FDI ASSIGNMENT | Foreign Direct Investment | Financial Crisis Of 2007–2008

CURRENT TRENDS IN FDI

INTRODUCTION:

FDI is categorized as cross border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise. Direct investment allows the direct investor to gain access to the direct investment enterprise which it might otherwise be unable to do. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise.

During last twenty to twenty-five years, there has been a tremendous growth in global Foreign Direct Investment (FDI). There was substantial growth in international trade. The growth in international flows of goods and capital implies that geographically distant parts of the global economy are becoming increasingly interconnected as economic activity is extended across boundaries. FDI is an important factor in the globalisation process as it intensifies the interaction between states, regions and firms. Growing international flows of portfolio and direct investment, international trade, information and migration are all parts of this process. The large increase in the volume of FDI during the past two decades provides a strong incentive for research on this phenomenon.

The definition of FDI flows has changed over time as the definition of FDI enterprises has changed. Direct investment capital flows are made up of equity capital, reinvested earnings, and other capital associated with various inter-company debt transactions. The last category is the most difficult, covering the borrowing and lending of funds including debt securities and supplier s cr edits between direct investors and subsidiaries, branches and associates. This includes inter-company transactions between affiliated banks (depository institutions) and affiliated financial intermediaries . However, the later are now to be included in direct investment only if they are associated with permanent debt (loan capital representing a permanent interest) and equity (share capital) investment or, in the case of branches, fixed assets . Deposits and other claims and liabilities related to usu al banking transactions of depositary institutions and claims

Reflecting this with effect from March 31. In addition to this. FDI IN EARLIER INDIA In the Indian context till the end of M arch 1991. equity capital. FDI was defined to include investment in: 1) Indian companies which were subsidiaries of foreign companies 2) Indian companies in which 40 percent or more of the equity capital was held outside India in one country 3) Indian companies in which 25 percent or more of the equity capital was held by a single investor abroad. FDI supplements domestic capital and technology. if any. the Indian Monitory Fund has provided certain guidelines which enable inter-country comparisons. As a part of its efforts to bring about uniformity in the reporting of international transactions by various member countries. A committee was constituted by the Department of Industrial Policy and Promotion (DIPP) in May 2002 to bring the reporting system of FDI data in India into alignment with international best practices. predictable. direct investment also includes net foreign liabilities of the branches of the foreign companies operating in India. of those individual investors who hold 10 percent or more of equity capital. Previously the data on FDI reported in the Balance of payment statistics used only equity capital. the RBI has recently revised data on FDI flows from the year 2001 onwards by adopting a new definition of FDI. reinvested earnings and other direct capital. debentures and deposits. Accordingly. It is the intent and objective of the Government to promote foreign direct investment through a policy framework which is transparent.and liabilities of other financial intermediaries are classified under portfolio investment or other investment. It is the policy of the Government of India to attract and promote productive FDI in activities which significantly contribute to industrialization and socioeconomic development. It has been . The revised definition includes three categories of capital flows under FDI. The system of periodic consolidation and updation is introduced as an investor friendly measure. simple and clear an d reduces regulatory burden. Direc t Investment also includes preference shares. 1992 the objective criterion for identifying direct investment has been modified and is Fixed at 10 percent ownership of ordinary share capital or voting rights.

3) Horizontal Foreign Direct Investment: This refers to a multi-plant firm producing the same line of goods from plants located in different countries 4) Vertical Foreign Direct Investment: If the production process is divided into upstream (parts and components) and downstream (assembly) stages. 5) Greenfield Foreign Direct Investment: Greenfield FDI is a form of investment where the MNC constructs new facilities in the host country. 1984) and other researchers describe as Vertical FDI . This is what Lipsey and Weiss (1981. be superseded by a circular to be issued on April 30. It is done by an entity outside the host country in the home country. portfolio investment or a repayable debt. therefore. portfolio investment or a repayable debt. This consolidated circular will. 2) Outward Foreign Direct Investment: This refers to a long term capital outflow from a country other than aid. 2011. It is done by an entity outside the host country in the home country. whose aim is to exploit scale economies at different stages of production arising from vertically integrated production relationships. TYPES OF FDI 1) Inward Foreign Direct Investment: This refers to long term capital inflows into a country other than aid.decided that from now onwards a consolidated circular would be issued every six months to update the FDI policy. and only the latter stage is transferred abroad. . then the newly established assembly plant s demand for parts and components can be met by exports from home-country suppliers. 6) Brownfield Foreign Direct Investment: Brownfield FDI implies that the MNC or an affiliate of the MNC merges with or acquires an already existing firm in the host country resulting in a new MNC affiliate.

