FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) plays an extraordinary and growing

role in global business. It can provide a firm with new markets and marketing
channels, cheaper production facilities, access to new technology, products,
skills and financing. For a host country or the foreign firm which receives the
investment, it can provide a source of new technologies, capital, processes,
products, organizational technologies and management skills, and as such
can provide a strong impetus to economic development.

Foreign direct investment, in its classic definition,

is defined as a company from one country making a physical

investment into building a factory in another country. The direct investment
in buildings, machinery and equipment is in contrast with making a portfolio
investment, which is considered an indirect investment. In recent years,
given rapid growth and change in global investment patterns, the definition
has been broadened to include the acquisition of a lasting management
interest in a company or enterprise outside the investing firm’s home
country. As such, it may take many forms, such as a direct acquisition of a
foreign firm, construction of a facility, or investment in a joint venture or
strategic alliance with a local firm with attendant input of technology,
licensing of intellectual property, In the past decade, FDI has come to play a
major role in the internationalization of business. Reacting to changes in
technology, growing liberalization of the national regulatory framework
governing investment in enterprises, and changes in capital markets
profound changes have occurred in the size, scope and methods of FDI. New
information technology systems, decline in global communication costs have
made management of foreign investments far easier than in the past. The
sea change in trade and investment policies and the regulatory environment
globally in the past decade, including trade policy and tariff liberalization,
easing of restrictions on foreign investment and acquisition in many nations,
and the deregulation and privatization of many industries, has probably been
the most significant catalyst for FDI’s expanded role.

The FDI story for India began in 1991 and announced the New
Industrial Policy to open doors for liberalization. Today India has been ranked
third in global foreign direct investments in 2009 and will continue to remain
among the top five attractive destinations for international investors during
2010-11, according to United Nations Conference on Trade and
Development.

As mentioned above, the overwhelming majority of foreign direct

investment is made in the form of fixtures, machinery, equipment and
buildings. This investment is achieved or accomplished mostly via mergers &
acquisitions. In the case of traditional manufacturing, this has been the
primary mechanism for investment and it has been heretofore very efficient.
Within the past decade, however, there has been a dramatic increase in the
number of technology startups and this, together with the rise in prominence
of Internet usage, has fostered increasing changes in foreign investment
patterns. Many of these high tech startups are very small companies that
have grown out of research & development projects often affiliated with
major universities and with some government sponsorship. Unlike traditional
manufacturers, many of these companies do not require huge manufacturing
plants and immense warehouses to store inventory. Another factor to
consider is the number of companies whose primary product is an
intellectual property right such as a software program or a software-based
technology or process. Companies such as these can be housed almost
anywhere and therefore making a capital investment in them does not
require huge outlays for fixtures, machinery and plants.
 India attracted FDI equity inflows of US$ 2,214 million in April 2010.
The cumulative amount of FDI equity inflows from August 1991 to April 2010
stood at US$ 134,642 million, according to the data released by the
Department of Industrial Policy and Promotion (DIPP).Over the years we have
witnessed tremendous development in the key sectors owing to FDI infusion.

Categorization of FDI
 FDI can be categorized as shown below

Inward FDI:

Inward FDI for an economy can be defined as the capital provided from
a foreign direct investor residing in a country, to that economy, which is
residing in another country. Here, investment of foreign capital occurs in
local resources. Flow of Inward FDI may face restrictions from factors like
restraint on ownership and disparity in the performance standard.
EXAMPLE: General Motors decide to open a factory in Malaysia. They are
going to invest some capital. That capital is inward FDI for Malaysia.

Outward FDI:
 When investment is made by a domestic company in the foreign
country, then there is outflow of FDI from domestic country to foreign
country. Foreign direct investment, which is outward, is also referred to as
direct investment abroad.

Outward FDI faces restrictions under a host of factors as described below

• Industries related to defense are often set outside the purview of

outward FDI to retain government's control over the defense related
industrial complex.
• Subsidy scheme targeted at local businesses.
• Government policies, which lend support to the phenomenon of
industry nationalization.

