FOREIGN DIRECT INVESTMENT

INVESTMENT 
Investment is ³the 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

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INVESTMENT OUTFLOW

INVESTOR (HOME COUNTRY)

RECEIVER (FOREIGN COUNTRY)

INVESTMENT INFLOW

RECEIVER (HOME COUNTRY)

INVESTOR (FOREIGN COUNTRY) 02

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.

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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.

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Why FDI
‡ Transportation Cost ‡ Market Imperfections ‡ Product Life Cycle ‡ Strategic Behavior ‡ Location Advantage

TYPES OF FDI

BY DIRECTION

BY TARGET

BY MOTIVE

INWARD

GREENFIELD INVESTMENT

RESOURCE SEEKING MARKET SEEKING EFFICIENCY SEEKING 05

OUTWARD 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.

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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

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ADVANTAGES OF FDI ‡Foreign Direct Investment plays a important role in the development of India's economy. It is an integral part of the global economic system. ‡FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. ‡FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

CONTD 
INFLOW OF CAPITAL IN HOME COUNTRY  REPATRIATION OF PROFITS BY INVESTOR  TECHNOLOGY DEVELOPMENT & TRANSFER  TRANSFER OF KNOWLEDGE  ACCESS TO NEW MARKETS  FDI LEAD EXPORT GROWTH  INFRASTRUCTURE DEVELOPMENT IN HOME COUNTRY  LEADS TO LIBERALIZATION & GLOBALIZATION

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DISADVANTAGES OF FDI
‡One of the most important disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. ‡ The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment. ‡Adverse effects on the balance of payments, when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country¶s balance of payments.

TRENDS IN FDI There has been a marked increase in both the flow and stock of FDI in the world economy over the last 30 years. FDI has grown more rapidly than world trade and world output because: ‡ The general shift towards democratic political institutions and free market economies has encouraged FDI ‡ The globalization of the world economy is having a Positive impact on the volume of FDI as firms undertake FDI

FDI POLICY IN INDIA

FDI POLICY: India has among most liberal and transparent policy on FDI among the emerging economies. FDI upto 100% is allowed under the automatic route in all sectors except the following which require prior approval of government: ‡ Manufacturing of tobacco products and its substitutes. ‡ Manufacturing of electronic aerospace and defence equipments. ‡ Manufacturing of item exclusively meant for small scale industries with more than 24% FDI. ‡ Proposals in which the foreign collaborator has an existing joint venture, technology transfer, trade mark in India in same field.

PROHIBITED SECTOR UNDER FDI
FDI is not permissible in the following cases: ‡ Gambling and Betting. ‡ Lottery Business. ‡ Business of chit fund. ‡ Housing and Real Estate business. ‡ Atomic Energy. ‡ Agricultural or plantation activities and plantations(other than Tea plantations). ‡ Retail Sector

FDI STATISTICS IN INDIA

FDI INFLOWS MONTH WISE DURING YEAR 2010

SECTORS ATTRACTING HIGHEST FDI INFLOWS

SHARE OF TOP INVESTING COUNTRIES