Dharmendra fdi project

PROJECT REPORT
TOPIC
“IMPACT OF INTERNATIONAL BUSINESS
IN INDIAN ECONOMY”
SUBMITTED BY :-
NAME :- CHINTU KUMAR
I.D. NO. :- 17127
COLLEGE CODE :- 459
COLLEGE NAME :- CATALYST EVENING COLLEGE
COURSE :- BBM (3rd
YEAR)
REGISTRATION NO. :- 1607006111/16
SUBMITTEDTO :-
MUKESH SIR

ACKNOWLEDGEMENT
I extend my sincere thanks to all those who help me in the
completion of this project. Without their undying help and
guidance, this project would not be what it is. I specially extend
my heartfelt thanks to my faculty guide Mukesh Sir for helping
me for every step and guiding me in every way possible.
Furthermore, I would like to show my grateful feeling to
Mukesh Sir, who once taught me and was my project supervisor
in the 3rd year. I also extend my appreciation towards my family
who encourage me and were by my side whenever I needed
them.

TABLE OF CONTENT
1.0 Introduction……………………………………........ 01-03
1.1 Meaning of FDI…………………………………...... 04-09
1.2 Scope of FDI………………………………………... 10-11
1.3 Type of FDI………………………………………… 11-12
1.4 Role of FDI…………………………………………. 13-15
2.0 Indian Economy…………………………………….. 16-18
3.0 Foreign Direct Investment in India………………... 19-22
3.1 Challenges for Foreign Investors in infrastructure
Development in India………………………………. 23
3.2 Why is India an attractive Destination for FDI ?..... 24
4.0 Objective of the Study………………………………. 25
5.0 Data Analysis……………………………………….. 25-37
6.0 Research & Methodology…………………………... 38
7.0 Conclusion………………………………………….. 39-42
8.0 Bibliography……………………………………........ 43-44
1

INTRODUCTION
Foreign Direct Investment (FDI) is a vital ingredient of the
globalization efforts of the world economy. The impact of FDI
on India has left an impression. The growth of international
production is driven by economic and technological forces. It is
also driven by the ongoing liberalization of FDI and trade
policies. One outstanding feature of the present-day world has
been the circulation of private capital flow in the form of FDI in
developing countries, especially since 1990s. Since the 1980s,
multinational corporations (MNCs) have come out as major
actors in the globalization context. Governments around the
world – in both advanced and developing countries – have been
attracting MNCs to come to the respective countries with their
FDI. This experience may be related to the broader context of
liberalization in which most developing and transition
countries have moved to market-oriented strategies. In this
context, globalization offers an unparalleled opportunity for
developing countries like India to attain quicker economic
growth through trade and investment.
In the period 1970s, international trade grew more rapidly than
FDI, and thus international trade was by far than most other
important international economic activities. This situation
changed radically in the middle of the 1980s, when world FDI
started to increase sharply. In this period, the world FDI has
increased its importance by transferring technologies and
establishing marketing and procuring networks for efficient
production and sales internationally (Shujiro Urata, 1998).
But now-a-days, it seems that impact of FDI on India is a
negative one. From a position of 8th rank in 2009 India has
fallen to 14th position as country attracting largest FDI,
according to “World Investment Report 2011” by United
Nations Conference on Trade and Development (UNCTAD).
Developing countries like Singapore, Thailand, Taiwan,
Malaysia etc. are attracting a higher FDI inflow than India.
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A number of studies and reports highlight the weakness of
India as a falling FDI destination. In the latest study from
World Bank “Ease of Doing Business in India 2011” India is
ranked as 134 out of 183 countries. GD on impact of FDI on
India can have different faces.
Foreign investment refers to investments made by the residents
of a country in the financial assets and production processes of
another country. The effect of foreign investment, however,
varies from country to country. It can affect the factor
productivity of the recipient country and can also affect the
balance of payments. Foreign investment provides a channel
through which countries can gain access to foreign capital. It
can come in two forms: FDI and foreign institutional
investment (FII). Foreign direct investment involves in direct
production activities and is also of a medium- to long-
term nature. But foreign institutional investment is a short-
term investment, mostly in the financial markets. FII, given its
short-term nature, can have bidirectional causation with the
returns of other domestic financial markets such as money
markets, stock markets, and foreign exchange markets. Hence,
understanding the determinants of FII is very important for any
emerging economy as FII exerts a larger impact on the
domestic financial markets in the short run and a real impact in
the long run. India, being a capital scarce country, has taken
many measures to attract foreign investment since the
beginning of reforms in 1991.
India is the second largest country in the world, with a
population of over 1 billion people. As a developing country,
India’s economy is characterized by wage rates that are
significantly lower than those in most developed countries.
These two traits combine to make India a natural destination
for FDI and foreign institutional investment (FII).
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Until recently, however, India has attracted only a small share
of global FDI and FII primarily due to government restrictions
on foreign involvement in the economy. But beginning in 1991
and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign
investment, a sharp reversal from decades of discouraging
economic integration with the global economy.
The world is increasingly becoming interdependent. Goods and
services followed by the financial transaction are moving across
the borders. In fact, the world has become a borderless world.
With the globalization of the various markets, international
financial flows have so far been in excess for the goods and
services among the trading countries of the world. Of the
different types of financial inflows, the FDI and foreign
institutional investment (FII)) has played an important role in
the process of development of many economies. Further many
developing countries consider FDI and FII as an important
element in their development strategy among the various forms
of foreign assistance.
4

MEANING OF FDI:-
Foreign direct investment (FDI) is an important factor in
acquiring investments and grows the local market with foreign
finances when local investment is unavailable. There are
various formats of FDI and companies should do a good
research before actually investing in a foreign country.
It has been proved that FDI can be a win-win situation for both
the parties involved. The investor can gain cheaper access to
products/services and the host country can get valuable
investment unattainable locally.
There are various vehicles through which FDI can be acquired
and there are some important questions the firms must answer
before actually implementing a FDI strategy.
FDI – Definition
FDI, in its classic definition, is termed as a company of one
nation putting up a physical investment into building a facility
(factory) in another country. The direct investment made to
create the buildings, machinery, and equipment is not in sync
with making a portfolio investment, an indirect investment.
In recent years, due to fast growth and change in global
investment patterns, the definition has been expanded to
include all the acquisition activities outside the investing firm’s
home country.
FDI, therefore, may take many forms, such as direct
acquisition of a foreign firm, constructing a facility, or
investing in a joint venture or making a strategic alliance with
one of the local firms with an input of technology, licensing of
intellectual property.
5

