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IMPACT OF FDI IN RETAIL AND MANUFACTURING SECTOR IN INDIA

Report submitted to

Centre for Management Studies Jamia Millia Islamia

in partial fulfilment of the requirements for the award of the degree of Master of Business Administration
by

HASSAN PARVEZ
Roll No. 11-MBA-16 Enrol No. 12/09/3333

Under the supervision of

Dr. SAIF SIDDQUI


Associate Professor

Centre for Management Studies Jamia Millia Islamia, New Delhi-110025

DECLARATION

I, HASSAN PARVEZ, hereby declare that the report entitled IMPACT OF FDI IN

RETAIL AND MANUFACTURING SECTOR IN INDIA in fulfilment of the


requirements for the award of the degree of Master of Business Administration which is submitted by me to the Centre for Management Studies, Jamia Millia Islamia University, New Delhi has been done by me and that, to the best of my knowledge and belief, it contains no material previously published or written by another person nor material which has been accepted for the award of any other degree or diploma , Associateship, Fellowship or other similar title or recognition. This is the original work and is the result of my own efforts.

Dated: 4th APRIL, 2013 Place: New Delhi HASSAN PARVEZ

CERTIFICATE

On the basis of the declaration submitted by HASSAN PARVEZ, a student of MBA(FullTime) 2nd Year, , I hereby certify that that the thesis entitled IMPACT OF FDI IN

RETAIL AND MANUFACTURING SECTOR IN INDIA which is submitted to the


Centre for Management Studies, Jamia Millia Islamia University, New Delhi in partial fulfilment of the requirements for the award of the degree of Master of Business Administration, is an original contribution with existing knowledge and faithful record of research carried out by her under my guidance and supervision. Certified further, that to the best of my knowledge the work reported herein does not form part of any other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other candidate.

Dated: 4th APRIL, 2013 Place: New Delhi

Dr. SAIF SIDDQUI Associate Professor Centre for Management Studies Jamia Millia Islamia, New Delhi

Executive Summary
The context foreign direct investment (FDI) is used in this research taking account of Indian economic impacts and its analysis on manufacturing and retail industry. The pull back of world economic down turn in past two years reflects in financial movement across the world. This effect FDI transactions and foreign interests are taken account in this research to meet the objectives. The growth of Indian economy with support of FDI is understood through the preliminary readings. analysis Literature on FDI and recent studies on the topics related to Objectives are used in this report. Literature starts with the historical movement of financial flow across the world economy. The focus leads to previous studies on FDI in India along with specific studies on Manufacturing and retail sectors. The frame work of the research is framed through the literature knowledge and recent studies. The conceptual framework concludes the literature review which meets the requirements of objectives. Methodology of the research is framed based on gaining impacts on retail industry and manufacturing industry of India through FDI. Research philosophy, approach and I reached a conclusion to justify my

strategy is established in this chapter to manage research operation under given time frame. The guidance of methodology is attained though research guiding books and journals. The unawareness of handling a research is taken into account while making this report. Data analysis of research is done with respect to conceptual frame work and objectives. Recent impacts on industrial sectors and its effect on FDI flows are analysed in this chapter. Specific analysis had done on manufacturing and retail industry to realise the impacts and growth of industry through FDI operations. The legal procedures and its updates are referred in this chapter to support findings of research. Supporting tabular and pictorial representations are provided to justify the findings of analysis. This report is concluded with the future scope of FDI flow to Indian economy and pointing the pitfalls of FDI strategies from Indian government. The feedback of existing system is added as clarifying recommendations at the end of the report.

1.2 Background: The world economic recovery from financial down turn seems fragile, especially in public investments and emerging risks including climate change. The private investment across the world is crucial and it stimulates certain economies to empower their resources and investors can attain better return to their investments. Manufacturers across the world are

searching for economies of scale and make profit out from manufacturing sector to compete and sustain in market. Foreign Direct investment plays a crucial role in private investments and it stabilises regional and international stock markets. After a significant downturn in global economy FDI is recovering its strength in developing and developed economies. The recent challenges to organisations which are participants of cutting-edge technology, formidable knowledge and competition make importance to economies with cheaper resources and infrastructure. The external challenges to organisations being part of effort to reduce low-carbon emissions and reducing green house gas emissions made the tough situation in business investment (World Investment report 2010).

Restructuring in global FDI patterns helps to overcome global financial crisis in medium term. The increasing rate of relative weight of transition and developing economies added pace to FDI restructuring. The decline of FDI in manufacturing sector and increased push is service sector is restructured in recession. This impact leads to internationalization of production and its investments to attain economies of scale. Indias solid growth from past two decade shares world production output and helps to attain purchasing power parity with adjusted exchange rates. Increase in import and export figures for past few years shows the production growth and internal market development of Indian economy. The integration to global economy has benefited Indian growth in capital inflows and stock market stability. The global achievements in remittance, domestic demand growth, tourism and emergence of successful corporate like Tata, reliance and Infosys in multiple business sectors supports Indian economic growth. This growth provides a promising factor to investors around the globe with assurance of return to their investments. The growth in technological innovations supports economic growth and infrastructure. Availability of resources in human and machinery aspects makes a supporting factor to these

development and growth plans. The majority of Youth in Indian population is another advantage to raise economic output which can underpin Indias competitiveness in global market. The competition from other Asian countries like Japan, china and Korea makes the challenges to attain opportunities to Indian Development. The growth in service sector in the beginning of decade is restructured though recession. Manufacturing is currently highlighted in support to Indian economy and investors are mostly specific on Investing in Indian manufacturing industry. Another key area of Investment opportunity in investment is retail industry of India. The retail industry to meet demands of huge population is a bigger challenge of corporate and foreign investors. The presence of established small scale and medium scale retailers will be a bigger threat for multi store sales and super market concepts in India. The legal regulation for direct entry to Indian retail industry make bottleneck for foreign investors to enter Indian retail market. Recently world acquisition of Indian companies over foreign companies like Corus,

Jaguar, Axon in manufacturing and service sector shifts their production range to India. The entrance of wall-mart, Tesco and spar to Indian retail market makes promising opportunities to foreign investors in manufacturing and retail sector. The decline of cross border mergers in primary services and manufacturing sector affects global FDI flows in past two years. The depressed stock prices and reduced value in transactions pull back investors in international organisations. This gives the way to invest in regional economies which are performing well in economic downturn. The stability of Indian banking system and liberation in entry modes helps India to overcome recession and get minor blisters in collapse of bigger banking firms like Lehman and brothers. FDI through private equity funds are raised on this occasion to make hold to FDI flows. India secured top five positions in FDI recipients and FDI outflow from India is very low comparing to inflows. The higher rate of individual disposable income compared to developed countries Strengthen Indian financial position and ability to face crisis. Indian retail industry accounts 10 percent of national GDP and eight percent of employment across the nation. The presence of vast middle class is the key attraction to global retail giants and the opportunity to invest in the region. The impact of global retail players in Indian economy is analysed in this report as part of achieving objectives of the research. The manufacturing industry constitutes 22 % of Indian GDP. The removal of quantitative restriction on imports and tariff withdraw improves Indian manufacturing sector to a competitive edge. The challenges and issues like focus on small scale unorganised manufacturing units, poor infrastructure and high cost of power builds obstacles for growth and investment in Indian manufacturing industry.

1.3 Research Objectives

Based on the Discussion in Background and my interest in finding the opportunities are market position in FDI flows to India, I specifically focussed my research objectives based on investments with manufacturing and retail industry in India. The objectives are:

1. To critically examine the impact of foreign direct investment in Indian economy. 2. To study the investment approach of FDIs and compare with other trading options attained through globalisation. 3. To critically analyze the importance of FDIs in Indian retail sector and identify pros and cons to the industry. 4. To evaluate the growth of manufacturing sector in India with support of FDI. its

The four objectives mentioned are attained through feasible data collection methods with the support of literature and conceptual model. The current available data is attained from different sources to answer the objectives of the research. To support my research literature regarding FDI and Indian retail and manufacturing sectors are used to build up conceptual model.

2.1 Introduction

In this chapter I discuss about various factors affecting like FDI, History of FDI theories of FDI and literature regarding Indian manufacturing and retails sectors. The literature focuses on achieving the objectives of research and makes a frame of conceptual model to collect data in data analysis chapter. Appropriate methods were used in methodology chapter to attain the data required to reach objectives. The interest of investors to attain better earnings to their investments and motives to become part of successful organisations are exploited though the frames work of FDI. The participation of investment organisations to individual investors are resembled in literature to analyse the motive of FDI and the factors affecting the flow of investment and their withdrawal. The macro-environmental factors and organisation policies are specific on investing. Here specification to any organisation is not at all used. Instead of that specification of two industries and their inflow in financial terms through FDI is concerned to attain research objectives. 2.2 Defining FDI

Hood and Young(2009) states FDI as organisational activity for adding values to control ownership and operations of organisations in various industries of interest. Different definitions are raised by multiple authors for FDI, where the investors range from individual to corporate level. The individual investors concentrate on portfolio investment through brokerage agencies and stock markets. Corporate investors try to gain control of organisation through huge investment. Stephen( 1998) states that FDI act as a tool for Corporate to gain capital managerial entrepreneurial and technological skills of a organisation or market under foreign production. Imad(2002) argues that FDI enacts as a method for individuals and organisations in one region of world to become stake holders of companies operating in different parts of world. The purpose of this method is to control distributions, production and core activities of participating firm. The classic

definition of FDI is defined as a company from one country is making physical investment to another organisation in different country. The direct investments in equipments, machinery and buildings are used in addition to indirect methods like portfolio investment. According to International monetary fund (IMF) and Organisation for economic corporation and development(OECD), FDI is a direct investment for obtaining a long lasting interest by resident entity of one country or economy in an organisation that is based on another country. Jonathan et al(2006)states that FDI equals retained earnings through direct investors plus shares of direct investors plus net increase in long term and short term loans minus overseas enterprise borrowing of money. The long lasting interest shows the existence of relationship between direct investment and investor and their degree of influence in managerial operation of latter organisation. The above definitions build a basic idea of FDI which commonly states that the investment from region of world to another region through organisations. With the aim of attaining market benefits and value to money FDI is highly used by all nations. 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 [1]. 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.

