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Foreign Direct Investment Economics Project M.K.

S College


introduction. meaning of foreign capital. role of foreign investments. FDI Scheme- fema regulations. Foreign investment policies. Foreign investment in india-post liberalization. Growing importance of fdi. Benefits of foreign direct investments.

Trends in global fdi. Conclusion.

India is believed to be a good investment destination among global investors despite challenging hurdles like political uncertainty, bureaucratic hassles, shortages of power facilities, and infrastructural deficiencies. At present, the country has a promising potential in terms of growth and diversification possibilities. India offers a high growth potential in practically all areas of business. It has slowly transformed itself from a highly protected, semi -socialist, autarkic economy since post-independence period into a

country which is smashing barriers and seeking foreign investments. Although the country has evolved into a more welcoming destination of foreign investment, investors find it increasingly difficult to enter Indian markets due to political, bureaucratic, socio -cultural and demographic complexities of the country. Doing business in India is both challenging and frustrating for investors at the same time. This project aims at providing an exhaustive analysis of the various factors that are to be considered by an investor who chooses to park his money in India. It is important for an investor to develop a good understanding of the Indian market and the countrys overall economy before taking a direct plunge into the economic system. As India moves ahead on the general trend of globalization and liberalization, and its policies get increasingly standardized with those of the global economy, it is nevertheless important to understand specific government policies that exist in relation to a particular area of business and analyze the political concerns which should be addressed. Indias Economic Sectors and Foreign Investment India has a strong information technology sector along with other highly promising sectors like the auto components, chemicals, apparels, pharmaceuticals, and jewellery. Rigid FDI policies of the country pose a severe hindrance to foreign investment in these and other growing sectors. FDI caps in most sectors are being relaxed or removed in the wake of the growing liberalization of the world economy. Indias recent FDI policy allows up to 100% foreign stake in certain ventures. Industrial licensing requirements have been substantially reduced through recent industrial policy reforms. The real estate sector owes its upward moving growth to a booming economy and relaxed FDI norms and policies. The approval of 100% FDI in the construction sector by the government in 2005 and this automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects.

Meaning of foreign capital

There are many Forms of Foreign Capital Flowing into India such as banking and NRI deposits. The various Forms of Foreign Capital Flowing into India has helped to bring in huge amounts of FDI into the country, which in its turn has given a major boost to the Indian economy. Foreign Direct Investment in India: The government of India made several changes in the economic policy of the country in

the early 1990s. This led to the deregulation and liberalization of the Indian economy and also increased the flow of foreign direct investment into the country. The total amount of foreign direct investment in India stood at US$ 42.3 billion in 2001, in 2002 this figure came to US$ 54.1 billion, in 2003 this figure stood at US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the total amount of foreign direct investment in India has increased at a very rapid pace over the last few years. Various Forms of Foreign Capital Flowing into India: The Forms of Foreign Capital Flowing into India include, NRI deposits, which are made in profitable foreign currency accounts. The total amount of Foreign Capital Flowing into India in the form of NRI deposits came to US$ 2.32 billion in 2000- 2001, in 2001- 2002 this figure stood at US$ 2.75 billion, and in 2002- 2003 this figure increased to US$ 2.98 billion. Further the various Forms of Foreign Capital Flowing into India are portfolio flow of capital that are made by institutional foreign investors that make investments in India's debt and stock markets. The total amount of Foreign Capital Flowing into India in the form of investments being made by foreign investors in the country's stock markets came to US$ 2.8 billion in 2000- 2001, in 2001- 2002 this figure stood at US$ 2 billion, and in 2002- 2003 this figure came to US$ 979 million. The Forms of Foreign Capital Flowing into India also include, investments that are being made by the foreign investors in the commercial banks of India. The total amount of Foreign Capital Flowing into India in the form of investments in the commercial banks by foreign investors came to US$ 2.63 billion in 2001- 2002 and the next year, this figure increased to US$ 5.15 billion. Indian government must boost Foreign Direct Investment: The government of India must make polices that will help bringing in huge amounts of foreign direct investment into the country, for this will lead to the growth of the Indian economy.


The role of foreign investments in a developing economy is very vital and especially in its industrialization process. Since Independence India pursued a policy of overcaution mixed skepticism. Thus our policies towards inflow of foreign funds did not encourage the entry of foreign capital into the country. The Reserve Bank of India through its regulatory mechanism guided and controlled the flow of foreign capital in India. Whatever might have been the wisdom in pursuing such policy it was learned through experience in the later decades that foreign capital is an important means to achieve faster economic development of the country.

