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Fdi in India

Fdi in India

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Published by Pratik Prakash

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Published by: Pratik Prakash on Mar 03, 2011
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01/31/2015

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VIVEK COLLEGE OF COMMERCE
CHAPTER-1:INTRODUCTION
The last two decade of the 20
th
century witnessed a dramatic world-wideincrease in foreign direct investment (FDI), accompanied by a markedchange in the attitude of most developing countries towards inward FDI. Asagainst a highly suspicious attitude of these countries towards inward FDI inthe past, most countries now regard FDI as beneficial for their developmentefforts and compete with each other to attract it. Such shift in attitude lies inthe changes in political and economic systems that have occurred during theclosing years of the last century.The wave of liberalisation and globalization sweeping across the world hasopened many national markets for international business. Global privateinvestment, in most part, is now made by multinational corporations(MNCs). Clearly these corporations play a major role in world trade andinvestments because of their demonstrated management skills, technology,financial resources and related advantages. Recent developments in globalmarkets are indicative of the rapidly growing international business. The endof the 20
th
century has already marked a tremendous growth in internationalinvestments, trade and financial transactions along with the integration andopenness of international markets.FDI is a subject of topical interest. Countries of the world, particularlydeveloping economies, are vying with each other to attract foreign capital toForeign Direct Investment in IndiaPage | 1
 
 
VIVEK COLLEGE OF COMMERCE boost their domestic rates of investment and also to acquire new technologyand managerial skills. Intense competition is taking place among the fund-starved less developed countries to lure foreign investors by offeringrepatriation facilities, tax concessions and other incentives. However, FDI isnot an unmixed blessing. Governments in developing countries have to bevery careful while deciding the magnitude, pattern and conditions of privateforeign investment.In the 1980s, FDI was concentrated within the Triad (EU, Japan and US).However, in the 1990s, the FDI flows to developed countries declined, whilethose to developing countries increased in response to rapid growth andfewer restrictions. Most FDI flows continue still to be concentrated in 10 to15 host countries overwhelmingly in Asia and Latin America. South, Eastand Southeast Asia has experienced the fastest economic growth in theworld, and emerged as the largest host region. China is now the largest hostcountry in the developing world.However, small markets with low growth rates, poor infrastructure, and highindebtedness, slow progress in introducing market and private-sector oriented economic reforms and low levels of technological capabilities arenot attractive to foreign investors.The remarkable expansion of FDI flows to developing countries had beliedthe fear that the opening of central and Eastern Europe and the efforts of thecountries of that region to attract such investment would divert investmentForeign Direct Investment in IndiaPage | 2
 
 
VIVEK COLLEGE OF COMMERCEflows from developing countries. The most important factors makingdeveloping countries attractive to foreign investors are rapid economicgrowth, privatization programmes open to foreign investors and theliberalisation of the FDI regulatory framework.In India, prior to economic reforms initiated in1991, FDI was discouraged by
Imposing severe limits on equity holdings by foreigners and
Restricting FDI to the production of only a few reserved items.The Foreign Exchange Regulation Act (FERA), 1973 (now replaced byForeign Exchange Management Act [FEMA]), prescribed the detailed rulesin this regard and the firms belonging to this group were known as FERAfirms. All foreign investors were virtually driven out from Indian industries by FERA. Technology transfer was possible only through the purchase of foreign technology. However, due to severe limits on royalty payments toforeigners to reduce foreign exchange use, this option was ineffective.However, the government granted liberal tax incentives to encourageindigenous generation of technology by domestic firms. In the absence of foreign technology, Indian industry suffered both in terms of cost of  production and quality.The initial policy stimulus to foreign direct investment in India came in July1991 when the new industrial policy provided, inter alia, automatic approvalfor project with foreign equity participation up to 51 percent in high priorityForeign Direct Investment in IndiaPage | 3

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