fdi and their impact on the economy

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Foreign Direct Investment

By: Md. Sulaiman Akbari

Roll No: 111

its Impact on the

Economy

&

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Channels of Capital Flow

Loan

s

Loans

Dir e

ctInv

es

Direct Investments

Gr an

ts

Grants and Aids

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What is FDI?

According to International Monetary Fund, FDIis defined as “Investment that is made toacquire a lasting interest in an enterpriseoperating in an economy other than of the

investor”.

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Classification of FDI

From the perspective of the investor

1. Horizontal FDI- is undertaken for thepurpose of horizontal expansion toproduce the same kind of goods abroad

1. Vertical FDI- is undertake for the purposeof exploiting raw materials (backwardvertical FDI) or to be nearer to consumersthrough the acquisition of distributionoutlets(forward vertical FDI).

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Contd….

From the perspective of the host country

Import substituting FDI- involves the production of goods previously imported by the host country.

Export increasing FDI- desire to seek new sourcesnew sources of input, such as raw materials andintermediate goods..

Government Initiated FDI- when a government offersincentives to foreign investors in an attempt toeliminate a balance of payments deficit.

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What forms a FDI may take?

Greenfield Investment-

(Occurs when the investing firmestablishes new production, distribution

or other facilities in the host country).

Cross-border mergers and acquisitions

Joint Ventures

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Various ‘types’ of FDI

1. To gain access to factors of production i.e.resources, technical knowledge, managerialknow-how, patents or brand names ownedby a firm and not available in the home

economy of foreign firms.

1. To gain access to cheaper factors of 

production, i.e. low-cost labor, material etc.

1. To secure access to customers in host-country market.

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COND…

4. Access to products in which internationalcompetitors undertaking mutual investment inone another ( either through cross-shareholdings, or through the establishment of 

Joint ventures.)

5. ‘Tariff-jumping’, where locational advantages

for foreign firms in their home country, but thefirms are prevented from exporting to the hosteconomy by existence of tariffs or otherbarriers.

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M otivation fo r

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Fifth level

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Need for Foreign Investment

Raising the level of investment

Up-gradation of technology

Exploitation of natural resources

Development of basic economic infrastructure

Improvement in exports competitiveness

Improvement in the balance of payments

position

Benefit to consumers

Revenue to government

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Adverse Implications of ForeignInvestment

Exploitative character

Attitude of discrimination

Obstruct the growth of indigenous industrial

entrepreneurship.

Competition with home investments, profitfalls, causes fall in domestic savings.

Contribution in public revenue is less due toliberal tax concessions, subsidies and tariff protection.

May influence political decisions in developing

countries.

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Political Ideology and FDI

RadicalView

PragmaticNationalism

FreeMarket

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The Radical View

Marxist view:

MNE’s exploit less-developed hostcountries

Extract profits

Give nothing of value in exchangeInstrument of domination, notdevelopment

Keep less-developed countries

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The Radical View

By the end of the 1980s radical view was in retreat

Collapse of communism

Bad economic performance of countries thatembraced the radical view

Strong economic performance of countries whoembraced capitalism rather than the radical view

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The Free Market View

Nations specialize in goods and services thatthey can produce most efficiently

Resource transfers benefit and strengthenthe host country

Positive changes in laws and growth of bilateral agreements attest to strength of 

free market view

All countries impose some restrictions on FDI

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Pragmatic Nationalism

FDI has benefits and costs

Allow FDI if benefits outweigh costs

Block FDI that harms indigenous industry

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Golden rules for Foreign Direct Investment

§ Remove unnecessary restrictions on equityparticipation by companies

§ Standardize guidelines for environmental issues

§ Strengthen intellectual property rules.

§ Reduce the variance of FDI laws based on sector.

§ Increase areas of automatic approval

§ increase political commitment, regulatorytransparency, and dispute resolution mechanisms toforeign participation infrastructure.

§ focus immediately on the infrastructure of airports,telecommunications, ports, and roads in selectedareas to make the country more attractive to foreigninvestors.

