Foreign Direct Investment

Contents
• The meaning of investment
• Determinants of foreign investment
• Types, forms, and theories of foreign investment
• Advantages and disadvantages of foreign investment
•MNCs as source of Foreign Investment
• The state of foreign investment in India
•Investment outflow from India
 What is investment?
• Investment refers to that part of current output that makes a new
addition to the existing stock of capital.

• The investment which is intended or planned is known as ex-ante

investment. The actual or realized investment is known as ex-post
investment.
Determinants of Foreign Investment
• Investment depending on the real rate of
interest
• Level of uncertainty
• Favourable and stable exchange rate
• Profitability
• Political environment
• Size of the market
• Necessity of new products
• Possibility of innovations
Determinants of Foreign Investment
• Consumers’ demand
• State policies
• Availability of capital and liquidity assets of
investors, and technology
• Cheap and disciplined labour
• Tax regime
• Easy repatriation
• Non-discrimination
• Security
• Better exports and imports
• Stable and favourable macroeconomic
fundamentals
Types of foreign investment
 Forms of Foreign Development
Investment
Horizontal
• In the case of horizontal FDI, the foreign investor undertakes the
same type and method of production.

Vertical
• In the case of vertical FDI, each stage of production is performed in
a country where the cost of production is the lowest.

Conglomerate
• In the case of conglomerate FDI, the FDI produces a product in the
host country, which is entirely new and it does not produce such
product in the home country.
 Theories of foreign investment
• Perfect or Preferable Market Theory
• Market Perfection or Monopolistic Advantage
Theory
• Internalization Theory
• Exclusive Gain Theory
• Locational Optimum Theory
• International Product Life Cycle Theory
• Theory of Herd Behaviour
• Eclectic Theory
• Towards a New Theory: Capability-Connectivity
Theory
 Foreign investment in India
• Foreign investment has been given a significant role in
the growth dynamics of India especially after liberalization
and deregulation of the economy since 1991.

• Every year, different types of foreign investment

including portfolio investment and FDI are pouring into the
country.
• India is now regarded as the third most lucrative place
after China and USA for foreign investment as disclosed by
the respondents of the United Nations Development
Programme (UNDP) survey.
Why Does India Want Foreign Direct
Investment
• To increase export earnings to reduce the balance of
payments problem
• To get the advantages of new and improved technology
• To get improved managerial skill from experienced
foreign firms
• To speed up the process of capital formation and
economic growth
• To reduce the dependency on foreign aid
• To increase development-oriented investment and
expertise
Government Policy towards Foreign
Direct Investment
• The policy of the government with respect to repatriation of profits
and dividends and capital was based on stringent laws like the Foreign
Exchange Regulation Act (FERA) of 1973.

• According to this Act, for a foreign company or person, prior

permission from the Reserve Bank of India (RBI) was necessary to
conduct business, trade of industrial or commercial nature, and
purchasing shares of Indian companies.

• Before 1991, the government policy on foreign investment

maintained that foreign capital should not be allowed to enter into
those areas where it already existed.
 FDI Inflows in the World Economy during 1991-2013 (Value in US $ million)

Period World Developed Economies Developing Economies

Value % Share Value % Share Value % Share

1991 155365.88 100 115329.65 74.23 39832.71 25.64

1995 343279.79 100 221606.79 64.56 117674.49 34.28

2000 1414999.4 100 1142367.6 80.73 266644.27 18.84

2005 996713.81 100 622871.53 62.49 341428.26 34.26

2010 1422254.8 100 703474.05 49.46 648207.58 45.58

2011 1700082.4 100 880406.18 51.79 724839.92 42.64

2012 1330272.9 100 516664.34 38.84 729449.23 54.83

2013 1451964.7 100 565625.83 38.96 778372.35 53.61

Source:-compiled from the various issues of World Investment Report, UNCTAD.

 Table:-2 India’s Share in World FDI inflows ($millions)

Year World India % Share of India

2000 1363215 2633 0.19
2001 684071 5477.64 0.80
2002 591386 5629.67 0.95
2003 551993 4321.08 0.78
2004 682749 5777.81 0.85
2005 927402 7621.77 0.82
2006 1393034 20327.76 1.46
2007 1871702 25349.89 1.35
2008 1489732 35657.25 2.39
2009 1186513 47138.73 3.97
2010 1328215 21125.45 1.59
2011 1564935 25542.84 1.63
2012 1467149 36190.40 2.47
2013 1228283 28199. 2.30

Source:- compiled from various issues of UNCTAD.

 Table:-3 India’s FDI inflows share of GFCF (In US $ millions)
Year INDIA's FDI Inflows FDI INFLOWS as %age share of GFCF
1991 75.0 0.12
1992 252.0 0.37
1993 532.0 0.87
1994 974.0 1.34
1995 2151.0 2.44
1996 2168.0 2.35
1997 3588.0 3.58
1998 2525.0 2.49
1999 3619.0 3.24
2000 2633.0 2.43
2001 5477.6 4.43
2002 5629.7 4.53
2003 4321.1 2.85
2004 5777.8 2.79
2005 7621.8 3.01
2006 20327.8 6.85
2007 25349.9 6.22
2008 35657.3 9.01
2009 47138.7 10.88
2010 21125.4 4.00
2011 25542.8 4.14
2012 36190.4 6.29
2013 28199.0 5.10
2014 34417.0 5.83

Source:- compiled from various issues of UNCTAD and World Bank

FDI inflow of top 10 countries in India (2000-13) - percentage share

Country 2000-13
Mauritius 36.83
Singapore 10.77
UK 9.84
Japan 7.33
U.S.A 5.65
Netherlands 5.03
Cyprus 3.45
Germany 2.92
France 1.83
U.A.E 1.26

Source:-various issues of SIA-newsletter, DIPP.

Service Sector 161539 238886 230197 630622 16.97
Housing & Real Estate 112002 95008 123425 330435 8.89

Chemical (Other Than Fertilizer) 20451 265942 17525 303918 8.18

Hotel & Tourism 22791 41934 180114 244839 6.59
Metallurgical Industry 47404 74859 82419 204682 5.51
Drugs & Pharmaceuticals 10040 145315 32728 188083 5.06
Telecommunications 69145 104926 4283 178354 4.80
Power 48677 78394 35263 162334 4.37
Automobile Industry 56599 39267 57425 153291 4.13
Petroleum & Natural gas 27086 99910 12013 139009 3.74
Miscellaneous Industries 76417 41766 16094 134277 3.61
Computer Software & Hardware 45348 31351 30167 106866 2.88
Trading 25781 25931 34657 86369 2.32
Industrial Machinery 26890 21675 32652 81217 2.19
Non Conventional Energy 28225 20340 32340 80905 2.18
 Investment outflow from India
• It has been estimated by some foreign analyst that
India is the 21st largest outward investor in the
world. Two factors are especially responsible for this
development.

• First, economic liberalization does not restrict

outward investment, and,

• Second, many of the Indian companies over the

years during the period of globalization have
acquired international skill and competitiveness.