Fdi Term Paper

8/3/2019 Fdi Term Paper

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Foreign directinvestment in service

sector of India

Term Paper

Required in the Curriculum OfMBA Second Semester

In

University of Kota

Supervised By:

Dr. Meenu Maheshwari

(Lecturer, commerce &management department)

(UOK)

Submitted By:

Neha Sharma


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ACKNOWLEDGEMENT

I am first of all grateful to commerce and management department,

university of Kota which has given me an opportunity to work on the topic

foreign direct investment in service sector of India.

I am indebted equally to Dr. Meenu Maheshwari (Lecturer in commerce and

management department) who constantly helped me at every step right

from the inception of the term paper to the final documentation. I was

fortunate to receive the benefit of his spirit and intelligence. She has truly

served as a friend, philosopher and guide to me.

I also wish to express my gratitude to GOD, Parents, friends and all those

people who added value to the term paper by making comments on the topic

and the work done.

Although the number of persons who assisted me is large and many of their

contributions are directly reflected in the report, I am of course personally

responsible for the conclusions and opinions expressed here and for the term

paper as a whole.

NEHA SHARMA


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PREFACE

India has undergone a paradigm shift owing to its competitivestand in the world. The Indian economy is on a robust growth trajectory and

Boasts of a stable annual growth rate, rising foreign exchange reserves andbooming capital markets among others.Among the services sectors, the key indicators of railways, namely, the nettonne kilometers and passenger kilometers have shown growth rates. In thetransport and communication sectors, the production of commercial vehicles,cargo handled at major ports, cargo handled by the civil aviation, passengershandled by the civil aviation and the total stock of telephone connectionsregistered growth rates. The key indicators of banking, namely, aggregate

bank deposits and bank credits have shown growth rates of 18 per cent and12.2 per cent, respectively during April-December, 2009-10 over thecorresponding period in 2008-09.

There is ample reason for India's viability as a destination for foreigninvestment. In addition to the above-mentioned macroeconomic indicators,higher disposable incomes, emerging middle class, low cost competitiveworkforce, investment friendly policies and progressive reform process allcontribute towards India being an appropriate choice for investors. TheIndian Government is committed in its efforts to maintain a healthy growthrate and provide a conducive policy environment to the enterprises, both

public and private, to invest and grow their business in the country. To thisend, the Government has liberalized the foreign investment regimesubstantially over the last decade. Today, foreign direct investment isallowed in almost all sectors barring a few sensitive areas such as defense.Further, FDI is allowed in most of the sectors under the automatic route,except a few, where approval from the Foreign Investment Promotion Boardis required.Indias foreign trade policy has been formulated with a view to invite andencourages FDI in India. The process of regulation and approval has beensubstantially liberalized. The Reserve Bank of India has prescribed theadministrative and compliance aspects of FDI.

The FDI policy rationalization and liberalization measures taken by theGovernment have resulted in increased inflows of FDI over the years. During2009-10 (from April 2009- December 2009), foreign direct investment (FDI)flows to India were valued at US$ 20.92 billion.


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FDI can be divided into two broad categories: investment underautomatic route and investment through prior approval of Government. The

pick up in FDI inflows further reflects growing investor interest in the Indianeconomy on the back of strong fundamentals and simplified procedures.

The sectors attracting the highest FDI equity inflows during April-December2009 have been the Services Sector, Computer Software &hardware,Telecommunication,Housing and real estate, Constructionactivities,power,Automobile industry, Metallurgical industries, Petroleum &

Natural gas, Chemicals.


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CONTENTS

Page no.

1. Introduction:

(a) introduction to the FDI(b) Introduction to the service sector(c) FDI and Service sector


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INTRODUCTION

INTRODUCTION TO FOREIGN DIRECT

INVESTMENT

Foreign direct investment (FDI) refers to long term participation bycountry A into country B. It usually involves participation in management,joint-venture, transfer of technology and "know-how".FDI or Foreign Direct Investment is any form of investment that earnsinterest in enterprises which function outside of the domestic territory of theinvestor.
http://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Know-howhttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Know-how


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FDIs require a business relationship between a parent company and itsforeign subsidiary. Foreign direct business relationships give rise tomultinational corporations. For an investment to be regarded as an FDI, the

parent firm needs to have at least 10% of the ordinary shares of its foreignaffiliates. The investing firm may also qualify for an FDI if it owns voting

power in a business enterprise operating in a foreign country.FDIs are governed by long run consideration, because these investments cannot be easily liquidated. Hence, factors like economic prospects, long term

political stability, government policies, industrial policies etc. influence theFDI decision.

Consistent economic growth, de-regulation, liberal investment rules, andoperational flexibility are all the factors that help increase the inflow ofForeign Direct Investment or FDI.

Types of Foreign Direct Investment:

FDIs can be broadly classified into two types: Outward FDIs, and

Inward FDIs.This classification is based on the types of restrictions imposed, and the

various prerequisites required for these investments.

An outward-bound FDI is backed by the government against all types ofassociated risks. This form of FDI is subject to tax incentives as well asdisincentives of various forms. Risk coverage provided to the domesticindustries and subsidies granted to the local firms stand in the way ofoutward FDIs, which are also known as 'direct investments abroad.'

