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Submitted in partial fulfillment of requirement of Bachelor of Business Administration (B.B.A) General

BBA VI Semester (M) (A) Batch 2010-2013 Submitted to: Ms. Prabhjot Kaur Assistant Professor Submitted by: Swati 03614101710


S. no DESCRIPTION Page no.

1 2 3 4 5

Acknowledgement Certificate of completion and Students Declaration Objective of the project Executive summary Introduction Introduction of FDI About outward FDI About trade in India

4 5-6 7 8-10


Historical Background History of FDI History of Trade 24-51

FDI and Trade in the recent years Recent trends in FDI Recent trends in Trade 52-78

9 10 12 13 14

Impact of FDI on Trade performance of India Research Methodology Recommendations and Limitations Conclusion Bibliography

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Table no 1 Table no 2 Table no 3 Table no 4 Table no 5 Table no 6 21 22 63 66 68 69 Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 11 23 27 31 35 45 65


I take this opportunity to express my profound gratitude and deep regards to my guide Ms. Prabhjot Kaur for her exemplary guidance, monitoring and constant encouragement throughout the course of this thesis. The blessing, help and guidance given by her time to time shall carry me a long way in the journey of life on which I am about to embark. I also take this opportunity to express a deep sense of gratitude to my college, HOD (Ms. Rashmi Bhatia), my class coordinator (Ms. Pallavi Ahuja), and all other faculties for their cordial support, valuable information and guidance, which helped me in completing this task through various stages. Lastly, I thank almighty, my parents, brother, sisters and friends and atlas but not the least for the constant encouragement and blessings without which this project would not be possible.


This is to certify that Swati, pursuing BBA 6th sem (A) (M) from JIMS KALKAJI,

has completed her project on the topic OUTWARD FI AND TRADE PERFORMANCE

under my guidance.

Her work is appreciable.

Project Guide: Ms. Prabhjot Kaur Assistant Professor


I hereby declare that the project report titled OUTWARD FDI AND TRADE

PERFORMANCE is my own work and has been carried out under the table guidance of

Ms. Prabhjot Kaur (Assistant Professor at JIMS Kalkaji). All care has been taken to keep this

project error free and I sincerely regret for any unintended discrepancies that might have

crept into this report.

Thank You (SWATI) BBA 6th Sem (M) (A) Jagannath International Management School (KALKAJI)


Date:-13/03/2013 6







Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Trade Trade is the transfer of ownership of goods and services from one person or entity to another by getting something in exchange from the buyer. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious metals, bill, paper money. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. IMPACT OF FDI ON TRADE PERFORMANCE OF INDIA Countries engage in international trade for a variety of reasons. Exports, in particular, are ameans to generate the foreign exchange required to finance the import of goods and services; toobtain economies of specialization, scale and scope in production; and to learn from the experience in export markets. In a globalizing world, furthermore, export success can serve as a measure for the competitiveness of a countrys industries. It may be noticed that export success among developing countries has been concentrated only in a few countries. 8

But, the comparative advantage of most of the developing countries still lies traditionally in primary commodities and unskilled-labour-intensive manufactures. Over time, as they grow and accumulate capital and skills, and wages rise, their competitive base has to change. They have to upgrade their primary and labor intensive exports into higher value-added items, and they have to move into new, more advanced, export-oriented activities. Both require greater inputs of skill and technology. Countries can attain these objectives in several ways: by improving and deepening the capabilities of domestic enterprises or by attracting Foreign Direct Investment (FDI) into export activities and upgrading these activities over time. These strategies may be complementary or alternatives. In most cases they are found together, but different countries deploy different combinations of domestic enterprise-led and FDI-led export development. Neither strategy is easy (UNCTAD 1999). The Government of India saw in FDI a potential non-debt creating source of finance and a bundle of assets, viz., capital, technology, market access (foreign), employment, skills, management techniques, and environment (cleaner practices), which could solve the problems of low income growth, shortfall in savings, investments and exports and unemployment. It was argued that FDI would also help India in the expansion of production and trade and increase opportunities to enhance the benefits that could be drawn from greater integration with the world economy. In other words, FDI would broaden the opportunities for India to participate in international specialization and other gains from trade. Besides FDI, export orientation has also been hailed as an engine of growth. The Newly Industrialized Economies (NIEs: Singapore, Hong Kong and Tai- wan) successful economic development has been attributed to these economies success in pursuing an exported growth strategy.

But more importantly, it was part of the IMF and World Bank condition that the Government of India must resort to macro-economic reforms and structural adjustments in order to be bailed out from the severe economic crisis in 1990-91 (UNCTAD 1999). So, in mid-1991 the Government of India resorted to full-fledged macro-economic reforms and structural adjustments with the announcement of the New Economic Policy (NEP). The liberalization policy automatically helped increase the FDI inflow into India. 9

And indeed, the increased inflows of FDI into the Indian economy have led to the expansion of cross-border production by multinational enterprises and their networks of closely associated firms in India. But, whether the impact of all this is on export performance is positive or negative is the question. In view of the facts observed above, this study makes an attempt to analyze the impact of FDI on the export performance in India. FDI traditionally played an important role in natural resource exports (ESCAP / UNCTC 1985; ESCAP /UNCTAD 1994), and its role is growing in the exports of certain processed agricultural products. It is also playing an increasing role in services, especially in tourism (UNCTAD 1998). But, the focus here is on manufacturing oriented exports as manufactured products are more relevant for a developing economy as an indicator of continued long-term dynamic growth in exports as well as the whole economy.




Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.



Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI is defined as the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements. Types Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Platform FDI Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it.

Importance and barriers to FDI The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has not been matched by similar increases in per-capita income and access to the basics of modern life, like education, health care, or - for too many - even sanitary water and waste disposal.


FDI has proven when skillfully applied to be one of the fastest means of, with the highest impact on, development. However, given its many benefits for both investing firms and hosting countries, and the large jumps in development were best practices followed, eking out advances with even moderate long-term impacts often has been a struggle. Recently, research and practice are finding ways to make FDI more assured and beneficial by continually engaging with local realities, adjusting contracts and reconfiguring policies as blockages and openings emerge.

Foreign direct investment and the developing world A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.

Difficulties limiting FDI

Foreign direct investment may be politically controversial or difficult because it partly reverses previous policies intended to protect the growth of local investment or of infant industries. When these kinds of barriers against outside investment seem to have not worked sufficiently, it can be politically expedient for a host country to open a small "tunnel" as focus for FDI. The nature of the FDI tunnel depends on the country's or jurisdiction's needs and policies. FDI is not restricted to developing countries. For example, lagging regions in the France, Germany, Ireland, and USA have for a half century maintained offices to recruit and incentivize FDI primarily to create jobs. China, starting in 1979, promoted FDI primarily to import modernizing technology, and also to leverage and uplift its huge pool of rural workers. To secure greater benefits for lesser costs, this tunnel need be focused on a particular industry and on closely negotiated, specific terms. These terms define the trade offs of certain levels and types of investment by a firm, and specified concessions by the host jurisdiction.


The investing firm needs sufficient cooperation and concessions to justify their business case in terms of lower labor costs, and the opening of the country's or even regional markets at a distinct advantage over (global) competitors. The hosting country needs sufficient contractual promises to politically sell uncertain benefits versus the better-known costs of concessions or damage to local interests. The benefits to the host may be: creation of a large number of more stable and higher-paying jobs; establishing in lagging areas centers of new economic development that will support attracting or strengthening of many other firms without costly concessions; hastening the transfer of premium-paying skills to the host country's work force; and encouraging technology transfer to local suppliers. Concessions to the investor commonly offered include: tax exemptions or reductions; construction or cheap lease-back of site improvements or of new building facilities; and large local infrastructures such as roads or rail lines; More politically difficult are concessions which change policies for: reduced taxes and tariffs; curbing protections for smaller-business from the large or global; and laxer administration of regulations on labor safety and environmental preservation. Often these un-politick "co-operations" are covert and subject to corruption. The lead-up for a big FDI can be risky, fraught with reverses, and subject to unexplained delays for years. Completion of the first phase remains unpredictable even after the contract ceremonies are over and construction has started. So, lenders and investors expect high risk premiums similar to those of junk bonds. These costs and frustration have been major barriers for FDI in many countries. On the implicit "marriage" market for matching investors with recipients, the value of FDI with some industries, some companies, and some countries varies greatly: in resources, management capacity, and in reputation. Since, as common in such markets, valuations can be mostly perceptual, then negotiations and follow-up are often rife with threats, manipulation and chicanery. For example, the interest of both investors and recipients may be served by dissembling the value of deals to their constituents. One result is that the market on what's hot and what's not has frequent bubbles and crashes.


Because 'market' valuations can shift dramatically in short times, and because both local circumstances and the global economy can vary so rapidly, negotiating and planning FDI is often quite irrational. All these factors add to the risk premiums, and remorses, that block the realization of FDI potential.

Foreign direct investment by country

There are multiple factors determining host country attractiveness in the eyes of large foreign direct institutional investors, notably pension and sovereign wealth funds. Research conducted by the World Pensions Council (WPC) suggests that perceived legal/political stability over time and medium-term economic growth dynamics constitute the two main determinants. Some development economists believe that a sizeable part of Western Europe has now fallen behind the most dynamic amongst Asias emerging nations, notably because the latter adopted policies more propitious to long-term investments: Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 Asian Crisis What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the Washington consensus by investing massively in infrastructure projects : this pragmatic approach proved to be very successful.

The United Nations Conference on Trade and Development said that there was no significant growth of global FDI in 2010. In 2011 was $1,524 billion, in 2010 was $1,309 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 and 2007.


Foreign direct investment in the United StatesBroadly speaking, the U.S. has a fundamentally 'open economy' and very. small barriers to foreign direct investment. The United States is the worlds largest recipient of FDI. U.S. FDI totaled $194 billion in 2010. 84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. Research indicates that foreigners hold greater shares of their investment portfolios in the United States if their own countries have less developed financial markets, an effect whose magnitude decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets. White House data reported in June 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce. President Barack Obama has said, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people." Select USA was created at the federal level to showcase the United States as the worlds premier business location and to provide easy access to federal-level programs and services related to business investment. Select USA provides the following services: business solutions for investors, advocacy, single location promotions, facilitated investment missions, economic development organization counseling, and Ombudsman to help resolve issues involving federal regulations, programs, or activities related to existing, pending and potential investments.

Foreign direct investment in China FDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment and topping the United States which had $57.4 billion of FDI. 16

During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.

Foreign direct investment in India Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political problems, even in the current (2012) election. India disallowed overseas corporate bodies (OCB) to invest in India.

Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.


Outward FDI and Exports Are foreign production and exports substitutes or complements? While standard trade Theory predicts that they are substitutes, recent empirical work largely indicates a complementary relationship between them. As discussed in Blonigen (2001), there are several reasons to suggest both substitution and complementarity effects. Substitution between them arises if intangible assets specific to the firm, such as technology and managerial skills, may induce a firm to operate production facilities abroad rather than export. It is often difficult to properly appropriate rents from such assets via contact with a third-party, which leads the firm to establish its own facilities abroad. FDI also replaces trade when there are sufficient costs to external transactions such as exporting or licensing. On the other hand, we expect a complementary effect when a firms production presence in a foreign market with one product may increase total demand for all of its products. For instance, the presence itself may increase the firms knowledge about the market and thus help tilt consumer preferences in the firms favor. Furthermore, recent empirical evidence reveals that almost half of trade flows are parent-to-affiliate input trade. 17

This may imply that foreign affiliate activities may increase exports of inputs to the host market from home countries. Empirical tests regarding to what extent FDI changes exports have been largely based on an FDI-augmented gravity model. By considering FDI patterns as an additional determinant of trade, a majority of research using this framework finds positive feedback from FDI to exports. For example, Lipsey and Weiss (1981) and Blomstrom et al. (1987) are among the early studies adopting this approach. By employing the detailed data of U.S. multinational firms, Clausing (2000) again finds complementarity between multinational activity and intra-firm trade. Hejazi and Safarian (2001) argue that U.S. outbound FDI has a larger predicted positive impact on U.S. exports than inbound FDI. On the other hand, there has been growing research indicating that the impact of FDI on trade could vary depending on FDI type, data-level, etc. For instance, Head and Ries (2003) suggest that horizontal investment tends to substitute for home production and exports, while vertical FDI expands home exports via intra-firm in intermediate inputs.

In addition, Swenson (1998) argues that less substantial complementarity and even substitution effects are revealed as one moves from more aggregated industry FDI data to less aggregated data. Finally, Blonigen (2001) emphasizes the importance of adopting the level of data aggregation appropriate for the hypothesis being tested. He finds a complementarity effect in the case of Japanese automobile parts for the U.S. market, but a substitution effect using product-level data on Japanese final consumer products. He also finds evidence that, when firms locate production abroad, the substitution effects are large onetime changes, not gradual steps over time.

Outward FDI, Trade and Domestic Activities

Another strand of FDI research that has attracted much attention from international economists is the relationship between FDI and domestic activities, especially employment, productivity and domestic investment. The recent surge of outward FDI has sparked debate on whether the home economy is hollowing out as productive capacity is moving abroad, thus hurting domestic growth and employment.


So far, the FDI literature produces quite mixed results on this issue, and consequently remains an open question Using firm-level data from US and Swedish multinationals, Blomstrom et al. (1997) examine the effects of affiliate net sales on employment of the parent companies. They find that U.S. parent firms tend to substitute foreign production in developing countries for home employment, but this is not the case for foreign production in developed countries. On the other hand, in case of Swedish firms, they provide evidence that foreign affiliate production raises the demand for home labor, regardless of FDI locations. In a different context, Feldstein (1995) provides aggregate level evidence that foreign investment diverts resources from domestic investment in OECD economies. On the other hand, Desai, Foley and Hines (2005a) find that foreign and domestic investments are positively correlated for U.S. multinationals. Recently, Desai, Foley and Hines (2005b) highlight the fact that foreign and domestic operations are jointly determined by other economic factors. This indicates that there are likely to be substantial questions of endogeneity in a regression of foreign operations on domestic activities, unless these determinants are explicitly controlled in estimation.

