

India, Singapore, Hong Kong and Mauritius.

Interesting phenomenon is that even after the accession of Hong Kong to mainland

28

China, capital has followed from Hong Kong into India. All the European Union
countries, particularly countries like U.K, Germany, France and Netherlands are
important source countries of FDI. As a single country outside EU block, Japan is
very important as a source country.

Table 1 reveals that though the number of countries from which FDI flows into India
is impressive, only a handful of countries are important as the source of FDI inflow.
Some countries are reluctant to make investment in India, Taiwan is an example.
Non-resident Indians (NRI) is a category in table 1 and the fact revealed in the table is
that the contribution of NRI in the FDI investment in India is not impressive.

29

Foreign Direct Investment in India

Foreign direct investment (FDI) in India has played an important role in the development
of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a
certain degree of financial stability, growth and development. This money has allowed
India to focus on the areas that may have needed economic attention, and address the
various problems that continue to challenge the country.

India has continually sought to attract FDI from the worlds major investors. In 1998 and
1999, the Indian national government announced a number of reforms designed to
encourage FDI and present a favorable scenario for investors.

FDI investments are permitted through financial collaborations, through private equity or
preferential allotments, by way of capital markets through Euro issues, and in joint
ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining
industries.

A number of projects have been announced in areas such as electricity generation,

distribution and transmission, as well as the development of roads and highways, with
opportunities for foreign investors.

The Indian national government also provided permission to FDIs to provide up to 100%

30

of the financing required for the construction of bridges and tunnels, but with a limit on
foreign equity of INR 1,500 crores, approximately $352.5m.

Currently, FDI is allowed in financial services, including the growing credit card
business. These services include the non-banking financial services sector. Foreign
investors can buy up to 40% of the equity in private banks, although there is condition
that stipulates that these banks must be multilateral financial organizations. Up to 45% of
the shares of companies in the global mobile personal communication by satellite
services (GMPCSS) sector can also be purchased.

By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but
less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable
democracy and a smoother approval process, lag so far behind China in FDI amounts?

Although the Chinese approval process is complex, it includes both national and regional
approval in the same process.

Federal democracy is perversely an impediment for India. Local authorities are not part
of the approvals process and have their own rights, and this often leads to projects getting
bogged down in red tape and bureaucracy. India actually receives less than half the FDI
that the federal government approves.

31

Sectors Attracting FDI

Though the services sector in India constitutes the largest share in the Gross Domestic
Product, still it has failed to some extent in attracting more funds in the forms of
investments.

Important sectors of the Indian Economy attracting more investments into the country are
as follows:

Electrical Equipments (Including Computer Software & Electronic)

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

Transportation Industry

Services Sector (financial & non-financial)

Fuels (Power + Oil Refinery)

Chemical (other than fertilizers)

Food Processing Industries

Drugs & Pharmaceuticals

Cement and Gypsum Products

Metallurgical Industries

FDI Inflows Year-Wise

Opening up of door policies adopted by the Government of India through its new
economic policies has attracted more investments in to the country. Indian Industries
have gone global and in the same direction the inflow of FDI in to the country has
increased at a faster rate.
32

The Inflow of FDI into the country over various years is as follows:

Amount of FDI inflows

Year (April-March)
(In US$ million)
1991-1992 (Aug-March)

167

1992-1993

393

1993-1994

654

1994-1995

1,374

1995-1996

2,141

1996-1997

2,770

1997-1998

3,682

1998-1999

3,083

1999-2000

2,439

2000-2001

2,908

2001-2002

4,222

2002-2003

3,134

2003-2004

2,634

2004-2005

3,755*

2005-2006 (Upto March 2006) 5,549

INDIA ranks second in the world in terms of financial attractiveness, people and
skills availability and business environment. This is revealed in AT Kearney's 2007
Global Services Location Index. Country's financial stability in the current
environment of financial turbulence and a possible unwinding of macro imbalances
sends clear message to the prospective foreign investors about India's position as an
expanding investment destination. "India's external sector has displayed considerable
strength and resilience since the reforms in 1991- despite several domestic as well as
global political events and supply shocks in food and fuel........we partner with the
33

global economy fully on the trade and current account while there is progressive
liberalisation of the capital account, consistent with the progress in reforms in the
real, fiscal and financial sectors", observed Dr Y.V.Reddy, Governor of India's
central banking authorities, Reserve Bank of India (RBI) at the World Leaders Forum
in New York in April this year. "The strong macro economic fundamentals, growing
size of the economy and improving investment climate has attracted global
corporation to invest in India. A major outcome of the economic reforms process
aimed at opening up the economy and embracing globalization has led to to
tremendous increase in Foreign Direct Investment inflows into India", says country's
powerful industry lobby CII.

CUMULATIVE FDI EQUITY INFLOWS

In Rs

In US$

Crore

Million

Cumulative amount of FDI inflows

3,93,020

89,819

105,673

23, 885

(From April 2000 to March 2009)

Amount of FDI inflows during 2008-9
(From April 2008 to January 2009)
34

Cumulative amount of FDI Inflows (Up

4,04,728

92,158

to April 2009)
SOURCE: DIPP, Federal Ministry of Commerce & Industry,
Government of India
Branding India as a "safe and stable" investment destination amid global financial
turmoil, country's Commerce and Industry minister Kamal Nath expects despite the
global financial meltdown, FDI inflows into India during the current fiscal year
(2008-09) will close at $ 35 billion signifying over $ 11 billion invested in the
previous financial year (India's fiscal year is April to March). In 2007-08, reinvested
earnings of foreign firms in India stood at $ 5.5 billion. Global firms have routed
most of the investment through tax havens like Mauritius and Singapore during
2007-08, while Japanese firms have poured more money into India. Lot of
investment is expected to flow into petroleum, manufacturing and electronic
hardware sectors, Nath said.

Year Wise FDI inflows into Infrastructure sector during April 2000 to December
2007
(In US$ million)
YEAR

AMOUNT

2000-01

292.37

2001-02

1902.26

35

2002-03

347.33

2003-04

388.37

2004-05

456.00

2005-06

914.04

2006-07

2179.39

2007-08 (Up to December 2007)

4095.80

TOTAL

10575.56

SOURCE: Federal Ministry of Commerce and Industry, Government of

India
Policymakers estimate that to sustain high growth rate India will need massive
investment in the five year period to March 2012, including $500 billion in
infrastructure, to sustain high growth rates. In January, India raised FDI limits in
petroleum refinery, aviation, commodity exchanges, credit information companies
and mining of some precious metals to attract more capital and boost growth in those
sectors. The Congress(I)-led UPA government has plan to raise FDI limits in
insurance to 49 cent. in fact the Cabinet has okayed it, now it will go to Parliament.
However, the retail trade is yet to be opened further. The government is in the
process of fine tuning FDI rules in order to make India more attractive as FDI
destination.