FDIandits Types
Strategically, FDI comes in three types −
 Horizontal − In case of horizontal FDI, the company
does all the same activities abroad as at home. For
example, Toyota assembles motor cars in Japan and the
UK.
 Vertical − In vertical assignments, different types of
activities are carried out abroad. In case of forward
vertical FDI, the FDI brings the company nearer to a
 Market (for example, Toyota buying a car distributorship
in America). In case of backward Vertical FDI, the
international integration goes back towards raw materials
(for example, Toyota getting majority stake in a tyre
manufacturer or a rubber plantation).
 Conglomerate − In this type of investment, the
investment is made to acquire an unrelated business
abroad. It is the most surprising form of FDI, as it
requires overcoming two barriers simultaneously – one,
entering a foreign country and two, working in a new
industry.
FDI can take the form of Greenfield entry or takeover.
 Greenfield entry refers to activities or assembling all the
elements right from scratch as Honda did in the UK.
 Foreign takeover means acquiring an existing foreign
company – as Tata’s acquisition of Jaguar Land Rover.
Foreign takeover is often called mergers and
acquisitions (M&A) but internationally, mergers are
absolutely small, which accounts for less than 1% of all
foreign acquisitions.
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This choice of entry in a market and its mode interacts with the
ownership strategy. The choice of wholly owned subsidiaries
against joint ventures gives a 2x2 matrix of choices – the
options of which are −
 Greenfield wholly owned ventures,
 Greenfield joint ventures,
 Wholly owned takeovers, and
 Joint foreign acquisitions.
These choices offer foreign investors options to match their
own interests, capabilities, and foreign conditions.
Why isFDIImportant?
FDI is an important source of externally derived finance that
offers countries with limited amounts of capital get finance
beyond national borders from wealthier countries. For
example, exports and FDI are the two key ingredients in
China's rapid economic growth.
According to the World Bank, FDI is one of the critical
elements in developing the private sector in lower-income
economies and thereby, in reducing poverty.
Vehicles of FDI :-
 Reciprocal distribution agreements − This type of
strategic alliance is found more in trade-based verticals,
but in practical sense, it does represent a type of direct
investment. Basically, two companies, usually within the
same or affiliated industries, but from different nations,
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 Agree to become national distributors for each other’s
products.
 Joint venture and other hybrid strategic
alliances − Traditional joint venture is bilateral,
involving two parties who are within the same industry,
partnering for getting some strategic advantage. Joint
ventures and strategic alliances offer access to proprietary
technology, gaining access to intellectual capital as
human resources, and access to closed channels of
distribution in select locations.
 Portfolio investment − For most of the 20th century, a
company’s portfolio investments were not considered a
 direct investment. However, two or three companies with
"soft" investments in a company could try to find some
mutual interests and use their shareholding for
management control. This is another form of strategic
alliance, sometimes called shadow alliances.
FDI – Basic Requirements
As a minimum requirement, a firm will have to keep itself
abreast of global trends in its industry. From a competitive
perspective, it is important to be aware if the competitors are
getting into a foreign market and how they do that.
It is also important to see how globalization is currently
affecting the domestic clients. Often, it becomes imperative to
expand for key clients overseas for an active business
relationship.
8

New market access is also another major reason to invest in a
foreign country. At some stage, export of product or service
becomes obsolete and foreign production or location becomes
more cost effective. Any decision on investing is thus a
combination of a number of key factors including −
 assessment of internal resources,
 competitiveness,
 market analysis, and
 Market expectations.
A firm should seek answers to the following seven questions
before investing abroad −
 From an internal resources standpoint, does the firm have
senior management support and the internal
management and system capabilities to support the setup
time and an ongoing management of a foreign subsidiary?
 Has the company done enough market research in the
domains, including industry, product, and local
regulations governing foreign investment?
 Is there a realistic judgement in place of what level of
resource utilization the investment will offer?
 Has information on local industry and foreign investment
regulations, incentives, profit sharing, financing,
distribution, etc., completely analyzed to determine the
most suitable vehicle for FDI?
 Has an adequate plan been made considering reasonable
expectations for expansion into the foreign market via the
local vehicle?
 If applicable, have all the relevant government agencies
been contacted and concurred?
9

 Have political risk and foreign exchange risk been judged
and considered in the business plan?
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.
Foreign Direct Investments (FDI) is investment of foreign
assets into domestic structures, equipment, and organizations.
FDI inflows are into the primary market and do not include
foreign investments into the stock markets. It is a long-term
investment and is used by the developing countries as a source
of their economic development, productivity growth, to
improve the balance of payments and employment generation.
Its aim is to increase the productivity by utilizing the resources
to their maximum efficiency. According to International
Monetary Fund, FDI is defined as Investment that is made to
acquire a lasting interest in an enterprise operating in an
economy other than that of the investor. The investor’s purpose
being to have effective voice in the management of the
enterprise.
FDI is normally defined as a form of investment made in order
to gain unwavering and long-lasting interest in the enterprises
that are operated outside of the economy of the shareholder.
There is a parent enterprise and a foreign associate to form a
Multinational Corporation (MNC). Parent enterprise has power
and control over its foreign affiliate on the investment.
10