In this context, they employ an instrumental variable approach in analyzing the detailed affiliate-level data of U.S. multinationals. They find that the estimated effect of foreign investment on domestic investment has a larger positive magnitude in the instrumental variables equation than does the corresponding estimated coefficient in the OLS equation. This result implies that omitted variables have the effect of making foreign and domestic investment look more like substitutes than is really the case.


ABOUT TRADE IN INDIA Trade Trade is the transfer of ownership of goods and services from one person or entity to another by getting something in exchange from the buyer. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious metals, bill, paper money. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. Trade exists for man due to specialization and division of labor, in which most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions size allows for the benefits of mass production. As such, trade at market prices between locations benefits both locations. Retail trade consists of the sale of goods or merchandise from a very fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser.[1] Wholesale trade is defined as the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services.


Foreign trade of India Foreign trade in India includes all imports and exports to and from India. At the level ofCentral Government it is administered by the Ministry of Commerce and Industry

There are records throughout history of India's trade with foreign countries. Around 100CE The Periplus of the Erythraean Sea is a document written by an anonymous sailor from Alexandria about 100CE describing trade between countries, including India. Among other things it says that at the time India exported cotton, ivory, mallow cloth, muslin, precious and semi-precious gems (agate, carnelian, diamond, oryx, pearls, sapphires, sardonyx), silk, spices, and curatives like black pepper, nard, spikenard, bdellium, long pepper, and malabathrum. The same document says that India was an importer of wines from Italy, Arabia, and Laodicea, copper, tin, lead, coral, topaz, storax, sweet clover, flint, glass, realgar, antimony, gold and silver coins, and performers for kings. 1991 economic reform Prior to the 1991 economic liberalization, India was a closed economy due to the average tariffs exceeding 200 percent and the extensive quantitative restrictions on imports. Foreign investment was strictly restricted to only allow Indian ownership of businesses. Since the liberalization, India's economy has improved mainly due to increased foreign trade. List of the largest trading partners of India According to Department of Commerce, the fifteen largest trading partners of India represent 62.1% of Indian imports, and 58.1% of Indian exports as of December 2010. These figures do not include services or foreign direct investment, but only trade in goods.


The largest Indian partners with their total trade (sum of imports and exports) in millions of US Dollars for calendar year 20112012 are as follows:

Country China United Arab Emirates United States Saudi Arabia Switzerland Singapore Germany Hong Kong Indonesia Iraq Japan Belgium Kuwait Unspecified Korea

Exports 18,076.55 35,925.52 34,741.60 5,683.29 1,095.34 16,857.71 7,942.79 12,931.90 6,677.99 763.97 6,328.54 7,160.76 1,181.41 16,436.76 4,352.35

Imports 57,517.88 35,790.39 24,470.16 31,060.10 32,404.95 8,600.29 16,275.56 10,646.93 14,623.55 18,939.63 12,100.57 10,450.29 16,375.37 1,052.09 13,098.93

Total Trade 75,594.44 71,715.91 59,211.75 36,743.40 33,500.29 25,458.00 24,218.35 23,578.83 21,301.54 19,703.60 18,429.10 17,611.05 17,556.78 17,488.85 17,451.28

Trade Balance -39,441.33 135.13 10,271.44 -25,376.81 -31,309.61 8,257.41 -8,332.77 2,284.96 -7,945.56 -18,175.66 -5,772.03 -3,289.54 -15,193.96 15,384.67 -8,746.58

This list does not include the Gulf Cooperation Council (GCC), which includes two (UAE and Saudi Arabia) of the above states in a single economic entity. As a single economy the Gulf Cooperation Council (GCC) is the largest trading partner of India with almost $160 billion in total trade.


This list also does not include the European Union (EU), which includes two (Germany and Belgium) of the above states in a single economic entity. As a single economy, the EU is the is the second largest largest trading partner of India with 40.5 billion worth of EU goods going to India and 39.4 billion of Indian goods going to the EU as of 2011, totaling approximately 79.8 billion ($104 Billion USD) in total trade. India is also the largest export and/or import partner of the following countries:

EXPORTS Guinea-Bissau Nepal Benin Iraq 75.9% 57.4% 32.4% 22.5% Nepal

IMPORTS 57% 25.6% 25.2% 19.8% 18.8%

Sri lanka Mauritius United Arab Emirates Tanzania



HISTORY OF FDI A Brief History of Foreign Direct Investment In India







Analysis of


Introduction There is hardly a facet of the Indian psyche that the concept of foreign has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991.


Contrary to the grand narrative opening of flood-gates idea of 1991, what took place was a gradual process of changes in policies on investment in certain sub-sections of the Indian economy. As a result of controversy surrounding Foreign Direct Investment owing to a lack of understanding, it has become the eye of a political storm. The paper aims to present a unique understanding of FDI in the context of liberalization and the prevailing political climate. FDI eludes definition owing to the presence of many authorities: Organization for Economic Cooperation and Development (OCED), International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD) and United Nations Conference on Trade and Development (UNCTAD). All these bodies attempt to illustrate the nature of FDI with certain measuring methodologies.

Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.

It is furthermore described as a source of economic development, modernization, and employment generation, whereby the overall benefits (dependant on the policies of the host government),triggers technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.

Changes in the national political climate have precipitated a marked trend towards greater acceptability of FDI. The envisioned role of FDI has evolved from that of a tool to solve the crisis under the license raj system to that of a modernizing force that has been given special agencies and extensive discourse. This evolution is illustrated by analysis of the Economic policies of the Indian government from 1991 to 2005. The primary focus of this analysis will be towards the industrial and infrastructural sectors which form the beginning of the gradual liberalization process that was started in 1991. A complete understanding of these two sectors will provide interesting statistics and information regarding trends of FDI. 25

Uneven Beginning In most narratives on Indias liberalization, 1991 has acquired a revolutionary status as a time of change in the planning of Indias future. The appointment of Economist Manmohan Singh, considered a non-political figure, as finance minister signalled a different approach to economics; one that in itself was radical, but did not significantly permeate the economic imagination of the Nation or the State. Data from various individuals and agencies can lead to different conclusions all of which can be challenged on different grounds. The Ministry of Finance, however, forms my primary source of information for two main reasons: it has been the agency of and party to economic reform and has compiled data on the state of reforms for the entire duration of their history. As early as the introductory chapter of the Ministry of Finance Economic Survey for 1991, the conclusion is thatcompared to domestic investment the contribution of foreign investment is bound to remain minor. At the time the focus for long term planning was still inwards as efforts were on to solve the balance of payments crisis with Indias own resources and ingenuity as self reliance presented itself as the only alternative. Denying the imminence of reform at the time, the Indian government clung to the self-reliance model and intended to reform only as much as was absolutely essential to arrest the crisis and revert to status quo.

Unevenness in implementation of policy was due to opposition to economic reforms from several stakeholders. Owing to the likelihood of reforms challenging over manning and under productivity; the first major revolt from workers in the public sector, who for the preceding four decades enjoyed employment with a virtual permanence.

A significant protest that took political roots began in the form of the Swadeshi Jagaran Manch (SJM) created by the RSS in the November of 1991; a few months after the new liberal economic policy. The fight against globalisation and privatisation found its chief targets in multinational companies. FDI was seen to be a new form of western imperialism which the Indian Nation was to combat through indigenous capabilities.


The rhetoric aimed at exploiting the feeling of insecurity spawned by the liberalization of the economy and strengthening national identity which was held synonymous with Hindu consciousness by invoking the spectre of foreign domination.

The tactic worked; many Indian capitalists accustomed to decades of protectionist policies, anxious about the impact of liberalization on their well being; got together to complain that foreign capital would drive them out of business. An argument of this nature came from the director of the Confederation of Indian Industry, a business lobby group, in an attack in April 1996 on the role of multinational corporations in India.

He accused them of not being committed to India for the long term, of not bringing in state of the art technology, and of an over reliance on imported components rather than Indian made ones. The population of rural India was barely affected and only remotely concerned with FDI but it formed the largest part of the Indian Nation and was swayed by anti- FDI rhetoric. Thus, in the interests of political expediency, P.V. Narasimha Rao, the then Prime Minister, could not and took care not to reform the economy too fast. Before announcing any reforms in contentious areas such as taxation, financial services and the public sector, the Prime Minister appointed committees to explore each issue, and make recommendations. These

recommendations, almost identical to prescriptions made by the World Back and the IMF, were deemed more acceptable from Indian committees. Politics and political standpoints made a very large impact on the trajectory of reforms.



The PM was also highly sensitive to the impact of reform on Indias voters; his instincts were driven by politics, not economics. A way to measure the popularity of the reforms can be done through the elections. The delinking in 1971 of state assembly polls from those to the national Parliament, some state or other is constantly going to the polls and as a result the central government face constant judgements at the tribunal of public opinion. Rao felt that an electoral setback even in one state could be interpreted as a verdict against the economic reforms nationwide; he therefore downplayed them as much as possible, and avoided making reforms that might have been politically costly in the short term, such as laying off public sector workers, privatizing or closing down inefficient factories, reducing subsidies, or taxing agricultural income.


Despite this, when electoral defeats came in states like Karnataka, and Andhra Pradesh, political stalwarts were quick to ascribe them to the reforms, alleging that the populous in general did not benefit from them. Election time manifestos of major political parties are an indicator of the standpoints of major political parties, and also tools to analyse the variance that liberalization could take. The party in power is concerned with self-perpetuation and cannot afford to alienate anyone. In an effort to broaden support bases, political parties often dilute their original agendas. An analysis of political party agendas is important as it forms the crux of the agenda once elected. The political parties that vied for the nations attention in their election manifestoes presented their agenda (a mix of ideology and party advancement) that could be implemented in 1991. Of the three major political parties (Congress, BJP and Communist Party (Marxist) (CPI(M)) had already placed the state of the Indian economy by tracing it to the IMF loans that were taken in 1981 by one of the previous Congress government.

The BJP talked about reversing current trends with the declaration that the country was corrupt and on the verge of bankruptcy. Their economic strategy required holding the price line and liberating the economy from bureaucratic controls and not excising duties on item of mass consumption for 5 years. In their tenure agriculture would have been given the first priority. The crux of the viewpoint can be summed by we will make our economy truly Swadeshi by promoting native initiatives. The above viewpoints were contrasted by the Congress Party that announced that foreign investment and technology collaboration would be permitted to obtain higher technology, to increase exports and to expand the production base. The Congress realized the importance of a change in the economic model but was also wary of domestic concerns. With their announcement for investment was a warning that such foreign investment will not be at the cost of self-reliance. The different approach of the Congress Party meant that if elected there could not be policies that alienated the segment of the population that followed or shared other party viewpoints.

Even after Congress came to power and reforms began, FDI was not in anyway defined in 1991 nor was it considered a mechanism for development. In the context of the time the emphasis is placed on stabilizing the economy. The goals for the upcoming year were to consolidate gains, bring problems under control and restore the governments capacity to pursue the social goals of generating employment, removing poverty and promoting equity. 29

What this illustrates is that while the new policy had brought in a dramatic increase in investment activity, there was no clear understanding of FDI as a proper mechanism for development or its future role.

This trend was visible through 1992-1993 where investment has increased but the role of the government emphasizes it role in filmi terms as a protector of the weak and to ensure peace, and prevent mischief It is in 1993-1994 where there seems to be a realization on the importance of FDI. Reading the definition it seems that both literature and economics have come together as an ideal definition of this concept is given that seems to weave together knowledge, technology, and high rates of growth. It takes another year before the policy reforms properly percolate down to the level of state governments and state capitals; the actual benefits of new industrial investment can only accrue if investment approvals and intentions are translated into real investment, employment and production. The role of the state government is critical because resources for production such as land use, water, power generation, and distribution and roads come under the purview of state governments.

The far reaching unanimity for FDI within came in 1995-1996 when the government began to showcase the progress made as a result of FDI along with defending the changes to critics. Statistics had been available for most years, but now FDI entered the mindset of the government. The future of Indias growth and output was seen to be connected to FDI and it was deemed necessary for promoting higher growth of output, exports and employment. Furthermore the government also defended FDI by stating that fears of foreign investment swamping our domestic industry or creating unemployment are unfounded or grossly exaggerated.

The acceptance of FDI was not shared by the opposition, as by the next elections the party positions show some level of variance but the general feelings were similar. The BJP stayed critical of the Congress Party and their so called acceptance of IMF conditionalities coupled with what they referred to as a radical different approach to Foreign Investment. The criticism delved into another level, as the party viewed that at some level the License Quota Permit Raj has remained intact. BJP believed in the Swadeshi approach, but recognized that foreign Investment would be required and encouraged for world class technology.


The party was able to effectively change its stance by allowing for FDI but stating that it would strive to minimize dependence of foreign saving thus elaborating distinctions that would keep Indias economic sovereignty. The party elaborated that globalisation is not a synonym for the liberation of national economic interest. The party was able to change its viewpoint by separating a progressive India open to new ideas, new technology and fresh capital but at the same time not a westernized India.

Meanwhile the Communist party stayed true to its previous stance and offered strong criticism of the general economic policy that unfolded since 1991, but it was just the reverse when it was seen from a practical point of view and the history of their stance when it comes to the states where they are in power. Needless to say the policies were theoretically seen as pro multinational and anti public sector and local industries. The issue of self reliance was still considered important and the policy of globalization and privatization were seen to strike a heavy blow at the self reliant path of development. The inclusion of FDI was analysed as MNCs acquiring vital sectors of the economy. The most important observation by CPI (M) was policy evaluation; that the BJPs economic nationalism was a crude mixture of swadeshi demagogy and actual support to liberalization policy of the congress. The Communist party observed the trends from the state governments of BJP and was able to effectively summarize and offer criticism that the BJP party line had oscillated between extremes (perhaps to mobilize support) from denouncing Enron and threatening to throw it into the sea, to quickly striking a fresh deal with the same company.

