A PROJECT

ON

ADVANTAGES AND DISADVANTAGES OF FDI

SUBJECT: COMPUTER - II
(Submitted as a partial fulfilment of the requirements for B.A. LL. B (Hons.) 5 Year Course)

SESSION 2022-23

SUBMTTED ON: 15TH MAY, 2023

SUBMITTED BY: SUBMITTED To:

Keshav Narayan Harsh Dr. Renu Arora

Roll No. : 64 (Faculty, Economics - II)

Semester II A

UNIVERSITY FIVE YEAR LAW COLLEGE

UNIVERSITY OF RAJASTHAN

JAIPUR
 Declaration

I, Keshav Narayan Harsh, hereby declare that this project title “Advantages And
Disadvantages Of FDI” is based on the original research work carried out by me under the
guidance and supervision of Dr. Renu Arora.

The interpretations put forth are based on my reading and understanding of the original
texts. The books, articles and websites etc. which have been relied upon by me have been
duly acknowledged at the respective places in the text.

For the present project which I am submitting to the university, no degree or diploma has been
conferred on me before, either in this or in any other university.

KESHAV NARAYAN HARSH Date: 15th May, 2023

Roll No. 64
Semester II-A
 TABLE OF CONTENTS
DECLARATION...................................................................................................................................................

CERTIFICATE......................................................................................................................................................

ACKNOWLEDGEMENT.....................................................................................................................................

CHAPTER I

INTRODUCTION

What is Foreign Direct Investment ?.......................................................................................7

CHAPTER II

HOW DOES FDI WORK

The Special Considerations.....................................................................................................9

Types Of FDI.........................................................................................................................10

The creation of new offence to protect the e-identity......................................................11

CHAPTER III

ROUTES THROUGH WHICH FDI OCCURS IN INDIA

CHAPTER IV
ADVANTAGES OF FDI

CHAPTER V
DISADVANTAGES OF FDI

CHAPTER VI
SECTORS IN WHICH FDI IS PROHIBITED IN INDIA

CHAPTER VII
FII/FIP INVESTMENT LIMIT IN INDIA
 ACKNOWLEDGEMENT

In the accomplishment of this project successfully ,many people have best

owned upon me their blessings and heart pledged support, this time I am
utilising to thank all people concerned with this project.

First of all, I would like to thank our Director Dr. Akhil Kumar for giving me
an opportunity. I would like to thank our supervisor Dr. Renu Arora whose
valuable guidance and suggestions helped me complete this project within time.

Last but not the least I would like to thank my parents and friends for their
valuable suggestions which helped me in completing this project successfully.

Keshav Narayan Harsh

 CERTIFICATE

Dr. Renu Arora Date: May 15, 2023

Faculty, Economics
University Five Year Law College
University Of Rajasthan,
Jaipur

This to certify that Mr. Keshav Narayan Harsh of II semester, section A of

University Five Year Law College, University Of Rajasthan, Jaipur has carried
out the project entitled “Advantages And Disadvantages Of FDI” under my
supervision and guidance. It is an investigation report of a minor project. The
student has completed the research work in my stipulated time and according to
norms prescribed for the purpose.

Supervisor

Dr. Renu Arora

 INTRODUCTION

Foreign Direct Investment, often abbreviated as FDI is defined as an investment made by an

individual or an organisation in one country into a business located in another. Apart from
money, FDI brings with it knowledge, technology, skills and employment.

Foreign direct investment (FDI) is an ownership stake in a foreign company or project made
by an investor, company, or government from another country.

Generally, the term is used to describe a business decision to acquire a substantial stake in a
foreign business or to buy it outright to expand operations to a new region. The term is
usually not used to describe a stock investment in a foreign company alone. FDI is a key
element in international economic integration because it creates stable and long-lasting links
between economies.

KEY TAKEAWAYS

 Foreign direct investments (FDIs) are substantial, lasting investments made by a

company or government into a foreign concern.
 FDI investors typically take controlling positions in domestic firms or joint
ventures and are actively involved in their management.
 The investment may involve acquiring a source of materials, expanding a company’s
footprint, or developing a multinational presence.
 The top recipients of FDI over the past several years have been the United States and
China.
 The U.S. and other Organisation for Economic Co-operation and Development
(OECD) countries have been the top contributors to FDI beyond their borders.
 HOW DOES FOREIGN DIRECT INVESTMENT (FDI)
WORK ?

Companies or governments considering a foreign direct investment (FDI) generally consider

target firms or projects in open economies that offer a skilled workforce and above-average
growth prospects for the investor. Light government regulation also tends to be prized. FDI
frequently goes beyond mere capital investment. It may include the provision of
management, technology, and equipment as well. A key feature of foreign direct investment
is that it establishes effective control of the foreign business or at least substantial influence
over its decision making.

