What is Foreign direct investment (FDI)?

Foreign direct investment (FDI) in its classic

form is defined as a company from one
country making a physical investment into
building a factory in another country. It is the
establishment of an enterprise by a foreigner.
Its definition can be extended to include

investments made to acquire lasting interest in

enterprises operating outside of the economy
of the investor.
 Foreign Direct Investment

 Involves ownership of entity abroad for

◦ production
◦ Marketing/service
◦ R&D
◦ Access of raw materials or other resource
 Parent has direct managerial control
◦ Depending on its extent of ownership and
◦ On other contractual terms of the FDI
 Nomanagerial involvement = portfolio
investment
Forms of FDI
 Horizontal integration (HI)
◦ Investment in the same industry abroad as a
firm operates in at home.
 Vertical integration (VI)
◦ Backward VI: Investments into an industry that
provides inputs for a firm’s domestic production
processes.
◦ Forward VI: Investments in an industry that utilizes
the outputs of a firm’s domestic production processes.
 Conglomerate (or diversified investment):
◦ Investments in different industries from home
Alternative Modes of Market Entry

 FDI

– FDI - 100% ownership

– FDI < 100% ownership, International Joint
Venture
 StrategicAlliances (non-equity)
 Franchising

 Licensing

 Exports: Direct vs Indirect

 Host Country Effects of FDI
 Benefits
◦ Resource -transfer
◦ Employment
◦ Balance-of-payment (BOP)
 Import substitution
 Source of export increase
 Costs
◦ Adverse effects on the BOP
 Capital inflow followed by capital outflow + profits
 Production input importation
◦ Threat to national sovereignty and autonomy
 Loss of economic independence
 Government Policy and FDI

 Home country
◦ Outward FDI encouragement
 Risk reduction policies (financing, insurance, tax
incentives)
◦ Outward FDI restrictions
 National security, BOP
 Host country
◦ Inward FDI encouragement
 Investment incentives
 Job creation incentives
◦ Inward FDI restrictions
 Ownership extent restrictions (national security; local
nationals can safeguard host country’s interests
Advantages of FDI
 Increase investment level and thereby income &
employment
 Increase tax revenue of government
 Facilitates transfer of technology
 Encourage managerial revolution through
professional management
 Increase exports and reduce import requirements
 Increase competition and break domestic
monopolies
 Improves quality and reduces cost of inputs
 Limitations and Dangers of FDI
 Flow to high profit areas rather than main concern
areas
 Through their power and flexibility, MNC can
undermine economic autonomy and control
 Sometimes interferes in the national politics
 Sometimes engage in unfair and unethical trade
practices
 Sometimes result in minimizing / eliminating
competition and create monopolies or oligopolistic
structures
 Foreign Direct Investment: the numbers*
●
US$ 7,016 million (from April 2009 to June 2009)

FDI inflows ●

●
US$ 27,309 million (from April 2008 to March 2009)
US$ 24,580 million (from April 2007 to March 2008)

Share of top investing ●

Mauritius (44%)
countries in FDI equity ●
Singapore (9%)
inflows
●
United States (8%)

Services (financial and non-financial)

Sectors attracting highest
●

●
Computer (software & hardware)
FDI equity inflows ●
Telecommunications (radio paging, cellular mobile, basic telephone services)

 India's foreign direct investment (FDI) declined by over 43 per cent to around USD 2.2
billion in May, 2009, compared to USD 3.9 billion  in the same period last year on
account of global recession.

• Data and figures have been obtained from “FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) From AUGUST 1991 to JUNE 2009” as may be accessed at
http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm
 Restricted Entry Level for Foreign Investors
FM Radio* Up linking for Up linking Single Brand Existing
news facilities, Retail Airport
channels, cable development,
print media, network*, internet
defense DTH*, service
industries domestic satellites,
and airlines, air atomic
petroleum transport minerals,
refining services, banks*,
investing telecom**
companies in
infrastructure
/service
sector, assets
reconstructio
n (FDI) only
 OPPORTUNITIES
Automotive Banks & BFSI
Aerospace & Defence

Chemicals Food & Beverages Funds

Hotels & Leisure IT & Outsourcing Insurance

Media & Entertainment Nanotechnology

Microfinance

Pharma, Life sciences & Real Estate & Construction Retail

Healthcare

Telecom Transportation & Logistics

Social Sector & Non Profits

Education
Infrastructure
FDI Policy
According to the current policy, FDI is not
permitted in the following sectors –
Certain sectors, namely:
 Atomic energy;
 Lottery business/gambling and betting;
 Agriculture (excluding floriculture,
horticulture, seed development, animal
husbandry, pisciculture and cultivation of
vegetables, mushrooms, etc.)
 Plantations (excluding tea plantation)
 Retail Trading (other than single brand retail)
 FDI Policy contd….

There are two routes for FDI in India –

Automatic Route
FDI is permitted under the automatic route for
all items/activities except the following-
• Where the foreign collaborator has an existing
venture/tie-up in India in the same field.
There are certain exceptions –
investment by a Venture Capital Fund
registered with SEBI;
existing joint venture has less than 3%
investment by either party;
 FDI Policy contd….
 Existing joint venture is defunct or sick
 Proposals falling outside notified sectoral policy/caps or sectors

in which FDI is not permitted

FIPB Route (Approval Route)
 In all other cases of foreign investment, where the project does

not qualify for automatic approval, as given above, prior

approval is required from FIPB.
 Decision of the FIPB is normally conveyed within 30 days of

submitting the application.

