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Foreign Direct Investment(FDI)
 

Foreign Direct Investment(FDI)

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  • Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period.

Foreign Direct Investment(FDI) Foreign Direct Investment(FDI) Presentation Transcript

  • FDI An Economic Reform K-MART
  • FOREIGN DIRECT INVESTMENT FDI inflow plays a predominant role in economic development Its seen as a means of supplement to domestic investment for achieving a higher level of growth development
  • Introduction  According to IMF, FDI or Foreign Direct Investment is that category of international investment that reflects the objective of obtaining a “lasting interest” by a resident entity in one economy in an enterprise resident in another economy  There is no specific definitions on FDI as such owing to the presence of many authorities like IMF,IBRD,OECD, and UNCTAD.
  • The commitment of money or capital to purchase financial instruments or assets in order to gain profitable returns.
  • Investment done by citizens and government of one country (home country) invest in industries of another country (host country). Foreign Investment through Foreign Direct Investments Foreign Institutional Investors
  • Inflow from Investors point of view • Market seeking : The investors are attached by the size of the local market , which depends on the income of the country and its growth rate. • Lower cost : Investors are most cost-conscious . They are influenced by infrastructure facilities and labor costs. • Location and other factors : Technology status of a country , brand name , goodwill enjoyed by the local firms , favorable location , openness of the economy , policies of the government and intellectual property protection granted by the government are some of the factors that attract investors to undertake investments
  • WHAT F.D.I REQUIRES ? Important factors which foreign investors take into consideration when entering a country are:  Reliable access to economic information.  The level of corruption.  Stability of political and business environment .  Ability to meet and comply with internationality acceptable standards and norms .  Character of local market (size , growth , potential) or the distance and the access to neighboring markets.  The existence of good and quality infrastructure.
  • Permit Non Permit Electrical equipments (including computer software and electronic Areas and ammunition . Telecommunication(Radio Paging, Cellular Mobile, basic telephony service Atomic energy . Service sectors (Financial &non financial ) Fuels (Power+ Oil Refinery Railway transport. Chemical (other than fertilizers) Drugs &Pharmaceuticals Coal and Lignite. Metallurgical Industries Mining of iron , manganese , chrome , gypsum , gold , diamonds , copper , and zinc .
  • FDI ATTRACTERS FDI DISCOURAGERS India has a well developed network and financial institutions and an organized capital market open to foreign institutional investors that attracts activities and export to neighbor countries.  High rates of taxation  For the last few years there has been political stability in the country.  India enjoy good reputation among other countries as a honoring of its commitments about repayment hem to undertake investments.  Indian skills and competence is used as a base for carrying out production obligations , remittance of dividends etc  India has vast potential of unskilled labor available at cheap rates as compared to other countries, and vast natural resources that attract foreign investors.  Lack of infrastructure facilities  Favoritisms in the selection of investment  Complicated legal framework of rules, regulations, procedures for foreign direct investment into India.  Lack of transparency.
  • SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS: Ranks Sector 2010-11 (April-March) 2011-12 (for April2011) 1 SERVICES SECTOR (financial & non-financial) 15,776 (3,353) 2,922 (658) 2 COMPUTER SOFTWARE & HARDWARE 3,571 (784) 425 (95) 3 TELECOMMUNICATIONS (radio paging, cellular mobile, basic telephone services) 7,546 (1,665) 205 (46) 4 HOUSING & REAL ESTATE 5,149 (1,127) 167 (38) 5 CONSTRUCTION ACTIVITIES (including roads & highways) 5,077 (1,125) 1,381 (311) 6 POWER 5,709 (1,252) 1,136 (256) 7 AUTOMOBILE INDUSTRY 6,008 (1,331) 1,182 (266) 8 METALLURGICAL INDUSTRIES 5,055 (1,105) 229 (52) 9 PETROLEUM & NATURAL GAS 2,621 (574) 28 (6) 10 CHEMICALS (other than fertilizers) 1,810 (398) 152 (34) Amount Rupees in crores (US$ in million)
  • Ranks Country 2010-11 (April- March) 2011-12 (for April 2011) 1 MAURITIUS 31,855 (6,987) 4,332 (976) 2 SINGAPORE 7,730 (1,705) 5,214 (1,175) 3 U.S.A. 5,353 (1,170) 80 (356) 4 U.K. 3,434 (755) 19 (4) 5 NETHERLANDS 5,501 (1,213) 172 (39) 6 CYPRUS 4,171 (913) 754 (170) 7 JAPAN 7,063 (1,502) 1,043 (235) 8 GERMANY 908 (200) 231 (52) 9 U.A.E. 1,569 (341) 91 (21) 9 FRANCE 3,349 (734) 977 (220) Total 88,520 (19,427) 13,846 (3,121) SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year-wise):
  • IMPACT OF FDI IN VARIOUS SECORS • RETAIL • PHARMA • EDUCATION • INSURANCE
  • Retail (CONTD • As per the current regulatory regime or say Policy Foreign Direct Investment (FDI) up to 51% is allowed with prior Government approval, in retail trade of ‘Single Brand’ products. Guidelines notified, vide Press Note 3 (2006 Series), require: i. Products to be sold should be of a ‘Single Brand’ only. ii. Products should be sold under the same brand internationally. iii. ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.
