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FOREIGN DIRECT INVESTMENT

Foreign direct investment (FDI) plays an extraordinary and growing

role in global business. It can provide a firm with new markets and marketing

channels, cheaper production facilities, access to new technology, products,

skills and financing. For a host country or the foreign firm which receives the

investment, it can provide a source of new technologies, capital, processes,

products, organizational technologies and management skills, and as such

can provide a strong impetus to economic development.

Foreign direct investment, in its classic definition,

is defined as a company from one country making a physical

investment into building a factory in another country. The direct investment

in buildings, machinery and equipment is in contrast with making a portfolio

investment, which is considered an indirect investment. In recent years,

given rapid growth and change in global investment patterns, the definition

has been broadened to include the acquisition of a lasting management

interest in a company or enterprise outside the investing firms home

country. As such, it may take many forms, such as a direct acquisition of a

foreign firm, construction of a facility, or investment in a joint venture or

strategic alliance with a local firm with attendant input of technology,

licensing of intellectual property, In the past decade, FDI has come to play a

major role in the internationalization of business. Reacting to changes in

technology, growing liberalization of the national regulatory framework

governing investment in enterprises, and changes in capital markets

profound changes have occurred in the size, scope and methods of FDI. New

information technology systems, decline in global communication costs have

made management of foreign investments far easier than in the past. The

sea change in trade and investment policies and the regulatory environment


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globally in the past decade, including trade policy and tariff liberalization,

easing of restrictions on foreign investment and acquisition in many nations,

and the deregulation and privatization of many industries, has probably been

the most significant catalyst for FDIs expanded role.

The FDI story for India began in 1991 and announced the New

Industrial Policy to open doors for liberalization. Today India has been ranked

third in global foreign direct investments in 2009 and will continue to remain

among the top five attractive destinations for international investors during

2010-11, according to United Nations Conference on Trade and

Development.

As mentioned above, the overwhelming majority of foreign direct

investment is made in the form of fixtures, machinery, equipment and

buildings. This investment is achieved or accomplished mostly via mergers &

acquisitions. In the case of traditional manufacturing, this has been the

primary mechanism for investment and it has been heretofore very efficient.

Within the past decade, however, there has been a dramatic increase in the

number of technology startups and this, together with the rise in prominence

of Internet usage, has fostered increasing changes in foreign investment

patterns. Many of these high tech startups are very small companies that

have grown out of research & development projects often affiliated with

major universities and with some government sponsorship. Unlike traditional

manufacturers, many of these companies do not require huge manufacturing

plants and immense warehouses to store inventory. Another factor to

consider is the number of companies whose primary product is an

intellectual property right such as a software program or a software-basedtechnology or process. Companies such as these can be housed almost

anywhere and therefore making a capital investment in them does not

require huge outlays for fixtures, machinery and plants.


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India attracted FDI equity inflows of US$ 2,214 million in April 2010.

The cumulative amount of FDI equity inflows from August 1991 to April 2010

stood at US$ 134,642 million, according to the data released by the

Department of Industrial Policy and Promotion (DIPP).Over the years we have

witnessed tremendous development in the key sectors owing to FDI infusion.

Categorization of FDI


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FDI can be categorized as shown below

Inward FDI:

Inward FDI for an economy can be defined as the capital provided from

a foreign direct investor residing in a country, to that economy, which is

residing in another country. Here, investment of foreign capital occurs in

local resources. Flow of Inward FDI may face restrictions from factors like

restraint on ownership and disparity in the performance standard.

EXAMPLE: General Motors decide to open a factory in Malaysia. They are

going to invest some capital. That capital is inward FDI for Malaysia.

Outward FDI:


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When investment is made by a domestic company in the foreign

country, then there is outflow of FDI from domestic country to foreign

country. Foreign direct investment, which is outward, is also referred to as

direct investment abroad.

Outward FDI faces restrictions under a host of factors as described below

Industries related to defense are often set outside the purview of

outward FDI to retain government's control over the defense related

industrial complex.

Subsidy scheme targeted at local businesses.

Government policies, which lend support to the phenomenon of

industry nationalization.

GREENFIELD INVESTMENT

A form of foreign direct investment where a parent company starts a

new venture in a foreign country by constructing new operational facilities

from the ground up. In addition to building new facilities, most parent

companies also create new long-term jobs in the foreign country by hiring

new employees.

Developing countries often offer prospective companies tax-breaks,

subsidies and other types of incentives to set up green field investments.

