Fdi Investments in India

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Project Report

On

FDI Investments in India

SUBJECT

International Business

SUBMITTED TO

Professor V. P. Singh

POST GRADUATE DIPLOMA IN MANAGEMENT

(2009-2011)

ATHARVA SCHOOL OF BUSINESS

MALAD-MARVE ROAD, CHARKOP NAKA, MALAD (WEST), MUMBAI

400095


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Group Members

NameRoll

Number

Sumeet Kotkar (Operation) OP(A) - 43

Krutika Paingankar

(Finance)FA - 63

Siddhi Mishra (Finance) FA - 56

Sonali Bera (Finance) FA - 06

Nikita Gupte (HR) HA - 26

EXECUTIVE SUMMARY


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India has made tremendous progress in building a policy environment to encourageinvestment. As a result, the countrys economy is growing more rapidly and FDI inflows haveaccelerated impressively. However, investment remains insufficient to meet Indias needs,

particularly in infrastructure. Current efforts to strengthen and liberalise the regulatory

framework for investment need to be intensified and Indias well-developed economiclegislation implemented at an accelerated pace both at national level and right across Indiasstates and union territories.

India has made tremendous progress in promoting investment

India has made impressive strides in building a policy environment to encourage bothdomestic and foreign investment, in particular to attract foreign direct investment (FDI) andfacilitate outward investment, as evidenced in this study. This progress is an integral part ofthe market-oriented reforms which have since 1991 set the scene for a shift to a consistentlyhigher rate of real annual GDP growth than the country has experienced in its recent history.The licence raj has been largely dismantled. Restrictions on large-scale investment have

been greatly relaxed. Many sectors formerly reserved to the public sector have been opened upto private enterprise. Import substitution and protectionism have been replaced by an opentrade regime. Sectoral restrictions on FDI have been progressively removed and foreignownership ceilings steadily raised. FDI approval procedures have been greatly liberalised.Foreign exchange restrictions related to investment have been relaxed. Experimentaleconomic zones such as the Special Economic Zones have been established to test investmentliberalisation measures. At the same time, other elements of the business environment thathave an impact on investment have improved. The legal framework for intellectual propertyrights (IPR) protection has been greatly developed in the past two decades and enforcementhas been strengthened. A non-discriminatory Competition Act is being gradually put intoeffect. Indias tax system now treats foreign-owned companies on a par with domestic firms.

The corporate governance framework has improved, taking advantage of international norms.The government is striving to increase investment in human capital. These reforms areexpected to last. India has a history of democracy and the rule of law which provides a firm

basis for the development of a sound legislative and regulatory environment for investment,incorporating good practices from other jurisdictions, generally on the basis of internationallyrecognized standards.

As a result, Indias FDI inflows have accelerated sharply in recent years (until the currenteconomic crisis). FDI inflows have grown from relatively insignificant levels in the early1990s to magnitudes now greater than most developing countries. These inflows have begun

to play an important role in providing employment, diversifying consumer choice and addingcompetitive stimulus to domestic investment. Indias outward investment, which has grownapace with its inward investment during the 2000s, is also contributing to Indias role as amajor player in the world economy. Indian companies are active in M&As in OECD countriesas well as greenfield investment in developing countries. This role is also evidenced by Indiasincreasingly active investment treaty practice.

INTRODUCTION


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Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It

can provide a firm with new markets and marketing channels, cheaper production facilities,

access to new technology, products, skills and financing. For a host country or the foreign

firm which receives the investment, it can provide a source of new technologies, capital,

processes, products, organizational technologies and management skills, and as such can

provide a strong impetus to economic development. Foreign direct investment, in its classic

definition, is defined as a company from one country making a physical investment into

building a factory in another country. The direct investment in buildings, machinery and

equipment is in contrast with making a portfolio investment, which is considered an indirect

investment. In recent years, given rapid growth and change in global investment patterns, the

definition has been broadened to include the acquisition of a lasting management interest in a

company or enterprise outside the investing firms home country. As such, it may take many

forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment

in a joint venture or strategic alliance with a local firm with attendant input of technology,

licensing of intellectual property, In the past decade, FDI has come to play a major role in theinternationalization of business. Reacting to changes in technology, growing liberalization of

the national regulatory framework governing investment in enterprises, and changes in capital

markets profound changes have occurred in the size, scope and methods of FDI. New

information technology systems, decline in global communication costs have made

management of foreign investments far easier than in the past. The sea change in trade and

investment policies and the regulatory environment globally in the past decade, including

trade policy and tariff liberalization, easing of restrictions on foreign investment and

acquisition in many nations, and the deregulation and privitazation of many industries, has

probably been the most significant catalyst for FDIs expanded role.

The most profound effect has been seen in developing countries, where yearly foreign directinvestment flows have increased from an average of less than $10 billion in the 1970s to ayearly average of less than $20 billion in the 1980s, to explode in the 1990s from $26.7billionin 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion ofglobal FDI.. Driven by mergers and acquisitions and internationalization of production in arange of industries, FDI into developed countries last year rose to $636 billion, from $481

billion in 1998 (Source: UNCTAD)

Proponents of foreign investment point out that the exchange of investment flows benefits

both the home country (the country from which the investment originates) and the hostcountry (the destination of the investment). Opponents of FDI note that multinationalconglomerates are able to wield great power over smaller and weaker economies and candrive out much local competition. The truth lies somewhere in the middle.

For small and medium sized companies, FDI represents an opportunity to become more

actively involved in international business activities. In the past 15 years, the classic

definition of FDI as noted above has changed considerably. This notion of a change in the

classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct

foreign investment is still made in the form of fixtures, machinery, equipment and buildings.

