Impact of FDI on IndianEntrepreneurship

Presented by - Zenith group Sanghamitra s. Parihar Palash Goyal Hina Agarwal Juhi Pawar Karishma kakkad

INTRODUCTION

Foreign Direct Investment (FDI) is fund flow between the countries in the form of inflow or outflow by which one can able to gain some benefit from their investment whereas another can exploit the opportunity to enhance the productivity and find out better position through performance.

The effectiveness and efficiency depends upon the investors perception, if investment with the purpose of long term then it is contributes positively towards economy on the other hand if it is for short term for the purpose of making profit then it may be less significant.

Overview of FDI

o A simple definition of FDI would be –“An investor based in one country acquires an asset in another country with the intent to manage that asset” (OECD, 2000).

o According to International Monetary Fund (IMF), FDI is defined as “ an investment that is made to acquire a lasting interest in an enterprise operating in a economy other than that of the investor”.

CURRENT SCENARIO OF FDI INFLOW IN

INDIA: Since economic reforms initiated in 1991, Government of

India has taken many programs to magnetize FDI inflows,

to improve the Indian economy.

An important objective of promoting FDI in India and other developing countries has been to promote efficiency in production and increase exports.

However, any increase in equity stake of the

foreign investors in existing joint ventures or purchase of a

share of equity by them in domestic firms would not

automatically change the orientation of the firm. That is,

“the aim of FDI investors would be to benefit from the

profit earned in the Indian market.

FDI AND INDIA

In order to have a flow of FDI, India maintained Double Tax

Avoidance Agreements (DTAA) with nearly 70 countries of the

world.

India has signed 57 (up to 2006) numbers of Bilateral

Investments Treaties (BITS).

India as the founding member of General Agreement on Tariffs

and Trade (GATT), World Trade Organization (WTO), a

signatory member of South Asian Free Trade Area (SAFTA)

and a member of Multilateral Investment Guaranty Agency

(MIGA) is making its presence felt in the economic landscape

of globalised economies which will help a conducive and

healthy atmosphere for foreign investors and thus resulting in

substantial amount of FDI inflows in the country.

ENTREPRENEURSHIP AND FDI

I'M NOT CLAIMING LOCAL ENTREPRENEURSHIP IS THE ONLY DETERMINANT OF FDI, BUT IT COULD

BE AN IMPORTANT DETERMINANT THAT IS OFTEN IGNORED.— says HBS professor YASHENG HUANG

OVERVIEW….ENTREPRENEURSHIP AND FDI

A far more important driver of FDI is at a micro level: FDI is determined in part by the strength or weakness of local entrepreneurship in host countries, Huang argued. The institutional quality of an economy, which affects the efficiency of capital allocation and the security of property rights of productive and innovative entrepreneurs, influences the supply of local entrepreneurship in an economy. Poor institutions reduce the supply of local entrepreneurship; high quality institutions increase local entrepreneurship.

"By that logic, at a given level of macroeconomic [and] macro political fundamentals, a country gets more or less FDI depending on the strength of local entrepreneurship.

If a country with strong macroeconomic and macro political fundamentals is also strong at a micro level—at an entrepreneurship level—then the country actually may not get much FDI," he said. Local firms may pose a serious competitive threat to foreign firms, at least in certain industries, and foreign firms will think twice before entering into such a market."

FDI AND ECONOMIC GROWTH

One school of thought argued that FDI has a negative impact on the growth of India because FDI flows mainly towards the primary sector which basically promoted the less market values.

However another school of thought argued that FDI inflow into the core sectors is assumed to play a vital role as a source of capital,management and technology in countries transaction economies.

•In the context of the new theory of Economic Growth, FDI is considered as an engine of growth of mainstream economies.

•As noted by the World Bank (2002), several recent studies concluded that FDI can promote the economic development of the host Country by promoting productivity growth and export. •However, the exact relationship between foreign multinationalcorporations and their host countries varies considerablybetween countries and among industries.

