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Foreign investment and multinational corporations

Capital flows on private account Foreign portfolio investment foreign direct investment

Foreign portfolio investment

Foreign institutions such as banks ,insurance companies,companies managing mutual funds purchase stocks and bonds of companies of other countries in the secondary markets. The investment is made for Diversifying their risks Higher interest on their investments

Advantages Provide needed finance Bring foreign exchange Disadvantages Volatile Destabilising effects on financial markets And the economy


FDI is the investment in the construction of physical capital such as building factories and infrastructure (power, telecom, ports etc) in the capital importing country. It may be done in several ways Cos may be specially set up in the capitalexporting country to carry out trade and industry in host country

Existing corp spreads out its business in another country by establishing branches. To form cos and register them in the borrowing country without having any connection in the lending country. Joint ventures or joint participation

Advantages of FDI
Such investment does not burden the taxpayersince no interest is to be paid at fixed rate as in the case of foreign borrowing.The foreign investor ids compensated by the profit he gets Efficient utilisation of resources to maximise profit. Introduction of new technology,modern skills ,innovations and new ideas.

Increased investment by ploughing back of part of profit unlike FII. Boost to exports and fall in imports improve BOP position. Inducement to domestic investment in the form of joint participation or in local ancillary industries. Real addition to productive capacity foreign borrowings may beutilised unproductively

Help to overcome suply-side bottlenecks The foreign cos have the resources,technology and technical knowhow to start productive ventures in infrastructure. FDIenters the developing countriesto build physical assets and these assets stay even if investor decides to sell out later to domestic buyers unlike FII.

Political and social instability Uncertainty about the juridiction of the courts. Exchange controls and currency convertibility Controls on capital issues Fear pof discriminatory legislation Fear of nationalisation Shutting out some industrial fields for foreign investors Employment of nationals in senior posts.

Conditions for favourable investment climate

Political stability and freedom from external aggression Security of life and property Availability of opportunities for earning profits Facilities for thr remittance of profits, dividends, interest etc. Freedom from double taxation

A general spirit of friendliness for foreign investors Facilities for the immigration and employment of foregn technical and administrative staff. Asystem of taxation that does not impose an excess burden on private foreign enterprise.

An organisation that engages in producion or service activities through its own affiliates in several countries, maintains control over the policies of the affiliates and manages from a global perspective. With a global perspective top managers allocate resources and coordinate activities to take the best possible advantage of favourable business conditions throughout the world.

A MNC passes throuhgh the following stages

Exports products to foreign countries Establishes sales organisations abroad Licenses use of patents technology to foreign firms that make and sell MNCs products. Establishing foreign manufacturing facilities but important decisions about such matters as product design and finances are made at the home office.

Gives foreign producion facilities substantial autonomy but still reserves some important decisions for the home office. Decentralises authority throughout the company so that functions at home and abroad are done by executives from different countries.


Benefits to home countries Transfer of technology, capital and entrepreneurship Improvement of host countries BOP Creation of local jobs and career opportunities Improved competition in the local economy and better utilisation of resources

Greater availability of of products for local consumers Greater access to high quality mgt talents that tends to be scarce in developing countries Encouragement to world economic unity and through that political and economic integration- all resulting in world harmony

Benefits to home countries

Acquision of raw materials from abroadexport of components and finished goods for assembly or distribution in forign countris Inflow of income from overseas profits , royalties,licensing fees and mgt contracts. Job and career opportunities at home and abroad in connection with overseas operations. Technology and mgt expertise acquired from competing in global markets

Traditionally foreign exchange transactions have been regulated in India. FERA aim at regulating foreign exchange. FERA was promulgated in 1973. It came into force 1974.

To regulate certain payments To regulate dealings in foreign exchange and securities To regulate transactions indirectly affecting foreign exchange To regulate the import and export of currency To conserve the foreign exchange resources of the country

To ensure the proper utilisation of foreign exchange in the interests of the economic development of the country. To regulate the acquisition, holding, transfer or disposal of immovable property by persons residents in india (other than foreign nationals) To regulate participation by residents in India in the trading , commercial and industrial activities abroad in the form of

To regulate the appointment of agent or technical or management adviser of any person or company in foreign companies. To regulate the purchase of goods in India(with a view to reselling them before processing) by foreign companies. To regulate foreign investment in the form of branches in India so that prior permission of RBI is required by foreign companies to carry on in India or establish

In the country for carrying on any activity of a trading, commercial or industrial nature. To regulate employment of foreign nationals. To regulate acquision etcof immovable property in India by foreign nationals or foreign companies.


A.Restrictions on dealing in foreign exchange RBI is the sole authority to regulate foreign exchange transactions. B.Restrictions on payments Section 9 laid down certain restrictions on payments. C.Restriction on import and export of certain currency and bullion

Section 13 of the Act provided that except with yhe permission of RBI no person can bring or send into India any foreign exchange or any Indian currency other tah foreign exchange obtained by him from an authorised dealer or money changer.Bullion movements prevented prior to 1993. D. Duty of person entitled to receive foreign exchange

Section 16 of the Act provided that no person who has a right to receive any foreign exchange or to receive from a person resident outside India a payment in rupees without RBI permission E.Payment for exported goods Section 18 provides that the central government may prohibit export of goods from India to any place

F. Regulation of transfer of securities. Section 19 of the Act provided that no person except with the RBI permission transfer or send any security to any place outside India. G.Restrictions on holding of immovable propery outside India Section 25. H. Restrictions on acquisition, holding etc of ommovable proprty in India.Sub section 1 of sec31

I. Restrictions on appointment of certain persons and companies as agents or technical or management advisors in India. Sec 28 laid down without permission of RBI No person resident outside India (a citizen of India or not)or a person who is not a citizen of India but is resident of India acts as such agent

J. Restricions on establishment of place of business in India Sec 29 prohibits to establish in India a branch, office or other place of busines sfor carrying on any activity of a trading commercial or industrial nature. K. Prior permission for taking up employment etc in India by nationals of foreign states.Sec 30

a.Provisions relating to Enforcement, penalty and prosecution. Sections dealing with enforcement. Sections 33 to 45. b.Penalty, adjudication and appeal. Sections 50 to 53. c.Offences and prosecutions. Sections 56 and 57.