Moreover, larger multinational corporations and conglomerates still make the overwhelmingpercentage of FDI. But, with the advent of the Internet, the increasing role of technology,


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loosening of direct investment restrictions in many markets and decreasing communication

costs means that newer, non-traditional forms of investment will play an important role in the

future. Many governments, especially in industrialized and developed nations, pay very close

attention to foreign direct investment because the investment flows into and out of their

economies can and does have a significant impact. In the United States, the Bureau of

Economic Analysis, a section of the U.S. Department of Commerce, is responsible for

collecting economic data about the economy including information about foreign direct

investment flows. Monitoring this data is very helpful in trying to determine the impact of

such investments on the overall economy, but is especially helpful in evaluating industry

segments. State and local governments watch closely because they want to track their foreign

investment attraction programs for successful outcomes.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies toaccomplish several tasks:

Avoiding foreign government pressure for local production.

Circumventing trade barriers, hidden and otherwise.

Making the move from domestic export sales to a locally-based national sales office.

Capability to increase total production capacity.

Opportunities for co-production, joint ventures with local partners, joint marketing

arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in very

general terms. While it is nice that many business writers like the expression, think globally,

act locally, this often used clich does not really mean very much to the average business

executive in a small and medium sized company. The phrase does have significant

connotations for multinational corporations. But for executives in SMEs, it is still just

another buzzword. The simple explanation for this is the difference in perspective between

executives of multinational corporations and small and medium sized companies.

Multinational corporations are almost always concerned with worldwide manufacturing

capacity and proximity to major markets. Small and medium sized companies tend to be more

concerned with selling their products in overseas markets. The advent of the Internet has

ushered in a new and very different mindset that tends to focus more on access issues. SMEs

in particular are now focusing on access to markets, access to expertise and most of all access

to technology.
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What would be some of the basic requirements for companies considering a foreign

investment?

Depending on the industry sector and type of business, a foreign direct investment may be anattractive and viable option. With rapid globalization of many industries and vertical

integration rapidly taking place on a global level, at a minimum a firm needs to keep abreastof global trends in their industry. From a competitive standpoint, it is important to be aware ofwhether a companys competitors are expanding into a foreign market and how they are doingthat. At the same time, it also becomes important to monitor how globalization is affectingdomestic clients. Often, it becomes imperative to follow the expansion of key clients overseasif an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some stage,export of product or service reaches a critical mass of amount and cost where foreign

production or location begins to be more cost effective. Any decision on investing is thus acombination of a number of key factors including:

assessment of internal resources,

competitiveness,

market analysis

market expectations.

TYPES OF FDI


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BY DIRECTION

Inward

Inward foreign direct investment is when foreign capital is invested in local resources.

Outward

Outward foreign direct investment, sometimes called "direct investment abroad", is

when local capital is invested in foreign resources.

Horizontal FDI

Investment in the same industry abroad as a firm operates in at home.

Vertical FDI

Backward Vertical FDI: Where an industry abroad provides inputs for a firm's

domestic production process.

Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's

domestic production.

BY TARGET

Greenfield investment

Direct investment in new facilities or the expansion of existing facilities. Greenfield

investments are the primary target of a host nations promotional efforts because they

create new production capacity and jobs, transfer technology and know-how, and can

lead to linkages to the global marketplace. The Organization for International

Investment cites the benefits of greenfield investment (or insourcing) for regional and

national economies to include increased employment (often at higher wages than

domestic firms); investments in research and development; and additional capitalinvestments. Criticism of the efficiencies obtained from greenfield investments include

the loss of market share for competing domestic firms. Another criticism of greenfield

investment is that profits are perceived to bypass local economies, and instead flow

back entirely to the multinational's home economy. Critics contrast this to local

industries whose profits are seen to flow back entirely into the domestic economy.


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Typically, this type of FDI is mostly widely practiced between developed economies;

especially those within closely integrated markets (e.g. the EU).

Strategic-Asset-Seeking

A tactical investment to prevent the loss of resource to a competitor. Easily compared

to that of the oil producers, whom may not need the oil at present, but look to prevent

their competitors from having it.

ROUTES OF FDI

FDI Approvals in India are carried out by agencies like the Reserve Bank of India and theForeign Investment Promotion Board. FDI Approval in India is done quickly by the concerned

agencies in order to bring in huge amounts of foreign direct investment into the country.

Various Routes of FDI Approval in India

The proposals for foreign direct investment in India get their approval through two routes that

are the Reserve Bank of India and the Foreign Investment Promotion Board. Automatic

approval is given by the Reserve Bank of India to the proposals for foreign direct investment

in India. The Reserve Bank of India gives approval within the time period of two weeks. It

gives approval to the proposals for foreign direct investment in India that involve FDI up to

74% in the nine categories that are included in List four, FDI up to 50% in the three categories

that are included in List two, and FDI up to 51% in the forty eight industries.

FDI Approval in India is also done by the Foreign Investment Promotion Board (FIPB), which

processes cases of non- automatic approval. The time taken by Foreign Investment Promotion

Board for approving the proposals for foreign direct investment in India is between four to six

weeks. The approach of FIPB is liberal as a result of which it accepts most of the proposals

and rejects very few.

Foreign Investment through GDRs

Global Depository Receipt (GDRs) enables the elevation of equity capital of Indian

companies in the global market. GDRs are usually calculated in foreign dollars and not

subjected to any other currency or ceilings in terms of investments. The Indian companies

who are seeking government's approval for enrolling in this sector are required to have a good

track record in terms of financial performance or other matters for a minimum period of three

years. For infrastructure projects such telecommunication, power generation, petroleum

exploration and refining, airports, roads, and ports, this requirement of three years is not

mandatory.


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Foreign Investment through GDRs - Clearance from FIPB-

FIPB is responsible for the clearance of Euro-issue to be floated by a company or a group of

companies in the financial year. For example, a manufacturing company, which is entitled to

the regulations and norms of Annex-III of the New Industrial Policy, is likely to witness a 51percent increase in the foreign direct investment amount after the proposed Euro issue. The

manufacturing company therefore is required to seek the FIPB approval before obtaining the

final approval from Ministry of Finance in case of a project, which does not abide by Annex-

III of the New Industrial Policy.

