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[FDI FOREIGN DIRECT INVESTMENT]

FDI
Foreign Direct Investment

MEANING

Foreign direct investment (FDI) is a direct investment into production or business in a


country by an individual or company of another country, either by buying a company in
the target country or by expanding operations of an existing business in that country.
Foreign direct investment is in contrast to portfolio Adjustment which is a passive
investment in the securities of another country such as Stocks and Bonds
Broadly, foreign direct investment includes "mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas operations and intra company loans".
[1]
In a narrow sense, foreign direct investment refers just to building new facilities.

Types of FDI
1. Horizontal FDI arises when a firm duplicates its home country-based activities at
the same value chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination
country for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains i.e., when firms perform value-adding
activities stage by stage in a vertical fashion in a host country.
Horizontal FDI decreases international trade as the product of them is usually aimed at
host country; the two other types generally act as a stimulus for it, fdi is building new
facilities

Financial Management| FDI

[FDI FOREIGN DIRECT INVESTMENT]

Working of FDI in different Fields

TYPES OF INVESTMENT

Greenfield investment: Direct investment in new facilities or the expansion of existing


facilities. Greenfield investments are the primary target of a host nations promotional
efforts because they create new production capacity and jobs, transfer technology and
know-how, and can lead to linkages to the global marketplace. Greenfield investments
are the principal mode of investing in developing countries.

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Mergers and Acquisitions: Occur when a transfer of existing assets from local firms to
foreign firms takes place. Cross-border mergers occur when the assets and operation of
firms from different countries are combined to establish a new legal entity. Cross-border
acquisitions occur when the control of assets and operations is transferred from a local
to a foreign company, with the local company becoming an affiliate of the foreign
company. Mergers and acquisitions are the principal mode of investing in developed
countries.

FDI IN INDIA IS PERMITTED THROUGH TWO ROUTES

Automatic approval by RBI


The FIPB route (Foreign Investment Promotion Board)

FDIS IS NOT PERMITTED IN THE FOLLOWING SECTORS

Arms and ammunition


Automatic energy
Railway Transport
Coal and lignite
Mining of iron, manganese,chromosome,gypsum,sulphur,gold,diamonds,copper
and zinc.

FDI IN REAL ESTATE

ACCORDING TO FICCI

The size of real estate industry is estimated to be around U.S $ 12billion.


Almost 80% real estate developed in India is in residential space & the rest
comprise of offices, shopping malls, hotels and hospitals.
Townships
Housing
Commercial premises

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[FDI FOREIGN DIRECT INVESTMENT]

Hotels
Resorts
Industrial parks
Resorts
Hospitals
Educational institutes
Recreational facilities

INVESTMENT IN SHOPPING MALLS IN INDIA

At present, housing and real estate is on the list of seven activities where FDI is
prohibited. The commerce and industry ministry, which administers the foreign
investment policy, is also looking at partly opening up retail trade, another
prohibited activity, for FDI.
The commerce and industry ministry has proposed opening up of the foreign
investment policy by allowing 100% FDI in construction of commercial properties
such as shopping malls and hotels.
In the broad sector of real estate, FDI of up to 100% is allowed only in the
development of integrated township. The automatic route is, however, not
available to such proposals which require to go through FIPB (Foreign
Investment Promotion Board) clearance

TELECOM SECTOR

Indias 23 million-line telephone network is one of the largest in the world and the
third largest among emerging economies.
The industry is considered as having the highest potential for investment in India.
India has witnessed rapid growth in Cellular, Radio Paging, Value-added
services, Internet and Global Mobile Communication by satellite (GMPCS)
services.
It offers an ideal environment for investment

FDI IN INSURANCE

It was first mooted by P. Chidambaram as finance minister in the united front


government in 1997.
The sector was opened up in 1999.

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The IRDA act (Insurance Regulatory and Development Authority Act, 1999)
allowed the insurance sector to be opened up.
Indian insurance industry has attracted $235 million foreign direct investment.
Currently the FDIs in insurance is restricted to 26%.
The current UPA government has announced its intention to increase the cap on
FDI in the insurance sector to 49%.
According to us ambassador to India David Mulford at a conference on Indian
insurance market. (06 October 2005) the FDI cap should be raised above 50 per
cent within a short period so that foreign investors would have management
control commensurate with their investment and the flow of FDI to the sector will
increase.

IMPORTANCE AND BARRIERS OF FDI

The rapid growth of world population since 1950 has occurred mostly in
developing countries. This growth has been matched by more rapid increases in
gross domestic product, and thus income per capita has increased in most
countries around the world since 1950

An increase in FDI may be associated with improved economic growth due to the
influx of capital and increased tax revenues for the host country.

