Foreign Direct Investment
Foreign direct investment (FDI) happens when a firm invests directly in facilities in a foreign
A firm that engages in FDI becomes a multinational enterprise (MNE)
Multinational = “more than one country”
Factors which influence FDI are related to factors that stimulate trade across national borders
Involves ownership of entity abroad for
Raw materials or other resource access
Parent has direct managerial control
The degree of direct managerial control depends on the extent of ownership of the
foreign entity and on other contractual terms of the FDI
No managerial involvement = portfolio investment
Why is FDI increasing?
Why do firms choose FDI over exporting or licensing to enter a
Why are certain locations attractive for FDI?
How does political ideology influence government policy over
From a host or source country perspective, what are FDI’s costs
How can governments restrict/encourage FDI?
ADVANTAGES OF INDIA
Stable democratic environment over 60 years of independence
Large and growing market
World class scientific, technical and managerial manpower
Cost-effective and highly skilled labor
Abundance of natural resources
Well-established legal system with independent judiciary.
Developed banking system and vibrant capital market
India among the top three investment hot spots and one of the
fastest growing economies in the world.
Large English speaking population
HOST COUNTRY EFFECTS OF FDI
• Resource -transfer
• Balance-of-payment (BOP)
• Import substitution
• Source of export increase
• Adverse effects on the BOP
• Capital inflow followed by capital outflow + profits
• Production input importation
• Threat to national sovereignty and autonomy
• Loss of economic independence
GOVERNMENT POLICY AND FDI
• Home country
• Outward FDI encouragement
• Risk reduction policies (financing, insurance, tax incentives)
• Outward FDI restrictions
• National security, BOP
• Host country
• Inward FDI encouragement
• Investment incentives
• Job creation incentives
• Inward FDI restrictions
• Ownership extent restrictions (national security; local nationals can
safeguard host country’s interests
HOME COUNTRY EFFECTS OF FDI
• BOP current account adversely affected by inward flow of
• Positive employment effect from increased exports of raw
materials / assemblies to the overseas subsidiary
• Repatriation of skills and know-how
• BOP trade position is negatively affected (lower finished
• Loss of employment to overseas market
F D I - APPROVAL
Foreign direct investments in India are approved
through three routes:
• Automatic approval by RBI.
• The FIPB Route.
• CCFI Route
• No need of Prior Approval From FIPB,RBI,GOI.
The investors are only required to notify the Regional Office
concerned of the Reserve Bank of India within 30 days of receipt
of inward remittances.
File the required documents with that Office within 30 days of
issue of shares to the non-resident investors.
The Reserve Bank of India accords automatic approval within a
period of two weeks (provided certain parameters are met) to all
• Foreign equity up to 50% in 3 categories relating
to mining activities .
• Foreign equity up to 51% in 48 specified industries.
• Foreign equity up to 74% in 9 categories .
THE FIPB ROUTE
• FDI in activities not covered under the automatic route require
prior government approval.
• Approvals of all such proposals including composite proposals
involving foreign investment/foreign technical collaboration is
granted on the recommendations of FIPB.
• Application for all FDI cases, except NRI investments and
100% EOUs, should be submitted to the FIPB Unit , DEA,
Ministry of Finance.
• Application for NRI and 100% EOU cases should be presented
to SIA in Department of Industrial Policy and Promotion (DIPP).
• Application can be made in Form FC-IL. Plain paper
applications carrying all relevant details are also accepted.
No fee is payable.
• Investment proposals falling outside the automatic route.
• Having a project cost of Rs. 6,000 million or more would require
prior approval of Cabinet Committee of Foreign Investment
• Decision of CCFI usually conveyed in 8-10 weeks. Thereafter,
filings have to be made by the Indian company with the RBI.
