191 Study of FDI Activity in India and Its Implications

Research Report
On
“Study of FDI Activity in India and its Implications”
Submitted By: Nishi Kumari

Satyarthi
MBA-Finance & Marketing 0415870007
Under The Guidance of : Mrs. Ruchi Goel
Janhit Institute of Education & Information

Dissertation Report Foreign Direct
Investment
Greater Noida
Acknowledgement
I take this opportunity to extend my sincerest and unflappable admiration to
Mrs Kalpana Sharma, Faculty, Janhit Institute of Education & Information for the
cooperation and support she has rendered me in my endeavor. She provided me with
the facilities and utmost co-operation for working on my project. She helped me
facilitate my dissertation by providing me with adequate assistance at all times,
valuable inputs & guidance at every stage of research process thus charting the project
towards its successful completion.
I would also like to thank Janhit Institute of Education & Information for having
presented me with the opportunity to undertake such a project which has helped me
develop deep insights about the Study of FDI Activity in India and its implications.
Every kind of possible help and support was shown by the to make this project a
success.
Nishi Kumari Satyarthi
2
Investment
CERTIFICATE
TO WHOMSOEVER IT MAY CONCERN
This is to certify that the dissertation titled “Study of FDI activity in India and its
implications” submitted by Nishi Kumari Satyarthi for the award of degree in Master
of Business Administration has been completed under my supervision and guidance.
This proves the candidate’s capacity for critical examination and sound judgment over
the problem studied by him.
The work is satisfactory and complete in every respect and the dissertation is in
a suitable form for submission.
Mrs. Ruchi Goel
(Faculty Guide)
3
Investment
TABLE OF CONTENTS
Index
• Synopsis
• Executive Summary
• What and Why is FDI
• Effect of FDI
• Different between Foreign and Domestic Investment
• Risks of FDI
• Argument against FDI
• Investment in Developing Countries
• Theory of FDI
• Variables in FDI Model
• Investment facilitation factors
• Investment promotions Model
• Cost and Benefit of FDI
• Strategy of FDI
• From India Scenario
• Policy towards FDI
• NRIs and PIOs
4
Investment
• Why we are Here?
• Why China
• Steps Taken By Government
The Research
• Statement Of The Objective
• Primary Objective Of The Study:
• Scope Of The Study:
• Research Methodology
• Research Design.
• Sampling Plan:
• Data Collection
• Limitations Of The Study
5
Investment
SYNOPSIS
The success of the software industry has created a new faith in Indian brain power and
this brain power is required to harness in production with efficiency and cheaper cost.
NRIs can now acquire a few acre of land to construct multi-storage apartment. This
will give a flip to the housing sector which shows a slowdown in the economy. The
tax administration in India is perceived to be extremely hostile to the non-resident
doing business in or with India.
A comprehensive legislature and policy framework needs to be promoted for a healthy

market any move to facilitate, quick, efficient and transparent transaction in the real
estate is the most soughed.
Will The current budget enable

india to attract more foreign
funds
23%
no
yes
cannot say
9%
68%
The Govt. recent idea of raising the FDI in the Public Sector Banks is most welcome
but there are many hurdles in the way yet to be amended reduction of Govt. holding
from 51% to 33% and increase of the voting right above 10%. The Govt. is yet to
clear the program of allowing 100% FDI in the private sector bank through automatic
route.
Deepak Parekh, chairman of the HDFC, private bank will be benefited from this
increased in the limit from 44% to 74% and allowed voting right beyond 10%. By
raising the FDI limit from 74% telecom operators like Bharti Televenture, Hutchison,
BPL, Idea and spice will be able to raise its fund in the international market through
6
Investment
equity route. An investment of Rs 5000 crores is required in the telecom sector in the
next 3 years to meet the growing demand.
The union budget of 2003-2004 proposes to extent the facility of seeking an advances
indirect tax ruling to wholly-owned subsidies of the foreign companies from the
coming fiscal at present this facility is available only to the joint ventures.
In India it cost the same for the firm to employ and to fire. Firm should be allowed to
trim employee according to the market conditions. Extensive labour’s reform is the
most sought. Higher income growth coupled with a persistence approach to reforms
will attract substantially more FDI into India.
The Pravasi Bharatiya Divas Jamboree raises an important question what an

important contribution can Non-resident and people of India origin can contributed?
Why Indian perform better outside rather when they are in India? We have everything
but still we cannot convert them in to higher productivity.
According to recent survey, India is losing its sheen as a foreign investment

destination, This does not gel with the recent increase in the flow of FDI OF $1.08
Billion in the first quarter of 2002-2003 which could go up to $8 billion once the RBI
begin to align FDI data with international practices. But the worrying point is that we
are receiving a lot less FDI than what we required. The tenth plan targeted a growth of
8% over 2% then the average annual growth rate achieving during the ninth plan. A
two per cent increase in the GDP required a 7 percentage point increase in the
investment. With saving continue to be 23% of GDP for quit sometime it will be
impossible that it will go up by 5 percentage point to the required 28% of the GDP in
the short run. China has demonstrated that this is possible in the short run if we can
create a sound, investment friendly environment.
There are lesson from China that we should learned, in fact China FDI’s constitutes
90% from NRCs from Hong Kong, Thailand and Singapore in view of the labour
intensive goods when it open its market in 1978. Despite being centralized economy it
delegated powers for the FDI approvals in favours of the local authorities and
provincial govt. which compete with each other to woo investors.
In the first place we have to put in place legislation on FDI to give the policy requisite
visibility and build confidence among the investors. The policy have to be integrated
in the over all national economic policy. Second states need to be given primacy in the
approvals and taken on boards as stakeholders. Authorized local authority to set up
SEZs and approvals of FDI. We need to provide quick international competitive
platforms as strategic locations for relocation of labor intensive manufacture. Forth
7
Investment
export oriented FDI to be given top priority with political and bureaucratic apparatus
to catalyze export led growth. And last but not the least we have to think big, plan
well and implement fast and speed up privatization process. Concentration on
education is no doubt an important objective for long lasting benefits.
My Project is base on the discussion of the above references by paying special

emphasized on WHAT, WHY AND HOW.
EXECUTIVE SUMMARY
Realizing the important contribution that private foreign capital can make to the
economic development, the Industrial Policy Resolution of 1991 ushered in major
changes to attract foreign investment in India. Such a positive and open-door policy of
India towards foreign investment and technology transfer has been in contrast to the
earlier restrictive approach. The sectors opened to foreign investment now are larger
as compared to the earlier policy. The enlarged spheres of FDI entry now include
mining, oil exploration, refining and marketing, power generation and
telecommunications, insurance, defense, print media and tourist and hotel industries.
The government also announced the opening of the Indian stock markets to direct
participation by Foreign Institutional Investors. The government has also amended the
foreign Exchange Regulation Act, introduced current account convertibility, eased
Statutory Liquidity Ratio and Cash Reserve Ratio on banks, reduced customs and
excise duties, provided insurance for non-business risks including expropriation and
so on. Following these liberalization, there has been an unprecedented growth in the
inflow of foreign investment and technology transfer into the country. Since 1991, the
composition of capital account has changed to a large extent. Non-debt creating
inflows have replaced the debit creating inflows and have increased from about 6%
during seventies and eighties to 43% during nineties. However, foreign investment is
much lesser than the country’s potential to attract and absorb it.
Between 1991 and 2001, India has received on an average US$ 2.2 billion
annually as foreign investment, as against China’s US$ 32.2 billion during the same
period. India is placed at the 119th position in the foreign direct investment
performance index of UNCTAD. India’s index value has been pt at 0.2 against
China’s 1.2 and Sri Lanka’s 0.4 and even Pakistan’s 0.2 which ranked higher at 114th
position (performance measured by standardizing a country’s inflows to the size of its
economy.
8
Investment
One can correlate the deceleration in macro fundamentals in recent years,

adversely affecting India’s FDI potential rating.
India’s burgeoning population, debt and fiscal deficit are sustainable only if the
country’s economy grows by at least 8% annually. This requires raising the level of
investment from 22% of the GDP to 30%. As per the classical theory of economics by
Keynes, this investment-saving gap must be financed through foreign investment.
Foreign investment should touch $8billion if India has to achieve 8% growth.
The special features of the book are as follows:
It highlights the salient features of the policy, followed by the Government of India, as
updated up to recent Budget, with regard to foreign investment.
It portrays the patterns in the FDI and portfolio flows by country sources, major
industrial sectors and major recipient states of India.
It analyzes the extent and pattern of dependence of Indian corporate Sector on the
foreign sources.
A study of the subsidiaries of foreign companies operating in India is the special

feature of this book.
The impact analysis highlights the impact of interest rates on NRI deposits, the impact
of FII investment of Stock Market Development in India and the impact of FDI and
technology transfer on the FDI recipient companies with regard to technological
capability building, export performance and foreign exchange inflow.
A study of the determinants of FDI and portfolio flow in India points out as to what
factors affect the FDI and portfolio flows and what policy reforms are required to
attract more foreign investment.
Special emphasized for the NRIs and PIOs ,their prospects ,problems and new policy
to lure them. suggestion.
some theory of FDI is explained which being useful to analyzed.
other topics like some expert’s comments, risks of FDI, policy and brief comment on
the improvement of this segment.
9
Investment
10
Investment
What and why is FDI?

Direct Investments are those investments in which the inflows of funds is for setting
up the infrastructural sites i.e., if a foreign company wants to set up a car
manufacturing plant, then this will be considered as direct investment. Every country
would go for wooing more such investments, as it is very difficult to withdraw once
the unit set-up starts functioning.
Foreign direct investment (FDI). It is certainly seen as being preferable to other

forms of foreign capital inflow, such as commercial borrowing and portfolio
investment. Furthermore, it is considered to be eminently advantageous in its own
terms, and something to be actively sought by governments of developing countries.
Foreign investment is said to be “direct” when a company invests to take control of a

venture abroad. For example, a company might buy land, buildings, equipment and
inventory to set up a company abroad.
Foreign direct investments (FDIs) influence a host country’s economics in areas such
as trade balance, technology transfer, competitive structure, and employment. Some
studies, which have examined the effects of foreign direct investments in a host
country’s economy, have found that foreign firms export a higher proportion of their
output than local firms (Cohen 1975, Jo 1976).
Since the launch of "Manmohan-economics" by the Narasimha Rao government in

1991 - FDI has been touted as the magic word that will transform "under-developed"
India into an advanced nation with a "modern" infrastructure.
Every government that has followed has dutifully talked of taking steps to encourage
and expand FDI. Mr. Vajpayee in his inaugural address also spoke about the priority
the NDA government would give to promoting FDI. In his speech, Mr. Vajpayee
assumed that everyone understood and appreciated the benefits of FDI.
Attracting foreign direct investment is at the top of the agenda of most countries
around the world. Much recent research has focused on identifying which factors and
policies can influence the location decision of multinational companies. These factors
range from market size, to taxes, red-tape alleviation, laws, infrastructure, and
investment promotion. The debate is still open on what combination of factors is the
most effective for attracting FDI, especially in small developing countries
The protection of foreign investment is typically considered a matter of international

law, but domestic lawmakers have from time to time sought to influence the treatment
of investors abroad through domestic legislation. In the early 1960s, for example, the
11
Investment
United States Congress passed what would become known as the "First Hickenlooper
Amendment." This law requires that the President terminate aid to any country that
has seized American-controlled property, has repudiated or nullified contracts with
Americans, or has "imposed or enforced discriminatory taxes or other exactions, or
restrictive maintenance or operational conditions," and that has failed to "discharge its
obligation under international law including speedy compensation for such property in
convertible foreign exchange, equivalent to the full value thereof. The statute
represents an attempt on the part of the United States to provide an enforcement
mechanism, through domestic law, that could carry out the American interpretation of
international law. Since its adoption, however, the First Hickenlooper Amendment has
been applied only twice, once against Ceylon in 1963 and once against Ethiopia in
1979.
It was already noted that effects (e.g., technology transfer) of FDIs on a host country’s
economy depend on the nature of the undertaken investments (Chen 1987). In this
regard, Dunning (1994) emphasized “re-evaluating the benefits of FDI by explaining
that each type of FDI has its own particular way of upgrading the competitiveness of
host countries….” A fundamental distinction, therefore, needs to be made both in
promotional methods and in incentives offered by host countries across types of FDI
projects (Contractor 1995).
The greater resilience in FDI flows than that of capital market flows in the face of the
financial crisis may be partly due to the fact that FDI is more responsive to long-term
growth trends than short-term changes in financial returns. FDI inflows are also
influenced in part by access to natural resources and human capital, which were not
immediately affected by the crisis.
World FDI flows have continued to grow rapidly and even accelerated somewhat in
the second half of the 1990s. These flows reached $1.3 trillion in 2000, increasing by
14% from 1999, though this pace was slightly slower than in the previous two years.
Industrial countries accounted for much of this upsurge in FDI flows. Their share in
the world FDI inflows has risen from a low of 65% in 1994 to 84% in 2000.
Why does a company invest abroad?
There are a myriad of reasons why a company decides to invest abroad. It may be
seeking new customers, it may find that there is a higher profit margin abroad it may
wish to benefit from economies of scale by increasing total output, it may which to
access new sources of material or new technology abroad it may face high tariff
barriers if it does not invest directly in a foreign county y rather than import to that
country and so on.
12
Investment
Types of FDI: Vertical vs. Horizontal

The types of FDI can be categorized as vertical vs. horizontal based on the production
function activities. Caves (1982,p.2) described a horizontal FDI as establishing
factory facilities in different countries in order to make same or similar goods he
referred to a vertical FDI for establishing plants abroad in order to produce output that
serves an input to its other parent or subsidiary plants. Furthermore, vertical FDI
projects can be divided into two types based on the flow of interrelated production
process functions, i.e.; downstream vs. upstream integration. In the case of
downstream vertical integration, a foreign subsidiary performs an assembly function
by using inputs supplied by the parent firm or other sister subsidiaries. on the
contrary, in the case of upstream vertical integration (component specialization), the
role of a foreign subsidiary is to produce inputs and to supply them to the parent or
other sister subsidiaries. The effects of FDI on a host country’s economy are different
across the vertical vs. horizontal FDI projects.
Trade effects
It is generally known that foreign affiliates play a significant role in the expansion of
the host (especially developing)country’s manufactured exports (Helliner 1973,
Cohen 1975, Nayyar 1978). For instance, it is a known fact that “transnational
corporations account for a considerable share of exports (i.e., approximately one-third
or more) in at least six newly industrializing countries. These corporations have been
responsible for the strong export performance of this group of countries. In Argentina,
the Republic of Korea and Mexico, the export amount approaches one-third. in Brazil,
it is over 40 percent and in Singapore it exceeds 90 percent” (UNCTC 1985,p. 113). It
is also noted that the trade effects of foreign investments very among industries,
regions as well as foreign ownership (Blomstrom 1990). However, it is believed that
the role of FDI in a host country’s trade can vary with different types of projects.
The impact of FDI on the trade balance of a host country should be analysed base on
four distinct categories: (1) “export-creating”, (2) “export-discouraging”, (3) “import-
saving”, and (4) “import-creating” (Mac Dougall 1960). However, focusing on the
FDI project as a unit of analysis is difficult to capture the effects of “export-
discouraging” and “import-saving”.
Export-Creating Effects
Export-creating effects are greater in vertical FDI projects than in horizontal FDI
projects.
13
Investment
Vertical integration represents an interdependency of the stages of production, which

are linked by a flow of intermediatesz (parts, semi-processed) products between
countries. Therefore, vertical FDI, by nature, induces intra-firm trade activities. In the
case of upstream vertical integration, a foreign subsidiary especially performs
assembly functions and supplies end products to the parent firm and/or other sister
subsidiaries that are located in different countries.
Import-Creating Effects
Import-creating effects are greater in vertical FDI projects than in horizontal FDI
projects.
Due to the nature of the adjacent stage to a related set or production processing
activities, vertical FDI tends to rely more on parent companies and other subsidiaries
for tangible and intangible resources. This reflects an activity that is more import-
creating in view of host country. For instance, in an off-shore assembly operation
which is a typical type of vertical FDI, core inputs are usually imported from the
parent company or other subsidiaries.
In contrast to vertical foreign investments, the horizontal foreign investments target

relative to local market demands has an import-substitution effect. This demonstrates
that horizontal FDI projects are less import creating than vertical FDI projects.
Since the effects of FDIs on the host country’s economy depended on the nature of the
undertaken investment projects, FDI ramifications should be examined depending on
the types of FDI projects. Various types of foreign investment projects were
categorized on the basis of production function, i.e., the vertical vs. horizontal
investment.
Based on the 108 FDI projects undertaken. It was found that vertical investment
projects have a grater effect on both export-creation and import-creation activities
than so horizontal foreign investment projects.
Considering the impact of FDI inflows on the domestic financial resources and
investment for development, it can be recognized that the FDI inflows can supplement
the two in the host developing countries. While all developing countries try to attract
FDI inflows do not have a major influence on the total investment in most developing
countries. In fact for all developing countries the ratio of FDI to gross domestic
capital formation averaged only 7.4% over the 1991-98 period, although it is higher in
the manufacturing sector.
14
Investment
DIFFERENCES BETWEEN FOREIGN AND DOMESTIC