SCOPE OF FDI :-
The foreign direct investment into India is a process for
facilitating people to invest in India. If you are really interested
in doing business in India with the help of foreign capital then
make sure that you are investing in the right source and you can
do this in a number of ways. Even when India was going
through tough times, it was still a good financial breeding
ground for all foreign investors. They have never felt the
pressure as their genre of investment has always been
unleashed for the purpose of ushering more capital within the
country.
There have been several Indian infrastructures who may have
suffered in the field of production and manufacturing due to
lack of essential capital. However, a good way for them to
survive is by offering FDI equity to companies or individuals
who would be interested in making huge capital investments.
Foreign direct investment in India is done in several ways.
Investment can take place through effective financial
collaborations. In this case the common interest is the yearly
financial turn over and to make this work out two or more
companies come in association and they share much in
contributing towards a common financial consensus. The effort
has to be there from both the ends, from the part of the investor
and also from the part of the collaborator. When collaborating,
you can keep the leadership factors aside and think about a
healthy togetherness contributing towards a bigger financial
platform.
As a way towards FDI equity is also a joint venture and a
technical collaboration. Once the company delivers the plan of
taking things technically ahead then other can contribute in a
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different way. It is more technical and less of financial
collaboration.
Foreign direct investment in India is not permissible in all
industrial sectors as it is not allowed in the domain of arms and
ammunition. You cannot invest in the field of atomic energy.
You cannot invest anything related to railway and transport and
you cannot even put your money in the field of coal and lignite.
It is even not permissible to invest money in matters of metal
mining. Thus, keeping aside these domains you still have a huge
scope for investment.
TYPES OF FDI:-
The various type of Foreign Direct Investment includes:
 Horizontal FDI: It is the investment done by a
company or organization which practices all the tasks
and activities done at the investing company, back at its
own country of operation. Therefore, basically such
investors are from the same industry where investments
are done but operating in two different countries. For
e.g., a car manufacture in Australia invests in a car
manufacturing company of India.
 Vertical FDI: The industry of the investor and the
company where investments are done are related to each
other. This type of FDI is further classified as:
12

 Forward Vertical FDI: In such investments, foreign
investments are done in organizations which can take
the products forward towards the customers. For e.g., a
car manufacturing company in Australia invests in a
wholesale Car Dealer company in India.
 Backward Vertical FDI: IN such investments, foreign
investments are done in an organization which is
involved in sourcing of products for the particular
industry. For e.g., the car manufacturer of Australia
invests in a tyre manufacturing plant in India.
 Conglomerate FDI: Such investments are done to gain
control in unrelated business segments and industries in
a foreign land. For e.g., the car manufacturer of Australia
 invests in a consumer durable goods manufacturer in
India. Here the investing company ideally manages two
challenges, first being gaining operational control in a
foreign land, and the second being starting operations in
a new industry segment.
 Greenfield Entry: In this special type of FDI, the
investing company refers to an investing organization
starting assembling from scratch just like Honda did in
United Kingdom
 Foreign Takeover: This type of FDI takes the form of a
foreign merger, acquisition or takeover of an existing
foreign company.
13

ROLE OF FDI :-
FDI plays an important role in the economic development of a
country. The capital inflow of foreign investors allows
strengthening infrastructure, increasing productivity and
creating employment opportunities in India. Additionally, FDI
acts as a medium to acquire advanced technology and mobilize
foreign exchange resources. Availability of foreign exchange
reserves in the country allows RBI (the central banking
institution of India) to intervene in the foreign exchange market
and control any adverse movement in order to stabilize the
foreign exchange rates. As a result, it provides a more
favourable economic environment for the development of
Indian economy.
But Why Do We Need FDI ?
There are various factors that signify the importance of FDI in
India some of which are listed below:
1) Helps in Balancing International Payments:
FDI is the major source of foreign exchange inflow in the
country. It offers a supreme benefit to country’s external
borrowings as the government needs to repay the international
debt with the interest over a particular period of time. The
inflow of foreign currency in the economy allows the
government to generate adequate resources which help to
stabilize the BOP (Balance of Payment).
2) FDI boosts development in various fields:
For the development of an economy, it is important to have new
technology, proper management and new skills. FDI allows
bridging of the technology gap between foreign and domestic
14

firms to boost the scale of production which is beneficial for the
betterment of Indian economy. Thus, FDI is also considered an
asset to the economy.
3) FDI & Employment:
FDI allows foreign enterprises to establish their business in
India. The establishment of these enterprises in the country
generates employment opportunities for the people of India.
Thus, the government facilitates foreign companies to set up
their business entities in the country to empower Indian youth
with new and improved skills.
4) FDI encourages export from host country:
Foreign companies carry a broad international marketing
network and marketing information which helps in promoting
domestic products across the globe. Hence, FDI promotes the
export-oriented activities that improve export performance of
the country.
Apart from these advantages, FDI helps in creating a
competitive environment in the country which leads to higher
efficiency and superior products and services.
Government Initiates to Promote FDI
The Indian government has initiated steps to promote FDI as
they set an investor-friendly policy where most of the sectors
are open for FDI under the automatic route (meaning no need
to take prior approval for investment by the Government or the
Reserve Bank of India). The FDI policy is reviewed on a
continuous basis with the purpose that India remains an
investor-friendly and attractive FDI destination. FDI covers
various sectors such as Defence, Pharmaceuticals, Asset
15

Reconstruction Companies, Broadcasting, Trading, Civil
Aviation, Construction and Retail, etc.
In the Union Budget 2018, the cabinet approved 100% FDI
under the automatic route for single-brand retail trading.
Under this change, the non-resident entity is permitted to
commence retail trading of ‘single brand’ product in India for a
particular brand. Additionally, the Indian government has also
permitted 100% FDI for construction sector under the
automatic route. Foreign airlines are permitted to invest up to
49% under the approval route in Air India.
The main purpose of these relaxations in foreign investment by
the government is to bring international best practices and
employee the latest technologies which propel manufacturing
sector and employment generation in India. To boost
manufacturing sector with a focus on ‘Make in India’ initiative,
the government has allowed manufacturers to sell their
products through the medium of wholesale and retail, including
e-commerce under the automatic route.
FDI Facts & Statistics:
According to Indian Brand Equity Foundation (IBEF), the total
FDI investments in India during April-December 2017 stood at
US$ 35.94 billion as the government has been providing
relaxation on FDI which is attracting a large number of foreign
investments. Moreover, the Telecommunications sector has
attracted the highest FDI equity inflow during April-December
2017, i.e. US $ 6.14 billion, followed by computer software and
hardware sector at US$ 5.16 billion & Services at US$ 4.62
billion. The total FDI equity inflows for December 2017 reached
US $ 4.82 billion.
During the period of April-December 2017, India gained
maximum FDI equity inflows from Mauritius.
16

