Foreign Direct Investment(FDI)Presentation Transcript
FDI An Economic Reform
FOREIGN DIRECT INVESTMENT
FDI inflow plays a predominant role in
Its seen as a means of supplement to
domestic investment for achieving a higher
level of growth development
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
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).
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
Chemical (other than fertilizers)
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
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
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.
IMPACT OF FDI IN VARIOUS SECORS
• 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
i. Products to be sold should be of a ‘Single Brand’ only.
ii. Products should be sold under the same brand
iii. ‘Single Brand’ product-retailing would cover only
products which are branded during manufacturing.
Automatic Route Government
No permission required Approval /License required.
• 51%Single Brand
• 100%Cash and
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
Lifestyle , Globus
Supermarkets Household product as well as food
as integral part of the service
Apna bazaar , food
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
Convenience stores Small Retail stores In and out
Retail Segment Percentage holding
Food and grocery 63% Reliance fresh, Café
brio, food bazaar
Clothing, textile and
9% Westside, shoppers
jewellery 5% Tanishq
Catering services 5% IRCTC
Consumer durable 4% Viveks, vijay sales,
pharmaceuticals 4% Piramal group
Entertainment 3% Bowling co.,
Furnishing, utensils 3% Hometown, Tangent
Mobile handsets 2% The mobile store,
•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.
•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
•Wide demographics -- average age of 25 yrs.
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-
Note: BOP C.K.Prahalad.
Second-largest employer after
Retail trade employing 35.06 million.
Wholesale trade generating an
additional employment of 5.48 million.
1.6 mn jobs .
•Technology Better use of resources and
Wastage and Storage problems will be
Efficient logistics, production, and
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.
• Indian retail sector :
Employs 8% (35 million)of the working population.
Could yield 12 to 15 million retail jobs in the coming
• Out of which organized segment is about 0.3 million.
• Retail sector grew at 9.4% on real terms & 15.4% on
• Communication Skills
• Multi Tasking
• Limited Retail Training
• Higher Level Skills
2008 2011 2013 2018
• 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
• The total number of shopping
malls is expected to expand at
a CAGR of over 18.9 per cent
• 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
• 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
•Indian Patent Act –
•Drug prices capped
•Local companies begin
to make an impact
•Rapid expansion of
Innovation and Research
•New IP law
1970 1980 1990 2000 2010
of organized Indian
Strong Manufacturing Base
Availability of high quality skilled
Excellent marketing and distribution
Less investment in research and development
Lack of coordination between industry and
Negligible expenditure on healthcare in the
Manufacture of fake and low quality medicines
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
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
The new MRP based excise duty regime threatens
the business of smaller pharmaceutical companies
• 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.
Types of FDI
• Setting up new plant
• Involves large risk
• Set up cost is high
• Purchase of existing plant
• Set up cost is less due to existing network
• Equity & management partnership between foreign &
• Foreign partner provides technology & capital and
Local partner provides the skills & knowledge to run
the firm in host country.
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
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
Indian drug industry has in the last five years seen half a dozen big takeovers by
• $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
• US drug and nutrition firm Abbott Laboratories paid $3.72 billion to acquire
Piramal Healthcare Ltd’s domestic drug formulation business and spent $726
million to buy out Ahmedabad-based consumer health company Paras
• French drug multinational Sanofi-Aventis SA acquired a majority stake in
Indian vaccines company Shanta Biotech in 2009 for €550 million
Comparison with emerging economies China and Brazil
Patent protection started
in 1990s but strictly
regulated from 2005
Share of Patent protected
drugs is 5% in total market
Share of MNCs in total
market is 25-30%
patent protection started
since 1994 and is strictly in
line with countries like US.
Share of patent protected
drugs is 15% in total
Share of MNCs in total
market is 65-70%.
Patent Protection started
Share of patent protected
drugs is 9% in total market.
Share of MNCs in the total
market is almost 24%
2 2 2
3 3 3
Future Outlook :
• With several companies slated to make investments in India, the future
scenario of the pharmaceutical industry in looks pretty promising. The
country's pharmaceutical industry has tremendous potential of growth
considering all the projects that are in the pipeline. Some of the future
According to a study by FICCI-Ernst & Young India will open a probable
US$ 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
• 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
• Lupin, a Mumbai based pharmaceutical company is looking to tap
opportunities of about US$ 200 million in the US oral contraceptives
• 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
Predicted Future Growth
The Insurance Bill was introduced in the Rajya Sabha in March 2008
under the first UPA government, as part of its financial sector
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
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
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
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
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.
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
•FDI may provide better access to technologies for the
•FDI can also lead to indirect productivity gains through
•Multinational firms may increase the degree of
competition in host-country markets which will force
existing inefficient firms to invest more in physical or
•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.