GREENFIELD INVESTMENT
A form of foreign direct investment where a parent company starts a
new venture in a foreign country by constructing new operational facilities
from the ground up. In addition to building new facilities, most parent
companies also create new long-term jobs in the foreign country by hiring
new employees.

Developing countries often offer prospective companies tax-breaks,

subsidies and other types of incentives to set up green field investments.
Governments often see that losing corporate tax revenue is a small price to
pay if jobs are created and knowledge and technology is gained to boost the
country's human capital. A related term to Greenfield Investment which is
becoming popular is Brownfield Investment, where a site previously used for
a "dirty" business purpose, such as a steel mill or oil refinery, is cleaned up
and used for a less polluting purpose, such as commercial office space or a
residential area.
MERGERS AND ACQUISITIONS

1. Horizontal
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.

2. Vertical
• A merger in which one firm acquires a supplier or another firm that is
closer to its existing customers.
• Often in an attempt to control supply or distribution channels.

3. Conglomerate
• A merger in which two firms in unrelated businesses combine.
• Purpose is often to diversify the company by combining uncorrelated
assets and income streams.

4. Cross--border (International) M&As

• A merger or acquisition involving a Indian and a foreign firm, either the
acquiring or target company.

JOINT VENTURE

A joint venture is here defined as shared ownership in a foreign

business. Some advantages of a MNE working with a local joint venture
partner are:
Better understanding of local customs, mores and institutions of government
• Providing for capable mid-level management.
 • Some countries do not allow 100% foreign ownership.
• Local partners have their own contacts and reputation which aids in
business.

IMPORTANCE OF FDI
FDI provides ready resource for the growth of the economy. For capital
starved country, FDI could be a boon. Generating funds internally may
require much time and also FDI is motivated by long term profit
considerations of the investors.
The enhanced money inflow from overseas means that the country can
import more goods those are basic to the building of the economy. This is
particularly important for developing country.

FDI acts as the nucleus around which other businesses can grow. For
example, TOYOTA motors have established their automobile plants in India
and they source fraction of parts from local firms.

Current Scenario

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, joint
schemes and technical alliance, private placements or preferential
allotments.
India has among most liberal and transparent policy on FDI among the
emerging economies. FDI up to 100% is allowed under the automatic route in
all sectors except the following which require prior approval of government:
An ongoing review of the FDI policy is carried out so as to initiate more
liberalization. Change in sectoral policy/sectoral equity cap is notified from
time to time through Press Notes. This is done by the Secretariat for
Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion.
Policy announcement by SIA are subsequently notified by RBI under FEMA.
FDI Policy permits FDI up to 100 % from foreign/NRI investor without
prior approval in most of the sectors including the services sector under
automatic route. FDI in sectors/activities under automatic route does not
require any prior approval either by the Government or the RBI. The
investors are required to notify the Regional office concerned of RBI of
receipt of inward remittances within 30 days of such receipt. They will have
to file the required documents with that office within 30 days after issue of
shares to foreign investors

Foreign Direct Investment in India is not allowed under the

following industrial sectors:

• Arms and ammunition

• Atomic Energy
• Rail Transport
• Mining of metals

Up to 100 per cent equity is allowed in the following sectors

• Export Trading Companies

• Hotels and Tourism
• Hospitals
• Shipping
• Deep Sea Fishing
• Oil Exploration
• Power
• Housing and Real Estate
• Highways, Bridges and Ports

Other Sectors
 • Drugs & Pharmaceuticals.
• Private Banking
• Insurance Sector
• Telecommunication.

Top 5 Sectors Attracting FDI – (2009-10) $ mn

SECTOR INVESTME
NT
In millions
Service Sector 4392
Construction 2868
Housing and real 2844
Estate
Power 1437
Automobile 1177

Many sectors present opportunities in India but this article will

concentrate on Retail, Education and Insurance Sectors which are ripe for
accepting FDI.

