Download - Full report on FDI
SUBMITTED TO: N.R VAID
FOSTIIMA BUISNESS SCHOOL
REPORT ON FOEIGN DIRECT
INVESTMENT
Saket Kumar, MBA SECOND YEAR.
ROLL NO : PGP091149
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INDEX
S.No TOPIC PAGE NO
1. What is Foreign Direct Investment 3.
2. Types of FDI 4
3. METHODS OF FOREIGN DIRECT INVESTMENT 7
4. Foreign direct investment incentives 7
5. ENTRY MODE 8
6. Policy 12
7. Determinants of FDI 16
8. Advantage & Disadvantage of FDI 17
9. Why India Gets Limited FDI 18
10. Conclusion 20
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What is Foreign Direct Investment?
Foreign direct investment (FDI) refers to long term participation by country A into
country B. It usually involves participation in management, joint-venture, transfer of
technology and expertise. There are three types of FDI: inward foreign
direct investment and outward foreign direct investment, resulting in
a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is
the cumulative number for a given period. Direct investment excludes investment
through purchase of shares.
It is the policy of the Government of India to attract and promote productive FDI from
nonresidents in activities which significantly contribute to industrialization and socio-
economic development. FDI supplements the domestic capital and technology.
India has one of the most transparent and liberal FDI regimes among the emerging and
developing economies. By FDI regime we mean those restrictions that apply to foreign
nationals and entities but not to Indian nationals and Indian owned entities. The
differential treatment is limited to a few entry rules, spelling out the proportion of equity
that the foreign entrant can hold in an Indian (registered) company or business.
Foreign direct investment (FDI) has become an integral part of national development
strategies for almost all the countries globally. Its global popularity and positive output in
augmenting of domestic capital, productivity and employment; has made it an
indispensable tool for initiating economic growth for nations.
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India is evolving as one of the ‘most favored destination’ for FDI in Asia and the Pacific
(APAC). It has displaced US as the second-most favored destination for foreign direct
investment (FDI) in the world after China according to an AT Kearney's FDI
Confidence Index. FDI in India has contributed effectively to the overall growth of the
economy in the recent times. FDI inflow has an impact on India's transfer of new
technology and innovative ideas; improving infrastructure, a competitive business
environment.
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BY DIRECTION
Inward FDI
Here, investment of foreign capital occurs in local resources.
The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of
existent regulations, loans on low rates of interest and specific grants. The idea behind
this is that, the long run gains from such a funding far outweighs the disadvantage of
the income loss incurred in the short run. Flow of Inward FDI may face restrictions from
factors like restraint on ownership and disparity in the performance standard.
Outward FDI
Foreign direct investment, which is outward, is also referred to as “direct investment
abroad”. In this case it is the local capital, which is being invested in some foreign
resource. Outward FDI may also find use in the import and export dealings with a
foreign country. Outward FDI flourishes under government backed insurance at risk
coverage.
BY TARGET
Greenfield FDI
Greenfield investments involve the flow of FDI for either building up of new production
capacities in the host nation or for expansion of the existent production facilities of the
host country. The plus points of this come in form of increased employment
opportunities, relatively high wages, R&D activities and capacity enhancement.
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The flip side comes in the form of declining market share for the domestic firm and
repatriation of profits made to a foreign country, which if retained within the country of
origin could have led
To considerable capital accumulation for the nation.
Horizontal FDI
Horizontal FDI is an investment made by a multinational company in different nations.
The investment is made for conducting the similar business operations as already
operated by the company. For example, if a soft drink manufacturing company makes
its plant outside its national borders then it is horizontal FDI. Horizontal FDI results in
expansion of the parent company and brings FDI in the other economy.
Vertical FDI
There are two types of vertical direct investment. The first type of foreign investment is
called foreign vertical direct investment which invests in the industry of foreign country.
Historically most backward vertical foreign direct investment has been in
extractive industries like oil extraction, bauxite mining, tin mining and copper mining.
