Foreign direct investment


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Foreign direct investment

  2. 2. FOREIGN DIRECT INVESTMENT• Foreign direct investment (FDI) occurs when a firm invests directlyin new facilities to produce and/or market in a foreign country. Oncea firm undertakes FDI it becomes a multinational enterprise• FDI is undertaken by firms so that they can take advantage ofresources that are either unavailable in the home country or becausethese resources are available at costs lower than those in their homecountry.• The firm has significant control of its foreign operation and canaffect managerial decisions of the foreign operation. It usuallyinvolves participation in management, joint-venture, transfer oftechnology and expertise.
  4. 4. Inward FDI:Inward FDI for an economy can be defined as the capital providedfrom a foreign direct investor residing in a country, to thateconomy, which is residing in another country. Here, investmentof foreign capital occurs in local resources.Flow of Inward FDI may face restrictions from factors likerestraint on ownership and disparity in the performance standard.EXAMPLE: General Motors decides to open a factory inMalaysia. They are going to invest some capital. That capital isinward FDI for Malaysia.
  5. 5. Outward FDI:When investment is made by a domestic company in the foreigncountry than there is outflow of FDI from domestic country toforeign country. Foreign direct investment, which is outward, is alsoreferred to as “direct investment abroad”.Outward FDI faces restrictions under a host of factors as describedbelow:•Industries related to defence are often set outside the purview ofoutward FDI to retain governments control over the defense relatedindustrial complex.•Subsidy scheme targeted at local businesses.•Government policies, which lend support to the phenomenon ofindustry nationalization
  6. 6. FEMA Guidelines on Outward FDI•Indian Companies can set up:- •100% subsidiary abroad •Joint venture abroad.•How much investment: • Max outward FDI restricted to 3 times of net worth as per last audited balance sheet. • Subscribe to share capital of foreign country • Outward remittances to foreign country to subscribe to share • Capital;or/& • Export of machinery, manpower, management ;or/& • Export of technical know how. No restrictions on repatriation of profits ECB can be raised for outward FDI
  7. 7. FIPB•FIPB is in Ministry of Commerce•Commerce Ministry chairman is Chairman of FIPB•Application on plain paper along with project report to besubmitted to FIPB•FIPB powers of sanction upto Rs.600 crores•Project of more than 600 crores will go to CCFI, “IMG”
  8. 8. GREENFIELD INVESTMENT•A form of foreign direct investment where a parent company starts anew venture in a foreign country by constructing new operationalfacilities from the ground up. In addition to building new facilities,most parent companies also create new long-term jobs in the foreigncountry by hiring new employees.•Developing countries often offer prospective companies tax-breaks,subsidies and other types of incentives to set up green field investments.Governments often see that losing corporate tax revenue is a small priceto pay if jobs are created and knowledge and technology is gained toboost the countrys human capital.•A related term to Greenfield Investment which is becoming popular isBrownfield Investment, where a site previously used for a "dirty"business purpose, such as a steel mill or oil refinery, is cleaned up andused for a less polluting purpose, such as commercial office space or aresidential area.
  9. 9. MERGERS AND ACQUISITIONS1. Horizontal • A merger in which two firms in the same industry combine. • Often in an attempt to achieve economies of scale and/or scope.2. Vertical • A merger in which one firm acquires a supplier or another firm that is closer to its existing customers. • Often in an attempt to control supply or distribution channels.3. Conglomerate • A merger in which two firms in unrelated businesses combine. • Purpose is often to ‘diversify’ the company by combining uncorrelated assets and income streams4. Cross-border (International) M&As • A merger or acquisition involving a Indian and a foreign firm, either the acquiring or target company.
  10. 10. JOINT VENTURE–A joint venture is here defined as shared ownership in aforeign business–Some advantages of a MNE working with a local joint venturepartner are: •Better understanding of local customs, mores and institutions of government •Providing for capable mid-level management •Some countries do not allow 100% foreign ownership •Local partners have their own contacts and reputation which aids in business. However, joint ventures are not as common as 100%-owned foreign subsidiaries as a result of potential conflicts or difficulties
  11. 11. IMPORTANCE OF FDI•FDI provides ready resource for the growth of the economy. Forcapital starved country, FDI could be a boon. Generating fundsinternally may require much time and also FDI is motivated bylong term profit considerations of the investors.•The enhanced money inflow from overseas means that the countrycan import more goods that are basic to the building of the economy.This is particularly important for developing country.•FDI acts as the nucleus around which other businesses can grow. Forexample, toyota motors have established their automobile plants inIndia and they source fraction of parts from local firms.
  12. 12. ADVANTAGES OF FDI•Foreign Direct Investment plays a pivotal role in the developmentof Indias economy. It is an integral part of the global economicsystem.•FDI ensures a huge amount of domestic capital, production level,and employment opportunities in the developing countries, which isa major step towards the economic growth of the country.•Foreign Direct Investments have opened a wide spectrum ofopportunities in the trading of goods and services in India both interms of import and export production.•FDI has also ensured a number of employment opportunities byaiding the setting up of industrial units in various corners of India.