Thus by 1996, though there was difference of opinion on FDI, term was slowly being worked into the party position as a debate able and mainly an election issue. If nothing else the topic has sparked discussion as its future will affect the welfare of the country.

Maintaining the Flow With the new government focus on FDI was evident in changes in 1996-97 that resulted in an increase in understanding and resources towards investment. This included the setting up of the Foreign Investment Promotion Council along with the Foreign Investment Promotion Board (FIPB) being streamlined and made more transparent. The first ever guidelines were announced for consideration of foreign direct investment proposals by the FIPB, which were not covered under the automatic route.


The list of industries eligible for automatic approval of up to 51 per cent foreign equity were expanded and there was a recognition that foreign direct investment flows provided savings without adding to the country's external debt. The case of comparison for numbers and example seem to be China and the Asian Tigers that were enjoying the economic boom.

By now FDI trends are taken more serious and FDI flow had to be maintained for the economy to grow. The government recognized that greater procedural simplifications were still needed in the area of FDI. In 1998 when there was a decline in FDI the government had to take greater technical measures in terms of liberalising investment norms in bring in FDI. Though these were steps in the right direction the government was not able to function as a central ruling body and elections had to be called that resulted with a BJP government.


Another Beginning

By now after having been in power the BJP in 1998-1999, overhauled its previous stance and in its party manifesto admitted that that the country cannot do without FDI because besides capital stocks it brings with it technology, new market practiCes and most importantly employment. However there is a clarification that FDI will be encouraged in core areas so that it usefully supplements the national efforts and discourage FDI in non priority areas. The Communist party while talking about land reforms also made a recognition of foreign capital that is to be solicited to those areas for which clear cut priorities are set.29 CPI (M) was not clear as the so called priorities were to be themselves are to be determined by the need for developing new production capacities and acquiring new technology. Meanwhile the Congress party (now was on a different level than the other party) planned an increase both the level and productivity of investment, both domestic and foreign, public and private, in infrastructure like power, roads, ports, railways, coal, oil and gas, mining and

telecommunications. The trends now illustrated that while the facets of FDI were not completely understood by all the parties it was a topic that was a major election and policy topic. The analysis reveals that FDI at this point could not be blocked but the parliamentary parties through their policy realized that its speed could be controlled to garner effective longevity for the party while balancing the investment needs of the country. The trends of FDI now resulted in policy formulation. For example in 1999-2000, when a second year of decline continued a Foreign Investment Implementation Authority (FIIA) was set up for providing a single point interface between foreign investors and the government machinery, including state authorities. This body was also empowered to give comprehensive approvals. After this point FDI has acquired an acceptable status and the debate is on the levels that will be allowed.

By the next election in 2004, FDI had become a non-electable issue. There was widespread acceptance of the topic among all the party lines and it was no longer will it be allowed but how the polices would be designed for FDI.


Sector Analysis When the reforms began in 1991 it was inevitable there would be a discrepancy as various sectors have different characteristics and procedures. The reforms and polices on FDI have trickled down to various sectors in different speed and effectiveness. Thus the progress of FDI will be effectively analyzed by studying two sectors of the Indian economy: Industry and Infrastructure. These sectors are an agglomeration of sub sectors that when combined from the integral components of the economic growth.

Significant Change versus Struggling On When initial reforms took place in 1991, Industry was one of the first to benefit from the reforms as it resulted in changing the overall system. Firstly the new policy of July 1991 sought substantially to deregulate industry so as to promote the growth of a more efficient and competitive industrial economy. During this process the procedures for investment in nonpriority industries were streamlined. On a central level the foreign Investment Promotion Board (FIPB) was established to negotiate with large international firms and to expedite the clearances required. The FIPB also considered individual cases involving foreign equity participation over 51 percent. Furthermore for industry an important step was the removal of the Mandatory Convertibility Clause. The government realised that foreign investment had been traditionally tightly regulated in India and now the government hand was lifting.

These changes while dramatic did not yield results immediately; though Foreign Investment was liberalised in 1992, manufacturing declined. The widespread social disturbances and economic uncertainties which prevailed during the year contributed to this decline and to a weakening of investment demand as investment intentions suffered from the uncertain conditions which prevailed. On a positive note by this time due to the announcement of the new industrial policy in July 1991, a large number of Government induced restrictions, licensing requirements and controls on corporate behaviour were eliminated. The full impact of the events surrounding Ayodhaya in 1992 were felt a year later, as the incident had disrupted industrial activity and had upset business plans and investment decisions. It was in the years of 1995-1996 that Industry observed a change that has become a staple of attracting FDI to India ever since.


With state governments undertaking procedural and policy reforms in line with liberalization taken by the centre, reforms were initiated by most state governments for promoting foreign investment, thus encouraging investment participation in industry.

While Industry had taken a stride forward, an examination of Infrastructure reveals a policy and approach that differs significantly from Industry. From the onset the status of infrastructure sector did not cause any state of panic, as overall the sector was not seen to be performing too badly, and was seen as the stabilizing force of the economy. The sector was seen as a bloc and in its components while the performance of coal and telecommunications sectors fell short of the respective targets; simultaneously energy, railways, and shipping exceeded their respective targets thus bringing up the overall performance of the sector to positive growth. This discrepancy was recognized in n 1992-1993 when the general review mentioned in an overview that capital intensive infrastructure industries such as power, irrigation and telecommunications, were handicapped by a number of constraints and where possible these industries should eventually develop competitive market structures. Once again the shipping, railways and telecommunications were able to meet targets while the performances of coal and power have been below target. As a result the sector as a whole was not liberalized but there were only suggestions that it was important to attract foreign and private investment in the power sector to overcome the resource constraint. 1993-1994 followed the trend whereby instead of economic data the analysis offered was the shortcomings on the Infrastructure sector such as its development largely in the public sector and need for structural changes in the organization, operation and management of the public sector enterprises. The call to induce greater efficiency and accountability by replacing the monopolistic nature of these sectors with a competitive environment was not followed by steps to make this dream a practicality. 1994-1995 follows in the same footsteps of the previous years but with recognition that as governments ability to undertake investment in infrastructure is severely constrained and it is necessary to induce much more private sector investment and participation in the provision of infrastructure services.1995-1996 illustrates the great unevenness of the growth that is taking place within sectors and between technologies. By the time infrastructure is linked to FDI as the condition of infrastructure has a direct correlation to international competitiveness and flow of FDI, the government has finished its tenure.


Understanding FDI

The period of the next coalition government in 1996-1998 could be seen as a willingness to understand FDI by placing policies that would result in an increase in FDI and further liberalization. There was a greater understanding on the role of FDI in both the sectors. Industry still lead the reforms whereby automatic approval of FDI was increased up to 74 per cent by the Reserve Bank of India in nine categories of industries, including electricity generation and transmission, non-conventional energy generation and distribution, construction and maintenance of roads, bridges, ports, harbours, runways, waterways, tunnels, pipelines, industrial and power plants, pipeline transport except for POL and gas, water transport, cold storage and warehousing for agricultural products, mining services except for gold, silver and precious stones and exploration and production of POL and gas, manufacture of iron ore pellets, pig iron, semi-finished iron and steel and manufacture of navigational, meteorological, geophysical, oceanographic, hydrological and ultrasonic sounding instruments and items based on solar energy. 36

The government also announced in January 1997 the first ever guidelines for FDI expeditious approval in areas not covered under automatic approval. This above trends illustrates the earlier point of the government recognizing and carrying forth of the previous work done by the Rao government. While the advantage of FDI did not reach the mindset of the common man the government seemed to show possibilities of development through FDI. For example when Indian industry registered a modest growth rate of 7.1 per cent in 1996-97, which was much lower than the 12.1 per cent growth in 1995-96, there was research carried out which revealed this was partially attributable to the mining and electricity generation sectors which recorded meager growth rates of 0.7 per cent and 3.9 per cent respectively. Thus the policy was immediately rectified by expanding the list of industries eligible for foreign direct equity investment under the automatic approval route by RBI in 1997-1998.

For infrastructure there was a realization that investments were, by their very nature, for longterm return activities. This implies that there is a continuing mismatch between the required debt maturities and the availability of funding. The focus of this government shifted from Infrastructural direct investment to more towards equity investment. In terms of specific cases there is only literature on two areas namely roads and ports in relation to FDI. By 1997-1998 the most the term infrastructure was expanded to include telecom, oil exploration and industrial parks to enable these sectors to avail of fiscal incentives such as tax holidays and concessional duties. Liberalisation of foreign investment norms in the road sector resulted in granting of automatic approvals for foreign equity participation up to 74 per cent in the construction and maintenance of roads and bridges and up to 51 per cent in supporting services to land transport like operation of highway bridges, toll roads and vehicular tunnels.42 Civil Aviation also dealt with a new policy for private investment that was announced allowing for 100 per cent NRI/OCB equity and 40 per cent foreign equity participation in domestic airlines. The development of the Infrastructure sector for FDI was still haphazard as power, telecommunications, postal services, railways, urban Infrastructure have no mention of FDI. In a narrative of the governments it can be easily observed that a strong legacy of FDI was inherited and the trend that continued were along the same fissures of development whereby liberal polices advanced with certain modifications.


The weak hold on power by the government meant there could not be an overhaul by further increasing FDI at a phenomenal level but slowly opened the economy by carrying on the reforms that the Congress had started.

A Procedural Battle In the next governments of the BJP, though the party ideology was initially formulated with its own unique ways of FDI advancement, the prospect of advancing overall development, and an established system by the last two governments resulted in continuing the reforms in the economy along the same lines. In course of the year several policy measures were announced for reviving industrial investment. These included reduction of income and corporate tax rates, reduction in excise duties on intermediates and customs duties on raw materials, reduction in bank rate and cash reserve ratio. By now the government had liberalised investment norms in various sectors, further simplified procedures, delicensed and de-reserved some of the key industries and stepped up public investment in infrastructure industries.

For industry the period started with a decline whereby the total foreign investment (FDI and portfolio) declined to $ 2312 million in 1998-99 from $ 5853 million in 1997-98, as a result of a reduction of $ 1.8 billion portfolio flows and a 32 per cent reduction in FDI. During 1998, the flows to developing countries declined by 3.8 percent, resulting in Indias share in these flows falling sharply to 1.4 per cent. World FDI flows to developing countries peaked in 1997 ($ 173 billion) when Indias share in these flows was 1.9 per cent. Nationally this resulted in several measures taken for facilitating the inflow of foreign investment in the economy. The scope of the automatic approval scheme of the RBI was again significantly expanded. The Government decided to place all items under the automatic route for Foreign Direct Investment/ NRI and OCB investment except for a small negative list and set up a Group of Ministers for reviewing the existing sectoral policies and caps. The Union Budget (1999-2000) permitted FDI up to 74 percent, under the automatic route, in bulk drugs and pharmaceuticals. In 2000-2001 the time frame for consideration of FDI proposals was reduced from 6 weeks to 30 days for communicating Government decisions. The 2001-2002 years were not good for Industry due to an industrial slowdown.


For Infrastructure by 1998-1999 the narrative is stabilizing to the same concept of broad statements regarding the role of infrastructure and its importance to the government. In terms of procedures automatic approval for foreign equity participation up to 100 percent is permitted for electricity generation, transmission and distribution for foreign equity investment not exceeding Rs.1500 crore. Once again in the outlook section the government realized the importance of infrastructure but there are not concrete steps listed to achieve this. In 1999-2000 there is talk of infrastructure growing in the year there is no data available on the role and amount of foreign direct investment. Breaking down into sub sectors for Infrastructure reveals that compared to Industry, Infrastructure has had a large discrepancy in its sub-sectors. For example the power sector performance during the period 1992-93 to 1999-2000 has been disappointing despite significant reforms in the sector, such as setting up of a regulatory authority and opening power generation to private investment, both domestic and foreign. For the postal sector the emphasis on social objectives has outweighed other considerations and user charges remained low. Therefore, notwithstanding the revision of tariff, the postal services continue to run into a deficit; in 1999-2000, the postal deficit was Rs. 1,596 crore. One of the important conclusions of the above review of infrastructure development is that the demand for infrastructure services continues to outpace supply. There is recognition of the role of Infrastructure in the upcoming years, as it is a precondition to rapid economic development but the policies have not brought the required change as quickly as expected. For example in urban infrastructure 100 percent FDI has been permitted on the development of integrated townships since 2001. However investments did not materialize because of very rigid existing conditions relating to land procurement especially in urban areas, where land revenue and reform legislation have precedence over organization. Moreover there are problems relating to lack of clear titles, old protective tenancy and rent control. The suggestion is that the system of maintenance of land records needs to be improved through computerization.


FDI Redux

By 2002 FDI changes completely for India as it is given new importance in Ministry of Finances Economic Survey in the form of a new subsection in Industry that exclusively dealt with FDI and went to great lengths to define its role, and provides much more data than in the previous years. There is also particular mention on how RBI is evaluating some modifications in the way that Indian FDI is measured, which could lead somewhat higher estimates for India. By now garnering FDI is a prized commodity in a competitive global arena and is analyzed in context as other countries are also improving policies and institutions, to further increase their FDI flows. By 2003-2004 the non-comparability of the Indian FDI statistics was addressed by a committee constituted in May 2002 by Department of Industrial Policy & Promotion (DIPP), in order to bring the reporting system of FDI data in India into alignment with international best practices.