Different economic factors encourage inward FDIs. These include interestloans, tax breaks, grants, subsidies, and the removal of restrictions andlimitations. Factors detrimental to the growth of FDIs include necessities of

differential performance and limitations related with ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign DirectInvestment takes place when a multinational corporation owns some sharesof a foreign enterprise, which supplies input for it or uses the output

produced by the MNC.


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Horizontal foreign direct investments happen when a multinational companycarries out a similar business operation in different nations.

Foreign Direct Investment is guided by different motives. FDIs that areundertaken to strengthen the existing market structure or explore theopportunities of new markets can be called 'market-seeking FDIs.' 'Resource-seeking FDIs' are aimed at factors of production which have moreoperational efficiency than those available in the home country of theinvestor.

REASONS OR MOTIVES FOR FDIs:

High transportation cost associated with exporting.

Problems with license and need to protect intellectual property.

Availability of investment brands from foreign government.

Lower operating cost.

Faster access of local market.

Under capacity at home. A desire to protect supplies of new material and component in

particular countries.

Local content requirement.

Especially favorable economic conditions in particular country.

Wanting to spread the risk of down terms in particular market.

Acquisition of know-how and technical skills.

Desire to minimize worldwide tax burden and maximize tax benefits.

The need to engage in local assembly or part manufacture.

The increase in worldwide trade and opening up of new markets.

Development of new technologies.

Liberalization of the nations economy.

Establishment of common market and other regional block withcommon external tariff.


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INTRODUCTION TO SERVICE SECTOR OF INDIA

Service Sector in India today accounts for more than half ofIndia's GDP. According to data for the financial year 2008-2009, the share ofservices, industry, and agriculture in India's GDP is 55.1 per cent, 26.4 percent, and 18.5 per cent respectively. The fact that the service sector nowaccounts for more than half the GDP marks a watershed in the evolution ofthe Indian economy and takes it closer to the fundamentals of a developedeconomy.Services or the "tertiary sector" of the economy covers a wide gamut ofactivities like trading, banking & finance, infotainment, real estate,transportation, security, management & technical consultancy among severalothers. The various sectors that combine together to constitute serviceindustry in India are:

Trade Hotels and Restaurants Railways

Other Transport & Storage Communication (Post, Telecom) Banking Insurance Dwellings, Real Estate Business Services Public Administration; Defense Personal Services Community Services Other Services

There was marked acceleration in services sector growth in the eighties andnineties, especially in the nineties. While the share of services in India's GDPincreased by 21 per cent points in the 50 years between 1950 and 2000,nearly 40 per cent of that increase was concentrated in the nineties. While


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almost all service sectors participated in this boom, growth was fastest incommunications, banking, hotels and restaurants, community services, tradeand business services. One of the reasons for the sudden growth in theservices sector in India in the nineties was the liberalization in the regulatoryframework that gave rise to innovation and higher exports from the servicessector.

The boom in the services sector has been relatively "jobless". The rise inservices share in GDP has not accompanied by proportionate increase in thesector's share of national employment. Some economists have also cautionedthat service sector growth must be supported by proportionate growth of theindustrial sector, otherwise the service sector grown will not be sustainable.In the current economic scenario it looks that the boom in the services sectoris here to stay as India is fast emerging as global services hub.


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FDI AND SERVICE SECTOR

The FDI Inflows to Service Sector has helped the development ofseveral industries in the service sector of the Indian Economy, such as TeleCommunication, Financial and Non financial, Hotel & Tourism, and manyothers.FDI Inflows to Service Sector has been phenomenal in the past few years.Since the onset of the liberalization of the Indian economy in 1991, thecountry has experienced a huge increase in the inflow of ForeignInvestments. The service sector in India has tremendous growth potential andas such it has attracted huge Foreign Direct Investments (FDI).

Despite the global financial crisis, inflow of foreign capital to thecountry has increased sharply in 2008. The aggregate inflow of foreign directinvestment (FDI) has more than doubled in 2008 over 2007. The stake wasenormous. For, Corporate Indias dependence on foreign funds has increasedsteadily in recent years as the easing of norms for FDI, especially, externalcommercial borrowings (ECB), over the years had led to a dramatic rise inthe inflow of foreign capital in India. Granted, there are reasons for cautionas these data relate to 2008 only and the situation may have changed in 2009.

After all, the crisis is not over yet. In fact, RBIs recent release shows thatthe inflow of ECB and foreign currency convertible bonds (FCCBs) hasslowed down considerably in 2009 down 73% from $1,702 million in

November 2008 to $453 million in February 2009.The decline in ECB is feared to affect the investment plans of

companies. After all, a large number of companies use these funds to importcapital goods. In fact, of the 32 companies which raised funds through ECBand FCCBs last February through the automated route, as many as 15 did sofor import of capital goods for expansion of capacity or for modernization of

plants. That Indias investment activities in recent years have largely been

financed by foreign sources may be seen in the sharp rise in FDI inflows.Aggregate inflow of FDI has increased more than nine times during the pastfive years, from Rs 14,781 crore in 2004 to Rs 1, 39,725 crore in 2008.

While improved macro fundamentals in recent years have strengthenedthe confidence of foreign investors in Indian industry, opening up of newareas and changes in government policy towards FDI must have engineeredthis jump in foreign capital inflow. That opening up of new areas has given


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foreign investors more investment options is reflected in the changingdestinations of foreign capital. The service sector, which was a restricteddomain for foreign capital in the past, for example, has become the mostsought-after area of late.