The net amounts of money involved with FDI are substantial, with more than $1.8 trillion of
foreign direct investments made in 2021. In that year, the United States was the top FDI
destination worldwide, followed by China, Canada, Brazil, and India. In terms of FDI
outflows, the U.S. was also the leader, followed by Germany, Japan, China, and the United
Kingdom.2

FDI inflows as a percentage of gross domestic product (GDP)  is a good indicator of a
nation’s appeal as a long-term investment destination. The Chinese economy is currently
smaller than the U.S. economy in nominal terms, but FDI as a percentage of GDP was 1.7%
for China as of 2020, compared with 1.0% for the U.S. For smaller, dynamic economies,
FDI as a percentage of GDP is often significantly higher: e.g., 110% for the Cayman Islands,
109% for Hungary, and 34% for Hong Kong (also for 2020).

NOTE:

In 2020, foreign direct investment tanked globally due to the COVID-19 pandemic,
according to the United Nations Conference on Trade and Development. The total $859
billion global investment that year compared with $1.5 trillion the previous year. 4 And
China dislodged the U.S. in 2020 as the top draw for total investment, attracting $163 billion
compared with investment in the U.S. of $134 billion.5 In 2021, global FDI bounced back
by 88%.
Special Considerations

Foreign direct investments can be made in a variety of ways, including opening

a subsidiary or associate company in a foreign country, acquiring a controlling interest in an
existing foreign company, or by means of a merger or joint venture with a foreign company.

The threshold for an FDI that establishes a controlling interest, per guidelines established by
the Organisation for Economic Co-operation and Development (OECD) , is a minimum 10%
ownership stake in a foreign-based company. That definition is flexible. There are instances
in which effective controlling interest in a firm can be established by acquiring less than
10% of the company’s voting shares.1

Types of Foreign Direct Investment

Foreign direct investments are commonly categorized as horizontal, vertical, or
conglomerate.

 With a horizontal FDI, a company establishes the same type of business operation in
a foreign country as it operates in its home country. A U.S.-based cellphone provider
buying a chain of phone stores in China is an example. 

 In a vertical FDI, a business acquires a complementary business in another country.

For example, a U.S. manufacturer might acquire an interest in a foreign company
that supplies it with the raw materials it needs.

 In a conglomerate FDI, a company invests in a foreign business that is unrelated to

its core business. Because the investing company has no prior experience in the
foreign company’s area of expertise, this often takes the form of a joint venture.
ROUTES THROUGH WHICH FDI OCCURS IN INDIA

There are two common routes through which India gets Foreign Direct Investments.

1. The Automatic Route

The automatic route is when an Indian company or Non-Resident does not need any prior
permission from the RBI or the Indian government for foreign investment in India. Several
sectors come under the 100 per cent automatic route category. The most common ones
include industries such as agriculture and animal husbandry, airports, air-transport services,
automobiles, construction companies, food processing, jewelry, health care, infrastructure,
electronic systems, hospitality, tourism, etc. There are also a few sectors in which 100 per
cent automatic route foreign investments are not permitted. These include insurance, medical
devices, pension, power exchanges, petroleum refining, and security market infrastructure
companies.

2. The Government Route

The second route through which FDIs occur in India is through the government route. If FDI
occurs through the government route, the company intending to invest in India must seek
prior government approval mandatorily. Such companies are required to fill and submit an
application form through the Foreign Investment Facilitation portal, which enables them to
obtain single-window clearance. The portal then forwards the foreign company’s application
to the respective ministry that holds the discretion to approve or reject the application. The
ministry consults the Department for Promotion of Industry and Internal Trade or DPIIT
before accepting or rejecting the foreign investment application. Once approved, the DPIIT
issues the Standard Operating procedure as per the existing FDI policy, paving the path for
foreign direct investment in India.
Like the automatic route, the government route also permits up to 100 per cent FDI. Here is a
sector and per cent wise break-up as permitted under the government route

FDI Sector FDI Per cent in India

Public Sector Banks 20 per cent

Broadcasting Content Services 49 per cent

Multi-brand retail trading 51 per cent

Print Media 26 per cent

Apart from the sectors mentioned above, 100 per cent FDIs can also occur through
government sectors such as core investment companies, food products, retail trading, mining,
and satellite establishments and operations.
 ADVANTAGES OF FDI

The following are the key advantages of foreign direct investment in India

1. FDI Stimulates Economic Development

It is the primary source of external capital as well as increased revenues for a country. It often
results in the opening of factories in the country of investment, in which some local
equipment – be it materials or labour force, is utilised. This process is repeated based on the
skill levels of the employees.