Use of GDRs in Foreign Direct Investment-

The proceeds of GDRs are used for providing financial assistance to import capital goods,

capital expenditure of domestic purchase or installation of plants, instrument and constructingand investment in software development procedures, defrayal or scheduled repayment of

earlier external loans, and equity investment in JV/WOSs in India.

Restrictions in Foreign Investment through GDRs-

Foreign Direct Investments in stock markets and real estate market through GDRs are not

allowed. The proceeds of investments can be stopped either in the foreign country from where

the FDI is coming or in India depending on the use of funds that are being approved for end

users. FDI investments under every circumstance require prior approval of the Indiangovernment.


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BENEFITS OF FOREIGN DIRECT INVESTMENT

One of the advantages of foreign direct investment is that it helps in the economicdevelopment of the particular country where the investment is being made.

This is especially applicable for the economically developing countries. During the decade of

the 90sforeign direct investmentwas one of the major external sources of financing for most

of the countries that were growing from an economic perspective. It has also been observed

that foreign direct investment has helped several countries when they have faced economic

hardships.

An example of this could be seen in some countries of the East Asian region. It was observed

during the financial problems of 1997-98 that the amount of foreign direct investment made in

these countries was pretty steady. The other forms ofcashinflows in a country like debt flows

and portfolio equity had suffered major setbacks. Similar observations have been made in

Latin America in the 1980s and in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done basically in

the way of provision of capital inputs. The importance of this factor lies in the fact that this

transfer of technologies cannot be accomplished by way of trading of goods and services as

well as investment of financial resources. It also assists in the promotion of the competition

within the local input market of a country. The countries that get foreign direct investment

from another country can also develop the human capital resources by getting theiremployeesto receive training on the operations of a particular business. The profits that are generated by

the foreign direct investments that are made in that country can be used for the purpose of

making contributions to the revenues of corporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also

helps in increasing the salaries of the workers. This enables them to get access to a better

lifestyle and more facilities in life. It has normally been observed that foreign direct

investment allows for the development of the manufacturing sector of the recipient country.

Foreign direct investment can also bring in advanced technology and skill set in a country.

There is also some scope for new research activities being undertaken.
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Foreign direct investment assists in increasing the income that is generated through revenues

realized through taxation. It also plays a crucial role in the context of rise in the productivity

of the host countries. In case of countries that make foreign direct investment in other

countries this process has positive impact as well. In case of these countries, their companies

get an opportunity to explore newer markets and thereby generate more income and profits. It

also opens up the export window that allows these countries the opportunity to cash in on their

superior technological resources. It has also been observed that as a result of receiving foreign

direct investment from other countries, it has been possible for the recipient countries to keep

their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The

biggest beneficiaries of these facilities are the small and medium-sized business enterprises.

Disadvantages of Foreign DirectInvestment

The disadvantages of foreign direct investment occur mostly in case of matters related tooperation, distribution of the profits made on the investment and the personnel. One of themost indirect disadvantages of foreign direct investment is that the economically backwardsection of the host country is always inconvenienced when the stream of foreign directinvestment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such anopinion. It is normally the responsibility of the host country to limit the extent of impact thatmay be made by the foreign direct investment. They should be making sure that the entitiesthat are making the foreign direct investment in their country adhere to the environmental,governance and social regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where the host countryhas some sort of national secret something that is not meant to be disclosed to the rest of theworld. It has been observed that the defense of a country has faced risks as a result of theforeign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated

by the workers of the recipient country. Foreign direct investment, at times, is also

disadvantageous for the ones who are making the investment themselves. Foreign direct

investment may entail high travel and communications expenses. The differences of language

and culture that exist between the country of the investorand the host country could also pose

problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that a

company may lose out on its ownership to an overseas company. This has often caused many

companies to approach foreign direct investment with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular geographicalregion. This causes a lot of inconvenience to the investor.
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The size of the market, as well as, the condition of the host country could be important factors

in the case of the foreign direct investment. In case the host country is not well connected with

their more advanced neighbors, it poses a lot of challenge for the investors.

At times it has been observed that the governments of the host country are facing problems

with foreign direct investment. It has less control over the functioning ofthe company that is

functioning as the wholly owned subsidiary of an overseas company.This leads to serious

issues. The investor does not have to be completely obedient to the economic policies of the

country where they have invested the money. At times there have been adverse effects of

foreign direct investment on the balance of payments of a country. Even in view of the various

disadvantages of foreign direct investment it may be said that foreign direct investment has

played an important role in shaping the economic fortunes of a number of countries around the

world.

FDI IN INDIA

Why FDI in India?

Second largest Economy (Purchasing Power Parity)-A safe place to do business

Largest reservoir of skilled manpower

Largest democracy political stability and consensus on reforms

Long term sustainable competitive advantage high growth rate economy

Liberal and transparent investment plans

Second largest emerging market

FDI Policy Liberalisation:
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FDI INFLOWS

India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative

amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion,

according to the data released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of the

total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December

2010, while telecommunications including radio paging, cellular mobile and basic telephone

services attracted second largest amount of FDI worth US$ 1,327 million during the same

period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066

million followed by power sector which garnered US$ 1,028 million during the financial year

April-December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024

million.

During April-December 2010, Mauritius has led investors into India with US$ 5,746 million

worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI

equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with

US$ 1,055 million, according to data released by DIPP.

COUNTRY WISE FDI INFLOWS


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FDI OUTFLOWS

The country's outward FDI showed a bigger decline of 52.7 per cent for the January-March

quarter of FY10 at $1.9 billion, as against $4.1 billion over the same period of 2008-09.

"During 2009-10, the actual outward FDI in joint ventures and wholly-owned subsidiaries

stood at USD 10.3 billion, which was 36.5 per cent lower than the investment made during the

previous year," RBI said in its July bulletin.

While manufacturing accounted for 43.1 per cent of the total investments by domestic

companies, finance, insurance real estate and business services attracted 28.1 per cent outward

investment from the country.

The apex bank said during the past fiscal the share of equity in the total outward FDI

financing decreased whereas the share of loans increased compared to 2008-09.

