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Foreign Direct Investment (FDI)
Purchase of physical assets or a significant amount of
ownership (stock) of a company in another geography in
order to gain a measure of management control.
Greenfield Investment:
It is the direct investment in new facilities or
the expansion of existing facilities. It is the
principal mode of investing in developing
countries.
Advantages of FDI (Firm’s Point of View)
Gain a foothold in a new geographic market
Increase a firm’s global competitiveness and
positioning
Fill gaps in a company’s product lines in a global
industry
Reduce costs in such areas as R&D, production, and
distribution
Advantages of FDI (Host Country’s Point of View)
Inflow of equipment
Transfer of technology
Scarce human capital
Financial resources
Fiscal incentives:
Tax rebate and holidays
Various export and import based incentives
Losses against future profits
Accelerated capital depreciation
Import based incentives: Duty exemptions; tax credits
(on materials)
Financial Incentives:
Direct subsidies and subsidized loans,
Loan guarantees
Guaranteed export credits
Low rates of Government insurance
Other Incentives:
Low cost and qualified labour
Natural resources
Political and economic stability
Long term market potential
Is FDI always Good?
Problem of Adverse Selection
FD Investors may tend to retain only High
Productivity Firms
Problem of Excessive Leverage
FDI in developing countries – The Future
Size of Local Markets will loose relevance
Shift from Market-Seeking FDI to
Efficiency-Seeking FDI
Policies should not be discriminatory
FDI in India – The Story so far
2nd most attractive destination – AT Kearney
Index
2nd most attractive investment destination
among transnational corporations – UNCTAD’s
‘World Investment report’
Most attractive location for off-shoring of
services activities – AT Kearney Global Services
location Index
FDI in India – FDI prohibited
Retail Trading (Except single brand)
Atomic Energy
Lottery Business
Gambling and Betting sector
FDI in India – FDI up to 26%
Broadcasting – FM radio, TV channel
Print Media
Defence Industries
Insurance
Petroleum and Natural Gas Sector
FDI in India – FDI upto 49%
Broadcasting – Hardware facilities, Cable
Network, DTH
Domestic Airlines and Air Transport Services
Telecommunication Services – basic & cellular
(over 49 and up to 79% require FIBP approval)
Infrastructure
Asset reconstruction
FDI in India – FDI up to 74%
Development of existing airports
ISPs
Establishment and operation of satellites
Atomic Minerals
Private Sector banks
Single Brand retailing
FDI in India – FDI upto 100%
Greenfield Airports
Mining of coal and lignite
Petroleum Sector – Market Study and formulation
Courier services
Tea Sector
Non banking finance corporations
Domestic Airlines
Power Trading
Cigarettes
Alcohol
ConclusionFDI is a major source of technology transfer in a developing
country. Besides this, it gives boost to infrastructural and sectoral
developments. It creates employment and increases in
competition in market. It helps a country grow potentially and at
a faster pace. Many countries (mainly China and India) have
observed the positive effects of FDIs in the recent times. Major
concern are the policies which will help in attracting more
investments. Hence a country should keep in mind all the pros
and cons of FDIs while deciding the policies, which will end up
in country’s future growth. As rightly said by Sh. Kamal Nath
(Minister of Commerce and Industry, Govt. of India)……
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