For infrastructure from 2002-2003 there is mention in sub sectors for FDI and not for infrastructure as a whole. Telecom has been a major recipient of FDI and during the period of August 1991 to June 2002, 831 proposals for FDI of Rs. 56,226 crore were approved and the actual flow of FDI during the above period was Rs. 9528 crore. In terms of approval of FDI, the telecom sector is the second largest after the energy sector. In 2002, the increase of FDI inflow was of the order of Rs 1077 crore during January to July 2002. The FDI target for the Telecommunication sector is estimated at US $2.5 billion per annum, by the Steering Group on FDI, Planning commission. By 2003-2004 literature on Infrastructure talks about investments needed to bring infrastructure to world standards. However there is no mention of details. Finally for 2004-2005 there is data for Telecom but in general there is no data on FDI in the infrastructure sector as a whole. The analysis of both the sectors and especially Infrastructure raises questions on the haphazard nature of FDI taking place. While this trend may have been acceptable in the early 1990s, when FDI was in its infancy the recognition and building of reforms by the successive governments raises the questions on what part of FDI is the government attention shifted in.


Sub sector: Telecommunications

Further narrowing of FDI in sub-sectors reveals more interesting trends. Research into Telecommunications furthers the haphazard nature of FDI investment and policy making. The current process for FDI in telecommunications can be attributed to two policies that were undertaken by the government: National Telecom Policy of 1994 and New Telecom Policy of 1999. Before the economic reforms teledensity was low, infrastructure growth was slow, and the lack of reforms restricted investments and adoption of new technologies. The existing legislative and regulatory environment needed major changes to facilitate growth in the sector. It was 1991 when the programme was undertaken to expand and upgrade Indias vast telecom network. The programme included: complete freedom of telecom equipment manufacturing, privatisation of services, liberal foreign investment and new regulation in technology imports. Simultaneously, the government-managed Department of Telecommunication was restructured to remove its monopoly status as the service provider. The government programme was formalised on a telecom policy statement called National Telecom Policy 1994 on 12 May 1994. However the 1994 policy was not sufficient to make the Indias telecommunications sector fully open and liberalised. The incumbent monopoly (DoT) was indifferent in implementing the national telecom policy effectively due to its lack of commitment and also due to the instability at the Centre over 1994 and 1998. This paved the way for designing a new policy framework for telecommunications which was called the New Telecom Policy 1999 and was delivered by the new government led by BJP coalitions. The New Telecom Policy 1999 (NTP99) was developed at the backdrop of three major events witnessed by the Indian economy after the reform process began in 1991. First, although NTP94 was a right step to bring reform in the telecommunications industry, it failed to achieve a desired goal until 1997. Second, the coalition government of the BJP brought stability to the Central government and after assuming power; the BJP-led government announced and followed through with further reform in telecommunications to attain an effective and efficient communications sector. This policy is an example that economics reforms and political systems coexist.


In order to achieve the BJP-led coalition government immediately formed a high powered committee to develop the Internet Services Development Policy headed by than Kerala CM Chandrababu Naidu.

The committee and the interest of the government led to the new policy. As a result in addition to the sectoral caps, the government policy played a major role in the liberalization of the telecom sector. As a result a large number of private operators started operating in the basic/mobile telephony and Internet domains. Teledensity has increased, mobile telephony has established a large base, the number of Internet users has seen a steep growth, and large bandwidth has been made available for software exports and IT-enabled services, and the tariffs for international and domestic links have seen significant reductions.

FDI Culture Many economists in the country have now realized the advantages of FDI to India. While the achievements of the Indian government are to be lauded, a willingness to attract FDI has resulted in what could be termed an FDI Industry. While researching the economic reforms on FDI, it was discovered that there exists a plethora of boards, committees, and agencies that have been constituted to ease the flow of FDI.

A call to one agency about their mandate and scope usually results in the quintessential response to call someone else. Reports from FICCI and the Planning Commission place investor confidence and satisfaction at an all time high; citizens too deserve to be clued in on the government bodies are doing.

According to the current policy FDI can come into India in two ways. Firstly FDI up to 100% is allowed under the automatic route in all activities/sectors except a small list that require approval of the Government. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or RBI. The investors are required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors. All proposals for foreign investment requiring Government approval are considered by the Foreign Investment Promotion Board (FIPB). 42

The FIPB also grants composite approvals involving foreign investment/foreign technical collaboration. As this clarity is useful for future investors, it has to be seen if these bodies are effective. The Initial research revealed four major bodies that have been constituted and could provide data pertaining to FDI-

1991 Foreign Investment Promotion Board FIPB consider and recommend Foreign Direct Investment (FDI) proposals, which do not come under the automatic route. It is chaired by Secretary Industry (Department of Industrial Policy & Promotion).

1996 Foreign Investment Promotion Council FIPC constituted under the chairmanship of Chairman ICICI, to undertake vigorous investment promotion and marketing activities. The Presidents of the three apex business associations such as ASSOCHAM, CII and FICCI are members of the Council.

1999 Foreign Investment Implementation Authority FIIA functions for assisting the FDI approval holders in obtaining various approvals and resolving their operational difficulties. FIIA has been interacting periodically with the FDI approval holders and following up their difficulties for resolution with the concerned Administrative Ministries and State Governments.

2004 Investment Commission Headed by Ratan Tata, this commission seeks meetings and visits industrial groups and houses in India and large companies abroad in sectors where there was dire need for investment. Attempting to research directives and results of the above bodies resulted in no direct contact but instead a list of various other sub bodies. Project Approval Board (PAB) for approving foreign technology transfer proposals not falling under the automatic route.


Licensing Committee (LC) for considering and recommending proposals for grant of industrial license. In addition, concerned Ministries/ Departments issue various approvals as per the allocation of business District Concerned and various Industries departments of Acts Centres, the State being generally Government administered look handle after sectoral by them. projects. projects. At the State level, State Investment Promotion Agency and, at the district level.

Fast Track Committees (FTCs) have been set up in 30 Ministries/Departments for close monitoring of projects with estimated investment of Rs. 100 crores and above and for resolution of issues hampering implementation. Investment Promotion and Infrastructure Development Cell gives further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry SIA has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce and Industry to provide a single window for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison with other organizations and State Governments) and in monitoring implementation of projects.

Indian Investment Centre- (This was supposed to be closed after the Planning Commission was established but still continues to operate) established as an autonomous organization in 1960 with the objective of doing promotional work abroad to attract foreign private investment into India and establishment of joint ventures, technical collaborations and third country ventures between Indian and foreign entrepreneurs.


The face of FDI usually resides with pamphlets and amalgamation of facts and figures that are circulated through many conferences. From these it can be deciphered that officially FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. The change in sectoral policy/ sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA). Thus while clear procedures have been established for FDI, government needs to seriously evaluate how much resources and money is being poured to what is becoming the FDI industry. The fluidity of bodies has resulted in the monetary value of FDI feeding a makeshift industry that deals with dealing with the concept and procedures of FDI.



At the time of independence, the attitude towards foreign capital was one of fear and suspicion. This was natural on account of the previous exploitative role played by it in draining away resources from this country.

The suspicion and hostility found expression in the Industrial Policy of 1948 which, though recognizing the role of private foreign investment in the country, emphasized that its regulation was necessary in the national interest. Because of this attitude expressed in the 1948 resolution, foreign capitalists got dissatisfied and as a result, the flow of imports of ca[ital goods got obstructed. As a result, the prime minister had to give following assurances to the foreign capitalists in 1949:

1. No discrimination between foreign and Indian capital. The government o India will not differentiate between the foreign and Indian capital. The implication was that the government would not place any restrictions or impose any conditions on foreign enterprise which were not applicable to similar Indian enterprises.

2. Full opportunities to earn profits. The foreign interests operating in India would be permitted to earn profits without subjecting them to undue controls. Only such restrictions would be imposed which also apply to the Indian enterprises.

3. Gurantee of compensation. If and when foreign enterprises are compulsorily acquired, compensation will be paid on a fair and equitable basis as already announced in governments statement of policy.

Though the Prime Minister stated that the major interest in ownership and effective control of an undertaking should be in Indian hands, he gave assurance that there would be no hard and fast rule in this matter.


By a declaration issued on June 2, 1950, the government assured the foreign capitalists that they can remit the he foreign investments made by them in the country after January 1, 1950. in addition, they were also allowed to remit whatever investment of profit and taken place.

Despite the above assurances, foreign capital in the requisite quantity did now flow into India during the period of the First plan. The atmosphere of suspicion had not changed substantially. However, the policy statement of the Prime Minister issued in 1949 and continued practically unchanged in the 1956 Industrial Policy Resolution, had opened up immense fields to foreign participation. In addition, the trends towards liberalization grew slowly and gradually more strong and the role of foreign investment grew more and more important.

The government relaxed its policy concerning majority ownership in several cases and granted several tax concessions for foreign personnel. Substantial liberalization was announced in the New Industrial Policy declared by the government on 24th July 1991 and doors of several industries have been opened up for foreign investment.

Prior to this policy, foreign capital was generally permitted only in the those industries where Indian capital was scarce and was not normally permitted in those industries which had received government protection or which are of basic and/or strategic importance to the country. The declared policy of the government was to discourage foreign capital in certain inessential consumer goods and service industries.

However, this provision was frequently violated as a number of foreign collaborations even in respect of cosmetics, toothpaste, lipstick etc. were allowed by the government. It was also stated that foreign capital should help in promoting experts or substituting imports.



The market place Trade provides mankind's most significant meeting place, the market. In primitive societies only religious events - cult rituals, or rites of passage such as marriage - bring people together in a comparable way. But in these cases the participants are already linked, by custom or kinship.

The process of barter brings a crowd together in a more random fashion. New ideas, along with precious arte facts, have always travelled along trade routes. And the natural week, the shared rhythm of a community, has frequently been the space between market days. Agricultural produce and everyday household goods tend to make short journeys to and from a local market. Trade in a grander sense, between distant places, is a different matter. It involves entrepreneurs and middlemen, people willing to accept delay and risk in the hope of a large profit. The archive found at Ebla gives a glimpse of an early trading city, from the middle of the third millennium BC.

When travel is slow and dangerous, the trader's commodities must be as nearly as possible imperishable; and they must be valuable in relation to their size. Spices fit the bill. So do rich textiles. And, above all, precious ornaments of silver and gold, or useful items in copper, bronze or iron. As the most valuable of commodities (in addition to being compact and easily portable), metals are a great incentive to trade. The extensive deposits of copper on Cyprus bring the island much wealth from about 3000 BC (Cyprus, in Latin, gives copper its name - cyprium corrupted to cuprum).

Later, when the much scarcer commodity of tin is required to make bronze, even distant Cornwall becomes - by the first millennium BC - a major supplier of the needs of Bronze Age Europe.


Waterborne traffic: 3000-1000 BC By far the easiest method of transporting goods is by water, particularly in an era when towns and villages are linked by footpaths rather than roads. The first extensive trade routes are up and down the great rivers which become the backbones of early civilizations - the Nile, the Tigris and Euphrates, the Indus and the Yellow River.

As boats become sturdier, coastal trade extends human contact and promotes wealth. The eastern Mediterranean is the first region to develop extensive maritime trade, first between Egypt and Minoan Crete and then - in the ships of the intrepid Phoenicians - westwards through the chain of Mediterranean islands and along the north African coast. Phoenicia is famous for its luxury goods. The cedar wood is not only exported as top-quality timber for architecture and shipbuilding. It is also carved by the Phoenicians, and the same skill is adapted to even more precious work in ivory. The rare and expensive dye, Tyrian purple, complements another famous local product, fine linen. The metalworkers of the region are famous, particularly in gold. And Tyre and Sidon are known for their glass.

These are only the products which the Phoenicians export. As traders and middlemen they take a cut on a much greater Cornucopia of precious goods - as the prophet Ezekiel grudgingly admits.

The caravan: from 1000 BC In the parched regions of north Africa and Asia two different species of camel become the most important beasts of burden - the single-humped Arabian camel (in north Africa, the Middle East, India) and the double-humped Bactrian camel (central Asia, Mongolia). Both are well adapted to desert conditions. They can derive water, when none is available elsewhere, from the fat stored in their humps.

It is probable that they are first domesticated in Arabia. By about 1000 BC caravans of camels are bringing precious goods up the west coast of Arabia, linking India with Egypt, Phoenicia and Mesopotamia.


This trade route brings prosperity to Petra, a natural stronghold just north of the Gulf of Aqaba on the route from the Red Sea up to the Mediterranean coast. In the heyday of the kingdom of Israel, around 1000 BC, this important site is occupied by the Edomites - bitter enemies of the Israelite kings, David and Solomon.

In the 4th century BC the Edomites are displaced by an Arab tribe, the Nabataeans. They soon come into conflict with new neighbours in Mesopotamia, the Seleucid Greeks, who have an interest in diverting trade from the Gulf of Aqaba.

New routes to the west: from 300 BC The presence of Greeks in Mesopotamia and the eastern Mediterranean encourages a new trade route. To ease the transport of goods to Greece and beyond, Seleucus founds in 300 BC a city at the northeast tip of the Mediterranean. He calls it Antioch, in honour of his own father, Antiochus. Its port, at the mouth of the river, is named after himself - Seleucia. Here goods are put on board ship after arriving in caravans from Mesopotamia. The journey has begun in another new city, also called Seleucia, founded in 312 BC by Seleucus as the capital of his empire. It is perfectly placed for trade, at the point where a canal from the Euphrates links with the Tigris.

A trade route from China: 2nd century BC A tentative trade route is becoming established along a string of oases north of the Himalayas. They are very exposed to the broad expanse of steppes - from which marauding bands of nomadic tribesmen are liable to descend at any moment - but protection by the Han dynasty in China is now making it reasonably safe for merchants to send caravans into this region. The goods are usually unloaded in each oasis and traded or bartered before continuing the journey westwards - where rich customers around the Mediterranean are eager for the luxury products of the east.