FDI Equity Inflows (2008-09)

36

In US$
MONTHS

In Rs crore
Million

April 2008

15005

3749

May 2008

16563

3932

June 2008

10244

2392

July 2008

9627

2247

August 2008

9995

2328

September 2008

11676

2562

October 2008

7284

1497

November 2008

5305

1083

December 2008

6626

1362

January 2009

13347

2733

Year 2008-09 (Up to January 2009)

105673

23885

Year 2007-08 (Up to January 2008)

58203

14466

YOY Growth (%)

(+) 81

(+) 65

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of

India

37

In FDI equity investments Mauritius tops the list of first ten investing countries
followed by US, UK, Singapore, Netherlands, Japan, Germany, France, Cyprus and
Switzerland. Between April 2000 and July 2008 FDI inflows from Mauritius stood
at $ 30.18 billion followed by $5.80 billion from Singapore; $ 5.47 billion from the
US; $ 4.83 billion from the UK; $ 3.12 billion from the Netherlands; $ 2.26 billion
from Japan; $1.83 billion from Germany; $ 1.41 billion from Cyprus; and $1.02
billion from France.

Top ten investing (FDI Equity) countries (In Rs. crore)

COUNTRY

2005-

2006-07

2007-08

06

11441

28759

44483

2008-09

Cumulative

% with

(from

(From April

total

April-

2000 to

(inflows

March,

April

in terms

2009)

2009)

of rupees)

50794

168485

Mauritius

44%
(2570)

(6363)

(11096) (11208)

(38305)

2210

3861

4377

8002

28303

(502)

(856)

(1089)

(1802)

(6404)

1164

8389

4690

3840

23002

(266)

(1878)

(1176)

(864)

(5246)

1218

2662

12319

15727

34467

USA

7%

UK

6%

Singapore

9%
(275)

(578)

(3073)

(3454)

(7934)

340

2905

2780

3922

15957

Netherlands

4%
(76)

(644)

(695)
38

(883)

(3611)

925

382

3336

1889

Japan

12041(2694) 3%
(208)

(85)

(815)

(405)

1345

540

2075

2750

9580

Germany

3%
(303)

(120)

(514)

(629)

(2191)

82

528

583

2098

5489

(18)

(117)

(145)

(467)

(1229)

310

266

3385

5983

11140

(70)

(58)

(834)

(1287)

(2491)

219

1174

1039

1133

4146

France

1%

Cyprus

3%

UAE

1%
(49)

(260)

(258)

(257)

(948)

Total FDI

24613

70630

98664

122919

404728

inflows*

(5546)

(15726)

(24579) (27309)

(92158)

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government

of India
Figures in bracket are in US$ million

39

FDI POLICIES IN INDIA:

The primary aim of these policies is to create a friendly business environment where
foreign investors feel comfortable with the legal and financial framework of the country,
and have the potential to reap profits from economically viable businesses. The prospect
of new growth opportunities and outsized profits encourages large capital inflows across
a range of industry and opportunity types.

Investors tend to look for predictable environments where they understand how decisionmaking processes work. Governments therefore are incentivized to build up a track
record of rational decision making. The business environment often requires work to
remove onerous regulations, reduce corruption and encourage transparency. Governments
often also seek to improve their domestic infrastructure to meet the operational needs of
investors.

Providing fiscal incentives for attracting FDI is a subject of controversy analysts have
argued both in favor and against the idea. A general consensus is developing in favor of
certain incentives which have been proven historically to grow profits and therefore
foreign investments.

When policies are effective, significant FDI investments are injected into countries that
help the domestic economy to grow. Different countries and regions offer various kinds
of fiscal incentives, with a related variance in the level of FDI investments attracted.

40

Governments are increasingly setting up promotional agencies to foster foreign direct

investment. These agencies promote FDI-friendly policies, identify prospective sectors
and investors, and structure specific deals and incentives for major foreign investors such
as multi-national corporations (MNCs).

Global trade associations also play a major role in some of these investment activities.
These associations are tasked with creating a positive environment for foreign direct
investors and ensuring that both investors and recipient countries enjoy a favorable
environment.

The formation of human capital is vital for the continued growth of FDI inflows. To
enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are
necessary. Governments must therefore enact policies to provide training and skills
upgrading to develop their workforce and meet the employment needs of foreign
investors.

GUIDELINES FOR THE CONSIDERATION OF FDI PROPOSALS BY THE

FOREIGN INVESTMENT PROMOTION BOARD (FIPB)

(The Guidelines are meant to assist the FIPB to consider proposals in an objective and
transparent manner. These would not in any way restrict the flexibility or bind the FIPB
from considering the proposals in their totality or making recommendation based on other
criteria or special circumstances or features it considers relevant. Besides these are in the

41

nature of administrative Guidelines and would not in any way be legally binding in
respect of any recommendation to be made by the FIPB or decisions to be taken by the
Government in cases involving Foreign Direct Investment (FDI). These guidelines are
issued without prejudice to the Government's right to issue fresh guidelines or change the
legal provisions and policies whenever considered necessary.)

These guidelines stand modified to the extent changes have been notified by Secretariat
for Industrial Assistance from time to time.

The following Guidelines are laid-down to enable the Foreign Investment Promotion
Board (FIPB) to consider the proposals for Foreign Direct Investment (FDI) and
formulate its recommendations.

All applications should be put up before the FIPB by the SIA (Secretariat for
Industrial Assistance) within 15 days and it should be ensured that comments of
the administrative ministries are placed before the Board either prior to/or in the
meeting of the Board.
Proposals should be considered by the Board keeping in view the time frame of
30 days for communicating Government decision (i.e. approval of C&IM/CCEA
or rejection as the case may be).
In cases in which either the proposal is not cleared or further information is
required, in order to obviate delays presentation by applicant in the meeting of the
FIPB should be resorted to.

42

 While considering cases and making recommendations, FIPB should keep in

mind the sectoral requirements and the sectoral policies vis-a-vis the proposal(s).
FIPB would consider each proposal in totality (i.e. if it includes apart from
foreign investment, technical collaboration/ industrial licence) for composite
approval or otherwise. However, the FIPB's recommendation would relate only to
the approval for foreign financial and technical collaboration and the foreign
investor will need to take other prescribed clearances separately.
The Board should examine the following while considering proposals submitted
to it for consideration:

Whether the items of activity involve industrial licence or not and if so the
considerations for grant of industrial licence must be gone into;

Whether the proposal involves technical collaboration and if so:- (a) the source
and nature of technology sought to be transferred.

Whether the proposal involves any mandatory requirement for exports and if so
whether the applicant is prepared to undertake such obligation (this is for items
reserved for SMALL and Medium Enterprises as also for dividend balancing, and
for 100% EOUs/SEZ units);

Whether the proposal involves any export projection and if so the items of export
and the projected destinations;

Whether the proposal has concurrent commitment under other schemes such as
EPCG Scheme etc.