The objective has been to provide inputs into a firm's downstream operations for
example oil refining, aluminum smelting and fabrication. Firms such as Royal
Dutch/Shell, British Petroleum, RTZ and Alcoa are among the classic examples.
The second type of the foreign direct investment included forward vertical foreign direct
investment in which an industry abroad sells the outputs of a firm's domestic production
process. Forward vertical foreign direct investment is less common than backward
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vertical foreign direct investment. For example when Volkswagen entered
the United States market it acquired a large number of dealers rather than distribute
its cars through independent United States dealers.
METHODS OF FOREIGN DIRECT INVESTMENT
The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods:
by incorporating a wholly owned subsidiary or company
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms:
low corporate tax and income tax rates
tax holidays
other types of tax concessions
preferential tariffs
special economic zones
EPZ - Export Processing Zones
Bonded Warehouses
investment financial subsidies
soft loan or loan guarantees
free land or land subsidies
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relocation & expatriation subsidies
job training & employment subsidies
infrastructure subsidies
R&D support
derogation from regulations (usually for very large projects)
ENTRY MODE
A foreign company planning to set up business operations in India has the following
options:
1) As an Indian Company
A foreign company can commence operations in India by incorporating a company
under the Companies Act, 1956 through
Joint Ventures; or
Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the
requirements of the investor, subject to equity caps in respect of the area of activities
under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral
equity caps & procedures can be obtained from Department of Industrial Policy &
Promotion, Government of India.
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Joint Venture with an Indian Partner
Foreign Companies can set up their operations in India by forging strategic alliances
with Indian partners.
Joint Venture may entail the following advantages for a foreign investor:
Established distribution/ marketing set up of the Indian partner
Available financial resource of the Indian partners
Established contacts of the Indian partners which help smoothen the process of
setting up of operations
Wholly Owned Subsidiary Company
Foreign companies can also to set up wholly owned subsidiary in sectors where 100%
foreign direct investment is permitted under the FDI policy.
Incorporation of Company
For registration and incorporation, an application has to be filed with Registrar of
Companies (ROC). Once a company has been duly registered and incorporated as an
Indian company, it is subject to Indian laws and regulations as applicable to other
domestic Indian companies.
2) As a Foreign Company
Foreign Companies can set up their operations in India through
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Liaison Office/Representative Office
Project Office
Branch Office
Such offices can undertake any permitted activities. Companies have to register
themselves with Registrar of Companies (ROC) within 30 days of setting up a place of
business in India.
Liaison office/ Representative office
Liaison office acts as a channel of communication between the principal place of
business or head office and entities in India. Liaison office cannot undertake any
commercial activity directly or indirectly and cannot, therefore, earn any income in India.
Its role is limited to collecting information about possible market opportunities and
providing information about the company and its products to prospective Indian
customers. It can promote export/import from/to India and also facilitate
technical/financial collaboration between parent company and companies in India.
The approval for establishing a liaison office in India is granted by the Reserve Bank of
India (RBI).
Project Office
Foreign Companies planning to execute specific projects in India can set up temporary
project/site offices in India. RBI has now granted general permission to foreign entities
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to establish Project Offices subject to specified conditions. Such offices cannot
undertake or carry on any activity other than the activity relating and incidental to
execution of the project. Project Offices may remit outside India the surplus of the
project on its completion, general permission for which has been granted by the RBI.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed
to set up Branch Offices in India for the following purposes:
Export/Import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is engaged.
Promoting technical or financial collaborations between Indian companies and
parent or overseas group company.
Representing the parent company in India and acting as buying/selling agents in
India.
Rendering services in Information Technology and development of software in
India.
Rendering technical support to the products supplied by the parent/ group
companies.
Foreign Airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its own but is
permitted to subcontract these to an Indian manufacturer. Branch Offices established
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with the approval of RBI may remit outside India profit of the branch, net of applicable
Indian taxes and subject to RBI guidelines Permission for setting up branch offices is
granted by the Reserve Bank of India (RBI).