FDI & INDIAN ECONOMY :-
The economy of India is the third largest in the world as
measured by purchasing power parity, with a gross domestic
product (GDP) of US $3.611 trillion. When measured in USD
exchange-rate terms, it is the tenth largest in the world, with a
GDP of US $800.8 billion.
The economy is diverse and encompasses agriculture,
handicrafts, textile, manufacturing and a multitude of services.
Although two-thirds of the Indian workforce still earns their
livelihood directly or indirectly through agriculture, services are
growing sector and are playing an increasingly important role
of India’s economy. The advent of the digital age, and the large
number of young and educated populace fluent in English, is
gradually transforming India as an important ‘back office’
destination for global companies or the outsourcing of their
customer services and technical support.
India is a major exporter of highly-skilled workers in software
and financial services, and software engineering. India followed
a socialist-inspired approach for most of its independent
history, with strict government control over private sector
participation, foreign trade, and foreign direct investment. FDI
up to 100% is allowed under the automatic route in all
activities/sectors except the following which will require
approval of the government activities that require an Industrial
License.
INVESTMENT RISKS IN INDIA
 Sovereign Risk
 Political Risk
 Commercial risk
 Risk due to terrorism
17

FDI POLICY IN INDIA
Foreign Direct Investment policy
FDI policy is reviewed on an outgoing basis and measures for
its further liberalisation are taken. Change in sectoral
policy/sectoral equity cap is notified from time to time through
press notes. FDI policy permits FDI up to 100% from foreign
investor without prior approval in most of the sectors including
the services sector under automatic route. FDI in sectors under
automatic route does not require any prior approval either by
the government or the RBI.
The foreign direct investment scheme and strategy depends on
the respective FDI norms and policies in India. The FDI policy
of India has imposed certain foreign direct investment
regulations as per the FDI theory of the government of India.
These include FDI limits in India for example:
 Foreign direct investment in India in infrastructure
development projects excluding arms and ammunitions,
atomic energy sector, railway system, extraction of coal
and lignite and mining industry is allowed upto 100%
equity participation with the capping amount as Rs. 1500
corers.
 FDI limit of maximum 49% in telecom industry especially
in the GSM services.
 FDI figures in equity contribution I the finance sector
cannot exceed more than 40% in banking services
including credit card operations.
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Foreign direct investment: Indian scenario
FDI is permitted as under the following forms of
investments –
 Through financial collaborations
 Through joint ventures and technical collaborations
 Through capital markets via Euro issues
 Through private placements or preferential allotments
CONCLUSION
A large number of changes that were introduced in the
country’s regulatory economic policies heralded the
liberalization era of the FDI policy regime in India and brought
about a structural breakthrough in the volume of FDI inflows
into the economy maintained a fluctuating and unsteady trend
during the study period. It might be of interest to note that
more than 50% of the total FDI inflows received by India, came
from Singapore and the USA.
According to findings and results, we have concluded that FII
did have significant impact on Sensex but there is less co-
relation with Bank and IT. One of the reasons for high degree of
any linear relation can also be due to the simple data. There are
other major factors that influence the bourses in the stock
market.
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FOREIGN DIRECT INVESTMENT IN INDIA :-
As defined earlier, FDI is “cross-border expenditures to acquire
or expand corporate control of productive assets” (Froth, 1993).
It is now recognised as an important factor to sustain growth
within a country’s economy. It has allowed various sectors to
grow in order to facilitate demand and expansion. Over the past
20 years, the level of FDI has grown in both developed and
emerging economies. FDI is seen as “an integral part of an open
and effective international economic system and a major
catalyst to development” (OECD Report, 2002). However,
different countries have different policies on how they would
like to promote the inflow on FDI, and this is no different for
India. The Economic Survey 2008-09 stated, “FDI is
considered to be the most attractive type of capital flow for
emerging economies as it is expected to bring latest technology
and enhance production capabilities of the economy”. Since the
early 90’s, India has expanded its scope for FDI by
progressively increasing the number of sectors that are eligible
(Rao and Dhar, 2011: 4). As discussed in the previous chapter,
the 1991 reforms in India led to numerous changes in economic
policy, which were of huge benefit to a faltering country. This
section will look at how India has embraced its new structure in
encouraging FDI as a source of economic development and
integrating itself with the world’s economy. In addition to this,
it will highlight why India has become such a popular attraction
for foreign investors in the recent past and discuss the trends in
various sectors. It will also highlight any negative impact FDI
has had on India and what measures are being taken to make
sure it remains a popular choice for investment. However, in
order to understand how FDI works, it is essential to look at
determinants that a foreign investor would look at before
investing. The Role of FDI in Indian Growth and Infrastructure
20

Development 16 4.1. Determinants of FDI Firms evaluate their
investment into foreign markets based on macroeconomic and
other national level factors that determine differences in FDI
inflow (Walsh and Yu, 2010: 4).
According to Dunning (1993), firms have four key elements
that would motivate them to invest in foreign markets: access to
resources, access to markets, efficiency gains and acquisition of
strategic assets. However, these components may be hindered
due to policy shifts by the local government. One determinant
of FDI is the market size and growth potential in the host
country. An increase in market size shows that there is
enormous demand for products and services. In addition to
this, economies of scale are present in the host country,
therefore providing lower transaction costs, which is an
attractive proposition for FDI. An increase in FDI will affect the
host country’s economic growth; however this can also in turn
affect the direction and volume of FDI (Tsai, 1994: 139). The
‘openness’ of the host country is an important determinant of
FDI as it is easier to import raw materials and capital goods,
which are necessary for investment (Tatoglu, 2002: 3). In order
for FDI to grow, international trade flows are of vital
importance as MNCs are expected to import and export large
quantities from the host country in which they have invested.
This means that the host country is required to remove barriers
to export or import. According to Jordan (2004), the extent to
which openness is a relevant factor depends on the type of
investment that is brought to a host country. Where MNCs are
market seeking, trade restrictions can have a positive impact on
FDI. The argument is that MNCs look to serve local markets
with the view of setting up subsidiaries in the host country if it
is difficult to import their own products into the country
(Demirhan and Masco, 2008: 359). In general, a more open
21