While equity (minus that of individuals and banks) accounted for over 64 per cent (over $6.6

billion) of the total outward FDI, loans accounted for about 35.6 per cent (over $3.6 billion).

In 2008-09, the share of equity financing was 81 per cent and loans stood at 19 per cent.

In terms of destinations, Singapore, Mauritius, the Netherlands, the US and the British Virgin

Islands accounted for 67 per cent of total outward FDI, with Singapore and Mauritius

remaining top destinations, accounting for over 48 per cent of the investments during the

period.


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In fact, Singapore increased its share of investments from India to 35.5 per cent during the

period, over 2008-09 when it accounted for 23.1 per cent share. The Netherlands, on the other

hand, witnessed a dip of 10 points to 7.2 per cent in the last fiscal as against 17.2 per cent in

2008-09 as the preferred destination.

The share of Mauritius remained constant at 12.8 per cent, while the US improved its sharemarginally from 5.7 per cent to 6.5 per cent.

SECTOR WISE FDI IN INDIA FOR FOREIGN

INVESTORS

Sector/Activity FDI Cap/Equity Entry Route

Airports 100% Automatic

Construction Development 100% Automatic

Petroleum & Natural Gas

(b) Refining26% (For PSUs)100% ( Private companies)

FIPBAutomatic

Other than Refining 100% Automatic

Telecommunication

Basic and cellular;STD/ISD 74% Automatic up to 49%

Manufacture of telecom equipment 100% Automatic

Power ( Except Atomic energy);regulations transmission,distribution and Power Trading

Ports 100% Automatic


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Roads & Highways 100% Automatic

Shipping 100% Automatic

FDI RESTRICTIONS IN INDIAN SECTORS

FDI Restrictions in Indian Sectors have been imposed in a number of sectors such as, atomicenergy, chit fund business and lottery business. FDI Restrictions in Indian Sectors have beenimposed by the government of India in order to protect the interests of the nation.

Foreign direct investment in India:The several policy initiatives taken by the government of India in the 1990s helped to

transform the country from a restrictive regime with regard to foreign direct investment to a

liberal one.

As in 2007, foreign direct investment in India is encouraged in almost all the sectors of the

country's economy under the automatic route. At the same time there are a few Indian sectors

in which foreign direct investment has been restricted by the government. Forms through

which foreign direct investment in India are allowed include, Euro issues, preferential

allotments, technical collaborations, and financial collaborations. The amount of foreign directinvestment in India came to around US$ 4.7 billion in 2006 - 2007, and the next year this

figure increased more than three times to about US$ 15.7 billion.

Various Indian sectors having FDI restrictions:

FDI Restrictions in Indian Sectors have been imposed on a few sectors by the Indiangovernment. FDI Restrictions in Indian Sectors have been imposed in order to protect theinterests of the country, as these sectors either relate to national security or sensitive enough tokeep apart the foreign companies. Foreign direct investment restrictions in Indian sectors have

also been imposed in order to allow the domestic companies to make more profits with less


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competition, than that of in the presence of rivalry international firms. The various IndianSectors having restrictions of foreign direct investment are:

Atomic energy Betting and gambling

Chit fund business Plantation or agricultural activities Real estate business Business in Transferable Development Rights Lottery business Retail trading Railway transport Mining of chrome, zinc, gold, diamonds, copper, iron, gypsum, manganese, and

sulphur Ammunition and arms

CHALLENGES FACING LARGER FDI

The challenges facing larger FDI in India are in spite of the fact that more than 100 of Fortune500 companies are already investing in India. These FDIs are already generating employmentopportunities, income, technology transfer and economic stability.

India is focusing on maximizing political and social stability along with a regulatoryenvironment. In spite of the obvious advantages of FDIs, there are quite a few challengesfacing larger FDIs in India, such as:

1. Resource challenge: India is known to have huge amounts of resources. There ismanpower and significant availability of fixed and working capital. At the same time,there are some underexploited or unexploited resources. The resources are well

available in the rural as well as the urban areas. The focus is to increase infrastructure10 years down the line, for which the requirement will be an amount of about US$ 150

billion. This is the first step to overcome challenges facing larger FDI.2. Equity challenge: India is definitely developing in a much faster pace now than before

but in spite of that it can be identified that developments have taken place unevenly.This means that while the more urban areas have been tapped, the poorer sections areinadequately exploited. To get the complete picture of growth, it is essential to makesure that the rural section has more or less the same amount of development as theurbanized ones. Thus, fostering social equality and at the same time, a balancedeconomic growth.

3. Political Challenge: The support of the political structure has to be there towards theinvesting countries abroad. This can be worked out when foreign investors put forward


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their persuasion for increasing FDI capital in various sectors like banking, andinsurance. So, there has to be a common ground between the Parliament and theForeign countries investing in India. This would increase the reforms in the FDI areaof the country.

4. Federal Challenge: Very important among the major challenges facing larger FDI, isthe need to speed up the implementation of policies, rules, and regulations. The vitalpart is to keep the implementation of policies in all the states of India at par. Thus,asking for equal speed in policy implementation among the states in India is important.

5. India must also focus on areas of poverty reduction, trade liberalization, and bankingand insurance liberalization. Challenges facing larger FDI are not just restricted to theones mentioned above, because trade relations with foreign investors will always bringin new challenges in investments.

FDI - opportunities and challenges for India

MERGERS and acquisitions are a major source of FDI inflows. This could mean that the netaddition to total physical production capabilities annually is less than that implied by the valueof annual FDI flows as most of the additions may well be created b y simply changingownership. Also, the 10 largest home countries accounted for nearly 80 per cent of global FDI

outflows with divergent trends between the developed and the developing. Developingcountries receive more FDI inflows per dollar of gross domestic product than do developedcountries. There could be a justification for this as FDI may be attracted into developingcountries by factors such as natural resources and not purely by the size of their economies.Most investments into Eastern Europe have been through the privatisation of government-owned enterprises although, of late, some direct FDI flows have also been noticed.