In 106 BC, for the first time, a caravan leaves China and travels through to Persia without the goods changing hands on the way. The Silk Road is open. In the 1st century BC the Romans gain control of Syria and Palestine - the natural terminus of the Silk Road, for goods can move west more easily from here by sea. Soon a special silk market is established in Rome. China, proudly self-sufficient, wants nothing that Rome can offer. And the Han rulers are unwilling to release silk - either as thread or woven fabric - except in exchange for gold. It has been calculated that in the 1st century AD China has a hoard of some five million ounces of gold. In Rome the emperor Tiberius issues a decree against the wearing of silk. His stated reason is the drain on the empire's reserves of gold. The Silk Road introduces global economics.

World trade: from the 1st century AD The Silk Road links east Asia and western Europe at a time when each has, in its own region, a more sophisticated commercial network than ever before. The caravan routes of the Middle East and the shipping lanes of the Mediterranean have provided the world's oldest trading system, ferrying goods to and fro between civilizations from India to Phoenicia. Now the Roman dominance of the entire Mediterranean, and of Europe as far north as Britain, gives the merchants vast new scope to the west. At the same time a maritime link, of enormous commercial potential, opens up between India and China.

The map of the world offers no route so promising to a merchant vessel as the coastal journey from India to China. Down through the Straits of Malacca and then up through the South China Sea, there are at all times inhabited coasts not far off to either side. It is no accident that Calcutta is now at one end of the journey, Hong Kong at the other, and Singapore in the middle.





Full Year, 2011 Analysis: Foreign Direct Investment (FDI) in the United States declined in 2011 to $227.9 billion. This is a 4 percent decrease over the 2010 figure of $236. 2 billion. The manufacturing sector remains the top sector for global companies investing in the United States.

3rd Quarter, 2011 Analysis: FDI in the United States was $73.3 billion for the 3rd quarter of 2011. Compared to the same time frame in 2010 (January - September), FDI in the U.S. declined by nearly 6 percent or $10 billion. Conversely, inward FDI is growing in many other countries around the world. The continued falling of cross border investment in the U.S. is a telling indicator of waning global economic competitiveness of the U.S. economy.

Recent Trends in Foreign Direct Investment*


Foreign direct investment (FDI) inflows and outflows to and from OECD countries showed continuing rapid growth last year. Inward investment into OECD countries grew by 35% and reached US dollars (USD) 684 billion, while outflows showed an increase of 22% and amounted to USD 768 billion. 52

Some OECD countries experienced an unprecedented level of inflows (e.g. Japan, Sweden and Germany) and others recorded historically high outflows (e.g. Denmark, France and Ireland). The increase in green field investment was significant in 1999, but it was by far exceeded by the growth in mergers and acquisitions (M&A). As in previous years, M&A was the primary vehicle behind the increase in FDI. Last year, Western Europe was the worlds leading region for crossborder M&A. As for individual countries, the United Kingdom overtook the United States as the most active source of M&A investment. In terms of inflows, the United States has remained the most attractive location. The telecom industry is still the most important sector for M&A closely followed by the chemicals sector. The 1990s brought considerable improvements in the investment climate, influenced in part by the recognition of the benefits of FDI. The change in attitudes, in turn, led to a removal of direct obstacles to FDI and to an increase in the use of FDI incentives. Continued removal of domestic impediments through deregulation and privatisation was also widespread. Deregulation and enhanced competition policy made M&A more viable in the telecommunications, electricity, other public utilities and financial services sectors, while privatisation programmes provided opportunities for international investment. The sale of state-owned companies to foreign investors represented a large share of the source of FDI, particularly among new members to the OECD and in some emerging economies. In addition to the structural factors, the growth of FDI depends heavily on the business cycle in both home and host countries. The continuing expansion in the United States helped global FDI flows gain and maintain momentum. The quick recovery of Asian countries previously affected by financial crises contributed to this trend. Regional agreements to foster investment flows also paved the way for a higher level of FDI. The investment strategies of multinational enterprises (MNEs) may provide important additional insights into FDI trends. Globalisation has become an integral part of corporate strategies in recent years, with FDI becoming an imperative rather than an opportunity. Moreover, the advent of new technology (e.g. the Internet) offers companies an increasingly effective strategy by which to penetrate overseas markets and to enhance the efficiency of their investments. The growth of FDI is to a certain extent self-perpetuating: competitors follow each other into a market, and FDI may induce other investments in the vertical chain, e.g. in suppliers or business service providers. The immediate outlook for investment flows therefore seems to be for continued growth. 53

This articles second section deals with the 1999 FDI trends in OECD countries. Section III deals specifically with M&A. In the last section, regional FDI trends in the 1990s are analysed and used to illustrate the role of the above-described factors in the growth of foreign investments in Asia, Latin America and selected other economies. II. Recent trends in OECD countries1 The increase in FDI in the OECD area continued in 1999, both in absolute value and as a percentage of GDP. This took FDI activity to a remarkable peak, following almost a decade of continued growth.2 In 1999, the increase of FDI inflows in Japan, Sweden and Germany were particularly notable. Compared with the previous year, they almost quadrupled in Japan, more than tripled in Sweden and more than doubled in Germany. Spectacular growth rates were also recorded in OECD outflows, with the outgoing FDI of Denmark, France, Ireland, New Zealand and Norway more than doubling compared with 1998. The United States and United Kingdom witnessed record high FDI flows in 1999. These countries were the most prominent home and host countries, accounting for more than half of total OECD inflows and more than 45% of outflows. Investment inflows to the United States grew by almost 50% and by 28% to the United Kingdom. Outflows from these countries increased by 15% and 67% respectively. As discussed below, the driving force behind this trend was transatlantic M&A.

Compared with last year, the United States strengthened its net capital importing position, while the United Kingdoms balance shows increasingly high net outflows. Inflows into the United States came mainly from Europe. The most important investors were the United Kingdom, Germany and the Netherlands. In 1999, as in the previous year, the United Kingdoms share represented more than one third of total investments in the United States. As far as the sectoral distribution of investments is concerned, the manufacturing sector (especially the machinery industry) and telecommunications were the most prominent absorbers of investments, while the traditionally higher share of the petroleum industry declined over the year. On the outflow side, Europe is still the most important recipient of US FDI. However, between 1998 and 1999, its share decreased from 61% to 53%. Canadas, Latin Americas and especially Asias shares of outflows increased, with each representing around 15% of total FDI outflows.


a) Mergers and acquisitions and other sources of FDI Europe is an increasingly active player in the M&A market. For example, Frances high inflows and record outflows (Frances position as a net outward investor, with an amount of exceeding USD 50 billion, was more than double the amount of the previous year) were primarily due to large M&A activity. The largest project in the chemical industry accounted for more than 10% of total French outflows.

Germany was the target of a record USD 52 billion inflow last year, over twice the level of the previous year. The record was due to a merger in the chemical industry, in the course of which the newly established enterprise located its headquarters abroad and acquired the majority stake in the German company. German investments abroad remained on the record high level of the previous year, and were also led by M&A. The four largest mergers in which German investors participated accounted for more than half of total investments abroad. The most important host countries were the United States and the United Kingdom, accounting for 45% and 23% of German FDI outflows, respectively. As a result, Germany maintained its net investor position in 1999.

The Netherlands witnessed a decrease over the previous years record high capital movements, though inflows and outflows were still high compared with the years before 1998. The country remained an important net outward investor. While still experiencing high inflows, Spain became a large investor, mainly due to its increased activity in Latin America. Spanish participation in the privatisation of public utilities and banks in the region was considerable. M&A between companies in the private domain (the most important of which including an Argentinean company) contributed to the high level of flows. As a result, Spain was a net investor for the third consecutive year. In 1999, while remaining a recipient of high gross inflows, Ireland doubled its investments abroad compared with 1998. This is related to the increasing importance of the country as a European platform for overseas companies. Sweden became one of the largest recipients of FDI in the OECD area in 1999. The country absorbed almost the same amount of FDI inflows as in the previous decade put together. The record-high inflows (almost USD 60 billion) were due to an M&A deal in the chemical industry, which accounted for around twothirds of the value of total inflows. As outflows were actually lower than in 1998, Sweden unusually became a net recipient. 55

The Czech Republic and Poland increased the level of FDI inflows due to large privatisation projects. Together with Hungary, they are still on the net receiving end of the FDI spectrum, as the companies in each country have been able to invest only negligible amounts abroad. Greece, Portugal and Turkey continued to experience low inflows. On the other hand, Portugal has been playing an increasingly active role on the outflow side in the last few years, effectively becoming a net investor abroad. As a new phenomenon, OECD members in Asia figured prominently as gross recipients of FDI. Japan received a historical record of inflows last year driven by the acquisition by Renault of an important stake in Nissan, as well as other M&A. Inflow into Japan was almost four times that of 1998, and almost half of the amount of the inflows of the entire decade, with European (especially French and Dutch) investors taking the leading role. However, even the record inflow did not come close to the traditionally high level of outflows, meaning that last year Japan was still a net investor abroad.

In Korea, in response to the financial crisis, regulatory changes favouring FDI continued last year, resulting in a further increase in the inflow of direct investments. After almost doubling the previous year, FDI grew by more than 60% in 1999. Inflows exceeded a generally unchanged level of outflows for the second consecutive year, changing the countrys position to that of a net recipient of FDI.

The inflows were boosted by an ongoing process of corporate restructuring and privatisation. The growth in direct investment from the EU and Japan was particularly pronounced. The fact that the first three countries listed in Table 2 account for half of the cumulated inflows and outflows indicates the high concentration of OECD FDI in the nineties. Eight of the top ten recipients of FDI are also among the top ten outward investing countries, indicating that the larger OECD countries tend to be active in both undertaking and receiving FDI. Germany, the United Kingdom and Japan were the largest net investors in the nineties, and the United States is the largest net recipient.


Mergers and acquisitions

The value of international cross-border M&A activity rose by 47% to attain record levels in 1999. This reflects a continuation of the rapid growth in M&A activity in Europe and North America and the gradual emergence of the Asia Pacific region from a period of recession and restructuring. In 1999 (like in previous years) the overwhelming majority of worldwide M&A was concluded among companies of OECD countries. Western Europe was the worlds leading region for cross-border M&A in 1999, activity in the region increasing by 78% in value terms, representing some 73% of the worlds cross-border deals. The region excelled as purchaser, while in the case of inward M&A it was closely followed by North America, indicating the continuing predominance of cross-Atlantic deals in the form of European acquisitions in the United States. The United Kingdom, fuelled by deals such as Vodafone-Airtouch and ZenecaAstra, was the worlds most acquisitive country for cross-border M&A in 1999, accounting for 30% of global M&A value. The United States was the leading country for inward deals in 1999 attracting 37% by total value, with major deals including Vodafone-Airtouch and Scottish Power-Pacificorp. Because M&A deals are the most important driving factors behind overall FDI flows for most OECD countries, last years M&A developments reflect those of FDI as described in the previous section. After the United States and the United Kingdom, Germany, France and Sweden were the most important host countries last year for inward M&A. Concerning outward M&A, the United Kingdom and the United States still lead, with Germany, France and the Netherlands as other important purchasing countries. Correspondingly, the list of the top ten worldwide M&A featured the companies of these countries and involved deals such as BP Amoco-Arco Atlantic Richfield, Mannesman-Orange, Hoechst-Aventis, Deutsche Telekom-One-2-One, Wal-MartAsda as well as those already mentioned. Asia has started to catch up in the worldwide surge in M&A. The key buyer among Asian countries is Japan, followed by Singapore and Hong Kong (China) China. As far as inward M&A in Asia is concerned, the United States led investment with deals valued at USD 20 billion. Central and Eastern Europe remained out of favour for cross-border M&A in 1999.


Poland was the most popular country in the region attracting USD 6 billion. Latin America fared better having USD 43 billion of inward investment during 1999 compared with USD 41 billion in 1998. Argentina was Latin Americas leading country for inward investment attracting M&A totaling USD 21 billion, almost half of the regions total.

Over the past ten years cross-border M&A activity has risen fivefold. The rise of mega deals is demonstrated by the dramatic increase in the average deal value, climbing from USD 29 million in 1990 to USD 157 million in 1999. The 1999 average value of cross-border deals is up nearly 50% on the equivalent figure of USD 106 million for 1998, illustrating the increasing power of larger firms to close deals in the international M&A marketplace. For many, buying power is based on high-stock values in a buoyant equity capital market, leaving many unquoted corporations with a problem, namely how to finance a strategic acquisition. In addition to the conventional driving forces behind M&A activity, such as internalisation benefits, operational synergies and strategic value, the current M&A explosion is fuelled by a number of other factors. The change in attitude in some countries towards take-overs, especially hostile ones, eased the barriers towards some large-scale M&A. The change in capital markets is also notable. Highly valued stocks provide an advantage for firms using them as the currency of take-overs. In Europe, the introduction of the euro reduced transaction costs and currency risks of M&A deals within the euro-zone. The reduction in transaction costs is particularly conducive to increasing the participation of small and medium-sized enterprises (SMEs) in the financial market. The deregulation of capital markets also enhances SMEs participation in M&A activities. On the institutional side, the role played by agents such as investment banks has grown significantly during the second half of the 1990s. These agents actively market acquisition opportunities and take initiatives in making deals. This new trend is in stark contrast to the traditional one in which the company itself initiated the deal. Apart from global forces, industry-specific factors may have driven M&A activity. Advances in technology have made it possible to manage crossborder supply chains and centralised purchasing for more than one country. This has driven cross-border M&A in the retail sector.


