FDI

WHAT IS FDI ?
• Foreign direct investment (FDI) is the movement of
capital across national frontiers in a manner that
grants the investor control over the acquired asset.
Thus it is distinct from portfolio investment which
may cross borders, but does not offer such control
• For an investment to be regarded as an FDI, the
parent firm needs to have at least 10% of the
ordinary shares of its foreign affiliates. The investing
firm may also qualify for an FDI if it owns voting
power in a business enterprise operating in a
foreign country.
Forms of FDI
• Purchase of existing assets in a foreign
country.
• New investment in property, plant,
equipment.
• Participation in a joint venture with a local
partner.
• Transfer of assets like HR, systems,
technological know-how in exchange for
equity in foreign companies.
 TYPES OF FDI
• BY DIRECTION:
Inward
Outward

• BY TARGET
Horizontal FDI
Vertical FDI
Backward Vertical FDI
Backward Vertical FDI
 CONTD…….
• BY MOTIVE
Resource-Seeking
Market-Seeking
Efficiency-Seeking
Strategic-Asset-Seeking
 WHY DO COMPANIES ENGAGE IN
FOREIGN DIRECT INVESTMENT?
1. Gain a foothold in a new geographic market;
2. Increase a firm’s global competitiveness and
positioning;
3. Fill gaps in a company’s product lines in a
global industry;
4. Reduce costs in such areas as R&D,
production, and distribution.
 FACTORS ATTRACTING FDI
• LOW COST BUT QUALIFIED, EDUCATED/SKILLED
LABOR POOL
• LONG-TERM MARKET POTENTIAL OR YIELDS
GREATER THAN CAN BE ACHIEVED DOMESTICALLY
• ACCESS TO NATURAL RESOURCES
• GEOGRAPHY
• STABILITY OF THE ECONOMIC AND POLITICAL
ENVIRONMENT
 FDI: POSITIVES AND NEGATIVES

POTENTIAL POSITIVES:
• INCREASE IN DOMESTIC EMPLOYMENT/DROP
IN UNEMPLOYMENT
• INVESTMENT IN NEEDED INFRASTRUCTURE
• POSITIVE INFLUENCE ON THE BALANCE OF PAYMENTS
• DEVELOPMENT OF DOMESTIC SUPPLIERS
• NEW TECHNOLOGY AND “KNOW HOW” TRANSFER
• INCREASED CAPITAL INVESTMENT
• TARGETED REGIONAL AND SECTORAL DEVELOPMENT
 CONTD……
POTENTIAL NEGATIVES:
• INDUSTRIAL SECTOR DOMINANCE IN THE DOMESTIC
MARKET
• TECHNOLOGICAL DEPENDENCE ON FOREIGN
TECHNOLOGY SOURCES
• DISTURBANCE OF DOMESTIC ECONOMIC PLANS IN
FAVOR OF FDI-DIRECTED ACTIVITIES
• “CULTURAL CHANGE” CREATED BY “ETHNOCENTRIC
STAFFING,” THE INFUSION OF FOREIGN CULTURE, AND
FOREIGN BUSINESS PRACTICES
Current FDI Statistics
• Public Sector Enterprise's – 26% FDI

• Private Sector Enterprise's – 74% FDI allowed

• Insurance – FDI % increased from 26% to 49%.

• Hotel and tourism – 100% FDI is permissible through automatic route.

• NBFC’s - 49% FDI is allowed from all sources on the automatic route subject to
guidelines issued from RBI from time to time.

• Infrastructure – 100% FDI allowed

Current FDI Statistics
• BPO Industry - FDI up to 100% is allowed subject to certain conditions. 

• Drugs and Pharmaceuticals - FDI up to 100% is permitted on the automatic route

for manufacture of drugs and pharmaceutical.

• Power - Up to 100% FDI allowed in respect of projects relating to electricity

generation, transmission and distribution, other than atomic reactor power
plants. There is no limit on the project cost and quantum of foreign direct
investment.

• Telecommunication – FDI is limited to 49% subject to  licensing and security

requirements and adherence by the companies