One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. This unprecedented growth of global FDI in 1990 around the world make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. In-fact, FDI provides a win - win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The 'home' countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the 'host' countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange.

Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a sole visible panacea for all their scarcities [2]. Further, the integration of global financial markets paves ways to this explosive growth of FDI around the globe. Under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment through single window system from the Prime Minister's Office. The foreign equity cap was raised to 51 percent for the existing companies. Government had allowed the use of foreign brand names for domestically produced products which was restricted earlier. India also became the member of MIGA (Multilateral Investment Guarantee Agency) for protection of foreign investments. Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. New sectors such as mining, banking, telecommunications, highway construction and management were open to foreign investors as well as to private sector.

Foreign direct investment and the spectrum towards globalization

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. 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 refers to the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments [3]. It 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 (positive or negative) 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. Foreign direct investment is nothing but increase the country's economy. Globalization can be described as 'a widening, deepening and speeding up of worldwide interconnectedness in all aspects of contemporary social life, from the cultural to the criminal, the financial to the spiritual' (Held and McGrew 1999:). 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 [4]. During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010. International trade is the cross-border trade in goods and services. On these pages, it is measured by the sum of imports and exports, divided by the GDP of a national

economy. The growth of international trade is a straightforward indication of economic globalization. When US residents, for example, read labels on their clothes showing they are made in China, Malaysia or Mexico, or decide to purchase a car made in South Korea, their sense of global connectedness is immediate. Investment is the conversion of money into some form of property from which an income or profit is expected to be derived. Foreign direct investments (FDI) are flows of money into a country that purchase a lasting stake in an enterprise for a foreign investor [5]. These investments are direct in the sense that the investor purchases ownership rights in a specific company, rather than in a portfolio of stocks held by a broker, say. FDI does not include short-term investments, portfolio investments or currency flows. Foreign Direct Investment is an indication of growing transnational ownership of production assets. It is a leading edge of economic globalization in the sense that increasing foreign ownership of productive may give direct influence over livelihoods and production [6]. The implications of foreign ownership of production may include both positive and negative elements, depending on the perspective of the observer. Foreign investment has often been an important avenue for the transfer of skills and technology. At the same time, foreign investment puts workers under foreign control, and leads to foreign appropriation of profits. Implications and limiting factors in 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 a focus for FDI. The nature of the FDI tunnel depends on the countries 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 [7]. 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 higherpaying jobs; establishing in lagging areas centers of new economic development that will support attracting or strengthening of many other firms without so 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 (certainly for less-developed regions) 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-politic "cooperation" are covert and subject to corruption [8]. 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, and 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 remorse's, that block the realization of FDI potential. Most attractive location of global FDI It is a well-known fact that due to infrastructural facilities, less bureaucratic structure and conducive business environment China tops the chart of major emerging destination of global FDI inflows. The other most preferred destinations of global FDI flows apart from China are Brazil, Mexico, Russia, and India. The annual growth rate registered by China was 15%, Brazil was 84%, Mexico was 28%, Russia was 62%, and India was 17% in 2007 over 2006 [9]. During 1991-2007 the compound annual growth rate registered by China was 20%, Brazil was 24%, Mexico was 11%, Russia was 41% (from 1994), and India was 41%. India's FDI need is stood at US$ 15 billion per year in order to make the country on a 9% growth trajectory (as projected by the Finance Minister of India in the current Budget) [10]. Such massive FDI is needed by India in order to achieve the objectives of its second generation economic reforms and to maintain the present growth rate of the economy. India's share in world FDI inflows has increased from 0.3% to 1.3%

from 1990-95 to 2007. Though, this is not an attractive share when it is compared with China and other major emerging destinations of global FDI inflows.

Source: compiled from the various issues of WIR, UNCTAD, World Bank Foreign direct investment in India Developed economies consider FDI as an engine of market access in developing and less developed countries vis--vis for their own technological progress and in maintaining their own economic growth and development. Developing nations looks at FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps [11]. FDI is considered as an instrument of international economic integration as it brings a package of assets including capital, technology, managerial skills and capacity and access to foreign markets. The impact of FDI depends on the country's domestic policy and foreign policy. As a result FDI has a wide range of impact on the country's economic policy. In order to study the impact of foreign direct investment on economic growth, two models were framed and fitted. The foreign direct investment model shows the factors influencing the foreign direct investment in India. The economic growth model depicts the contribution of foreign direct investment to economic growth.

The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that is not allowed access through the automatic route. FIPB comprises of Secretaries drawn from different ministries with Secretary, Department of Economic Affairs, MoF in the chair [12]. This inter-ministerial body examines and discusses proposals for foreign investments in the country for sectors with caps, sources and instruments that require approval under the extant FDI Policy (prescribed vide Circular 1 of 2012) on a regular basis. The Minister of Finance, considers the recommendations of the FIPB on proposals for foreign investment up to 1200 crore. Proposals involving foreign

investment of more than 1200 crore require the approval of the Cabinet Committee on Economic Affairs (CCEA). FIPB is mandated to play an important role in the administration and implementation of the Government's FDI policy. It has a strong record of actively encouraging the flow of FDI into the country through speedy and transparent processing of applications, and providing on-line clarification [13]. In case of ambiguity or a conflict of interpretation, the FIPB has always stepped in with an investor-friendly approach. The e-filing facility is an important initiative of the Secretariat of the FIPB to further enhance its efficiency and transparency of decision making. Any suggestions to improve the e-filing system and FIPB procedure are welcome. 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 2010-2012. 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. India disallowed overseas corporate bodies (OCB) to invest in India.

On 14 September 2012, Government of India allowed FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up to 51% and in single-brand retail up to 100%. The choice of allowing FDI in multi-brand retail up to 51% has been left to each state. But Government of India does not allow foreign e-commerce companies to pick-up 51% stake in multi-brand retail sector in business-to-consumer space citing regulatory issues, problems in checking inter-state transactions in e-commerce activities In its supply chain sector, the government of India had already approved 100% FDI for developing cold chain. This allows non-Indians to now invest with full ownership in India's burgeoning demand for efficient food supply systems. The need to reduce waste in fresh food and to feed the aspiring demand of India's fast developing population has made the cold supply chain a very exciting investment proposition. Foreign investment was introduced by Prime Minister Manmohan Singh when he was finance minister (1991) by the government of India as FEMA (Foreign Exchange Management Act). This has been one of the top political problems for Singh's government, even in the current (2012) election. FDI and Indian economy With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalization of the economy since the early 1990s as well as gradual opening up of the capital account [14]. As part of the capital account liberalization, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations.

The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 201011 from US$ 27.1 billion in the preceding year.

FDI Inflows by Sector Cumulative FDI inflows reached just over US$60 billion between August 1991 and July 2007. Since 2002, some sectors such as electrical equipment, services, drugs and pharmaceuticals, cement and gypsum products, metallurgical industries have also been doing very well in attracting FDI. The electrical equipment sector and the services sector in particular received the largest shares of total FDI inflows between August 1991 and July 2007. These were followed by the telecommunications, transportation, fuels, and chemicals sectors [15]. The Department of Industrial Policy and Promotion has recently modified the classifications of the sectors and data released from August 2007 has been based on the new sectoral classifications.

According to that classification, the top performers are the services and computer software & hardware sectors. Clearly, India has attracted significant overseas investment interest in services. It has been the main destination for off-shoring of most services as back-office processes, customer interaction and technical support (UNCTAD, 2007). Indian services have also ventured into other territories such as reading medical X-rays, analyzing equities, and processing insurance claims. According to some reports, however, increasing competition is making it more difficult for Indian firms to attract and keep BPO employees with the necessary skills, leading to increasing wages and other costs.

Cumulative

FDI

Inflows,

August

1991

to

July

2007

(US$

millions)

Source: Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India. Note: ** Year-wise/data available from January 2000 onwards only.

Cumulative

FDI

Inflows,

April

2000

to

Dec

2007

(US$

millions)

Source: Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India Statement on RBI'S regional offices (with state covered) received FDI equity inflows1 (from April 2000 to January 2012): Amount Rupees in crores (US$ in Millions) S. No. RBIs Regional State covered 200920102011-12 Cumula tive %age to total

Office

10 (Apr.Mar.) 39,409 (8,249)

11 (April ( Apr.- Jan.) March) 27,669 39,758 (6,097) (8,564) -

1.

MUMBAI

2.

NEW DELHI

3.

BANGALORE

MAHARASHT RA, DADRA & NAGAR HAVELI, DAMAN & DIU DELHI, PART OF UP AND HARYANA KARNATAKA

Inflows (April . 00 Jan. 12) 241,228 (53,632)

Inflows (i n terms of US$) 34

46,197 (9,695) 4,852

12,184 (2,677) 6,133 (1,332) 6,115 (1,352)

33,089 (7,114) 5,776 (1,240) 6,115 (1,352)

146,778 (32,202) 42,434 (9,468) 36,602 (8,082)

20

4.

CHENNAI

(1,029) TAMIL NADU, 3,653 PONDICHERR Y (774)

5.

AHMEDABAD

GUJARAT

3,876 (807) 5,710 (1,203)

3,294 (724) 5,753 (1,262) 426 (95)

4,234 (902) 3,697 (779) 1,732 (377)

35,927 (8,058) 30,259 (6,740) 8,100 (1,864)

6.

HYDERABAD

ANDHRA PRADESH

7.

KOLKATA

8.

CHANDIGAR H`

WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR ISLANDS CHANDIGARH , PUNJAB, HARYANA, HIMACHAL PRADESH

531 (115)

1,038 (224)

1,892 (416)

203 (44)

4,888 (1,068)

9.

BHOPAL

10 . 11 .

PANAJI

MADHYA PRADESH, CHATTISGAR H GOA

255 (54) 808 (169) 606 (128)

2,093 (451) 1,376 (302) 167 (37)

527 (114) 123 (26) 1,731 (363)

3,537 (768) 3,449 (751) 3,389 (730)

KOCHI

KERALA, LAKSHADWE EP

12 . 13 . 14 . 15 .