INVESTMENT
When an investor considers a foreign investment, however, he immediately faces a

number of complications found in the domestic marketplace.
What then is different about foreign investment? On the financial front, multiple
currencies and multiple interest rates complicate financial management. Equally
important, the operating environment involves multiple legal system, tax authorities,
and government policies. In a nutshell, foreign investments must contend with a
simple feature that has little impact in a domestic environment: international borders.
Crossing an international border will generally result in a number of important
consequences.
Most of the financial complications resulting from crossing an international

border can be traced to two factors which have not yet been covered in this chapter:
crossing a border means that (1) multiple currencies have to be used and (2) multiple
governments can intervene. Multiple currencies imply that investors must worry
about exchange rates and exchange rate changes as well as confront multiple interest
rates and costs of capital. Multiple governments imply that investors must decipher
multiple tax codes, as well as the way domestic and foreign tax codes interact, and
must consider additional political interventions which affect operations.
15
Investment
RISK OF FDI
HEDGING THE RISKS INVOLVED IN FOREIGN INVESTMENT
Whether the method used for measuring the risk attached to foreign investment and
adjusting the return for this risk all analysts agree that an attempt should be made to
eliminate or at least minimize the risks attached to a specific foreign project if this is
feasible
The more common risks encountered in foreign ventures are:
• Country and political risk
• Technological risk
• Exchange rate and inflation risk
• Cost and pricing risk
• Credit risk
When two parties enter into a contract in a domestic setting, we expect them to
negotiate, subject to transaction costs, the most efficient possible agreement. When a
potential investor enters into an agreement with a host nation, however, the two will
not generally arrive at the most efficient agreement. The parties are unable to reach
the optimal agreement because of the unusual nature of their relationship and the dual
roles played by the host country. The host country is not merely one of the contracting
parties, but is also able, through legislation, to establish and change the legal rules
under which the investor must operate.
Domestic legal structures, critical to the bargain struck between two private parties
under domestic law, are no longer adequate. The central problem is that a sovereign
state is not able to bind itself to a particular set of legal rules when it negotiates with a
prospective investor. Regardless of the assurances given by the host prior to the
investment and, importantly, regardless of the intention of the host at the time, if it
later feels that the existing rules are less favorable to its interests than they could be, it
can change them.
Because the host may decide to change the domestic laws to suit their own purposes,
the investor cannot rely on those laws to protect his interests. The only alternative
legal structure is international law.87 unlike domestic law, the host cannot change the
requirements of international law in order to suit itself. Unfortunately for both the
potential investor and the potential host who wishes to reassure a potential investor,
16
Investment
international law does not directly govern the relationship between states and firms.
Because the host may decide to change the domestic laws to suit their own purposes,
the investor cannot rely on those laws to protect his interests. The only alternative
legal structure is international law. Unlike domestic law, the host cannot change the
requirements of international law in order to suit itself..
That potential hosts and investors cannot sign a binding and enforceable contract
under international law explains why the debate over the protections afforded by
customary international law was so important. The lack of a mechanism to allow
contracting between firms and states creates a dilemma that is sometimes referred to
as a problem of "dynamic inconsistency." Dynamic inconsistency describes situations
in which a "future policy decision that forms part of an optimal plan formulated at an
initial date is no longer optimal from the viewpoint of a later date, even though no
new information has appeared in the meantime."
The particular problem facing foreign direct investment, one must consider how the
lack of contracting options affects the incentives of a government in its dealings with
a particular foreign investor. Initially, while negotiations with a firm are taking place,
the government of a potential host country, by assumption, wishes to encourage the
investor to invest in its country. The firm, on the other hand, would like to achieve the
greatest possible return and will invest in the host country only if that country offers
the greatest anticipated profit. the host may agree to offer certain tax advantages to the
investor, it may agree to allow the repatriation of profits and it may waive certain
import restrictions that are in place in the country. The firm, on the other hand, will
provide benefits to the country in the form of employment, technology transfers, and
so on. The firm might also agree to a set of conditions on its behavior. It might
reinvest a certain percentage of profits in the business, may agree to certain labor and
environmental standards, and may offer to provide some services to the community in
which it is located.
It is not possible to write such a contract. This makes the investment problem much
more difficult. Even if an investment is valuable enough to make it worthwhile for the
country to commit to some form of concessions to benefit the investor -- favorable tax
treatment, for example -- it cannot do so. The host country can do no more than make
non-binding promises to the potential investor. If the investment takes place, it will be
based on these promises and nothing more.
17
Investment
Once the firm has sunk its capital into the investment, the relationship between the
parties undergoes a dramatic transformation. The host country, in particular, faces an
entirely different set of incentives. It no longer needs to offer benefits sufficient to
attract the investment; it only has to treat the investor well enough to keep the
investment. The difference between the two time periods (before and after investment)
comes about because both the host and the investor know that once the firm has made
its investment, it typically cannot disinvest fully. In other words, once it has invested,
withdrawal would impose a cost on the firm. The host country can take advantage of
this situation, and extract additional value from the firm by, for example, increasing
the tax rate beyond the level that was agreed upon when the investment took place.
Had the firm known that the tax rate would be higher than the agreed upon level, it
may have chosen to invest elsewhere, or not to have invested at all. Once the
investment is made, however, it may be cheaper for the firm to simply pay the higher
tax rather than attempting to disinvest in order to reinvest in a different country.
In global terms, the efficient outcome is achieved if investment takes place where it
will earn the greatest total return. The dynamic inconsistency problem will discourage
investment that would be desirable because the firm realizes that the host will squeeze
additional value from the firm after the investment is made -- causing the firm to
avoid certain investments altogether. Furthermore, in cases in which the host is
considering expropriation, it does not face expectation damages.
Regardless of the agreement that might be reached between an investor and the host
state, once the investment is in place, the host can abrogate the agreement and impose
whatever conditions it chooses, including expropriation, as long as it pays
"appropriate" compensation. The dynamic inconsistency problem will increase the
expected cost of investment, and will, therefore, deter some investors. Given the
assumption that investment decisions are not price sensitive, however, there will be
only a modest reduction in investment relative to a contracting regime.
Jayati Ghosh - (professor of economics at Jawaharlal Nehru University, and

columnist for Frontline magazine) - have been warning of the potential dangers
associated with FDI. He have pointed out how the majority of FDI has come in the
form of speculative investments in India's stock market, where select scripts have seen
phenomenal jumps in their stock prices, while stocks of some major Indian
manufacturing companies have languished at very low valuations. They have also
warned that such speculative investments could leave just as easily as they came,
leading to greater instability in India's financial markets.
18
Investment
It was pointed out how FDI flows have simply enabled trans-national giants like Coke
and Pepsi to set up monopolies in highly profitable sectors where Indian business
concerns were already meeting the requirements of the market. Neither have these
companies brought in any valuable nor improve new technology.
19
Investment
ARGUMENTS AGAINST FOREIGN INVESTMENT

Although foreign investment tends to contribute much needed resources to host
countries and developing countries sin particular, many view it with misgivings.
There are many arguments against foreign investment. Most of these arguments have
to do with conflicts between company goals and host government aspirations:
Foreign investment brings about the loss of political and economic sovereignty.
It controls key industries and export markets.
It exploits local natural resources and unskilled workers.
It undermines indigenous cultures and societies by imposing Western values and

lifestyles on developing countries.
It seems that, while foreign direct investment has the potential to contribute positively
to development, there is no guarantee that it would have no harmful impact on host
countries. But the question of foreign investment need not be a zero-sum game. A
feasible framework for investment must be set up to define the rights and
responsibilities of both parties. This framework should allow for a reasonable return
to the investor and positively contribute to the development of a host country.
Sucheta Dalal, (columnist for the Economic Times and the Indian Express) reveal
that even in the power and telecom sectors, FDI has come at a very heavy price. In a
detailed review of the highly controversial Enron Power project, Sucheta Dalal
exposed the Maharashtra Government's lies and obfuscations in this regard. She
pointed out how the Maharashtra State Electricity Board (MSEB) was paying roughly
5 Rs. a unit to Enron, but had reduced it's purchases from the Tata Electric Company
which was selling power at under 2 Rs. a unit. Since the MSEB was selling power at 3
Rs. a unit, it was effectively subsidizing the Enron Power Co.
That it may either bankrupt the state electricity board - or make the electricity
generated completely u that it may either bankrupt the state electricity board - or make
the electricity generated completely unaffordable for the Indian consumer. But it isn't
the power sector alone, where FDI flows have been problematic.
Unaffordable for the Indian consumer. But it isn't the power sector alone, where FDI
flows have been problematic.
20
Investment
David Woodward (The next crisis? Direct and Equity Investment in Developing
Countries; Zed Books, London and New York, 2001), in his book reveals how little
we actually know about even the extent of FDI, and especially stocks of FDI, in
different countries. It emerges that official data - including those produced by the
International Monetary Fund (IMF) and the World Bank - almost certainly
underestimate to a substantial extent, the true value of inward FDI stocks and their
absolute rate of increase. Far from trying to improve this state of affairs, the Fund and
the Bank have promoted the liberalization of foreign investment regimes, which
actually tends to reduce the availability of data and even the possibility of collecting
it. Such lack of knowledge of the extent of inward FDI stocks can even be dangerous
in other ways.
Similarly, Woodward indicates how misleading it may be to assume that FDI

necessarily contributes to increased employment. In fact, the employment effect will
depend on a whole range of variables, including the balance between Greenfield FDI
and the purchase of existing assets; the labour intensity of new productive capacities
or new organizational techniques; the extent to which FDI-based production
substitutes for existing production and their relative labour intensities, and so on. In
general, therefore, it is not the case that FDI creates much more net employment
unless it is really very large in scale and heavily involved in Greenfield activities, and
even in such cases it need not be more employment-intensive.
Large-scale flows of FDI also have effects on other domestic economic policies.
Imposes severe constraints on domestic government policy because of the fear of
withdrawal, FDI is embodied in the presence of multinational corporations (MNC’s)
which tend to be large and powerful lobbies in the matter of domestic policies. To
attract more FDI by governments with over-optimistic expectations regarding such
investment means that all sorts of concessions are offered, which may turn out to be
very expensive for the economy in the medium or long term. Woodward suggests that
such FDI promotion tends to focus heavily on the demand side, in terms of
requirements imposed on host countries, which involve changing their own policies in
order to make themselves more attractive.
FDI can contribute to the underlying fragility of an economy and make it more
susceptible to balance of payments crises.
First, as rapidly growing stocks of inward FDI generate similarly growing profits that
form part of the foreign exchange outflow. Secondly, when FDI fuels an increase in
imports, such as capital goods for investment projects and other such payments.
21
Investment
Thirdly, because current foreign exchange costs of MNCs typically exceed the foreign
exchange they tend to earn through exports of import substitution. Fourthly, through
the role played by foreign affiliates, including those FDI can contribute to large
current account deficits, which tend to precede financial crises. They can also add to
both the economic shocks preceding crises and to the process of contagion. this
involved in retailing, in changing patterns of consumption through advertising and
brand promotion.
Woodward shows that positive effects arise only where new productive capacity is
created in the export sector, or in very strongly import-substituting sectors. If FDI
takes the form of purchase of existing capacity, even in the export sector it will have a
negative foreign exchange effect even if export production goes up, unless the
productivity of capital increases enough to offset the other increased foreign exchange
costs. At lower levels of import substitution, the effects of "Greenfield" FDI on new
capacity are much more ambiguous, and may be negative.
But in the new climate, in which developing country markets are seen as riskier and
international investors are becoming more risk-averse, efforts to attract more FDI will
involve even more concessions on the terms of such investment. "The result will be to
accelerate the build-up of liabilities without a commensurate effect on the now
seriously limited capacity of national economies to bear them".
The Budget speech of the Finance Minister, in which he announced a reduction on

corporate tax paid by foreign companies from 48 per cent to 40 per cent, despite the
shocking shortfalls in tax collection. This concession was explicitly declared to be a
means of wooing more FDI into the economy.
22
Investment
IS FOREIGN INVESTMENT RISKIER THAN HOME INVESTMENT?
The traditional view of foreign direct investment is that type of investment is riskier
than investment in the home country. The main differential factor is knowledge, a
company knows more about local conditions than conditions in a foreign country.
In recent years the traditional view that foreign investment is riskier than home
investment has been questioned.
The incremental risk added to the earnings of a company undertaking a direct foreign
investment can be measured in much the same way as one can measure the risk added
to the current earnings of the company by introducing a new product or project onto
the market.
A new product can diversify the existing product portfolio of a company in such a
way that it reduces the variance on the income from the product portfolio. The new
product can help to stabilize the earnings of a company and so reduce the “beta” or
risk attached to the earnings figure.
Much of the research that found that foreign trading and investment actually reduced
the risk attached to the earnings of a company worldwide was conducted and
published in the 1970s.
Rugman (19750), after adjusting for several factors, found that the share price or US
companies with a higher than average percentage of foreign sales was less volatile
than companies with a lower percentage or foreign sales.
Agmon and Lessard (1977) found that the share of multinational companies with a
high fraction of foreign sales enjoyed lower betas than companies with a low fraction
of their sales being sole abroad. For example, firms with 1% to 7% of foreign sales
had betas averaging 1.04. Firms with 42% to 62% of foreign sales had betas averaging
0.88. As on e would expect companies with a high fraction of foreign sales tend to
invest more abroad.
The basic cause of this apparent anomaly is the lack of correlation between the growth
rates of the different countries of the world. Whereas local sales are falling during a
recession in one country the sales in some other country are booming. It is true that
the growth rates of the economies of the advanced industrial countries are auto
correlated (correlated through time) but the rise and fall in economic activity do not
coincide in time.
When this low correlation between the growth pattern of different countries is plugged
into the model of foreign investment the result reduces the variance on the income
23
Investment
stream of the multinational company whose income is diversified over many

countries.
Investment in developing country
In recent years, foreign direct investment ("FDI") has grown at an unprecedented rate.
Between 1986 and 1990, total world FDI flows increased from US$88 billion dollars
to US$234 billion, representing an average rate of increase of twenty-six percent in
nominal terms and eighteen percent in real terms. From 1980 to 1993, the stock of
foreign investment increased at an average annual rate of eleven percent in real terms,
reaching a total of $2.1 trillion in 1993. A significant proportion of FDI flows is
directed at developing countries. FDI flows to these countries grew from $13 billion
in 1987 to $22.5 billion in 1989 to $90.3 billion in 1995.
Developing countries have two options of raising capital. First, by creating capital
surplus from internal sources of capital formation such as controlling consumption,
reducing foreign imports and other measures such as taxation, public borrowing,
budgetary savings from current revenue and profits of public enterprises.
Bilateral Investment Treaties (BITs) have become the dominant mechanism for the
international regulation of foreign direct investment. The tremendous popularity of
these treaties is puzzling because they provide investment protections that exceed
those offered by the former rule of customary international law, the Hull Rule, to
which developing countries have long objected on sovereignty grounds. Furthermore,
as the paper demonstrates, BITs may be welfare reducing for developing countries. By
forcing LDCs to compete for inward foreign investment, and by providing a
mechanism through which developing countries are able to make binding
commitments to investors, BITs may reduce the benefit developing countries obtain
from foreign investment.
Because the treaties are bilateral in nature, however, they offer an LDC an advantage
over other countries in the competition to attract investment. For this reason,
individual countries are willing to sign such agreements, despite the fact that LDCs as
a group are harmed.
The conflicting views of developed and developing nations on the question of

compensation for expropriation is evidence of the predictable fact that one's view
regarding the appropriate standard of compensation is determined by whether one is a
net importer or exporter of investment capital. It is the direction of the flow of
investment capital and wealth and power disparities between developed and
24
Investment
developing countries that gives them different perspectives on questions of investment

regulation.
A developing country would not be able to commit itself credibly to respect

agreements with investors and would, therefore, have a reduced ability to negotiate
with prospective investors in order to attract investment. This will drive up the cost of
investment and cause profitable investments that both the host and the investor wish
to undertake to be foregone because they are not rendered unprofitable by the
dynamic inconsistency problem. This is an inefficient result.
Most importantly, the investor may choose to invest without any binding
commitments from the host country because LDCs( least develop countries) offer
advantages that are unavailable in the investor's home country (e.g., low labor costs,
favorable environmental or labor laws, locational advantages, natural resources, and
so on). The risk that the host will attempt to seize value from the investor can be
thought of as a random tax. The investor knows that he may or may not be subject to
this tax. He will invest despite this risk if the benefits are sufficiently large.
For developing countries as a group, however, the sensitivity of investment demand is

likely to be much lower. Consider a particular firm that is considering an investment
in a developing country. If the cost of investment rises in one country, it is likely that
the firm could find another country that also meets its needs. On the other hand, if the
cost of investment rises in all developing countries, the firm must either invest despite
the increased cost or abandon its intention to invest in a developing country. Because
the advantages offered by one developing country are much more likely to be found in
another developing country than in a developed country, the firm is much more likely
to invest in a developing country despite such an increase in the cost of investment
Because investment decisions, with respect to investment in LDCs as a group, are

relatively inelastic -- meaning that a change in price leads to only a small change in
the amount invested -- a large amount of foreign investment will take place even in
the absence of a binding contractual regime between host governments and firms.
It is demonstrated that although an individual country has a strong incentive to