For instance.This resilience could lead many developing countries to favour FDI over other forms of capital flows. and particularly short-term flows were subject to large reversals during the same period The resilience of FDI during financial crises was also evident during the Mexican crisis of 1994-95 and the Latin American debt crisis of the 1980s. 2) FDI is an important and probably dominant channel of international transfer of technology. skills and managerial knowhow needed to appropriate technology properly. MNCs.LIKELY BENEFITS OF FDI 1) FDI is less volatile than other private flows and provides a stable source of financing to meet capital needs. In sharp contrast. Although there is substantial evidence that such investment benefits host countries. When compared to the chart below we can clearly see the portfolio investment and loans comparison with the FDI. 3) The technology disseminated through FDI generally comes as a package including the capital. they should assess its potential impact carefully and realistically Foreign direct investment (FDI) has proved to be resilient during financial crises. the main drivers of FDI are powerful and effective vehicles for disseminating technology from developed to developing countries and are often the only source of new and innovative technology which is not available in the arm s length market. Bifurcation between developing and emerging market countries is shown below: . furthering a trend that has been in evidence for many years. other forms of private capital flows portfolio equity and debt flows. Also. such investment was remarkably stable during the global recession of 2008-10. when compared to other inflows FDI have proved strong in almost every countries. in USA. The resilience of foreign direct investment during financial crises may lead many developing countries to regard it as the private capital inflow of choice.

Incomplete utilisation of FDI benefits due to incoherent institutional policies and regulatory conditions. The adjustment costs associated with FDI include: i. they may not be shared equitably in the society. Increased market concentration iii. unavailability of skilled labour and infrastructure. where benefits exist. Higher short term unemployment due to corporate restructuring ii. .FDI versus other flows LIKELY COSTS OF FDI Recent years have seen increased public concern that the benefits of FDI have yet to be demonstrated and that.

It is found that FDI response to these trade actions (tariff jumping FDI) occurs only for firms with previous experience as MNCs.  Trade protection is also found to encourage FDI.  A stable and transparent policy framework towards FDI is an attractive factor to potential investors.  Infrastructure facilities including transportation and communication are important determinants of FDI. to strike.  Wages are an important factor determining inward FDI. However. MNCs are potentially subject to taxation in both the host and home countries. to collective bargaining and to the protection of the union members . It is found that the way in which p arent country reduces double taxation on their MNCs can have implications for FDI. where there is a control for productivity. It is possible that lower wages are associated with higher levels of inward FDI. It is found that FDI is positively correlated to the right to establish unions. An allied proposition here is that a distortion free foreign trade regime which is neutral in terms of the incentives it provides for Import Substitution (IS) and Export Promoting (EP) industries attracts relatively large volumes of FDI than either an IS or EP regime. An unexplored issue has been the role of information decisions. Thus access to better information may make FDI to that location more likely.  Resource endowments of a host country including natural and human resources are a factor of importance in the investment decision process of the foreign firms. measured by GDP per capita and sustained growth of these markets measured by growth rates of GDP. acquiring knowledge of the local regulatory environment and coordination for supplies. there could be a positive association found between FDI and the types of labour standards that may raise wages but that ultimately contributes to worker s productivity.  Fiscal and monetary incentives in the form of tax concessions do play a role in attracting FDI.  Macroeconomic stability signified by stable exchange rates and low rates of inflation is a significant factor in attracting foreign investors. attract relatively large volumes of FDI.FACTORS WHICH ATTRACT FDI IN A COUNTRY  Host countries with a sizeable domestic market.  Political stability in the host countries is an important factor in the investment decision process of foreign firms. FDI requires substantial fixed costs of identifying an efficient location.  Foreign firms place a premium on a distortion free ec onomic and business environment.