The service sector has been the prime mover of Indias gross domesticproduct in recent years and foreign investors never had doubts about itspotential. However, policy restrictions in the past did not allow them toinvest in this industry as much as they willed. Now that restrictions have

been eased, FDI has flowed in to this industry as never before.

It accounted for a huge 24.3% of the total FDI inflow in 2008. In actualterms, the FDI inflow to this sector has grown 32 times in the past five yearsfrom a mere Rs 1,074 crore in 2004 to Rs 33,947 crore in 2008.

The second most important destination of FDI in 2008 wastelecommunication. It accounted for about 8.3% of the total FDI flowing intothe country in 2007.

But while the service sector and the telecommunication industry haveincreased their share in total FDI inflows in the country in 2008, the softwareindustry has gone down the ladder further. The poor performance of thesoftware companies dampened the mood of the foreign investors and FDIinflow to software sector has fallen sharply.

The sector received only Rs 7,810 crore FDI in 2008 against Rs 10,214 crorein 2007. Its share in total FDI inflow has fallen to only 5.6% in 2008 against16% in 2007. But as the financial crisis continues, the big question is: WillFDI inflow to India grow at the same rate in the coming months?

After all, the service sector, which has been the main contributor to GDPgrowth, was the biggest gainer of the rise in FDI inflow in recent years. Nowif the FDI inflow slows down, it will affect the growth of the service sectorand in turn, the GDP growth.


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EXPORT

OPPORTUNITIES ANDEXPORT CAPABILITIES

OF SERVICE


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Services, particularly the financing and transportation of goods, have playedan important role in world trade for centuries. In recent years, the focus ofservices trade has shifted away from just facilitating trade in goods as the

sector has emerged as an independent entity in itself with services trade inthe four supply modes opening up new opportunities. More recently, theintegration of telecommunications and computer technologies has madevirtually all services tradable across borders. Rapid technological advancesin the past few decades in transport, computing and telecom have resulted inenterprises making use of distant resources for production and serving widermarkets. The trend of globalization, reinforced by liberalization policies andthe removal of regulatory obstacles has fuelled steady growth of internationalinvestment and trade in services. Better communications and multinationalenterprises have also facilitated the movement of people, both as

independent service employers and employees. The convergence betweencomputers and telecommunication technologies has had a number ofsignificant consequences for the competitiveness of services like making it

possible for firms to provide services rapidly and conveniently, locating thework force of a firm anywhere in the world, as long as they can telecommuteto work, etc. The growth of the Services sector and consequently the growthof the Indian economy perhaps have a trade angle. Though external trade istaken only net in the GDP and its effect may not be felt directly as thedeficit in merchandise trade overshadows the positive balance in services

trade, the indirect effects of exports of services is high on the domesticgrowth of services and even industry. For example, the domesticallydynamic services like trade, hotels, Transport and communications etc. arerelated to important services in exports like travel and transportation. Thegrowth in export of software services has given fillip to domestic productionand use of these services. The dynamic growth of professional servicesexports has a bearing on the growth of these services domestically. Similarlygrowth of shipping services and travel services exports can have a direct

bearing on domestic industries related to these services.

The importance of the vast and growing export business opportunities forIndias services sector can be seen by juxtaposing the import demand ofmajor service importers with our export capabilities.


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FDI POLICIES

FDI POLICIES OF GOVT. IN SERVICE SECTOR


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India has one of the most transparent and liberal Foreign Direct Investment(FDI) regimes among emerging and developing economies. Differentialtreatment is limited to a few entry rules, predominantly in some Servicessectors, spelling out the proportion of equity that the foreign investor canhold in an India-registered company or businesstermed "sector caps".Foreign corporate and individual investment in India, termed collectively asForeign Direct Investment (FDI) when it relates to control or ownership of acompany in India, takes one of two routes:

Automatic route or Automatic Approval:

This requires no prior approval for FDI. Post-facto filing of data relating tothe investment made with the Reserve Bank of India (RBI) is for record anddata purposes. This route is available to all sectors or activities that do nothave a sector cap i.e. where 100% foreign ownership is permitted, or for

investments that are within a sector cap (e.g. less than or equal to 26% shareof an Insurance company) and where the Automatic route is allowed.

FIPB Approval the Foreign Investment Promotion Board (FIPB) approvesinvestment proposals:

where the proposed shareholding is above the prescribed sector caps,or

where the activity belongs to that small list of sectors where FDI iseither not allowed or where it is mandatory that proposals be routed

through the FIPB (e.g. sectors that require industrial licensing)

The FIPB ensures a single-window approval for the investment and acts as ascreening agency (for sensitive/negative list sectors). FIPB approvals (orrejections) are normally received in 30 days. Some foreign investors use theFIPB application route where there may be absence of stated policy or lackof policy clarity.

An outline of the broad policies for the service sector is provided below:

100% FDI under the automatic route is permitted for many service sectorssuch as real estate construction, townships1, resorts, hotels and tourism(including tour operators and travel agencies, serviced apartments,convention and exhibition centres), films, IT and IT - enabled services,ISP/email/voice mail services, business services and consultancy, renting andleasing, Venture Capital Funds/Companies (VCFs/VCCs), medical/healthservices, education, advertising and wholesale trade and courier services.


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100% FDI permitted in non-banking financial services subject to minimumcapitalization norms.