Russia has not yet successfully tackled the internal economic restructuring with the result thatthe privatisation route has not picked up as expected. In Latin America and the Caribbean,

privatisation of service- or natural resource-based state enterpri ses continues to be the drivingforce of FDI inflows. China remains the largest FDI host country in Asia; By comparison,

India was unable to get more than $4 billions, though the target is $10 billions this year.Africa is still awaiting the realisation of its potential; the most promising countries for FDIinflows in the continent are South Africa, Nigeria, Botswana, Cote d' Ivoire and Tunisia,although Ghana, Mozambique, Namibia, Tunisia and Uganda have also been identified ashaving good potential fo r FDI flows.

A contributing factor for the increased flow of foreign investment in the 1990s has been theextensive reform by host governments, removal of restrictive policies governing FDI flowsand permitting free flows of capital. Approval procedures were simplifi ed and rationalisedeither by removing licensing requirements or keeping it to the bare minimum. A survey, by

the European Round Table of Industrialists, of the improvements of conditions for investmentin 25 developing countries, in the wake of liberali sation, noted that more companies werewilling to invest in the developing world for strategic considerations and to realise the long-


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term economic potential of these markets. Towards that goal, regulatory efficiency, asopposed to simple deregulation, s hould be the policy focus. Improved conditions forinvestment are not automatically, or always, identical with deregulation, much less efficientregulatory framework. The demand for a competition policy and an open investment regimeas demanded at the WT O, has its genesis in this premise.

What are the opportunities and challenges before developing countries such as India? Thewave of M and As as a driving force for FDI will continue, particularly in crucial sectors suchas IT, telecom, financial and pharmaceuticals. These might be aided b y trade liberalisation,investment in capital markets, deregulation and the fiercer competitive pressures resultingfrom globalisation and technological changes. The Unctad study notes: ``Expanding firm sizeand managing a portfolio of locational assets becomes more important for firms, enablingthem to take advantage of resources and markets worldwide. The search for size is also driven

by the search for financi al, managerial and operational synergies, as well as economies ofscale. Finally, size puts firms in a better position to keep pace with an uncertain and rapidly-evolving technological environment, a crucial requirement in an increasingly knowledge-inten

sive world economy, and to face soaring research costs. ``Other motivations include efforts toattain a dominant market position as well as short-term financial gains in terms of stock value.

In many instances the dynamics of the process feeds upon itself, as firms fear that if they donot find suitable partn ers, they may not survive, in the long run.'' From the host-country pointof view, some important issues can be identified. To what extent can foreign investment servethe overall socio-economic goals in an open regime? Income disparities, employmentgeneration, technology flows, environmental costs of industrial development, commitment toexports are some of the key issues.

There could be a crowding-out effect in the face of competition for scarce resources andmarkets. The pattern of investment and the routes FDI flows might take may undergo asignificant change. For instance, M and As may become more common. There could b etakeovers of local firms in a few cases with implications for domestic brands. Takeovers perse are not to be frowned upon. But the ground rules for transparency and prevention ofinsider-trading practices must be enforced vigorously under SEBI guideli nes. Today, this is aweak area in Indian corporate mergers. Improving the host country's negotiating power withTNCs needs attention. Information of cost and the status of technology offered and the globalstrategies of firms are vital to strengthen the bargaining capability. There is likely to be anincreasing role of the TNC home countries in controlling the flow of critical or dualtechnology on so called `security grounds' which issue musty be discussed to evolve suitable

international standards. With particular reference to portfolio investments and profitrepatriation, host countries must evolve suitable financial policies and instruments to preventcapital market volatility.

As in Budget 2000-01, raising the level of investment by the FIIs which essentially operate inthe capital market might have both advantages and disadvantages. The advantage is that thisstep might integrate India's financial market with the rest of the world. But there is a price:Market volatility could have a destabilising effect and bearish and bullish trends can bemanaged at will by large investors. This might also be true when more Indian companies havetheir stocks listed in world capital markets where the volumes traded are high as is thevelocity. The solution is not to argue against these measures if we want globalisation but to

encourage indus trialisation and improve corporate performance to international standards.Also, the number of good scrips must increase as should the volumes traded. The regulatory


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framework of the capital market must also improve with the professionalisation of brokeragefirms, and the enforcement of strict dealing and settlement standards. Increasingly, tradingvelocity will be much higher, and scripless trading, w ith networked stock markets to rope inmore investors, will be necessary.

Importantly, economic management should not give cause for alarm as FIIs are highlytemperamental investors whose business is to maximise profits and minimise risks for theirmembers and not necessarily to work for the development of the host country. Th is must bedone keeping the markets liberalised and open so that investor confidence is not shaken.

The Malaysian example of placing an embargo on capital repatriation at a time of crisis is notto be emulated. However, to the extent to maintain a globally competitive regime movementof capital cannot have a totally disruptive effect. Otherwise, the ex perience of east Asiancountries and Japan may be repeated. With increased investment by TNCs, there should beeffective tools in our tax system and the administrative machinery needs to be adequatelyadjusted to address the question of transfer pricing. Lastly, evolving good corporate

governance and proper internal checks and balances through independent audit committees isa must. So far, this area has been only a talking point among corporates with some leadingchambers of commerce even treating this issue as a voluntary measure

FDI - India vs. China

With the rapidly changing world economy, every country around the globe is trying tointegrate its economy with rest of the world. This process is known as globalization.Globalization, as a process of integration of economies around the globe, usually goes through

various ways and one such visible way is the inflow of Foreign Direct Investment (FDI). Inrecent times, FDI has emerged as a buzzword in international business and has receivedsubstantial consideration in the policy analysis circles. It represents long-term movement ofcapital in and out of a country with the purpose of buying physical assets to start a business. Itspecifies the transfer of a package of resources across the countries, which not only includescapital, but also technology, management, and marketing expertise. Although the process ofFDI is a universal phenomenon, the developing countries, however, have strived hard toattract more of it to fill the resource gaps for their economic development.

