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Group 4(ii)

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  • 1. • FOREIGN DIRECT INVESTMENT (FDI)
  • 2. DEFINITION : • “Foreign direct investment occures when an investor based in one country acquires assets in another country with the interest to manage the asset.” • Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets.
  • 3. THEORIES OF FDI 1. THEORY OF IMPERFECT MARKET : The firms having comparative technological or organizational advantage invest abroad to gain firm specific advantages 2. PRODUCT LIFE CYCLE THEORY : The product life cycle theory tries to explain that when the product reaches the maturity stage the firm starts investing abroad to low cost production areas
  • 4. 3. INTERNATIONALISATION : Firms invest abroad in order to retain inside the group the firms competitive advantage 4. ELECTIC THEORY OF FDI : According to this theory it is not possible for a single theory to explain all forms of multinational strategies as there are a wide range of factors that influence FDI decision
  • 5. Factors influencing : A. Ownership advantages : It arise due to the firm owning a special knowledge or because of economies of scale or due to monopolistic advantage B. Locational advantages : It is due to location bound endowments enjoyed by a firm C. Internationalization advantage : It refers to the extent to which the firm can market its advantages within the various units of the firm
  • 6. WHY DO FIRMS INVEST ABROAD ? • To reduce cost of production • To have diversified sourcing facilities • To increase volume of sale • To promote knowledge sharing • To retain domestic customers
  • 7. FDI STRATEGIES : • BRANCHES : Parent company open up branches in foreign country • JOINT VENTURE : It is a partnership between the foreign and domestic company where the partnership firms share equity and a new firm is formed Eg : Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion
  • 8. EXAMPLES :
  • 9. • WHOLLY OWNED SUBSIDIARY : If the foreign investment is equal to the entire equity capital it is called as a wholly owned subsidiary
  • 10. Examples :
  • 11. • MERGER : A merger is a combination of two or more companies being merged into an existing company or a new company may be formed Eg : Reliance Petrochemicals Ltd. Merged with Reliance Industries Ltd. In 2010 • ACQUISITION AND TAKEOVER : Acquisition is a simple act of acquiring control over the management of other companies Eg : HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
  • 12. BENEFITS OF FDI • FDI supplements domestic capital • Availability of scarce factors of production • Improvement in Balance of Payment • Influence on foreign trade • Development of social and economic infrastructure • FDI promotes research
  • 13. ARGUMENTS AGAINST FDI • Capital flow may not be real : FDI may not bring fresh capital if the foreign company purchases equity financed by domestic lenders. • Obsolete and mismatched technology : The technology being brought by the MNCs is one that run its course in the home country and has been rendered obsolete
  • 14. • FDI may cause in loss of competition : When FDI is through mergers and acquisition , it may reduce competition in the host country • Exploitation of resources
  • 15. FDI IN INDIA • Foreign Direct Investment (FDI) is permitted as under the following forms of investments – 1. Through financial collaborations 2. Through joint ventures and technical collaborations 3. Through capital markets via Euro issues 4. Through private placements or preferential allotments
  • 16. • FDI is not permitted in the following industrial sectors : 1. Arms and ammunition 2. Atomic Energy 3. Railway Transport 4. Coal and lignite 5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc
  • 17. FDI-TOP INVESTERS IN INDIA MAURITIUS 38 % SINGAPORE 10 % U.K 9 % JAPAN 7 % U.S.A 6 % NETHERLANDS 4 % CYPRUS 4 % GERMANY 3 % FRANCE 2 % U.A.E 1 %
  • 18. FDI - LEADING SECTORS SERVICES SECTOR 19 % TELECOMMUNICATIONS 7 % CONSTRUCTION ACTIVITIES 7 % COMPUTER SOFTWARE & HARDWARE 7 % HOUSING & REAL ESTATE 7 % CHEMICALS 6 % DRUGS & PHARMACEUTICALS 5 % POWER 4 % AUTOMOBILE INDUSTRY 4 % METALLURGICAL INDUSTRIES 4 %

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