economy, that embraces foreign trade, will encourage FDI.
Exchange rates are a variable that could potentially influence
the decision of MNCs to invest in a foreign market. A weak
exchange rate in the host country would allow firms to
capitalise on low prices in order to purchase raw materials, land
space, and facilitate production. Froot and Stein (1991) believe
that a weaker host country currency will increase inward FDI
within an imperfect capital market model as depreciation
makes the host country’s assets less The Role of FDI in Indian
Growth and Infrastructure Development 17 expensive relative
to assets on the home country. It would affect a firm’s cash flow,
expected profitability and the attractiveness of domestic assets
to foreign investors (Tatoglu, 2002: 4). Therefore, the value of
the exchange rate is seen as a potential barrier to entry into a
foreign market. If this were not attractive enough for MNCs
looking to invest abroad, then they would have to look for
alternative routes of investment, which could be in domestic
markets. The emphasis on whether political stability as a
determinant of FDI is still largely in the balance. There is no
concrete evidence to suggest that the relationship between
political instability and FDI is risky for MNCs when investing in
foreign markets. Jespersen et al (2000) believes that there is no
relationship between FDI flows and political risk while
Schneider and Frey (1985) find a positive relationship between
the two indicators (Demirhan and Masca, 2008). If the foreign
firm feels as though they will be able to invest and operate in a
profitable and efficient manner without the risk of political
uncertainty, it will continue to do so. Labour costs and
productivity will also have an impact on whether MNCs invest
in a foreign country. Higher wages in the host country tend to
discourage FDI, as one of the advantages of MNCs investing in
foreign markets, especially emerging economies, is the
22

Availability of cheap labour. However, when cost of labour is
not of the utmost importance, the productivity and skills of the
labour force are expected to have an impact on decisions about
whether FDI is a viable solution (Demirhan & Masca, 2008).
Infrastructure is another key investment area that is important
in determining the impact of FDI. Jordaan (2004) states that
FDI inflows will increase within a country if infrastructure is
preserved and maintained continuously. The government of the
host country plays a valuable part in encouraging FDI into the
development of infrastructure. A foreign investor or MNC will
always have a strong preference towards high quality
infrastructure, which is able to provide communication links,
direct transportation and substantial distribution channels in
order to profit from their investment. Empirical studies have
been conducted to explain the determinants of FDI within a
host country. The aforementioned variables that affect the
decision of an MNC potentially investing in a foreign country
are all viable; however recent studies have tested this The Role
of FDI in Indian Growth and Infrastructure Development 18
particular determinants. Tatoglu (2002) states that the “size of
the domestic market, the openness of an economy to foreign
trade, infrastructure of the host country, attractiveness of the
domestic market, exchange rate instability and economic
instability” influence FDI. The findings of this study suggest
that a positive relationship occurs between FDI and the size of
the domestic market, openness to trade, infrastructure and
attractiveness of the foreign market. However, there seems to
be a negative effect between FDI and exchange rate instability
and economic instability. Using the determinants outlined
above, the following section will discover why India is such a
prospective attract.
23

Challenges for Foreign Investors in Infrastructure
Development in India
Throughout this paper it has been highlighted how India has
been, and still is, an attractive proposition for MNCs to invest in
infrastructure projects in a number of different sectors. The
policy changes that have occurred since 1991 have encouraged
an increase in FDI through private sector investment, especially
under the PPP structure. However, India still faces a number of
challenges in order to ensure that the inflow of investment is
continuous so that it can achieve high growth levels to compete
with the rest of the open economy. For example, India’s urban
infrastructure still shows signs of over-crowded public
transport, significant road congestion and under-developed
water and sewage system (Deutsche Bank Report, 2007).
Further investment is essential in these sectors as the urban
population is set to 0! 10! 20! 30! 40! 50! 60! 70! 80! 90! 100!
0! 10000! 20000! 30000! 40000! 50000! 60000! 70000!
80000! Number! Of! Projects! Total! Investment! ($millions)!
Year! India's Rise in PPP Projects and Total Investment
Number! Of! Projects! Total! Investment! The Role of FDI in
Indian Growth and Infrastructure Development 44 increase by
20% by 2015 according to a UN estimate (Deutsche Bank
Report, 2007). This section looks at the two main challenges
that foreign investors still face when contemplating their
involvement in infrastructure development in India.
24

Why is India an Attractive Destination for FDI?
FDI has grown enormously throughout the world, none more
so than in emerging economies. It has allowed a country to
develop its infrastructure in order to provide a greater standard
of living. It is the role of multinational enterprises that has
coincided with the surge in FDI, which implies a rising share of
foreign ownership in those economies has been its main
recipients (Graham and Krugman, 1993). The scope of FDI had
changed in the mid-1980s, as MNCs were not just securing
their future income in particular countries, but were trying to
establish control within their chosen sector. But why has India
become such an attractive proposition for foreign investors?
India has cemented itself as one of the largest economies in the
world. In addition to this, India is regarded as the world’s
second fastest growing economy and is therefore an attractive
market for FDI. The stock of FDI in India has increased
dramatically from less than $2 billion in 1991, when the
economic reforms took place, to more than $45 billion in 2005
(Nunnenkam and Strake, 2007: 1). Kumar (2005) believes that
there are two key factors that have increased the inflow of FDI
into India. The first is the structural factors such as the quality
of infrastructure, market size and geographical and cultural
concurrence with major sources of capital. The second are
policy factors such as tax rates, investment incentives and
performance requirements (Manikandan, 2008). The Role of
FDI in Indian Growth and Infrastructure Development 20 As
you can see, FDI has had a major impact of the country’s
economy, especially since 1991. However, due to the global
economic crisis in 2008, the level of FDI that has gone into
India has slightly decreased, as foreign investors have taken a
much more cautious approach by not investing as much in an
emerging economy that poses such a high risk.
25