Certain service sectors are being opened up in a phased manner to allowdomestic companies to prepare for global competition. In both banking and

insurance, foreign investment is permitted subject to specific caps or entryconditions. FDI in media is permitted with varying sector caps. Retail tradeis currently restricted to 51% FDI permitted in single brand retail stores and100% FDI permitted in wholesale cash and carry. Legal services arecurrently not open to foreign investment.

Restricted List of Sectors

Sectors where FDI is prohibited are Retail Trading (except single brandproduct retailing), Atomic Energy, Lottery Business, Gambling and Betting,

Business of Chit Fund, Nidhi Company, Trading in TransferableDevelopment Rights (TDRs) and any activity/sector that is not opened toprivate sector investment. Besides the above, FDI is not allowed inplantations*.

Subject to these foreign equity conditions, a foreign company can set up aregistered company in India and operate under the same laws, rules andregulations as any India-owned company.

India extends National Treatment to foreign investors with absolutely no

discrimination against foreign-invested companies registered in India or infavor of domestic ones.

Service sector and entry routes:

The table has been given in the following page.

Services

SectorOwnership

Limit

Entry

RouteRemarks


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Banking

Indian Private Banks 74% Automatic

Foreign banks can take anequity stake of more than 5%(up to 74%) only in thoseprivate sector banks which

have been identified by the RBIfor restructuring

PSU Banks 20%Subject to compliance withRBI guidelines

NBFCs 100% Automatic

Includes 19 specified activities;subject to minimumcapitalization norms andcompliance with RBIguidelines

Microfinance 100% Automatic

Insurance 26% Automatic

Includes both Life and Non-Life Insurance; subject tolicense from InsuranceRegulatory & DevelopmentAuthority

Real estate and

construction

Subject to minimum land areaof 10 hectare for servicedhousing plot and built-up areaof 50,000 sq. mts. forconstruction developmentprojects. Also minimum

capitalization and completionnorms. Minimum 3 years lock-in from the completion ofcapitalization

Townships 100% Automatic

Housing 100% Automatic

Construction Development Projectsincluding Townshipsand housing

100% Automatic

Build-up Infrastructure 100% Automatic

Credit Informationcompanies

49% FIPBPrior clearance from FIPB. FIIinvestment permitted up to24%

Trading

Retail Trade - SingleBrand

51% Automatic

Retail Trade - MultiBrand Not Permitted

Trading (Export, Cashand Carry Wholesale)

100% Automatic

Commodity Exchanges 49%FDI up to 26%, FII up to 23%.No single investor can holdmore than 5%

Tourism


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Hotels, restaurants,beach resorts

100% AutomaticIncludes facilities for providingaccommodation and foodservices

Tour and travelagencies

100% Automatic

Broadcasting

TV softwareproduction

100%Subject to maximum foreignequity up to 49% includingFDI/NRI/FII

Hardware facilities -(Up linking, HUB,etc.)

49%

Subject to maximum foreignequity up to 49% includingFDI/NRI/FII; FDI in news andcurrent affairs channels whichuplink from India is capped at26%

Cable network 49% Subject to maximum foreignequity up to 49% includingFDI/NRI/FII

DTH 20%

Subject to maximum foreignequity up to 49% includingFDI/NRI/FII. FDI not toexceed 20%

Terrestrial BroadcastFM

20%Subject to licensee being acompany registered in Indiaunder the Companies Act, 1956

Terrestrial TV

Broadcast Not Permitted

Print Media

Scientific/Technicaljournals

100%

Other non-news/non-current affairs/specialtypublications

74%

Newspapers,Periodicals dealingwith news and current

affairs

26%

Other Services

Advertising and Film 100% AutomaticIncludes all film relatedactivities

Courier and expressservices

100% FIPBIncludes all express postalservices except the distributionof letters


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Lottery, Betting andGambling

Not Permitted

Defense and StrategicIndustries

26% FIPB

Subject to security andlicensing requirement; productsto be sold primarily to the

Ministry of DefenseR&D activities 100% Automatic


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INDIAS FDI

GROWTH

Boosted by the rapid pace of the economic progress, profitableinvestment regime, flexible procedural policies with the relaxationsintroduce in various sectoral, has in turns prove to be the horde for theinternational key players in finding the new investment opportunities in theIndia. Rising trend of the foreign direct investment is also signaling towards


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the pivotal role playing by the foreign direct investment in the growth of theeconomy. The facts are also standing high as in the year 2007-08, foreigndirect investment in India has crossed the mark of US$25 billion, which was56 per cent more than what it was in 2006-07, i.e., US$15.7 billion. In thefirst half of the current financial year, 2008, India's foreign direct investmentwas registered to be US $341 billion. It has been projected that during thetime period of 2008-09, the FDI of the country could attract US$35 billion.

India as the Favorable Destination

The result of the global survey conducted by Ernst and Young has put theIndia on the fourth rank of the most favorable destination after China,Central Europe and Western Europe, on the basis of the prospects of thedifferent business locations. India has been put ahead of the United States ofAmerica and Russia. India received total 30 per cent votes but both America

and Russia got 21 per cent votes each.