JAIPUR

RAJASTHAN

149 (31) 227 (48) 702 (149) 51 (11)

230 (51) 514 (112) 68 (15) 37 (8)

111 (23) 602 (133) 122 (27) 5 (1)

2,561 (544) 1,414 (310) 1,329 (288) 321 (73)

0.3

KANPUR

BHUBANESH WAR GUWAHATI

UTTAR PRADESH, UTTRANCHAL ORISSA

0.2

0.2

16 . 17 .

PATNA

ASSAM, ARUNACHAL PRADESH, MANIPUR, MEGHALAYA, MIZORAM, NAGALAND, TRIPURA BIHAR, JHARKHAND

0.1

25 (5) 20,543

58 (11) 24,786 (5,241) 122,307 (26,192)

85 (17) 160,533 (35,376) 722,834 (159,97

REGION NOT INDICATED

15,056

20

SUB. TOTAL

(3,148) (4,491) 123,120 88,520 (25,834 (19,427

100

18 .

RBI'S-NRI SCHEMES (from 2000 to 2002)

) 0

) 0

3) 533 (121) 723,367 (160,09)

123,120 88,520 GRAND TOTAL (25,834) (19,427 4)

122,307 (26,192)

FINANCIAL YEAR-WISE FDI INFLOWS DATA AS PER INTERNATIONAL BEST PRACTICES: (Data on FDI have been revised since 2000-01 with expended coverage to approach International Best Practices) (Amount US$ million) S.No. Finan cial Year (AprilMarch ) FOREIGN DIRECT INVESTMENT (FDI) Equity ReOthe invest r ed capit al FIPB Equity earnin + Route/R capital of gs BIs unincorpo Automat rated + ic Route/ bodies # Acquisiti on Route FDI FLOWS INTO INDIA Investme nt by FIIs Foreign Institutio nal Investors Fund (net)

Total FDI Flow s

%age growth over previou s year(in US$ terms)

FINANCIAL YEARS 2000-2012 1. 2000-01 2,339 61

1,350

279

4,029

1,847

2.

2001-02

3,904

191

1,645

390

6,130

(+) 52 %

1,505

3.

2002-03

2,574

190

1,833

438

5,035

(-) 18 %

377

4.

2003-04

2,197

32

1,460

633

4,322

(-) 14 %

10,918

5.

2004-05

3,250

528

1,904

369

6,051

(+) 40 %

8,686

6.

2005-06

5,540

435

2,760

226

8,961

(+) 48 %

9,926

7.

2006-07

15,585

896

5,828

517

22,826

(+) %

146 3,225

8.

2007-08

24,573

2,291

7,679

292

34,835

(+) 53 %

20,328

9.

2008-09

31,364

702

9,032

776

41,874

(+) 20 %

(-) 15,017

10.

2009-10 (P) (+) 2010-11 (P) (+)

25,606

1,540

8,668

1,93 1 658

37,745

(-) 10 %

29,048

11.

19,430

874

11,939

32,901

(-) 13 %

29,422

12.

2011-12 26,192 (P) ( April -

850

9,100

2,20 4

38,346

2,745

January 2012) CUMULATIVE 162,55 TOTAL (from 4 April 2000 to January 2012) Source:

8,590

63,198

8,71 3

243,05 5

106,123

(i) RBIs Bulletin March 2012 dt. 13.03.2012 (Table No. 44 - FOREIGN INVESTMENT INFLOWS). (ii) "#" Figures for equity capital of unincorporated bodies for 2010-11 are estimates. (iii) (P) all figures are provisional (iv) "+" Data in respect of Re-invested earnings & Other capital for the years 2009- 10 , 2010-11 are estimated as average of previous two years. (v) RBI had included Swap of Shares of US$ 3.1 billion under equity components during December 2006. (vi) Monthly data on components of FDI as per expended coverage are not available. These data, therefore, are not comparable with FDI data for previous years.

The scintillation and spectrum of FDI in Indian market India has been ranked at the second place in global foreign direct investments in 2010 and will continue to remain among the top five attractive destinations for international investors during 2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012 [16]. The 2010 survey of the Japan Bank for International Cooperation released in December 2010, conducted among Japanese investors, continues to rank India as the second most promising country for overseas business operations.

A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14. According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010 [17]. However, it is ranked the 2nd most attractive destination following China in the next three years. Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more Canadian firms are now focusing on India as an investment destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010 [18]. India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP). The services sector comprising financial and non-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDI worth US$ 2,853 million during AprilDecember 2010, while telecommunications including radio paging, cellular mobile and basic telephone services attracted second largest amount of FDI worth US$ 1,327 million during the same period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066 million followed by power sector which garnered US$ 1,028 million during the financial year April-December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024 million [19]. During April-December 2010, Mauritius has led investors into India with US$ 5,746 million worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with US$ 1,055 million, according to data released by DIPP.

2.3 Historical Evolution of FDI

Financial flow and investments across different nations were started from nineteenth century as part of colonial power by British Empire. To make smooth colonial operations in transporting and developing goods British Empire invest in their colonies in a wide range. The colonial activities form other European countries also initials foreign investment to different colonies. British consumer goods and industrial sector involved in FDI The world war disrupts the flow of money to colonies and they starts investing in technology and resources to support the war. The dominancy of United States in technological and financial areas as a after math of world wars brings a new face FDI flow. Emergence of US as superpower made that regions as most FDI inflow and outflow processing nation. Teeple(2000) states that increase in international integration of economies, globalisation and FDI builds changes in global economy after second world war. The need of better transportation and infrastructure in developed countries and developing countries makes a initiation to FDI flows. On 1980 major developed countries adopt FDI policies where major participants are US and Japan the lowers saving rate and disposable income of US individual make contribution to society and economy; this makes a major attraction for investors in this region. From 1980s boom through economic growth and merger and acquisitions boom led to a rise in FDI. Aizenman (2002) argues that developing economies and organisation make more out of this concern and which lead to increased revenue for multinational corporate. From the beginning of 90s FDI is mostly a factor discussed in multinational organisations and stock exchange.

Fig 2.1: Shares of Transition and developed countries in Global FDI flow (percent) (Source:UNCTAD 2010) The participation of transition ad developing economies in global FDI flow is represented here. The growth of FDI for developing countries from 2000 to 2004 makes remarkable changes in these economies; currently it is high all time high reaching 50 % of global FDI. The dependency of investments on price of petroleum and gold affect the flow of FDI. The decline of FDI from 2004 to 2008 shows the higher price of petroleum and outflow is increased to attain economies of scale. The lack of return on investment and concise reinvestment schemes of corporate take away interest of investors from foreign investment. This affects FDI flow to developing economies, even though ultra booming countries like brazil, china, India and Mexico attain benefits through portfolio investment and bank lending. The increase in technological innovations makes significant progress in Globalisation and FDI flow . technological advance helps rapid improvement in communication and infrastructure of developing countries. The growth in transportation and

communication and ease of avoiding production interest rate makes a focus in FDI flow. The increase of Mergers and acquisitions(M&A) lead to growth of FDI form 80s to 2000. The sharp fall of mergers from 2000 affects FDI flow. The similarity in fund flow for FDI and M&A is significantly supports financial flow through different economies through organisations. Economies with larger M&A operations acquire higher FDI inflows and M&A acts as tool to advance technologically and to compete with challenging issues in market.

Current Status: Indias retail industry accounts for 10 percent of its GDP and 8 percent of the employment to reach $17 billion by 2010. The Indian retail market is estimated at US$ 350 billion. But institutionalized retail is estimated at only US$ 8 billion. However, the opportunity is huge-by 2010, institutionalized retail is expected to grow at 6 per cent by 2010 and touch a retail business of $ 17 billion as against its current growth level of 3 per cent which at present is estimated to be $ 6 billion, according to the Study undertaken by The Associated Chambers of Commerce and Industry of India (ASSOCHAM). Indian retailing is clearly at a tipping point. India is currently the ninth largest retail market in the world. And it is names of small towns like Dehradun, Vijayawada, Lucknow and Nasik that will power India up the rankings soon. Institutionalized retail in India has the potential to add over Rs. 2,000 billion (US$45 billion) business by the Year 2010 generating employment for some 2.5 million people in various retail operations and over 10 million additional workforces in retail support activities including contract production & processing, supply chain & logistics, retail real estate development & management etc. It is estimated that it will cross the $650-billion mark by 2011, with an already estimated investment of around $421 billion slated for the next four years. FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand Retailing was, however, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows during the period, under the category of single brand retailing. The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products etc., covering high-end items. Single brand retail outlets with FDI generally pertain to high-end products and cater to the needs of a brand conscious segment of the population, mainly attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific brand. This segment of customers is distinctly different from one that is catered by the small retailers/ kirana shops.