Governments often see that losing corporate tax revenue is a small price to

pay if jobs are created and knowledge and technology is gained to boost the

country's human capital. A related term to Greenfield Investment which isbecoming popular is Brownfield Investment, where a site previously used for

a "dirty" business purpose, such as a steel mill or oil refinery, is cleaned up

and used for a less polluting purpose, such as commercial office space or a

residential area.


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MERGERS AND ACQUISITIONS

1. Horizontal A merger in which one firm acquires a supplier or another firm that is

closer to its existing customers.

Often in an attempt to control supply or distribution channels.

2. Vertical

A merger in which one firm acquires a supplier or another firm that is

closer to its existing customers.

Often in an attempt to control supply or distribution channels.

3. Conglomerate

A merger in which two firms in unrelated businesses combine.

Purpose is often to diversify the company by combining uncorrelated

assets and income streams.

4. Cross--border (International) M&As

A merger or acquisition involving a Indian and a foreign firm, either the

acquiring or target company.

JOINT VENTURE

A joint venture is here defined as shared ownership in a foreign

business. Some advantages of a MNE working with a local joint venture

partner are:

Better understanding of local customs, mores and institutions of government

Providing for capable mid-level management.


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Some countries do not allow 100% foreign ownership.

Local partners have their own contacts and reputation which aids in

business.

IMPORTANCE OF FDI

FDI provides ready resource for the growth of the economy. For capital

starved country, FDI could be a boon. Generating funds internally may

require much time and also FDI is motivated by long term profit

considerations of the investors.

The enhanced money inflow from overseas means that the country can

import more goods those are basic to the building of the economy. This is

particularly important for developing country.

FDI acts as the nucleus around which other businesses can grow. For

example, TOYOTA motors have established their automobile plants in India

and they source fraction of parts from local firms.

Current Scenario

Foreign Direct Investment in India

In India, Foreign Direct Investment Policy allows for investment only in

case of the following form of investments through financial alliance, joint

schemes and technical alliance, private placements or preferential

allotments.

India has among most liberal and transparent policy on FDI among the

emerging economies. FDI up to 100% is allowed under the automatic route in

all sectors except the following which require prior approval of government:

An ongoing review of the FDI policy is carried out so as to initiate more

liberalization. Change in sectoral policy/sectoral equity cap is notified from

time to time through Press Notes. This is done by the Secretariat for

Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion.


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Policy announcement by SIA are subsequently notified by RBI under FEMA.

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. They will have

to file the required documents with that office within 30 days after issue of

shares to foreign investors

Foreign Direct Investment in India is not allowed under the

following industrial sectors:

Arms and ammunition

Atomic Energy

Rail Transport

Mining of metals

Up to 100 per cent equity is allowed in the following sectors

Export Trading Companies

Hotels and Tourism

Hospitals

Shipping

Deep Sea Fishing

Oil Exploration

Power

Housing and Real Estate

Highways, Bridges and Ports

Other Sectors


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Drugs & Pharmaceuticals.

Private Banking

Insurance Sector

Telecommunication.

Top 5 Sectors Attracting FDI (2009-10) $ mn

SECTOR INVESTME

NT

In millionsService Sector 4392

Construction 2868

Housing and real

Estate

2844

Power 1437

Automobile 1177

Many sectors present opportunities in India but this article will

concentrate on Retail, Education and Insurance Sectors which are ripe for

accepting FDI.

Sector Specific Foreign Direct Investment in India

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist

complexes providing accommodation and/or catering and food facilities to

tourists. Tourism related industry include travel agencies, tour operating


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agencies and tourist transport operating agencies, units providing facilities

for cultural, adventure and wild life experience to tourists, surface, air and

water transport facilities to tourists, leisure, entertainment, amusement,

sports, and health units for tourists and Convention/Seminar units and

organizations.

For foreign technology agreements, automatic approval is granted if

i. Up to 3% of the capital cost of the project is proposed to be paid for

technical and consultancy services including fees for architects,

design, supervision, etc.

ii. Up to 3% of net turnover is payable for franchising and

marketing/publicity support fee, and up to 10% of gross operating

profit is payable for management fee, including incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to

guidelines issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC

activities shall be as per levels indicated below:

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services


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v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

xiv. Housing Finance

xv. Foreign Exchange Brokering

xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought

upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which

US $ 7.5 million to be brought up front and the balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of

all permitted non-fund based NBFCs with foreign investment.