In the case of Export Oriented Units (EOUs) whether the prescribed minimum
value addition norms and the minimum turn over of exports are met or not;

43

Whether the proposal involves relaxation of locational restrictions stipulated in

the industrial licensing policy;

Whether the proposal has any strategic or defence related considerations, and

Whether the proposal has any previous joint venture or technology

transfer/trademark agreement in the same or allied field in India, the detailed
circumstance in which it is considered necessary to set-up a new joint enture/enter
into new technology transfer (including trade mark), and proof that the new
proposal would not in any way jeopardize the interest of the existing joint venture
or technology/trade mark partner or other stake holders.

While considering proposals the following may be prioritised.

Items/activities covered under automotive route (i.e. those, which do not qualify
under automatic route).

Items falling in infrastructure sector.

Items which have an export potential

Items which have large scale employment potential and especially for rural
people.

Items, which have a direct or backward linkage with agro business/farm sector.

Item which have greater social relevance such as hospitals, human resource
development, life saving drugs and equipment.

Proposals, which result in induction of technology or infusion of capital.

The following should be especially considered during the scrutiny and consideration
of proposals:

44

The extent of foreign equity proposed to be held (keeping in view sectoral caps if
any - e.g. 24% for SSI units, 40% for air taxi/airlines operators, 49% in
basic/cellular/paging in Telecom sector etc).

Extent of equity with composition of foreign/NRI (which may include

OCB)/resident Indians.

Extent of equity from the point of view whether the proposed project would
amount to a holding company/wholly owned subsidiary/a company with dominant
foreign investment (i.e. 75% or more) joint venture.

Whether the proposed foreign equity is for setting up a new project (joint venture
or otherwise) or whether it is for enlargement of foreign/NRI equity or whether it
is for fresh induction of foreign equity/NRI equity in an existing Indian company.

In the case of fresh induction of foreign/NRI equity and/or cases of enlargement

of foreign/ NRI equity in existing Indian companies whether there is a resolution
of the Board of Directors supporting the said induction/ enlargement of
foreign/NRI equity and whether there is a shareholders agreement or not.

In the case of induction of fresh equity in the existing Indian companies and/or
enlargement of foreign equity in existing Indian companies, the reason why the
proposal has been made and the modality for induction/ enhancement [i.e.
whether by increase of paid up capital/authorised capital, transfer of shares
(hostile or otherwise) whether by rights issue, or by what modality].

Cases pertaining to FIPB approvals, which involve increase in the non-resident

equity within the approved percentage of non-resident equity in a joint venture

45

company and enhancement of paid-up capital in a wholly owned subsidiary do not

require FIPB approval provided the intent for increase in the amount of foreign
equity is duly notified to SIA and formal documentation by way of intimation is
made to SIA within 30 days of receipt of funds and allotment of shares (to nonresident shareholders).

Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines.

Whether the activity is an industrial or a service activity or a combination of both.

Whether the item of activity involves any restriction by way of reservation for the
SMALL and Medium Enterprises.

Whether there are any sectoral restrictions on the activity (e.g. there is ban on
foreign investment in real estate while it is not so for NRI investment).

Whether the item involves only trading activity and if so whether it involves
export or both export and import, or also includes domestic trading and if
domestic trading whether it also includes retail trading.

Whether the proposal involves import of items which are either hazardous,
banned or detrimental to environment (e.g. import of plastic scrap or recycled
plastics).

In respect of activities to which equity caps apply, FIPB may consider

recommending higher levels of foreign equity as compared to the prescribed caps,
keeping in view the special requirements and merits of each case.
In respect of other industries/activities the Board may consider recommending 51
per cent foreign equity on examination of each individual proposal. For higher
levels of equity up to 74 per cent the Board may consider such proposals keeping
46

in view considerations such as the extent of capital needed for the project, the
nature and quality of technology, the requirements of marketing and management
skills and the commitment for exports.
FIPB may consider recommending proposals for 100 percent foreign owned
holding/subsidiary companies based on the following criteria:

where only "holding" operation is involved all subsequent/downstream

investments to be carried out would require prior approval of the Government;

where proprietary technology is sought to be protected or sophisticated

technology is proposed to be brought in;

where at least 50% of production is to be exported;

proposals for consultancy; and

proposals for industrial model towns/industrial parks or estates.

In special cases, where the foreign investor is unable initially to identify an Indian
joint venture partner, the Board may consider and recommend proposals
permitting 100 per cent foreign equity on a temporary basis on the condition that
the foreign investor would divest to the Indian parties (either individual, joint
venture partners or general public or both) at least 26 per cent of its equity within
a period of 3-5 years.
Similarly in the case of a joint venture, where the Indian partner is unable to raise
resources for expansion/ technological upgradation of the existing industrial
activity

the

Board

may

consider

and

recommend

increase

in

the

proportion/percentage (up to 100 per cent) of the foreign equity in the enterprise.
47

 In respect of trading companies, 100 per cent foreign equity may be permitted in
the case of the activities involving the following:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and
sale of goods and services among the companies of the same group.

In respect of the companies in the infrastructure/services sector where there is a

prescribed cap for foreign investment, only the direct investment should be
considered for the prescribed cap and foreign investment in an investing company
should not be set off against this cap provided the foreign direct investment in
such investing company does not exceed 49 per cent and the management of the
investing company is with the Indian owners.
No condition specific to the letter of approval issued to a foreign investor would
be changed or additional condition imposed subsequent to the issue of a letter of
approval. This would not prohibit changes in general policies and regulations
applicable to the industrial sector.
Where in case of a proposal (not being 100% subsidiary) foreign direct
investment has been approved up to a designated percentage of foreign equity in
the joint venture company the percentage would not be reduced while permitting
induction of additional capital subsequently. Also in the case of approved
activities, if the foreign investor(s) concerned wished to bring in additional capital
48

on later dates keeping the investment to such approved activities, FIPB would
recommend such cases for approval on an automatic basis.
As regards proposal for private sector banks, the application would be considered
only after "in principle" permission is obtained from the Reserve Bank of India
(RBI).
The restrictions prescribed for proposals in various sectors as obtained, at present,
are given in the annexure - IV and these should be kept in view while considering
the proposals.

49

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN

INDIA
FDI in India for Foreign Investors
Hotel & Tourism: FDI in Hotel & Tourism sector in India
100% FDI is permissible in the sector on the automatic route.
The term hotels include restaurants, beach resorts, and other tourist complexes providing
accommodation and/or catering and food facilities to tourists. Tourism related industry
include travel agencies, tour operating agencies and tourist transport operating agencies,
units providing facilities for cultural, adventure and wild life experience to tourists,
surface, air and water transport facilities to tourists, leisure, entertainment, amusement,
sports, and health units for tourists and Convention/Seminar units and organizations.
For foreign technology agreements, automatic approval is granted if
i.

up to 3% of the capital cost of the project is proposed to be paid for technical and
consultancy services including fees for architects, design, supervision, etc.

ii.

up to 3% of net turnover is payable for franchising and marketing/publicity

support fee, and up to 10% of gross operating profit is payable for management
fee, including incentive fee.