After a long wait of nearly 45 years pragmatism finally prevailed in the highest portal of decision-making with the announcement of the New Industrial Policy in 1991. and took a radically different attitude towards foreign capital. The foreign direct investment was allowed under the new regime in almost all sectors of the economy. The economy was opened up to bring it in tune with the global economy. And changes were effected in industrial and trade policies which were substantially liberalized .In the liberalized atmosphere the change in the attitude of the government was inevitable. Foreign investments can be of two types direct as well indirect. The direct foreign investment which is also known as FDI and includes investments from non-Resident Indians and Overseas Corporate Bodies (OCB) . These are parts of the government efforts to supplement the domestic resources for the economic development of the country. Now FDI is permitted in all sectors including service sector with some sectoral caps. Even foreign investments are allowed in the SSI sector. Similarly such investments are allowed for trading activities with a cap. There are other modes of FDI like Global Depository Receipts, American Depository Receipts, Foreign Currency Convertible Bonds etc. Although India is endeavouring to catch up with China in attracting foreign capital but it is still way behind it.


It is the intent and objective of the Government to promote foreign direct investment through a policy framework which is transparent, predictable, simple and clear and reduces regulatory burden. The system of periodic consolidation and updation is introduced as an investor friendly measure. Investment is usually understood as financial contribution to the capital of an enterprise or purchase of shares in the enterprise. Foreign investment is investment in an enterprise by a Non-Resident irrespective of whether this involves new capital or re-

investment of earnings. Foreign investment is of two kinds (i) Foreign Direct Investment (FDI) and (ii) Foreign Portfolio Investment. International Monetary Fund (IMF) and Organization for Economic Cooperation and Development(OECD) define FDI similarly as a category of 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. In the Indian context, FDI is defined in Para 2.1.12 of this Circular. It is the policy of the Government of India to attract and promote productive FDI in activities which significantly contribute to industrialization and socio-economic development. FDI supplements domestic capital and technology.

FDI includes investment by:

a non resident, a non resident incorporated entity (foreign company), a non resident Indian, Person of Indian orgin, Issue of preference shares. American Deposit Receipts/ Global Deposit Receipts. Foreign Currency Convertible Bonds.

FDI includes investment through

Foreign investment policies

Central Level Policies The central level policies governing various strategic factors affecting businessinvestment, land acquisition, electricity provide a conducing environment for business environment. The policies have been aligned over the years with an objective to thrust India on the path of economic growth by attracting foreign and indigenous investment and assisting such investments through a positive business environment inclusive convenience in investment norms, tax reforms, power reforms, port development etc. Some of the key policies have been discussed below:

Foreign Direct Investment Policy - Salient Features FDI up to 100% is allowed under the automatic route in all activities / sectors except the following which will require approval of the Government: . Activities / items that require an Industrial License; . Proposals in which the foreign collaborator has a previous / existing venture / tie up in India in the same or allied field . All proposals relating to acquisition of shares in an existing Indian company by a foreign / NRI investor. . All proposals falling outside notified sectoral policy / caps or under sectors in which FDI is not permitted. The policy permits FDI up to 100 % from foreign / NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors / activities under automatic route does not require any prior approval either by the Government or the RBI. FDI in areas of special economic activity Special Economic Zones 100% FDI is permitted under automatic route for setting up of Special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB. Export Oriented Units (EOUs) 100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals which are not covered under the automatic route would be considered and approved by FIPB. Industrial Park 100% FDI is permitted under automatic route for setting up of Industrial Park. Electronic Hardware Technology Park (EHTP) Units All proposals for FDI / NRI investment in EHTP Units are eligible for approval under automatic route subject to parameters listed . For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in the policy.


By the beginning of 1990s, the Indian Economy was under great crisis and faced its stiffest challenge. India faced a serious balance of payment problem and foreign exchange reserves were at record low. That is when the government decided to alter the course of the Indian economy. The introduction of reforms in 1991 resulted in sweeping changes in the Indian Economy. The reforms process consisted of three processes, liberalization, privatization and globalization (LPG model). Under liberalization markets were deregulated, under privatization private participation was

encouraged and many a public sector undertaking (PS U) were privatized and under globalization restrictions on foreign investments were removed. The Indian economy moved away from its isolation, to be integrated with the global economy and to competitively utilize its advantages to make rapid strides in terms of growth. In India today 60% of the population is dependent directly and indirectly on agriculture and agriculture contributes 17% of GDP. The Industrial sector has witnessed massive restructuring by the way of mergers and acquisitions, process reengineering, foreign joint ventures, technological up gradation. Certain sectors like cement, steel, pharmaceuticals, and automobiles have been witnessing unprecedented growth. The service sector has been one of the major beneficiaries of the economic boom. The outsourcing industry comprising of IT and ITES became the new poster boy of the Indian economy. The huge pool of engineering talent was absorbed by the IT industry, while graduates could carve out a career in the ITE'S industry. The purchasing power of the booming middle class was enhanced, who went on a consumption spree, which in turn allowed the retail sector to flourish. The booming economy also created a wave of real estate boom across the country. India is the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign direct investments (FDI); India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to some positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle -class population stands at 50 million and represents a growing consumer market. S India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In Marc h 2005, the government amended the rules to allow 100 per cent FDI in t he construction business. This automatic route has been permitted in towns hips, housing, built -up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city - and regional-level infrastructure. A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which require relaxation in FDI restrictions include civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record $19.5 billion in fiscal year 2006-07 (April- March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24 billion and for 2008-09, it is expected to be above $35 billion.