•The characteristics of the host country and the policy environment are important determinants of net benefit of FDI.

Analysis of FDI and its role…. Researchers have argued that new firm

creation and entrepreneurship are the engines of economic growth and development.

However, most studies analyzing the process of transition from a command to a market economy have focused on the privatization of existing firms rather than on the creation of new domestic firms, arguably an equally important channel for growth and development.

CONT………

Only recently, researchers have started to evaluate the determinants of entrepreneurship, including the impact of the business environment, institutions, and the role of the government.

But, studies of entrepreneurship in the transition economies are incomplete without considering the impact of foreign direct investment (FDI), which has been shown to play a critical role in fostering growth, technology transfer, new market development, and enterprise restructuring.

Impact of FDI…… FDI can have two opposing effects on domestic

entry. Presence of foreign firms in an industry can discourage entry of domestic firms by raising the technological barriers to entry. We refer to this as the entry barrier effect.

Alternatively, foreign presence can generate demand for local products and services, bring new or higher quality inputs, and generate new business opportunities in the local market, thus encouraging the entry of domestic firms. We refer to this as the demand creation effect.

IMPACT OF FDI…… On one hand, foreign firms can raise the barriers

to entry (entry barrier effect) and thus inhibit the creation of new domestic firms.

On the other hand, foreign firms can generate positive entry spillover effects via bringing new business opportunities to domestic entrepreneurs (demand creation effect), thus encouraging the entry of domestic firms across industries.

Assessing which of these two effects dominates is critical for the public policy debate on the restructuring process in the transition economies.

OPPORTUNITIES,POTENTIAL SECTORS

Foreign Direct Investment (FDI) as a strategic component of

investment is needed by India for its sustained economic growth

and development through creation of jobs, expansion of existing

manufacturing industries, short and long term project in the field

of healthcare, education, research and development (R & D) etc.

Government should design the FDI policy such a way where

FDI inflow can be utilized as means of enhancing domestic

production, savings and exports through the equitable

distribution among states by providing much freedom to states,

so that they can attract FDI inflows at their own level.FDI can

help to raise the output, productivity and export at the sectoral

level of the Indian economy.

However, it can observed that the result of sectoral level output, productivity and export is minimal due to the low flow of FDI into India both at the macro level as well

as at the sectoral level. Therefore for further opening up of the

Indian economy, it is advisable to open up the export oriented sectors and higher growth of the economy could be achieved through the growth of these sectors.

CHALLENGES

The export and import balance may be upset. Predatory pricing of global retailers may wipe out the domestic retailers High cost of borrowing affect the investment of domestic retailers.. Global players will give a cut throat competition for the existing retailers. Employment in several sectors would be affected.

India has received total FDI of US$ 180,034 million from the year 1990-91to 2009-10 which is due to the initiatives taken by the government of India in attracting FDI inflows in India. The FDI inflows have shown a rising trend from 1991-92 to 1997-98 owing to the sincere programmes of structural liberalization and open market reforms.

CONCLUSION

The concept of ‘Investment led Economic Development’ has promoted the idea that the outward and inward FDI position of a country is linked to its economic development relative to the rest of the world.

  The effects of FDI in the host economy are usually

believed to be increase in the employment, augment in the productivity, boost in exports and amplified pace of transfer of technology.

It facilitates the utilization and exploitation of local raw materials, introduces modern techniques of management and marketing, eases the access to new technologies, foreign inflows can be used for financing current account deficits, finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt) and increases the stock of human capital via on the job training.

SUGGESTIONS…. FDI is a vital ingredient of the globalization efforts of the world

economy. The growth of international production is driven by economic and technological forces. It is also driven by the ongoing liberalization of Foreign Direct Investment(FDI) and trade policies.

For FDI to be a noteworthy provider to economic growth, India would do better by focusing on improving infrastructure, human resources, developing local entrepreneurship, creating a stable macroeconomic framework

and conditions favorable for productive investments to augment the process of development.

FDI OVERVIEW

ANY QUESTIONS……?

THANKYOU