Problems: There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions [1] . As per some industry estimates, 25-30% of fruits and vegetables and 5-7% of food grains in India are wasted [2] . Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant. Intermediaries dominate the value chain. They often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of institutionalized retail [3] . A study commissioned by the World Bank attributes the export non-competitiveness of Indias horticulture produce to its weak supply chain. The study shows that the average price that the farmer receives for a typical horticulture product is only 1215 per cent of the price the consumer pays at a retail outlet [4] . There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a farm-to-fork retail

supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages. The MSME sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of uninstitutionalized sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08 [5] . This has largely been due to the inability of this sector to access latest technology and improve its marketing interface. Entry of foreign players must be gradual with social safeguards so that the effects of labour dislocation can be analysed and policy fine tuned. Foreign players should initially be allowed only in metros. The CPAS study also argued that the two facts, i.e. that the uninstitutionalized retail sector of small and medium retailers employs over 40 million; and that we have 11 retail outlets for every 1000 people5, suggests a considerable element of forced employment in this sector. The reality of jobless growth only adds to the forced employment. Mind you only 4% of Indias 11 million retail outlets have floor areas in excess of 500 sq.ft6. This should dispel any image of any preponderance of large-scale retailing we may have derived to the size of the old established downtown retail outlets and in the new suburban malls. Retail in India is mostly the millions of tiny shops with pucca and semi-pucca premises, and millions more on handcarts and pavements. Hence the CPAS study argued that entry of large format mass retailers like Wal-Mart is fraught with many risks. The National Sample Survey relating to household expenditures as evidenced by Table 6 are revealing. Fruits and vegetables only account for 9.88% of urban household expenditure9. It is widely agreed that the supply chain that links the Indian producer to the domestic consumer is primitive, outmoded and wasteful. Many studies exist that detail the extent of wastage. We will readily concede that large format retailing with its capacity for bulk procurement and capital investment, even if it accounts for a fraction of the retail trade in the sector, might be able to make some headway in modernizing the supply chain. But this does not make FDI imperative. This experience should open the eyes of those who argue that our farmers will gain preferential entry into international markets by the likes of Wal- Mart. In case the coffee experience is not convincing lets consider other such experiences. The cocoa farmers of Ghana now receive only 3.9% of the price of a typical milk chocolate bar but the retail margin hovers around 34.1%. A banana farmer in South America gets 5% of the retail price of the banana while 34% accrues

to distribution and retail. For value added clothing items such as jeans, no less than 54% of the final price goes to the retailers, while the manufacturing labor gets around 12%19. Apart from the disadvantageous terms of trade for producers in developing countries, the situation is worsening steadily for primary products everywhere vis--vis the concentrated bargaining powers of the multinational retail giants. The MNCs will deal with only the large-growers, fix prices in advance and the system of transparent auctions in Mandis will be bypassed. Since no two supermarket chains will operate in the same domain, farmers will have no choice but to comply with the lower prices offered by the retailer. The supermarket will earn premiums from customers for improved quality; the rejects will be dumped on the local farmers lowering their earnings. Our farm sector is in a deep crisis as it is, and we should not invite any more trouble. Manufacturing sector in India must be developed to address the dislocation of existing retailers.
Prospects: It is estimated that India will need substantial investment to develop infrastructure for supporting retail development. A significant portion of this will need to be earmarked for up gradation of the supply chain for fruits & vegetables. A major portion of his investment is expected to come from the private sector, for which an appropriate regulatory and policy environment is necessary. FDI's potential for impact can be greater because of the combination of scale, capital, and global capabilities which allow MNCs to close existing large productivity gaps more aggressively. FDI can be a powerful catalyst to spur competition in industries characterized by low competition and poor productivity. Examples include the cases of consumer electronics in Brazil and India, food retail in Mexico, and auto in China, India, and Brazil. Increasingly, foreign direct investment is integrating developing countries into the global economy, creating large economic benefits to both the global economy and to the developing countries themselves. Industry restructuring enables global growth as companies reduce production costs and create new markets. For the large developing countries, integrating into the global economy through foreign direct investments improves standards of living by improving productivity and creating output growth. The biggest beneficiaries from this transition are consumers - both global consumers that reap the benefits from global industry restructuring, and consumers in the host countries that see their purchasing power and standards of living improve.

In the initial stage, FDI up to 49% could be allowed to enable domestic players to enter into joint ventures have access to investment, technological know-how and best management practices while retaining management control. The 2008 study has observed that institutionalized retail, which now constitutes a small four per cent of the total retail sector, is likely to grow at a much faster pace of 45-50 per cent per annum and quadruple its share in total retail trade to 16 per cent by 2011-12. However, this represents a positive sum game in which both uninstitutionalized and institutionalized retail not only coexist but also grow substantially in size. The BMI India Retail Report for the third-quarter of 2010, forecasts that the total retail sales will grow from US$ 353 billion in 2010 to US$ 543.2 billion by 2014. With the expanding middle and upper class consumer base, there will also be opportunities in India's tier II and III cities. The greater availability of personal credit and a growing vehicle population to improve mobility also contribute to a trend towards annual retail sales growth of 11.4 per cent. Mass grocery retail (MGR) sales in India are forecast to undergo enormous growth over the forecast period. BMI further predicts that sales through MGR outlets will increase by 154 per cent to reach US$ 15.29 billion by 2014. This is a consequence of India's dramatic, rapid shift from small independent retailers to large, modern outlets. Moreover, for the 4th time in five years, India has been ranked as the most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney in its 8th annual Global Retail Development Index (GRDI) 2009. India remains among the leaders in the 2010 GRDI and presents major retail opportunities. India's retail market is expected to be worth about US$ 410 billion, with 5 per cent of sales through institutionalized retail, meaning that the opportunity in India remains immense. Retail should continue to grow rapidlyup to US$ 535 billion in 2013, with 10 per cent coming from institutionalized retail, reflecting a fast-growing middle class, demanding higher quality shopping environments and stronger brands, the report added. Bharti Retail strengthened its position in northern India by opening 59 stores, Bharti Wal-Mart is expected to open 10 to 15 wholesale locations in the next three years, and Marks & Spencer is considering plans to open additional outlets in the next few years. The Government of Indias Department of Consumer affairs in collaboration with the Indian Council for Research on International Relations (ICRIER) has published FDI in Retail Sector INDIA in June 2005. The study strongly advocates that foreign direct investment should be allowed in retailing since it would speed up the growth of

institutionalized formats, without offering any valid reasons as to why the growth of institutionalized formats is so important. It further states, In the initial stage FDI upto 49% should be allowed which can be raised to 100% in 3 to 5 years depending on the growth of the sector. FDI cap below 49% (i.e. 26%) would not bring in the desired foreign investment. It admits Foreign Retailers have pointed out that setting up of manufacturing base in India is difficult since the infrastructure is poor, labor laws are unfriendly, etc.11 If this ridiculous argument is carried to its logical limit, India will then have to import just about all manufactured goods. FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption. So far the Indian economy has been heavily geared towards the service sector that contributes 56% of our GDP. The service sectors contribution to the increase in GDP over the last 5 years has been 63.9%. Having a high contribution from services is an attribute that is characteristic of developed economies. What is anomalous in the Indian case is the fact that in other fast developing economies, say China, manufacturing accounts for a significant share of GDP, whereas in India, manufacturing contributes a mere 23.1% of the GDP. It is evident that the manufacturing sector has been the engine for economic growth in China, which has been growing at 10.1% since 1991.22 In India; the credit for its 5.9% growth over the corresponding period goes mostly to the service sector. Ironically it would seem that the Indian economy is getting a post-industrial profile without having ever been industrialized! Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process. If there arent any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy. One could argue that the alarmingly low contribution of industry is attributable to the structural adjustments going on in the sector, getting rid of the flab and getting ready to compete, but that still cannot undermine the seriousness of the issue at hand, in that only 6.22 million out of a productive cohort of 600 million is employed in institutionalized manufacturing. Gradual opening up of the retail segment for FDI will work to the advantage to both the consumers and existing retailers. While consumer will have variety of global standard branded goods and services to choose from and that too at reachable cost. The existing retailers will be saddled with a host of unseen opportunities like joint

ventures with foreign partners apart from avenues to upgrade their technologies, systems etc. More importantly FDI in retail in India would help generating millions of jobs for the teeming jobless numbers in India. A conservative estimate puts the number of direct jobs at one million in three years. More importantly revitalized retailing necessitating a never ending supply chain of goods and services will infuse new life into the manufacturing sector, especially agriculture, food processing, small and medium enterprises and handicrafts creating avenues of indirect employment for many more millions. At the macro level, FDI in retail will enable Indian economy to integrate with the global economy. It will help to overcome both the lack of experience in institutionalized retailing as well as lack of trained manpower. FDI in retail would reduce cost of intermediation and entail setting up of integrated supply chains that would minimize wastage, give producers a better price and benefit both producers and consumers. From the stand point of consumers, institutionalized retailing would help reduce the problem of adulteration, short weighing and substandard goods

2.4 Theories of Foreign Direct Investment

In 1960 FDI considered as flow of investment through economies. Later on it changes to transfer of technology, capital along with managerial and organisation skills. The transfer of resources form organisations or between participant parties become the later focus of FDI. The theoretical version of FDI until 1960 based on neoclassical theory of capital movements, elaborating that movement of capital from lower return on investment economies to higher return on investment economies.

2.4.1 Hymers theory

Hennart(1994) states that international difference in interest rates are the motivation factors of FDI. Hymer(1960) finds direct and portfolio investment are similar where direct investments are carried out by manufacturing firms and financial organisations participate in portfolio investment. Hymer added his findings on reason to invest in single nation rather than spreading the risk to multiple nation investment. He added that FDI is a tool where investors have the control over production activities of foreign organisation. Hymers theory of FDI looks up on barriers on economic entrance and it may depend on legal system, economy and government of that nation. This may act as a barrier for international production. 2.4.2 Caves Theory

Caves (1971) added certain factors to hymers theory. Caves distinguished between Vertical FDI and horizontal FDI. The entrance of same product stream in different region is horizontal FDI where entering to different stage of production or product line at another region shows vertical FDI. Intention of Horizontal FDI due to unique assets of foreign companies and it may depend on two characteristics as well. The first feature is the ownership of asset will be a public good within the firm and the second one states the profit made through the asset in host country must be depend upon production in that region. Vertical FDI is mostly focussed on range of profit attained from foreign markets. The dependency to long term prices and investments is huge which ensure that market structure is characterised by limited suppliers. 2.4.3 Internalisation theory This theory is based on the Caoses theory of the firm (1937) which examines the transaction cost in organisation formation. The cost of internalisation and cost of market price and negotiation to enforce contracts is high. Internalisation process is develops to explain organisations internal production and FDI. Training, research, development and other major operation of organisations are liked financial market. When the market for intermediately products is imperfect then the incentives arises for the firm to internalise the provided benefits which exceeds the cost. Another intermediate product in FDI is knowledge; it may lead to internalisation and internationalisation. The delay in developing knowledge through research and

development is highly affected in financial terms. The internalisation if knowledge leads to bilateral concentration of power and to uncertain outcomes. 2.5 Models in FDI The emphasis of FDI in a selected region may lead to development and growth in the recipient economy. On other side foreign investors may bring a domestic setting in the recipient country or distortion impact on the countrys economy which may lead to market imperfections. The models of FDI discuss the Concept and effect of FDI (Moran 1998)

2.5.1 The Benign Model The model describes the FDI role to breakout the vicious cycle of restricting underdevelopment. The factors lead to underdevelopment covers lower productivity, lower remuneration which cause lower savings and lower investment. These factors may cause poverty in unfavourable conditions economic and political conditions. Gillis et al.(1996) states that FDI can break this factors of underdevelopment by contributing more effective marketing, technology and management for better

productivity, Increased productivity help to improves the remuneration and saving level of the population. Advantage in national income depends on capital and elasticity of demand to attain capital. FDI improves efficiency and productivity of host country, additional investment along with social and economic interaction produce completion in market with less return to capital. Completion leads to demand of skilled labour and there by equalising the income distribution, education level and healthcare for the society. This model makes advantage to the host countrys economy together with improved life circumstances in the region. 2.5.2 The Malign Model The model links operations of multinational corporations in interested regions for better return and reinvestment. The FDI may cause to social intervention, increased pollution, Thwart passage of law, Minimum wage requirements. Cardoso and Dornbusch (1989) states FDI provides multinational companies can compete with the domestic players in imperfect completions and drive domestic producers out of the market . These may lead for importing good under the label of multinational companies. The decreased job offers may increase the demand of skills to get employed and lower remuneration.