A critical factor in determining India's continued economic growth and realizing the potential to be an economic superpower is going t o depend on how the government can create incentives for FDI flow across a large number of sectors in India. The supply of money into the economy has increased steadily due to FDIs. (Between April 2008 and January 2009, India received total foreign investments of US $ 15,545 million).The Foreign Institutional Investors (FIIs) have invested heavily in the stock market, resulting in a continual bull run for an extended period of time. The BSE indices scaled a new peak of 21, 000 in January 2008. India, post liberalization, has not only opened its doors to foreign investors but al so made investing easier for them by implementing the following measures: o Foreign exchange controls have been eased on the account of trade. o Companies can raise funds from overseas securities markets and now have considerable freedom to invest abroad for expanding global operations. o Foreign investors can remit earnings from Indian operations. o Foreign trade is largely free from regulations, and tariff levels have come down sharply in the last two years. o While most Foreign Investments in India (up to 51 % ) are allowed in most industries, foreign equity up to 100 % is encouraged in export-oriented units, depending on the merit of the proposal. In certain specified industries reserved for the small scale sector, foreign equity up t24 % is being permitted now. 20 As the industry progresses, opportunities abound in India, which has the world's largest middle class population of over 300 million, is attracting foreign investors by assuring them good ret urns. The scope for foreign investment in India is unlimited. India offers to foreign investors a well balanced package of fiscal incentives for exports and industrial investments that includes: o Complete tax exemptions. Investment incentives are offered by both the Central Government and the Government of the State in which the unit is located. o India has tax treaties with 40 countries. Moreover, the support of the common man regarding FDI is clearly from the sharp hike in India's gross expenditure in the past few years.

Growing importance of fdi


1986-89 and again in 1995, outflows of FDI grew much more rapidly than world trade. Over the period 1973-95, the estimated value of annual FDI outflows multiplied twelve times (from $25 billion to $315 billion), while the value of merchandise exports multiplied eight and a half times (from $575 billion to $4,900 billion). Sales of foreign affiliates of multinational corporations (MNCs) are estimated to exceed the value of world trade in goods and services (the latter was $6,100 billion in 1995).

Intra-firm trade among MNCs is estimated to account for about one-third of world trade, and MNC exports to all other firms for another third, with the remaining one-third accounted for by trade among national (non-MNC) firms.

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship.

It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95. For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages. Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI. In recent years, FDI has been used more as a market entry strategy for investors, rather than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see the world economy as their market. Additionally for investors, FDI provides the benefits of reduced cost through the realization of scale economies, and coordination advantages, especially for integrated supply chains. The preference for a direct investment approach rather than licensing and franchising can also been viewed in terms of strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house

Trends in Global Foreign Direct Investment

Flow of Foreign Direct Investment has grown faster over recent past. Higher flow of Foreign Direct Investment over the world always reflect a better economic environment in the presence of economic reforms and investment-oriented policies. Global flow of foreign direct investment reached at a record level of $ 1,306 billions in the year 2006. Increase in FDI was largely fuelled by cross boarder mergers and acquisitions (M&As). FDI in 2006 increased by 38% than the previous year.

Most of the developing and least developed countries worldwide equally participated in the process of direct investment activities. FDI inflows to Latin American and Caribbean region increased by 11 percent on an average in comparison to previous year. In African region FDI inflows made a record in the year 2006. Flow of FDI to South, East and South East Asia and Oceania maintained an upward trend. Both Turkey and oil rich Gulf States continued to attract maximum FDI inflows. United States Economy, being worlds largest economy also attracted larger FDI inflows from Euro Zone and Japan.

The following diagram shows the annual Growth of FDI inflows over the world:

Higher inflows of FDI to a country largely generates employment in the nation. FDI in manufacturing sector creates more employment opportunities than to any other sectors. For the year 2006, countries such as Luxembourg, Hong Kong China, Suriname, Iceland and Singapore ranked in the top of Inward performance Index Ranking of the UNCTAD. Over recent years most of the countries over the world have made their business environment investment friendly for absorbing global opportunities by attracting more investable funds to the country.


Hence I herby conclude the project where been our knowledge says that after referring to all the facts and figures mentioned above FDI(Foreign Direct Investments) plays a very important role in our economy. That is today FDI is contributing 4% to the economy and government is trying the best to upgrade the foreign investments and trying to explore so that investors find it easy to invest. As we know there are many loop holes also that is there is a major need to change economic and political policies.

Roll no.

Name of the student

Marks obtained Marks out of

02. 19. 22. 34. 42. 60.

Rushabh Ambalia Tushar Khimasia Vinali Madhani Manan Parikh Anuja Shah Jinang Vora

10 10 10 10 10 10

US$ 4.9 billion already recorded for the first quarter of