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d. Foreign investors can set up 100% operating subsidiaries without the

condition to disinvest a minimum of 25% of its equity to Indian entities,

subject to bringing in US$ 50 million as at b) (iii) above (without any

restriction on number of operating subsidiaries without bringing in additional

capital)

e. Joint Venture operating NBFC's that have 75% or less than 75% foreign

investment will also be allowed to set up subsidiaries for undertaking other

NBFC activities, subject to the subsidiaries also complying with the

applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.

f. FDI in the NBFC sector is put on automatic route subject to compliance

with guidelines of the Reserve Bank of India. RBI would issue appropriate

guidelines in this regard.

Trading: FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it

is primarily export activities, and the undertaking is an export house/trading

house/super trading house/star trading house. However, under the FIPBroute:-

i. 100% FDI is permitted in case of trading companies for the following

activities:

Exports;

Bulk imports with ex-port/ex-bonded warehouse sales;

Cash and carry wholesale trading; Other import of goods or services provided at least 75% is for

procurement and sale of goods and services among the companies of

the same group and not for third party use or onward

transfer/distribution/sales.


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ii. The following kinds of trading are also permitted, subject to

provisions of EXIM Policy:

a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level

for such trading companies who wish to market manufactured products

on behalf of their joint ventures in which they have equity participation

in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which,based on technology provided and laid down quality specifications, a

company can market that item under its brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for

manufacture provided such test marketing facility will be for a period

of two years, and investment in setting up manufacturing facilities

commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the

condition that such companies would divest 26% of their equity in favor of

the Indian public in five years, if these companies are listed in other parts of

the world. Such companies would engage only in business to business (B2B)

e-commerce and not in retail trading.

Power: FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity

generation, transmission and distribution, other than atomic reactor power

plants. There is no limit on the project cost and quantum of foreign direct

investment.


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Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of

drugs and pharmaceutical, provided the activity does not attract compulsory

licensing or involve use of recombinant DNA technology, and specific cell /

tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and

pharmaceuticals and bulk drugs produced by recombinant DNA technology,

and specific cell / tissue targeted formulations will require prior Government

approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for

construction and maintenance of roads, highways, vehicular bridges, toll

roads, vehicular tunnels, ports and harbors.

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and

consultancy for integration of pollution control systems is permitted on the

automatic route.

FDI & RETAIL SECTOR

Retail Sector in India is fragmented and contributes 10-14 % of the

GDP. It accounts for employment of 21 mn people i.e. 7% of the workforce

and is suffering from constraints in form of poor infrastructure and supply

chain management. Unorganized retail sector accounts for more than 90%

business in India.

Benefits for Consumers


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More investment in Supply Chain and logistics means that there will be

less wastage and more supply for the customers. Consumers will eventually

gain as a result of cost reduction at various levels of the supply chain. More

benefits in terms of consumer finance, Discounts and quality of service like

standardization, consistency and pre-sale activities. The best part being even

the rural consumer will benefit as more and more companies are looking to

tap rural unexplored market

Benefits for Producers

Producers will benefit from reduced Costs in terms of minimized

Inventory holding costs, reduced response time to market. As seen in the

markets where FDI is allowed in retail sector, there will also be technology

inflows and best practices for farmers as well as end retailers. Eventually

producers will reap benefits in form of increased demand for products and

better margins. Apart from that companies will also benefit from lower labor

and sourcing costs in India. Food processing sector may also benefit due to

this decision.

FDI & EDUCATION SECTOR

Education sector is an ideally placed for FDI infusion with low literacy

rates and large population size in India. Foreign Direct Investment (FDI) in

education is allowed in India under the automatic route, without any sectoral

cap, since February, 2000. There is no offshore campus of any foreign

university in India. In India there are more than 125 institutions running

technical programmes in collaboration with foreign universities and

institutions.


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Opportunity

There are only 10.5 million students enrolled in all higher education

institutions in India that is just 11 per cent of the relevant age group (17 to

23) population. According to 2004-05 survey 80,466 Indian students were

enrolled in USA universities and 15,000 Indian students were enrolled in the

UK universities.

India is suffering problem of Brain Drain since years, it can be

controlled to certain extent by providing world class education here. Local

institutions will be compelled to improve their curriculum as foreign players

bring new methods and practices and degrees awarded here will become

internationally accepted and recognized. The most important point being

establishment of new education institution and infrastructure and also

generate employment.

FDI & INSURANCE Sector

The US$ 41-billion Indian life insurance industry is considered the fifth

largest life insurance market, and growing at a rapid pace of 32-34 per cent

annually, according to the Life Insurance Council.