MAJOR BODIES CONSTITUTED FOR FDI
1991- Foreign Investment Promotion Board (FIPB)
1996- Foreign Investment Promotion Council (FIPC)
1999- Foreign Investment Implementation Authority (FIIA)
2004- Investment Commission
Secretariat for Industrial Assistance (SIA)
Foreign Investment up to 100% is allowed in green
field projects under automatic route
Foreign Direct Investment is allowed in existing
- up to 74% under automatic route
- beyond 74% and up to 100% subject to
FDI in basic and cellular, unified access services,
national/ international long distance , V-Sat, public
mobile radio trunk services , global mobile
personal communications services
- Automatic up to 49%
- FIPB beyond 49% but up to 74%
Manufacture of telecom equipments - Automatic up
FDI up to 49% (40%) permitted under automatic
Automatic Route is not available
However, a foreign airlines are not allowed to
have any direct or indirect equity participation
100% investment by NRIs/OCB’s
DRUGS & PHARMA
• FDI up to 100% is permitted under the
automatic route for manufacture of drugs
and pharmaceuticals (The following is the
• FDI up to 74% in the case of bulk drugs,
their intermediates Pharmaceuticals and
formulations would be covered under
• FDI above 74% for manufacture of bulk
drugs will be considered by the
Government on case to case basis
FDI up to 26% allowed on the automatic route
However, license from the Insurance Regulatory &
Development Authority (IRDA) has to be obtained
There is a proposal to increase this limit to 49%
Coal & Lignite mining for captive consumption by
power projects, and for iron & steel and cement
production - Automatic up to 100%
Mining covering exploration and mining of
diamonds and precious stones, gold, silver and
minerals - Automatic up to 100%
Petroleum and natural gas sector, other than
refining and including market study and
formulation; setting up infrastructure for
marketing - Automatic up to 100%
For petroleum refining activity 100% FDI is
permitted in Indian Private Companies under
automatic route and up to 26% FDI is
permitted in Public Sector Undertakings with
PRIVATE SECTOR BANKING
Foreign Investment up to 74% is permitted from all sources under
the automatic route subject to guidelines for setting up of
branches/subsidiaries of foreign banks issued by RBI from time to
FDI up to 100% in publishing/printing scientific &
technical magazines, periodicals & journals
FDI up to 26% in publishing news papers and
periodicals dealing in news and current affairs.
All investments are subject to the guidelines
issued by the Ministry of Information and
Wholesale / cash & carry trading - Automatic upto
Trading for exports - Automatic upto 100%
Trading of items sourced from small scale sector 100% with Government approval
Single Brand product
FDI permitted for setting up hardware facilities such
as up-linking, HUB, etc up to 49% under Government
FDI permitted in Cable Network up to 49% under
Government approval route
Foreign Investment (FDI/FII) up to 49% allowed under
Government approval route in Direct to Home Service
Providers. FDI limited to 20%
FDI permitted in FM radio up to 20% under
Government approval route
100% FDI is permitted for the following activities:
Electricity Generation (except Atomic energy)
Mass Rapid Transport System
Roads & Highways
Ports & Harbors
Hotel & Tourism
FDI is not permitted in the following industrial sectors :
Arms and ammunition.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
Agricultural or plantation activities
Housing and Real Estate Business (except development of townships,
construction of residential/commercial premises, roads or bridges to the
extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
ADVANTAGES OF FDI
• Increase in Domestic Employment/Drop in unemployment
• Investment in Needed Infrastructure.
• Positive Influence on the Balance of Payments.
• New Technology and “Know How” Transfer.
• Increased Capital Investment.
• Targeted Regional and Sectoral Development.
DISADVANTAGES OF FDI
• Industrial Sector Dominance in the Domestic Market.
• Technological Dependence on Foreign Technology
• Disturbance of Domestic Economic Plans in Favor of
• “Cultural Change” Created by “Ethnocentric
Staffing” The Infusion of Foreign Culture , and
Foreign Business Practices
Year wise revised FDI
Inflow since 2000-2001 with
expended coverage to
%age to total Inflows (in terms of US $)
TOP INVESTORS IN INDIA