50

Private Sector Banking:

Non-Banking Financial Companies (NBFC)
49% FDI is allowed from all sources on the automatic route subject to guidelines issued
from RBI from time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be
as per levels indicated below:
i.

Merchant banking

ii.

Underwriting

iii.

Portfolio Management Services

iv.

Investment Advisory Services

v.

Financial Consultancy

vi.

Stock Broking

vii.

Asset Management

viii.

Venture Capital

ix.

Custodial Services

x.

Factoring

xi.

Credit Reference Agencies

xii.

Credit rating Agencies

xiii.

Leasing & Finance

xiv.

Housing Finance

xv.

Foreign Exchange Brokering

xvi.

Credit card business

51

xvii.

Money changing Business

xviii.

Micro Credit

xix.

Rural Credit
b. Minimum Capitalization Norms for fund based NBFCs:
i) For FDI up to 51% - US$ 0.5 million to be brought upfront
ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5
million to be brought upfront and the balance in 24 months
c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted

non-fund based NBFCs with foreign investment.
d. Foreign investors can set up 100% operating subsidiaries without the condition to
disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50
million as at b) (iii) above (without any restriction on number of operating subsidiaries
without bringing in additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment
will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject
to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i)
and (b)(ii) above.

52

f. FDI in the NBFC sector is put on automatic route subject to compliance with
guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this
regard.
Insurance Sector: FDI in Insurance sector in India
FDI up to 26% in the Insurance sector is allowed on the automatic route subject to
obtaining licence from Insurance Regulatory & Development Authority (IRDA)
Telecommunication: FDI in Telecommunication sector
i.

In basic, cellular, value added services and global mobile personal

communications by satellite, FDI is limited to 49% subject to licensing and
security requirements and adherence by the companies (who are investing and the
companies in which investment is being made) to the license conditions for
foreign equity cap and lock- in period for transfer and addition of equity and other
license provisions.

ii.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up

to 74% with FDI, beyond 49% requiring Government approval. These services
would be subject to licensing and security requirements.

iii.

No equity cap is applicable to manufacturing activities.

iv.

FDI up to 100% is allowed for the following activities in the telecom sector :
a.

ISPs not providing gateways (both for satellite and submarine cables);

b.

Infrastructure Providers providing dark fiber (IP Category 1);

c.

Electronic Mail; and

d.

Voice Mail
53

The above would be subject to the following conditions:

e.

FDI up to 100% is allowed subject to the condition that such companies

would divest 26% of their equity in favor of Indian public in 5 years, if
these companies are listed in other parts of the world.

f.

The above services would be subject to licensing and security

requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
Trading: FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51% provided it is primarily
export activities, and the undertaking is an export house/trading house/super trading
house/star trading house. However, under the FIPB route:i. 100% FDI is permitted in case of trading companies for the following activities:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and
sale of goods and services among the companies of the same group and not for
third party use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM
Policy:
54

a. Companies for providing after sales services (that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level for such
trading companies who wish to market manufactured products on behalf of their
joint ventures in which they have equity participation in India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the SMALL and Medium Enterprises under which,
based on technology provided and laid down quality specifications, a company
can market that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for manufacture
provided such test marketing facility will be for a period of two years, and
investment in setting up manufacturing facilities commences simultaneously with
test marketing.
FDI up to 100% permitted for e-commerce activities subject to the condition that such
companies would divest 26% of their equity in favor of the Indian public in five years, if
these companies are listed in other parts of the world. Such companies would engage
only in business to business (B2B) e-commerce and not in retail trading.

55

Power: FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation,
transmission and distribution, other than atomic reactor power plants. There is no limit on
the project cost and quantum of foreign direct investment.
Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of drugs and
pharmaceutical, provided the activity does not attract compulsory licensing or involve use
of recombinant DNA technology, and specific cell / tissue targeted formulations.
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk
drugs produced by recombinant DNA technology, and specific cell / tissue targeted
formulations will require prior Government approval.
Roads, Highways, Ports and Harbors
FDI up to 100% under automatic route is permitted in projects for construction and
maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports
and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and consultancy for
integration of pollution control systems is permitted on the automatic route.

56

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India
FDI up to 100% is allowed subject to certain conditions.
Special Facilities and Rules for NRI's and OCB's
NRI's and OCB's are allowed the following special facilities:
1. Direct investment in industry, trade, infrastructure etc.
2. Up to 100% equity with full repatriation facility for capital and dividends in the
following sectors:

i.

34 High Priority Industry Groups

ii.

Export Trading Companies

iii.

Hotels and Tourism-related Projects

iv.

Hospitals, Diagnostic Centers

v.

Shipping

vi.

Deep Sea Fishing

vii.

Oil Exploration

viii.

Power

ix.

Housing and Real Estate Development

x.

Highways, Bridges and Ports

57

xi.

Sick Industrial Units

xii.

Industries Requiring Compulsory Licensing

xiii.

Industries Reserved for SMALL and Medium Enterprises

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies

raising Capital through Public Issue up to 40% of the new Capital Issue.
4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership
engaged in Industrial, Commercial or Trading Activity.
5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the
equity Capital or Convertible Debentures of the Company by each NRI.
Investment in Government Securities, Units of UTI, National Plan/Saving
Certificates.
6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through
a General Body Resolution, up to 24% of the Paid Up Value of the Company.
7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from
Shares or Debentures of an Indian Company.

58

OBJECTIVE OF THE STUDY

To find out the contribution of FDI among the three sectors

How can this contribution be increased

Whether FDI is playing a significant role in the eco growth of india.

59

PURPOSE OF THIS STUDY

At a theoretical level, FDI brings both capital and technology which makes the local
firms more competitive and encourages the economic development in the faster way. The
spill over effect of foreign companies will have a long-term effect in the host countries.
In the practical level, this study explores the role of FDI in economic growth in India.
This case study explores, whether FDI played role in economic growth or not? Another
reason for the study is worlds big institutions like IMF, WTO and UNCTAD promoting
international trade and activities of Multinational activities for the growth of world
economies. India is able to attract a significant amount of FDI among Asian countries.
This study explores the FDI policies adopted in India to attract more FDI over the years.
Such policy recommendation would be useful for the developing countries to attract more
FDI. Further more, this study verifies the theoretical model of endogenous growth theory
of economic growth by using the macro economic figures of India. The present study
examines the empirical assessment of the impact of FDI in economic growth of India
over the period of 1980-2005.