Foreign equity up to 26% is allowed in the insurance sector. The entry

of foreign partners has resulted in the sector attracting FDI of US 543 million

as on 31st March, 2007. On account of competition from private insurance

players, the market share of state owned insurance companies like GIC, LIC

and others have come down to 70% in last 4-5 years from over 97%.

However, the reach of industry is only around 15% according to IRDA

which poses tremendous opportunities for new companies. The foreign

players may look to partner with domestic players for local knowledge and in

turn share best practices. It is also impossible to cater to the large

population without more players pumping in the money. Bringing in more


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players may also create opportunity for other business like IT and other

related service providers.

Opportunities

General Insurance

This business of General Insurance sector has picked up off late. Public

sector players posted 13.85 per cent growth in gross premium in 2009-10. At

the same time, private players recorded a 12.82 per cent increase in gross

premium till March 2010. Further nearly 30mn vehicles policies were issued

and total premium of US$ 1.83 billion was collected.

Health Insurance

Health insurance is lucrative consideration for both existing as well as

new players and according to a forecast by private research firm as it is

expected to grow at compounded annual growth rate of 25% and total

premium between April and December 2009 was US$ 1.35 billion, up from

US$ 1.12 billion, an increase of 20 per cent, as per figures released by theregulator. This means that there is enough room for new players.

Products like Bancasssurance has also found fancy of many private

firms. It is forecasted that bancassurance will play a crucial role in the overall

development of the Indian insurance sector with the channel expected to

generate 40 per cent of private insurers premium income by 2012.

India Further Opens up Key Sectors for Foreign

Investment

India has liberalized foreign investment regulations in key sectors,

opening up commodity exchanges, credit information services and aircraft

maintenance operations. The foreign investment limit in Public Sector Units


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(PSU) refineries has been raised from 26% to 49%. An additional sweetener

is that the mandatory disinvestment clause within five years has been done

away with.

FDI in Civil aviation up to 74% will now be allowed through the

automatic route for non-scheduled and cargo airlines, as also for ground

handling activities.

100% FDI in aircraft maintenance and repair operations has also been

allowed. But the big one, allowing foreign airlines to pick up a stake in

domestic carriers has been given a miss again.

India has decided to allow 26% FDI and 23% FII investments in

commodity exchanges, subject to the proviso that no single entity will hold

more than 5% of the stake.

Sectors like credit information companies, industrial parks and

construction and development projects have also been opened up to more

foreign investment.

TRENDS IN FDI

There has been a marked increase in both the flow and stock of FDI in the

world economy over the last 30 years.FDI has grown more rapidly than world

trade and world output because:

The general shift toward democratic political institutions and free

market economies has encouraged FDI.

The globalization of the world economy is having a Positive impact on

the volume of FDI as firms undertake FDI

FDI AND ECONOMIC DEVELOPMENT


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Foreign direct investment (FDI) is considered to be the lifeblood and an

important vehicle for economic development as far as the developing nations

are concerned. The important effect of FDI is its contribution to the growth of

the economy.

FDI has an impact on country's trade balance, increasing labour

standards and skills, transfer of new technology and innovative ideas,

improving infrastructure, skills and the general business climate.

FDI also provides opportunity for technological transfer and up

gradation, access to global managerial skills and practices, optimal

utilization of human capabilities and natural resources, making industry

internationally competitive, opening up export markets, providing backward

and forward linkages and access to international quality goods and services.

THEORIES OF FDI

1. Firm Specific Advantage approach:

A firm can capture foreign market by its assets such as brand name,

superior technology, or its skills in management. The returns will be much

higher that that obtainable in home country.

Example: KELLOGS and PIZZA HUT had moved into large markets of

developing countries by having FDI in those countries.

2. Product Life Cycle Theory:

The product cycle theory is a theory made of few steps that followeach other:

Firm creates product to accommodate local demand.

Firm exports product to accommodate foreign demand.

Firm establishes foreign subsidiary to establish presence in expands


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product line in foreign country.

Firm's Foreign business declines as its competitive advantages are

eliminated

Example: 1. Intel latest chip is available all over the world.

2. All the new models of personal computers of IBM are available all

around the world.

3. The OLI Paradigm:

Also known as Eclectic Theory of FDI

According to this theory a firm would go for FDI when all the following

three types of advantages are present:

1. Ownership advantage i.e. overall knowledge of the firm specific

advantages.