  13. 13. DISADVANTAGES OF FDI•One of the most important disadvantages of foreign directinvestment is that the economically backward section of the hostcountry is always inconvenienced when the stream of foreign directinvestment is negatively affected.• The differences of language and culture that exist between thecountry of the investor and the host country could also poseproblems in case of foreign direct investment.•Adverse effects on the balance of payments, when a foreignsubsidiary imports a substantial number of its inputs from abroad,there is a debit on the current account of the host country’s balanceof payments.
  14. 14. TRENDS IN FDIThere has been a marked increase in both the flow and stock of FDIin the world economy over the last 30 years.FDI has grown more rapidly than world trade and world outputbecause:• The general shift toward democratic political institutions and freemarket economies has encouraged FDI• The globalization of the world economy is having a Positiveimpact on the volume of FDI as firms undertake FDI
  15. 15. FDI AND ECONOMIC DEVELOPMENTForeign direct investment (FDI) is considered to be the lifeblood andan important vehicle for economic development as far as thedeveloping nations are concerned. The important effect of FDI is itscontribution to the growth of the economy.FDI has an impact on countrys trade balance, increasing labourstandards and skills, transfer of new technology and innovative ideas,improving infrastructure, skills and the general business climate.FDI also provides opportunity for technological transfer and upgradation, access to global managerial skills and practices, optimalutilization of human capabilities and natural resources, makingindustry internationally competitive, opening up export markets,providing backward and forward linkages and access to internationalquality goods and services.
  16. 16. FDI INCENTIVESTypes of FDI Incentives• Fiscal Incentives - to reduce tax burden of foreign investors.• Financial Incentives - grants given by government• Other Incentives - like subsidized infrastructure, market preference, preferential foreign exchange rates.
  17. 17. FDI AND FIIBoth FDI and FII is related to investment in a foreign country. FDI orForeign Direct Investment is an investment that a parent companymakes in a foreign country. On the contrary, FII or ForeignInstitutional Investor is an investment made by an investor in themarkets of a foreign nation.In FII, the companies only need to get registered in the stock exchangeto make investments. But FDI is quite different from it as they investin a foreign nation.The Foreign Institutional Investor is also known as hot money as theinvestors have the liberty to sell it and take it back. But in ForeignDirect Investment, this is not possible. The Foreign Direct Investmentis considered to be more stable than Foreign Institutional Investor.
  19. 19. • Foreign direct investment (FDI) has become an integral part ofnational development strategies for almost all the countries globally.Its global popularity and positive output in augmenting of domesticcapital, productivity and employment; has made it an indispensabletool for initiating economic growth for nations.• India is evolving as one of the ‘most favored destination’ for FDI inAsia and the Pacific (APAC). It has displaced US as the second-mostfavored destination for foreign direct investment (FDI) in the worldafter China.• FDI in India has contributed effectively to the overall growth of theeconomy in the recent times. FDI inflow has an impact on Indiastransfer of new technology and innovative ideas; improvinginfrastructure, a competitive business environment.
  20. 20. FDI POLICY:India has among most liberal and transparent policy on FDI amongthe emerging economies. FDI upto 100% is allowed under theautomatic route in all sectors except the following which requireprior approval of government: • Manufacturing of tobacco products and its substitutes. • Manufacturing of electronic aerospace and defence equipments. • Manufacturing of item exclusively meant for small scale industries with more than 24% FDI. • Proposals in which the foreign collaborator has an existing joint venture, technology transfer, trade mark in India in same field.
  21. 21. FDI Policy contd:An ongoing review of the FDI policy is carried out so as to initiatemore liberalization. Change in sectoral policy/sectoral equity cap isnotified from time to time through Press Notes. This is done by theSecretariat for Industrial Assistance (SIA) in the Department ofIndustrial Policy & Promotion. Policy announcement by SIA aresubsequently notified by RBI under FEMA. • FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. • FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. • The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt. They will have to file the required documents with that office within 30 days after issue of shares to foreign investors.
  22. 22. PROHIBITED SECTOR UNDER FDIFDI is not permissible in the following cases: • Gambling and Betting. • Lottery Business. • Business of chit fund. • Housing and Real Estate business. • Atomic Energy. • Agricultural or plantation activities and plantations(other than Tea plantations). • Retail Sector
  23. 23. INDUSTRIAL LICENSING POLICYIndustrial Licenses are regulated under the Industries (Development& Regulation) Act, 1951. The requirements of Industrial license hasbeen progressively reduced. At present industrial license formanufacturing is required only for the following: • Industries retained under compulsory licensing. • Items reserved for small scale sector.-> An industrial undertaking is defined as a small-scale unit if thecapital investment in plant and machinery does not exceed Rs 10million. A small scale unit can not have more than 24 per centequity in its paid up capital from any industrial undertaking, eitherforeign or domestic.