OBJECTIVE OF THE STUDY
1. Impact of FDI on employment generation in Indian Economy
2. Impact of FDI on GDP growth in Indian Economy
3. Impact of FDI on BOP
DATA ANALYSIS
1. Impact of FDI on employment generation in Indian
Economy:-
Foreign direct investments are long run programs initiated by
multinational companies; they seek simple incentives such as
markets, comparative advantage of labor in a country, cheaper
raw material etc. but how does it increase employment?
There are basically two kinds of investment
26

1) Brown field investment—when a company purchases existing
production facilities.
2) Green field investment—when a company builds a new
production facility.
Either way there is bound to be increase in employment due to
investments made. But the extent of the employment
generation depends on the nature of business these firms want
to do, with entry of new firms in the country there must be
increase in competition in the domestic markets, this gives
diversity to the consumers, other positive implication of FDI is
the improvement of technology and knowledge.
In India most of the sector-wise distribution of FDI (appendix
1) has been in service sector (Services sector includes Financial,
Banking, Insurance, Non-Financial / Business, Outsourcing,
R&D, Courier,) i.e. 17.18% of total FDI. While in construction
development India has 9.76% FDI inflows. Most of these
industries are capital intensive in nature and we should not
expect much growth in labor employment.
Agriculture sector— the primary sector employs 50% of the
total employment directly while 12% indirectly, it has received
about 0.16 % in agriculture services and 0.16% in agriculture
machinery of FDI, though it is a small fraction of FDI it led to a
steady growth in agriculture sector12.
Keeping in mind that agriculture sector contributes up to 19%
in GDP of India we should expect more inflow of FDI in this
sector, but when we compare the ratio of GDP contribution of
primary sector to the labor employment we find that the theory
of disguised unemployment to be true, moreover most of the
employment generated belongs to the unorganized sector. The
productivity of labor in agriculture sector has depleted to an
alarming extent and the only way to raise living standard may
seem to be that prescribed by Professor Arthur Lewis in his
Labor surplus model for developing countries. The FDI in other

27
sector certainly seem to be pointing in the above mentioned
direction of Professor Arthur Lewis model, when we take a
closer look at the employment trend of agriculture in India we
find that there has been a steady decline.
Employment Shares of major sectors
Sect
or
1972
-73
1977
-78
1983 1987
-88
1993
-94
1999
-
200
0
Agric
ulture
74 72.3 68.4 65.5 60.3
8
56.7
Indus
try
11.4 12.3 13.7 15.5 15.82 17.56
Servi
ces
14.6 15.4 17.5 18.4 23.8 25.74
The only way by which Indian agriculture sector can improve its
labor productivity is by employing more of capital intensive
technology. Such practices have already shown good results in
U.S.A, Mexico etc.
Industrial sector—Indian industrial sector have had its leaps
and bounds and is now expected grow at a much better pace
though it has received a FDI share of 4.96% in automobile
sector, 3.88% in power sector, 4.17% in fertilizers etc. it is still

28
growing and contributed to 18% of employment in India. This
share of FDI inflow in industrial sector does not reflect its
incapacity by any means as the major benefit received by this
sector has been transfer of technology and knowledge through
multinational companies13. With this the productivity of Indian
labor has improved tremendously, the national manufacturing
policy (NMP) ratified by the Indian government aims at 25%
contribution to GDP and 100 million employment by 2022,
under such strong optimism this sector is likely to increase its
share of FDI as well.
There has been a steady increase in index of industrial
production (IIP)14 in the recent past of the core industries of
India and we can expect that this sector will do better in the
future, with labor migrating towards the urban industrial areas
in search of employment they need to increase their
productivity which they are able to do as the results show.
Service sector—this sector is attracting a huge sum of FDI i.e.
17.18%, most of the FDI that came from Mauritius and
Singapore was inclined towards the service sector but since the
global financial crises in 2007-08 this percentage has dropped.
It is clear that the service sector is sensitive towards the exports
at least in India, with the plummeting service exports of -15% in
2015 this sector has gotten the worse hit since the crises, the
rate of employment generation in this sector is pretty stable
though. During the period of 2004-06 when the Indian GDP
was growing at a rate of 8% the service exports played the most
important role also FDI inflow it this sector was at its peak.
Skilled labor from all over the country flooded into this sector
but as soon as the exports were reduced this sector could not
bear the labor cost and instead left it unemployed or did not
hired them to begin with, moreover the FDI inflow was reduced
to 2/3 of what it was in 2005.

29
2. Impact of FDI on GDP growth in Indian Economy:-
We can classify the effects as direct and indirect effect of FDI on
any economy, similarly in Indian context the direct
contribution of FDI has been in balance of payments and
technology transfer etc. however the generally disregarded
effect of FDI is indirect effect.
The foreign direct investment can be regarded as inflow of
capital. It can be explained by the use of Keynesian multiplier
concept where here, Y is national income and I is investment,
explanation: if an investment of $100 is done, then the labor
employed would earn $100 and consume say $80 on goods by
purchasing it from certain person now this person earns $80
and similarly decides to purchase an item worth $64 from

30
another person then this person earns $64 and story goes on
until $0 is left to spend further, the total income generated here
will be not be equal to $100 instead it will be 100+80+64… this
concept is called the multiplier effect. Though this theory has its
short comings never the less it is gives an effective explanation.
FDI contributes more to the economy this way and hence it
becomes more important to understand its indirect effect,
though direct effects should not be underestimated. Never the
less, the cluster of points in the below given graph can be
explained by the initial phase of opening of the Indian economy
this part of the graph signifies that initially the growth of GDP
was not increasing as rapidly in later phases also one can
observe that FDI inflow did not follow a similar trend and
continuosly increased with a few exceptions at the time of
global slowdown indicating its sensitivity.
The below given data is does not throw any light on the indirect
or multiplier effect of FDI in India though it is relevant.
FDI inflows into the country is likely to rise to 2.5 per cent of
GDP over the next five years, helped by economic growth and
ongoing structural reforms, said a report by UBS Securities
India.
The foreign direct investments (FDI) into India have nearly
doubled over the past decade to USD 42 billion, which was 1.9
per cent of GDP in 2016-17. “Post 2014 general election, FDI
inflows saw a compound annual growth rate of 11 per cent
versus a dip of 6 per cent seen over the previous 5 years,” UBS
said. “We expect FDI inflows to India to rise further to 2.5 per
cent of GDP over the next 5 years,” added the foreign
brokerage.