60

STATEMENT OF PROBLEM

Today, India stands as one of the developed OECD member country in the world. The
country has a land of 98,799 Sq Km with 49.232 million populations (UNESCO, 2008).
Indians enjoy one of the worlds highest standards of living today with the per capita
income of US $19,738 (World Bank, 2008) which was one of the poorest countries in the
world with US $ 100 in 1960s. This study explores the role of FDI in this amazing
growth of India and the FDI policies adopted by Indian policy makers.

FDI has been seen one of the big resources for industrial development in India over the
years. FDI stock increased to US $ 119.billions in 2007 from US $ 1.13 billions in 1980
(WIR, 2008) and

India has gained the name of miracle on the Han river. It is

interesting to explore the impact of FDI on the rapid growth of Indian economy.

Despite the natural resources availability in the country, economic policies and political
environment also influence the inflow of foreign investments in the countries. The
theoretical concept of impact of FDI is that FDI does not only bring capital but also it
brings technology, knowledge and due to the spill over effect development of process
remains for the long run. FDI works as the catalyst for the economic growth of a country,
especially for the developing countries. FDI is not only a single factor determining the
economic growth, rather foreign trade, domestic investment, employment level,
government consumption are also major factors affecting growth. On the other hand,
stock of human capital is factors determining the level of FDI inflow besides the

61

resources available in the host countries. How the growth is affected by these variables?
Does high level of FDI increase the higher level of economic growth? What would be the
interaction between FDI and Trade, human capital and domestic investment? The study
examines the effect of this variable in economic growth.

1.5 Research Objectives

The main objective of this study is to explore the impact of FDI on Indian economy
growth and spill over effect of MNEs to the Indian firms. The study also reviews the
Indias foreign direct investment policies and initiatives for attracting FDI over the years
for enhancing economic growth and investment. The study aims to recommend the trade
and investment policies from the Indian experiences to the developing countries like
India.

1.6 Scope of the Study

This research estimates the impact of FDI on economic growth in India over the period
of 1980 2010. This dissertation attempts to determine empirical impact of FDI on
Indias economy using macro economic time series data. Domestic investment,
employment, FDI, exports and human capital are considered as the endogenous variable
for economic growth. The study tries to explore the question where high level of FDI
cause higher level of economic growth.

62

1.7 Organization of the dissertation

This dissertation is divided in to seven chapters. Chapter one explains the background of
the study, purpose of the study, statement of the problem, objectives of the study, scope of
the study and organization of the study. Chapter two reviews the literature the theoretical
and empirical research on theories of FDI and impact of FDI on economic growth of the
previous research works. Chapter three (A) provides a brief history and current overview
of Indian economy which gives the glimpse of Indian economy and Chapter three (B)
provides an overview of Indiaese economy. Chapter four elaborates the conceptual
framework of this study, details of research methodology and models specification for
econometric model of the study. Chapter five presents an overview of recent FDI inflow
to India with review of FDI policies over the study period. Chapter Six presents the
discussion and analysis of empirical study. Chapter seven presents summary, findings and
recommendations of this dissertation.

63

RESEARCH METHODOLOGY

Research methodology is a systematic way, which consists of series of action steps,

necessary to effectively carry out research and the desired sequencing to these steps. The
marketing research is a process of involves a no. of inter-related activities, which overlap
and do rigidly follow a particular sequence. It consists of the following steps:

Formulating the objective of the study

Designing the methods of data collection

Selecting the sample plan

Collecting the data

Processing and analyzing the data

Reporting the findings

The main objective of the study is to assess the impact of FDI in Indian economy over
the period of 1980 to 2005. India received a huge amount of FDI and achieved high
economic growth rate with gradual liberal trade policy regimes. This study analyzes the
linkage between FDI and economic growth in India.

64

Conceptual Frame work

Basically, the conceptual frame work of the study is derived from the Borensztein, Jose
de Gragorio and John-Wha Lee, 1995. They have shown the impact of FDI on economic
growth in the following linkage.

FDI

Capital accumulation
Direct FDI
Indirect crowding in lower cost of innovation
Productivity growth
Major source of innovation
Technology transfer
Contagion effect
Impact on human capital formation
Linkages
Pecuniary (crowding in)
Technological (contagion, transfers)

Economic

Growth

According to their argument, Foreign Direct Investment accelerates capital accumulation

in host country by increasing total investment and lowering the cost of innovation and
indirectly by crowding in domestic investment and scarce resources of the economy and
productivity is enhanced by technology transfer but it is constrained by human capital in
the host economy. They argue that FDI develops stock of human capital. There should be
a linkage between domestic investment and human capital to achieve the higher
productivity.

65

Research Methodology and Model

The present study is focused on the evaluating the impact of FDI in economic growth in
Indias economy during the period of 1980-2005. Only secondary data are used for the
analysis of the research objectives. The massive inflow of foreign capital and double digit
growth in the economy in India has attracted the research interest on it.

This study employs the endogenous growth theory as developed by Balasubramanyam,

Salisu and Sapsford, 1996 and Borensztein, Gragorio and Lee 1998. This model assumes
that FDI contributes to economic growth directly through new technologies and other
inputs as well as indirectly through improving human capital, infrastructure and
institutions and countrys level of productivity depends on FDI, trade, domestic
investment. The impact of FDI on economic growth is analysed by using the following
econometric equation.

G = +1K + 2FDI + 3Emp + 4HC + 5Exp + C1FDI*K +C2FDI*HC+C3 FDI *Exp

+e
Where,
G = Per capita GDP growth rate
K = Domestic Capital Investment
FDI = Foreign Direct Investment
HC = Human Capital
Exp = Exports

66

Emp = Employment

The variables K, FDI, and Exports are measured as percentage of GDP. The model is
extended to the work Borensztein, Gragorio and Lee and included other variables to
observe the interaction between FDI and Trade, Domestic Investment and Human
Capital. Past studies had shown a positive impact of FDI, Export, human capital and
domestic investment on economic growth.

The stock of efficient human capital is required to absorb the technologies brought by
FDI and it determines whether the potential spillover effect is realized. The host country
requires sufficient number of human capital to utilize the technologies brought by FDI,
meaning that higher the level of human capital in the host country, higher the effect of
FDI in economic growth of the host country. The study assumes a positive relationship
between FDI and GDP growth rate as well as a positive interaction between FDI and
human capital in accelerating the economic growth. The issue relating to the interaction
between FDI and domestic investment; it is assumed that there is positive interaction
between FDI and domestic investment because FDI has is considered as an important
medium for transferring capital, technologies and host countries that encourages the
domestic investment level. The interaction term estimates the combined effect of FDI and
domestic investment in economic growth and a positive coefficient for the interaction
term would indicate that FDI and domestic investment reinforce (complementary) to each
other.