Large European retailers are racing to become bigger so as not to lose market share to large foreign competitors or new entrants, such as Walmart. M&A activities in the pharmaceutical and chemical industries are largely driven by increasing returns to scale in R&D. And the financial services industry in Europe offers a relatively fragmented market, which may prompt M&A motivated by consolidation. The telecommunications industry was again the most active in the global M&A market, with deals representing 20% of the worlds total in 1999. The chemical industry was second, and petroleum and gas exploitation came third. Banking and financial services and the production and distribution of electricity, gas and other forms of energy were the next most active sectors in 1999.

Trends of FDI in the 1990s in selected emerging and recent OECD Member economies Taking a longer perspective, there has been an impressive growth of FDI in the 1990s. Global flows more than trebled, while investments in developing countries grew almost six-fold. Although OECD members continue to play a dominant role in international investment, increasing importance has been attached to emerging economies. This section reviews the trends in FDI in the 1990s in some of the major host countries among the emerging economies.

Asia Asia has been attracting the lions share of international investment in developing countries for some time. Inward investment into Asia in the 1990s experienced healthy, uninterrupted growth prior to the financial crisis. It recorded a decline in 1998 as the impact of the crisis took effect. Consequently, its share in the global investment flow declined and became almost on a par with that of Latin America.

The Asian financial crisis in the late 1990s had varying impacts in countries of the region, depending on the nature of investment and local economic conditions. Investment in Asia in the 1990s was characterised by the rising prominence of China both as an FDI recipient and investor, and by the growth of intra-regional FDI. China emerged as a popular destination of FDI in the early 1990s, and became the second largest FDI recipient in the world after the United States by 1993. Other main destinations of international investment within Asia in the 1990s are Singapore, Malaysia, Thailand, Indonesia, Hong Kong (China), Chinese Taipei and Philippines. 59

These eight countries together account for over 80% of investment into non-OECD Asian countries. By 1997, the level of inward investment in newly industrialising economies [NIEs Chinese Taipei, Singapore and Hong Kong (China)] had almost doubled compared with the beginning of the decade. Flows into Hong Kong (China) and Singapore have not been stable, while Chinese Taipei attracted a steady flow until the crisis. The volume of FDI in Chinese Taipei and Hong Kong (China) declined considerably in 1998, due to the slowdown of the regional economies. OECD investment into Hong Kong (China) turned negative, minus USD 1.1 billion in 1998, from USD 4.3 billion in 1997. Although it is suggested that China surpassed the United States and Japan to become the largest investor in Hong Kong (China) since the early 1990s, the decline of OECD investment provides a substantial explanation for the shrinking investment. Since the latter part of 1980s, inward investment in ASEAN has grown at an impressive rate. The growth was largely led by Japanese investment, triggered by the appreciation of the yen, which pushed Japanese manufacturers out of the home country. The share of Japanese manufacturing investment in ASEAN4 (Malaysia, Indonesia, Philippines, and Thailand) grew from 8% in 1987 to 18% in 1992. Although it has not regained its peak, it has maintained a 16-17% share to date. Malaysia began to support export-oriented investments at an early stage. Since the late 1980s, Malaysia recorded a phenomenal growth of inward investment. After its peak in 1992, investment was maintained at the high level until the financial crisis, whereafter it dropped substantially. Indonesia owes its success in attracting investment principally to the oil and gas sector. The country recorded uninterrupted growth until 1997, but was hit hardest by the crisis. Thailand, successful in attracting both market-seeking and export-oriented investors during the 1990s, increased its FDI inflow by 47% in 1998. The conversion of the Philippines to investment promotion is more recent, since the mid-1990s. The country demonstrated its advantage as an export platform and increased export-oriented investment in the aftermath of the financial crisis. The origin of inward investment differs considerably among the countries. The majority of inward investment in Singapore originates in OECD countries. The presence of European investment is also strong in Indonesia, while in the Philippines and Thailand the share of investors is evenly divided among the United States, Japan, Europe and NIEs. The increasing prominence of NIEs investment in Malaysia is notable.


It is worth noting the growth of intra-regional FDI in the 1990s, particularly from NIEs in the neighbouring countries. The role of Singapore may serve as an illustration. Today, a quarter of FDI in Malaysia comes from Singapore, which makes the country the largest investor in Malaysia. The share of Singaporean investment in Thailand, 12%, is also high. Chinese Taipei is also gaining importance in the region as an investor. The country was the second largest investor in Vietnam in 1997, which accounted for 17% of the total investment into Vietnam, although Singapore surpassed it in the following year. Chinese Taipei began to venture outside of the region in the 1990s. While 44% of investment went to ASEAN countries in the early 1990s its share has been shifting rapidly towards Latin America since the latter part of the 1990s. Perhaps the biggest beneficiaries of the growth of intra-regional FDI are less developed ASEAN members. In most of these countries, other ASEAN countries play a vital role as investors. Hong Kong (China) has been the biggest investor into China since the inauguration of Chinas open policy in 1979, consistently accounting for roughly 60% of foreign investment. Contrary to its dynamism in China, Hong Kong (China) is much less active in other Asian countries. At the same time China has emerged as the biggest investor in Hong Kong (China) in the 1990s. In fact, Chinas outward investment expansion is another noteworthy phenomenon of the 1990s. Chinese investors mostly state-owned enterprises have demonstrated diversified interests: there is high concentration of investment in the trade and services sector in Hong Kong (China), whereas the availability of raw materials is seen as the main motive for their investments in Australia and Canada. Chinese investment in the United States is also active, in search of proprietary technology. Market-seeking investment from China can be found in a great variety of locations around the world.

Trends in FDI in India

Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India.

According to AT Kearney report India sits in 3rd place on the FDI Confidence Index globally. European and North American investors place it 3rd, while Asia-Pacific investors rank it 4th. 61

India is the top location for nonfinancial services investment, and also scores highly in heavy industries, light industries and financial services. Even during economic crisis looming largely on other economies, FDI inflows to India soared from US$25.1billion in 2007 to US$41.6billion in 2008.

Multinationals are managing to counter FDI restrictions and supply chain challenges at the most possible way showing path to others who are hesitant to enter into Indian market. For instance, Wal-Mart has taken steps to develop supply chains, procure 30-35 per cent local produce, making changes to its stock policy by reducing inventories etc. Similarly, Auto majors are pumping money in the sector. Ford planned to invest US $500mn in its Chennai plant, NissanRenault planning to manufacture ultra-low-cost car with its local partner Bajaj Auto, French tyre maker Michelins to invest US$874mn in its first Indian manufacturing facility. All these developments are helping in getting FDI inflows into the country.

The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. As a result FDI inflows during 1991-92 to March 2010 in India increased manifold as compared to during mid-1948 to March 1990. As per the fact sheet on FDI, there was Rs 6,303.36 billion FDI equity inflows between the period of August 1991 to January 2011.

The FDI inflows in India during mid-1948 were Rs 2.56 billion. It is almost double in March 1964 and increases further to Rs. 9.16 billion. India received a cumulative FDI inflow of Rs. 53.84 billion during mid-1948 to march 1990 as compared to Rs.1,418.64 billion during August 1991 to march 2010.

An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to around US$37 billion by 2009-10.


FDI flow in India (in crores)

Table no. 1


Even if we examine quarterly figures, we find that FDI flows that rose from US$6.9 billion in the second quarter of 2009 to a peak of US$8.2 billion in the third quarter of that year, have since stayed in the 5-6 billion range for all but one quarter, namely January-March 2011. In fact, if we consider the 16 quarters ending Jan-March 2011, there have been only two in which FDI inflows stood at between US$6-7 billion and four when it exceeded US$7 billion.

It is now clear that FDI was related to the recessionary conditions in the western economies. The recent flattening of monthly FDI flows is a sign more of recovery in the western economies than any loss of long term interest in the Indian economy. The monthly figure only shows that the incremental FDI is going back to the pre-recession years rather than indicating decline of FDI into India.

In fact when foreign direct investment into India had tumbled 32 per cent to just US$3.4 billion , as mentioned in financial times during January to March 2011 that it emerged that net FDI flows in the month of April alone amounted to US$3.1 billion.

Also, FDI is all about long term investment. Companies have already invested in to India and are unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue to inch upwards.

Recent trends have also shown that FDI inflow changes are mainly due to portfolio investment, which displayed a degree of volatility.


Source of FDI: The list of investing countries to India reached to maximum number of 120 in 2008 as compared to 15 in 1991. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries.

Mauritius is the major investing country in India during 1991-2008. Nearly 40per cent of FDI inflows came from Mauritius alone. The other major investing countries are USA, Singapore, UK, Netherlands, Japan, Germany, Cypress, France and Switzerland. An analysis of last eighteen years of FDI inflows in the country shows that nearly 66per cent of FDI inflows came from only five countries viz. Mauritius, USA, Singapore, UK, and Netherlands.

Mauritius and United states are the two major countries holding first and the second position in the investors list of FDI in India. While comparing the investment made by both countries, one interesting fact comes up which shows that there is huge difference in the volume of FDI received from Mauritius and the US. It is found that FDI inflows from Mauritius are more than double from that of US.


Top 10 FDI investing countries in India are Mauritius, Singapore, United States, UK, Netherlands, Japan, Cyprus, Germany, France and UAE.

Share of top investing countries FDI equity inflows:

Table no. 2 66

FDI-Sectoral analysis: FDI inflows are welcomed currently in 63 sectors as compared to 16 sectors in 1991. The sectors receiving the largest share of FDI inflows upto 2010 were the service sector and computer software and hardware sectors, each accounting for 22.14 per cent and 9.48 per cent respectively. There were followed by the telecom, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing, information; and professional, scientific and technical services.

Infrastructure sector received 28.62% of total FDI inflows from 1991-2008 Services sector received 19.34% of total FDI inflows from 1991-2008. Trading sector received 1.67% of total FDI inflows from 1991-2008. Consultancy Sector received 1.14% of total inflows from 2000-2008 Education sector received US $308.28 million of FDI inflows from 2004-2008. Housing and Real Estate Sector accounts for 5.78% of total FDI inflows during 2000-2008. Construction Activities Sector received 6.15% of the total inflows during 2000 to Dec. 2008. Automobile Industry received US $3.2 billion of total FDI inflows to the country during 2000 to 2008. Computer Software and Hardware sector received US $8.9 billion of total FDI inflows during 2000 to Dec. 2007. Telecommunications Sector received an inflow of US $8.2 billion during 1991 to 2008.


Table no. 3


Sector specific FDI policy:

Table no. 4





The world economy expanded by 3.3 per cent in 2005, less rapidly than in 2004, but still slightly faster than the decade average. economic growth remained strong in most regions although less buoyant than in the preceding year. only Europes economy continued to record low GDP growth less than half the rate observed in North America. In contrast to Europe, Japan experienced a strengthening of economic activity. In light of slower economic growth worldwide in 2005 and of oil market developments, merchandise trade growth like GDP growth decelerated in real terms, but still exceeded the average for the last decade. The trade deceleration was most pronounced in the developed, oil-importing regions. real merchandise imports of the United States, the European Union (25) and Japan grew at half the 2004 rate in 2005 and less than the global average. Most of the developing regions and the Commonwealth of Independent States (CIS) recorded real import growth rates above the global average and in excess of their export growth. oil price increases are a significant part of the explanation for this performance in many of the countries concerned. Sharply higher crude oil prices pushed up energy costs worldwide but did not trigger a marked rise in consumer prices as it happened in the previous two major oil crisis in 1973/75 and 1979/81. Several factors contributed to this outcome. first, many developed countries today have a lower oil intensity of output than three decades ago, as the services sector accounts for a larger part of GDP. Second, the slack in production capacity combined with moderate wage increases in many developed regions lowered the possibility of passing on higher energy costs to consumers. Core consumer price inflation that is all items excluding energy and food decreased in the euro area and the United States and stagnated in Japan in 2005. The maintenance of moderate consumer price inflation occurred in a policy environment in which monetary and fiscal policy continued to be stimulative. In a number of countries, however, inflationary tendencies could be observed in house prices and perhaps also in the stock market. the sharp rise in gold prices, to a 24 year peak level, might 70

be also driven in part by demand from investors looking to hedge their assets against inflation. Fiscal deficits in major developed economies remained high in 2005. Although the United States reduced somewhat its public sector deficit to GDP ratio, at 3.5 per cent it was still larger than that of the euro area. Japans fiscal deficit, the largest among the major developed countries, stagnated at 6.5 per cent of GDP in 2005. The further increase in the US current account deficit, to a new peak level in absolute (US$805 billion) and relative terms (6.5 per cent of GDP) was financed without any strains on international capital markets. Oil market developments contributed significantly to the widening of the US external imbalance, while the impact of exchange rate developments were mixed. the moderate rise in US interest rates and the (at least temporarily) increased demand for dollars linked to higher oil prices led to an appreciation of the US dollar against the yen, the euro and the pound in the course of 2005.

Against a trade weighted group of seven major currencies, the US dollar depreciated 2 per cent on a yearly average basis in 2005, but it appreciated 7 per cent from December 2004 to December 2005. On balance, exchange rate developments in 2005 did not contribute to a reduction of the core element of the global imbalances, which are found in the trade flows between the United States and east Asia. In late 2005 and early 2006, most trade and price indicators point to a further widening in the United States current account deficit in the coming year. One of the most challenging questions in the current global economic situation is for how long the increase in the United States current account deficit can continue. Most observers agree that it would be preferable if existing imbalances could be stabilized and gradually reduced, as this would smoothen the inevitable adjustment process. a further rise in global external imbalances may be increasing the risk of a sudden disruptive reduction in the imbalances. Such an abrupt adjustment, accompanied by large exchange rate variations would be more painful and generate larger welfare losses than a more gradual adjustment. In a scenario with disruptive adjustments, protectionist pressures are likely to increase, which if translated into restrictive measures would also have a negative affect on global economic activity.