The global FDI inflows have been on an increasing trend and have increased from a low ofUS$ 209 bn in 1995 to US$ 612 bn in 2005. Though the major share of FDI inflows was

always into developed countries, but an important feature was that all developing regionsincluding Africa lately saw an increase in inflows. Among the individual countries, China has

been particularly active and successful in attracting large FDI inflows since the beginning ofits economic reforms in 1979. On the contrary, India has been successful in attracting largeinflows of FDI, though at a slower rate in comparison to China, since the reforms that beganin 1990. One of the most visible reasons for China having an upper hand in attracting FDI isthat the country started its reform process much earlier than India. During the beginning of1990s, India had only US$0.097 bn FDI inflows while China had US$3.5 bn and the ratio ofFDI inflows between the two countries was about 36:1. Both the Asian neighbors were

progressing at a faster rate during the 1990s for attracting more and more FDI inflows into theeconomy. In the turn of the century, China attracted an amount of US$40.7 bn FDI, while

India attracted US$2.3 bn only but substantially high in comparison to its earlier period. Theincrease in the FDI inflows led to the decline of FDI ratio between the countries to about 17:4.


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At present, China's FDI inflows have increased to US$62 bn, while India's FDI inflows are inthe region of US$6 bn and have, in the process, contributed to the decline of the ratio betweenthe two countries to 10:3. It is predicted that if this declining ratio continues, India can levelits FDI inflows with China within a couple of years. But the question is why is China verysuccessful in attracting FDI inflows and how can India level its position with China?

There are large numbers of factors that affect the substantial inflows of FDI into Chineseeconomy and can be roughly grouped under three broad heads: Economic structure, openeconomic policies and cultural and legal environment. Under economic structure, China isvery successful for its market potentiality. As we know, market size is considerably animportant factor in attracting more FDI from Europe and USA. In fact, many MNCs of USAand Europe have been India can attract more FDI and can compete with China, if it can createa favorable environment similar to that of China. Rudra Prakash Pradhan Faculty,Economics and Finance Group, Birla Institute of Technology and Science (BITS), Pilani,Rajasthan. Chartered Financial Analyst December 2005 13 The FDI Inflows: China vs. Indiasetting up their factories in China with the aim of producing goods for domestic market.

Another factor that is favorable for China's FDI inflows is its cheap, skilled labor force. Thelow wage costs appear to have played a significant role in attracting export-oriented FDI toChina and in the distribution of FDI flows across its provinces. This has contributed to China'srapid emergence as an important global competitor in laborintensive manufacturing. Empiricalstudies have already confirmed that a region with more developed infrastructure tends toreceive more FDI. China is no exception to it and is successfully attracting more FDI inflows

because of its excellent infrastructure. If we look into the Chinese economy, the FDI inflowsare substantially high in eastern coastal-China because of this region's superior infrastructureand transport links to external markets. Taking the advantage of positive impact ofinfrastructure on FDI inflows, China classified its economy into certain special economiczones as per the availability of infrastructure and made the local governments to put an effortto upgrade the infrastructure in order to attract more FDI. China is substantially advanced intransport, electricity, gas, water, posts and telecommunication, which all have a positiveimpact on FDI inflows.

China has strong scale effects. It suggests that once a province has attracted a critical mass ofFDI, it finds easier to attract more. This is because foreign investors perceive the presence ofother foreign investors as a positive signal. Additionally, economies of scale make it moreefficient for MNCs to locate in the same area, allowing them to share information andfacilities (like education and health) for expatriate workers. The coastal provinces of China

particularly the southern provinces of Guangdong and Fujian, which are close to Hong Kong

SAR and Taiwan, have been the largest recipient of FDI and have acquired an importantadvantage over the inland provinces in attracting FDI over the past two decades.

The open door policies of China towards attracting FDI are very encouraging. Since thebeginning of reform process, Chinese government fixed the goal of attracting FDI inflows intoits economy, expecting that it would introduce new technologies and capital that would behelpful to develop its export sector. China's open door policy for attracting FDI followsrelaxation in governmental controls and provides practical assistance along with political andlegal assurances. It also follows with tax concessions and special privileges for foreigninvestors and the establishment of Open Economic Zones (OEZs). The tax incentives forForeign- Found Enterprises (FFEs) are mostly in the form of reduced enterprise income tax

rates and tax holidays. These are available to all FFEs as well as domestic firms in the OEZsand to export-oriented and advanced-technology FFEs outside the OEZs. The firms in the


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OEZs enjoy great autonomy in managing their operations. They face minimal controls on themovements of goods and are allowed to export and import almost freely. These firms also

benefit from more flexible labor relations and more land use rights. For export- oriented andadvanced-technology FFEs, there is tax exemption on profit remittances and additional tax

benefits for reinvested profits and larger reductions in land use fees. OEZs have played a

central role in the gradual opening of economy to foreign investors. The local authorities inthe OEZs are solely responsible for infrastructural development and other investment as longas they could raise the funds from taxation, from profits of the enterprise they wholly or partlyown, or from banks in the zones. The foreign enterprises are allowed to access foreignexchange and domestics market.

The inflow of FDI is also significantly affected by culture, corruption, and legal environment.It is often argued that the unique phenomenon of a large Chinese Diaspora has been the key toChina's success in attracting FDI. The fact that Hong Kong SAR, Singapore and TaiwanProvince of China together account for more than half of FDI inflows into China is usuallyused to support this argument. Simultaneously, it is also indicated that the large share of non-resident Chinese in FDI flows into China is a reflection of distortions rather than a uniqueadvantage. Cultural barriers such as language that deter foreign investors from entering Chinacould be a sign that the investment climate is difficult for outsiders, which implies a cost, notan advantage. Also, Chinese law is ambiguous and legal disputes are often settled through

personal contracts rather than formal contracts enforceable in the courts. The ambiguity in thelaw has, in turn, contributed to corruption. China scores relatively poor on corruption andgovernance indicators in international comparisons, which is measured through TransparencyInternational Corruption Perceptions Index.