global FDI flows in 2009 remained much lower. However. based on UNCTAD estimates. plunged in the fourth quarter of 2009 after several quarters of marginal improvement. The Global FDI Quarterly Index in the third quarter in 2009 was 36 points lower than the level in the prev ious year. However. when compared to the corresponding quarte r of 2008.2 trillion. After experiencing a severe fall in 2008. The number of international greenfield projects also declined markedly. Regarding the mode of entry. FDI flows in the third quarter remained relatively stable. as investment conditions are improving in many countries. the decrease was especially marked for equity capital flows. FDI flows to developed countries continued their dramatic decline in 2009 (by a further 41%).7 trillion in 2008 to a little over US$1. cross-border mergers and acquisitions (M&As) were the most affected. which are highly correlated with FDI equity capital flows. fro m 113 to 111 (see table below). Global cross-border M&As. The factors in current trends in FDI are: y FDI flows to the developing world are expanding again y Regional FDI patterns are shifting in the developing world y South-South FDI is significant and growing y China continues to be the developing world s FDI magnet y Strong commodity prices are boosting FDI for extractive industries . which had risen in 2008. respectively). followed by a slight rebound in the second quarter. All components of FDI equity capital. UNCTAD s Global FDI Quarterly Index declined only slightly. there is a huge upward slide in the FDI scenario after post recession period. though to a much lesser degree ( -23%). declined in 2009 (by 35% and 39%. The decline in FDI was widespread across all major groups of economies. FDI flows to developing and transition economies. reinvested earnings and other capital flows (mainly intra-company loans) were affected by the downturn. However. as the impact of the global financial and economic crisis continued to unfold. Initial indicators for the fourth quarter of 2009 show no signs of a pickup in FDI flows. Nevertheless. Global FDI flows in 2010 will exceed $1. with a 66% decrease in 2009 as compared to 2008. which are most directly related to transnational corporations (TNCs) longer-term investments strategies. After a sharp fall in the first quarter of the 2009.FDI TRENDS Global inflows of foreign direct investment (FDI) fell by 39% from US$1.0 trillion in 2009. it is still likely that a modest rebound in flows will take place in 2010.

Thus there is a definite need to incorporate the va rious dimensions of FDI into a theory of open economy development so as to explain in one integrated theoretical paradigm. early reports indicate that developing countries experienced a third consecutive year of FDI expansion. and then in an environment of global economic recession and uncertainty declined through 2003 for both developed and developing countries and we saw again a decline at the time of global recession period of 2008. Recently not only did India become a more frequent destination for FDI. The impassioned advocacy of increased FDI flows (inward and outward) is based on the well worn arguments that FDI is a rich source of technology and knowhow. it can invigorate the labour oriented export industries of India. promote technological change in the industries and put India on a higher growth path. but also many Indian firms have started investing abroad in a big way. Since that low point. FDI inflows have again begun to grow. For 2009. forecasts suggest that FDI flows to developing countries will rise sharply . albeit a modest one. however. In the developing world the increase has been dramatic: in 2009/2010 FDI inflows rose by 30 percent from the 2008/2009 trough. become a self propelling and dynamic actor in the accelerated growth of the economies. the undercurrents of both inward and outward FDI flows. This exuberance of FDI needs to be based on analytical review of India s needs and requirements and her potential to participate in huge investment flows. Reports suggest that in developing countries the flow of FDI is more rapid than in high income countries. Thus we find a surge in both inward and outward FDI flows. Comparison between FDI flow in developed and developing country is given belo w: . It is widely known that capital flows into developing economies like India have risen sharply in nineties and has. therefore. And for the rest of the decade.y Private investment in public infrastructure is surging y Efficiency-seeking FDI is an increasing share of all FDI in developing countries y The end of global textile/apparel quotas has had mixed impacts on FDI y OECD s Policy Framework for Investment is an important new analytical tool FDI flows to the developing world are expanding again Worldwide FDI flows peaked in 2000. This study focuses on FDI as a vector of Indian globalisation.