As already noted, despite an acceleration of global economic activity and trade in the course of the year, annual average changes in world output and trade were lower than in the preceding year although higher that the decades average. World economic output of goods and services is estimated to have expanded by 3.3 per cent and real merchandise exports rose by 6 per cent in 2005. the year-to-year deceleration of global economic output and trade was rather close to the predictions made in early 2005. However, at the more disaggregated level the actual outcome deviated from projections, but the impact of these deviations on output and trade tended to offset each other. the negative impact of higher than predicted oil prices on global output and trade in 2005 was partly offset by more resilience than expected to the oil price hikes, illustrated, for example, by the stronger than projected economic activity in Japan. a regional breakdown of the world economy reveals that the sluggishness of the European economy constituted the major drag on world trade and output growth as Europe continued to report the weakest trade and output expansion of all regions. the four largest economies in Europe (Germany, France, the United Kingdom and Italy) all recorded GDP growth below 2 per cent, while the new Members of the European Union continued to grow faster than the old Members, with a combined GDP growth up by 4 per cent in 2005. North Americas GDP growth of 3.4 per cent continued to exceed slightly global economic growth (measured at market exchange rates). Within the region, the US economy recorded the strongest growth. economic growth in the developing regions remained robust in 2005, though somewhat less dynamic than in the preceding year. In South and Central America (including the Caribbean), Africa and the Middle east, GDP growth averaged between 4 and 5 per cent. for each region these growth rates in 2005 exceeded their respective short-term (2000-05) and the medium term (1995-05) growth performance. developing Asia did not escape the global trend to more moderate growth in 2005.

However, with regional GDP growth up by 6.5 per cent, developing ASIA again recorded the highest growth of all developing regions. China and India, the two countries with the largest populations in the world, again reported outstandingly high GDP growth in 2005 at 9.9 per cent and 7.1 per cent respectively.


The strongest economic growth of all regions in 2005 was reported by the Commonwealth of Independent States (CIS). Substantial gains from sharply higher export earnings stimulated public and private expenditure and led to GDP growth of 6.6 per cent in 2005, twice the global average. Since the financial crisis of 1998, the annual economic growth of the region exceeded that of the world economy and averaged at nearly 7 per cent over this six-year period. the marked expansion in the output of the regions energy sector contributed much to this development. Developments in the world energy markets not only impacted on regional economic growth, but also shaped global trade flows. The most visible sign of the change in global energy markets is the substantial rise in fuel prices and, in particular, the price of crude oil since 2003. these price developments are caused by major shifts in global oil demand. following the recession of 2001/02, a strong increase in global oil demand could be observed. robust economic growth in the United States and vigorous energy-intensive growth in major emerging economies (especially China) were key factors. Strong oil demand in the US economy led to a sharp rise in its oil imports, as domestic crude oil production continued to shrink. the strength of oil demand in many emerging markets was underpinned by the high energy intensity of this growth. recently, oil demand has been artificially sustained in some of these markets as end user prices were not fully adjusted to reflect the rise of energy prices in international markets. High global oil demand growth quickly absorbed the existing excess oil extraction capacity, located mainly in the Middle east. production capacity problems were not limited to the production of crude oil but occurred also at the refinery level. even a doubling of oil prices between 2003 and 2005 did not lead to a significant increase in global oil production capacity. the low short-term price elasticity of oil supplies is due to the fact that additions of new capacity require an increase in drilling activities and investments in oilfield developments which need a lead time of several years before production capacity goes up. In addition, declining yields in operational oilfields have been observed in the United States and the North Sea. Investment plans in new oilfields might also have been delayed due to oil price volatility over the past few years. Exceptional temporary factors also contributed to oil price developments in 2005. Hurricanes in the Gulf of Mexico damaged oil industry installations in the region and according to OECD estimates, led to the temporary closure of 3 per cent of global oil production capacity and 2 per cent of the worlds oil refinery capacity.


The repercussions of this severe disruption in production, refining and distribution could be contained by releasing oil from the strategic petroleum reserves and OPECs offer to make all its spare production capacity available to meet market demand. what have been the major consequences of these oil market developments for output on trade? the further sharp rise in oil prices in 2005 occurred at a time of generally low inflation. this meant that changes in the nominal price of oil were reflected in higher real and relative prices. Prices of fuels and other mining products in each of the three economies depicted one-third, while the import prices of agricultural and manufactured goods nearly stagnated or increased moderately in 2005. The negative impact of the oil price hike on world economic growth has so far been less far-reaching than observed in the past and predicted by most model simulations.

Four explanations can be offered for this more benign outcome: first, the recent oil price hikes originate from the strength of oil demand and not from a disruption of oil supplies, which is considered to be less damaging to economic activity. a second factor is the reduced oil-intensity of GDP growth in OECD countries caused by efficiency improvements in energy use and a shift in output towards services, which are less energy intensive than other sectors. this was not fully taken into account in the simulations. the third proposition is that the oil exporters spend their increased export earnings faster on imports of goods and services than in previous oil crises. finally, it is suggested that the oil exporters have invested their increased net wealth in US corporate and government bonds, and not in more liquid assets, which has helped to limit the rise in long-term interest rates and thereby sustained investment and consumption.


All regions participated in the deceleration of world merchandise trade, as each major region expanded its real merchandise imports in 2005 less rapidly than in 2004. the expansion of imports of the oil-importing developed countries Japan, the European Union (25) and the United States in 2005 was less than half the rate recorded in 2004. while US imports rose less than world trade they still expanded twice as fast as those of the European Union.


linked to its sluggish economic performance, Europes trade growth was sharply reduced in 2005. Although the depreciation of the euro, the British pound and the Swiss franc in the course of 2005 improved somewhat the price competitiveness of European exporters in markets outside Europe, the expansion of real merchandise exports was limited to 3.5 per cent in 2005. However, as three-quarters of Europes exports are destined to European countries, trade growth can only recover with stronger intra-European trade flows.

North Americas real merchandise exports and imports expanded by about 6 per cent, the same rate as world trade in 2005. oil-exporting Canada and Mexico increased their real imports faster than their exports, while the opposite development could be observed for the Unites States. for the first time in eight years US merchandise exports rose faster than world exports. the relative strength of US merchandise exports can be attributed to the recovery of agricultural product shipments and the continued strength of capital goods exports. South and Central Americas merchandise exports and imports continued to be among the most dynamic trade flows in 2005. Strong global demand and high prices for its major export commodities, combined with robust economic growth in the region, stimulated the regions exports and imports, which expanded at double-digit rates. The major net-oil exporting regions the Middle east, Africa and the Commonwealth of Independent States all recorded a very strong expansion of their real merchandise imports by far exceeding world trade growth. Asias merchandise exports and imports expanded by 9.5 per cent and 7.5 per cent respectively. Asias trade developments are prominently shaped by Chinas performance. In 2005, it is estimated that Chinas exports continued to expand by one-quarter in real terms and thereby more than two times faster than Asias total exports or its own import growth.



In 2005, the value of world merchandise exports rose by 13 per cent, to US$10.1 trillion, and that of world commercial services exports by 11 per cent, to US$2.4 trillion. for both merchandise and commercial services, this represented a marked deceleration in growth if compared with the preceding year. Cross-border commercial services exports expanded for the third year in a row less rapidly than world merchandise exports trade value developments by sector showed a large variation in their expansion rates in 2005, largely due to relative price developments. weak and stagnating prices for food, agricultural raw materials and manufactured goods contrasted with a further sharp rise in the prices for metals and fuels. The share of fuels and other mining products in world merchandise trade rose sharply to 16 per cent, the highest level since 1985 and matching the level recorded in 1970. on the other hand, the share of agricultural products in world merchandise exports decreased to a historic record low of less than 9 per cent. although recent oil price developments played a major role in the further relative decline of agricultural products in world merchandise exports, they only accentuated an existing long-term downward trend. The share of agricultural products (including processed products) in world merchandise exports has decreased steadily over the last six decades, from more than 40 per cent in the early 1950s to 10 per cent in the late 1990s, as both volume and price trends have been less favourable than for other merchandise products. Among manufactured goods it is estimated that the largest value increases were for iron and steel products, as well as for chemicals. although there was a recovery in the global demand for computers and other electronic products, the trade value of these categories expanded no faster than the rate for manufactured goods in general. In other words, electronic products have not yet regained the dynamic role they played in the expansion of trade in manufactures throughout the 1990s. In the 1990s the export value of electronic goods rose on average by 12 per cent or two times faster than all other manufactured goods. available information in early 2006 also points to a below-average expansion of global trade in textiles and clothing in 2005.


Among the broad commercial services categories (transportation, travel and other commercial services), expansion rates have been similar, ranging from nearly 10 per cent for travel to 12 per cent for transportation services. the relative strength in the export value of transportation services is largely linked to price developments. regional trade flows measured in dollar values reflect volume, price and exchange rate changes which sometimes work out in a cumulative manner and sometimes offset each other. Europe, the largest trader among the major geographic regions, recorded the lowest export and import growth for both merchandise and commercial services of all regions in 2005. It was also Europe which experienced the steepest deceleration among all regions in dollar trade growth in 2005.

Most of this deceleration can be attributed to exchange rate developments. Measured in euro terms Europes merchandise and commercial services both expanded by about 7 per cent in 2005, only moderately less than in 2004 North Americas merchandise and commercial services exports rose by 12 per cent and 10 per cent respectively, which was somewhat less than the corresponding global averages. Imports of services expanded in line with the regions exports but merchandise import growth exceeded export growth. over the last five years, the growth of North Americas merchandise and commercial services exports was about half the 10 per cent average annual growth observed globally. although North Americas merchandise imports expanded one and a half times faster (at 6 per cent) than its own exports over this five-year period, they still lagged the expansion of world trade, estimated at 10 per cent. the Middle east, Africa and the CIS, the worlds largest net exporters of fuels, benefited from the further rise in fuel prices and increased their merchandise exports between 29 per cent and 36 per cent in 2005. the sharply rising export revenues in 2004 and 2005 enabled these regions to expand their merchandise and services imports faster than the global average.9the importance of product structure as a determinant of the export performance in 2005 is highlighted if one distinguishes between the oil exporting African countries and the non-oil exporting African countries. Merchandise exports of South Africa and the other non-oil exporting countries in Africa have seen an increase of about 12 per cent on a par with world merchandise trade growth. exports of the oil exporting African countries had been far more dynamic surging by 45 per cent, through a combination of larger export volumes and higher prices.


The oil exporting African countries recorded a merchandise trade surplus (f.o.b.- c.i.f.) in excess of US$100 billion, while the oil importing African countries record a deficit of US$40 billion in 2005. South and Central America and the Caribbean region not only recorded very high merchandise trade of nearly one-quarter in 2005, but also the strongest expansion in commercial services trade of all regions. Strong economic growth, favourable commodity price developments and exchange rate appreciations contributed to these outstanding developments in the regions nominal trade values in 2005. There was a sharp deceleration in Asias nominal merchandise export and import growth but the expansion rate remained at 15 per cent and 16 per cent respectively somewhat stronger than global trade growth in 2005. trade performance varied a good deal among Asian merchandise exporters. China, the leading trader in the region, reported export growth of 28 per cent and accounted for the first time for more than one-quarter of Asias merchandise exports.10 other Asian countries exports increased by 11 per cent in 2005, less than global merchandise exports. one of the weakest export growth rates in Asia was reported by Japan (5 per cent) and for the four east Asian traders (comprising Chinese Taipei; Hong Kong, China; the republic of Korea and Singapore), export expansion in 2005 was limited to 12 per cent, less than half the rate observed in 2004. despite its strong economy, Chinas import growth slowed down sharply in 2005. Under the impact of higher fuel prices, Japans merchandise imports rose by 14 per cent, nearly three times faster than its exports. India reported import growth of 35 per cent, one of the highest rates among Asian trader. Asias commercial services exports and imports have been far more dynamic than world commercial services trade.




Countries engage in international trade for a variety of reasons. Exports, in particular, are a means to generate the foreign exchange required to finance the import of goods and services; to obtain economies of specialization, scale and scope in production; and to learn from the experience in export markets. In a globalizing world, furthermore, export success can serve as a measure for the competitiveness of a countrys industries.

It may be noticed that export success among developing countries has been concentrated only in a few countries. But, the comparative advantage of most of the developing countries still lies traditionally in primary commodities and unskilled-labour-intensive manufactures. Over time, as they grow and accumulate capital and skills, and wages rise, their competitive base has to change. They have to upgrade their primary and labor intensive exports into higher value-added items, and they have to move into new, more advanced, export-oriented activities. Both require greater inputs of skill and technology. Countries can attain these objectives in several ways: by improving and deepening the capabilities of domestic enterprises or by attracting Foreign Direct Investment (FDI) into export activities and upgrading these activities over time. These strategies may be complementary or alternatives. In most cases they are found together, but different countries deploy different combinations of domestic enterprise-led and FDI-led export development. Neither strategy is easy (UNCTAD 1999). The Government of India saw in FDI a potential non-debt creating source of finance and a bundle of assets, viz., capital, technology, market access (foreign), employment, skills, management techniques, and environment (cleaner practices), which could solve the problems of low income growth, shortfall in savings, investments and exports and unemployment. It was argued that FDI would also help India in the expansion of production and trade and increase opportunities to enhance the benefits that could be drawn from greater integration with the world economy.


In other words, FDI would broaden the opportunities for India to participate in international specialization and other gains from trade. Besides FDI, export orientation has also been hailed as an engine of growth. The Newly Industrialized Economies (NIEs: Singapore, Hong Kong and Tai- wan) successful economic development has been attributed to these economies success in pursuing an exported growth strategy.