2. FDI Results In Increased Employment Opportunities

As FDI increases in a nation, especially a developing one, its service and manufacturing
sectors receive a boost, which in turn results in the creation of jobs. Employment, in turn,
results in the creation of income sources for many. People then spend their income, thereby
enhancing a nation’s purchasing power.

3. FDI Results In The Development Of Human Resources

FDI aids with the development of human resources, especially if there is transfer of training,
technology and best practices. The employees, also known as the human capital, are provided
adequate training and skills, which help boost their knowledge on a broad scale. But if you
consider the overall impact on the economy, human resource development increases a
country’s human capital quotient. As more and more resources acquire skills, they can train
others and create a ripple effect on the economy.
4. FDI Enhances A Country’s Finance And Technology Sectors
The process of FDI is robust. It provides the country in which the investment is occurring
with several tools, which they can leverage to their advantage. For instance, when FDI
occurs, the recipient businesses are provided with access to the latest tools in finance,
technology and operational practices. As time goes by, this introduction of enhanced
technologies and processes get assimilated in the local economy, which make the fin-tech
industry more efficient and effective.

5. Second Order Advantages

Apart from the above points, there are a few more we cannot ignore. For instance, FDI helps develop
a country’s backward areas and helps it transform into an industrial centre. Goods produced through
FDI may be marketed domestically and also exported abroad, creating another essential revenue
stream. FDI also improves a country’s exchange rate stability, capital inflow and creates a competitive
market. Finally it helps smoothen international relations.
 DISADVANTAGES OF FDI

Like any other investment stream, there are merits and demerits of FDI as well, which are
mostly geo-political. For instance FDI can:

 hinder domestic investments and transfer control of domestic firms to foreign ones

 risk political changes, exposing countries to foreign political influence 

 influence exchange rates. 

 Influence interest rates

 Overtake domestic industry if they cannot compete 

 Unchecked FDI can make a country vulnerable to foreign elements like digital crime
(e.g. issue of Huawei)

However, in comparing FDI advantages and disadvantages, it is quite apparent that the
benefits outweigh the cons. If you wish to know more about FDI in India, reach out to
an Angel One Expert.
 SECTORS IN WHICH FDI IS PROHIBITED IN INDIA

While foreign direct investments are permitted through several sectors, as mentioned above,
there are specific sectors and industries wherein FDI is strictly prohibited, irrespective of the
automatic or government route. These include:

1. Atomic Energy Generation

2. Gambling, betting businesses, and lotteries

3. Chit fund investments

4. Agricultural and plantation activities (excluding fisheries, horticulture and

pisciculture, tea plantations, and animal husbandry)

5. Real estate and housing (excluding townships and commercial projects)

6. TDR trading

7. Products manufactured by the tobacco industry such as cigarettes and cigars

 FIIs/FPIs INVESTMENT LIMIT IN INDIA

FIIs, NRIs (Non-resident Indians), and PIOs (Persons of Indian Origin) can buy
shares/debentures of the companies listed on the Indian stock exchange through PIS
(Portfolio Investment Scheme). However, SEBI and RBI have set an investment limit for
them in the listed Indian companies to limit the influence of these foreign investors on the
company, and financial markets, and to save the economy from the potential damage if FIIs
flee from the Indian market in a mass. The below infographic will help you understand the
ceiling limit for FIIs/NRIs/PIOs.

As an investor, you should also know that the overall ceiling limit can be raised as mentioned
below after passing a special resolution for the same.

1. For FII investment, it can be raised to the sectoral cap of that particular industry

2. For NRIs, it can be raised to 24%

Before we proceed further, you must know the conditions you need to fulfil to
purchase equity shares and convertible debentures of the company under PIS.

1. The total purchase of NRIs/PIOs should be within an overall ceiling limit of

1. 24% of the paid-up equity capital of the company, or

2. 24% of the total paid-up value of each series of convertible debenture

*Above condition is for both repatriation and non-repatriation basis 

Note: Investment on a repatriation basis means the amount received from the sale/maturity of
the said investment can be sent to the source country. On the other hand, investment on a
non-repatriation basis means the sale/maturity proceeds on the said investment couldn’t be
sent to the source country. 

2. The investment made on a repatriation basis by an NRI/PIO in the equity shares and
convertible debentures should not exceed 5% of the paid-up equity capital of the company or
5% of the total paid-up value of each series of convertible debenture
 CONCLUSION

Foreign direct investments prove beneficial to both, the foreign company

investing in India as well as to the country in which the investment is made. For
the investing country, FDI translates to reduced costs whereas the country
enabling the FDI can develop human resources, skills, and technologies.
Common FDI examples include mergers and acquisitions, logistics, retail
services, and manufacturing. If you need information on foreign investment
opportunities in India, you can reach out to an Angel One Investment advisor.