fdi and their impact on the economy
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8/7/2019 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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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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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