Sector Specific Foreign Direct Investment in India

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.

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
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 up front 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.

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.

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:

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 scale sector 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.

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.

FDI & RETAIL SECTOR

Retail Sector in India is fragmented and contributes 10-14 % of the

GDP. It accounts for employment of 21 mn people i.e. 7% of the workforce
and is suffering from constraints in form of poor infrastructure and supply
chain management. Unorganized retail sector accounts for more than 90%
business in India.

Benefits for Consumers

 More investment in Supply Chain and logistics means that there will be
less wastage and more supply for the customers. Consumers will eventually
gain as a result of cost reduction at various levels of the supply chain. More
benefits in terms of consumer finance, Discounts and quality of service like
standardization, consistency and pre-sale activities. The best part being even
the rural consumer will benefit as more and more companies are looking to
tap rural unexplored market

Benefits for Producers

Producers will benefit from reduced Costs in terms of minimized

Inventory holding costs, reduced response time to market. As seen in the
markets where FDI is allowed in retail sector, there will also be technology
inflows and best practices for farmers as well as end retailers. Eventually
producers will reap benefits in form of increased demand for products and
better margins. Apart from that companies will also benefit from lower labor
and sourcing costs in India. Food processing sector may also benefit due to
this decision.

FDI & EDUCATION SECTOR

Education sector is an ideally placed for FDI infusion with low literacy
rates and large population size in India. Foreign Direct Investment (FDI) in
education is allowed in India under the automatic route, without any sectoral
cap, since February, 2000. There is no offshore campus of any foreign
university in India. In India there are more than 125 institutions running
technical programmes in collaboration with foreign universities and
institutions.
Opportunity

There are only 10.5 million students enrolled in all higher education
institutions in India that is just 11 per cent of the relevant age group (17 to
23) population. According to 2004-05 survey 80,466 Indian students were
enrolled in USA universities and 15,000 Indian students were enrolled in the
UK universities.

India is suffering problem of Brain Drain since years, it can be

controlled to certain extent by providing world class education here. Local
institutions will be compelled to improve their curriculum as foreign players
bring new methods and practices and degrees awarded here will become
internationally accepted and recognized. The most important point being
establishment of new education institution and infrastructure and also
generate employment.

FDI & INSURANCE Sector

The US$ 41-billion Indian life insurance industry is considered the fifth
largest life insurance market, and growing at a rapid pace of 32-34 per cent
annually, according to the Life Insurance Council.

Foreign equity up to 26% is allowed in the insurance sector. The entry

of foreign partners has resulted in the sector attracting FDI of US 543 million
as on 31st March, 2007. On account of competition from private insurance
players, the market share of state owned insurance companies like GIC, LIC
and others have come down to 70% in last 4-5 years from over 97%.

However, the reach of industry is only around 15% according to IRDA

which poses tremendous opportunities for new companies. The foreign
players may look to partner with domestic players for local knowledge and in
turn share best practices. It is also impossible to cater to the large
population without more players pumping in the money. Bringing in more
players may also create opportunity for other business like IT and other
related service providers.

Opportunities

General Insurance

This business of General Insurance sector has picked up off late. Public
sector players posted 13.85 per cent growth in gross premium in 2009-10. At
the same time, private players recorded a 12.82 per cent increase in gross
premium till March 2010. Further nearly 30mn vehicles policies were issued
and total premium of US$ 1.83 billion was collected.

Health Insurance

Health insurance is lucrative consideration for both existing as well as

new players and according to a forecast by private research firm as it is
expected to grow at compounded annual growth rate of 25% and total
premium between April and December 2009 was US$ 1.35 billion, up from
US$ 1.12 billion, an increase of 20 per cent, as per figures released by the
regulator. This means that there is enough room for new players.

Products like Bancasssurance has also found fancy of many private

firms. It is forecasted that bancassurance will play a crucial role in the overall
development of the Indian insurance sector with the channel expected to
generate 40 per cent of private insurer’s premium income by 2012.