The report of the National Council of Applied Economic Research (NCAER)has stated out In the first nine months of 2007-08, the net capital flows roseto US$ 83 billion from US$ 30 billion the country received during thecorresponding period of the previous year. Those funds which have come asthe FDI or the external commercial borrowing has sufficient to raise the

portfolio funds between the time period of financial year 2007 and financialyear 2008, the reserves have seen the rising trend by US$150 billion. Suchinflux of the funds has found to be sufficient for financing the currentaccount deficit during the aforesaid time period. The Japan Bank forInternational Cooperation reveals that the India has emerged out as the'favorable business point' for the Japanese investors.

More flow of the foreign direct investment has been seen in the skillintensive and high value added service industries, especially those which arerelated to the financial services and information technology. Furthermore,India has come out as the international service industry with the moreattraction of FDI, providing the more unassailable low cost opportunities, the

prevalence of high technology and language skills and the high supportivegovernment policies. Companies from across the world are now busy inevincing their interest into various sectors such as construction, energy,electrical equipments, telecommunication, automobiles etc.

Many automobile companies from Japan, France and America havecome up with their manufacturing base in the India.


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Presently, inflow of foreign direct investment in the real estate sectoris estimated in between of US$5 billion and US$5.50 billion. It has

been projected that the investment in the Indian real sector will touchthe mark of US$20 billion in next 2 years i.e., by 2010. Some of theleading international players- IJM Corp (Malaysia), Lee Kim TahHolding (Singapore), Salim Group (Indonesia), Emaar Properties(Dubai).

Many foreign players are also interested in making their entry into theIndian arena. Like Wal Mart, Marks & Spencer, Rosebay etc. have theinvestment to around US$10.

The surging force in the mobile service is presumed to reach at US$24billion, as the cumulative FDI, in the telecommunication sector by2010.

Government planning:

From last 10 years, India's government has undergone the complete changein its outlook when it comes about the FDI. The government has taken upseveral measures for augmenting the injection of the FDI in the India. Someof the steps taken in this direction are-

It is hoping that the government would soon take concrete steps inremoving the disinvestment clause, which is the compulsory clauseapplicable on the international companies on various key sectors like

chemical, food processing etc. The government may permit 49% foreign direct investment in sectors

like apparels, gems & jewelry. Restructure of the Foreign Investment Promotion Board. Formation of the Indian Investment Commission for functioning as the

1 stop haven for the investor and bureaucracy. Raising the FDI Limit in many sectors like media, petroleum, telecom,

aviation, banking etc.


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FDI INFLOWS IN

INDIA

The Sectorwise Analysis of FDI Inflow in India reveals that maximum FDIhas taken place in the service sector including the telecommunication,information technology, travel and many others. The FDI Inflows to Service


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Sector has helped the development of several industries in the service sectorof the Indian Economy, such as Tele Communication, Financial and Nonfinancial, Hotel & Tourism, and many others.

FDI Inflows to Service Sector has been phenomenal in the past few years.Since the onset of the liberalization of the Indian economy in 1991, thecountry has experienced a huge increase in the inflow of ForeignInvestments. The service sector in India has tremendous growth potential andas such it has attracted huge Foreign Direct Investments (FDI).

The total cumulative amount of FDI inflows in India were Rs 563,656million, about US$129,656 million over a decade from 1991 to January2010. The country attracted FDI inflows of US$1.74 billion as at November2009. That marked a 60 per cent increase that was achieved in November

2008 which stood at US$1.08 billion. The cumulative amount of FDI inflowstabulated from 1991 to end of December 2009 was US$127.46 billion. TheDepartment of Industrial Policy and Promotion stated in its latest data.Equity FDI inflows into India stood at US$1.54 billion in 2009, December.Thus when tabulated cumulatively, a total sum of US $20.92 billionrepresents the countries FDI Equity inflows from April to December 2009.

In the April to December, fiscal year of 2009, foreign investments in Indiainflows peaked at an impressive US$26.5 billion. That was in addition to thetotal FDI inflows of US$23.82 made in January to October of the same year.

The Department for Industrial Policy and Promotion estimates that Octoberlast year had a 56% in FDI at a sum of US$2.33 billion. The Indian servicessector attracted net FDI estimated at US$3.54 billion from April toDecember, 2009. Computer software and hardware sector got aroundUS$595 million in the same period. US$2.36 billion marked theTelecommunications earnings in FDI over the same time. Leading investorsinto India with major FDI inflows were led by Mauritius with a staggeringUS$8.91, with Singapore coming a close second with US$1.7 billion. TheUS had an overall US$1.58 billion in FDI inflows into India over the same

period of time.

The Indian economy continues to perform impressively despite the bitingGreek Crisis and its fears. The Retail market in the Country ranks as the fifth

biggest worldwide. This has made India an attractive destination for foreigninvestments. The Country's total mergers and topped US$2,167 million whencompared to the US$1, 324 million and US$223 million in the same time in


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2008 and 2009. A survey by the Japan Bank for International Cooperationranked India as the second most promising destination for foreigninvestments. The first position went to China. This survey was done amongstJapanese foreign investors in the Countries of study. The Indian has beensignificant in its encouragement of foreign investments in India for itsemerging economy.