  • Automatic Route Government No permission required Approval /License required.
  • Barter system Weekly market Village melas Kirana Stores Conveni ence store Government Stores Super markets Hyper markets Malls Brand outlets
  • • 51%Single Brand Retailing • 100%Cash and Carry Model
  • Incentives attract FDI. Market size and potential are sufficient inducers.  Tax breaks, import duty exemptions, land and power subsidies, and other enticements.
  • Format Description Retailers Hypermarkets Offering basket of product Spencers, Big bazaar Cash and Carry Bulk-buying requirement Bharti-wal-mart Departmental stores Large layout, Wide merchandise mix Lifestyle , Globus Supermarkets Household product as well as food as integral part of the service Apna bazaar , food bazaar Shop-in-shop Shops located in shopping malls Navras ( big bazaar) Specialty stores Focus on individual product type Brand Factory Category killers Particular segment The LOFT Discount stores Branded product at discounted prices Subhiksha, levi’s outlet Convenience stores Small Retail stores In and out
  • Retail Segment Percentage holding in sector Major retailers Food and grocery 63% Reliance fresh, Café brio, food bazaar Clothing, textile and fashion 9% Westside, shoppers stop, globus jewellery 5% Tanishq Catering services 5% IRCTC Consumer durable 4% Viveks, vijay sales, Croma pharmaceuticals 4% Piramal group Entertainment 3% Bowling co., Furnishing, utensils 3% Hometown, Tangent Concept Mobile handsets 2% The mobile store,
  • 20% 8% 14% 6% 12% USA China Japan Brazil India Contribution Respective to GDP
  • US Sales: $374.5 bn Earnings: $12.9 billion Stores: 6,800 worldwide France Sales: $130 bn Earnings: $5.2 billion Stores: 87,422 worldwide UK Sales: $102.6 billion Earnings: $5.5 billion Stores: 3,729 worldwide Germany Sales: $101 billion Earnings: $1.5 billion Stores: 2,221 US Sales: $77.3 bn Earnings: $4.2 billion Stores: 2,258
  • •A large emerging market . Increase in disposable income of a family. 70 mn Indians – salary of $18,000. Rise to 140 mn by 2011. Consumer spending power increased by 75% in last 3 years. The per capita income in 2009–2010 has more than doubled to US$ 849 from US$ 348 in 2000–01. INDIA
  • •Increase in consumer class. Consumer class will grow from 50 million at present to 583 million by 2025. With more than 23 million people taking their place among the world’s wealthiest citizens. Upper class Middle class Lower class
  • •Wide demographics -- average age of 25 yrs. •Brand consciousness. 60 % of population below age of 30. Awareness through World Wide Web. •Changing consumer mindset. Focus shifting from low price to convenience, value and a superior shopping experience. •Small Basket Size Shaping of Consumption
  • •Easy consumer credit. EMI & loan via credit cards -- easy for Indian consumers to afford expensive products. For instance, Casas Bahia’s- Brazil. Upper class Middle class Lower class Note: BOP C.K.Prahalad.
  • •Employment generation. Second-largest employer after agriculture. Retail trade employing 35.06 million. Wholesale trade generating an additional employment of 5.48 million. Additional 1.6 mn jobs .
  • •Technology Better use of resources and goods. Wastage and Storage problems will be resolved. Efficient logistics, production, and distribution channels. Digital records.
  • •Rural market. Robust Consumption. 70% Indian households. 2/5 of the country’s total consumption pie. Accounts to 45% of GDP.
  • •FDI in Retail sector will resolve problems regarding foreign exchange in India. •The life-long basic needs will keep on driving the Retail Industry.