India Further Opens up Key Sectors for Foreign

Investment

India has liberalized foreign investment regulations in key sectors,

opening up commodity exchanges, credit information services and aircraft
maintenance operations. The foreign investment limit in Public Sector Units
(PSU) refineries has been raised from 26% to 49%. An additional sweetener
is that the mandatory disinvestment clause within five years has been done
away with.

FDI in Civil aviation up to 74% will now be allowed through the

automatic route for non-scheduled and cargo airlines, as also for ground
handling activities.

100% FDI in aircraft maintenance and repair operations has also been
allowed. But the big one, allowing foreign airlines to pick up a stake in
domestic carriers has been given a miss again.

India has decided to allow 26% FDI and 23% FII investments in
commodity exchanges, subject to the proviso that no single entity will hold
more than 5% of the stake.

Sectors like credit information companies, industrial parks and

construction and development projects have also been opened up to more
foreign investment.

TRENDS IN FDI

There has been a marked increase in both the flow and stock of FDI in the
world economy over the last 30 years.FDI has grown more rapidly than world
trade and world output because:

• The general shift toward democratic political institutions and free

market economies has encouraged FDI.
• The globalization of the world economy is having a Positive impact on
the volume of FDI as firms undertake FDI

FDI AND ECONOMIC DEVELOPMENT

 Foreign direct investment (FDI) is considered to be the lifeblood and an
important vehicle for economic development as far as the developing nations
are concerned. The important effect of FDI is its contribution to the growth of
the economy.
FDI has an impact on country's trade balance, increasing labour
standards and skills, transfer of new technology and innovative ideas,

improving infrastructure, skills and the general business climate .

FDI also provides opportunity for technological transfer and up
gradation, access to global managerial skills and practices, optimal
utilization of human capabilities and natural resources, making industry
internationally competitive, opening up export markets, providing backward
and forward linkages and access to international quality goods and services.

THEORIES OF FDI

1. Firm Specific Advantage approach:

A firm can capture foreign market by its assets such as brand name,
superior technology, or its skills in management. The returns will be much
higher that that obtainable in home country.
Example: KELLOGS and PIZZA HUT had moved into large markets of
developing countries by having FDI in those countries.
2. Product Life Cycle Theory:
The product cycle theory is a theory made of few steps that follow
each other:
• Firm creates product to accommodate local demand.
• Firm exports product to accommodate foreign demand.
• Firm establishes foreign subsidiary to establish presence in expands
 product line in foreign country.
• Firm's Foreign business declines as its competitive advantages are
eliminated
Example: 1. Intel latest chip is available all over the world.
2. All the new models of personal computers of IBM are available all
around the world.

3. The OLI Paradigm:

• Also known as µEclectic Theory of FDI

• According to this theory a firm would go for FDI when all the following
three types of advantages are present:
1. Ownership advantage i.e. overall knowledge of the firm specific
advantages.
2. Location advantage i.e. knowledge of foreign country’s economic,
social and political factors.
3. Internalization advantage i.e. a firm may have a joint venture or
a wholly owned subsidiary in the foreign country. Hence it would
have internalization advantage.
FDI INCENTIVES

Why FDI Incentives?

• To attract FDI
• To steer the FDI into favoured industries or regions of the country For
instance, India may desire FDI in infrastructure development.
• Influence the type of incoming FDI. For instance, China may want
technology-intensive investment.

Types of FDI Incentives

• Fiscal Incentives - to reduce tax burden of foreign investors.

• Financial Incentives - grants given by government

• Other Incentives - like subsidized infrastructure, market preference and

preferential foreign exchange rates.
FDI INFLOWS MONTH WISE DURING YEAR 2010
SECTORS ATTRACTING HIGHEST FDI INFLOWS
SHARE OF TOP INVESTING COUNTRIES
IN INDIA
FDI Policy
The above-mentioned industrial policy provisions hold good for both
the domestic and foreign companies. Once the approval has been given to a
foreign investor, namely, a multi-national enterprise (MNE), an overseas
corporate body (OCBs) or a Non-Resident Indian (NRI), these companies are
treated on par with any other Indian company (national treatment).