67

This study uses the time series data for the period of 1980-2005 for the analysis of the
objectives and uses the multivariate regression analysis (OLS) for the analysis of data.
The data is processed by using OxMetrics software (PcGive. All values of GDP, FDI, and
export are converted in to millions. Time series data may produce spurious regression due
to the existence of stationary of data. Hence, Dickey Fuller and augmented Dickey Fuller
tests are performed to check to unit root of the data. All the variables are transformed in
to logarithms before generating the statistical results.

Data Collection Method and Sources

Different sources are used to gather the data required for analysis. The aggregate inflow
of FDI is obtained from World Investment Report 2008 from UNCTAD. The detailed
information on FDI inflow by sector and imports exports data are obtained from OECDs
International Direct Investment Statistics vol. 2008 via ESDS international database and
GDP figures, population statistics and employment are obtained from World Economic
Outlook Database, October 2008 from International Monetary Fund. The data for
domestic investment is obtained from www.nationmaster.com. There are various
indicators of human capital stocks in the country. Secondary level of education is one of
the indicators of human capital in the country. The statistics of secondary level of
education

of

India

is

obtained

from

(www.uis.unesco.org).

68

UNESCO

Institute

for

Statistics

Hypothesis of the study as pursued in the chapter

We are trying to test the following hypotheses:

1)

Foreign Direct Investment flows to the region where returns on capital

are higher. This is true both in the case of inter-country comparison and intra-country
regions. One important factor in this study is the rate of growth of Gross Domestic
Product. The latter has another important role and this is that a higher growth rate of
GDP ensures higher absorption capacity of the economy. It implies that the necessary
condition for attracting higher volume of FDI is the higher growth rate of gross domestic
product in the region.

(2) While the first hypothesis shows the necessary condition for inflow of FDI in a
region, this may not be sufficient. The sufficient condition is the existence of both
infrastructure in the region that can facilitate the profitable investment and a long term
sustenance of the investment procedure. By infrastructure we put emphasis on the way
we have defined infrastructure in a qualitative way. It implies that while the existence of
good physical infrastructure is important, the other aspects of non-physical infrastructure
as explained before are also important.

We will test the above two hypotheses with the help of analysis through tables, diagrams
and also with some rigorous analysis in the form of testing of models.

69

DATA ANALYSIS
FDI: A Model in the making:

Foreign Direct Investment is one aspect of foreign capital flow in the domestic economy.
In the open economy set-up, capital funds flow will maintain equilibrium by adjustment
in the real variables in the external sectors.

In an open economy aggregate demand [AD] will be

AD= C+ I + G + X + T* ,

where,

C,

consumption,

I,

G,

and

are

investment,

government expenditure and export

respectively. T* is transfer of funds
abroad.
The aggregate supply [ AS] will be

AS = C + S + T + M + Tr*,

where, C, S, M and T

are

consumption, savings, import and

taxation respectively. Tr* is the funds
transfer inflow in the country.

70

Using traditional macroeconomic assumptions that government budget is balanced, which

means G =T, and consumption plan is always satisfied, that means we can eliminate C
from both sides we can write after imposing equilibrium in the economy,

I + X + T* = S + M + Tr*,

Or,

T* - Tr* = (S - I) + ( M - X)

Or,

Tr* - T* = ( I -S ) + ( X -M ) ..

[ 15.1]

In our scheme of things, Tr* - T* is the excess funds inflow into the country that can be
taken as the foreign direct investment [ FDI]. Both S and I are functions of income Y and
rate of interest r. Again, X and M are functions of domestic price P, foreign price P* and
exchange rate e. Also,
P = e . P*

.. [ 15.2]

From [1] we can write using functions,

FDI = { I( Y, r) - S ( Y, r)} + { X( P, e ) - M ( P, e )}

Or, FDI = f ( Y, r , e , P )

71

. [15. 3]

Since nominal exchange rate and price level move in the same direction [ e is the price of
foreign currency in terms of domestic currency], and nominal interest rate includes
inflation expectations, keeping all the three-- nominal interest rate, exchange rate and
price level--- may lead to multi-collinearity, a particular problem in econometrics when
some of the independent variables are correlated among themselves. So we drop price
level for the purpose of econometric estimation. So equation [ 15.3] in estimable form
looks like [ through logarithmic transformation],

Log FDI = a0 + a1 log Y + a2 log e + a3 r + u

. [15. 4]

Theoretical value will be a1 > 0, a2 < 0, a3 > 0

The estimation can be made in level form also. That shows the relative strength of
different determinants of FDI in a developing country.

The variable Y will capture the importance of the absorption capacity of the economy. It
is expected that a faster growth can absorb larger amount of capital, domestic or foreign,
into the economy. The exchange rate takes care both the potential return and opportunity
cost of investment. Again, the interest rate reveals the reference rate of the feasible return
on capital and also the cost of domestic capital.

72

Empirical Exercise

The data on FDI in India can be

had only from 1991 onwards and as such the

data base is weak. We have taken the time series 1991 to 1997 for the econometric
estimation of the model (Equation 15.4). The results for India and Malaysia are placed
below. We find that the coefficient of log e gives wrong sign though the t-value is not
satisfactory. Other coefficients are of correct signs.
Indian case of regression results.
Dependent Variable:
FDI
Method: Least Squares
Date: 07/06/00 Time:
17:10
Sample: 1991 1997
Included observations:
7
Variable Coefficient Std. Error t-Statistic Prob.
C

0.1712

GDP
LR
ER

1.791128
0.00696 0.008616 0.807765
143.4031 206.9004 0.693102
212.8466 130.8458 1.626697

0.4783
0.5381
0.2023

R-

0.943273

squared
Adjusted

var
0.886545 S.D. dependent

R-

-9973.503 5568.279

Mean dependent

1431.571
1307.848

var

squared
73

S.E. of

440.5233

regressio
n
Sum

Akaike info

15.30936

criterion
582182.2

Schwarz criterion

15.27845

F-

16.62815

squared
resid
Log

-49.58277

likelihoo
d
Durbin-

statistic
1.708655

Prob(F-statistic)

0.022543

Watson
stat

The same analysis is applied in case of Malaysia and the results are as follows.
Table 10: Malaysia
Year Direct

GDP

Inestmen

Lending Exchange
Rate

Rate

t
Million Million
USD
USD
1984
6510 32737
1985
7388 31912
1986
6111 27536
1987
6806 31978
1988
7054 33405
1989
8096 37945

11.35
11.54
10.69
8.19
7.25
7

2.43
2.43
2.6
2.49
2.72
2.7
74

1990
1991
1992
1993
1994
1995
1996
1997
1998

10318
12440
16860
20591
22916

42852
48669
56911
61187
74326
86091
98618
70788

7.17
8.13
9.31
9.05
7.61
7.63
8.89
9.53
10.61

2.7
2.72
2.61
2.7
2.56
2.54
2.53
3.89
3.8

Dependent Variable:
FDI
Method: Least Squares
Date: 07/17/00 Time:
12:01
Sample(adjusted):
1986 1994
Included observations: 9 after
adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C
GDP
LR
ER