negotiate with potential investors -- thereby making itself a more attractive location
than other potential hosts -- developing countries as a group are likely to benefit from
forcing investors to commit to a country through their investment before the final
terms are established . Thereby giving the host a much greater ability to gain value
from the investment. Put another way, developing countries as a group may have
25
Investment
sufficient market power in the "sale" of their resources as host countries that if they
act collectively they stand to gain more than if they compete against one another and
bid down they receive.
The customary international law that has traditionally applied to takings by the host
state is referred to as the "Hull Rule," in reference to Secretary of State Cordell Hull
who authored the most famous articulation of the rule in 1932. The key words, penned
by Hull, that have come to represent the traditional "full compensation" position is
that the expropriation of property owned by foreigners requires "prompt, adequate and
effective" compensation.
The world is very different today. The customary international law that once governed
foreign investment was successfully called into question by developing states who
advocated an alternative international norm and who ultimately left the international
community without any legal standard having the status of customary law. The Hull
rule was challenged by developing countries who claimed, on sovereignty grounds,
the right to determine how they would treat investors and the standard of
compensation that should apply if that treatment was sufficiently harmful. Although
many countries continue to advocate the Hull Rule, a sufficient number of developing
states oppose it to ensure that it can no longer be considered a rule of customary law.
Furthermore, had developing countries decided, as a group, that it served their interest
to provide greater protections for foreign investors, they could have adopted
additional General Assembly Resolutions or signed multilateral agreements to that
effect. They have done neither. One possible explanation of the behavior of LDCs is
that they have come to conclude that they will be better off if they allow themselves to
be bound through a contractual mechanism with investors.
LDC behavior can best be understood through a strategic analysis of the incentives
facing developing countries individually and as a group. first considers the efficiency
implications of each regime, and then examines the impact of each regime on the
distribution of the gains from investment.
Once an investment is made, the firm and the host state face one another in a new
negotiating posture. The host has the power to unilaterally change the conditions
under which the firm operates and the firm's only defenses are the ability to stop
operations and pull out of the country and the reputation concerns of the host. It
would, therefore, be possible for the host to extract considerable surplus from the firm
through increased tax rates, restrictions on the repatriation of profits, domestic content
26
Investment
regulations, and so on. LDCs, therefore, are better off. Although there may be a small
reduction in total investment, developing countries will gain much more from each
dollar of foreign investment that does take place.
Most developing countries have moved to market oriented and private sector led
economies. There is widespread reduction and removal of trade barriers, deregulation
of internal markets privatization and liberalization of technology and investment flows
at the national level.
Many developing countries and economies in transition have concluded bilateral

treaties to protect foreign direct investment (FDI) and avoid double taxation. A
number of regional schemes such as the EU (European Union), NAFTA (North
American Free Trade Agreement), ASEAN (Association of South-East Asian
Nations) and MERCOSUR (Southern Common Market), have reduced barriers to FDI
or are in the process of doing so, facilitating intra-regional investment and trade flows.
At the multilateral level, the General Agreement on Trade in Services has contributed
to the liberalization of FDI in services. The FDI global regime that has emerged after
these changes though uneven, is much friendlier towards foreign investors than in the
past. This is in the context of the unprecedented changes of the late 1980s and early
1990s. The first section of this chapter focuses on these changes. The second section
specifies the policy challenge for the developing countries. The third section specifies
some serious concerns for the Indian economy.
Finally, we must consider whether or not it is reasonable to assume that investment in

developing countries would continue even if LDCs were unable to make binding
commitments. Because the lack of a method for creating binding contracts has the
effect of raising the costs of investing, whether it is reasonable to assume that the
demand for the resources of LDCs is relatively insensitive to changes in the cost of
investing. In other words, we are asking whether developing countries, if they behave
as a group, have monopolistic power. If they do not have monopolistic power,
potential investors faced with the dynamic inconsistency problem will simply choose
to invest in developed countries -- where the risks to the investment may be
considered less severe. The assumption can be justified on at least two grounds. First,
although developing countries and developed countries share certain traits, there are
enough identifiable traits of developing countries that are different from those of the
developed world to support our assumption. For example, labor in developing
countries is often extremely inexpensive relative to developed countries. Even the
threat of an increase in the wage rate in an LDC may not deter an investor because
even if there were a substantial increase in the cost of labor, it would remain below
that of the developed world. Similarly, developing countries have natural resources
27
Investment
that do not exist in developed countries, or that are not as abundant. In addition, the
legal and regulatory climate of developing countries may be more advantageous for
investors.
Economic development remains an urgent global need. The need for economic
development is self-raised as an automatic consequence of the globalization.
Although many countries have achieved significant increases in income in the last few
years, there still exist great international inequalities in the level of income. The
lower class of nations is still far bigger. More than two-third of the people live in
countries where the per capita income is only a tiny fraction of what it is in the highly
developed countries. To raise the standard of living of the people in such countries
and to enable them to use the fruits of scientific and technological miraculous
advances in agriculture, industry transport, communication, education, health services
ad other fields, it is almost essential that in such economies, capital formation should
take place at a higher rate than before, so that the big developmental projects may be
financed properly. Thus, for rapid economic development, the central problem is
capital formation.
28
Investment
Theories of FDI
Major theories of direct foreign investment
There are many theories of DFI some compete with each other in explaining DFI, and
some complement each other. In this section, we will cover six major, distinct
theories, although there will occasionally be overlap.
Technological Advantages
A technological advantages theory of DFI asserts that firm specific advantages which
explain why firms expand domestically also explain why they expand aboard. This
theory is most closely identified with Hymer (19860, 1976), but is also examined by
Kindle berger (1969) and Caves (1971).
Oligopoly Models
Some industrial organization approaches to DFI have been formulated. Oligopoly

models of DFI that use a growth motive for corporations or a desire to maintain and
increase market share as the starting point are principal among them.
Furthermore, no specific advantages are associated with the host countries. In this
situation, DFI would be determined by variables other than the rates of return.
Exchange Risk Theory
Another macroeconomic theory of DFI is Aliber’s (1970) exchange risk theory, in

which the risk that exchange rate changes will severely alter the home currency value
of a foreign investment provides a barrier to portfolio investment and intermediated
investment by risk averse investors.
Evaluation of theories of DFI
This section briefly assesses how each theory of DFI meets the following three
criteria (1) locational advantages (2) why DFI is chosen over portfolio investment and
intermediated investment – or the existence of an overcompensating ownership
advantage, and (3) the prevalence of cross-hauling in DFI.
It accounts for locational advantage by viewing source countries as those countries

with technological advantages and host countries as those without.
29
Investment
Currency based Approaches
The currency based theories are normally based on the imperfect foreign exchange
and capital market. One such theory developed by Aliber (1971) postulates that
internationalization of firms can best be explained in terms of the relative strength of
different currencies. Firms from strong currency countries move out to weak currency
countries. in a weak- currency country, the income stream is fraught with greater
exchange risk. As a result, the income of a strong currency country firm is capitalized
at a higher rate. In other words, such a firm is able to acquire a large segment of
income generation in the weak currency country’s corporate sector. The merit of
Aliber’s hypothesis lies in the fact that it has stood up to empirical testing. FDI in
United States, Canada and the United Kingdom has been found in consistency with
the hypothesis. However, the theory fails to explain why there is FDI in the same
currency area.
MacDougall-Kemp Hypothesis:
The literature explaining why a firm seeks to make FDI is ample. One of the earliest
theory was developed MacDougall (1958) , subsequently elaborated by Kemp (1964) .
Assuming a two-country model—one being the investing country and the other being
the host country and the price of capital being equal to its marginal productivity. They
explain that when capital move freely from one country to another, its marginal
productivity tends to equalize between the two countries. This lead to improvement, in
efficiency in the use of resources which leads ultimately to an increase in welfare. So
long as the income from foreign investment is greater than the loss of output the
investing country continues to invest abroad because it enjoy greater national income
than prior to foreign investment. The host country too witnesses increases national
income as a sequel to the greater magnitude of investment that it is not possible in the
absent of foreign investment inflow.
PRODUCT CYCLE THEORY:
Hymer explained ‘why ‘ foreign investment takes place, Hood and Young explain “
where “ foreign investment takes place , but it was Raymond Vernon (1966) who
added “when” to the “why” and “where” based on data obtained from US corporate
activities. Raymond Vernon theory is known as the Product cycle theory.
Raymond feels that most of the products follow a life cycle that is divided into three
stages. The first is known as the “innovation” stage. In order to compete with other
firms and to have a lead in the market the firms innovates a product through research
30
Investment
and development. The product is manufactured in the home country primarily to meet
the domestic demand, but a portion of the output is also exported to other developed
countries. The quality of the product, and not the price, forms the basis of demand
because the demand is price – inelastic at this stage.
The second stage is known as “maturing product’ stage. At this stage, demand for the
new product in other developed countries grows substantially and turns price elastic.
Rival firms in the host countries itself began to appear at this stage to supply similar
products at the lower price owing to lower distribution cost, whereas the product of
the innovator involves the transportation cost and tariff which are imposed by the
importing government. Thus in order to compete with the rival firm, the innovator
decides to set up production unit in the host countries itself that would eliminate the
transportation cost and tariff. This leads to internationalization of production. The
imposition of tariff in the host country encouraging foreign direct investment is
confirmed by Uzawa and Hamada, but they feel that entry of foreign capital in
protected industry reduces welfare in the host country.
Politico-economic Theories
The politico-economic theories concentrate on political risk. Political stability in the

host countries leads to foreign investment therein (Fdatehi-Sedah and Safizedah,
1989). Similarly, political instability in the home country encourages investment in
foreign countries (Tallman, 1988). However, Schneider and Frey (1985) believe that
the theory underlying the political determinants of FDI is less well developed than
those involving economic determinants. The political factors are only additive ones
influencing foreign investment.
The Electric Paradigm
Dunning’s eclectic paradigm is combination of the major imperfect market based

theories of FDI, viz., industrial organisation theory, internalization theory and location
theory. It postulates that at any given time, the stock of foreign assess owned by a
multinational firm is determined by a combination of firm specificity or ownership
advantage (O), the extent of location bound endowments (L), and the extent to which
these advantages are marketed within the various units of the firm (I). Dunning is
conscious that configuration of the O-L-I advantages varies from one country to
another and from one activity to another and that foreign investment will be greater
where the configuration is more pronounced.
31
Investment
What should a theory of DFI seek to explain?

The first challenge for a theory of DFI is to determine which countries will be source
countries (or home countries) and which will be host countries, an issue often
referred to as the locational indication. In other words, a theory of DFI should explain
data one country patterns of investment, or why certain countries (such as Japan) tend
to be home countries and certain countries (such as Mexico) tend to be host countries.
Theories of DFI should therefore indicate something in addition to or instead of the

interest rate argument for locational indication in an effort to explain why project rates
of return are higher abroad than they are domestically.
Government policies that create market imperfections can also play a part in creating
locational advantage. Large expanding markets may offer high rates of return too. A
company may wish to set up production in such a country, rather than simply export,
to lower transportation costs and to take full advantage of the opportunities such
markets present. This may be another explanation for the manufacturing rush into
Europe. A tax argument is also associated with location advantage
WHAT ARE THE KEY VARIABLES IN THE DIRECT FOREIGN

INVESTMENT MODEL?
The following questions need to be asked before a company decides to make a direct
investment in a foreign country:
What increase in “incremental” demand for the products of the Company will result
from the foreign investment?
At what price in terms of foreign currency can the goods or services be sold in the
foreign market? What is the price elasticity of demand for the product in the foreign
market?
What are the fixed cost and variable costs of production in the foreign market at
various levels of output?
What is the full cost of the investment? How much of this cost can be recovered if the
project fails? What proportion of the cost of the investment can be bought in the
foreign county and how much needs to be imported? Imported from where? What
grants and tax concessions can be negotiated with the government in the foreign
country?
32
Investment
What are the working capital requirements for the foreign project? Will these
requirements be very different from the requirement in the home country? For
example, must higher levels of inventory be maintained to service production because
of increased distance from suppliers?
What is the expected future rate of inflation in the foreign country? How disruptive
would a high rate of inflation be to production and sales abroad? How will the
predicted rate of inflation impact on the exchange rate between the home and the
foreign currency?
What is the cost of funds in the foreign country? What proportion of these funds can
be faired locally and what proportion must be imported from abroad? How has the
cost of funds moved in recent years in the foreign country?
Is this investment project likely to be a permanent project or a capital venture with a

fixed life? If the lifetime is short what is the likely terminal value of the project?
What are the exchange control regulations in this country? What are the rules
regarding repatriation of profits from this country? Are these rules applied rigorously?
How stable is the exchange rated between the foreign and

home currency? Are devices such as forward markets, options and swaps available in
the foreign country or elsewhere to hedge exchange rate risk?
How stable is the government of the country in which the investment is to be made?
What is the political risk index attached to this country by political risk assessors?
what tax rates and regulations are imposed in the profits made by companies in the
foreign country? Are any subsidies available to encourage foreign investment? What
is the-holding tax rate on dividends?
The above set of questions presents a formidable list of things that need to be found
out before a foreign direct investment can be properly assessed, yet it represents only
a fraction of the facts that need to be garnered by an investment team before a
decision can be taken to make a foreign investment.
The Eclectic Theory of John Dunning sets out a background for the motives for and
determinants of foreign direct investment and portfolio investment. the ownership,
location and internationalization factors have been identified for the analysis of the
determinants of the Foreign Direct Investment and Portfolio Equity Investment flows
in India.
33
Investment
Economic Stability of the Country
Monetary and fiscal policies, which determine the parameters of economic stability
such as the interest rates, tax rates and the state or external and budgetary balances,
influence all types of investment, domestic or foreign.
Investment and Savings Rates in East and South East Asian economies have, by and
large, averaged higher than those registered in Latin American economies. Besides,
such rates have risen from one sub-period to the other in the former region. The
proportion of FDI in domestic investment has been found low till 1990 but has gone
up subsequently in all the sample economies except in Korea and Thailand where it
has gone down.
The influence of FDI on savings and investment has been positive (statistically
significant) only in three economies namely Chile, Korea and Thailand. The
experience of Argentina and Philippines in contrast where FDI has had a negative
influence on savings. The influence of FDI flows on national economies of the
developing countries, therefore, may be viewed with caution.
MODE OF INVESTMENT
Economic Determinants
Natural Resources
The most important host-country determinant of FDI has been the availability of
natural resources. According to Dunning, in the nineteenth century much of FDI by
European, United States and Japanese firms was prompted by the need to secure and
economic and reliable source of minerals, primary products for the investing
industrializing nations of Europe and North America.
National markets
From a host-country’s perspective, the relevant economic determinants for attracting

market seeking FDI include market size, in absolute terms as well as in relation to the
size and income of its population, and market growth.
Created Assets
The availability of low-cost unskilled labour largely immobile, has been the most
prominent economic determinant of FDI. This is so especially for TNCs seeking
greater efficiency in producing labour intensive final products or for TNCs producing
34
Investment
final products for which some stage of production, geographically, separable from
other stages, is intensive in the use of unskilled labour.
Investment Facilitation factors
Investment facilitation factors include promotion efforts, the provision of incentives

to foreign investors, the reduction of the “Hassle costs” of doing business in a host-
country (e.g., reducing or eliminating corruption and improving administrative
efficiency), and the provision of amenities that contribute to the quality of life of
expatriate personnel.
Investment promotional measures
Promotional measures are taken to shorten the delayed reactions of investors to

emerging investment opportunities or to help investors, especially small and medium
sized firms, discover new opportunities that they would not find on their won. Such
actions are aimed at shortening the psychic distances between the host and home
countries.
Investment incentives
A large number of governments, especially of developed countries, compete among

themselves by offering a variety of investment incentives to attract FDI. There is
competition among OECD countries in offering investment incentives to attract FDI.
E.g., Mercedez was paid US $ 2,00,000 per job created in 1996 in the US.
Earlier studies, their conclusions and limitations
Research on the effects of policy variables on FDI, especially with respect to

developing countries, more particularly India, is rather limited. While there has been
much research on the general determinants of FDI in less developed countries with
survey by Agarwal (1980). This study focuses on factors like comparative labour
costs, country size, the nature of exchange rate regime and political including political
instability.
Several more recent empirical studies on the determinants of FDI mention the
potential importance of policy-related variables such as tax rates, foreign investment
incentives and openness in the determinants of FDI. Yet in their empirical analysis,
they do not analyze them. Tsai (1994) notes the importance of qualitative factors, such
as qualitative stability and incentives, but does not include them in the empirical
analysis on the ground that such variables are difficult to define and quantify.
35
Investment
Study has confined its analysis to trace signs of the impact of foreign collaboration
on-
National Technological Capability of the Indian History,
Export performance of the subsidiaries of Foreign Companies, and
Foreign Exchange Inflows into India.
COSTS AND BENEFITS OF FDI