31
UBS noted that unlike China, where the government has phased
out FDI-favoured policies, India will be increasingly recognised
as a favoured destination by overseas investors “if growth is
accompanied with continuous structural reforms”.
Interestingly, the report said that over the last couple of years,
India has recorded a pickup in FDI inflows to the
manufacturing sector. Historically such investments have been
more towards the service sector. According to the report, FDI
flows into manufacturing “bodes well for creating a productive
spill-over impact on other sectors of the economy; for instance,
boosting exports and creating jobs”.
“In 2016-17, the largest increase in FDI was in the telecom
sector (USD 4.2 bn) followed by insurance. Besides these,
cement, electrical equipment, banking services, metallurgical
industries and the broadcasting sectors also received higher
flows in the last fiscal,” it added.
Observing that India needs FDI inflows to fund its current
account deficit, UBS said the country requires “to focus on
attracting stable FDI flows to improve the competitiveness of its
manufacturing sector and to make it an integral part of the
global value chain”.
It said transfer of technical and organisational knowledge that
accompanies these flows would help boost productivity, support
investments and contribute to India’s overall growth — under
the right conditions.

32
3. Impact of FDI on BOP :-
Balance of Payments (BOP) The balance of payment of a
country is a one year systematic record of all its economic
transactions with the rest of world. The balance of payment
account of a country is worked out on the principle of double
entry book keeping. Each transaction is entered on the credit
and debit side of the balance sheet. Every credit in the balance
of payments is matched by a debit somewhere to confirm to the
principle of double entry book keeping.
A country’s Balance of Payments (BOP) consists of current
account, capital account and official settlement account. The
Foreign Direct Investment (FDI) inflows are reported under the
capital account of BOP. The early effect of an inflow of FDI on
BOP is invariably positive. The FDI inflows also affect the BOP
statement indirectly through the current account of BOP
because FDI inflows have significant impact on the volume of
import and export of a country. Thus the FDI inflow has an
important role to determine the BOP account of a country.

33
The vital and paramount impact of FDI on the balance of
payments is in-determined. It depends upon the two opposite
tendencies or factors. The FDI inflow tends to increase the
imports of host country because the FDI companies import
capital and intermediate goods and services that are not readily
available in the host country. The increase in GDP due to the
inflow of FDI may also be followed by the increase in imports.
All these factors cause negative impact on the BOP.
The trend in FDII and KAB needs to be discussed. During the
period 1991-92 to 2014-15, the FDII and CAB data has shown
myriad trends. While the FDI Inflows has been consistently
Increasing with fluctuation and downfall in few selected years,
the rate of increase appears to Be more after 2006-07. Figure 1
highlights the trends in the levels of the data of FDI Inflows and
KAB. As it is clear from the graph, KAB has shown substantial
fluctuation in 2008-09 and 2012-13. These changes may be
traced to policy changes from time to time and particularly
year 2008-09 may be linked to world economic crisis due to
which there was a setback to the flow of cross border capital.
The descriptive of the two series shows the mean
value of US$ 16010.26 million for FDII and US$ 30784.38
million for KAB with a maximum value of US$ 46556 and
US$ 106585 million, respectively. The minimum value of
FDII and KAB in the sample period is US$ 119.25 million and
US$ 3876 million. The problem. value of Jarque-Bera shows
that FDII series is normally distributed (0.1735) and KAB series
is also normally distributed (0.0855).

34
FDI Limits In India
FDI in India can be done through two routes:
Automatic Route and Government Route.
Automatic route: In this, prior approval by the Government
of India or Reserve Bank of India is not required.
Government route: In this, prior approval by government is
required.
Sector Limit Entry Route
Agriculture & Animal Husbandry 100% Automatic
Plantation Sector
(Tea,Coffee,Rubber,Cardamom,Palm
oil, Olive oil)
100% Automatic
Mining 100% Automatic
Petroleum & Natural Gas (Petroleum
refining by the Public Sector
49% Automatic

Undertakings (PSU)) 35
Petroleum & Natural Gas(All other
activity)
100% Automatic
Defence 100%
Automatic u
Above 49%
Government rou
case basis
Broadcasting Carriage Services 100%
Automatic u
Government ro
49%
Broadcasting Content Services 49% Government
Print Media
[Publishing of newspaper and
periodicals dealing with news and
current affairs ][Publication of
Indian editions of foreign magazines
dealing with news and current
affairs ]
26% Government
Print Media
[Publishing/printing of scientific and
technical magazines/specialty
journals/ periodical ][Publication of
facsimile edition of foreign
newspapers ]
100% Government
Civil Aviation 100% Automatic
Airports[Greenfield projects ] 100% Automatic
Airports[Existing projects ] 100%
Automatic up
Government ro
74%

36
Construction Development
100% Automatic
Industrial Parks 100% Automatic
Satellites- establishment and
operation
100% Automatic
Private Security Agencies 74% Automatic
Telecom Services 100%
Automatic up
Government ro
49%
Trading
[Cash & Carry Wholesale
Trading/Wholesale Trading
(including sourcing from MSEs) ]
100% Automatic
E-commerce activities 100% Automatic
Single Brand product retail trading 100%
Automatic up
Government ro
49%
Multi Brand Retail Trading 51% Government
Processed Food Products 100% Automatic
Duty Free Shops 100% Automatic
Railway Infrastructure 100% Automatic
Asset Reconstruction Companies 100% Automatic

37
Banking- Private Sector
74%
Automatic up
Government ro
49% and up to 74
Banking- Public Sector 20% Government
Credit Information Companies (CIC) 100% Automatic
Infrastructure Company in the
Securities Market[in compliance
with SEBI Regulations ]
49% Automatic
Insurance 49% Automatic
Pension Sector 49% Automatic
Power Exchanges 49% Automatic
White Label ATM Operations 100% Automatic
Non-Banking Finance Companies
(NBFC)
100% Automatic
Pharmaceuticals[Greenfield] 100% Automatic
Pharmaceuticals[Brownfield] 100% Government
Railway Infrastructure 100% Automatic
Regulated Financial Services 100% Automatic