The strength of technology and management from multinational organisations make oligopoly in market and few international players in region. The reinvestment from multinational companies to related industries ruins the small scale producers and they loose the market power. On this situation purchasing power of the regional customers will fall down to selected options and they were forced to use the limited availability in market.

2.6 Host economy and FDI

Multinational enterprises are more capital intensive in economies where skilled labour and productivity is high. The benefits of FDI is not only direct investment and attraction to economy, there may be indigenous spill overs. This can act in two ways: market access spill over and productivity. The market access spill over happens when local firm in economy get exact knowledge about distribution network and host markets of Multinational Enterprise. Productivity spill over happen when Multinational enterprise increases the productivity of domestic firms. Markusen and Venables (1999) analyze the effect of foreign firms on the development of domestic firms in the industrial sector. In their model, foreign companies compete with domestic producers while creating additional demand for domestically produced intermediate goods through linkages with local suppliers. This can lead to domestic firms entering into the intermediate goods sector, which can result in lower costs that, reflected in lower final prices that increase demand, can benefit domestic firms producing final goods. The host economy can improve imports and reduce exports through the promotion of FDI. This may affect exporting regional goods to foreign markets. The FDI can help in short term to make infrastructure and development plans for the host economy.

2.7 Indian Manufacturing Industry To attract FDI oriented invest which can be translated to gains in development , India find the best effective ways through the choice of target industries which are performing best in export activities . Multinational corporate works on these industries to invest more through FDI. The globalised world gives more opportunity to people associated with business sector. The competition in quality of export goods and achieving market share in foreign markets give impulse to manufacturing industry of India. The availability of expertise and infrastructure at cheaper cost helps Indians to

make out more from foreign investments. Access to FDI benefits manufacturing industry especially to established brands and their distribution networks. FDI can support manufacturing industry by training, technology, intermediate inputs and capital goods to develop the comparative advantages of Indian economy. Manufacturing sector is the key industry for foreign investors in any economy. The foreign affiliates exploit themselves to be leaders in marketing and export oriented manufacturing. The linkage between the distribution channel and marketing is highly crucial in this context. The role of FDI in manufacturing sector may be direct or indirect. When exporting foreign affiliates make a deal or backstage link with local firms it lead to direct investment. The indirect investment rises when the local firms copy the operations of foreign firms in local economy and benefiting in manufacturing, infrastructure and business operations in demand to foreign companies. The relationship between FDI and exports are complements and substitutes. The substitutive relationship states the assumption of international trade between factor endowments and factor prices which are specifically meant for homogenous products. These differences become smaller when the globalisation context came into practise the import tax reduction reduces exports as well which encourage FDI.

.
2.8 Indian Retail Industry The key sector of focus for FDI is Indian retail industry. The availability of huge population and meeting the demands of them is at the attraction for foreign investors in this industry. The retailing provides interface between customer and the produces which is for personal consumption. The institutional buyers also use retailing industry but majority purchase from intermediates in marketing chain. A retailer stocks produces goods and sell the product for individual consumer to make a marginal profit. The retailing links the customer with the products and marketing chain. The Indian retail industry is in a booming stage of development. Reports from AT Kearney, the well-known international management consultancy states that Indian is the second most attractive retail market in world market. Indian retail industry provides the contribution of 14 % of national GDP and providing employment to 7% of national work force.

Indian retail industry is categorised as organised and unorganised business sectors. The organised sector refers to trade undertaken by licensed retailers which they

submit, at tax returns and benefits to employees. The supermarkets and hypermarkets along with large stores under private ownership will come under this sector. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

Super stores and hyper markets are operating in major cities only where they fail to sustain in regional markets with competition with unorganised retailers. The retailers in organiaed industry are finding difficulty to attain breakeven in financial figures. The huge expense of labour and operational expense is failed to meet through profit. This makes a negative impact on FDI in Indian industry. Meanwhile superstores are highly successful in major cities and regional towns. The cost effectiveness in still not attained by superstores competing with unorganised retailers. The new wave of mass purchasing in higher rates and selling in cheaper rates to attract customers will help super stores to gain market share. Their strategy focus on changing the market situation by grabbing market interest and share. The fear stays that when they gain market share they will buy for less and sell for more. Unorganised retailers are advantage for middle class segments in Indian economy. The new wave attracts Foreign investors and organisations like Wall-Mart and Tesco to enter Indian market through collaborative alliances. Existing super store chains like big bazaar and Total is hardly making profits out of their business operations. On this context we evaluate the effectiveness of FDI in Indian market.

2.9 Previous Studies On Indian FDI


Several recent studies are identified in Indian FDI industry. Certain key reports are considered in reference to my report. Private Foreign investment in India (Suma and Sandeep 1990), FDI in Indias retail sector More bad than good?(Mohan et al: 2010), A critical analysis of Foreign Direct investment in India ( Kulwinder 2005) is referred in addition to Indian governments manual on foreign direct investment

policy and procedures. The support of UNCAD report 2010 gives a direction to make out the research. The flow of international FDI and the importance of Indian economy is realised through that report. The guidance field and policies of Indian government On FDI makes a clear picture of restrictions and procedures to make a FDI in India.

The advantage of portfolio investment rather than investing directly to a particular organisation is identifies to these reports. Previous studies are referred to gain knowledge and link with conceptual model.

2-10 Different Motives of Foreign Investment


Different types of FDI motives are used by investors to invest in a booming economy in search of economies of scale. Chryssochoidis, Millar & Clegg(1997) states that five different types of foreign direct investment (FDI) are used by foreign investors to enter a foreign market. The glossary of types of investment are investing in factors of production, search of low cost labour, mutual investment in cross-share holding, reaching foreign customers and diversion in regional integration. The first motive is to take access of factors in production technology, patents, brands and even ownership of a company on host economy. When these factors are not at all fruitful to gain return on investment the foreign investors will invest locally or search another economies for benefits. The globalisation makes a trend of technical dominancy for organisation and cost-effectiveness in production. The second motive is stated by Raymond Vernon that FDI is part of product life cycle. When company seeks cheaper modes of production in resources and labour FDI will enact in Organisation. The support from government of host country wills exploits this strategy of development. The subsidies and tax deduction to promote this strategy may focus foreign investors to invest in that organisation. The joint venture operations are feasible in this motive to attain collaborative efforts to integrate technical expertise and economic advantage. Though FDI can utilise through collaboration with local manufacturers, Major motive is to gain benefit through alliance. The third motive focus on sustaining in global competition through cross-share holdings and joint venture. The investment in R&D is focus of FDI in certain economies, especially in India. The availability of skilled employees and expertise can be used for research to develop new technologies, which can be taken to cheaper economies for production. The mutual investment of organisations in each other shares is also part FDI where they promote production and sub-product specialisation. Through this move of FDI organisations support each other on specific products. The fourth motive of FDI is to reach foreign customers in host country. The export of good from one economy to another for the reach of customer is not feasible for major products. To reach customers through products manufacturing in host

country may be essential, the changes in design specification and tactical moves can be obtained easily though regional manufacturing than exporting. This factor leads to develop manufacturing units and market chain in host country. FDI plays a vital role through this motive in most economies. The last and fifth motive of FDI is regional integration from diversionary aspect. The location advantage is key in this motive. The barriers and over expense due to taxes, tarrifs in home country may lead to decision of shifting manufacturing to different economy. This makes multinational organisations to local companies to shift their production operations to better economies with limited tax and operational expenses. The trade barriers can be over come through this decision along with gaining a new market presence in new economy.

2.11 Conceptual frame work of Research


Based on the knowledge acquired from the literature and on the way to pursuing the objectives I derived a conceptual framework for collecting information in Data analysis chapter under this frame. The methods used to collect information are mentioned in the research methodology chapter. The models states different sources of FDI summing up investments on all segments of National industries. The choice of manufacturing and retail industry makes direct investment i manufacturing and port folio investment on retail due to restriction for direct investment in retail industry. The domestic investment and FDI contribute to national savings. Based on this frame work I analysed data with support to previous studies in foreign investment in India.

National savings

Domestic Investment

Manufacturing Industry

Retail Industry Overall Market segments

Foreign Investment Direct Investment Portfolio Investment

Fig 2.2: Conceptual framework (Source: based on authors analysis)

CHAPTER 3 RESEARCH METHODOLOGY

In this chapter I discuss about methods and practices followed in my Research to find out objectives of research mentioned in Chapter 1. Different research practices

are used to find out datas relating to research topic. The constraint of time delimited my efforts to wide data collection strategies. Primary data collection is not feasible for my economic condition alond with the time constraint. The secondary data collection is used for the purpose using different secondary data collection methods. The research onion process five layers in developing research methods. These layers are mentioned in the figure given below.