  • SKILLED WORKERS COMPETITION REAL ESTATE PROBLEM MARKET POWER SUPPLY CHAIN MANAGEMENT PROBLEM IN RAISING FUNDS TAXATION POLICIES INFLATION
  • • Indian retail sector :  Employs 8% (35 million)of the working population.  Could yield 12 to 15 million retail jobs in the coming five years. • Out of which organized segment is about 0.3 million. • Retail sector grew at 9.4% on real terms & 15.4% on nominal terms.
  • Demand • Communication Skills • Multi Tasking Supply • Limited Retail Training Opportunities • Higher Level Skills
  • 0 0.2 0.4 0.6 0.8 1 1.2 1.4 2008 2011 2013 2018 0.35 0.59 0.83 1.3 Expected Growth CAGR 10% • In the last four year, the consumer spending in India climbed up to 75%. • By the year 2013, the organized sector is also expected to grow at a CAGR of 40%. • The total number of shopping malls is expected to expand at a CAGR of over 18.9 per cent by 2015.
  • PHARMA
  • • The pharma industry generally grows at about 1.5-1.6 times the Gross Domestic Product growth • Globally, India ranks third in terms of manufacturing pharma products by volume and thirteenth by value • The Indian pharmaceutical industry is expected to grow at a rate of 9.5 % till 2015 • In 2009-2010, India exported drugs worth US$7.2 billion in to the US and Europe followed by Central and Eastern Europe, Africa and Latin America • The Indian vaccine market which was worth US$800 million in 2010- 11 is growing at a rate of more than 20% • The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012
  • Indian Pharmaceutical Evolution Phase II Government Control •Indian Patent Act – 1970 •Drug prices capped •Local companies begin to make an impact Phase III Development Phase •Process development •Production infrastructure creation •Export initiatives Phase IV Growth Phase •Rapid expansion of domestic market •International market development •Research orientation Phase V Innovation and Research •New IP law •Discovery Research •Convergence 1970 1980 1990 2000 2010 Phase I Early Years •Market share domination by foreign companies •Relative absence of organized Indian companies
  • Strength Cost Effective Strong Manufacturing Base Availability of high quality skilled workforce. Excellent marketing and distribution network Diverse ecosystem Weakness Less investment in research and development Lack of coordination between industry and academia. Negligible expenditure on healthcare in the country. Manufacture of fake and low quality medicines Opportunities Increased export potential Marketing tie ups with multinational companies to sell their products in domestic market. Immense scope to position India as a centre for international clinical trials. Key player in global pharmaceutical R&D. Export of generic drugs to developed markets Threats Product patent regime is a major threat to domestic industry unless the industry takes up R&D initiative aggressively. Drug Price Control Order puts undue pressure on product prices, affecting the profitability of the pharmaceutical companies. The new MRP based excise duty regime threatens the business of smaller pharmaceutical companies SWOT Analysis SWOT Analysis
  • • The government of India has undertaken several including policy initiatives and tax breaks for the growth of the pharmaceutical business in India. Some of the measures adopted are: Pharmaceutical units are eligible for weighted tax reduction at 150% for the research and development expenditure obtained. • Two new schemes namely, New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Program have been launched by the Government. • The Government is contemplating the creation of SRV or special purpose vehicles with an insurance cover to be used for funding new drug research. • The Department of Pharmaceuticals is mulling the creation of drug research facilities which can be used by private companies for research work on rent. Government Initiatives
  • Types of FDI • Setting up new plant • Involves large risk • Set up cost is high Green Field Investment • Purchase of existing plant • Set up cost is less due to existing network Brown Field Investment • Equity & management partnership between foreign & local entity. • Foreign partner provides technology & capital and Local partner provides the skills & knowledge to run the firm in host country. Joint Venture
  • FDI statistics in India • 100% FDI is allowed under the automatic route. • 100% FDI in Green Field Project • In Brownfield projects, there is a great scrutiny by Competition Commission of India (CCI) and trying to reduce it to upto 49% • Reasons:- In order to reduce collusion and predatory pricing. • The pharmaceutical industry attracted @2.11% of the total FDI inflows. • The pharmaceutical industry was the 8th largest sector attracting the FDI inflows • The Drugs and Pharmaceutical sector has attracted FDI inflow worth US$ 1,825.43 million between April 2000 and September 2010 • The FDI stock in Pharmaceutical Industry is 4.0% of the total FDI in India
  • FDI by Country The largest source of FDI in Indian pharmaceutical industry is Mauritius. Many global investors in India route their FDI through Mauritius to take advantage of the India-Mauritius bilateral tax treaty.