FEMA (2000)

The additional provisions, which apply only to entry of foreign direct

investment (FDI) emanate from the provisions of Foreign Exchange
Management Act (FEMA), 2000. According to FEMA, 2000 no person resident
outside India shall without the approval /knowledge of the Reserve Bank of
India (RBI) may establish in India a branch or a liaison office or a project
office or any other place of business. FDI in a particular industry may,
however, be made through (a) the automatic route under powers delegated
to the RBI or (b) the SIA route with the approval accorded by the FIPB. The
automatic route means that foreign investors only need to inform the RBI
within 30 days of bringing in their investment (in form FNC1) and again
within 30 days of issuing any shares. Companies getting foreign investment
approval through FIPB route do not require any further clearance from RBI
for the purpose of receiving inward remittance and issue of shares to foreign
investors. Since the RBI has granted general permission under FEMA in
respect to proposals approved by the Government (FIPB). Such companies
are, however, required to notify the regional office concerned of the RBI of
receipt of inward remittance within 30 days of such receipt and again within
30 days of issue of shares to the foreign investor. Under the small-scale
policy, equity holding by other units including foreign equity in a small-scale
undertaking is permissible up to 24 per cent. Furthermore, there is no bar on
higher equity holding for foreign investment not reserved by SSI, if the unit
does not belong to the reserved list of SSI and is willing to give up its small-
scale status.

Entry Rules and Sectoral Caps on FDI

 Although MNEs/OCBs enjoy the same status as domestic companies,
they face restrictions by way of limitations imposed in respect to holdings in
different sectors vis-à-vis the domestic company.

Apart from discrimination arising from sectoral caps on foreign equity

holdings, the other differences between the foreign investor and a domestic
investor arise from the followings:

(a) The foreign investor has to obtain FIPB approval in regard to all proposals
in which the foreign collaborator has a previous venture/tie up in India;
(b) The foreign investor has to obtain FIPB approval in regard to all proposals
relating to acquisition of existing shares in an Indian company/takeovers;

(c) Mergers/amalgamation of companies require the approval of both the

FIPB and the RBI.

(d) Investment and returns are not freely repatriable in certain cases and is
subject to conditions such as lock in period on original investment, dividend
cap, foreign exchange.

Moreover, no foreign direct investment (FDI) is allowed in Agriculture,

including plantation (except for tea plantations). The Group of Ministers
(GoM) under the chairmanship of Minister of Commerce & Industry is the
competent authority to take a view on the FDI policy, including sectoral caps.
Besides the Commerce & Industry minister, the other members of the GoM
comprise of the Minister for Power, Minister for Communication and
Information Technology, Minister for Small Scale Industries and Minister for
External Affairs.

WTO, TRIMS and FDI

Under the Trade Related Investment Measures (TRIMS) of WTO (1994),

the member countries are required to phase out performance requirements
especially in regard to the local content requirement and foreign exchange
neutrality by 1.1.2000 for developing countries and by 1.1 .2002 for least
developed countries. Accordingly, India notified two TRIMS, viz., that relating
to local content requirements in the production of certain pharmaceutical
products and dividend balancing requirement in the case of investment in 22
categories of consumer items (Economic Survey, 1999).

It is noteworthy that the TRIMS Agreement of WTO has a built in

mechanism for review. In the recently concluded Fourth Ministerial
Conference at Doha (November 2000), developing countries could
successfully defer implementation of TRIMS by another two years. The
agreement would come up for consideration again during the Fifth Ministerial
Conference.