Fig 3.1: Research onion (Source: Saunders: 1993)

3.1 Research Philosophy

The way of thinking about knowledge development about research is dependent with the choice of research philosophy. Researchers thinking way for finding the data based on objectives are specified through research philosophy. Different views of research philosophy are realism, interpretivist, and positivism(Saunders, Lewis and Thornhill, 2003:95-97). Epistemological philosophical Approach gives more concern about acceptable knowledge and resources for applying in research. Positivist philosophy refers to be useful to natural scientists on observing natural things and making a law or theory at the end of research. Researcher acts as a objective analyst in this sort of philosophy (Bryman and Bell, 2003:25).To avoid

replication and for using statistical analysis a certain emphasis is used in this philosophy. Realism philosophy is specifically based on existing reality which is independent of beliefs and thoughts of a human. The realism philosophy relates to positivism in certain aspects. Interpretivist philosophy is similar to positivism where the researcher sympathise on positivism arguments with rich insights into complex world for reduced complexity. On other side, when the researcher posses strongest argument rather than sympathising the positivism, then it is constructionism philosophy. Axiological philosophy deals with ethical and aesthetic considerations of research. Ontological philosophy makes use of finding realistic issues in research topic. In my research I follow Interpretivist philosophy to analyse the FDI impacts in manufacturing and retail industry of India. I used realism philosophy which supported me to accept certain realistic factors associated with research findings.

3.2 Research approach


The support of theory or literature and depth of knowledge about theory is states in research approach. Two kinds of research approaches are generally used by researchers which are inductive and deductive approaches. Deductive approach focuses on developing a hypothesis based on researchers knowledge and the research is meant for testing or proving the hypothesis to realistic context. Inductive approach focus on collecting data and knowledge to make theory or hypothesis. In inductive approach the purpose of research is to make a theory through data analysis. While linking this approach with philosophy of research inductive approach refers to interpretivist and deductive approach refers positive philosophy. In deductive approach developing a hypothesis by researchers knowledge or relating two paradigms for the purpose and testing the hypothesis through research

operations. Through examinations and analysis modifications of theory is applied at the end of research. Inductive approach is less structured and allows more flexibility for alternative explanations than rigd approach of deductive method (Collis and Hussey, 2003:15). Inductive approach is used in this research to find independent variables Under FDI context. These variables are evaluated as reasons for FDI flow to certain economy. This approach helps me to use previous studies based on deductive approach.

3.3 Research Strategy


While choosing a research strategy I found difficulty of choice a particular strategy for my research purpose. Consideration of time, financial and academic ability of mine, I preferred a better strategy for my Research. Research strategies are highly prone to research strategy, which are dependent with inductive and deductive approach. The different research strategies are survey, experiment, grounded theory, case study, ethnography, action research, exploratory, descriptive, explanatory studies including cross sectional and longitudinal studies(Saunders, Lewis and Thornhill, 2003:85-98).

In my research I chose case study strategy for developing the research Knowledge to make out analysis of research. Case study strategy follows strategy for doing research with a particular phenomenon with in real life context with usage of multiple evidence form different sources. In this research I used different sources to investigate the channels of FDI to Indian economy and i confirm it through validation of data by matching it with differtn sources. Case study usage as strategy helps to answer various What why and how in research context (Yin, 1994). This strategy supports data collection through documentary analysis, observing the context , conducting interviews and through questionnaires. I un scientific feel of case study strategy is avoided through knowledge on theory and interpreting previous studies on the topic.

3.4 Time horizon


Conducting my research as part of academic study delimits my research time span to short term of 75 days. These days restricts me to acquire knowledge about my research topic and framing the research to reach the objectives. The search f choosing a methodology pulls me back and get confirmed with case study strategy. The feasibility study of myself to arrange interviews under this time frame limits me to case study strategy. The time horizon specifies on snapshot or dairy model of outcome for research. Snapshot refers to cross sectional study and dairy refers to longitudinal study of research topic. Cross sectional studies always follow survey strategy (Easterby-Smith et al.,2002;Robson,2002) and its specifies on a certain study at certain time span. Qualitative methods are used in this sort of studies. Longitudinal studies posses the capacity to study about development and change. Scvaneveldt and Adams (1991) states that research is able to exercise a measure of control over different studies through observing people. Longitudinal studies flows the saying has there been any

change over a period of time?(Bouma and Atkinson, 1995:114 cited in Saunders et.al:2003). In this research I follows cross-sectional study method to find objectives of research

3.5 Research process


The processing of research dependent data is specified in this part of research methodology. Tow type of research process are generally used to obtain the research data. They are qualitative and quantitative approaches of data finding. Measurement of research data through analysis and interpretation is done in quantitative data analysis. To reach a conclusion suitable to objectives and aim of research qualitative process is used by researchers using qualitative methods of data analysis. Qualitative process refers to interpretivist and quantitative process refers to deductive approach of research. (Bryman and Bell, 2003:25).

Less structured

More Structured

Interpretivist

Procedural

Inductive

Deductive

Fig 3.2: Dimensions of Qualitative Analysis(Saunders et.al:2003) Quantitative process used to deliver statistical, standardised output which refers numerical methods to reach a conclusion. Quantitative process use no-standardised data using conceptualisation and classification. Reliability and validity of research objects are key factors of making the choice of qualitative and quantitative research process. In my research i use qualitative process of study taking account of conceptualisation and classification of data according to research objectives. This helps me to process non-standardised data regarding FDI from different sources. Cochran and Dolan (1984) related difference between qualitative and quantitative research to distinction between exploratory (qualitative) and confirmatory

(quantitative) analysis.

3.6 choice of previous studies


With support of concerned literature and knowledge relating to objectives of research I choose different previous studies to support my research. Different cases are used in this research to evident my findings and data for the purpose. Private Foreign investment in India (Suma and Sandeep 1990),FDI in Indias retail sector More bad than good?(Mohan et al: 2010), A critical analysis of Foreign Direct investment in India ( Kulwinder 2005) is referred in addition to Indian governments manual on foreign direct investment policy and procedures. These previous studies on FDI in India and specific studies on retail sector investment in India supports my research process to find data and compare and validate it with their interpretations. The analysis of these previous studies provides the knowledge and gateway of finding facts and functionalities of FDI in Indian economy. To full fill my research aim as a student of Coventry University, I like to explore the resources available for me in the library and through concerned resources. The choice of different case study is upporte4d by Yin(2009) that prediction of results through findings is a literal replication process. He added that through contrasting results with anticipatable reasons prediction can be stated through replication. Choice of multiple case studies will come under literal replication. .

3.7 Data collection and credibility of findings


Research datas are supported by primary and secondary data collection methods. Primary data collection methods includes conducting interviews, makings surveys wi with help of questionnaires. Secondary case study uses resources from different sources like textbooks, journals, articles, video and audio recordings, informal conversations and websites along with previous study reports relating to research topic. The choice of case study strategy and time span forced me to stick on

secondary data collection methods. While conducting the feasibility to do interview with authorities of FDI India, my efforts didnt reach a hit to obtain it. The questionnaire process is too wide under the time span which questioners should be filled by foreign investors or stake holders of FDI in India.

Due to above reasons I choose Secondary data collection methods through different resources from Lanchester library and internet sources. An informal telephonic conversation with certain official in India makes valid knowledge and information for my research. The literature about FDI and Indian retail industry is obtained thorough historical data and text, books. Methodology chapter is derived through evaluating different research patterns and by text books relating to research framing. Previous studies in research area support me to initiate data analysis and interpretation. Based on my studies I derive a conclusion and found the area of improvement needed. this states in recommendation of report.

When using multiple data sources validation of data is critical .Yin (2009) discusses usage of data triangulation while using multiple data sources. Certain problems will be considered when data triangulation is used, issues like validation of collected data due to the conflict in different methods and phenomenon of collection. Documentation

Finding & Facts

Archive methods Discussions

Information

Figure 3.3 Triangulation of Data (Source: Based on Authors analysis) The credibility of research findings are obtained through reliability, Generalisability and validity of data. Different threats affecting the data are participant error and observer error. The participant bisas and observer bias are dependent to questionnaire interpretation and response (Saunders et.al 2003). Avoidance of ambiguity with relevant maturity in findings develops morality in entire research report. Another threats affecting the research report is testing, history and instrumentation which may be too much dependent to nature of researcher.

3.8 limitations of Research


The limitation of the research is mostly pointing to time span and delimiting to secondary sources, the unawareness of handling a research process in limited time span make a fear a the initial stage. Later on by acquiring knowledge about research topic and how to do the research, I gained confidence to tackle objectives. The major limitations I feel while doing the research is the absence of real data which are currently in Indian economy. The lack of computerised informations through websites about Indian FDI force me to chose datas of previous years as reference to the context. The lack of experience and too much dependent to secondary data is another limitation of this research.

CHAPTER 4

DATA ANALYSIS

As a largest democratic country in world, India shows consistent growth in business and investment sectors. Attracting foreign investors to India through higher levels of confidence and ensuring better benefits to investors from region. Indian positioned itself s 4th nation with higher purchasing power parity and in top list of industrialised nations. The flow of private foreign funds and direct investment from foreigners nourish Indian economy to add fuel to developing business sectors. The banking interest rate and average return on investments makes better decisions to investors in choosing their sectors. Advisory and monitoring agencies are promoting investors interest to the region. Competition with Chinese economy to make advantage of investments builds a firm strategy for Indian economists. Indian manufacturing and retail industry is highly attracted by foreign investors. The presence of one billion populations and the importance of these business sectors are explored in world economy. Here i state my analysis of FDI India based on my objectives. 4.1 FDI culture of India The economic condition of India is highly dependent with national economists. With the experience and knowledge of Dr. Manmohan singh , prime minister of India , nation attain a firm growth through political and economic stability across the nation. This reflects each sectors of business to attract foreign investors to India. Through identifying the economic reforms in India FDI is promoted by plethora of boards, agencies and committees at different business situations and time. The satisfaction and confidence provided by Indian economy and policy makers develop a substantial growth in FDI industry of nation. This flow nourishes the growth of independent business sectors in national level. The source of Indian FDI flow is mainly through two ways: allowance of 100% FDI through automatic route in business sectors giving exception to small organisations, where foreign investors need approval from government. With the concern of Reserve bank of India, foreign investors have to notify regional FDI office prior to 30 days of inward remittance. All proposals of foreign investors are processes by foreign investment promotion board (FIPB). FIPB also makes collaborative actions to make technical collaboration and alliances for product development or infrastructure development with the aid of foreign agencies or organisations. Different bodies managing FDI in the region include FIPB, Foreign investment promotion council (FIPC).Foreign investment Implementation authority (FIIA) and investment

commission for verifying the monitory usage of foreign funds in the economy.