2. Location advantage i.e. knowledge of foreign countrys economic,

social and political factors.

3. Internalization advantage i.e. a firm may have a joint venture or

a wholly owned subsidiary in the foreign country. Hence it would

have internalization advantage.


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FDI INCENTIVES

Why FDI Incentives?

To attract FDI

To steer the FDI into favoured industries or regions of the country For

instance, India may desire FDI in infrastructure development.

Influence the type of incoming FDI. For instance, China may want

technology-intensive investment.

Types of FDI Incentives

Fiscal Incentives - to reduce tax burden of foreign investors.

Financial Incentives - grants given by government

Other Incentives - like subsidized infrastructure, market preference and

preferential foreign exchange rates.


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FDI INFLOWS MONTH WISE DURING YEAR 2010


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SECTORS ATTRACTING HIGHEST FDI INFLOWS


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SHARE OF TOP INVESTING COUNTRIES

IN INDIA


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FDI Policy

The above-mentioned industrial policy provisions hold good for boththe domestic and foreign companies. Once the approval has been given to aforeign investor, namely, a multi-national enterprise (MNE), an overseascorporate body (OCBs) or a Non-Resident Indian (NRI), these companies aretreated on par with any other Indian company (national treatment).

FEMA (2000)

The additional provisions, which apply only to entry of foreign directinvestment (FDI) emanate from the provisions of Foreign ExchangeManagement Act (FEMA), 2000. According to FEMA, 2000 no person residentoutside India shall without the approval /knowledge of the Reserve Bank ofIndia (RBI) may establish in India a branch or a liaison office or a projectoffice or any other place of business. FDI in a particular industry may,however, be made through (a) the automatic route under powers delegated

to the RBI or (b) the SIA route with the approval accorded by the FIPB. Theautomatic route means that foreign investors only need to inform the RBIwithin 30 days of bringing in their investment (in form FNC1) and againwithin 30 days of issuing any shares. Companies getting foreign investmentapproval through FIPB route do not require any further clearance from RBIfor the purpose of receiving inward remittance and issue of shares to foreigninvestors. Since the RBI has granted general permission under FEMA inrespect to proposals approved by the Government (FIPB). Such companiesare, however, required to notify the regional office concerned of the RBI ofreceipt of inward remittance within 30 days of such receipt and again within30 days of issue of shares to the foreign investor. Under the small-scale

policy, equity holding by other units including foreign equity in a small-scaleundertaking is permissible up to 24 per cent. Furthermore, there is no bar onhigher equity holding for foreign investment not reserved by SSI, if the unitdoes not belong to the reserved list of SSI and is willing to give up its small-scale status.

Entry Rules and Sectoral Caps on FDI


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Although MNEs/OCBs enjoy the same status as domestic companies,they face restrictions by way of limitations imposed in respect to holdings indifferent sectors vis--vis the domestic company.

Apart from discrimination arising from sectoral caps on foreign equity

holdings, the other differences between the foreign investor and a domesticinvestor arise from the followings:

(a) The foreign investor has to obtain FIPB approval in regard to all proposalsin which the foreign collaborator has a previous venture/tie up in India;(b) The foreign investor has to obtain FIPB approval in regard to all proposalsrelating to acquisition of existing shares in an Indian company/takeovers;

(c) Mergers/amalgamation of companies require the approval of both theFIPB and the RBI.

(d) Investment and returns are not freely repatriable in certain cases and issubject to conditions such as lock in period on original investment, dividendcap, foreign exchange.

Moreover, no foreign direct investment (FDI) is allowed in Agriculture,including plantation (except for tea plantations). The Group of Ministers(GoM) under the chairmanship of Minister of Commerce & Industry is thecompetent authority to take a view on the FDI policy, including sectoral caps.Besides the Commerce & Industry minister, the other members of the GoMcomprise of the Minister for Power, Minister for Communication andInformation Technology, Minister for Small Scale Industries and Minister for

External Affairs.

WTO, TRIMS and FDI

Under the Trade Related Investment Measures (TRIMS) of WTO (1994),the member countries are required to phase out performance requirementsespecially in regard to the local content requirement and foreign exchangeneutrality by 1.1.2000 for developing countries and by 1.1 .2002 for leastdeveloped countries. Accordingly, India notified two TRIMS, viz., that relatingto local content requirements in the production of certain pharmaceuticalproducts and dividend balancing requirement in the case of investment in 22categories of consumer items (Economic Survey, 1999).

