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FDI

FDI

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03/25/2014

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Presented by : Vaishali Sharma Lecturer MBA- IBE

FDI

Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country ( the host country) with the intent to manage the asset.

Defination of FDI

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Types of FDI

FDI Types ◦ Purchase of existing assets  Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems  ◦ New investment No local entity exists or is available for sale, local financial incentives may encourage, no inherited problems, long lead time to generation of sales or other desired outcome  ◦ Participation in an international joint-venture Shared ownership with local and/or other non-local partner

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Which factors encourages FDI?
• • Financial incentives (Funds from local Government) • • • Fiscal incentives (Exemption from import duties) • • • Indirect incentives (Provides land and infrastructures at less commercial prices)

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 

Which factors encourages FDI?
• • •Political stability • •Mar ket potential & accessibility • •Lar ge economy • •Mar ket size
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Don’t Be Confused Between FDI & FII

FII - is Foreign Institutional Investors, i.e, foreign Investment Bankers like Goldman sachs, Merrill lynch, Lehman bros etc...investing in indian markets in other words buying indian stocks.FII's generally buy in large volumes which has an impact on the stock markets... FDI - is Foreign Direct Investments i.e. a foreign company having a stake in a public sector undertaking in a country for a long period and that company is called Multinational Enterprise.

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The Direction of FDI

Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets ◦ The US has been the favorite target for FDI inflows ◦


While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased ◦ Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia

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Modes of FDI
1) By Direction * Inward *Outward 2) By Target * Mergers and Acquisitions * Horizontal FDI * Vertical FDI (a) Backward Vertical FDI (b) Forward Vertical FDI 3 )By Motive * Resource-Seeking * Market-Seeking * Efficiency-Seeking * Strategic-Asset-Seeking
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             

BY TARGET


Mergers and Acquisitions Transfers of existing assets from local firms to foreign firms takes place; 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.





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BY MOTIVE
 

Resource-Seeking This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones.. Efficiency-Seeking It is suggest ed t hat t his t ype of FDI com es wit h t he expect at ion t hat it furt her increases t he profit abilit y of t he firm . Typically, t his t ype of FDI is m ost ly widely pract iced bet ween developed econom ies; especially t hose wit hin closely int egrat ed m arket s (e.g. t he 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.

  

  

  

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INDIA AN IDEAL INVESTMENT DESTINATION
 World’s largest democracy Second largest emerging market (US$ 2.4 trillion)  Liberal Foreign Investment Regime

 Skilled and competitive labour force  Amongst the highest rates of return on investment  Large domestic market
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 

FDI Approval Procedure
Automatic Route in most Sector Government Route for few sectors

RBI

FIPB

No permission required, only to notify RBI within 30 days of issue of shares to foreign investors

Approval is granted generally in 30 days
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FDI Inflows….Robust Growth

9000 8000 7000 6000 5035
US $ m

7722

(Only 7404 Equity)

6130

6051

5000 4000 3000 2000 1000 0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 Apr - Nov

4029

4322

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2500

FDI Inflows- Sector -wise
2000

Electrical equipment including software moves to over all 2nd position in Nov 2006.
1500

Services sector shows spurt in growth and the top sector attracting FDI – moving up from the third position. Spurt in FDI in Real Estate causes the construction sector to the third position in Nov 2006.

US $ m 1000 500 0 2000-01 2001-02 2002-03

2003-04

2004-05

2005-06 Transportation

2006 April Nov

Electrical Equipment (including Software) Chemicals (other than Fert.) Construction Activities

Telecommunications Services Sector

Fuels (Power & Oil Refinery)

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FDI Policy …. Prohibited activities
•Retail except single brand retailing allowed upto 51% with FIPB approval • •Atomic energy • •Lottery business • •Betting and Gambling

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FDI Policy for Industry Sector…Fully permitted
Manufacturing •100% FDI permitted in all activities under automatic route except: • –Cigar and cigarettes of tobacco - FIPB – –Products reserved for Small Scale Sector
•FDI less than 24% under automatic route •FDI beyond 24% - FIPB subject to export obligation •

–Defence products

•FDI upto 26% - FIPB subject to licensing of Arms and Ammunitions

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FDI Policy for Industry Sector…. Fully permitted
Mining
•Coal – FDI upto 100% as per Coal Mines (Nationalization) Act 1977 •Diamond, Gold, Silver , Minerals – upto 100% under automatic route as MMRD Act •Atomic minerals – upto 74% in JV with PSUs – FIPB • •

Electricity

•FDI upto 100% under automatic route in Generation, Transmission, Distribution and Power Trading as per Electricity Act 2003

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FDI Policy for Service Sector…. Largely permitted
Upto 26 %
   

FM Broadcasting (20%) - FIPB Uplinking News and CATV Channel - FIPB Print Media – News Papers & Periodicals FIPB Insurance - Automatic

Upto 49 %

•Broadcasting - Cable Network, DTH, Setting up hardware - FIPB - FIPB •Stock Exchanges •Air Transport Services - Automatic

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FDI Policy for Service Sector…. Largely permitted

Upto 74 %

Telecommunication
(Beyond 49%)

- FIPB -

Private sector banks Automatic

Upto 100 %

•Development of existing airports
(Beyond 74%)

- FIPB - FIPB -

•Publishing scientific magazines •Courier services FIPB

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Political Ideology & FDI

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Advantages of FDI
 Infrastructure

transfer

and technology

  Increased

Productive efficiency due to competition from multinational subsidiaries


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Advantages of FDI
 Faster

growth of output and employment  Consumer Benefits
  

Price Quality

Varieties
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Advantages of FDI
 Increase

in Exports

 Increase 

in savings and Investment

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Costs of FDI

Detriment of the growth of domestic producer and the national economy

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Costs of FDI

Enviroment and natural resource costs Abuse of local culture and traditions Ex

FDI

Tourism

Abuse

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Costs of FDI

Facilitate hegemony by the dominant US and the western cultures.


  

Pr int

TV

Ent e r t a inm e nt

Political Influence (News)

26

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