When direct investment flows from one country to another, it creates benefits both for
the home country and the host country. Thus when a firm decides to make FDI, it
takes into account the benefits and costs to be accrued to not only its home country
but also to the host country.
Benefits to the Host country
Availability of scarce factors of production
Some times FDI is accompanies by labour force that performs those jobs that the local
labour force is either not willing to do or is incapable of doing on account of lack of
skill. Besides, the foreign labour force infuses non-traditional mental attitudes among
the local labour force. Also, foreign inventors make available raw material and
improved technology. At the same time, the host countries often encourage FDI
inflow because they get improved technology, and more importantly, an ongoing
access to continued research and development programmes of the investing country.
Improvement in the balance of payments
FDI helps improve the balance of payments of the host country. The inflow of
investment is credited to the capital account. At the same time, the currency account
improves because FDI helps either import substitution or export promotion.
Building of economic and social infrastructure
When the foreign investors invest in sectors such as the basic economic
infrastructure, social infrastructure, financial markets and the marketing system, the
host country is able to develop a support system that is necessary for rapid
industrialization.
36
Investment
Fostering of economic linkages
Foreign firms have forward and backward linkages. They make demand for various
inputs that in turn helps develop the input –supplying industries. They employ labour
force and so help raise the income of the employed people that in turn raises the
demand and industrial production in the country.
Strengthening of government budget
The foreign firms are a source of tax income for the government. They pay not
income tax, but tariff on their import as well.
Benefits for the Home Country
FDI benefits the home country too. The country gets a supply of necessary raw
material if the investor makes investment in the exploration for a particular raw
material. The balance of payments improves insofar as the parent company gets
dividend, royalty, technical service fees and other payments and from the rising export
of the parent company to the subsidiary. If FDI takes place in order to develop a
vertical set up aboard, the export is quite significant.
Cost to the Host Country
As far as employment of locals is concerned, the MNCs normally show reluctance to

train the local people. Technology being normally capital intensive does not assure
larger employment. Sometimes, the manufacturing processes followed by the foreign
investors do no abide by the pollution norms or by the norms regarding optimal use of
the natural resources or the norms regarding location of industries. All this is not in
the host country’s interest.
The foreign investors are generally more powerful and the domestic industrialists do
no compete with hem wit the result that the domestic industry fails to grow. The
foreign companies charge higher prices for their products in view of their oligopolistic
position in the market. The foreign companies infuse foreign culture into the
industrial set up and also into the society. Sometimes they are so powerful that they
are even able to subvert the government.
37
Investment
STRATEGY FOR FDI

When a firm decides to operate in a foreign land, it needs to follow a specific
strategy in order to make its operation a viable one. The strategy must be designed so
as to enable it to have an edge over competing firms, to this end, the firm may
concentrate either on product innovation, product differentiation, on the cartels and
collusion, or on some other strategies. In fact, the strategy depends to a great extent on
how mature the product is or how designed its cost structure is. The existence of
competing firms and the opening up of the sectors to foreign investors in the host
country are some of the factors, which would influence the strategy to be employed.
Firm-specific Strategy
When a firm has already spent a huge sum of money on research and development, it
normally stresses on serving the consumers abroad with an innovated product and
this gives it a definite edge over competing firms.
When the product innovation strategy fails to work, a firm may adopt a product
differentiation strategy. This is done through putting a trademark on the product, or in
other worlds, through branding the product. Branding substitutes to a great extent the
product-innovation strategy insofar as the branded product enjoys an exclusive
status, quite different from similar products in the market.
A single brand gives a better marketing impact, eliminates confusion and reduces
advertising cost.
Cost –economizing Strategy
When a firms product becomes standardized and it faces competition from similar
products of other firms, the firm tried to locate its subsidiary in a country where either
raw material or labour is cheap. Cheapness of these factors of production provides the
firm an opportunity to reduce the cost of production and to maintain an edge over
other firms. For instance, if an MNC invests broad in the raw material sector, it
would be able to get that particular raw material at a lower cost and to export it either
to he parent unit or to any other subsidiary.
Joint venture with a rival firm
Sometimes when a rival firm in the host country is so powerful that it is not easy for
the MNC to compete, the latter prefers to join hands with the host country firm for a
joint venture agreement and the MNC thus is able to penetrate the host country
market.
38
Investment
Whatever strategy is adopted by the MNCs abroad, there are certain necessary pre-
conditions. First of all, they should have an idea of the profitable investment
opportunities and the ways to tap those opportunities. Secondly, each and every
strategy must be carefully evaluated since a particular project may no be competitive
on all fronts. If one strategy is not useful, the firm should go in for another strategy. If
one strategy is not useful, the firm should go in for another strategy. Thirdly, the firm
must evaluate the life span of each strategy. It must possess the flexibility of
switching over from one strategy to another, especially when the life span of a
particular strategy comes to an end.
39
Investment
India scenario
In 1951 India adopted the path of planned development on the lines of the Soviet
model, but within a mixed economy framework in which both the public and private
sectors played their roles. In the following decades the union and state governments in
India made investments directly and through their instrumentalities, while at the same
time regulating private sector investment towards realizing social goals set by the
planners. In the process India relied largely on domestic resource mobilization and to
a far lesser extent on external aid, mostly in the form of debt capital from multilateral
institutions. The inward-oriented development strategy pursued over three-and-a-half
decades did not yield expected outcomes in terms of targeted growth rates, self-
reliance or better spatial and interpersonal income distribution. On the contrary,
greater protectionist measures and multistage government interventions made India a
high cost economy.
In June 1991 the Indian govt. went all out for foreign investments and initiated a
programme of macro economic stabilization and structural adjustment support by IMF
and World Bank. The equity participation, which was kept under 40%, has been
increased to 51% and subsequently this has been further raised. A foreign Investment
Promotion Board (FIPB) authorized to provide a single window clearance has been set
up in PMO to invite and facilitate investments in India by international companies.
The Foreign Exchange regulation Act of 1973 has been emended and restriction
placed on foreign companies by FERA has been lifted.
During the pre-reform period neither India nor China preferred FDI though India was
open to foreign investment to a very limited extent. The policy regimes in both the
countries drastically changed in the post-reform periods, which began from 1978 for
China and mildly in 1985 and more rapidly in 1991 for India. During the reform
period both the countries welcomed FDI to play a role in their economies.
FDI SURVEY 2002 SHOWS 385 respondents from across sectors: automobiles,
engineering and machinery, energy, infrastructure, information technology, food and
beverages, tourism, drugs and pharmaceuticals, consumer goods and electronics.
Turnover ranged from Rs 10 crore to Rs 850 crore.
Performance of foreign investors is satisfactory with 61% reporting profits or break-

even (36% making profits, 25% breaking even). 70% said their CAPACITY
UTILISATION was in the range of 50%-75%. This is fairly positive considering most
are new entrants.
40
Investment
AP is ranked 6th in terms of FDI approvals but 3rd according to investor rankings.
These perceptions are a powerful indicator as to which states can expect to receive
higher FDI inflows in the near future. Haryana is also strikingly different. Ranking of
other states more or less coincide with FDI Approval rankings.
POLICY issues have shown a marked improvement over the last year with 93%
saying handling of approvals at the center is Good to Average, and policy related
issues such as funds flow mechanisms are effective.
It is seen that the policy framework in India dealing with foreign private investment
has changed from cautious welcome policy during 1948-66 to selective and restrictive
policy during 1967 to 1979. in the decade of eighties, it was the policy having partial
liberalization with many regulations. Liberal investment climate has been created
only since 1991. The period from 1991 till date the characterized by transparency and
openness and is intended to seek more foreign investment inflows. However, there are
some specific aspects, (e.g. lack of transparency in the approval of FIPB/ SIA cases
regulations at the levels of state governments for accessing operating facilities and
rates of taxes and tariffs especially with regard to corporate taxation, capital gains tax
and customs duty) which need detailed review and revisions for rendering the Indian
environment relatively more competitive for FDI inflows than before.
The FDI inflows in 2001-2002 April - January show a 79% hike to $2.95 billion
compared to the same period last year. The Government facilitates Foreign Direct
Investment (FDI) and investment from Non-Resident Indians (NRIs) including
Overseas Corporate Bodies (OCBs), predominantly owned by them, to complement
and supplement domestic investment. Foreign technology induction is encouraged
through FDI and foreign technology collaboration agreements. FDI and Foreign
technology collaborations are approved through automatic route by Reserve Bank of
India (RBI) or otherwise by FIPB (Foreign Investment Promotion Board).
Actual inflow of FDI 1995 1996 1997 1998 l999 2000 2001 2002 (April)
Government's Approval 38.7 57.6 101.3 82.4 61.9 63.4 96.4 32.9
RBI Automatic 5.3 6.2 8.7 7.6 17.0 32.4 12.6

6.1
Approval
NRI Schemes 19.7 20.6 10.4 3.6 3.5 3.5 2.3 0.1
Total 63.7 84.4 120.4 92.1 73.0 83.9 131.1 45.6
Year-wise Foreign Investments in India
41
Investment
Year Direct Rs. (Crore) Portfolio Rs. (Crore) Total Rs. (crore)
1990-91 417.6 25.3 442.9
1991-92 554.7 17.2 571.9
1992-93 1354.5 1049.2 2403.7
1993-94 2519.7 15338.1 17857.8
1994-95 5650.2 16443.2 22093.4
1995-96 9171.9 11816.4 20988.3
1996-97 11592.8 14241.6 25834.4
1997-98 13747.1 7860.4 21607.5
1998-99 8866.6 (-) 262.3 8604.3
State wise ranking
State Ranking Ranking
42
Investment
by according to FDI
Investors Approvals
Maharashtra 1 Maharashtra 1
Karnataka 2 Delhi 2
Andhra Pradesh 3 TamilNadu 3
Tamilnadu 4 Karnataka 4
Gujarat 5 Gujarat 5
Haryana 6 Andhra Pradesh 6
Madhya Pradesh 7 MadhyaPradesh 7
West Bengal 8 WestBengal 8
Uttar Pradesh 9 Orissa 9
Uttar Pradesh 10
Haryana 11
43
Investment
Gross FDI/GDP
US
UK
Switzerland
Sweden
Singapore
Netherlands
Ireland
India
Finland
Denmark
China
Belgium
0 20 40 60 80
Source: World Bank
Will The current budget enable

india to attract more foreign
funds
23%
no
yes
cannot say
9%
68%
44
Investment
KEY SECTORS FOR INVESTMENT

To attract greater FDI for accelerating economic development, the Government of
India has formulated a sectoral FDI policy that gives special incentives for investing
in certain key sectors.
The key sectors identified for Foreign Direct Investment, include:
• Bio-Technology
• Civil Aviation
• Drugs and Pharmaceuticals
• E-Business
• Electronics and Information Technology
• Entertainment Industry
• Food Processing
• Insurance Banking and Financial Markets
• Mining
• Oil and Natural Gas
• Ports
• Power
• Roads
• Telecommunications
• Tourism
• Urban Infrastructure and Housing
45
Investment
Foreign Direct Investment (FDI) is permitted as under the following

forms of investments.
• Through financial collaborations.
• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
• Arms and ammunition.
• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,

zinc.
Foreign Investment through GDRs is treated as Foreign Direct Investment.
Indian companies are allowed to raise equity capital in the international market
through the issue of Global Depository Receipt (GDRs). GDRs are designated in
dollars and are not subject to any ceilings on investment. An applicant company
seeking Government's approval in this regard should have consistent track record for
good performance (financial or otherwise) for a minimum period of 3 years. This
condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.
The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the
Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up
capital in the case of public sector banks, including the State Bank of India. The
ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs
46
Investment
SECTOR SPECIFIC GUIDELINES FOR FOREIGN

DIRECT INVESTMENT
Sl.No. Sector Guidelines
1. Private Sector 100% from all sources on the automatic route subject to
Banking guidelines issued from RBI from time to time.
Non Banking FDI/NRI/OCB investments allowed in the following 19 NBFC

Financial activities shall be as per levels indicated below:
Companies (NBFC)
Merchant banking
Insurance
Underwriting
Portfolio Management Services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodial Services
Factoring
Credit Reference Agencies
Credit rating Agencies
Leasing & Finance
Housing Finance
Forex Broking
Credit card business
Money changing Business
Micro Credit
47
Investment
Rural Credit
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
Minimum capitalisation norms for non-fund based activities:
Minimum capitalisation 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.
FDI up to 26% in the Insurance sector is allowed on the

automatic route subject to obtaining license from Insurance
Regulatory & Development Authority (IRDA)
2. Domestic (Detailed guidelines have been issued by Ministry of Civil

Airlines Aviation)
48
Investment
In the domestic Airlines Sector
FDI up to 40% permitted subject to no direct or indirect equity

participation by foreign airlines.
Airports 100% investment by NRIs/OCBs.
The automatic route is not available.
Up to 100% with FDI, beyond 74% requiring Government

approval
3. Telecommunication 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 licence conditions for
foreign equity cap and lock- in period for transfer and addition
of equity and other licence provisions.
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
licencing and security requirements.
No equity cap is applicable to manufacturing activities.
FDI upto 100% is allowed for the following activities in the

telecom sector :
ISPs not providing gateways (both for satellite and submarine

cables);
Infrastructure Providers providing dark fiber (IP Category 1);
Electronic Mail; and
Voice Mail
The above would be subject to the following conditions:
FDI up to 100% is allowed subject to the condition that such

companies would divest 26% of their equity in flavor of Indian
public in 5 years, if these companies are listed in other parts of
49
Investment
the world.
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.
4. Petroleum Under the exploration policy, FDI up to 100% is allowed for

(other than Refining) small fields through competitive bidding; up to 60% for
unincorporated JV; and up to 51% for incorporated JV with a
Petroleum
No Objection Certificate for medium size fields.
(Refining)
For petroleum products and pipeline sector, FDI is permitted
up to 51%.
FDI is permitted up to 74% in infrastructure related to

marketing and marketing of petroleum products.
100% wholly owned subsidiary(WOS) is permitted for the

purpose of market study and formulation.
100% wholly owned subsidiary is permitted for

investment/Financing.
For actual trading and marketing, minimum 26% Indian equity

is required over 5 years.
The automatic route is not available.
FDI is permitted up to 26% in case of public sector

units(PSUs). PSUs will hold 26% and balance 48% by public.
Automatic route is not available.
In case of private Indian companies, FDI is permitted upto

100% under automatic route.
5. Housing & Real No foreign investment is permitted in this sector except for
Estate development of integrated townships and settlements where
FDI upto 100% is permitted with prior Government approval.
NRIs/OCBs are allowed to invest in the following activities.
Development of serviced plots and construction of built up

residential premises
50
Investment
Investment in real state covering construction of residential

and commercial premises including business centres and
offices
Development of townships
City and regional level urban infrastructure facilities,

including both roads and bridges
Investment in manufacture of building materials, which is also

opened to FDI
Investment in participatory ventures in (a) to (e) above
Investment in housing finance institutions, which is also

opened to FDI as an NBFC
6. Coal and Lignite Private Indian companies setting up or operating power

projects as well as coal or lignite mines for captive
consumption are allowed FDI up to 100%.
100% FDI is allowed for setting up coal processing plants

subject to the condition that the company shall not do coal
mining and shall not sell washed coal or sized coal from its
coal processing plants in the open market and shall supply the
washed or sized coal to those parties who are supplying raw
coal to coal processing plants for washing or sizing.
FDI up to 74% is allowed for exploration or mining of coal or

lignite for captive consumption.
In all the above cases, FDI is allowed up to 50% under the

automatic route subject to the condition that such investment
shall not exceed 49% of the equity of a PSU.
7. Venture Capital Offshore Venture Capital Funds/Companies are allowed to

Fund(VCF) and invest in domestic venture capital undertaking as well as other
Venture Capital companies through the automatic route, subject only to SEBI
Company(VCC) regulations and sector specific caps on FDI.
8. Trading 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
51
Investment
house/star trading house. However, under the FIPB route:-
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:
Companies for providing after sales services (that is not

trading per se)
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.
Trading of hi-tech items/items requiring specialized after sales

service
Trading of items for social sector
Trading of hi-tech, medical and diagnostic items.
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.
Domestic sourcing of products for exports.
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
52
Investment
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 favour 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 retails trading.
9. Investing companies In respect of the companies in infrastructure/service sector,

in infrastructure/ where there is a prescribed cap for foreign investment, only
service sector the direct investment will be considered for the prescribed cap
and foreign investment in an investing company will not be set
off against this cap provided the foreign direct investment in
such investing company does not exceed 49% and the
management of the investing company is with the Indian
owners. The automatic route is not available.
10. Atomic Minerals The following three activities are permitted to receive
FDI/NRI/OCB investments through FIPB (as per detailed
guidelines issued by Department of Atomic Energy vide
Resolution No.8/1(1)/97-PSU/1422 dated 6.10.98):
Mining and mineral separation
Value addition per se to the products of (a) above
Integrated activities (comprising of both (a) and (b) above.
The following FDI participation is permitted:
Up to 74% in both pure value addition and integrated projects.
For pure value addition projects as well as integrated projects

with value addition upto any intermediate stage, FDI is
permitted upto 74% through joint venture companies with
Central/State PSUs in which equity holding of at least one
PSU is not less than 26%.
In exceptional cases, FDI beyond 74% will be permitted

subject to clearance of the Atomic Energy Commission before
FIPB approval.
53
Investment
11. Defence and Foreign Direct Investment, including NRI/OCB investment, is

strategic industries permitted up to 26% with prior Government approval subject
to licensing and security requirements.
12. Agriculture No FDI/NRI/OCB investment is permitted

(including
plantation)
13. Print media No FDI/NRI/OCB investment is permitted
14. Broadcasting a. TV Software Production
100% foreign investment allowed subject to:
all future laws on broadcasting and no claim of any privilege

or protection by virtue of approval accorded, and
not undertaking any broadcasting from Indian soil without

Government approval.
b. Satellite Broadcasting
T.V. Channels irrespective of the ownership or management

control to uplink from India provided they undertake to
comply with the broadcast (programme and advertising) code.
c. Setting up hardware facilities, such as uplinking, HUB,

etc.
Private companies incorporated in India with permissible

FII/NRI/OCB/PIO equity within the limits (as in the case of
telecom sector FDI limit up to 49% inclusive of both FDI and
portfolio investment) to set up uplinking hub (teleports) for
leasing or hiring out their facilities to broadcasters.
d. Cable Network
Foreign investment allowed up to 49% (inclusive of both FDI

and portfolio investment) of paid up share capital. Companies
with minimum 51% of paid up share capital held by Indian
citizens are eligible under the Cable Television Network Rules
(1994) to provide cable TV services.
e. Direct-to-Home
54
Investment
Company with a maximum of foreign equity including