Fig 4.1: FDI inflows to India 1990-2007 (US $ Millions)(Source: Reserve bank of India) To make assure with the satisfaction of foreign investors for their investment in region and to ensure the return on their investment organisation are working under the mentioned boards with specific management of funds, those include Project approval board(PBB) to technical projects investment, Licensing committee(LC) to cross check the rules for providing licence to foreign investors and fast track committees are working on district and state levels. Indian Investment centre (IIC) promotes the joint ventures and technical collaborations with foreign organisation to develop new trends and innovative products through Indian industrial sector. The receiving of FDI policy is done as ongoing process base d on time and changes in world economy. The liberalization of the rules is taken for national interest investments from foreign investors. 4.2 Contribution of FDI in Indian economy

The inward flow of FDI either under Government route or the Automatic route is essential to report through advance reporting form. The details of the receipt of the amount of consideration for issue of equity instrument shares are fully and

mandatorily convertible debentures and mandatorily convertible preference shares through an AD Category I Bank, together with copies of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the

Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances. Foreign direct investment inflows affect growth of economy through increased investment and technological advancing. Macroeconomic identity is used to explain FDI and domestic investment. Investment total of a period is calculated with a formula: Investment=domestic savings +foreign savings Her the foreign savings represent investment from foreign investors to Indian economy, which plays major role in national investment. the coincidence with reduction in debt inflows is accompanied by fall of deomestic savings where foreign savings aer calculates as : Foreign savings=imports-exports When foreign savings play major role in FDI it affects the Indian economy to import more goods with a fall on exports, thus it makes the dark side of FDI. But for short run FDI will help to develop the infrastructure and establishments of industrial operations. Referring to table china reduces FDI inflows from previous years to promote exporting rather than importing.

Table 4.1: FDI comparitive inward figures in Asian Region( Source:EIU 2007)

FDI can gradually increase the domestic investment in India which in turn helps for possible faster growth. The increased profitability rate in domestic markets blunt export incentive for local and foreign firms. The nature of high-cost economy affects Indian export market is not a hotspot of multinational organisations. The motivation of FDI to jump barriers of investing in India is supported by aided organisations. The rent seeking nature of FDI shows the future crisis in operational funds. Especially in IT sector, advantage in Exchange rates and low cost expertise forces European countries and US make use of Export form India. The industrial concentration and

foreign presence is related across industrial sectors. Industrial policy and control of production capacities are affecting FDI flow in Indian manufacturing sector. The critical factor against FDI in Indian retailing system is the existence of traditional retail sector. The elimination of job opportunities in traditional retail sector may develop path for FDI in retail industry. The fear of Indian population with strategic move of foreign superstores like Tesco and wall mart to make their chain of networks affects FDI flow in retail sector. The contribution of FDI to Indian economy is high for last two decades. Spill overs to local firms for productivity could be either positive or negative. Both qualitative case studies and empirical studies based on richer set of data have established the direct effect of technology transfer on domestic firms productivity, however, several other case studies have put forward varied evidence on the role of foreign investment in generating technology transfer to domestic firms

4.3 Impact of FDI in Indian Economy


The flow of private capital is witnessed in economic change of each economy. In Indian economy private capital is reaching inform of foreign direct investment makes a major impact form 1990s. The emergence of FDI as the largest source of external investment source makes a new trend in Indian economy. The scenario of Indian investment is highly interested in research and investment for multinational organisations. The reform from 1991 makes exerting pull in FDI over different

production sectors of India. The growth of infrastructure, raise of average literacy, increased job opportunity is obtained is foreign investment in addition to domestic savings. By 1990 foreign direct investment has become inevitably a key component of national development strategies for almost all the countries over the Globe and FDI was considered to be an essential to for jump-starting economic growth through its bolstering of domestic capital, productivity and employment (World Investment Report [UNCTAD], 2005: Transnational Corporations and the Internationalization on R&D). The share of individual nations in Indian FDI inflow is states in the table below the cumulative flow of funds are represented in table. The multiples source of FDI supports Indian economy in various sectors of business.

Table 4.2: Share of top investing countries in FDI inflows ( Source: GOI 2009) For last two decades the reforms have generated encouraging and favourable atmosphere for foreign investors to invest on Indian economy. Indian government Use these funds for making infrastructure and for enhancement of power and telecommunication industry. The exporting is also boosted with these funds by it in turn affects export opportunity. The motive behind promoting FDI in India is that once the infrastructure is established FDI attraction can be obtain through demand-driven operations. Indian government focus on manufacturing sector to utilise FDI funds from 2000. They directly encourage manufacturing Giants like Tata, Jindal, and other major companies to seek foreign investment for short term. Sectorial liberalisation, promotional incentives, Operational conditions and liberal entry makes a favourable condition for foreign investors. Approaches taken on five year plans are focuses on these attributes aiming a firm GDP growth rate and incremental capital output ratio. The rate of domestic savings is also gains in these time. The gap of domestic savings and investment requirement is filled by foreign investment.

4.4 Advantages of Portfolio Investment and Direct Investment


The gain of increase in liquidity over domestic markets through portfolio investment helps to cover market deficiency. As market become more prone to liquidity of

capital markets. Portfolio investment can manage the short in market based on demand. Promotion of brokerage agencies like Kodak, India bulls helps to market portfolio investment in regional investors and thereby giving a opportunity to foreign investors on the attractiveness of Indian stock market. The management of portfolio through these agencies make operations simple in port folio investment. Long term investment and short term investment are supportive through portfolio investment where investors can withdraw their investment any time without any notice to organisations. The online facility of managing portfolio investment added easiness on handling the operations without importance to place of presence. Regional investors make marginal savings through speculation in stock market. By constant monitoring of individual shares in stock market helps speculation operations to gain marginal benefits from portfolio. Through this way liquid market makes attraction to investors. The discipline and knowledge about domestic capital markets will obtain forecast of shares in short term. This makes investors to add certain shares to their portfolio for cash hunt.

Foreign portfolio investment can also bring discipline and know-how into the domestic capital markets. In a deeper, broader market, investors will have greater incentives to expend resources in researching new or emerging investment opportunities. This wider nature of portfolio investment attracts foreign and domestic investors. The completion between organisations to make financial flow to their

business operations develop information flow in terms of quality and quantity. The transparency of operations and management of spill-overs into various economic sectors can be determined in portfolio investment. with out prior accounting knowledge about portfolio and tactics awareness of share marketing investors can invest in portfolio investment. by monitoring the scrip values through different medias investors can gain information about their investment growth and subsidiary informations.

Foreign portfolio investment can also help to promote development of equity markets and the shareholders voice in corporate governance. As companies compete for finance the market will reward better performance, better prospects for future performance, and better corporate governance. As the markets liquidity and functionality improves, equity prices will increasingly reflect the underlying values of the firms, enhancing the more efficient allocation of capital flows. Well functioning equity markets will also facilitate takeovers, a point where portfolio and direct investment overlap. Takeovers can turn a poorly functioning firm into an efficient and

more profitable firm, strengthening the firm, the financial return to its investors, and the domestic economy. Foreign portfolio investors may also help the domestic capital markets by introducing more sophisticated instruments and technology for managing portfolios. For instance, they may bring with them a facility in using futures, options, swaps and other hedging instruments to manage portfolio risk. Increased demand for these instruments would be conducive to developing this function in domestic Markets, improving risk management opportunities for both foreign and domestic investors. In the various ways outlined above, foreign portfolio investment can help to strengthen domestic capital markets and improve their functioning. This will lead to a better allocation of capital and resources in the domestic economy, and thus a healthier economy. Open capital markets also contribute to worldwide economic development by improving the worldwide allocation of savings and resources. Open markets give foreign investors the opportunity to diversify their portfolios, improving risk management and possibly fostering a higher level of savings and investment.

Fig 4.2: Trend of FDI inflows and FII in India ( Source : GOI 2009) With its orientation to developing enterprises directly, foreign direct investment helps to strengthen economic potential. Sometimes, this is accomplished through greenfield investment, adding new and different economic activity and consequently diversifying the economy. Other times, this will be achieved through building up existing enterprises and enhancing their potential. Both of these activities will add a new and healthy element of increased competition to an economy, which is itself a

powerful force for economic development. Competition is one of the ways a foreign direct investment can have a broader effect on the economy. It spurs other enterprises to increase their own efficiency and productivity. Competition plays a major role in improving the allocation of resources, boosting the economic prospects of the domestic economy and worldwide sustainable economic development. Technology transfers and the development of human capital are often seen as two of the primary benefits of foreign direct investment. Competition has a role to play in both, as it encourages domestic competitors of the foreign investment to build up their own technological capabilities and the productivity of their labour force. They will, among other things, learn from the technology of the foreign investor and the ways in which it improves the productivity of its labour and management. The development of human capital can be one of the chief contributions of foreign direct investment. The foreign owners will bring their management skills and technology to their enterprises. In training the local workforce, they will pass on those management skills and technology. As their workers move on to other jobs in domestic firms, or start their own businesses, they will bring with them the management, working skills, and the technology that they have learned. Thus, in a very direct manner, the human capital of the host country can be developed by foreign direct investment, and the investment' technology transferred. Human capital development and technology transfer also occur through the foreign investments relationships with its suppliers and the downstream users or sellers of its products. The investment will require from its suppliers a certain standard of product, perhaps a higher standard than they are accustomed to producing. In order to meet that higher standard, they will have to improve their workers skill levels and their management system. They may also gain new technological expertise needed for the required product standard from the foreign investment. The current trend toward outsourcing and closer collaboration along the supply chain means that there will be a greater tendency to pass management, production and technology know-how to suppliers, enhancing the transfer of technology and skills. Enterprises that are downstream in the supply and sales chain will receive similar benefits, although less obviously and perhaps less frequently, both through the direct use of a higher standard product incorporating technological improvements, and through efforts by the foreign investment to maximize the value of its product.Foreign enterprises often incorporate foreign trade, either with the parent company or with customers, or both. Thus, another benefit that foreign direct investment brings is increased opportunities and avenues for trade. Trade and investment are increasingly integrated, as are their benefits. Foreign direct investment can also provide environmental and social

benefits. Often, international investors will operate at higher environmental and social standards than their domestic competitors. Although they may not bring standards up to the highest level possible, they will have the effect of raising the standards above existing levels. 4.5 Impact of FDI in Indian manufacturing sector