SIIA & FIIPB

The Secretariat for Industrial Assistance (SIA) under the Department of

Industrial Policy & Promotion in the Ministry of Commerce & Industry
provides information and assistance to Indian and foreign companies in
setting up industries and also assist them in finding out joint venture
partners. It functions as the Secretariat of the Foreign Investment
Implementation Authority (FIAA). Once a project has been
approved/conceived, the FIAA helps them in obtaining the required
clearances. It also sorts out operational problems through constitution of
Fast Track Committees (FTCs). The Foreign Investment Promotion Board
(FIPB), on the other hand, is a committee of secretaries, with representations
from Ministry of Finance, Ministry of External Affairs, Ministry of Small Scale
Industries and Department of Commerce under the chairmanship of
Secretary, Department of Industrial Policy & Promotion. The FIPB considers
those projects, which require its approval. However, investments exceeding
Rs.600 crore are required to get the approval of the Cabinet Committee on
Foreign Investment (CCFI).
Foreign Technology Agreements

Foreign technology induction is encouraged both through FDI and

through foreign technology agreements. India has one of the most liberal
policy regimes in regard to technology agreements. Foreign technology
collaborations are:-

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment permitted either through automatic route or

through FIPB. Automatic approval: RBI accords automatic approval for all
industries for foreign technology collaboration agreements subject to:

1. The lump sum payments not exceeding US$ 2 million

2. Royalty payable is limited to 5 per cent for domestic sales and 8 per cent
for exports subject to total payment of 8 per cent on sales over a 10-year
period.

3. The period for payment of royalty not exceeding 7 years from the date of
commencement of commercial production, or 10 years from the date of
agreement whichever is earlier.

FIPB Route:
For the following categories, Government approval is necessary:

1. Proposals attracting compulsory licensing.

2. Items of manufacture reserved for the small-scale sector.

3. Proposals involving any previous joint venture or technology transfer/trade

mark agreement in the same or allied field in India.

4. Extension of foreign technology collaboration agreements (including those

cases which may have received automatic approval in the first instance).

5. Proposals not meeting any or all of the parameters for automatic approval.

The different components of foreign technology collaboration such as

technical know-how fees, payment for design and drawing, payment for
engineering service and royalty are eligible for approval through the
automatic route, and by the Government. Payments for hiring of foreign
technicians, deputation of Indian technicians abroad, and testing of
indigenous raw material, products, and indigenously developed technology in
foreign countries are, however, governed by separate RBI procedures and
rules and are not covered by the foreign technology collaboration approval.
Similarly, payments for imports of plant and machinery and raw material are
also not covered by the foreign technology collaboration approval for which
RBI is the competent authority.

ADVANTAGES AND DISADVANTAGES OF FDI.

ADVANTAGES OF FDI

• Foreign Direct Investment plays a pivotal role in the development of

India's economy. It is an integral part of the global economic system.
• Foreign direct investment permits the transfer of technologies.
• FDI ensures a huge amount of domestic capital, production level, and
employment opportunities in the developing countries, which is a
major step towards the economic growth of the country.
• Foreign Direct Investments have opened a wide spectrum of
 opportunities in the trading of goods and services in India both in
terms of import and export production.
• FDI has also ensured a number of employment opportunities by aiding
the setting up of industrial units in various corners of India.
• Helps in the creation of new jobs in a particular country.
• As a result of receiving foreign direct investment from other countries,
it has been possible for the recipient countries to keep their rates of
interest at a lower level.
• Increases tax revenues
• Boost manufacturing sector

DISADVANTAGES OF FDI

• One of the most important disadvantages of foreign direct investment

is that the economically backward section of the host country is always
inconvenienced when the stream of foreign direct investment is
negatively affected.
• The differences of language and culture that exist between the country
of the investor and the host country could also pose problems in case
of foreign direct investment.
• Adverse effects on the balance of payments, when a foreign subsidiary
imports a substantial number of its inputs from abroad, there is a debit
on the current account of the host country’s balance of payments.
• Foreign direct investment may entail high travel and communications
expenses.
• There is a chance that a company may lose out on its ownership to an
overseas company.
• Government has less control over the functioning of the company that
is functioning as the wholly owned subsidiary of an overseas company.
• They are unreliable.