FDI/NRI/OCB/FII of 49% would be eligible to obtain DTH
License. Within the foreign equity, the FDI component not to
exceed 20%.
f. Terrestrial Broadcasting FM
The licensee shall be a company registered in India under the

Companies Act. All share holding should be held by Indians
except for the limited portfolio investment by
FII/NRI/PIO/OCB subject to such ceiling as may be decided
from time to time. Company shall have no direct investment
by foreign entities, NRIs and OCBs. As of now, the foreign
investment is permissible to the extent of 20% portfolio
investment.
g. Terrestrial TV
No private operator is allowed in terrestrial TV transmission.
15. Power 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.
16. Drugs & FDI up to 100% is permitted on the automatic route for
Pharmaceuticals 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.
17. Roads & Highways, FDI up to 100% under automatic route is permitted in projects
Ports and Harbors. for construction and maintenance of roads, highways,
vehicular bridges, toll roads, vehicular tunnels, ports and
harbors.
18. Hotels & Tourism 100% FDI is permissible in the sector on the automatic route.
55
Investment
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
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.
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.
19. Mining. For exploration and mining of diamonds and precious stones
FDI is allowed up to 74% under automatic route.
For exploration and mining of gold and silver and minerals

other than diamonds and precious stones, metallurgy and
processing FDI is allowed up to 100% under automatic route.
Press Note No. 18 (1998 series) dated 14.12.98 would not be

applicable for setting up 100% owned subsidiaries in so far as
the mining sector is concerned, subject to a declaration from
the applicant that he has no existing joint venture for the same
area and / or the particular mineral.
20. Postal services FDI up to 100% is permitted in courier services with prior
Government approval excluding distribution of letters, which
is reserved exclusively for the state.
21. Pollution Control FDI up to 100% in both manufacture of pollution control

and management equipment and consultancy for integration of pollution control
56
Investment
systems is permitted on the automatic route.
22. Advertising and a) Advertising sector

films
FDI up to 100% allowed on the automatic route
b) Film sector
(film production, exhibition and distribution including related
services/products)
FDI up to 100% allowed on the automatic route with no

entry-level condition
23. Mass Rapid Metro FDI up to 100% is permitted on the automatic route in mass
Transit System rapid transport system in all metros including associated real
estate development.
24. Township FDI up to 100% is permitted for development of integrated

Development townships including houses, commercial premises, hotels,
resorts, city and regional level urban infrastructure facilities
such as roads and bridges, mass rapid transit system; and
manufacture of building materials. Development of land and
providing allied infrastructure will form an integral part of
township’s development. FDI in this sector would be
permissible with prior Government approval..
25. Establishment and FDI up to 74% is permitted with prior Government approval
Operation of satellite
Just in time of the announcement of the budget the GOM ( group of minister ) on
Foreign Investment on 24th of February 2003 recommended an increase in the ceiling
of foreign direct investment. In the following sectors
100 % in Refineries and Airport Infrastructure.
74 % in Telecom.
49 % in Air Lines.
100 % in Non-News Scientific and Technical Journals.
57
Investment
For internet services providers without gateways, the GOM favored e-mail and voice
mail tobe allow up to 100 % through route subject to the condition that the FDI
beyond 49 % would required FIPB clearance.
A country service framework (CSF) - for India, making it the focus of a newly set up
regional centre for South Asia. The main objective of the CSF, which will conform to
India's priorities, is to help attract more foreign direct investment not only in new
sectors but also to increase productivity in existing sectors. With the Indian private
sector as a driving force in the formulation of the programme, the CSF will also
integrate all the UNIDO ongoing and future projects under one umbrella.
Automatic Approval by RBI for Foreign Technology Collaboration

Agreements.
RBI grants automatic permission for foreign technology agreement in all areas of
electronics and IT provided:
Lump sum payment of the price of the technology does not exceed USD 2 million and
Royalty payments do not exceed 5% of domestic sales and 8% of exports. (The

royalty rates are net of taxes).
The payments are subject to an overall ceiling of 8 percent of total sales over a period
of 10 years from the date of agreement or over 7 years period from the date of
commencement of commercial production, whichever is earlier. Application for
investment under the automatic process is to be made to the RBI and approval is
generally granted within three weeks.
In fact India has done well precisely because it has received so little aid, and depended
largely on its own resources and foreign investment. The net aid inflow exceeded $ 2
billion in 1991-92, fell sharply in the next three years, and turned into a net outflow of
$ 486 million in 1995-96. The net outflow is estimated at $ 621 million in 200-01.
India’s success in the 1990s has been based not on aid but on the lack of it.
Between 1991 and 2001, India has received on an average US$ 2.2 billion annually as
foreign investment, as against China’s US$ 32.2 billion during the same period. India
is placed at the 119th position in the foreign direct investment performance index of
UNCTAD. India’s index value has been pt at 0.2 against China’s 1.2 and Sri Lanka’s
0.4 and even Pakistan’s 0.2 which ranked higher at 114th position (performance
measured by standardizing a country’s inflows to the size of its economy.
58
Investment
One can correlate the deceleration in macro fundamentals in recent years, adversely
affecting India’s FDI potential rating. India’s burgeoning population, debt and fiscal
deficit are sustainable only if the country’s economy grows by at least 8% annually.
This requires raising the level of investment from 22% of the GDP to 30%. As per the
classical theory of economics by Keynes, this investment-saving gap must be financed
through foreign investment. Foreign investment should touch $8billion if India has to
achieve 8% growth. There is moderate relationship between foreign investment and
economic development of India during the period 1990-91 to 1998-99 but the
relationship is not significant. FI should be attracted more towards Direct Investment
rather than Portfolio Investment. For during any recession time the portfolio
investment could easily pull out as a result of which the overall foreign investment
would suffer. More of direct investment would give employment opportunities which
would have increased the per capita income to great extent.
POLICY TOWARDS FDI

India's post-independence economic policy combined a vigorous private sector with
state planning and control, treating foreign investment as a necessary evil. Prior to
1991, foreign firms were allowed to enter the Indian market only if they possessed
technology unavailable in India. Almost every aspect of production and marketing
was tightly controlled, and many of the foreign companies that came to India
eventually abandoned their projects.
Corporate Taxation
59
Investment
The government also used taxation to pursue its objective of ensuring that the
majority control of enterprises was in India hands. There were three level of
discrimination:
A company registered in India was taxed at a lower rate than one registered aboard.
A company in which the public was substantially interested was taxed at a lower rate
than one in which it was not substantially interested. Thus discriminatory taxation
was designed to persuade foreign (and Indian) companies to keep their stake in
subsidiaries below a certain level. Amongst closely held companies, trading and
investment companies were taxed at a higher rate than other companies. The tax
differential between Indian and foreign companies was raised to 20 per cent in 1956-
57, and has remained around 15-20 per cent since then.
Thus the list of products where foreign investment could be considered mainly
consisted of two types of products (1) products which were not being produced in the
country and for which setting up production was proving difficult, and (2) products
which had a single producer in the country, generally a foreign firm, for which it was
proving difficult to set up competitors.
Prior to 1991, foreign equity participation was limited to 40 percent, and foreign
investors were saddled by numerous operating constraints. Foreign equity investments
in excess of 51 percent, or those which fall outside the specified "high priority" areas,
must be approved by the Foreign Investment Promotion Board (FIPB) and approved
by a Cabinet Committee.
Foreign Investment Policy:
The Ministry of Industry has expanded the list of industries eligible for automatic
approval of foreign investments and, in certain cases, raised the upper level of foreign
ownership from 51 percent to 74 percent and further in certain cases to 100 percent. In
January 1998, the RBI announced simplified procedures for automatic FDI approvals.
The announcement further provided that Indian companies will no longer require prior
clearances from the RBI for inward remittances of foreign exchange or for the
issuance of shares to foreign investors.
New policies
The industrial policy announced in July 1991 was vastly simpler, more liberal and
more transparent than its predecessors, and it actively promoted foreign investment as
indispensable to India's international competitiveness. The new policy permits
automatic approval for foreign equity investments of up to 51 percent, so long as these
60
Investment
investments are made in one of 35 "high priority" industries that account for the lion's
share of the industry.
The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in

Indian companies on a daily basis. For effective monitoring of foreign investment
ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points
lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for
companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up
capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for
companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off
limit for public sector banks (including State Bank of India) is 18 per cent..
TRIMs Agreement
The agreement on Trade Related Investment Measures (TRIMs Agreement) states

explicitly that certain measures governing the treatment of investment have restrictive
or distortive effects on trade. The agreement, which applies only to investment
measures related to trade in goods, provides that no signatories shall apply any TRIM
inconsistent with Articles iii (National Treatment) and xi (General Elimination of
Quantitative Restrictions) of the GATT 1994. to this end, an illustrative list of
TRIMs, deemed to be consistent with the above articles, was appended to the
Agreement. This list covers the following types of prohibited TRIMs. Those that
require particular levels of local sourcing by an enterprise (i.e. local content
requirements); Those which restrict the volume or value of imports which enterprise
can buy or use, to the volume or value of products it exports (i.e., trade-balancing
requirements).
Those that restrict the volume of imports to the amount of foreign exchange inflow
attributable to an enterprise, and those which restrict he exportation by an enterprise
of products whether specified in terms of the particular type, volume or value of
products or a proportion of volume or value of local production.
POLICY IMPLICATIONS
The findings of the present study suggest that in a developing country like India
which seeks Foreign Direct Investments as development resource the focus of the FDI
policy should be on maximization of its contribution to India’s development rather
than on maximization of the magnitude of inflows by themselves. One respect where
substantial, potential remains to be exploited with respect to foreign companies
contribution to India development is expansion of the countries exports. Attracting
export-oriented FDI is not an easy task given the stiff competition among developing
61
Investment
countries. Transnational corporations pick up the winners among competing

developing countries. For TNCs in a number of industries India’s large domestic
market is an important attraction. This attraction can be used as a bargaining leverage
to induce transitional corporations to set-up export oriented units in the country. This
however is possible only through a selective policy with respoect to entry. The
government may identify a number of industries in which large domestic market may
be particularly attractive for foreign companies such as consumer durables and non-
durables and office equipment. Entry into such industries by foreign companies may
be restricted to proposals having substantial export obligations. Export requirements
on foreign companies would not only generate foreign exchange but would also
ensure that companies bring to the country an internationally competitive technology.
INVESTMENT BY NRI
An Indian Citizen who stays abroad for employment/ carrying on business or
occupation outside India or stays abroad under circumstances indicating an intention
for an uncertain duration of stay abroad is a non-resident. Persons posted in UN
organizations and officials deputed abroad by Central/State Governments and public
Sector undertakings on temporary assignments are also treated as non-residents. Non-
resident foreign citizens of Indian Origin are treated on par with non-resident Indian
citizens (NRIs) for the purpose of certain facilities.
Foreign citizen is deemed to be of Indian origin if: -
62
Investment
He held an Indian passport at any time, or He or his father or paternal grandfather was
a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955
provided that citizens of Pakistan, Bangladesh, Afghanistan, Bhutan, Sri Lanka and
Nepal shall be deemed to be not of Indian origin.
Reserve Bank would consider applications for repatriation of original investment in

commercial property in respect of properties purchased on or after 26th May 1993 up
to the consideration amount remitted in foreign exchange for the acquisition of the
property provided the property is sold after a period of three years from the date of the
final purchase deed or from the date of payment of final installment of consideration
amount, whichever is later.
Investment facilities for NRIs and OCBs
The government of India has given several special benefits to NRIs and OCBs for
investing in India.
Maintenance of bank accounts in India
Full convertibility of NRI deposit accounts
NRIs can maintain rupee or foreign currency denominated bank accounts in India with
banks holding authorised dealer license.
Depending on the currency of account and its repatriability, NRIs can chose from five
different types of such accounts as per their convenience.
Investment in securities, shares and deposits of Indian firms and companies
NRIs are permitted to make direct investments in firms/ companies in India and in
government securities, national savings certificates and units of domestic mutual
funds. Sale proceeds of these instruments can be repatriated, provided they were
bought out of funds remitted from abroad or from the investor's repatriable accounts
in India.
Investment in shares and debentures of companies is allowed without any limits,

provided the investment was made on a non repatriable basis. However, repatriation
of income/interest earned on such investments may be made subject to satisfying
certain conditions.
There are various schemes for investment in domestic companies, with repatriation
benefits. NRIs/ OCBs can invest up to 100 percent in shares and debentures of
domestic companies in accordance with the foreign direct investment policy. Under
63
Investment
all these schemes, repatriation of the capital invested along with interest and dividend
is freely allowed.
Investment in immovable property in India, whether residential or commercial, by

NRIs/ OCBs is permitted.
Free repatriation of NRIs Indian earnings such as rent, dividend, pension, interest etc.
Existing or new public/ private companies can issue upto 100 percent of
equity/convertible debentures to NRIs/OCBs for projects relating to development of
commercial and residential real estate.
NRIs/OCBs are allowed to invest in urban development and housing sector.
NRIs/OCBs are allowed to invest upto 100 percent in the Civil Aviation Sector.
The government on occasion has denied requests for a foreign equity stake exceeding
51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with
NRI majority ownership) may hold 100 percent ownership in all industries except
those reserved for the public sector.
These reserved industries are:
• arms,
• ammunition and defense equipment;
• atomic energy;
• mineral oils;
• minerals used in atomic energy; and
• railway transport
To allow more NRI investments, the GOI recently allowed repatriation of

investment in all activities, except agriculture and plantations, subject to certain
conditions. As of June 1995, NRIs and PIOs may invest on a repatriable basis in
new issues of shares/debentures only of industrial or manufacturing companies.
NRI Portfolio Investment
Non Residents of Indian Nationality/Origin may make investment in shares (both

equity and preferential) and debentures (convertible and non-convertible) quoted on
64
Investment
Stock Exchange in India with full benefit of repatriation of capital investment and
income earned thereon, provided the shares/debentures, purchased through a
recognized Stock Exchange in India at the rate prevailing on the floor of the Stock
Exchange and the purchase of equity shares/convertible debentures in any one
company by each Non Resident investor does not exceed 1% of the paid up value of
the equity capital/convertible debentures of the company with the provision that an
investor may purchase debentures up to 1% of the total value of each debenture series
if the company has issued convertible debentures in different series.
Investment of OCB
Overseas Companies, partnership firms, and the corporate bodies which are owned
directly or indirectly to the extent of at least 60% by NRIs/PIOs or Overseas Societies
and Trusts in which at least 60% of the beneficial interest is irrevocably held by such
persons shall be permitted to invest in the development of serviced plots, construction
of built up residential premises, construction of residential and commercial premises,
development of townships, development of infrastructure facilities, manufacture of
building materials and participatory ventures in these areas and in housing finance
institutions, repatriate the principal investment in foreign exchange and in net profits
upto 16% earned after the first three years of investment, and repatriate dividend on
equity/interest on shares/debentures subject to the payment of applicable taxes without
any lock-in-period.
Acquisition of Immovable Properties by the NRI / PIO
NRIs/PIOs shall be allowed to repatriate an original investment in equivalent foreign

exchange in residential properties upto a maximum of two houses NRIs/PIOs can
acquire by way of purchase or inheritance and transfer or dispose of by sale,
commercial immovable properties situated in India. Repatriation of original
investment in equivalent foreign exchange will be allowed by the Reserve Bank of
India on receipt of application NRIs/PIOs can acquire, transfer or dispose of
residential properties upto two houses situated in India by way of a gift from or to a
65
Investment
relative, whether resident in India or not. The rental income or proceeds of any such
investment will be allowed to be repatriated in a phased manner over a period of 3
year as per the Circular No. 18of RBI Exchange Control Department dated 19.8.1994.
GOVERNMENT SECURITIES/UTI UNITS
NRIs are freely permitted to invest their funds in Government securities/National

Savings Certificates/Units of UTI through authorized dealers (Banks authorized to
deal in foreign exchange). Units of UTI can also be purchased and resold directly
from UTI. If the securities were purchased out of funds remitted from abroad or out of
NRE/FCNB accounts, sale/maturity proceeds can be repatriated. However,
sale/maturity proceeds of securities purchased out of funds in NRO accounts would
not be repatriable and can only be credited to NRO accounts. But the interest earned
on such investments is fully repatriable, subject to production of a Chartered
Accountant's certificate and an undertaking/certificate regarding payment of tax from
the Income Tax Authorities.
FIRMS/COMPANIES:
NRIs can make direct investments in proprietory/partnership concerns in India as also
in the primary issues of shares/debentures of Indian companies. They can also make
portfolio investments, i.e. purchase of shares/debentures of Indian companies through
stock exchanges in India. These facilities are available on both repatriation and non-
Repatriation basis.
a) With repatriation benefits:
There are no separate schemes for NRIs/OCBs for direct investment in India on
repatriation basis as the 24%, 51%, and 100% schemes have since been withdrawn
under FEMA. NRIs/OCBs are now on par with any other foreign investor and they
may invest in shares/convertible debentures issued by an Indian company under the
Foreign Direct investment.
the citizens of Bangladesh/Pakistan/Sri Lanka)/OCBs can purchase shares/convertible

debentures of Indian companies under FDI subject to the following conditions:-
(i) The company should not engage in the following activities/manufacturing:
a. Banking
b. NBFC's activities in Financial Services Sector
c. Civil Aviation
d. Petroleum including exploration/refinery/marketing
e. Venture Capital Fund & Venture Capital Company
f. Investing companies in Infrastructure & Service Sector
66
Investment
g. Atomic Energy & related projects

h. Defence & Strategic industries
i. Print Media
j. Postal services
k. Agriculture (including plantation)
(ii) The investment should not exceed the specified ceiling in the following
sectors:
Sector Investment
a) Telecommunications Services: 49%