-11709.42
0.378765
303.9656
1375.409

R-

0.977099

squared
Adjusted

variable
0.963358 S.D. dependent

Rsquared
S.E. of
regressio

10544.32
0.028102
223.4611
3515.937

-1.110495
13.47845
1.360262
0.391193

Mean dependent

0.3173
0
0.2319
0.7118
9064.778
3568.531

variable
683.0949

Akaike info

16.19225

criterion

n
75

Sum

2333093

Schwarz criterion

16.2799

squared
resid
Log

-68.86511

likelihoo
d
Durbin-

F-

71.10889

statistic
1.429221

Prob(F-statistic)

0.00016

Watson
stat

76

Nature of FDI Inflow

As indicated in the above paragraphs the nature of FDI inflow into India is not
uniform of the two routes of FDI inflow, automatic route and Government route. There
has been a steady rise from 1991 1997, but after there has been a perspective decline
inflow to FDI into India. This aspect is revealed in exhibit 1 should be investigated the
factors responsible for the deceleration of FDI inflows into India from 1997. The same
picture in a different format is presented in exhibit 3.

Exhibit 1: FDI Inflows into India

FDI Inflow into India (Rs Million)

120000
100000
80000
60000

Aut

40000

Gov

20000

Total

0
1991

1992

1993

1994

1995

77

1996

1997

1998

1999

Exhibit 2: Shares of Automatic Route and Government Route in the Total Inflow of
Distribution of Automatic and Government Route in Total Inflow of FDI in Inda
(% Shares)
100
90
80
70
60
50
40
30
20
10
0
1992

1993

1994

1995

1996

FDI

78

1997

1998

1999

Gov
Aut

Exhibit 3: FDI in India - Approved to Actual

30

Foreign Direct Investment in India - Actual and Approved

FDI - Actual and Approved - Rs Million

3000000

25

Actl

2500000

20

Appr

2000000

Share

15

1500000
10

1000000
500000

1991

1992

1993

1994

1995

1996

1997

1998

(Share %) of Actual to Approved

3500000

1999

Between the two routes of FDI inflow into India the Government route is
predominant as the percentage of shares through the Government route is much higher
compared to the automatic route. This aspect is revealed in exhibit 2.
Though the number of source countries from which FDI inflows into India
happens is impressive, the principal sources are ;

USA, UK, Japan, Germany, France,

India, Mauritius and NRI. This aspect has been revealed in exhibit 4.

79

Exhibit 4: FDI Inflow into India from Select Countries.

100%
90%
80%
70%

NRI
S. Korea

60%

France
50%

Germany
Japan

40%

U.K.
Mauritius

30%

U.S.A.
20%
10%
0%
1992

1993

1994

1995

1996

80

1997

1998

1999

Exhibit 5
Actual FDI as Percentage of Approved FDI (1991-1999)
(Country-wise)
70

60

50

40

30

20

10

Actual as%of Approval

81

Exhibit 6: FDI Inflows (1991-1999) in Major Sectors

Commercial, office &
household equipment Drugs and
Transportation industry
0.8%
pharmaceuticals
7.3%
Chemicals (other than
Textiles (includ dyed,
1.2% Electricals equipment
Trading
6.6%
fertilizers)
printed)
1.0%
Food
processing
5.7%
1.2%
industries
Telecommunications
3.4%
Fuels
5.8%
Service sector
5.2%
Glass
5.8%
0.8%
Industrial machinery
Paper and pulp including
0.5%
paper product
Hotel & tourism
1.2%
0.4%
Miscellaneous
Nri scheme
Miscellaneous industries Mettallurgical industries
mechanical &
11.2%
39.9%
engineering
0.9%
1.2%

Exhibit 7.
FDI (Approved and Inflow)
600000

Approved

500000

Inflow

300000
200000
100000

Year

82

1999

1998

1997

1996

1995

1994

1993

1992

0
1991

FDI

400000

Exhibit 8
175

30000

150

25000

125

20000

100

15000

75

10000

50

5000

25

Infrastr

FDI

Exhibit 9
Relationship between State level FDI and Infrastructure Index

30000

FDI Approved

25000
20000
15000
10000
5000
0
60

80

100

120

Infrastructure Index

83

140

160

FDI

Exhibit 10

30000

Relationship between State level FDI and % mandays Lost

FDI Approved

25000
20000
15000
10000
5000
0
0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

% Mandays lost

40.00

FDI

Exhibit 11

Relationship between State level FDI and Urbanaisation Growth

30000
25000
FDI Approved

20000
15000
10000
5000
0
-4

-2

4
Urbanaisation Grow th

84

10

12

FDI

Actual inflow of FDI as a percentage total approval for the period 1991-1999 is
not uniform country wise and this interesting aspect is revealed in exhibit 5. We see that
the percentage is quite high for countries like Russia, Netherlands, Mauritius and Hong
Kong. But countries like UK, USA, Canada show very low percentage of actual inflow
as a percentage of the total approval. One explanation may be that total volume of inflow
from these countries is very high compared to other countries that register higher
percentage, but this fells to give the total explanation.

We have seen earlier that FDI inflows in major sectors in India during the period
1991 1999 is not uniform and the distribution is very skewed.

This is revealed in

exhibit 6. We see that while transportation industry comments 7.3%, telecommunication

5.8%, service sector 5.8%, chemicals 5.7%, electrical equipment 6.7% and fuels 5.2%,
other things like hotel and tourism, trading, industry machinery etc. have failed to attract
sizeable FDI inflow.

85

CONCLUSION
The developing countries will need FDI to supplement the inadequate domestic
savings in face of growing requirement of capital to maintain a crucial rate of economic
growth so that the people below the poverty line can be lifted within a reasonable time.
We have seen that the share of FDI inflow in the developing countries is very much high,
with some countries like China have been able to attract huge amount on foreign capital.
Though the comparison with China regarding the inflow of FDI is not truly justified,
India should have been able to attract the relatively larger volume of Foreign Capital than
what she has done so far. In the earlier paragraphs attempts have been made to point out
the factors which are responsible for the inflow of FDI. In certain quarters studies have
been made to analyze the nature of FDI inflow in developing countries particularly in
Asian and Latin American countries. Filtering down the studies available in the literature
help us to identify certain factors, which are also relevant in Indian situation. We should
be clear that some of these variables are qualitative in nature and those are mentioned
often in academic literature to Thailand. But China is an example how export orientation
can be properly utilized to attract foreign capital and also to maximize the growth
process. Not only that China has been able to use FDI on a selective basis to maximize
the rate of growth, but China has one unique advantage, which India is lacking and this
should be mentioned to keep the comparison straight.
China is lucky to have two highly developed regions like Hong-Kong and Taiwan.
The first it has obtained from the United Kingdom in 1997 and a large chunk of FDI in
China is from Hong-Kong. Taiwan is a breakaway province of China and in spite of
political row, Taiwan invests huge amount of capital in China. Apart from these two
86

highly developed regions and a large supplier of foreign capital China has a large ethnic
Diaspora in Asian countries. This group is financially very rich and they invest huge
amount in the mainland.