 The proposal for foreign investment is decided on a case-to-

case basis depending upon the merits of the case and in

accordance with the prescribed sectoral policy.
India: Attractive Investment Destination
With improved performance on PE ratio and ROE, Indian markets have attracted
large investments
Return on the Investments in India FDI Inflow - India: 2001-07
18,000
(2006 Q1) 15,730
16,000

Market PE P/B Ratio RoE (%) 14,000

Ratio 180 percent
12,000

USD Million
Increase
India 16.1 4.53 22 10,000

China 10.62 2.06 17 8,000

5,546
6,000 4,222
Indonesia 10.26 3.09 NA 3,755
4,000 3,134 2,634
Korea 9.85 1.84 16 2,000

Malaysia 13.21 1.82 16 0

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Taiwan 12.17 2 11
Thailand 9.84 2.32 23
Net FII into India: 2001-07
EM Asia 11.19 2.12 15 12
10.00 10.20
Latin 9.35 2.46 18 10 9.40
America
8
USD Billion
EM 10.9 2.39 15 6.72
Europe 6

4
1.80
2
0.60
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
 Why India?
“India has evolved into
India is among the one of the world's
three most attractive leading technology India has among the
FDI destinations in the centers“. highest returns on
world.
foreign investment.
Craig
CraigBarrett
Barrett
Intel
IntelCorporation
Corporation
AATTKearney
Kearney
FDI
FDIConfidence
ConfidenceIndex
Index2005
2005 By 2032, India will be US
USDepartment
Departmentofof
among the three Commerce
Commerce

largest economies in
the world.

“The Indian market has two

BRIC
core advantages - an
BRICReport,
Report,Goldman
GoldmanSachs
Sachs
increasing presence of
“We came to India for the multinationals and an upswing
costs, stayed for the in the IT exports”.
quality and are now
investing for innovation”. “India is a developed
country as far as Travyn
TravynRhall,
Rhall,
ACNielsen
ACNielsen
intellectual capital is
concerned”.
--Dan
DanScheinman,
Scheinman,Cisco
CiscoSystem
SystemInc.
Inc.as
astold
told
totoBusiness
BusinessWeek,
Week,August
August2005
2005

Jack
JackWelch
Welch
General
GeneralElectric
Electric
Reasons for low FDI in India over the
years
 Tight bureaucratic control and delays in
clearance of FDI proposals.
 Corruption.
 Rigid labor laws.
 Political hostility of Left parties.
 Poor Infrastructure.
 Exit policies not clear.
WHY LOW FDI?
1. IMAGE AND ATTITUDE
1. Internal Working
2. Approach Towards FDI’s

2. POLICY FRAMEWORK
1. FDI Policy
2. Domestic Policy
EFFORTS TAKEN OVER YEARS TO
INCREASE FDI
 Internal Ministerial committee set up to
contemplate the FDI policies and procedures
 Foreign Investment Promotion Board
◦ The board was set up to ease the process of entry to be
tumbled to 6-8weeks.
 Quality Of Infrastructure
◦ India handicapped at attracting EXPORT ORIENTED FDI due
to poor infrastructure.
 State obstacles
◦ State to State excise duty on goods like entry tax etc is a de
motivator for fdi’s.
 Legal Delays
◦ only 3% of fdi are in favour of INDIAN RULE OF LAW
RECOMMENDATIONS
REGULATORY REFORMS

 Foreign Investment Law: Like most

countries a law on foreign investment can
be enacted in association with FEMA, with
the objectives of A) Promotion of FDI
B) National treatment of FDI|
The law can also deal with things
like:double taxation, preferential treatment
of FDI.
 State Laws On Infrastructure be improved
 INSTITUTIONAL CHANGES
 Industry Dept: The FIPB could be empowered
to give initial Central government level
registration and approvals where possible.
The Transaction of Business rules should be modified to
empower the Foreign Investment Implementation Authority
(FIIA) so as to enable it fix the time frame for investment
related approvals both at the State and Central levels.
 Planning FDI targets

 Fund for Assistance to States

 Non-governmental Facilitation Services

What is an FII?

Foreign Institutional Investor (FII) is used to

denote an investor - mostly of the form of an
institution or entity, which invests money in
the financial markets of a country different
from the one where in the institution or entity
was originally incorporated. FII investment is
frequently referred to as hot money for the
reason that it can leave the country at the
same speed at which it comes in.
 SEBI’s definition of FIIs presently
includes •
•
Pension Funds
•
Mutual Funds
•
Investment Trust
•
Insurance or reinsurance companies
•
Endowment Funds
•
University Funds
Asset Management Companies
Nominee Companies
Institutional Portfolio Managers
Trustees
Power of Attorney Holders
Bank
It also includes asset management companies
and
other money managers operating on their
behalf.
Difference between FDI and FII
1.FDI is when a foreign company brings capital
FII is when a foreign company buys equity in a
into a country or an economy to set up a company through the stock
markets. Therefore, production or some other facility. FDI gives the
in this case, FII would not give the foreign
foreign company some control in the operations company any
control in the company. of the company

2. Foreign direct investment involves in the direct

Foreign portfolio investment is a short-term
production activity and also of medium to long-
investment mostly in the financial markets and it
term nature
consists of Foreign Institutional Investment
(FII).

3. It enables a degree of control in the company.

It does not involve obtaining a degree of control
in a company.

4.FDI brings long-term capital ,The FII brings short-term one

 Categories of registered FIIs
• Regular FIIs:
– not less than 70 per cent in equity related
instruments
– 30 per cent in non-equity instruments.
• 100 per cent debt-fund FIIs:
– permitted to invest only in debt instruments.
Forbidden Areas for FII:
• GOVT BONDS