Manufacturing: 100%
b) Housing & Real Estate 100%
c) Coal and Lignite PSUs : 49%

Other than PSUs: 50%
d) Drugs & Pharmaceutical 74%
e) Hotel & Tourism 51%
f) Mining Exploration & mining of diamonds & precious

stones: 74%
Exploration & mining of gold, silver and
minerals other than diamonds and precious
stones: 100%
g) Advertising 74%
h) Films 100%
i) Any other sector/activity 100%
b) On Non-Repatriation Basis
Investments in shares and debentures of companies through recognized stock

exchanges in India by Non Residents of Indian Nationality/Origin are permitted,
provided the non-resident investor undertakes not to seek repatriation of the capital
invested and income earned thereon. In respect of equity shares and convertible
debentures, investment is allowed upon an overall ceiling of 24 per cent of the total
paid-up equity of the company concerned and 24 per cent of the total paid-up value of
67
Investment
each series of convertible debentures by all eligible non- resident investors taken
together. The limit of 24 per cent applies to purchase of equity shares and convertible
debentures by all eligible non-resident investors taken together.
The Indian Government has launched a scheme to attract NRI investment in housing
and real estate development. A nodal cell in the National Housing Bank (NHB) has
been created to co-ordinate decisions. The cell has representatives from State
Governments and other agencies and will finalize policies and procedures related to
NRI investment under the agencies of the Ministry of Urban Development.
Non Resident Indian persons of Indian origin/overseas corporate bodies are allowed to
invest up to 100 percent equity in such industries. The term `Hotels' includes, among
others restaurants, beach resorts and other tourist complexes providing
accommodation and or catering and food facilities to tourists. The term Tourism
Related Industry includes
It apprises them of Government policies and procedures and the facilities and
incentives available to them
It provides them the necessary data for the selection of projects.
It assists them in obtaining the approval of the Government authorities.
It is represented on the State Level Review Committees, which monitor the
implementation of the projects, and thereby helps them in removing difficulties, if
any, in the process of implementation.
In the recent budget, the finance minister announced the government's commitment to
a 90-day period for approving all foreign investments. Government officers will be
assigned to larger foreign investment proposals and will facilitate Central and State
clearances in a time-bound manner. Unlisted companies with a good 3 year track
record, have been permitted to raise funds in international markets through the issue
of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).
A number of recent policy changes have reduced the discriminatory bias against
foreign firms.
The government has amended exchange control regulations previously applicable to

companies with significant foreign participation.
The ban against using foreign brand names/trademarks has been lifted.
The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65
percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.
68
Investment
The long-term capital gains rate for foreign companies was lowered to 20 percent; a
30 percent rate applies to domestic companies.
The Indian Income Tax Act exempts export earnings from corporate income tax for
both Indian and foreign firms.
Other policy changes have been introduced to encourage foreign direct and
foreign institutional investment.
For instance, the Securities and Exchange Board of India (SEBI) recently formulated
guidelines to facilitate the operations of foreign brokers in India on behalf of
registered Foreign Institutional Investors (FII's). These brokers can now open foreign
currency-denominated or rupee accounts for crediting inward remittances,
commissions and brokerage fees
The condition of dividend balancing (offsetting the outflow of foreign exchange for
dividend payments against export earnings) has been eliminated for all but 22
consumer goods industries. A 5-year tax holiday is extended to enterprises engaged in
development of infrastructural facilities. Even without a registered office in India,
foreign companies are allowed to start multimode transport services in India.
The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the
construction of roads/bridges. The peak custom duty rate was reduced to 50 percent
from 65 percent in the March 1995 budget. Import regime changes included
enhancement of the scope of Special Import License (SIL) programs, and the
expansion of freely importable items on the Open General License (OGL) list to
include some consumer goods.
THE labour law reforms proposed in the Union Budget for 2001-2002 is a major step
forward in the area of full scale implementation of economic reforms in India. After
participating in an interactive session with members of The Bengal Chamber of
Commerce and Industry (BCCI), Mr. Hiroshi Hirabayashi, Ambassador of Japan in
India, told newspersons here that this was an important step for attracting foreign
investments into the country, including from Japanese companies, which always felt
the need for an ``exit policy.'' Mr. Hirabayashi said the management must have the
right to fire and hire, and a proper exit policy was a pre-requisite for speedier
investment flows into the country. He, however, strongly reiterated that the rights of
workers must be fully protected while initiating such labour law reforms.
MEMORANDUM OF UNDERSTANDING
69
Investment
In order to promote investment and technology transfer from abroad, the Indian
Investment Center has signed Memoranda of Understanding with the following
organizations
The Bank of Tokyo-Mitsubishi Ltd
ANZ Grind lays Bank
Oman International Bank
Korea Institute of Industry and Technology Information
Hong Kong and Shanghai Banking Corporation
Belgian Corporation for International Investment
Industrialization Fund for Developing Countries, Denmark
Sanpaolo Bank, Italy
Industrial Development Corporation of Trinidad and Tobago
Singapore Trade Development Board
Commerzbank Germany
On 16-30 June 2002 TERI Newswire certainly has more than peripheral interest in
the government's recent decision to open up the print medium to FDI or foreign direct
investment. Typically, the reaction has been mixed. In Hyderabad, for instance, one
Telugu newspaper is reported to have come out strongly against the move whereas
another, an English-language daily, has welcomed it. As information and
communication technology continues to expand its reach, providing easy, fast, and
increasingly cheap access to a wide range of news sources, be it the television
channels such as CNN and BBC or web sites such as netscape.com and msn.com,
sometimes one wonders whether the debate on the impact of allowing FDI in the print
medium on society is largely academic. However, it is not. Given the enormous reach
of the print medium, the authority that it commands even now not only because of the
decades of tradition but also because of the permanence of print, and its ability to
convey subtle and abstract concepts - something that is much harder to accomplish
through moving images - the matter can never be purely of academic interest. The
increasingly consumerist orientation of Indian society can be attributed in a large
measure to the wide reach of television, particularly cable television, not only in space
but also in time. It is a reasonable assumption to believe that print will complement
such impact.
70
Investment
WHY WE ARE HERE?

The alarm bells have been ringing for a while to warn the country that it is becoming
less and less attractive to the foreign investor. Busy as the nation's leaders are in
their never-ending internecine battles, no one seems to have taken note of it.
Despite repeated assurances from the top that India is committed to economic
reforms, the world remains skeptical. The words are not being matched by action.
Whether India sells loss-making public undertakings or not, is her business. That is
the way the world looks at it. But covering the growing budgetary deficit is a matter
of concern to every investor, foreign or Indian. Being glued to a perennial deficit
is a clear pointer to an impending economic crisis and a deterrent to any sound-
minded investor.
The recent volubility of the anti reform lobby is not the only reason for foreign
investors being put off; increasingly Indian entrepreneurs are finding it difficult to
71
Investment
convince potential partners that India is stable both politically and economically -
and that the system works. Terrorism threats, law and order, rampant corruption and
Pakistan as neighbour are enough factors to scare any one away from the country.
India's economy stood fourth in the world when she became free in 1947. The rupee
was a hard currency and was the legal tender in the Gulf countries. Foreign
exchange reserves were ample. The inherited infrastructure was among the finest -
the roads were good, there was a 24-hour supply of good running drinking water in
the cities, electric power supplies did not fail, the telephone system worked.
When Sashtri’s successor, Indira Gandhi, having shaken herself loose from the old
guard of the Congress Party, was forced to rule with a minority government from
1969 she became dependent on the Left and the Communists. The result was the
consolidation of the "license permit raj". A host of measures, including bank
nationalization, gave India's economy the pink hue of near communism. It was no
longer an attractive destination for foreign investment. Then India's economic growth
came to be known as the 'Hindu' rate of growth, achieving on average of between two
and three percent - a growth that was wiped out by burgeoning population and
inflation.
The economy became a victim of circumstances beyond the control of India's

hardworking and enterprising people, whose misfortune it became to be ruled by
politicians and bureaucrats enjoying the ill-gotten wealth provided by a regime
of regulation.
The problems for a foreign visitor on a scouting mission to India begin as he lands in
the country. Delhi's airport has seen little improvement in the last ten or fifteen years;
it hardly deserves the status of "international air terminal". The immigration
procedures do not include a 'Fast Track' for business and first class travelers.
Government has failed to evolve a foolproof control system to protect passengers
arriving from abroad.
Non Resident Indians are treated much the same - indeed, they seem to face greater
problems. But, they know how to handle the situation - they know that mutual
advantage can be bought at a price. The loser is India, in terms of both tax collected
and the country's reputation.
Currently, there are no investment disputes over expropriation or nationalization.

Government demands for penalty payments for alleged overcharging by
pharmaceutical companies during the 1980's could lead to de-facto expropriation of
some foreign drug companies' assets in India.
72
Investment
A committee has been named to study these longstanding disputes, but the failure of
successive governments to produce a swift and transparent resolution has led to a
virtual standstill in foreign investment in India's pharmaceutical sector. Indian courts
provide adequate safeguards for the enforcement of property and contractual rights.
However, case backlogs frequently lead to long procedural delays. India is not a
member of the International Center for the Settlement of Investment Disputes, nor of
the New York Convention of 1958. Commercial arbitration or other alternative
dispute resolution (ADR) methods are not yet popular ways of commercial dispute
settlement in India. The recent introduction in Parliament of a new Arbitration Bill
signals the importance now accorded to this matter by the GOI.
Citing slow infrastructure development, continuing red-tapes (bureaucratic malaise)

and problems foreign companies face when dealing with income-tax and customs
departments as the three main impediments for lack of further Japanese investments
into the country, he said overall, India was an excellent investment location for
overseas companies. As pointed by Mr. Hiroshi Hirabayashi, Ambassador of Japan
in India in a seminar held recently in Kolkata. Listing information technology (IT),
infrastructure develop-ent (mainly power, roads and flyovers) and food-processing as
the three key areas for future Japanese investments in India, Mr. Hirabayashi said
Japan India Business Council was already coordinating work in all these three areas.
As Japan ranked fourth in FDI in India, behind the US, Mauritius and the UK.
India has been talking about creating Special Economic Zones along the lines that
China has done to make life easy for the foreign investor to do business, but here
again progress is tardy. Meanwhile China is leaving India far behind in securing
foreign investment, as are other developing countries seeking. The answer lies in
making India itself a "Welcome Economic zone" of a globalize world. India's health
care system is another deterrent to the foreigner. In contrast, China has created
special hospitals to deal with foreigners, and their doctors are usually available.
The Prime Minister has been making every effort in his visits abroad to get the
Indian Diaspora to bring into India the story of their successes. He is listened to
with respect. But the voices of dissent and controls in the garb of 'swadeshi' that
many of his party men raise leave every one confused. Day to day hassles,
pinpricks and chaotic atmosphere at the country's airports need to be removed.
Traditionally, India has been reluctant to adopt the sort of free-market reforms insisted
on by international lenders such as the International Monetary Fund, instead forging a
highly regulated and idiosyncratic form of capitalism. This has led to complaints from
international investors, on whom India is increasingly relying as it strives to build a
competitive hi-tech industry. Economists have become concerned that the Indian
73
Investment
economy, although relatively robust, is not growing as quickly as it needs to in order

to eradicate poverty. And heavy regulation of capital flows have irked the huge and
often wealthy overseas Indian community, another potential source of finance.
What is it that makes China, or for that matter Singapore, Thailand and Taiwan the
darling of investors? Can India ever be gripped by the investment fever that China has
experienced? India is mainly involved in low-end work such as outsourcing and
trading of human resources as compared to countries such as China, Taiwan and
Singapore which are involved in more high-end work such as hardware
manufacturing, telecommunication, software product development, broadband
infrastructure building and convergence.
S Jagadeesan, joint secretary, Department of Industrial Policy and Research, accepts

that point: “If India is to realize its full FDI-drawing potential, it must become more
competitive with reforms. FDI in the auto sector will enable to import cheap import in
to India but tariff barrier induced them to invest in high cost production in a highly
protected market
WHY CHINA?
THE dumping of Chinese goods is not only threatening India's domestic industry but
is also likely to affect foreign direct investment (FDI) flows. The dragon has cast its
shadow even on the domestic industries of developed nations such as Japan. While the
dumping is hitting the small-scale sector and the chemical industry in India, it is the
textile industry that threatened in Japan.
Like many other developing countries, both China and India have made the
remarkable transformation from being hostile to FDI in the 1970s to eagerly attracting
it now – although India seriously lags behind China in level of inflows. Both countries
have high levels of corruption and red tape.
Both India and Japan are on their feet to counter the dumping, but their approaches are
different. While India is using anti-dumping measures and tariffs to shield its
domestic industry, Japan is using economic measure -- that is, by investing more in
74
Investment
China to produce and sell to its own domestic market at half the price of similar
products produced in Japan.
In the latter part of the 1990s, foreign investments did not pour into China as
expected. After logging $91 billion in 1995, FDI into China slipped to $41 billion in
1999. The charm of investing in China seemed to have abated. But the current interest
of the developed nations in China reveals an altogether new purpose: Salvaging their
own domestic industries. This would mean a shrinking of FDI flows into India, as
both China and India are treated on a par with regard to investment potential.
FDI has played a big role in promoting China's technological progress. Such as
electronics, automobiles, pharmaceuticals, telecommunications equipment and
engineering machinery, are foreign firms. As a result, these firms have emerged as the
engine for China's hi-tech exports.
China has, since 1998, stepped up its efforts to encourage foreign investments into
technology development and innovation. Several incentives, such as import duty
exemption for equipment and technology brought into China by foreign-invested
research companies, tax breaks for incomes obtained from transfer of technology, and
business tax exemption to foreign enterprises transferring advanced technology, are
luring foreign investors to China.
China's accession to the WTO is a major reason for the return of their foreign
investors. This would mean opening up of China's high-potential service sector -- such
as retailing, wholesaling, banking, insurance, information technology, and
telecommunications as also professional services of accountancy, and management
consultancy -- to foreign investors. The service sector accounts for one-third of
China's GDP.
Actual FDI inflows in India and China
FDI as a % of Gross Fixed

Capital Formation
Year India ($ China ($ Ratio India China

billion) billion)
(1) (2) (3) (4) (5) (6)
1991 0.155 4.4 3.52 0.3 2.9
75
Investment
1992 0.233 11.2 2.08 0.4 7.4
1993 0.574 27.5 2.09 1.0 12.2
1994 0.958 33.8 2.83 1.4 17.3
1995 2.1 35.9 5.85 2.4 15.0
1996 2.383 40.2 5.93 2.9 17.0
1997 3.33 44.3 7.52 n.a. n.a.
1998 2.23 45.6 4.89 n.a. n.a.
On the contrary, in its decade of liberalizations, India has failed to provide a

competitive manufacturing base to MNC’s -- neither for their export efforts nor to
meet the needs of the large middle-class market. Attention has been paid largely to the
development of the software sector. Foreign enterprises have, therefore, hardly made
any effort to use India as their production base for exporting to their own countries.
If India wants to compete with China, it will have to strengthen its manufacturing
facilities. But this is not easy. Hence, the only alternative would be to open up its
service sector more boldly, that is, well before China does so after gaining WTO
entry.
India, for instance, has a vast potential to attract FDI into retail and wholesale trading.
Following the removal of the Quantitative Restrictions and the gradual reduction in
tariffs, the distribution industry has emerged as a high-potential area for investment.
Considering India's size and the diversified nature of its regional markets, the
domestic private sector alone cannot pump in the investment required. Hence, foreign
investors should be encouraged to supplement the enlarged distribution industry with
resources and technology, rather than be paranoid about protecting the domestic
players.
the inflow of foreign capital in the form of foreign aid (ODA), loans and private
foreign investments in the form of direct foreign investment (DFI) and portfolio
investment (PFI). The economic sanctions imposed on India in May, 1998, have
reduced the inflow of foreign capital. ODA and bilateral loans flow to India seem to
suffer the most
The Indian economic situation is quite critical in view of the falling credit rating of
India as Down-Graded by S&P have shake foreign institutional investor's confidence.
The government should make efforts to introduce more reforms in the trade and
76
Investment
financial sector to attract foreign capital and also to provide incentives to encourage
domestic savings.
Even as India has been trying hard to get augmented flow of foreign direct investment
(FDI) unsuccessfully, China, the darling of foreign investors, is focusing its energy to
evolve strategies to attract FDI in less favoured regions.
the Chinese authorities and the Organization for Economic Cooperation and
Development (OECD) are cooperating in a policy dialogue designed to encouraging
investment in less favoured regions.
In response, the Chinese authorities launched last year the Great Western
Development - or ``Go West'' - campaign. This is an ambitious top down bid to steer
State investment
We have a plural and diverse country where auto manufacturers want to ban import of
vehicles and are trying to put up as many non-tariff barriers as possible, we have
media barons who want to ban entry of foreign media, Dr. Anantha Nageswaran
argues in one of his article” The Incestuous Indian Elite” Coded India needs to be
saved and protected from Indians first and then from global predators and monsters.
Portfolio Investment
One of the main risks of investing in India is that of poor liquidity, given the
extremely poor volumes and the impact costs that this implies. The other systematic
risk of investing in India is the macroeconomic risks of unbridled government deficits
financed through borrowing and the consequent impact on GDP growth, interest rates
and potential inflation and rupee foreign exchange rates.
Another risk is that of ownership and it is an element, which is dramatically

increasing in importance. There are four main types of investors – FIIs, domestic
mutual funds, retail investors and corporate investors (largely through buybacks and
open offers) – whose behavior needs to be analyzed. Ownership patterns are available
in annual reports.
FIIs are the swing investors in most cases and they make a huge impact on the price of
the stock, especially when there are relaxations on the ceilings of foreign portfolio
77
Investment
investment. Value investing does not seem to be working at the moment in India
cheap just gets cheaper.
IT SECTORS
Though the IT industry has been registering staggering growth rates over the last five
years, direct foreign investment has not been forthcoming. In fact, these figures are
headed southwards. Vineet Joshi says that unless the usual suspects such as
bureaucratic red tape and other issues are sorted out, India will not be able to reap the
fruit. the country has registered staggering growth rates during the last five years, the
amount of foreign investment in the sector has been heading southwards. Couple this
with the fact that most other smaller Asian countries raked in billions of dollars
through FDI, The numbers say it all China virtually rode on the Foreign Direct
Investment (FDI) boom last year with a massive $40 billion investment, 20 percent of
which ($8 billion) was in IT and telecommunication. While FDI investment in
hardware was a complete zero in the past 10 years, software also didn’t show up well
with just $2 billion. Telecommunication accumulated a total of $4 billion through
FDI.
China and Malaysia, which have made FDI a ‘provincial issue’. This gives power to
each and every province to manage its own IT investments. Every province is allowed
to take independent decisions, improve infrastructure and compete amongst
themselves. Contrast this with India, where FDI is strictly a centralized issue. Another
policy initiative, which favours foreign investment in China and Taiwan is the
creation of a number of hi-tech clusters, in India the only visible example is
Pondicherry. And even though the government may try to pass off Cyberabad, Tidel
Park in Tamil Nadu and Hi-tech city in Gurgaon as places on par with Silicon Valley.
Kamiah Singhal, secretary, Internet Service Provider Association of India (ISPAI),

