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• FOREIGN DIRECT INVESTMENT (FDI)
DEFINITION :• “Foreign direct investment occures when an
investor based in one country acquires assets in another country with the interest to manage the asset.”
• Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets.
THEORIES OF FDI
1. THEORY OF IMPERFECT MARKET : The firms having comparative technological
or organizational advantage invest abroad to gain firm specific advantages
2. PRODUCT LIFE CYCLE THEORY : The product life cycle theory tries to explain
that when the product reaches the maturity stage the firm starts investing abroad
to low cost production areas
3. INTERNATIONALISATION : Firms invest abroad in order to retain inside
the group the firms competitive advantage4. ELECTIC THEORY OF FDI : According to this theory it is not possible for a
single theory to explain all forms of multinational strategies as there are a
wide range of factors that influence FDI decision
Factors influencing :
A. Ownership advantages : It arise due to the firm owning a special
knowledge or because of economies of scale or due to monopolistic advantage
B. Locational advantages : It is due to location bound endowments enjoyed
by a firmC. Internationalization advantage : It refers to the extent to which the firm can
market its advantages within the various units of the firm
WHY DO FIRMS INVEST ABROAD ?
• To reduce cost of production
• To have diversified sourcing facilities
• To increase volume of sale
• To promote knowledge sharing
• To retain domestic customers
FDI STRATEGIES :
• BRANCHES : Parent company open up branches in foreign
country• JOINT VENTURE : It is a partnership between the foreign and
domestic company where the partnership firms share equity and a new firm is formed
Eg : Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion
EXAMPLES :
• WHOLLY OWNED SUBSIDIARY : If the foreign investment is equal to the
entire equity capital it is called as a wholly owned subsidiary
Examples :
• MERGER : A merger is a combination of two or more
companies being merged into an existing company or a new company may be formed
Eg : Reliance Petrochemicals Ltd. Merged with Reliance Industries Ltd. In 2010
• ACQUISITION AND TAKEOVER : Acquisition is a simple act of acquiring control over
the management of other companies
Eg : HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
BENEFITS OF FDI
• FDI supplements domestic capital• Availability of scarce factors of production• Improvement in Balance of Payment• Influence on foreign trade• Development of social and economic
infrastructure• FDI promotes research
ARGUMENTS AGAINST FDI
• Capital flow may not be real : FDI may not bring fresh capital if the foreign
company purchases equity financed by domestic lenders.
• Obsolete and mismatched technology : The technology being brought by the MNCs is
one that run its course in the home country and has been rendered obsolete
• FDI may cause in loss of competition : When FDI is through mergers and
acquisition , it may reduce competition in the host country
• Exploitation of resources
FDI IN INDIA
• Foreign Direct Investment (FDI) is permitted as under the following forms of investments –
1. Through financial collaborations2. Through joint ventures and technical
collaborations3. Through capital markets via Euro issues4. Through private placements or preferential
allotments
• FDI is not permitted in the following industrial sectors :
1. Arms and ammunition2. Atomic Energy3. Railway Transport4. Coal and lignite5. Mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamonds, copper, zinc
FDI-TOP INVESTERS IN INDIAMAURITIUS 38 %
SINGAPORE 10 %
U.K 9 %
JAPAN 7 %
U.S.A 6 %
NETHERLANDS 4 %
CYPRUS 4 %
GERMANY 3 %
FRANCE 2 %
U.A.E 1 %
FDI - LEADING SECTORS
SERVICES SECTOR 19 %
TELECOMMUNICATIONS 7 %
CONSTRUCTION ACTIVITIES 7 %
COMPUTER SOFTWARE & HARDWARE 7 %
HOUSING & REAL ESTATE 7 %
CHEMICALS 6 %
DRUGS & PHARMACEUTICALS 5 %
POWER 4 %
AUTOMOBILE INDUSTRY 4 %
METALLURGICAL INDUSTRIES 4 %