38
RESEARCH METHODOLOGY
The present study is based on the objectives like how much
amount of foreign investment is required for India’s economic
growth and to analysis the trend of FDI & FIIs for economic
development and how the status of economy has improved after
economic reforms. To fulfil all above said objectives data has
been gathered from secondary sources like reports and
publication of Govt. and RBI relating to foreign Investment,
economic journals, books, magazines and internet etc
Since the sample evidence has been taken from the context of
Indian Economy, therefore, this study uses secondary data to
prove the validity of the topic. The data under study has been
mostly collected from RBI Statistics Database on Indian
Economy from the period of 2000-2012. The paper deals with
the study of the current economic scenario of India in terms of
total FDI inflows, FDI inflows on a sectoral basis, growth of
GDP and its export performance over the years. Magnitude of
FDI Inflows in India from the period 2000-2012: The historical
background of FDI in India dates back from the time when East
India Company was established in India with the objective of
setting up units in India. This is how railways came into being
in India. If we examine the current state of FDI inflows in India,
it can be seen that there has been an exponential increase in the
flow of FDI in India with more liberalized reforms coming into
being. But on the other side of it, it is also seen that with years
to come, there has been some volatility in its flow. But if we see,
FDI again picked up pace because of automatic approval route
via RBI.

39
CONCLUSION
The positive effects of inward FDI for workers in host
economies suggest that FDI-friendly policies could be a useful
component of an integrated policy framework for development.
When designing policies to promote FDI, policy-makers should
take into account that these may not only affect the volume of
inward FDI, but also its composition and, as a result, its
corresponding benefits. The OECD Policy Framework for
Investment provides a useful starting point. For a start,
removing specific regulatory obstacles to inward FDI could be
important. There are two types of implications i.e. positive and
negative as per following:
Positive Implications
1. FDI provides capital which is usually missing in the target
country-Long term capital is suitable for economic
development.
2. Foreign investors are able to finance their investments
projects better and often cheaper.
3. Foreign corporations create new workplaces.
4. FDI bring new technologies that are usually not available in
the target country-There is empirical evidence that there are
spill-over effects as the new technologies usually spread beyond
the foreign corporations.
5. Foreign corporations provide better access to foreign
markets-Ex. Foreign corporations can provide useful contacts
even for their domestic subcontractors.
6. Foreign corporations bring new know-how and managerial
skills into the target country Again, there is a spill-over effects –

40
as people leave the corporations they leave with the knowledge
and know-how they accumulated.
7. Foreign corporations can help to change the economic
structure of the target country with a good economic strategy
governments can attract companies from promising and
innovative sectors
8. “Crowding in” effect-The foreign corporations often bring
additional investors into the target country (ex. their usual
subcontractors)
9. Foreign corporations improve the business environment of
the target country-Ethical business or rules of conduct.
10. Foreign corporations bring new “clean” technologies that
help to improve the environmental conditions.
11. Foreign corporations usually help increase the level of wages
in the target economy.
12. Foreign corporations usually have a positive effects on the
trade balance.
Negative Implications
1. Foreign corporations may buy a local company in order to
shut it down (and gain monopoly for example).
2. “Crowding out” effect- We can see this effect if the foreign
corporations target the domestic market and domestic
corporations are not able to compete with these corporations.
3. Foreign corporations ay cut working positions (privatization
deals or M&A transactions).

41
4. Foreign corporations have a tendency to use their usual
suppliers which can lead to increased imports (no problem if
the production is export driven).
5. Repatriation of the profits can be stressful on the balance of
payments
6. The high growth of wages in foreign corporations can
influence a similar growth in the domestic corporations which
are not able to cover this growth with the growth of
productivity- The result is the decreasing competitiveness of
domestic companies.
7. Missing tax revenues- If the foreign corporations receive tax
holidays or similar provisions.
8. The emergence of a dual economy- The economy will contain
a developed foreign sector and an underdeveloped domestic
sector.
9. Possible environmental damage.
10.“Incentive tourism” The United States welcomes foreign
investment and seeks to accord foreign investors the same fair,
equitable, and non-discriminatory treatment given to American
investors. U.S. investment policy is governed by the following
principles.
National Treatment: Foreign investors from different countries
should be granted equal treatment.(Becomes as Most-
Favoured-Nation)
Protection of Investor Rights in Accord with International Legal
Principles and Multilateral Conventions: Any benefit of
investment or agreement of an investor's financial, physical,
and intellectual property rights should be done for a public
purpose, in a non-discriminatory fashion under due process of

42
law without violating previous contractual arrangements, and
accompanied by prompt, adequate, and effective compensation.
Multilaterally, the United States has worked actively to promote
and implement these principles. For example, in 1976 and
1984, the United States sought and achieved two decisions by
the Organization for Economic Cooperation and Development
(OECD), consisting of understandings among OECD members
on national treatment, investment incentives and disincentives,
guidelines for multinational enterprises, liberalization of capital
flows, and the right of establishment for foreign (including
U.S.) investors. The U.S. Government now is pursuing an
initiative in the current Uruguay Round of multilateral trade
negotiations to reduce foreign government restrictions on
investment in the form of trade-related investment measures
and to ensure high international standards of protection for
intellectual property, such as copyrights, trademarks, and
patents.
A number of changes were approved on the FDI policy to
remove the caps in most sectors. Fields which require
relaxation in FDI restrictions include civil aviation,
construction development, industrial parks, petroleum and
natural gas, commodity exchanges, credit information services
and mining. But this still leaves an unfinished agenda of
permitting greater foreign investment in politically sensitive
areas such as insurance and retailing. The total FDI equity
inflow into India in 2009-10 stood at 123,378crore, a growth of
25% in rupee terms over the previous period. India has also
been suggested to participate in FDI initiative globally to
promote and facilitate the policies related to FDI for capital
gain and more attraction toward Indian economy, by which
increase the efficiency and effectiveness in term of FDI.

43
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