“Only two years after the ISP policy was announced were the guidelines for setting up
international gateways laid down. What is even more disturbing is the fact that the
norms for landing station rights for fiber optic cables are yet to be drafted. Our
processes are too complex. After a policy decision is taken, it takes so long before it is
implemented, and even after implementation, there is no saying when the policy will
be altered. Approaching the FIPB and filing an interest for investing in India is by
itself not a simple process, forget about the spate of approvals, litigation, sanctions
required henceforth. This scares away investors.
78
Investment
This is perhaps exactly opposite of what other Asian countries such as Malaysia and
Thailand are doing. The governments in these countries have started giving counter
guarantees to IT companies for investing in their country, apart from single window
clearance and extra tax benefits.
In fact, all these factors coupled with poor infrastructure has led to the cost of doing
business in India being higher than other Asian countries.
To ensure increased investments in the country. it can applied the ‘entry barrier
policy’ to the hardware and software market, whereby a foreign player needs to invest
in the country before tapping the local market. Though it has applied this policy to the
automobile sector, IT went a begging and this resulted in decreased of FDI inflow.
Experts feel the hardware sector, which today has zero FDI could have garnered at
least $1 billion if entry barriers were put in place.
We are already seen as a corrupt nation, but what is even more alarming is the fact
that we refuse to do anything about it. While connectivity no longer remains an issue,
the administrative process needs to be cleaned up.
Indian policymakers should spend time in introspection and see where they have
failed. While the cross ministry meeting marked the first step towards the ironing out
of issues blocking the free flow of investments into the country, the government needs
to move on from there and flush out at least some if not all of the problems faced by
the FDI.
Indeed, the World Bank itself keeps warning that India’s fiscal deficit is too high, and
that the government should borrow less. The World Bank says it now knows how to
use aid productively. The secret, apparently, is to give aid only to countries with
sound policies and governance, and deny it to others. But this approach should surely
mean reducing aid to most existing recipients. Why then is more aid being demanded
from donors? Which recipients can productively absorb tens of billions of dollars of
additional aid?
79
Investment
Expert view’s
In The India Economic Submit 2000, Percy Barnevik, Chairman, Investor AB,
Sweden, started the session by saying that India received less than US$ 2 billion last
year, which is less than a fifteenth of what China receives and is about 1% of the total
FDI flow to developing countries, which in turn is a fraction of the world FDI flow.
Barnevik pointed out that for the foreign investor India is appealing because of low
wages and size of the Indian market, but this is sometimes offset by negatives such as
unfriendly bureaucracy, poor infrastructure, slowdown of reforms and so on. In this
regard he mentioned that when considering India we should look at the actual physical
investments that have taken place and not approvals. On the positive side, Barnevik
mentioned that India is underrated as its reputation has improved. It has come a long
way from the socialist times of the 70s and 80s. He suggested that India should
leverage the image that it has gained in sectors like IT.
80
Investment
Presenting the perspective of a foreign investor in India, Alex von Behr, President
and Chief Executive Officer, Coca-Cola India, said that the scenario in India has
changed. Now the consumer is the king, looking for high quality at low cost and at
choices and brands. This is still in conflict with a system that is trying to free itself
from a mindset which tends to frown upon consumption and thinks along the lines of
essentials, non-essentials, luxuries and minimal quality at controlled prices. Von Behr
stated that recent research has shown that FDI has emerged as a principal source of
capital and economic development, and that it can create 3 to 5 million jobs each year
and add 1.5% to GDP growth. Today, in developing countries, it accounts for 50% of
total inflows, exceeding portfolio investments, bank loans and development aid put
together, and is the most stable form of inflow.
Von Behr pointed out that there is no one model for attracting FDI. As examples, he
cited the case of Poland, which resorted to shock therapy, China, which succeeded by
focusing on manufacturing and export and developing coastal areas, as well as
offering attractive incentives, and Malaysia, which created conditions to attract
export-oriented and capital intensive industries. Von Behr expressed concern over the
fact that India attracts one fifth of what it desires and converts less than a third of its
approvals. He stressed the need for an objective study of the existing US$ 12 billion
FDI in India. According to von Behr successful FDI is the best attraction for getting
more. However, he also focused on three domestic issues that need immediate
attention: taxes, regulation and labour issues.
Drawing attention to the issue of excise duty, von Behr said that there exists an
irrational structure with some luxury items such as yachts, fur skins, firearms and so
on being subject to an excise duty of 24%, air-conditioners and beer subject to 32%,
while items like soft drinks are subject to 40% duty. Turning to sales tax, he said that
sales tax in various states can range from 4% to 25% spanning more than 20 different
rates. On top of this, von Behr said, these are open to subjective interpretation.
Commenting further on the system, he said that there are entry taxes, municipal taxes
and so on added to this. He pointed out that it is almost impossible for a company to
plan out a profitable project under these circumstances.
Talking of regulations, von Behr said that more than 40 different licenses/approvals
must be obtained from 15 different agencies of central and state governments to set up
any "non-controversial" manufacturing operation in India. And time frames vary from
six months to four years. As an example, he reported that setting up a franchising
operation in India for fast foods takes 221 approvals. He also referred to some of the
outdated laws that hinder operating businesses in India.
81
Investment
Piyush G. Mankad, Secretary, Ministry of Industry, Chairman, Foreign Investment

Promotion Board, India, reminded the gathering that India is now much more open
and that all sectors are open to FDI except the ones on the negative list. Among the
other initiatives being taken by the government, Mankad mentioned one on labour
sector reforms and the one on small-scale Industry reservation policy. He said that the
thrust of the government is shifting to micro aspects, whereby a lot of procedural
simplification can be expected. He also mentioned that a greater degree of synergy
with the states is being targeted. Mankad informed the investors that the government
would ultimately withdraw from non-essential activities and would leave issues like
certification to industry associations.
The Industry Secretary reiterated the need for looking at issues like corruption, lacks
of efficiency, risk and reward, and so on. He said there is an urgent need to create a
conducive package and for that the country needs double-digit growth. This in turn
would only be possible if infrastructure facilities were made conducive.
During the discussions, the issue of small-scale industry reservation was raised, along
with the suggestion of reducing barriers to entry of small FDI in this sector, especially
in high-tech areas. Some investors also pointed out that on paper there are no
problems in investing in India - neither is there a problem of discrimination against
foreign investors in terms of approval. The actual problem starts when the investor
actually tries to set up business. Interview by INDIA TODAY Associate Editor Rohit
Saran. “We cannot deny that India suffers from an image problem."
India and the EU: Bilateral and Multilateral Partners on the road from Doha,
Indian Institute for Foreign Trade New Delhi, 22 November 2001, The impact of this
is already felt in telecommunications, insurance, foreign exchange control, removal of
caps on FDI, to name just a few. We are following closely the progress on the next
wave of reform: The bills in the area of competition, on fiscal responsibility, on labour
reform, on infrastructure funding, and banking reform are some examples. But the
Indian economy as a whole would also benefit from more trade openness. Tariffs
lowered to the level of South East Asian neighbours, the removal of technical barriers
to trade, rationalizations of customs rules, quality and standards would go a long way
towards realizing India's economic ambitions. This is where the "Joint Initiative to
Enhance Trade and Investment" comes in.
82
Investment
STEPS TAKEN BY INDIAN GOVT.

FIPB
The FDI/Foreign technology collaboration agreement proposals that do not conform
to the guidelines for automatic approval require Government approval through the
Foreign Investment Promotion Board (FIPB). The Government has set up a special
'Foreign Investment Promotion Board' (FIPB) as a fast track mechanism to invite and
facilitate foreign investments in large projects in India, which are considered
beneficial to the Indian economy but are not covered by the automatic approval
process and norms under which SIA is authorized to grant investment approvals.
Special Economic Zones (SEZs)
Automatic approval for all manufacturing activities in SEZs up to 100%, except the
following activities: (a) Arms and ammunition explosives and allied items of defence
83
Investment
aircraft & warships; (b) Atomic substances; (c) Narcotics and psychotropic substances
and hazardous chemicals; (d) Distillation and brewing of alcoholic drinks; and (e)
Cigarettes/cigars and manufactured tobacco substitutes. Items ineligible for automatic
route will have to follow FIPB route. This is indeed an important scheme for
companies to operate in a business environment that is expected to match other
competing nations.
The Indian Investment Center
The Indian Investment Center, a Government of India organization, with more than
three decades of rich experience in investment promotion, is the first contact point and
is the single window agency for authentic information or any assistance that may be
required for investments, technical collaborations and joint ventures. All its services
are free of charge
The Indian Investment Center promotes wider knowledge and understanding in the
capital exporting countries of the world, of conditions, laws, policies, procedures and
incentives pertaining to investment and the infrastructural facilities available and of
investment opportunities in India.
It advises and assists foreign entrepreneurs on matters pertaining to financial and

technical collaborations in India. It functions as a single reference point for foreign
investment projects and assists Indian and foreign entrepreneurs in meeting the
procedural requirements of project approvals and in over-coming bottlenecks, if any,
in the process for implementation of the project. It advises foreign investors on setting
up industrial projects in India by providing information regarding investment
environment and opportunities, the Government industrial and foreign investment
policies, taxation laws and facilities and incentives and assists them in identifying
collaborators in India. It assists Indian companies in identifying source of capital and
technology abroad facilitating foreign collaborations. It undertakes promotional work
and guides entrepreneurs abroad through designated officers in the Indian Diplomatic
Missions and other organizations.
84
Investment
Investment Scenario in India
Q-1 How would you rate current economic conditions in India vs. 2004 - 2005?
1. Substantially better 2. Moderately better
3. Same 4. Moderately worse
5. Substantially worse
Q-2 What do you expect Indian economy to be in 2005 - 2006?
Q-3 How would you rate current investment climate in India vs. 2004 - 2005?
Q-4 What do you expect investment climate in India to be in 2006?
Q-5 How would you rate performance of your portfolio company vs. 2004 - 2005?
85
Investment
Q-6 What do you expect performance of your portfolio company to be in 2004 –

2005?
Q-7 How would you rate current new fund raising climate vs. 2004 - 2005?
Q-8 What do you expect new fund raising climate to be in 2004 - 2005?
Q-9 How would you rate current Indian Business climate vs. 2004 - 2005?
Q-10 What do you expect Indian Business climate to be in 2004 - 2005?
86
Investment
Q – 11 What are the largest external factors influencing business opportunities

during Q2, 2005?
1. Emerging Technological Innovations 2. Public Sector Growth

3. Stock Market BSE/NSE 4. Steel Prices Hike
5. Petrol Price Hike 6. Manufacturing sector growth
Q – 12. Please specify the segment specific Investment made by your company in
following subcategories during 2004 - 2005?
1. Biotech 2.Automobile
3..Retailing 4.Manufacturing
5..KPO 6.IT
7..Health Care 8.Telecommunication
9..Any other
87
Investment
Analysis
Frequency Tables
How would you rate current economic conditions in India vs. 2004 - 2005?
Valid Cumulative
Frequency Percent Percent Percent
Valid Substantially
4 23.5 26.7 26.7
better
Moderately
4 23.5 26.7 53.3
better
Same 5 29.4 33.3 86.7
Moderately
1 5.9 6.7 93.3
worse
Substantially
1 5.9 6.7 100.0
worse
Total 15 88.2 100.0
Missing System 2 11.8
Total 17 100.0
What do you expect Indian economy to be in 2005 - 2006?
Valid Cumulative
Valid Substantially
3 17.6 20.0 20.0
better
Moderately
5 29.4 33.3 53.3
better
Same 4 23.5 26.7 80.0
Moderately
1 5.9 6.7 86.7
worse
Substantially
2 11.8 13.3 100.0
worse
Total 15 88.2 100.0
Total 17 100.0
88
Investment
What do you expect investment climate in India to be in 2006?
Valid Cumulative
Valid Substantiall
4 23.5 26.7 26.7
y better
Moderately
7 41.2 46.7 73.3
better
Same 3 17.6 20.0 93.3
Moderately
1 5.9 6.7 100.0
worse
Total 15 88.2 100.0
Total 17 100.0
What do you expect performance of your portfolio company to be in 2004 -
Valid Cumulative
Valid Substantial
7 41.2 46.7 46.7
ly better
Moderately
6 35.3 40.0 86.7
better
Same 1 5.9 6.7 93.3
Moderately
1 5.9 6.7 100.0
worse
Total 15 88.2 100.0
Total 17 100.0
89
Investment
How would you rate current new fund raising climate vs. 2004 - 2005?
Frequenc Valid Cumulative

y Percent Percent Percent
Valid Substantiall
4 23.5 26.7 26.7
y better
Moderately
9 52.9 60.0 86.7
better
Same 2 11.8 13.3 100.0
Total 15 88.2 100.0
Total 17 100.0
How would you rate current Indian Business climate vs. 2004 - 2005?

Valid Moderately
2 11.8 100.0 100.0
better
Total 17 100.0
What are the largest external factors influencing business opportunities during
Q2, 2005?

Valid Emerging
Technological 3 17.6 20.0 20.0
Innovations
Stock Market
7 41.2 46.7 66.7
BSE/NSE
Steel Prices
3 17.6 20.0 86.7
Hike
Petrol Price
1 5.9 6.7 93.3
Hike
Manufacturing
1 5.9 6.7 100.0
sector growth
Total 15 88.2 100.0
Total 17 100.0
90
Investment
Please specify the segment specific Investment made by your company in


Valid Biotech 3 17.6 20.0 20.0
Automobi
1 5.9 6.7 26.7
le
Retailing 4 23.5 26.7 53.3
Manufact
1 5.9 6.7 60.0
uring
..KPO 3 17.6 20.0 80.0
IT 3 17.6 20.0 100.0
Total 15 88.2 100.0
Total 17 100.0
Frequency Table
How would you rate current economic conditions in India vs. 2004 - 2005?
Valid Cumulative
Valid Substantiall
4 23.5 26.7 26.7
y better
Moderately
4 23.5 26.7 53.3
better
Same 5 29.4 33.3 86.7
Moderately
1 5.9 6.7 93.3
worse
Substantiall
1 5.9 6.7 100.0
y worse
Total 15 88.2 100.0
Total 17 100.0
91
Investment

Valid Substantiall
3 17.6 20.0 20.0
y better
Moderately
5 29.4 33.3 53.3
better
Same 4 23.5 26.7 80.0
Moderately
1 5.9 6.7 86.7
worse
Substantiall
2 11.8 13.3 100.0
y worse
Total 15 88.2 100.0
Total 17 100.0
How would you rate current investment climate in India vs. 2004 - 2005?

Valid Substantiall
5 29.4 33.3 33.3
y better
Moderately
6 35.3 40.0 73.3
better
Same 3 17.6 20.0 93.3
Moderately
1 5.9 6.7 100.0
worse
Total 15 88.2 100.0
Total 17 100.0
92
Investment
What do you expect investment climate in India to be in 2006?

Valid Substantiall
4 23.5 26.7 26.7
y better
Moderately
7 41.2 46.7 73.3
better
Same 3 17.6 20.0 93.3
Moderately
1 5.9 6.7 100.0
worse
Total 15 88.2 100.0
Total 17 100.0
How would you rate performance of your portfolio company vs. 2004 - 2005?
Valid Cumulative
Valid Substantiall
3 17.6 20.0 20.0
y better
Moderately
5 29.4 33.3 53.3
better
Same 3 17.6 20.0 73.3
Moderately
3 17.6 20.0 93.3
worse
Substantiall
1 5.9 6.7 100.0
y worse
Total 15 88.2 100.0
Total 17 100.0
93
Investment
How would you rate current new fund raising climate vs. 2004 - 2005?