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Canada.6% FDI. dollars.35 billion U. the Cayman Islands. Major focus of FDI inflow and outflow is in Asia.3. A total of 14.89 million. In 2010. wherein China is playing the major role in this area. a Ministry of Commerce (MOC) spokesman said Tuesday.25 million was sanctioned by the central administration.2 percent year on year to 6.S. In 2009. developing economies gained a massive share of 51. China's Hong Kong. Sweden. In contrast.924 billion U. ministry spokesman Yao Jian said. reflecting weaker short and medium -term growth prospects. that was 50% less than FDI in 2008.65 percent from a year earlier. up 17. The manufacturing sector received 47.83 million to set-up a fully governed subsidiary in the warehousing industry. nine tenders contributing total FDI of US$ 112.459 foreign-invested companies were approved for establishment in China during the first seven months of the year.94 percent of the July FDI inflow and the services industry got 45. Among the sanctioned tend ers. The figure brought FDI inflow to China in the first seven months of the year to 58.S. as per the report by Planning Commission of India.S.167 million against 8 deals amounting to US $ 1. Australia. as per the survey by Ernst & Young on globalization. dollars. On the other hand. the nation's endowments in infrastructure industry doubled. supported by low funding costs. an increase of 20. bringing total outbound i nvestment by the end of July to 226. during the first seven months of the year. endowment proposals in India Inc witnessed an upsurge of around 16% in 2009 to US$ 345.75 billion U. The aggregate cost of 32 domestic mergers and acquisition (M&A) agreements in India in January 2010 stood at US$ 2. With the fiscal structure gaining momentum. reaching new highs in all regions. as per the report conducted by a premiere sectoral body. the MOC data showed without giving year-on-year comparisons. FDI flows to high-income countries are expected to fall 4%. FDI inflows to developing countries are expected to rise 17% in 2010 .09 percent.324 million and 28 deals amounting to US$ 223 million in 2009 and 2008. The amount of foreign direct investment (FDI) that flowed into China in July 2010 rose 29. the United States and Brazil were the main overseas destinations of C hinese FDI. Yao said on a month-on-month basis. dollars in overseas markets. FDI inflow had increased by more than 20 percent for two straight months.S. From 4% of 2004 to 8% of 2005. reflecting the solid recovery in FDI flows into China. dollars. This was chiefly because of major decline in FDI into industrial mark ets.Regional FDI patterns are shifting in the developing world FDI inflows increased in all regions of the developing world. respectiv ely. the Indian government gave its consent to 14 FDI tenders which are likely to bring foreign investment amounting to US $ 157. Mitsui and Company of Japan is expected to contribute US$ 69.5 billion U.9 percent year on year. These encompass: . Chinese entities invested 26. excluding financial investment. more than what the developed nations gained. In the fiscal year 2009.

the food processing and agri -based companies have attracted US$ 300 million PE investments during January -June 2010. IIML. a Mexico-based multiplex operator. according to Jean Leviol. said Shahabad Dalal.39 million by Standard Chartered Bank that is likely to elevate to 100% from 74.1 million. in real estate and urban infrastructure projects by the end of 2010. Cinepolis. KS Oils and NDTV Imagine NDTV Lifestyle tender worth US$ 54. IL&FS Investment Managers (IIML) plans to invest US$ 300 million.7 million to undertak e the business of broadcasting non-news and current affairs television channels. for US$ 235.9% in its portfolio management arm Tenders by SaharaOne. In 2009. and would focus on automobile.320 mega watt (MW) coal -fired plant of Thermal Powertech Corporation India Ltd. private equity (PE) and venture capital (VC) investments are projected t o reach US$ 17 billion in 2010. Trade and Financial Affairs. The company which started operat ions in India last year plans to invest US$ 350 million in the next five years to operate 500 screens in 40 cities. The report includes a survey conducted across leading PE investors globally.y y y y y y y y US$ 58. The survey revealed number of respondents planning to invest in the range of US$ 200 -500 million in 2011 has risen nearly four -fold to 27 per cent. AIP Power will set up power plants either directly or indirectly by promotion of joint ventures at an investment of US$ 24. as per figures released by Grant Thornton.82 million worth FDI tender by Asset Reconstruction Company FDI valuing US$ 44.72 billion by 2012.4 million. energy and environment sectors among others. Further. has picked up 49 per cent stake in the 1. We are in the advance stages of finalising 3-4 deals in residential real estate and urban infrastructure space like roads and hospitality . Global media magnate Rupert Murdoch -controlled Star India holdings' investment of US$ 70 million to acquire shares of direct -to-home (DTH) provider Tata Sky. Sembcorp Utilities. a special purpose vehicle and subsidiary of Gayatri Projects Ltd. According to a study released by global consultancy Bain & Company. . Investments by French companies in India is expected to touch US$ 12.29 million Asianet's proposal worth US$ 91. is looking at expanding its footprint in India. Minister Coun sellor for Economic. French Embassy in India. PE investments in these sectors were about US$ 398 million. a company based in Singapore.28 million Tender by India Infrastructure Development Fund based in Mauritius that is likely to bring US$ 517. ViceChairman and MD.