  • Impact of Foreign Investment Indian drug industry has in the last five years seen half a dozen big takeovers by foreign companies. • $3.6 billion acquisition of promoters’ stake in Ranbaxy Laboratories in 2008 by Japan’s Daiichi Sankyo Co. Ltd. • US drug maker Mylan Inc. paid $734 million to acquire Hyderabad-based Matrix Laboratories in 2006. • German health care group Fresenius SE spent $219 million to take over Dabur Pharma in 2008.
  • Impact of Foreign Investment • US drug and nutrition firm Abbott Laboratories paid $3.72 billion to acquire Piramal Healthcare Ltd’s domestic drug formulation business and spent $726 million to buy out Ahmedabad-based consumer health company Paras Pharmaceuticals. • French drug multinational Sanofi-Aventis SA acquired a majority stake in Indian vaccines company Shanta Biotech in 2009 for €550 million
  • Comparison with emerging economies China and Brazil Patent protection started in 1990s but strictly regulated from 2005 Share of Patent protected drugs is 5% in total market Share of MNCs in total market is 25-30% China 1 India patent protection started since 1994 and is strictly in line with countries like US. Share of patent protected drugs is 15% in total market. Share of MNCs in total market is 65-70%. Brazil Patent Protection started from 2005. Share of patent protected drugs is 9% in total market. Share of MNCs in the total market is almost 24% 11 2 2 2 3 3 3
  • Future Outlook : Pharmaceutical Industry
  • • With several companies slated to make investments in India, the future scenario of the pharmaceutical industry in looks pretty promising. The country's pharmaceutical industry has tremendous potential of growth considering all the projects that are in the pipeline. Some of the future initiatives are: According to a study by FICCI-Ernst & Young India will open a probable US$ 8 billion market for MNCs selling expensive drugs by 2015 • The study also says that the domestic pharma market is likely to reach US$ 20 billion by 2015 • The Minister of Commerce estimates that US$ 6.31 billion will be invested in the domestic pharmaceutical sector Future Scenario
  • • Public spending on healthcare is likely to raise from 7 per cent of GDP in 2007 to 13 per cent of GDP by 2015 • Dr Reddy's Laboratories has tied up with GlaxoSmithKline to develop and market generics and formulations in upcoming markets overseas • Lupin, a Mumbai based pharmaceutical company is looking to tap opportunities of about US$ 200 million in the US oral contraceptives market • Due to the low cost of R&D, the Indian pharmaceutical off-shoring industry is designated to turn out to be a US$ 2.5 billion opportunity by 2012 Future Scenario
  • Predicted Future Growth
  • EDUCATION
  • INSURANCE
  • The Insurance Bill was introduced in the Rajya Sabha in March 2008 under the first UPA government, as part of its financial sector reforms. The Union Cabinet on September 1, 2008, approved the Bill for Comprehensive amendment of insurance laws which proposes to raise the FDI ceiling in insurance sector from 26% to 49 %. The Bill also covers the following; 1. To allow foreign reinsurers like Lloyd’s of London, to open branches in India. 2. To lower the capital requirement of standalone health insurance companies to Rs. 50 crore from 100 crore. 3. To allow insurance companies to appoint insurance agents, surveyors and loss assessors The Insurance Amendment Bill
  • The Government has decided to review the guidelines for foreign direct investment and has proposed extensive changes in the guidelines. Proposals include; 1. Investment by Indian Companies in which foreign firms have beneficial investment will be counted as direct FDI 2. Investments by companies that are owned and controlled by foreign entities to be considered in calculating indirect foreign investment. 3. Investment by non-resident entities to be counted as FDI. Changes in FDI Rules
  • A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country. Nearly 80% of the Indian population is without life, health and non-life insurance The insurance sector in India is a colossal one and is growing at a rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s Gross domestic product (GDP). Insurance Industry in India is worth US$ 30 billion, consisted of Life insurance worth US$ 25 billion and non-life insurance worth US$ 5 billion. Interesting Statistics
  • The Indian Insurance market is expected to be around US$ 60 billion by the end of 2011. Investment opportunities exist both in Life and non-life segments as strong economic growth with increase in affluence and rising risk awareness leading to rapid growth in insurance sector. The expected inflow is likely to create 3 lakh jobs in the sector as more companies are planning to use the additional funds mainly to execute their expansion plans
  • OUTLOOK •FDI may provide better access to technologies for the local economy. •FDI can also lead to indirect productivity gains through spill overs. •Multinational firms may increase the degree of competition in host-country markets which will force existing inefficient firms to invest more in physical or human capital. •MNCs may also provide training of labour and management which may make them become available to the economy in general. •The increased flow of FDI in a country has given a major boost to the country's economy •Hence measures must be taken in order to ensure that the flow of FDI in both these countries continues to grow.