Valid Substantiall
4 23.5 26.7 26.7
y better
Moderately
9 52.9 60.0 86.7
better
Same 2 11.8 13.3 100.0
Total 15 88.2 100.0
Total 17 100.0
What do you expect new fund raising climate to be in 2004 - 2005?

Valid Substantiall
6 35.3 40.0 40.0
y better
Moderately
2 11.8 13.3 53.3
better
Same 2 11.8 13.3 66.7
Moderately
4 23.5 26.7 93.3
worse
Substantiall
1 5.9 6.7 100.0
y worse
Total 15 88.2 100.0
Total 17 100.0
94
Investment
How would you rate current Indian Business climate vs. 2004 - 2005?

Valid Moderately
2 11.8 100.0 100.0
better
Total 17 100.0
What do you expect Indian Business climate to be in 2004 - 2005?

Valid Moderately
1 5.9 50.0 50.0
better
Substantiall
1 5.9 50.0 100.0
y worse
Total 2 11.8 100.0
Total 17 100.0
What are the largest external factors influencing business opportunities during
Q2, 2005?
95
Investment

Valid Emerging
Technological 3 17.6 20.0 20.0
Innovations
Stock Market
7 41.2 46.7 66.7
BSE/NSE
Steel Prices
3 17.6 20.0 86.7
Hike
Petrol Price
1 5.9 6.7 93.3
Hike
Manufacturing
1 5.9 6.7 100.0
sector growth
Total 15 88.2 100.0
Total 17 100.0
Please specify the segment specific Investment made by your company in


Valid Biotech 3 17.6 20.0 20.0
Automobi
1 5.9 6.7 26.7
le
Retailing 4 23.5 26.7 53.3
Manufact
1 5.9 6.7 60.0
uring
..KPO 3 17.6 20.0 80.0
IT 3 17.6 20.0 100.0
Total 15 88.2 100.0
Total 17 100.0
Bar Chart
96
Investment
How would you rate current economic conditions in India vs.

2004 - 2005?
3
n
u
q
y
cF
re
0
Substantially Moderately Same Moderately Substantially
better better worse worse
How would you rate current economic conditions in India vs.
2004 - 2005?
The graph clearly indicates that most of the investors feel that the investment climate
in India the same and a number of the them also feel that the climate has increased
over a period and will continue to improve in future. Most of the investors feel that
current growth momentum is likely to continue at a steady pace.
97
Investment
3
n
u
q
y
cF
re
0
98
Investment
What are the largest external factors influencing business

opportunities during Q2, 2005?
3
n
u
q
y
cF
re
0
Emerging Stock Market Steel Prices Petrol Price Hike Manufacturing
Technological BSE/NSE Hike sector growth
Innovations
What are the largest external factors influencing business
opportunities during Q2, 2005?
Please specify the segment specific Investment made by your

company in following subcategories during 2004 - 2005?
2
n
u
q
y
cF
re
0
Biotech Retailing ..KPO
Automobile Manufacturing IT
99
Investment

2
n
u
q
y
cF
re
0
Biotech Retailing ..KPO
Automobile Manufacturing IT
100
Investment
How would you rate performance of your portfolio company

vs. 2004 - 2005?
3
n
u
q
y
cF
re
0
How would you rate performance of your portfolio company vs.
2004 - 2005?
101
Investment
Bar Chart
3.0 How would you rate

current economic
conditions in India
vs. 2004 - 2005?
2.5
Substantially
better
Moderately better
2.0 Same
Moderately worse
Substantially
1.5 worse
C
n
u
o
t
1.0
0.5
0.0
What do you expect new fund raising climate
to be in 2004 - 2005?
Crosstabs
Case Processing Summary
Cases
Valid Missing Total
N Percent N Percent N Percent
How would you rate
current economic
conditions in India
vs. 2004 - 2005? *
15 88.2% 2 11.8% 17 100.0%
What do you expect
performance of your
portfolio company to
be in 2004 -
How would you rate current economic conditions in India vs. 2004 - 2005? *
What do you expect performance of your portfolio company to be in 2004 -
Crosstabulation
102
Investment
Count
What do you expect performance of your portfolio
company to be in 2004 -
Substantially Moderately Moderately
better better Same worse Total
How would you Substantially
0 3 0 1 4
rate current better
economic Moderately better 3 0 1 0 4
conditions in India Same 3 2 0 0 5
vs. 2004 - 2005? Moderately worse 0 1 0 0 1
Substantially
1 0 0 0 1
worse
Total 7 6 1 1 15
Bar Chart
3.0 What do you

expect performance
of your portfolio
company to be in
2.5
2004 -
Substantially
better
2.0 Moderately better
Same
Moderately worse
1.5
C
n
u
o
t
1.0
0.5
0.0
How would you rate current economic
conditions in India vs. 2004 - 2005?
Crosstabs
103
Investment
Cases
Valid Missing Total
How would you
rate current
investment climate
in India vs. 2004 -
2005? * What do 15 88.2% 2 11.8% 17 100.0%
you expect new
fund raising
climate to be in
2004 - 2005?
Bar Chart
3.0 What do you

expect new fund
raising climate to
be in 2004 - 2005?
2.5
Substantially
better
Moderately better
2.0 Same
Moderately worse
Substantially
1.5 worse
C
n
u
o
t
1.0
0.5
0.0
Substantially Moderately Same Moderately
better better worse
How would you rate current investment
climate in India vs. 2004 - 2005?
Crosstabs
104
Investment
Cases
Valid Missing Total
What are the largest
external factors
influencing business
opportunities during
Q2, 2005? * Please
specify the segment
15 88.2% 2 11.8% 17 100.0%
specific Investment
made by your
company in
following
subcategories during
2004 - 2005?
Bar Chart
3 .0 P le a s e s p e c ify th e
s e g m e n t s p e c i f ic
In v e s tm e n t m a d e b y
2 .5 y o u r c o m p a n y in
fo llo w in g
s u b c a t e g o r ie s
2 .0
d u r in g 2004 -
2005?
1 .5 B io t e c h
C
n
u
o
t
A u to m o b i le
R e t a ilin g
1 .0
M a n u f a c t u r in g
..K P O
IT
0 .5
0 .0
Em Pe M
tro an
St
St
er uf
gin lP
ee
oc
ric ac
g tu
k
lP
Te e ri n
M
ric
ch Hi
ar
ke g
es
no se
ke
log cto
t
H
BS
ik
ica rg
e
ro
E/
l In wt
N
no h
SE
va
tio
n s
What are the largest external factors ...
Crosstabs
105
Investment
Cases
Valid Missing Total
How would you rate
current new fund
raising climate vs.
2004 - 2005? * What 2 11.8% 15 88.2% 17 100.0%
do you expect Indian
Business climate to
be in 2004 - 2005?
How would you rate current new fund raising climate vs. 2004 - 2005? * What
do you expect Indian
Business climate to be in 2004 - 2005? Crosstabulation
Count
What do you expect
Indian Business climate to
be in 2004 - 2005?
Moderately Substantially
better worse Total
How would you Moderately better
rate current new
fund raising 1 1 2
climate vs. 2004 -
2005?
Total 1 1 2
106
Investment
Crosstabs
Cases
Valid Missing Total
How would you rate
performance of your
portfolio company vs.
2004 - 2005? * Please
specify the segment
15 88.2% 2 11.8% 17 100.0%
specific Investment
made by your
company in following
subcategories during
2004 - 2005?
Bar Chart
3.0 How would you rate

current economic
conditions in India
vs. 2004 - 2005?
2.5
Substantially
better
Moderately better
2.0 Same
Moderately worse
Substantially
1.5 worse
C
n
u
o
t
1.0
0.5
0.0
Substantially Moderately Same Moderately
better better worse
What do you expect performance of your
portfolio company to be in 2004 -
107
Investment
Bar Chart
4 Howwouldyourate
current newfund
raisingclimatevs.
2004- 2005?
Substantially
better
3
Moderately better
Same
2
C
n
u
o
t
0
Howwouldyourate current economic
conditionsinIndia vs. 2004 - 2005?
Bar Chart
3.0 Howwould you rate

current investment
climate in India vs.
2004 - 2005?
2.5
Substantially
better
Moderately better
2.0 Same
Moderately worse
1.5
C
n
u
o
t
1.0
0.5
0.0
What do you expect Indian economy to be in
2005 - 2006?
Conclusion
108
Investment
European Union Trade commission, Pascal Lamy has coded that FDI is a key factor
in the economics growth and wealth, leading to sustainable development. But such
investment needs transparent, stable Govt. and non-discriminatory climate. The
current budget is emphasizing on the attracting FDI including scraping the need from
case to case clearance of FDI by FIBP to the extend as possible.
In general, India needs to do a lot of work on the basics to make life a little easier, not
just for the foreign visitor, but also for its own people. It has to devise a regime that
does not leave the individual so frustrated that he finds it necessary to resort to unfair
means to get anywhere.
Under a regime without contracting, however, the order of events is different. The
firm must first commit itself to a particular country by investing. Only then does the
country choose the conditions under which it will allow the firm to operate. The host
faces some constraints. It must provide the protections to which investment is entitled
under international law, it must not impose conditions that are so arduous that the
investor will prefer to pull out rather than continuing to operate its business, and it
must consider the effect of its actions on its reputation and on future investors.
Despite these constraints on its choice of conditions, the host is in a much better
position under the no-contract case than it is under the contract case. FDI is a saleable
product and even developed nations like Japan look at FDI flows to fill up the hollow
in the domestic investment market.
Bilateral investment treaties have become the dominant vehicle through which North-
South investment is protected from host country behavior. Because these treaties
allow investors and hosts to establish binding and enforceable contracts, there is little
doubt that Bits increase the efficiency and reduce the cost of foreign investment. In
particular, the treaties solve the dynamic inconsistency problem by permitting the host
state to bind itself to a particular course of action before the investment takes place.
Step to improve
1 Study the economic performance of existing FDIs and identify their key
problems. Move from subjective perceptions to researched facts.
109
Investment
2 Align tax categories with national priorities of FDI, employment, growth and
revenue generation instead of age-old labels of luxuries, necessities and so on. Make
the process transparent.
3 Reform the regulatory framework on a time-frame and work with industry

associations to formulate effective rules and regulations.
4 Form a new innovative joint body between government and business so that
expectations.can be managed on both sides and progress monitored regularly - this
will lead to joint shouldering of the responsibility for economic progress.
Like In Rome Italian investors were told that the government is considering
appointing an official assistant with each big foreign investment project to take it
through all the clearances.
Opening of Independent Research center which will provide information to the

Investors and MNCs, These reports may also contain a rating and target price that are
based upon those assumptions of forecasting. FDI in more important sectors such as
Power and Telecommunications, India must permit FDI even in industries where it
isn't beneficial. Most experts feel that India can extensively attract FDI in IT are in the
area of convergence, hardware manufacturing and software services. FDI in IT in
India would result in faster growth of the IT sector and subsequently growth of the
New Economy. Currently, IT makes up just 1.68 percent of GDP. This figure will
significantly rise if we have more FDI. It will also result in increased skill levels,
much better infrastructure, greater job access and a wider market. The current trends
in global FDI flows reveal that the cross-border merger and acquisition (M&As) is the
main route and the service sector the major recipient.
Today, FDI is not just about getting foreign money, but has become a clear statement
of the health of the economy. FDI’s also helped recoveries, notably in South Korea
and Latin American countries. It also helps bring with it-advanced technology in the
area where the country lags.
Continued political stability is important, reducing ground-level hassles were

imperative for future FDI inflows and adequate Market Growth, Boosting investor
sentiments, Stepping up Image-Building Efforts, Confidence-building measure,
Drastically improving Infrastructure facilities are the most important factors to attract
FDI.The empirical analysis of selected FDI companies confirms the postulated
complementary relationship between domestic research expenditure and technology
import. However, the empirical analysis does not validate the hypothesis that
110
Investment
technology import and FDI stake are significant positive factors in explaining the
variations in the export performance of Indian subsidiaries of foreign companies. It,
therefore, stands to reason that subsidiaries of foreign firms continue to confine their
operations to cater to Indian domestic market, despite the ease with which they can
seek access to their holding companies advanced technology, investment related
intellectual property, marketing networks, etc., The justification of FDI as a means of
bridging the B-O-P gap is conclusive in case of India. The FDI companies, during
1987-88 to 1999-2000 have reported a shortfall of foreign exchange earnings over the
expenditure in foreign exchange. On the other hand, the subsidiaries of foreign
companies, during the same period, have reported net accretions to foreign exchange
earnings.
It is suggested that a policy targeting export- oriented FDI or high technology FDI
may be very favourable for the country’s B-O-P rather than one attempting to
maximise the magnitude of FDI irrespective of its composition. And to accelerate
India’s exports, on sustainable basis, the focus has to be centered around
“Technology-based exports”.
The Pravasi Bharatiya Divas Jamboree raises an important question what an

important contribution can Non-resident and people of India origin can contributed ?
why Indian perform better outside rather when they are in India ? we have everything
but still we cannot convert them in to higher productivity.What NRIs and PIOs can do
is to kick start the focus about the poor quality of the infrastructure and governance.
They can be quite influential in promoting India’s economics through investment and
savings.
We need a system that will penalize undesirable behavior and rewards desirable
ones.in the first place we have to put in place legislation on FDI to give the policy
requisite visibility and build confidence among the investors. The policy have to be
integrated in the over all national economic policy. Second states need to be given
primacy in the approvals and taken on boards as stakeholders. Authorized local
authority to set up SEZs and approvals of FDI. We need to provide quick
international competitive platforms as strategic locations for relocation of labor
intensive manufacture. Forth export oriented FDI to be given top priority with
political and bureaucratic apparatus to catalyze export led growth. and last but not the
least we have to think big, plan well, implement fast and speed up privatization.
Concentration on education is no doubt an important objective for long lasting
benefits.
111
Investment
REFERENCES
Liberalization and WTO By Chanchal Chopra.
Trade and Local Linkages by Yung-Chul Kwon.
International Financial Management by V.Sharan.
My Economics Affairs.
Foreign Investment and Economic Development of India By H.Ramananda Singh and

Saikat Nag
Prospects of Trade and Investment in India and China By Atul Sarma.
112
Investment
Destroying India's economy in an age of globalization by Prem Prakash.
Global Corporate Finance by Suk.h.Kim and Seung.H.Kim
Articles and Publications in the following Websites on FDI
ficci@ficci.com
ani@ndc.vsnl.net.in
labourhindu@com.
www.rbi.org.in.
www.hindu@net.com.
indmin.nic.in.
federation of India export organization.
World forum on FDI.
csmweb2.smcweb.com.
www.valuenotes.com.
113

191 Study of FDI Activity in India and Its Implications

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

191 Study of FDI Activity in India and Its Implications

Enviado por

Direitos autorais:

Formatos disponíveis

Research Report

“Study of FDI Activity in India and its Implications”

Submitted By: Nishi Kumari

MBA-Finance & Marketing 0415870007

Under The Guidance of : Mrs. Ruchi Goel

Janhit Institute of Education & Information

I take this opportunity to extend my sincerest and unflappable admiration to

facilitate my dissertation by providing me with adequate assistance at all times,

towards its successful completion.

Nishi Kumari Satyarthi

TO WHOMSOEVER IT MAY CONCERN

Mrs. Ruchi Goel

• What and Why is FDI

• Different between Foreign and Domestic Investment

• Argument against FDI

• Investment in Developing Countries

• Variables in FDI Model

• Investment facilitation factors

• Investment promotions Model

• Cost and Benefit of FDI

• From India Scenario

• Policy towards FDI

• NRIs and PIOs

• Why we are Here?

• Steps Taken By Government

• Statement Of The Objective

• Primary Objective Of The Study:

• Scope Of The Study:

• Limitations Of The Study

A comprehensive legislature and policy framework needs to be promoted for a healthy

Will The current budget enable

The Pravasi Bharatiya Divas Jamboree raises an important question what an

According to recent survey, India is losing its sheen as a foreign investment

My Project is base on the discussion of the above references by paying special

One can correlate the deceleration in macro fundamentals in recent years,

The special features of the book are as follows:

A study of the subsidiaries of foreign companies operating in India is the special

some theory of FDI is explained which being useful to analyzed.

What and why is FDI?

Foreign direct investment (FDI). It is certainly seen as being preferable to other

Foreign investment is said to be “direct” when a company invests to take control of a

Since the launch of "Manmohan-economics" by the Narasimha Rao government in

The protection of foreign investment is typically considered a matter of international

Why does a company invest abroad?

Types of FDI: Vertical vs. Horizontal

Vertical integration represents an interdependency of the stages of production, which

In contrast to vertical foreign investments, the horizontal foreign investments target

DIFFERENCES BETWEEN FOREIGN AND DOMESTIC

When an investor considers a foreign investment, however, he immediately faces a

Most of the financial complications resulting from crossing an international

HEDGING THE RISKS INVOLVED IN FOREIGN INVESTMENT

The more common risks encountered in foreign ventures are:

• Country and political risk

• Exchange rate and inflation risk

• Cost and pricing risk

Jayati Ghosh - (professor of economics at Jawaharlal Nehru University, and

ARGUMENTS AGAINST FOREIGN INVESTMENT

It controls key industries and export markets.

It exploits local natural resources and unskilled workers.

It undermines indigenous cultures and societies by imposing Western values and

Similarly, Woodward indicates how misleading it may be to assume that FDI

The Budget speech of the Finance Minister, in which he announced a reduction on

IS FOREIGN INVESTMENT RISKIER THAN HOME INVESTMENT?