But more importantly, it was part of the IMF and World Bank condition that the Government of India must resort to macro-economic reforms and structural adjustments in order to be bailed out from the severe economic crisis in 1990-91 (UNCTAD 1999). So, in mid-1991 the Government of India resorted to full-fledged macro-economic reforms and structural adjustments with the announcement of the New Economic Policy (NEP). The liberalization policy automatically helped increase the FDI inflow into India. And indeed, the increased inflows of FDI into the Indian economy have led to the expansion of cross-border production by multinational enterprises and their networks of closely associated firms in India.

But, whether the impact of all this is on export performance is positive or negative is the question. In view of the facts observed above, this study makes an attempt to analyze the impact of FDI on the export performance in India. FDI traditionally played an important role in natural resource exports (ESCAP / UNCTC 1985; ESCAP /UNCTAD 1994), and its role is growing in the exports of certain processed agricultural products. It is also playing an increasing role in services, especially in tourism (UNCTAD 1998). But, the focus here is on manufacturing oriented exports as manufactured products are more relevant for a developing economy as an indicator of continued long-term dynamic growth in exports as well as the whole economy.


Theoretical and Empirical Foundations

This section deals with the studies previously conducted on the role of FDI in strengthening the manufacturing export performance of developing countries. It is pertinent to point out that many studies find that FDI promotes the manufactured exports of recipient countries (Athukorala and Menon 1995; Zhang and Song 2001; Zhang and Felingham 2001; Zhang 2005; Banga 2006; Piamphongsant 2007; Kohpaiboon 2008). But, the pattern of manufacturing export success in the developing world is highly skewed. A small number of countries dominate manufactured export activity, with concentration level rising by level of technological sophistication.

Balasubramanyam et al. (1996) find the effect of FDI on average growth rate for the period 1970-85 for the cross-section of 46 countries as well as the sub-sample of countries that are deemed to pursue export-oriented strategy to be positive and significant but not significant and sometimes negative for the sub-set of countries pursuing inward-oriented strategy.

Similar findings have been shown by Athukorala and Chand (2000) and Kohpaiboon (2003, 2006a,b). Aitken et al. (1997) showed the external effect of FDI on export with the example of Bangladesh, where the entry of a single Korean Multinational in garment exports led to the establishment of a number of domestic export firms, creating the countrys largest export industry. Hu and Khan (1997) attribute the spectacular growth rate of Chinese economy during 1952 to 1994 to the productivity gains largely due to market oriented reforms, especially the expansion of the non-state sector, as well as Chinas open-door policy, which brought about a dramatic expansion in foreign trade and FDI.

In this direction, Greenway et al. (2004) and Kneller and Pisu (2007) suggest that Multinational Corporations (MNCs), especially export oriented ones, appear to generate positive export spillovers and significantly increase the probability of exporting for domestically-owned firms operating in the same industry. Conversely, Barrios et al. (2003) studied the case of Spain and found no evidence of export spillovers to local firms from the existence of MNCs.


Ruane and Sutherlands (2004) findings through using the case of Ireland agrees with Barrios et al.s (2003) findings that there appears to be no evidence of export spillovers from MNCs to local firms in Ireland.

What leads to these mixed results? This can be seen from many studies that have portrayed that the export role of FDI, particularly by Multinational Corporation (MNCs) or Transnational Corporations (TNCs) from developed countries, has understandably been larger in complex industrial activities and hence contributed to positive spillovers and expanded the export base. In this connection, Bernard and Jensen (2004), in their study observe that large, productive plants, plants which are owned partially or wholly by US MNCs, and/or plants with high labour quality all have higher probabilities of exporting and a higher propensity to export. This role has varied by country and has been especially important in three types of activities: offshore assembly, mature infant industries and large scale processing of natural resources for exports. Off-shore assembly for export is concentrated in electrical and electronic industries, with some activity in automotive and other engineering products. This can be seen in the Indian economy also. In the hard disk drive industry, United States TNCs conduct innovative Research and Development (R and D) at home, perform complex technological tasks in Singapore


And less advanced ones in Thailand and, more recently, China (Wong 1997). The main area of off-shore assembly activity of FDI can be viewed in EPZs. The impact of EPZs on the long term export performance, however, is unclear. A once-for-all increase in exports based on low wages is not the same as sustained upgrading of skills and capabilities. The generous use of incentives to attract FDI to EPZs often raises doubts about the net contribution of EPZs to the country. Their sole benefit often lies in the employment of low-wage, low-skilled labour, with little spillover to domestic firms or to skill and technology development. A transition from labour-intensive assembly with very low value added to more value-added activities and deeper local linkages may not take place. Where it does, it takes time.


In Bangladesh, where garment exports from EPZs began in the 1970s, there are signs only now that the industry is moving beyond the simple assembly of shirts (ILO 1998; Van Heerden 1999). However, there are several cases where EPZs have deepened their linkages and technological levels over time. In Malaysia, electronics exporters have attracted other TNCs to deepen backward linkages, and have also increased sourcing fromlocal firms. They have upgraded their technological activity and enlarged their product range. However, such development is not automatic: much depends on policies for upgrading skills and attracting the right kind of investor. Much of Singapores success is due to careful targeting of industries such as electronics, which accounts for over half of exports, and to inducements for TNCs to upgrade their technologies. In turn, this was feasible only because of government investments in skills, infrastructure and support institutions (ILO 1998; Van Heerden 1999). The second type of complex export- oriented activity involves mature infant industries and is an outgrowth of import substitution, from industries being restructured because of economic liberalization (Londero and Teitel 1998). In most large import-substituting economies with a large foreign presence, such as Mexico and Argentina, TNCs lead the export surge. In some cases they induced upgrading of their suppliers and deepened their own technology into design and research activity in some major production centres (Mortimore 1997, 1998). The third type of activity involves large-scale processing of natural resources for export.

Benavente et al. (1997) in this connection observe that the liberalization of FDI served to attract considerable foreign interest in building stateof- the-art facilities in the Latin American countries. For example, the development in mining projects in Chile, mining, oil and natural gas in Argentina, Mexico and Venezuela. In total, as local firms grow and become international competitors, it becomes harder for them to obtain technology from TNCs through FDI. Independent R and D then becomes vital in order to copy, absorb and create technology; the leading firms set up large research and design departments and invest heavily in innovation (Hobday 1995; Kim 1997). More recently, local firms have begun to use strategic alliances with leading foreign TNCs to expand their technology base.


All in all, the autonomous strategy has givensuch developing economies much greater local content in sophisticated manufacturing and industrial depth and in manufacturing export performance. Leading electronics firms in the Republic of Korea and Taiwan Province of China are good examples of local firms using armslength technology transfer and exporting arrangements to build their capabilities (Hobday 1995). However, UNCTAD (1998) is skeptical about the positive contribution of FDI on manufacturing export performance as it opines that capital and consumption goods not available locally are imported, and profits remitted, thus cutting into the export earnings generated. Ernst et al. (1998) observe that the role of FDI was low in countries where local firms had good capabilities and could undertake subcontracting at low cost to the buyer. The FDI role tended to be larger when local capabilities were weak. Similarly, in Latin America FDIs role was high in low quality segments where wage costs are the main competitive factor; there is little design capability or independent marketing (Mortimore 1998). A study on China brings to notice both positive and negative trends in the same country with regard to the role of FDI on export performance. In east China, geographical advantage in export attracts FDI inflow and FDI promotes export. In addition, rise of FDI-GDP ratio increases regional share in industrial value added in east China. These effects contribute positively to regional income growth in east China although there is a direct crowding out effect between FDI and domestic investment (as input) in growth. In contrast, the negative impact of FDI inflow in central China on regional export orientation weakens its contribution to regional income growth (Wen 2005). Hence, FDI through TNCs has the potential to contribute to export performance in the host countries. Their role is particularly large in the most dynamic segments of export activity and, within those, in activities where increasing amounts of trade are inside corporate networks. How well developing countries use this potential depends largely on their own strategies and efforts. Opening up passively to international investment and trade is useful, but it is only a partial answer. Its main benefit lies in realizing existing comparative advantages based on natural resources and initial capabilities. Where capabilities are weak and static, FDI may well lead only to a short-lived hump in export performance. To build a more sustainable and dynamic export base, countries have to use proactive policies. They also need to improve their human capital and capabilities in order to attract higher quality investment.




Marketing research is the function which likes the consumers, customers & public to the marketer through information which is used to identify & define marketing opportunities & problems, generate, refine & evaluate marketing action; monitor marketing performances & improve understanding of marketing as a process. It has following steps: I: PROBLEM DEFINITION II: DEVELOPMENT OF AN APPROACH TO THE PROBLEM III: RESEARCH DESIGN FORMULATION IV: FIELDWORK OR DATA COLLECTION V: DATA PREPARATION AND ANALYSIS VI: REPORT PREPRATION AND PRESENTATION



It is framework or blueprint for conducting the market research project. It specifies the details of procedures necessary for obtaining the information needed to structure and/or solve marketing research problem.


Research design broadly classified into two parts : Exploratory Research Conclusive Research EXPLORATORY RESEARCH:

Exploratory research looks for hypothesis in well-established fields of study. Hypothesis usually comes from ideas developed in previous researches or are delivered from theory. Hypothesis is tentative answer to the question that serves as guide for most of the research projects It seeks to discover new relationships. All marketing research projects start with it. This is a preliminary phase & is absolutely essential in order to obtain a proper definition of problems at hand. The major emphasis is on the discovery of ideas & insight. CONCLUSIVE RESEARCH:

Conclusive research provides information that helps the executive so that he can make a rational decision. This study has done well while attempting to arrive at a more clear description of an apparent problem.

2.2 TARGET POPULATION: The collection of elements or object that possess the information sought by the researcher and about which inference are to be made. Target population should be defined in term of Element and Sampling unit.



Object that possess the information sought by the researcher and about which inferences are to be made. SAMPLING UNIT:

The basic unit containing the elements of the population to be sampled .

2.3 SAMPLE SIZE: Sample size refers to the number of elements to be used in a study.

2.4 SAMPLING TECHNIQUES: Sampling Techniques are of two types: Non probability (non random) Probability sampling (random sampling) The sampling technique used in this research is Non - random sampling techniques in which I have choose convenience sampling technique because it is least expensive and least time consuming of all sampling techniques. Convenience sample: It is also known as "accidental" sample or "man-in-the-street" samples.


The scope of the study will be useful in future. Through this study we can know what is the Role of Outward FDI and Trade Performance and what are the factors that influence the Indian Business. Through this study we will find out the factors of awareness of FDI and TRADE. Hence by implementing all the above we can analyze the OUTWARD FDI and TRADE PERFORMANCE.


2.6 DATA COLLECTION METHOD: The data collection process can be relatively simple depending on the type of data collection tools required and used during the research. Data collection tools are instruments used to collect information for performance assessments, self-evaluations, and external evaluations. The data collection tools need to be strong enough to support what the evaluations find during research. Here are a few examples of data collection tools used within three main categories. Secondary participation: Secondary participation require no direct contact to Data collection tools used in personal contact observations are used ather information. It involve: Postal mail Electronic mail Telephone Web-based surveys

In-person observations when there is face to face contact with the participants. Some examples of this type of data collection tool would include: In-person surveys used to gain general answers to basic questions Direct or participatory observations where the researcher is directly involved with the study group Interviews used to gain more in depth answers to complex questions Focus groups where certain sample groups are asked their opinion about a certain subject or theory.


Case Studies And Content Analysis:

Case studies and content analysis are data collection tools which are based upon pre-existing research or a search of recorded information which may be useful to the researcher in gaining the required information which fills in the blanks not found with the other two types during the data collection process. Some examples of this type of data collection tool would include: Expert opinions leaders in the field of study Case studies previous findings of other researchers Literature searches research articles and papers I have used case studies, referred books and internet sites, previous year reports and newspapers for preparing the project report.




The study recommends the regional industrial equilibrium by inviting FDI in India. Must spotlight on product diversification, particular service or product should not be judged while attracting FDI inflow. The policy maker should aware about overall development of Indian economy.

The study enforces the proper utilization of foreign investment. The related authority should plan strategies where FDI must be employed as medium of enhancing infrastructure, industrial production, healthcare, savings and deposits, technological education, employments, exports and competitions.

It is suggested that most of the FDI inflows should invest in the export oriented products and services then India can diminish its deficit financial position in the international trade.

It is advocates that government should design such policies under FDI which must be related with agriculture base industry. It will important step in reducing unemployment from rural region because 60% human resources lives in rural area. Give maximum reward to the farmers for their agricultural crops and try to increase the wages level of the skilled and unskilled labour.

It is also suggested that the Indian government must promote research and development to maintain fine economic growth under FDI. Maximum preference should be given to the development of human resources. Try to stabilize the political environment. FDI should use as means of controlling inflation and deflation, upgrading the education system, ensuring personal security of the citizens.



Tax incentives or disincentives on firms that invest outside of the home country or on repatriated profits

Subsidies for local businesses Leftist government policies that support the nationalization of industries (or at least a modicum of government control)

Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labor markets and agriculture.

Security industries are often kept safe from outwards FDI to ensure localized state control of the military industrial complex.

Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions The thought is that the long term gain is worth more than the short term loss of income



Foreign direct investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI may be undertaken by individuals as well as business entities. Foreign direct investment (FDI) continues to gain in importance as a form of international economic transactions and as an instrument of international economic integration. The rate of growth of worldwide FDI inflows in the past two decades has substantially exceeded that of worldwide gross domestic product (GDP), exports and domestic investment. Transnational corporations (TNCs) account for an increasing share and, in some cases, a substantial part of the assets, employment, domestic capital formation, research and development, sales and trade of many countries and have become one of the driving forces of integration in the world economy.



Foreign Direct Investment: Six Country Case Studies, By Yingqi Annie Wei, V. N.

Foreign Direct Investment: Trends, Data Availability, Concepts, and Recording practices, By Neil K. Patterson, International Monetary Fund

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