Host countries often try to channel FDI investment into new infrastructure and
other projects to boost development. Greater competition from new companies
can lead to productivity gains and greater efficiency in the host country and it has
been suggested that the application of a foreign entitys policies to a domestic
subsidiary may improve corporate governance standards.

Furthermore, foreign investment can result in the transfer of soft skills through
training and job creation, the availability of more advanced technology for the
domestic market and access to research and development resources. The local
population may be able to benefit from the employment opportunities created by
new businesses

Foreign Expertise can be an important factor in improving the existing technical


processes in the country.

Advances in technology and process it improves the competitiveness of countries


in Domestic Economy.
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Can Improve the quality of products and processes in a particular sector,


increased attempts to better human resource.

Can create jobs, in an effort to increase productivity, skilled and semi-skilled


workers needed.

Further Reduce unemployment and thus reduce social problems.

Expertise transfer, research and development requires the fees to the high cost
of developing the technology.

Facts and Figures of FDI


SOME POLICY ISSUES WITH REGARD TO FOREIGN INVESTMENT AND MNCs
[1] Workers in advanced countries oppose exports of capital, outsourcing etc.
[2] Countries fear volatility of portfolio investment;
LDC gov'ts prefer FDI but opposition, local NGOs often fear foreign domination
[3] They also fear monetary and exchange rate consequences of large capital
flows:
inflows cause exchange rate appreciation and can harm current a/c trade
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outflows cause exchange rate collapse, reduction in real incomes etc.
Gov'ts want controls; but controls can create other problems, e.g. corruption
[4] LDCs want advanced-country MNCs to transfer technology
MNCs fear expropriation by LDC governments
Need to construct contracts to mitigate fears, align incentives
[5] Transfer pricing of intra-firm trade makes corporate profit taxation problematic
[6] Prisoners' Dilemmas among LDC governments to attract FDI
(Similar problems exist among US states, cities)

CAPITAL FLOWS, FOREIGN DIRECT INVESTMENT


AND MULTINATIONAL CORPORATIONS
SOME FACTS AND FIGURES
Large cross-border capital flows
are not a new phenomenon:
There was pre-World-War-1
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Globalization Mark 1
Only recently have foreign assets
as a fraction of world GDP
passed those levels
May retreat in the next decade!
Two forms of foreign investment:

[1] Portfolio: ownership


equity or debt securities
[2] Direct: management and control
by home-headquartered firms, of productive assets located abroad

Importance of FDI in Indian Economy

Foreign investment was introduced in 1991 under Foreign Exchange Management Act
(FEMA), driven by then finance minister Manmohan Singh . As Singh subsequently
became the prime minister, this has been one of his top political problems, even in the
current times. India disallowed overseas corporate bodies (OCB) to invest in India. India
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imposes cap on equity holding by foreign investors in various sectors, current FDI limit
in aviation sector is maximum 49%.
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD ( United
Nations Conference of Trade and Development ) 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.

Single Brand Retail in India

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Policy Before 2011


FDI upto 51%, with Prior governments approval is allowed in retail trade of single brand
products, subject to the following conditions:

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FDI upto 51% would be allowed, with prior government approval, for retail trade
of single brand products.
Products to be sold should be of a Single Brand only.
Products should be sold under the same Brand internationally.
single Brand products retailing would cover only products which are Branded
during Manufacturing.

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The Change
The Government finally has permitted 100% FDI in single Brand retail under the
government approval route subject certain condition. Some of the stipulated conditions
are;
a) Products to be sold should be of a single Brand only.
b) Products should be sold under the same brand internationally i.e, products
should be sold under the same brand in one or more countries other than india.
c) Single Brand product retail trading would cover only which are branded during
manufacturing.
d) The foreign Investors should be the owner of the Brand.
e) In respect of Proposal involvinf FDI beyond 51%, mandatory sourcing of at 30%
of the value of products sold would have to be done Indian small industries /
village and cottage industries artisans and Craftsmen.

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Overcoming Critics

The Controversy creates is that Independent stores will close, leading to massive jobs
looses.
Few Thousand Jobs may be Created, but millions be Lost.

Organized retail will need workers.

If walmart Like Retail companies were to expand in India as much as there


presence in united states, and the staffing level in Indian Stores kept at the same
Level as in the United States stores, Walmart alone would employ 5.6 millions
India Citizens.

Adjusted for these Market shares, the expected jobs in future Indian organized
would Total over 85 Million.

In Addition, millions of additional jobs will be created during the building of the
maintenance of retail stores, roads, cold storage, centers, soft ware industries,
electronic cash registers and other retail supporting organizations.

Instead of Job looses, retail reforms are lightly to be massive boost to Indian job
availability.

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Financial Management| FDI