The major problems facing in Indian manufacturing industry is the poor infrastructure and technology abundance. Apart from urban area of Indian cities infrastructure and transportation is not suit to global trends. The acute nature of labour market affects human resources for manufacturing industry. Another infrastructure issues related to manufacturing sector is the availability or ports, airports, and storage areas for finished goods. FDI supported Indian economy and manufacturing sector for last to decades in developing new technologies and infrastructure in urban area of Indian geographical area. Quadrilateral road lines and better communication system is essential for better manufacturing plants. Apart from huge corporations involved in manufacturing, Government of India (GOI) doesnt give better support to domestic manufacturers in nourishing heir establishments and products. Regional subsidies and allowances are only shelter for these manufacturers. Small scale manufacturers make large community in manufacturing sector and they hold 62 % of Indian manufacturing industry. The power problems are another issues facing by Indian manufacturing sector. Indian cost of power is the highest in Asian economy (UNCTAD 2009). The lack of nuclear power stations is the major reason of power scarcity and higher price. With support to foreign investors Indian planned to develop 12 nuclear plants with Korean collaboration in 2012. This will boost up Indian manufacturing industry to gain cheaper cost of production. The acute infrastructure woes in Indian economy are supported with FDI for last few years to make specific products for certain organisations. These kind of activities make issues in partiality for states and regional areas. The tax relaxation in territories under India attracts foreign investors to manufacture goods from these areas. But double taxation for transporting good from these areas make a hurdle for more investment in these areas. The World Bank study on topic Doing Business in India produces a report ranking India as a rather inglorious 120 out of 178 economies. The report specifies the investigation on specifications and regulations to make manufacturing units in India. Ten factors of indicators are presented in report which FDI is supporting in Indian

manufacturing sector. They: are; starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The investment pattern in manufacturing sector is through direct and portfolio investment. Individual investors who were familiar with giant manufacturing organisation will invest on portfolio investment. They add these organisations in their favourite portfolio; the direct investment is mostly seeking by intermediate manufacturing units and small scale units. Basically for gaining technology can leadership and attaining more operational techniques from foreign organisations. Manufacturing industry in Indian is highly dependent with FDI for last two decades for another five year plan of new government of India, promotion of FDI in manufacturing will boost up more trends . the opportunity to manufacture world class machineries and automobiles Indian industries will increase the profile of manufacturing sector and financial flow.

4.6 Impact of FDI in Indian retail sector

The major issue of Indian retail sector is the wide presence of unorganised retailing. 95 % of overall retail industry is in hands of these unorganised retailers, Where 5% is only handling by organised retailers in India. The estimate on the true size of retail industry shows that 4, 00,000 crores will cover the revenue of retail industry. The corporate owned organised business constitutes only 15,000 crores in effective. Government of India finds the opportunity in retail sector for upcoming 5 years an the sales fore cast shows 44% of the total GDP and food sales account for 63% of the total retail sales, increasing to Rs.100 billion from just Rs. 38.1 billion in 1996. Retailing opportunity in food retail trade is very large when comparing to total economic activity of India. Efficiency enhancements in food retail industry is attained though FDI in retail sector. The improvement in corporate sector and unorganised sector through implementing wholes ale distributors with the aid of FDI helps Indian authorities to get control of retail industry. The need of technology and expertise in retail sector is currently acquiring through agencies and organisation from foreign countries. Through FDI and foreign investment of superstore in foreign countries, real time technologies and operational experience can be learned to Indian retail industry. Employment activities and economic operation in rural area of India is promoted

though small scale retail operations and development of opportunity in rural areas. Finding new opportunity in retail sectors and maintaining hygienic operations in retail sector is essential. The recent studies in the retail sector of India states that the magnitude of expansion in retail rates is facing economic expansion along with jobless growth. The fear of job loss in automation of busieness opearions affects the acceptance of organised stores and business units in Indian economy. The defensive approach from trade unions and interest group to protect jobs in these sectors will not promote entry of new corporate giants in retail industry. The demographic condition of Indian population is too much dependent with unorganised retailers . the public image of organised retailing is considered as a belonging part of upper class society. Indian holds a wide population living in middle class and upper middle class. Through targeting this population segment to organised retailing, authorities can make more business venture sand opportunities in Indian retail industry. For the purpose foreign investments can be obtained with assurance of expected return to their investments in retail industry.

CHAPTER 5

CONCLUSION AND RECCOMENDATIONS

5.1 Future of FDI flow In Indian Economy

The expectancy of decline in FDI for future is the major talk for foreign investors. The rising of new highly booming economies will act as a threat for Indian economy to sustain its FDI flow. The regulatory frame work of Indias FDI plans should make transparent, somehow it may cause bureaucrats to learn it easily. Through relaxing the manufacturing sector and retail sector India can gain more FDI flows in future. The sign of growth is inevitable to Indian economy. The industry experts are identifying the sensitivity of local markets through understanding needs of

populations and scope in future industry. Specific scope in manufacturing and retail sector are identifying by market analysis organisation and this should come in practice for attracting more FDI. The unique advantages of the region in retail industry are developed along with home delivery and online shopping system. FDI influence on total size of retail industry in coming years where global giants in retail industry is about to enter Indian retail market. Nourishing existing players in retail industry and promoting new investors can bring more FDI funds to India. The forecast of increase in trade on retail industry of India will make way to big malls and infrastructures in retail sector. This parallel progress of economy with support of FDI organised retailing. This in turn helps authorities to take account of retail sector from unorganised retailers. The integration of Indian manufacturing and retail sector to global supply chains and production system will improve quality standards and economic opportunities for Indian organisations. Through exploiting industry trends in terms of cost and quality FDI can be used to invest in diversified products related to manufacturing and retail industry. This can help to make new market chain and job opportunities for the population. Support from World Bank and other supporting organisations can be exploited to gain more FDI funds in future. Promoting internal organisations who are operating on manufacturing and retail sectors like Tata and reliance can attract foreign investors. The market analysis conducting by Wal-mart and Tesco to enter Indian market is promoted to show up the opportunity in Indian retail industry. By promoting small private ownership business and supporting them to make alliances and collaborations with foreign organisation will rise Indian industry sectors to global standards. The availability of quality real estate is another attraction for foreign investors. These properties can be utilised by other industrial segments in future. Consolidation buzz word in retail sector is expected in coming years to make big impacts, the increased floor space and landscape allowance for retail and manufacturing sector will bring foreign organisations to make entire products or their parts through Indian manufacturing industry. The production standards and maintenance of pollution in region is restricted through appropriate policies. The future policies as part of Copenhagen summit to reduce carbon emission will affect manufacturing industry in a wide manner. But the initial slump facing though new policies will uplift the standards of pollution handling and carbon emissions. Small retail players like Vishaal , Reheja and Shriram groups are approaching foreign super store s like Costco, Morrisons to attain technology advantage and skills from

foreign countries. This in turn make interest on these organisation to enter Indian retail industry.

Table 5.1 Forecast Of FDI in India( Source Economic intelligence unit)


Market analysts forecast the future of FDI dependency with annual budgeting and climate variations. The fair monsoon in Indian climate system alerts manufacturing sector for better infrastructure. The retail industry also needs same demand for the purpose. This may lead to huge rental opportunity in Indian economy. Through

investing in developing infrastructure for supporting these industries, construction and estate industry can make advantage through FDI. India makes advantage on recession by proving the stability of banking and other industrial sectors. The sudden down fall of global economic system is not at all affected in Indian economy. As a result the establishment of strong business fundamentals of industrial sectors is proved to global economy from Indian example. Increase in profitability and validity on investing to Indian economy will give amore assurance to foreign investors on their investment. The growth of organisations in manufacturing and retail industry will make more investors to become stake holders of those organisations.

5.2 Recommendations for FDI Flows in India


Here I specify the pitfalls in Indian FDI strategies and expected future issues as recommendations for investment in India for foreign investors. The contribution of Mauritius is too high in form of FDI where it holds 44 % of FDI inflow. This higher level of FDI inflow from a single country affects the FDI pattern of Indian economy. Especially the avoidance of double taxation for Mauritius Organisations makes dummy companies registered in Mauritius to overcome the taxation problems. This may affect the regional economy and financial status of India. The lack of opportunity in Greenfield projects through acquisition should be resolved. FDI can act as a tool to elaborate the manufacturing in these markets segments at rural areas. Protection of national interest should be considered as prime factor than regional or state interests in FDI. The population of India can be used to gain the FDI flow to explore the talent pool of India. The shortage of FDI in education and training affects the development of talent pool in future. Even though domestic savings can manage it well, FDI can make significant role in these area. The scope of food processing in retail industry can be exploited with the great agricultural background of India. This can develop more FDI flows in Retail sector of India. The strength of equity market in India can be exploited to develop debt market. This affects debt funds of organisation working in India and abroad on exchange interest risk. This should be taken into consideration under next annual policy making. To develop technological competitiveness in Indian FDI should be promoted in R&D section of all industries. This move can make India as a technical dominate nation through foreign investment. the issues on intellectual property rights should be revised based on specific industry sector. The importance of manufacturing and retail sector in India is considered din policy making to encourage foreign investors to invest in region along with agriculture and resource management. The strength of Indian banking system is reflected in global crisis period, even though banks in India is supporting manufacturing and retail industry, international banks should be invited to fund manufacturing and retail operation in Indian economy. These

recommendations in FDI can build up better exporting of goods and establishment of organisations to meet customer demands in Indian economy.

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