Branch Office on "Stand Alone Basis"
Such Branch Offices would be isolated and restricted to the Special Economic zone
(SEZ) alone and no business activity/transaction will be allowed outside the SEZs in
India, which include branches/subsidiaries of its parent office in India. No approval shall
be necessary from RBI for a company to establish a branch/unit in SEZs to undertake
manufacturing and service activities subject to specified conditions.
Policy
FDI up to 100% is allowed under the automatic route in all activities/sectors except the
following which will require approval of the Government:
• Activities/items that require an Industrial License;
• Proposals in which the foreign collaborator has a previous/existing venture/tie up in
India in the same. Prior Government approval for new proposals would be required
only in cases where the foreign investor has an existing joint venture, technology
transfer, trade mark agreement in the same field. With the amendment of the Press
Note 18, joint ventures formed with foreign investment before December 12, 2004
would be considered as “existing JVs” which will fall under the ambit of Press Note
18. The foreign partner in such JV has to obtain a No Objection Certificate (NOC)
from the Indian partner for starting new venture in India in the “same” field of activity.
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• All proposals relating to acquisition of shares in an existing Indian company by a
foreign/NRI investor.
• All proposals falling outside notified sectoral policy/caps or under sectors in which FDI
is not permitted.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization
are taken. Change in sectoral policy/sectoral equity cap is notified from time to time
through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department
of Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified
by RBI under FEMA.
Automatic Route
FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in
most of the sectors including the services sector under automatic route. FDI in
sectors/activities under automatic route does not require any prior approval either by the
Government or the RBI. The investors are required to notify the Regional office
concerned of RBI of receipt of inward remittances within 30 days of such receipt and will
have to file the required documents with that office within 30 days after issue of shares
to foreign investors.
The present Automatic Route allows Indian companies engaged in all industries except
for certain select industries/sectors to issue shares to foreign investors up to 100% of
their paid up capital in Indian companies. There are also some areas where though
Automatic Route is available, foreign investors cannot invest beyond a certain
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percentage of the paid up capital of the Indian companies or where investment is
subject to some other conditions.
Foreign investors have to, however, keep in mind that they may invest freely under the
Automatic Route described above but where such investment does not conform to
policies of Government of India, a specific approval from Government must be sought.
For example, there are Government guidelines on location of industrial units, or there
are certain items like explosives or liquor that need an industrial license.
Government approval route
All activities which are not covered under the automatic route, prior Government
approval for FDI/NRI shall be necessary. Areas/sectors/activities hitherto not open to
FDI/NRI investment shall continue to be so unless otherwise decided and notified by
Government.
An investor can make an application for prior Government approval even when the
proposed activity is under the automatic route.
Proposals requiring Govt’s Approval
Application for proposals requiring prior Govt’s approval should be submitted to FIPB in
FC-IL form. Plain paper applications carrying all relevant details are also accepted. No
fee is payable. The following information should form part of the proposals submitted to
FIPB: -
(a) Whether the applicant has had or has any previous/existing financial/technical
collaboration or trade mark agreement in India in the same or allied field for which
approval has been sought; and
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(b) If so, details thereof and the justification for proposing the new venture/technical
collaboration (including trade marks).
(c) Applications can also be submitted with Indian Missions abroad who will forward
them to the Department of Economic Affairs for further processing.
(d) Foreign investment proposals received in the DEA are placed before the Foreign
Investment Promotion Board (FIPB) within 15 days of receipt. The decision of the
Government in all cases is usually conveyed by the DEA within 30 days.
FDI Prohibited
FDI is not permissible in the following cases
i. Gambling and Betting, or
ii. Lottery Business, or
iii. Business of chit fund
iv. Nidhi Company
v. Housing and Real Estate business (to a certain extent has been opened. For details
please see note on Construction)
vi. Trading in Transferable Development Rights (TDRs)
vii. Retail Trading (discussions are being held to open this area-B2B and Cash & Carry
are permitted)
viii. Atomic Energy
ix. Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of
Vegetables, Mushrooms etc. under controlled conditions and services related to
agro and allied sectors) and Plantations(other than Tea plantations)
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Determinants of Foreign Direct Investment
One of the most important determinants of foreign direct investment is the size as well
as the growth prospects of the economy of the country where the foreign direct
investment is being made.