Japanese pharmaceutical major. The plant will begin production in 2011. . Eisai plans to invest US$ 21. The headquarters would need about US$ 500 million in investments over three years. according to Ben Verwaayen. Alcatel-Lucent plans to shift its global services headquarters to India. is planning to invest US$ 12.7 million to set up a plant n ear Chennai to produce crawler cranes. Chief Executive Officer. The investment will be used for increasing the manufacturing capacity of Active Pharmaceutical Ingredients (APIs) and product research at the Eisai Knowledge Centre in Visakhapatnam. Alcatel-Lucent. Franco-American telecom equipment maker. a subsidiary of Kobe Steel. Japan's Kobelco Cranes.25 million in India to expand its manufacturing capacity and research capabilities.

7.025 (27.005) 552.670 (1.922 (883) 5.089) 50.802) 3.S. 6.840 (864) 3.878) 8.985) 19.570 (11.899 (11. 8.331) 123.921 (415) 2.314) 19.230 (1.983 (1.720 (3.376) 11.278) 12.552 (563) 364 (79) 1.A.627) 5.454) 8.329 (11.094 (657) 4.349 (724) 1. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years): Amount Rupees in crores (US$ in million) Ranks Country 2008-09 (AprilMarch) 2009-10 (AprilMarch) 2010-11 ( AprilSeptember) Cumulative Inflows (April 00 September 10) 228.E.508 (327) 2.129 (243) TOTAL FDI INFLOWS * 123.831) 8.750 (629) 2.728 (1. 50.182 (1. U.313 (1.698 (4.943) 3.002 (1.152 (1.834) 50.120 (25.212) 22.098 (467) 1.329) 40.447 (4.792) %age to total Inflows (in terms of US $) 42 % 9% 7% 5% 4% 4% 4% 2% 2% 1% 1. 3.378) - .K.727 (3. NETHERLAN DS CYPRUS JAPAN GERMANY FRANCE U.295 (2. 4.017 (629) 17. 5.395 (301) 1. 2.889 (405) 2.633 (10. 9 10.A.832 (2.E.507 (6.283 (899) 7.626 (51.437 (303) 3.183) 2.415 (4.980 (626) 1.002) 27.538 (9.268 (123.379) 9. MAURITIUS SINGAPORE U.849) 5.289 (498) 1.229) 15.139) 3.287) 1.133 (257) 49.

Brazil. for example. Much South-South FDI is directed to entering host-country or regional markets. Mexico. up from 16 percent in 1995. but some is also natural resource-seeking. Indonesia. notably Chinese and Indian investment in Sub Saharan Africa. China. and India are key FDI providers. This South-South FDI may have been about 37 percent of total FDI inflows to the developing world in 2003. multiplying the developing world s potential FDI sources. and South Africa is a major investor in Sub -Saharan Africa but there are also rising inter-regional trends as well. .SOUTH-SOUTH FDI IS SIGNIFICANT AND GROWING Multinational enterprises based in developing countries have become increasingly important sources of FDI capital for other developing countries. Russia. Most South-South FDI is intra-regional China is a major investor in Asia. South-South FDI will likely to continue to grow in importance over the rest of the decade.

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