In brief, the Chinese success in attracting FDI inflows has been primarily due to its largespecial economic zones as well as the availability of adequate infrastructure, highlystreamlined administration, cheap yet skilled labor force, flexible labor laws, low corruption,strong legal environment, better bureaucratic delivery system, and favorable regulatory andtax treatment to foreign firms. In this range, the position of India is comparatively low andthat leads to low FDI inflows into the Indian economy. India can attract more FDI and can

compete with China, if it can create a favorable environment similar to that of China.Institutional reforms in a more accountable and transparent way, are imperative for thecountry. It calls for the creation of special economic zones, improvement in infrastructure,

policy stability, introduction of labor reforms, establishment of a strong legal environment,streamlining of the bureaucracy, and the elimination of corruption. It should not be a dauntingtask, if there is adequate political will with respect to the economy.


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FUTURE FOR THE ASIAN COUNTRIES IN FDI

A recent survey of transnational corporations found that companies see China and India as theworlds first and second most important destinations for foreign direct investment over the2010 to 2012 period, respectively.

The World Prospectus Survey 2010-2012 was released yesterday by the United NationsConference on Trade and Development (UNCTAD), showing that China has once againretained title of the worlds most important FDI destination. India, meanwhile, overtook theUnited States to claim the surveys second spot as the U.S. economy continues to struggle.

The figure below shows the top priority host economies for FDI for the 2010 to 2012 period

(the number of times that the country is mentioned as a top priority for FDI by transnationalcorporations). The number in parenthesis is the countrys rank in last years UNCTAD survey.
http://www.unctad.org/Templates/webflyer.asp?docid=13779&intItemID=1528%E2%8C%A9=1http://www.unctad.org/Templates/webflyer.asp?docid=13779&intItemID=1528%E2%8C%A9=1


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The figure below shows prospects for respondent companies FDI expenditures in 2010 to2012 as compared to 2009 by home region (average of responses from the transnational

corporations surveyed) with 0 indicating no change, 1 indicating an increase of less than 10percent, 2 indicating an increase between 10 percent and 30 percent, 3 indicating an increasebetween 30 percent and 50 percent, and 4 indicating an increase of more than 50 percent.

FUTURE OF FOREIGN DIRECT INVESTMENT

India has been ranked at the second place in global foreign direct investments in 2010 and willcontinue to remain among the top five attractive destinations for international investors during2010-12 period, according to United Nations Conference on Trade and Development(UNCTAD) in a report on world investment prospects titled, 'World Investment ProspectsSurvey 2009-2012'.The 2010 survey of the Japan Bank for International Cooperation releasedin December 2010, conducted among Japanese investors, continues to rank India as the secondmost promising country for overseas business operations.A report released in February 2010

by Leeds University Business School, commissioned by UK Trade & Investment (UKTI),ranks India among the top three countries where British companies can do better businessduring 2012-14.


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According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the4th most attractive foreign direct investment (FDI) destination in 2010. However, it is rankedthe 2nd most attractive destination following China in the next three years.

Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific

Foundation in Canada, more and more Canadian firms are now focusing on India as aninvestment destination. From 8 per cent in 2005, the percentage of Canadian companiesshowing interest in India has gone up to 13.4 per cent in 2010. India attracted FDI equityinflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equityinflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the datareleased by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of thetotal FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December2010, while telecommunications including radio paging, cellular mobile and basic telephoneservices attracted second largest amount of FDI worth US$ 1,327 million during the same

period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066million followed by power sector which garnered US$ 1,028 million during the financial yearApril-December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024million.

During April-December 2010, Mauritius has led investors into India with US$ 5,746 millionworth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDIequity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US withUS$ 1,055 million, according to data released by DIPP.

INVESTMENT SCENARIO

In the year 2010, India has assumed a notable position on the world canvas as a keyinternational trading partner, majorly because of the implementation of its consolidated FDI

policy. The consolidation, first undertaken in March 2010, pulls together in one document allprevious acts, regulations, press notes, press releases and clarifications issued either by theDIPP or the Reserve Bank of India (RBI) where they relate to FDI into India. According to themodified policy, foreign investors can inject their funds though the automatic route in theIndian economy. Such investments do not mandate any prior government permission.However, the Indian company receiving such investment would be required to intimate theRBI of any such investment.

The FDI rules applicable to such sectors are, therefore, fairly clear and unambiguous.


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In May 2010, the government cleared 24 foreign investment proposals, worth US$ 304.7million. These include:

Asianet's proposal worth US$ 91.7 million to undertake the business of broadcastingnon-news and current affairs television channels.

Global media magnate Rupert Murdoch-controlled Star India holdings' investment ofUS$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky.

AIP Power will set up power plants either directly or indirectly by promotion of jointventures at an investment of US$ 24.4 million.

According to the 6th Annual Edition 2010 data released by Grant Thornton India, anaccounting and consulting firm, total of 971 deals valued at US$ 62.2 billion were registered.The increasing confidence in the Indian economy, buoyancy in the capital markets, significantimprovements in global perception of India and improved performance of the earlier cross-

border transactions, resulted in India Incs total merger and acquisitions (M&A) and privateequity (PE) activity to reach US$ 6.24 billion, registering a growth of 159 per cent over 2009.

The total M&A deals in 2010 were valued at US$ 49.8 billion (622 deals) and PE were valuedat US$ 6.2 billion (253 deals), while the qualified institutional placement (QIP) deals in 2010were valued at US$ 6.2 billion (56 Deals). Moreover, cross border activity also surged in 2010and significant outbound investments totalled US$ 22.50 billion, while the inbound activityalso increased significantly to touch US$ 9 billion (91 deals).

Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake inthe 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation IndiaLtd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 235.1million.

Renewable energy project developer, Juwi Group, launched its first facility in India inBengaluru resulting in Juwi India Renewable Energies Pvt Ltd, being headquartered inBangalore.

In the biggest foreign direct investment (FDI) into India, BP, the worlds fourth-largestenergy company, will pay $7.2 billion for a 30 per cent stake in 23 oil and gas blocksof Reliance Industries Ltd (RIL).