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ROLE OF FDI IN

ECONOMIC

DEVELOPMENT

FDI has attracted increasing interest from developing countries because ofthe perceived benefits in terms of the injection of capital, technology andknowledge. This article analyses the main analytical underpinningsconcerning the inter-relationships between FDI and host country economicdevelopment. We undertake a brief review of empirical studies on the issue


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of FDI-led growth process. We highlight a very basic point emerging fromthe literature, that FDI is not a sine qua non for development. FDI-led growthis not a process that occurs automatically in the host country, and this reflectsthe complex nature of the interrelationships between multinationalenterprises (MNEs) and host country economic agents. A vast majority of theexisting empirical studies indicate that FDI does not always make a positivecontribution to either economic growth or factor productivity. This is often

because host countries are not able to capture the bulk of benefits associatedwith FDI without a certain threshold level of absorptive capabilities.Foreign direct investment has a major role to play in the economicdevelopment of the host country. Over the years, foreign direct investmenthas helped the economies of the host countries to obtain a launching padfrom where they can make further improvements.

This trend has manifested itself in the last twenty years. Any form of foreigndirect investment pumps in a lot of capital knowledge and technologicalresources into the economy of a country.

This helps in taking the particular host economy ahead. The fact that theforeign direct investors have been able to play an important role vis--vis theeconomic development of the recipient countries has been due to the fact thatthese countries have changed their economic stances and have allowed theforeign direct investors to come in and improve their economies.

It has often been observed that the economically developing as well asunderdeveloped countries are dependent on the economically developedcountries for financial assistance that would help them to achieve someamount of economical stability.The economically developed countries, on their part, can help these countriesfinancially by investing in these countries. This financial assistance can bechannelized into various sectors of the economy. The channelization isnormally done on the basis of the requirements of particular sectors.

It has been observed that the foreign direct investment has been able toimprove the infrastructural condition of a country. There is ample scope oftechnological development of a country as well. The standard of living of thegeneral public of the host country could be improved as a result of theforeign direct investment made in a country. The health sector of many arecipient country has been benefited by the foreign direct investment. Thus itmay be said that foreign direct investment plays an important role in the


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overall economic and social development of a country.

It has been observed that the private sector companies are not alwaysinterested in undertaking activities that help in improving the infrastructureof the country. This is because the gains form these infrastructural activitiesare made only in the long term; there are no short term benefits as such.

This is where the foreign direct investment can come in handy. It can alsoassist in helping economically underdeveloped countries build their ownresearch and development bases that can contribute to the technologicaldevelopment of the country. This is a very crucial contribution as most ofthese countries are not able to perform these functions on their own. Theseassistances come in handy, especially in the context of the manufacturingand services sector of the particular country, that are able to enhance their

productivity and ultimately advance from an economic point of view.

At times foreign direct investment could be provided in form of technology.Else, the money that comes in a country through the foreign directinvestment can be utilized to buy or import technology from other countries.This is an indirect way in which foreign direct investment plays an important

part in the context of economic development. Foreign direct investment canalso be helpful in assisting the host countries to set up mass educational

programs that help them to educate the disadvantaged sections of the society.Such assistance is often provided by the non-governmental organizations inthe form of subsidies. The developing countries can also tackle a number ofhealthcare issues with the help of the foreign direct investment. The Indianeconomy is the third largest in the world as measured by Purchasing PowerParity, with a gross domestic product of US $3.611 trillion. When measuredin USD exchange-rate terms, it is the 10th largest in the world, with a GDP ofUS $800.8 billion (2006). India is the second fastest growing major economyin the world, with a GDP growth rate of 8.9% at the end of the first quarterof 2006-2007. However, India's huge population results in a per capitaincome of $3,300 at PPP and $714 at nominal.

The Indian economy is diverse and encompasses agriculture, handicrafts,manufacturing, textile, and a multitude of services. Although two-thirds ofthe Indian workforce still earns their livelihood directly or indirectly throughagriculture, service sector is a growing one and are play an increasinglyimportant role of India's economy. The advent of the digital age, and thelarge number of young and educated populace fluent in English, is gradually


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transforming India as an important 'back office' destination for global(multinational) companies for the outsourcing of their customer services andtechnical support. India is a major exporter of highly talented workforce insoftware and financial services, and software engineering.

India adopted a socialist-inspired approach for most of its independenthistory, with strict government control over private sector participation,foreign trade, and foreign direct investment. However, since the earlynineties, India has gradually opened up its markets through economicreforms by reducing government controls on foreign investment. The

privatization of publicly owned industries and the opening up of somesectors to private and foreign investors has proceeded slowly amid politicaldebate.

India faces a burgeoning population and the challenge of reducing social andeconomic inequality. Even though Poverty remains a serious problem, it hasdeclined considerably since independence, mainly due to the greenrevolution and economic reforms.

FDI up to 100% is allowed under the automatic route in all activities/sectorsexcept the sectors, which will require approval of the Government.

The question that begs for an elaboration is that is high growth and inflowsof FDI solve structural imbalance of Indian economy and will it succeed in

improving the lot of bottom section of the Indian economy, which are livingin abysmally poor socio-economic conditions in the countryside. Theemployment elasticity in the agriculture and industrial sector has gone downin the post-reform period, therefore, the creation of employmentopportunities will be a gigantic task for the policy makers. FDI has come inthe most capital-intensive sectors; therefore, the required employmentopportunities could not be created especially for the manual and the semiskilled labor. High skilled workforce gained substantially. That is why highgrowth is called urban centric and thus has developed a wedge between theurban and rural economy. There is urgent need to fill this void. The processof Policymaking has matured in the democratic Indian polity since theindependence. It is thus predicted that the growing problems will receivemature response and policy will be articulated in such a way to use FDI theway China has used to enhance economic growth while taking more andmore investment to industrialize the rural sector of the Indian economy. TheIndian economy has reached in the orbit of high rate of economic growth. It


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is being widely acclaimed and considered as an emerging global economicpower. The rate of growth recorded during the period 1950-51 to 2006-07clearly indicated a tendency of steady upward trend. However, the decade of80's emerged as a beginning of the high rate of economic growth or at least adramatic departure from the past growth performance. This tendency hadcontinued in the nineties and further growth stimulus has occurred in theearly 21st century.

