FDI Manish Mahajan

7/31/2019 FDI Manish Mahajan

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MANISH MAHAJAN

SRS2011PGDM19F004

DIV-A-PGDM


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INTRODUCTION

International Trade and Foreign Direct Investment are thetwo most important international economic activitiesintegrating the world economy.

Due to increase in the mobility of factors of production

across countries, FDI has become an integral part of afirms strategy to expand international business.

FDI is the largest source of external finance fordeveloping countries.

FDI not only serves as a source of capital inflow but alsohelps to enhance the competitiveness of domesticeconomy through transfering technology, raisingproductivity and generating new employmentopportunities.


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WHY FDI IS SUPERIOR TO OTHER TYPES

OF CAPITAL INFLOWS ?The following are the reasons why FDI is superior. They

are:

FDI flows are less volatile and easier to sustain at the timeof economic crisis.

FDI is more likely to be used to improve productivity.

As FDI provides more than just capital by offering access

to internationally available technologies, managementknow-how and marketing skills.


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CONCEPT OF FDI

FDI means acquiring ownership in an overseas business

entity.

It is a movement of capital across national frontier which

gives control to investor over the assets acquired.

FDI occurs when an investor in one country acquires an

asset in another country with the intent to manage.

A firms become an MNC by way of FDI as its operations

extend to multiple countries.


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DEFINITION:FDI can be defined as It is an investment involving a long

term relationship and reflecting a lasting interest and

control by a resident enterprise in one economy in an

enterprise resident in an economy other than that of the

foreign direct investor.


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BENEFITS OF FDI:Access to superior technology:-

Here foreign firms bring superiortechnology to the host countries while investing. Theextend of benefits depends upon the technology spillover

to other firms based in the host country.

Increased competition:-

The investing foreign firm increases

industry output resulting in overall reduction in domesticprices, improved products or services quality and greateravailability. This intensifies competition in hosteconomies resulting in net improvement in consumer

welfare.


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Increase in domestic investment:-

It is found that capital inflows in theform of FDI increase domestic investment so as to surviveand effectively respond to the increased competition.

Bridging host countries foreign exchange gap:-

In most developing countries thelevels of domestic savings are often insufficient to supportcapital accumulation to achieve growth targets. Besides

the level of foreign exchange may be insufficient topurchase imported inputs. Thus FDI helps in makingavailable foreign exchange for imports.


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NEGATIVE IMPACT OF FDI:

Market monopoly:-MNCs are far more advanced than domestic

companies owing to their large size and financial power. This

enterprise have ability to operate at a large scale and invest

heavily in marketing, advertising and R&D activities as a resulttheir product would be different than domestic company

product as a result more people will buy new advances

product.

Corruption:-

Large foreign investors often bribe government

officials and distort market forces.


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Technology dependence:-

MNCs often function in a way that

doesnt result in technology sharing or technology transfer

thereby making local firms technologically dependent or

technologically less self reliant.

Profit outflow:-

Foreign investors import their inputs and

use the host country as a processing base with little valueadded earning in the host country. A large proportion of

their profits may be repatriated.


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TYPES OF FDI:

FDI may be classified under various heads depending upon

the criteria used. Major types of FDI are discussed here in

a detailed manner.

On the basis of direction of investment:-

INWARD FDI:- Foreign firms taking control over domestic

asset is termed as inward FDI. From an Indian perspective

direct investment made by foreign firms such as Suzuki ,

Honda, LG etc in India are examples of inward FDI.


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OUTWARD FDI:- Domestic firms investing in foreign

countries taking control over the foreign assets is knownas outward FDI. This is also known as Direct Investment

Abroad(DIA). Tata Motors , Infosys , Videocon etc are

examples for outward FDI.

On the basis of types of activity:-

HORIZONTAL FDI:- When a firm invest in a foreign

country in similar production activity as carried out in

home country is a horizontal FDI. This occurs when the

multinational undertakes the same production activities in

multiple countries. A number ofMNCs such as coke, LG

etc expanded internationally by way of horizontal FDI.


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VERTICAL FDI:- Direct investment in industries abroad

so as either provide inputs for the firms domesticoperations or sell its domestic outputs overseas is termd as

vertical FDI.

BACKWARD VERTICAL FDI:- Direct investmentoverseas aimed at providing inputs for the firms

production processes in the home country is termed as

backward vertical FDI. This type of FDI is common in

extractive industries like mining and petroleum extraction.Companies like Shell and British Petroleum expanded

their international business by backward vertical FDI.


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FORWARD VERTICAL FDI:- Direct investment in a

foreign country aimed to sell the output of the firms

domestic production processes is referred to as forward

vertical FDI. Setting up a marketing network , assembly or

mixing operations overseas are illustrations of forward

vertical FDI.

CONGLOMERATE FDI:- Direct investment overseas

aimed at manufacturing products not manufactured by the

firm in the home country is termed as conglomerate FDI.


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On the basis of entry modes:

GREENFIELD INVESTMENT:- Investing in creation ofnew facilities or expansion of existing facilities is termed

as Greenfield investment. The selection FDI mode is

influenced by-

1. Institutional Factors

2. Cultural Factors

3. Transactional factors

MERGERS AND ACQUISITIONS:- For establishingoverseas production facilities mergers and acquisition

are crucial tool for a firms internationalization strategy.

It is estimated that 70%-80% of FDI are in the form of

MERGERS AND ACQUISITIONS.


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On the basis of sector:-

INDUSTRIAL FDI:- Investment by foreign firms in themanufacturing sector is termed as industrial FDI. Major

objectives of FDI in the manufacturing sector include are-

1. To achieve cost efficiency by way of talking advantage

of availability of raw material inputs and manpower atcheaper costs.

2. To bypass trade barriers such as high import tariffs and

other import restrictions.

3. To be closer to the markets and serve them moreefficiently.

4. To have physical presence due to strategic reasons.


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NON INDUSTRIAL FDI:- Investment by a foreign firm in

services sector is termed as non industrial FDI. The majorreasons for this are-

1. As services are non tradable FDI becomes a strategic

option to enter international markets.

2. To overcome regulatory obstacle.

3. To create regular contact with the customer.


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PROMOTION OF FDI IN INDIA:-

INSTITUTIONAL FRAMEWORK:-

1. The Department of Industrial policy and Promotion is

responsible for promoting FDI inflows in India.

2. This department advices to potential investors aboutinvestment policies, procedures and opportunities.

3. It also helps in resolving the problems faced by foreign

investors in the implementation of their projects through

Foreign Investment Implementation Authority which

interacts directly with investor.


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POLICY FRAME WORK:-

1. The policy framework of FDI in India evolved in aphased manner from the strategy of import substitution

soon after independence to progressive liberalization

that begin in early 1990s.

2. FDI inflows in the development of infrastructure ,setting up of Special Economic Zones and technological

upgradation of Indian industry through Greenfield

operation investments in manufacturing and in projects

with high employment potentials are encouraged.


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FDI PROHIBITED:-

Retail Trading.

Atomic Energy.

Lottery Business.

Gambling and Betting sector. Business of Chit Funds.

Plantation except Tea.

Activity/sector not opened to private sector investment.


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FDI Manish Mahajan