Investments by French companies in India are expected to touch US$ 12.72 billion by2012, and would focus on automobile, energy and environment sectors among others,according to Jean Leviol, Minister Counsellor for Economic, Trade and FinancialAffairs, French Embassy in India.

Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million in India to

expand its manufacturing capacity and research capabilities. The investment will beused for increasing the manufacturing capacity of Active Pharmaceutical Ingredients(APIs) and product research at the Eisai Knowledge Centre in Visakhapatnam.

India's largest automobile company Maruti Suzuki will supply its latest compact car A-Star to Volkswagen AG . The car, which will undergo some modifications and designchanges, will be sold in India and Asian markets under a new brand, according tosenior officials in the automobile industry.

Franco-American telecom equipment maker, Alcatel-Lucent plans to shift its globalservices headquarters to India. The headquarters would need about US$ 500 million ininvestments over three years, according to Ben Verwaayen, Chief Executive Officer,Alcatel-Lucent.

Robert Bosch Engineering and Business Solutions Ltd (RBEI), a 100 per cent ownedIT subsidiary of Robert Bosch GmbH of Germany, a supplier of technology and


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services to automobile OEMs, has announced an additional investment of US$ 66.36million over next two years to expand its global powertrain electronics centre in India.RBEI develops software for in-house applications of Bosch group for its globaloperations.

The HSBC Markit Business Activity Index, which measures business activity among Indianservices companies, based on a survey of 400 firms, rose to 58.1 in January 2011 from 57.7 inDecember 2010.

ConclusionAs evidenced by analysis and data the concept and material significance of FDI has evolvedfrom the shadows of shallow understanding to a proud show of force. The government whileserious in its efforts to induce growth in the economy and country started with foreigninvestment in a haphazard manner. While it is accepted that the government was undercompulsion to liberalize cautiously, the understanding of foreign investment was lacking. Asectoral analysis reveals that while FDI shows a gradual increase and has become a staple forsuccess for India, the progress is hollow. The Telecommunications and power sector are thereasons for the success of Infrastructure. This is a throwback to 1991 when Infrastructurereforms were not attempted as the sector was performing in the positive.


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FDI has become a game of numbers where the justification for growth and progress is themoney that flows in and not the specific problems plaguing the individual sub sectors.Political parties (Congress, BJP, CPI (M)) have changed their stance when in power and whenin opposition and opposition (as well as public debate) is driven by partisan considerationsrather that and effort to assess the merit of the policies. This is evident is the public posturing

of Hindu right, left and centrist political parties like the Congress. The growing recognition ofthe importance of FDI resulted in a substantive policy package but and also the delegation ofthe same to a set of eminently dispensable bodies. This is indicative of a mood of promotioncounterbalanced by a clear deference of responsibility.In the comparative studies the notion of Infrastructure as a sector has undergone a definitionalchange. FDI in the sector is held up primarily by two sub sectors (telecommunications andPower) and is not evenly distributed.

The three major industrial houses (CII, ASSOCHAM, FICCI), World Bank and the PlanningCommission have similar recommendations for FDI and yet despite their concurrence, acomprehensive policy in this respect is still to be formulated after 15 years of Indias

economic reforms. The Swadeshi alternative has receded in public policy debate.

Centre for Civil SocietyThe decisions governing FDI have been spread over many areas and agencies that have to be

streamlined or an overarching regulatory body and practical policy has to be developed. Thusthe impact of the reforms in India on the policy environment for Foreign Direct Investment

presents a mixed picture. The industrial reforms have gone far, though they need to besupplemented by more infrastructure reforms, which are a critical missing link.

BIBLOGRAPHY

WEB SITES:

http://www.hindu.com/businessline

http://business.mapsofindia.com
http://www.hindu.com/businessline/2000/03/31/stories/04312001.htmhttp://business.mapsofindia.com/india-retail-industry/fdi/challenges-facing-larger.htmlhttp://www.hindu.com/businessline/2000/03/31/stories/04312001.htmhttp://business.mapsofindia.com/india-retail-industry/fdi/challenges-facing-larger.html


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http://www.going-global.com

www.2point6billion.com

BOOKS REFERRED:

1.Does Foreign Direct Investment Promote Development?Edited by Theodore H. Moran , Edward M. Graham and Magnus Blomstrm.

2. Foreign Direct Investment. By: A.K. Thakur.

3. Foreign Direct Investment in India: Problems and Prospects

Anil Kumar Thakur (ed.)Tapan Kumar Shandilya (Ed.)
http://www.going-global.com/articles/understanding_foreign_direct_investment.htmhttp://www.piie.com/staff/author_bio.cfm?author_id=56http://www.piie.com/staff/author_bio.cfm?author_id=54http://www.piie.com/staff/author_bio.cfm?author_id=428http://www.nbcindia.com/Descriptions.asp?6v6yr_vq=ILIKKDH&Book=Foreign-Direct-Investment-in-India-Problems-and-Prospectshttp://www.aggarwaloverseas.com/searchResult.aspx?authorname=Anil%20Kumar%20Thakur%20(ed.)&authorId=85122http://www.aggarwaloverseas.com/searchResult.aspx?authorname=Tapan%20Kumar%20Shandilya%20(ed.)&authorId=93468http://www.going-global.com/articles/understanding_foreign_direct_investment.htmhttp://www.piie.com/staff/author_bio.cfm?author_id=56http://www.piie.com/staff/author_bio.cfm?author_id=54http://www.piie.com/staff/author_bio.cfm?author_id=428http://www.nbcindia.com/Descriptions.asp?6v6yr_vq=ILIKKDH&Book=Foreign-Direct-Investment-in-India-Problems-and-Prospectshttp://www.aggarwaloverseas.com/searchResult.aspx?authorname=Anil%20Kumar%20Thakur%20(ed.)&authorId=85122http://www.aggarwaloverseas.com/searchResult.aspx?authorname=Tapan%20Kumar%20Shandilya%20(ed.)&authorId=93468

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Fdi Investments in India