FOREIGN DIRECT INVESTMENT

R. Srinivasan
 Necessity for FDI
1. Achieving growth & development targets
– Filling the gaps in supplies of
• Savings
• Foreign Exchange requirements due to trade deficit
• Government Revenue
• Human Capital Skills
– Management
– Entrepreneurship
– Technology; and
– Skills
 Necessity for FDI
2. Acts as nucleus of growth, helping the growth of several other
ancillary units for supply inputs to the main foreign company
3. Generates healthy competition in the domestic economy, leading to
– Enhanced customer choice
– Reduction in prices of goods & services
– Stimulates capital investments by firms in plants, equipment, R & D etc., to
gain competitive advantage
4. Locational, Skill & Cost advantage
British economist John Dunning Observes that “market
imperfections make licensing and exporting difficult, thereby
rendering FDI an obvious choice”
5. Reduction of Political Risks
– Chinese FDIs in Foreign oil companies to reduce oil insecurity
6. To drive away poverty by ushering economic growth
 Factors Influencing FDI
1. Supply
– Production costs
• Real estate prices
• Wages
• Taxes, etc.
– Logistics
– Resource availability
– Access to technology
2. Demand
– Customer Access
– Competitive advantage
• Brand equity
 Factors Influencing FDI
3. Political
– Economic Priorities Vs Profit Motives
– Trade Barriers
– Development Incentives
4. Cultural
5. Technological
 Attracting FDI
• Institutional Framework
– Department Industrial Policy & Promotion
– Secretariat for Industrial Assistance
– RBI
– Department of Economic Affairs
– Directorate General of Foreign Affairs
• Policy Framework
– Opening of Economy and encouragement of FDI in
various sectors
 FDI Policy Initiatives
• FDI not allowed
– Multi brand Retail
– Atomic Energy
– Lottery, gambling, betting etc.
– Chit Funds
– Plantation, except tea
• FDI up to 24%
– Manufacturers of items reserved for small scale sector; but allowed with prior
government approval
• FDI up to 26%
– FM broadcasting
– News & current-affairs TV channels with prior approval
– Defence production
– Insurance
– News Papers & periodicals, with prior government approval
 FDI Policy Initiatives
• FDI up to 49%
– Broadcasting
• Setting up of hardware facilities; with govt. approval
• Cable network; with govt. approval
• DTH services; FII with govt. approval; FDI only 20%
– Air transport service
– Commodity exchanges
– Credit information companies with govt. approval
– Refining; Prior approval in case of PSU companies
– Asset Reconstruction company with govt. approval
• FDI up to 51%
– Single brand product retailing
 FDI Policy Initiatives
• FDI up to 74%
– ISP with gateway, with govt. approval beyond 49%
– Establishment & operation of satellites; with govt. approval
– Private Banking
– Telecom services
– Non-scheduled air transport services
• FDI up to 100%; with govt. approval
– Trading
• Items from small sector
• Test marketing of items approved for mnaufacturers
– Courier Service
– Tea Sector; subject to 26% divestment in favor of Indian public
within 5 years
 FDI Policy Initiatives
• FDI up to 100%; with govt. approval
– ISP without gateway, infrastructure provider, e-mail, voice
mail etc.; with govt. approval beyond 49%
– Mining & mineral separation of titanium bearing minerals
and ores, its value addition and integrated service
– Cigars & Cigarettes
– Airports – existing projects; with approval
– Uplinking and non-news & current TV channels
– Infrastructure / service sector
– Publishing of Scientific magazines, specialty journals
 FDI Policy Initiatives
• FDI up to 100% under automatic route
– Agriculture
• Floriculture, horticulture, development of seeds, animal husbandry,
pisiculture, aquaculture
– Industrial
• Mining
– Exploration & mining of diamonds, Coal & lignite, etc.
• Manufacturing
– alcohol distillation & brewing, coffee & rubber processing, etc.
• Petroleum
– Other than refining, like market study & formulation, financing, financing for
marketing
– Refining for private companies
• Power
– Generation (except atomic), transmission, distribution etc.
 FDI Policy Initiatives
• FDI up to 100% under automatic route
– SEZs & Free Trade Warehousing Zones, Industrial
Parks, Construction of Development Projects
– Services
• Civil Aviation
– Airports – greenfiled projects
– Helicopter services etc.
• NBFCs
• Trading
– Wholesale / Cash & Carry trading
– Trading for exports etc.