It is noteworthy that the TRIMS Agreement of WTO has a built inmechanism for review. In the recently concluded Fourth MinisterialConference at Doha (November 2000), developing countries couldsuccessfully defer implementation of TRIMS by another two years. The


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agreement would come up for consideration again during the Fifth MinisterialConference.

SIIA & FIIPB

The Secretariat for Industrial Assistance (SIA) under the Department ofIndustrial Policy & Promotion in the Ministry of Commerce & Industryprovides information and assistance to Indian and foreign companies insetting up industries and also assist them in finding out joint venturepartners. It functions as the Secretariat of the Foreign InvestmentImplementation Authority (FIAA). Once a project has beenapproved/conceived, the FIAA helps them in obtaining the requiredclearances. It also sorts out operational problems through constitution ofFast Track Committees (FTCs). The Foreign Investment Promotion Board(FIPB), on the other hand, is a committee of secretaries, with representationsfrom Ministry of Finance, Ministry of External Affairs, Ministry of Small Scale

Industries and Department of Commerce under the chairmanship ofSecretary, Department of Industrial Policy & Promotion. The FIPB considersthose projects, which require its approval. However, investments exceedingRs.600 crore are required to get the approval of the Cabinet Committee onForeign Investment (CCFI).

Foreign Technology Agreements

Foreign technology induction is encouraged both through FDI andthrough foreign technology agreements. India has one of the most liberalpolicy regimes in regard to technology agreements. Foreign technologycollaborations are:-

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment permitted either through automatic route orthrough FIPB. Automatic approval: RBI accords automatic approval for allindustries for foreign technology collaboration agreements subject to:

1. The lump sum payments not exceeding US$ 2 million

2. Royalty payable is limited to 5 per cent for domestic sales and 8 per centfor exports subject to total payment of 8 per cent on sales over a 10-yearperiod.

3. The period for payment of royalty not exceeding 7 years from the date ofcommencement of commercial production, or 10 years from the date ofagreement whichever is earlier.

FIPB Route:


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For the following categories, Government approval is necessary:

1. Proposals attracting compulsory licensing.

2. Items of manufacture reserved for the small-scale sector.

3. Proposals involving any previous joint venture or technology transfer/trademark agreement in the same or allied field in India.

4. Extension of foreign technology collaboration agreements (including thosecases which may have received automatic approval in the first instance).

5. Proposals not meeting any or all of the parameters for automatic approval.

The different components of foreign technology collaboration such as

technical know-how fees, payment for design and drawing, payment forengineering service and royalty are eligible for approval through theautomatic route, and by the Government. Payments for hiring of foreigntechnicians, deputation of Indian technicians abroad, and testing ofindigenous raw material, products, and indigenously developed technology inforeign countries are, however, governed by separate RBI procedures andrules and are not covered by the foreign technology collaboration approval.Similarly, payments for imports of plant and machinery and raw material arealso not covered by the foreign technology collaboration approval for whichRBI is the competent authority.

ADVANTAGES AND DISADVANTAGES OF FDI.

ADVANTAGES OF FDI

Foreign Direct Investment plays a pivotal role in the development of

India's economy. It is an integral part of the global economic system.

Foreign direct investment permits the transfer of technologies.

FDI ensures a huge amount of domestic capital, production level, and

employment opportunities in the developing countries, which is a

major step towards the economic growth of the country.

Foreign Direct Investments have opened a wide spectrum of


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opportunities in the trading of goods and services in India both in

terms of import and export production.

FDI has also ensured a number of employment opportunities by aiding

the setting up of industrial units in various corners of India.

Helps in the creation of new jobs in a particular country.

As a result of receiving foreign direct investment from other countries,

it has been possible for the recipient countries to keep their rates of

interest at a lower level.

Increases tax revenues

Boost manufacturing sector

DISADVANTAGES OF FDI

One of the most important disadvantages of foreign direct investment

is that the economically backward section of the host country is always

inconvenienced when the stream of foreign direct investment is

negatively affected.

The differences of language and culture that exist between the country

of the investor and the host country could also pose problems in case

of foreign direct investment.

Adverse effects on the balance of payments, when a foreign subsidiary

imports a substantial number of its inputs from abroad, there is a debit

on the current account of the host countrys balance of payments.


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Foreign direct investment may entail high travel and communications

expenses.

There is a chance that a company may lose out on its ownership to an

overseas company.

Government has less control over the functioning of the company that

is functioning as the wholly owned subsidiary of an overseas company.

They are unreliable.

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