Report Presentation

Outflow Of FDI from India in other Countries

Introduction
Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other longterm capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise

Major Sectors for FDI Outflow

IT Sector Pharmaceuticals Industry Emerging Services and Product Metal Industrial Goods Automotive Components Beverages Cosmetics Industry Energy Sector Mobile Communications Software Industry Financial Services

Major factors for outflow

Access to the Global Markets Huge Cash Reserves Natural Resources Distribution Networks of Foreign Companies Foreign Technologies Strategic Assets like Brand Names

Other Factors
Strong Financial System Good Credit Rating Stronger Balance Sheets Confidence shown by Global Business Communication Competitive Business Environment Larger Fund Supply Favorable Regulatory Environment Higher Margins, profits and revenues

Some Big ticket Deals

Tata Motors & J-LR Tata Steel & Corus Hindalco Industries & Novelis Tata Tea & Energy Brand of US Suzlon Energy & RE Power of Germany Subex Azure & Syndesis of Canada Ranbaxy & Merck ( Deal did not strike )

Drivers for FDI abroad

The increasing number of home-grown Indian firms. Indian firms are investing abroad to access foreign markets, production facilities and international brand names. Access to technology and knowledge has been a strategic consideration for Indian firms. Securing natural resources is becoming an important driver for Indian outward FDI.

Drivers for FDI abroad

Favorable Economic Conditions Large foreign exchange reserve Liberal policies India Corporate Advantage Understanding of global environment: Consolidated domestic presence: Large free cash reserves

Pros and Cons

Pros Diversification of investments Hedge against currency movements of the local currency vis-a-vis other currencies Tax advantages Cons Exchange rate fluctuation risk especially in the short run Higher transaction costs

Pros and Cons

Exit risk like exchange control restrictions (repatriation of capital and income), lack of liquidity, low market depth, settlement delays Handling and complying with the special regulatory and tax norms Communication gaps Need to keeping abreast with international and company specific developments Minimum portfolio size

Determinants of Indian FDI in Developing Countries Historical perspective

Drivers of outward FDI quite different for the pre1990 period compared to post-1990 period

Pre-1990 Size of investment was small Policy-led barriers (MRTP, FERA) and slow economic growth main reasons Low firm-level specific capabilities & modest intangible advantages reasons for foray into developing nations

Determinants of Indian FDI in Developing Countries Historical perspective Lack of SME participation due to inward looking development policies Strong FDI bias towards developing countries Cordial attitude of host countries helped matters Post-1990 Natural resource based companies forayed Liberalization lifted ceilings

Reasons for FDI Growth

Large- Scale Overseas Expansion

Change RBIs Guidelines

Business operations Secure Strategic resource for enhancing their learning capabilities Increased Competition

Market Access for exports

Reasons For FDI decline: Since 2008

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Cre it Cru ch epreci ti f the I US ll r i 2008 i rupee g i st

Favorable policy changes

Hiked the overseas investment limit from 200 per cent of the net worth to 300 per cent of the net worth; Hiked the limit on overseas portfolio investment from 25 per cent of their net worth to 35 per cent of their net worth; Allowed Indian residents to remit up to US$ 1,00,000 per financial year, from US$ 50,000 previously, for any current or capital account transaction or a combination of both. Allowed mutual funds to invest funds to the tune of US$ 4 billion in overseas avenues, from an earlier cap of US$ 3 billion

Prospects
Revival of global and domestic growth Improvements in Corporate Profitability Ease of Financing Cash-rich Indian firms, including SMEs Cheap valuations of Foreign Assets

Sagar Shukla PG/SS/10-12 GOM Presentation