Foreign direct investment is an investment made by a foreign individual orcompany in productive capacity of another country. It is the movement ofcapital across national frontiers in a way that grants the investor control overthe acquired asset.

As the third-largest economy in the world in PPP terms, India is a preferred

destination for foreign direct investments (FDI). India's recently liberalizedFDI policy permits up to a 100% FDI stake in ventures. Industrial policyreforms have substantially reduced industrial licensing requirements,removed restrictions on expansion and facilitated easy access to foreigntechnology and FDI. The upward moving growth curve of the real-estatesector owes some credit to a booming economy and liberalized FDI regime.A number of changes were approved on the FDI policy to remove the cap inmost of the sectors. Restrictions will be relaxed in sectors as diverse as civilaviation, construction development, industrial parks, commodity exchanges,

petroleum and natural gas, credit-information services, Mining etc. The

future of Indian economy is brighter because of its huge human resources,rapidly upcoming service sector, availability of large number of competent

professionals, vast market for every product, increasing impact ofconsumerism, absence of controls and licenses, interest of foreignentrepreneurs in India and existence of four hundred million middle class

people. Today, India provides highest returns on FDI than any other countryin the world.


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ADVANTAGES

AND

DISADVANTAGE

S OF FDI


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With the development of economic globalization, foreign direct investment

(FDI) is increasingly being recognized as an important factor in theeconomic development of countries. Although FDI began centuries ago, thebiggest growth has occurred in recent years. This growth resulted from

several factors, particularly the more receptive attitude of governments toinvestment inflows, the process of privatization, and the growinginterdependence of the world economy.

Foreign direct investment (FDI) occurs when a firm invests directly infacilities to produce and/or market a product in a foreign country (Charlesw.l.hill, "International business"). FDI takes on two main forms; the first is agreen-field investment, which involves the establishment of a wholly newoperation in a foreign country. The second involves acquiring or mergingwith an existing firm in the foreign country. On the other hand, FDI isdivided into two kinds; horizontal FDI (market-expansion investments)which is investment in the same industry abroad as a firm operates in athome; And vertical FDI (resource-seeking investments), which comprisestwo forms further; the first is backward vertical FDI investing an industryabroad that provides inputs for a firm's domestic production process. Thesecond is forward vertical FDI in which an industry abroad sells the foods of

a firm's domestic production processes.

ADVANTAGES OF FDI:

One of the advantages offoreign direct investmentis that it helps in the economic development of the particular country wherethe investment is being made.

This is especially applicable for the economically developing countries.During the decade of the 90s foreign direct investment was one of the majorexternal sources offinancing for most of the countries that were growing

from an economic perspective. It has also been observed that foreign directinvestment has helped several countries when they have faced economichardships.

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 offoreign direct investment made in these countries was pretty steady. The
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other forms ofcash inflows in a country like debt flows and portfolio equityhad suffered major setbacks. Similar observations have been made in LatinAmerica in the 1980s and in Mexico in 1994-95.

Foreign direct investment

Also permits the transfer of technologies. This is done basically in the wayof provision of capital inputs. The importance of this factor lies in the fact

that this transfer of technologies cannot be accomplished by way oftradingof goods and services as well as investment of financial resources. It alsoassists in the promotion of the competition within the local input market of acountry.

The countries that get foreign direct investment from another country canalso develop the human capital resources by getting their employees to

receive training on the operations of a particular business. The profits thatare generated by the foreign direct investments that are made in that countrycan be used for the purpose of making contributions to the revenues ofcorporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particularcountry. It also helps in increasing the salaries of the workers. This enablesthem to get access to a better lifestyle and more facilities in life. It hasnormally been observed that foreign direct investment allows for thedevelopment of the manufacturing sector of the recipient country.

Foreign direct investment can also bring in advanced technology and skillset in a country. There is also some scope for new research activities being

undertaken.

Foreign direct investment assists in increasing the income that is generatedthrough revenues realized through taxation. It also plays a crucial role in thecontext of rise in the productivity of the host countries. In case of countriesthat 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 andprofits.

It also opens up the export window that allows these countries theopportunity to cash in on their superior technological resources. It has also

been observed that as a result of receiving foreign direct investment fromother countries, it has been possible for the recipient countries to keep their
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rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates ofinterest. The biggest beneficiaries of these facilities are the small andmedium-sized business enterprises.

DISADVANTAGES OF FDI:

The disadvantages of foreign direct investment occur mostly in case ofmatters related to operation, distribution of the profits made on theinvestment and the personnel. One of the most indirect disadvantages offoreign direct investment is that the economically backward section of thehost country is always inconvenienced when the stream of foreign direct

investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and Chinacorroborate such an opinion. It is normally the responsibility of the hostcountry to limit the extent of impact that may be made by the foreign directinvestment. They should be making sure that the entities that are making theforeign 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 wherethe host country has some sort of national secret something that is notmeant to be disclosed to the rest of the world. It has been observed that thedefense of a country has faced risks as a result of the foreign directinvestment in the country.

