Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor.
Foreign direct investment is an investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a way that grants the investor control over the acquired asset.
Wiki : The net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.
NEED FOR FDI
To gain access to resources and technical know-how.
Foreign capital brings with it additional productive factors like business experience and knowledge.
To gain access to market.
To get greater efficiency. ( cheap labour, resource etc).
Domestic capital is not enough for the level of economic development planned.
- Foreign investment is prohibited in following areas:
Agriculture (Except Floriculture, Horticulture, Seed development ).
Lottery Business/Gambling Betting.
Plantation ( Except tea Plantation ).
Types of FDI
Inward and outward FDI.
Vertical and Horizontal FDI.
Greenfield investment and Mergers & Acquisitions.
Foreign Investment Promotion Board (FIPB)
The Foreign Investment Promotion Board (FIPB), housed in the Department of Economic Affairs, Ministry of Finance, is an inter-ministerial body, responsible for processing of Foreign Direct Investment (FDI) proposals in India. The Board offers a single-window mechanism in respect of FDI proposals, which require government approval and are not permissible under the automatic route as per the extant FDI Policy, as formulated by Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry.
Approvals under PMO: FIPB was initially constituted under the Prime Minister’s Office.
Transfer to DIPP in 1996: The Board was reconstituted in 1996 with the transfer of FIPB to DIPP.
Transfer to DEA in 2003: The FIPB was transferred to the Department of Economic Affairs (DEA), Ministry of Finance in terms of the Presidential Order dated 30.01.2003. Project-proposals involving a total investment of less than 600 crore were considered and approved by the Finance Minister and those with a total investment beyond 600 crore were submitted to the CCEA for decision. The threshold limit for investment in proposals that require approval of the CCEA (Cabinet Committee on Economic Affairs ) has been subsequently raised to 1200 crore.
Automatic Route and FIPB
Under Delegated powers exercised by RBI.
FDI upto 100%for new and existing companies, JVs,firms is permitted under automatic route for all items except for those where approval from SEBI or FIPB is required.
Under Foreign Investment Promotion Board
Required for the projects that do not qualify for automatic approval route.
A proposal to be made to FIPB which studies the project and conveys its decision within 30 days of submitting application.
Preference is given to projects in high priority industries.
Step wise Economic reforms since 1991 as given on the RBI website:
Effect of Economic liberalization on FDI
Year Wise FDI Inflow
Sectoral Representation (From April 2000 to April 2011)
TOP 10 COUNTRIES (From April 2000 to April 2011)
Benefits of FDI
Plays a complimentary role in capital formation.
Employment generation and productivity enhancement.
Encourages the transfer of management skills, intellectual property, and technology.
Improves forex position of the country.
Promotion of the competition within the local input market.