§ Expand export processing zones to provide moderninfrastructure export-oriented projects.

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What areas to analyzebefore Investing in a Foreign

Market??

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Host Country Determinants

Policy framework for FDI

Economic, political and social stability.

Rules regarding entry and operations.

Standards of treatment of foreign affiliates

Policies on functioning structure of 

markets(especially competition and M&A policies)

Privatization policy

Trade policies.

Tax policy

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CONTD…

Business Facilitation

Investment promotion (including image-building,

investment generating activities and investmentfacilitation services)

Investment incentives

Hassle costs(related to corruption, administrative,efficiency, etc.)

Social amenities (bilingual schools, quality of life,etc.)

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Contd…

Economic determinants

Market seeking

Resource/asset-seeking

Efficiency seeking.

T d i FDI

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Trends in FDI

Flow and stock increased in the last 20 years

In spite of decline of trade barriers, FDI hasgrown more rapidly than world tradebecause

Businesses fear protectionist pressures

FDI is seen as a way of circumventing tradebarriers

Dramatic political and economic changes in

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The Direction of FDI

Historically, most FDI has been directed at the developednations of the world as firms based in advanced countriesinvested in other markets

The US has been the favorite target for FDI inflows

While developed nations still account for the largest share of 

FDI inflows, FDI into developing nations has increased

Most recent inflows into developing nations have been targeted atthe emerging economies of South, East, and Southeast Asia

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FDI Flow by Region

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Foreign DirectInvestment in INDIA

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FDI in india

Pre-liberalization policies

The attitude towards foreign capital wasone of fear and suspicion and only selectiveforeign investments were approved.

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Liberalization Policies

Liberalization is a process whereby liberalvalues, concepts and percepts take operationalform.

Abolition of industrial licensing system exceptfor some industries.

Ownership levels of 50%, 74%, and 100%

foreign equity.

Opening new sectors to foreign-ownedcompanies.

Foreign ownership up to 100% is permitted inmost manufacturing sectors.

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Post Liberalization Period

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Fourth level● Fifth level

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Attractiveness of India for FDIs

The 2009 survey of the Japan Bank forInternational Cooperation released inNovember 2009, conducted among Japaneseinvestors continues to rank India as the

second most promising country foroverseas business operations, after China.

A report released in February 2010 by LeedsUniversity Business School, commissioned byUK Trade & Investment (UKTI), ranks Indiaamong the top three countries whereBritish companies can do better business

during 2012-14.

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Click to edit Master text stylesSecond level● Third level●

Fourth level● Fifth level

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Recent trends of FDI in India

India attracted FDI equity inflows of US$ 2,214million in April 2010. The cumulative amount of FDI equity inflows from August 1991 to April2010 stood at US$ 134,642 million, according

to the data released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial andnon-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDIworth US$ 4.4 billion during April-March 2009-10, while construction activities including

roadways and highways attracted second

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COND…

In April 2010, the telecommunication sectorattracted the highest amount of FDI worth US$430 million, followed by services sector at US$355 million and computer hardware and

software at US$ 172 million, according to datareleased by DIPP. During the financial year2009-10, Mauritius has led investors into Indiawith US$ 10.4 billion worth of FDI comprising43 per cent of the total FDI equity inflows intothe country. The FDI equity inflows in Mauritiusis followed by Singapore at US$ 2.4 billion andthe US with US$ 2 billion, according to datareleased by DIPP.

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Critical Appraisal of FDI in India andits impact on the economy.

Does liberalization mean simply inviting a goodnumber of foreign companies on whatever termswith whatever objectives in mind and in whatever

sector indiscriminately?

To what extent is technology, that has gainedentry, consistent with India’s employment

objectives?

Has local technological development received aset-back on account of foreign technology?

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References

Ø Business Environment Shaikh Saleem

Ø Financial Services, Nalini Prava

Ø International Financial Management, V.K.

BhallaØ International Business Environment, V.K.

Bhalla

&

Various publications of:

q