At times it has been observed that certain foreign policies are adopted thatare not appreciated by the workers of the recipient country. Foreign directinvestment, at times, is also disadvantageous for the ones who are making

the investment themselves.

Foreign direct investment may entail high travel and communicationsexpenses. The differences of language and culture that exist between thecountry of the investor and the host country could also pose problems in caseof foreign direct investment.
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Yet another major disadvantage of foreign direct investment is that there is achance that a company may lose out on its ownership to an overseascompany. This has often caused many companies to approach foreign directinvestment with a certain amount of caution.

At times it has been observed that there is considerable instability in aparticular geographical region. This causes a lot of inconvenience to theinvestor.

The size of the market, as well as, the condition of the host country could beimportant factors in the case of the foreign direct investment. In case the

host country is not well connected with their more advanced neighbors, itposes a lot of challenge for the investors.

At times it has been observed that the governments of the host country arefacing problems with foreign direct investment. It has less control over thefunctioning of the company that is functioning as the wholly ownedsubsidiary of an overseas company.

This leads to serious issues. The investor does not have to be completelyobedient to the economic policies of the country where they have investedthe money. At times there have been adverse effects of foreign directinvestment on the balance of payments of a country. Even in view of thevarious disadvantages of foreign direct investment it may be said that foreign

direct investment has played an important role in shaping the economicfortunes of a number of countries around the world.


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DETERMINANTS

OF FDI


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One of the most important determinants of foreign direct investment is thesize as well as the growth prospects of the economy of the country where theforeign direct investment is being made.

It is normally assumed that if the country has a big market, it can growquickly from an economic point of view and it is concluded that the investorswould be able to make the most of their investments in that country.

In case of foreign direct investments that are based on export, the dimensionsof the host country are important as there are opportunities for biggereconomies of scale, as well as spill-over effects.

The population of a country plays an important role in attracting foreigndirect investors to a country. In such cases the investors are lured by the

prospects of a huge customer base.

Now if the country has a high per capita income or if the citizens havereasonably good spending capabilities then it would offer the foreign directinvestors with the scope of excellent performances.

The status of the human resources in a country is also instrumental inattracting direct investment from overseas. There are certain countries likeChina that have taken an active interest in increasing the quality of theirworkers.

They have made it compulsory for every Chinese citizen to receive at least

nine years of education. This has helped in enhancing the standards of thelaborers in China.

If a particular country has plenty of natural resources it always findsinvestors willing to put their money in them. A good example would beSaudi Arabia and other oil rich countries that have had overseas companiesinvesting in them in order to tap the unlimited oil resources at their disposal.


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Inexpensive labor force is also an important determinant of attracting foreigndirect investment. The BPO revolution, as well as the boom of theInformation Technology companies in countries like India has been a proofof the fact that inexpensive labor force has played an important part inattracting overseas direct investment.

Infrastructural factors like the status of telecommunications and railwaysplay an important part in having the foreign direct investors come into aparticular country.

It has been observed that if the infrastructural facilities are properly in placein a country then that country receives a substantial amount of foreign directinvestment. If a country has extended its arms to overseas investors and is

also able to get access to the international markets then it stands a betterchance of getting higher amounts of foreign direct investment.

It has been observed in the recent years that a couples of countries havealtered their stance vis--vis overseas investment. They have reset theireconomic policies in order to suit the interests of the overseas investors.

These companies have increased the transparency of the legal frameworks inplace. This has been done so that the overseas companies can understand theimplications of their investment in a particular country and take the

appropriate decisions.


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CONCLUSION


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Services sector has become important for many economies in the world andvery important particularly for India. While for the medium and long term, itis important to accelerate the growth of industrial sector particularlymanufacturing sector to catch up with the growth of services sector andmaintain a decent and stable growth of agricultural sector, which is stillsubject to the vagaries of nature, in the short and even medium term, the sure

bet for higher growth of the Indian economy lies in further accelerating thegrowth of the Services sector, which can be done with considerable easecompared to other sectors.

Services sector growth can also complement growth in manufacturing sector.Thereare sectors where a lot of complementarities exists between services &manufacturing growth .g. Telecom Services and Telecom equipmentmanufacturing, electronic hardware & software where a hardware-softwarecombination can accelerate growth of both hardware and software assuggested in the Medium Term Export Strategy (MTES) of the Departmentof Commerce, healthcare services and pharmaceutical sector, shipbuildingalong with shipRepair & maintenance services and shipping where growth is sure withgrowth in volume ofTrade, R&D services and pharma & biotech sectors, etc. Identifying and

promoting the growth of these sectors with considerable backward forwardlinkages can help growth of both services and manufacturing and somemanufacturing sub-sectors can ride piggy back on theSuccess of the complementary services to achieve quick growth.Thus the services sector has high potential. Till now, we have been focusingmainly on software. We have many such niche sectors in services. The recentgrowth in export of professional services is an example of the potential of

other services.


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BIBLIOGRAPHY: http://www.wikipedia.org

Economic Times

www.rediff.com

Google search engine samvak.tripod.com/foreigndirectinvestment-fdi.html www.bookstore.com

FDI in India by lata M chakravarthy www.amazon.com

www.questia.com

http://join.autoprofitsites.com/qualified/index.php?mid=407639
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