It is normally assumed that if the country has a big market, it can grow quickly from
an economic point of view and it is concluded that the investors would be able to make
the most of theory investment in that country.
The population of a country plays an important role in attracting foreign direct
investors to a country. In such cases the investors are lured by the prospects of a huge
customer base.
If the country has a high per capita income or if the citizens have reasonably good
spending capabilities then it would offer the foreign direct investors with the scope of
excellent performances.
The status of the human resources in a country also helps in attracting direct
investment from overseas.
If a country has plenty of natural resources it always finds investors willing to put their
money in them.
Inexpensive labour force is also an important determinant of attracting foreign direct
investment.
Infrastructural factors like the status of telecommunication and railways play an
important role in having the foreign direct investors come into a particular country.
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Advantage of FDI
Causes a flow of money into the economy which stimulates economic activity
Employment will increase
long run aggregate supply will shift outwards
Aggregate demand will also shift outwards as investment is a component of
aggregate demand
It may give domestic producers an incentive to become more efficient
The government of the country experiencing increasing levels of FDI will have a
greater voice at international summits as their country will have more
stakeholders in it.
Disadvantages of FDI
FDI has adverse effects on competition.
FDI will be make the host country lost the control over domestic policy.
Certain foreign policies are adopted that are not appreciated by the workers of
the recipient country
Another disadvantage of foreign direct investment is that there is a chance that a
company may lose out on its ownership to an overseas company.
Local market is affected badly
If there is a lot of FDI into one industry e.g. the automotive industry then a
country can become too dependent on it and it may turn into a risk that is why
countries like the Czech Republic are "seeking to attract high value-added
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Problems of Foreign Capital or why .Too services such as research and
development (e.g.) biotechnology)"
Why India Gets Limited FDI
Image and Attitude: There is a perception among investors that foreign businesses are
still treated with suspicion and distrust in India.
Domestic Policy: While the FDI policy is quite straightforward and getting increasingly
liberalized for most sectors, once an investor establishes his presence, “national”
treatment means that this investor is subject to domestic regulations, which are
perceived as being excessive.
Procedures. Although approval for investment is given quite readily, actual setting up
requires a long series of further approvals from central, state and local authorities. This
introduces substantial implementation lags.
Quality of infrastructure. Foreign investors are concerned about a number of
problems with the infrastructure sector – in particular, electricity and transport. Irregular
and undependable supply complicates problems for foreign investors.
State government level obstacles. This issue is tied up with one of the most pressing
agenda items for reform. At the level of actual investment the practices of state (and
often lower levels) governments become important. There is widespread agreement
among most observers that state government practices in issues such as land records,
utility (power, water etc.) connections, providing clearances of various sorts may make
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an important difference in the time it takes to get a plant up and running. Differences in
state practices in such matters partly explain the disproportionate flow of FDI to some
states in the peninsular region of India. In addition, there are some fiscal barriers to
unimpeded flow of goods and services within the country, although the level of such
barriers has come down in recent times.
Delays in legal process. Despite a highly structured legal system, dispute settlement
and contract enforcement are time consuming activities in India. Such apprehensions
deter the rapid flow of foreign investment.
Conclusion
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FDI provides India with stability in inflow of funds, access to international markets,
export growth, transfer of technology and skills and improves balance of payments.
More FDI does not necessarily guarantee high growth rates. The relative emphasis
must shift from a broad (scatter shot) approach to one of targeting specific companies in
specific sectors. Socially responsible FDI should be encouraged through the
development of national and international investment guidelines and regulations.
FDI is beneficial to India’s growth and India’s growth is beneficial for FDI. India needs to
create a talent pool suitable for the investors and it needs to develop infrastructure that
will encourage the investors. These steps taken by India to bring FDI will also help India
to grow on its own. FDI if monitored and nurtured in such a way that it will bring more
skills and resources to India will be mutually beneficial.
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