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Investment is “the flow of funds from one destination to another” for any activity.
Thus, an investment is carried on with some purpose.
The purpose can be varied.
For Example: Manufacturing, infrastructure, R & D 01
INVESTOR (HOME COUNTRY)
RECEIVER (FOREIGN COUNTRY)
INVESTMENT INFLOW INVESTOR (FOREIGN COUNTRY) 02
RECEIVER (HOME COUNTRY)
FOREIGN DIRECT INVESTMENT (FDI)
Foreign Direct Investment (FDI) means a company or any other entity in one country making a physical investment in other country. FDI includes investments made to acquire a lasting interest in enterprises that are operating outside the economy & national borders of an investor. FDI (for a country) represents foreign assets in domestic structures, equipments & organizations. FDI does not include foreign investments in stock markets. 03
For Example: British company investing directly in Indian healthcare sector, is considered as FDI. Companies engaged in FDI may be involved in the functional areas such as: Production, Marketing and R & D. In order to qualify as FDI, the investment must give an investor some control over its foreign affiliate. The United Nations defines control as owning 10% or more of ordinary shares or voting power in an incorporated firm or its equivalent.
TYPES OF FDI
BY TARGET BY MOTIVE
RESOURCE SEEKING MARKET SEEKING EFFICIENCY SEEKING 05
HORIZONTAL FDI VERTICAL FDI
BY DIRECTION INWARD: Inward FDI or Inbound FDI is a form of inward investment where foreign capital is invested in local resources of home country.
OUTWARD: Outward FDI or direct investment abroad is when local capital is invested in foreign resources.
BY TARGET GREENFIELD INVESTMENT: Investments in new facilities or expansion of existing facilities. Results are: New jobs, new technology & know-how, enhanced R&D, etc. 06
HORIZONTAL FDI: It occurs when a multinational company makes investments in other countries but in the same industry to which it belongs.
VERTICAL FDI: It occurs when a MNC acquires a stake in a foreign company that either uses its output or provides it the inputs. The foreign company can be a supplier or a customer.
BY MOTIVE RESOURCE SEEKING: It occurs when the investments seek to acquire factors of production that are more efficient than those available in the home country of the investor. 07
In some cases, the resources may not be available in the home economy at all. Example: Cheap labor, oil, etc.
MARKET SEEKING: It includes investments that aims at penetrating new markets or maintaining existing markets. FDI with this motive is common among MNCs.
EFFICIENCY SEEKING: It includes the investors who invest with the hope of exploiting the benefits of economies of scale, cost effectiveness & profit maximization. 08
BENEFTS OF FDI
INFLOW OF CAPITAL IN HOME COUNTRY REPATRIATION OF PROFITS BY INVESTOR TECHNOLOGY DEVELOPMENT & TRANSFER TRANSFER OF KNOWLEDGE ACCESS TO NEW MARKETS FDI LED EXPORT GROWTH EMPLOYMENT GENERATION INFRASTRUCTURE DEVELOPMENT IN HOME COUNTRY LEADS TO LIBERALIZATION & GLOBALIZATION 09
STRATEGIES FOR FOREIGN INVESTORS TO INVEST IN INDIA
LIAISON OFFICE / REPRESENTATIVE OFFICE A foreign company can set up liaison office in India to test the Indian market. Once it is convinced of the potentiality of Indian market, it can then bring in greater investment. A liaison office is not allowed to undertake any business activities in India & therefore cannot earn any income in India. The Foreign Investment Promotion Board (FIPB) of RBI is the regulatory body. 12
PROJECT OFFICE Foreign companies planning to execute specific projects in India can set up temporary project offices. Special approval from RBI is required for setting up a project office. A project office can be set up only till the completion of project.
BRANCH OFFICE GOI has allowed foreign companies engaged in manufacturing & trading activities to set up branch offices in India for purposes like trading activities, research work, import & export activities. 13
As an Indian company
Joint Venture with an Indian partner
Wholly – owned subsidiary companies
FDI POLICY IN INDIA
The Government of India has put in place a liberal, transparent and investor – friendly FDI Policy, wherein FDI up to 100% is allowed on the automatic route in most of the sectors, except in:
Activities that attract industrial licensing Proposals where foreign investors have existing ventures in India Proposals for acquisition of shares in an existing Indian company by a non-resident investor Activities where automated route is not available 15
CRITERIA CONSIDERED BY INVESTORS FOR FDI
Political stability & strong policy to protect investors Safety & security of life, money & output Investment protection through legal provisions Continuous infrastructure development A banking system with up – to – date technology A highly productive labor & smooth working conditions Clear & simple tax procedures Availability of raw materials & other components The demand for the products that investors manufactures 16