These two factors i.e. the existence of Hong-Kong and Taiwan and a large
Chinese Diaspora having strong economic linkage make China unique among the
developing countries regarding the inflow of FDI. This is true in spite of a political
regime which is totally opposite of the capitalist system. This aspect is interesting. China
has become a capitalist economic system with a totalitarian political set-up as only
Chinese Communist Party is the legitimate political party there.
The inflow of FDI is sometimes associated with the level of technological
development in the country. In this case again the China example should be mentioned.
So long as foreign capital is flowing in and particularly in areas where China is lacking,
the Chinese authority is not bothered about the type of technology the foreign investor is
bringing. The system is regimented and it has ruled about a debate in political circles
which are very common in a democratic set up in India. This type of system has been
found to be very suitable for the foreign investors. India also has been able to import
modern technology in crucial industries so that it can maintain competitive edge in the
export front.
Sometimes the export performance requirements are tagged with the inflow of FDI
and authority of developing countries puts emphasis on this aspect. On this point several
questions are important.

87

1. How well do international markets work in apportioning FDI in line with comparative
advantage?
2. What investment diverting actions are being taken by other countries to set a location
of international manufacturing production in their own directions?
3. What obstacles inhibit international markets from functioning more effectively.

These questions are crucial to understand the nature of FDI inflow in developing
countries. It is a fact that the developing countries are competing among themselves to
attract foreign capital.
Sometimes the location issue becomes important for the inflow of FDI and the
nature of industry becomes related to that. Some particular industries like automobile,
petrochemical and electronics are mentioned for the initial phase of investment. The
sources of inputs and location of cheap labour becomes important sometimes in the
determination of location of particular industries.
Another important issue has come in a study related to the dynamism of FDI in
developing countries. While the host government tries to convince the international
investor to commit capital to develop a new production side, a country would have to
spend more resources to build up a infrastructure so that foreign firm's commitment
remains. But the concern of the host country does not end here. Literature in this
particular areas has identified five broad categories of concern in developing countries
which are in the process of transition:

88

1. Cultural Factors (worker's motivation, cultural preparation)

2. Labour regulations (Flexibility in hiring and laying of workers)
3. Responsiveness of the surrounding economy in providing supporting goods and
services
4. Institutional base of commercial law to give guidance when dispute arises
5. The credibility of public sector commitments about taxes, infrastructure and other
regulatory issues.
Literature also reveals the concern of foreign investors regarding the credibility of
promises of the host government and the institutional factors like the judicial systems of
security. These are the pattern of information gap which the foreign companies desire to
bridge in order to evaluate the returns associated with the investment opportunity. The
MNCs are most often oligopolies and the countries where they are having head quarters
behave also as oligopolies. They introduce entry barriers and transfer knowledge only
when it becomes a public good. In most cases technological knowledge is strictly kept
under control. This practice prevents dissemination of latest technology in the host
country. In this case experience with all the countries is not the same.

89

RECOMMENDATIONS

The study focused on the role of role of FDI in economic growth in India. Despite the
qualitative evidences of role of FDI in the economic growth in India, quantitative
regression analysis showed negligible impact of FDI in economic growth. Indian policy
makers directed the foreign direct investment in the priority sector of the development at
the time of taking off economic phase. Basically, economic and trade policies should be
carefully developed for a long term and economic growth in the countries especially
developing countries. Faster economic growth is the requirement of least developed
countries (LDCs). Indian model of economic growth could be useful for developing
economies like India. Focusing on FDI and economic growth in India, FDI was one of
the change agents for industrial reforms. The careful policy formulation and opening of
sub-sectors helped to upgrade competitive positions of local firms in India. The study
recommends the following major points to the Indian policy makers for keep growing its
economy and to accelerate the Indiaese economic growth via foreign direct investment.
To Indian policy makers:
1. Foreign direct investment should be encouraged especially in the high-tech
industries and value added products because India can not compete with
neighbouring country in terms of cost and local markets.
2.

India has attracted very small amount of in Pharmaceutical and bio-medical

sectors. More FDI should be attracted in these sectors to lead in this industry in
the region.

90

3. FDI in R&D activities is very negligible in India. MNEs working in R & D

should be encouraged to establish in India.
4. FDI in electricity and gas sectors has been negative FDI in the recent years.
Indian policy makers should provide favourable environment for MNEs to retain
their investment and increase the investment in the energy sectors.

For developing countries like India:

FDI played important role on changing the industrial patterns of Indian firms to
achieve international competitiveness which helped to achieve rapid economic
development in India. Basically, Indian firms learned the technologies and skills
from MNEs which made Indian firms competitive. Developing countries like India
can learn from the Indian experiences regarding FDI policies to accelerate the
economic growth. The Indian experiences and some literature show export-led
economic growth. However, world financial crisis of 2008 challenged this hypothesis
due to decline of goods and services in the international markets. Hence, India can
learn from these experiences that export-led growth may be short term growth.
1. Identify the sectors for FDI where governments strategic economic plan is
directed and channelizes the inflow of FDI in the early stage of economic
development.
2. India is rich in water resources. Government should attract more FDI in this sector
to transform the Indiaese economy by producing sufficient energy for self and
export.

91

3. The natural beauties and Himalayan ranges has huge potential for tourism
industry, however, small amount of FDI has been attracted in these industry in
India. Indiaese tourism industry can transform Indiaese economy by developing
India as the best place to visit in the world.
4. Poor Infrastructure and transportation inaccessibility are the bottleneck for
Indiaese economy. FDI in Greenfield investors should be encouraged.
5. Government should develop basic infrastructure and free zones to facilitate and
attract FDI in different regions of the country.
6. FDI incentives should be provided the foreign investors and establish grievance
handling institutions to solve the problems by foreign investors.
7. One stop services should be provided to the foreign investors to faster
establishment of MNEs; slow registration process, bureaucratic hurdles,
corruptions and poor infrastructure are the main problems of foreign investors in
the developing countries.
8. Flexible labour laws should be permitted for the foreign firms to enhance the
efficiency of resources.

92

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The MIT Press, Massachusetts, US.

Aghoin, P. and Howitt, P. (1998), Endogenous Growth Theory, Massachusetts Institute of

Technology Press, United States.

Asiedu, E. (2001) On the Determinants of Foreign Direct Investment to Developing

Countries: Is Africa Different?, University of Kansas, Department of Economics.

Balasubramanyam, V.N. M.A. Salisu, and D. Sapsford (1996) Foreign Direct Investment
and Growth in EP and Countries, Economic Journal 106(92-105).

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