fundamentals of corporate finance 11th canadian edition test bank.docx
FDI IN RETAIL IN INDIA
1. Group Members: SRIJAN MISHRA
BHAVANI SINGH
MADHURESH MADHUKAR
AKHIL PRUTHI
Supervisor : ANKUR CHHABRA
Shyam Lal College (Evening)
University of Delhi
Session 2013-14
( Semester-II )
MARCH 31, 2014
FC-BUSSINESS,ENTREPRENEURSHIPAND MANAGEMENT
FDI IN DETAIL
BACHELOR WITH HONOURS IN ECONOMICS
2. Abstract
In this topic we have done a project on FDI . We have discussed what is
FDI,what are the types of FDI, what are the procedure to bring FDI, what's it's
importance in our day to day life and why do we need FDI. As the defination of
FDI states that Foreign direct investment(FDI) is a direct investment into
production or business in a country by an individual or company of
another country, either by buying a company in the target country or by
expanding operations of an existing business in that country.
There may be adverse effects of bringing FDI in INDIA. The most
important is about being unemployment between the middle class people
or 'aam aadmi'. India’s share of world FDI inflows 0.78% in 2005 to
3.11% in 2009 which is a good for them who are in favour. For our country
FDI many benefits as it have employment, resource transfer and balance
of payment(BOP) for citizen.
4. Introduction
{Insert introduction text here. The introduction opens the report with a presentation of
study background and objectives. It should address motivation and context of study . You
can discuss about the project background, historical aspects etc. Explain what are the specific
problems that you are going to address. It is important to detail out not only the problem, but
also how are you going to study or solve those problems. You can also insert figures, tables or
any other data available from reliable sources. Suggested length : 2-5 pages.}
Major Issues/Problems
{Discuss the major issues that you found challenging or interesting during reading about
the topic. Suggested length : 1-2 pages.}
Suggested solutions/ Your learning
{Discuss here the solution or your viewpoints in your own simple words as what do you
think about the available solution. You may also write about any new idea or perspective
about the topic that you think should be studied further. Suggested length : 1-2 pages.}
Observations and Discussion
{Discuss the observations that you made during the study including results and
discussion here. This section also reports implications of results. Suggested length : 1-2
pages.}
5. FOREIGN DIRECT INVESTMENT
Foreign direct investment(FDI) is a direct investment into production or
business in a country by an individual or company of another country, either
by buying a company in the target country or by expanding operations of an
existing business in that country. Foreign direct investment is in contrast to
portfolio investment which is a passive investment in the securities of another
country such as Stocks and Bond.
Broadly, foreign direct investment includes "mergers and acquisitions,
building new facilities, reinvesting profits earned from overseas operations
and intra company loans".In a narrow sense, foreign direct investment refers
just to building new facilities. The numerical FDI figures based on varied
definitions are not easily comparable.
6. TYPES OF FDI
a) Horizontal FDI : Horizontal FDI arises when a firm duplicates its home
countrybased activities at the same value chain stage in a host country
through FDI.
b) Platform FDI : Foreign direct investment from a source country into a
destination country for the purpose of exporting to a third country.
c) Vertical FDI : Vertical FDI takes place when a firm through FDI moves
upstream or downstream in different value chains i.e. when firms perform
valueadding activities stage by stage in a vertical fashion in a host country.
THE MERITS OF HORIZONTAL FDI VERSUS VERTICAL FDI
Vertical FDI takes place when the multinational fragments the production
process internationally, locating each stage of production in the country
where it can be done at the least cost. Horizontal FDI occurs when the
multinational undertakes the same production activities in multiple
countries. We consider a model where the riskneutral multinational must
commit its investment prior to the realization of shocks.
7. The multinational has monopoly power and confronts two types of risk. It
may face random productivity shocks or encounter a host country that tries to
confiscate its rents. We show that greater uncertainty reduces the expected
income from vertical FDI but increases the expected income from horizontal
FDI. In addition, predatory actions by the host country are more costly to the
multinational that has structured its production vertically rather than
horizontally.
Consequently, increased uncertainty should encourage horizontal
FDI but discourage vertical FDI. If vertical FDI is more likely to flow into
emerging markets and horizontal FDI into mature markets, then the empirical
finding that most FDI is horizontal rather than vertical might be due, in part,
to the greater uncertainty associated with emerging markets. We report cross
country regression results that provide some support for the predictions of the
model. Volatility appears to have a differential impact on FDI inflows into
mature and emerging markets. For mature markets that supposedly attract
mainly horizontal FDI, greater volatility significantly increases FDI inflows.
For emerging markets that receive relatively more vertical FDI inflows,
increased volatility does not increase FDI inflows.
8. What is the procedure for receiving Foreign Direct
Investment in an Indian company?
An Indian company may receive Foreign Direct Investment under the two
routes as given under:
i. Automatic Route
FDI is allowed under the automatic route without prior approval either of the
Government or the Reserve Bank of India in all activities/sectors as specified
in the consolidated FDI Policy, issued by the Government of India from time to
time.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval
of the Government which are considered by the Foreign Investment Promotion
Board (FIPB), Department of Economic Affairs, Ministry of Finance.
9. The importance of Foreign Direct Investment
There is a strong relationship between foreign investment and
economic growth. Larger inflows of foreign investments are needed for the
country to achieve a sustainable high trajectory of economic growth. There are
several irrefutable reasons for this. For the economy to grow by 7 to 8 per cent
a year there is a need to invest around 35 to 40 per cent of GDP. National
savings fall far short of this by nearly 10 per cent. Foreign borrowing and
foreign investments have to meet this investmentsavings gap. This is generally
recognized and successive governments have attempted to provide various
incentives to foreign investors.
Now that there is peace and security, the biggest hindrance for
attracting foreign investments has been removed. Therefore higher amounts of
foreign direct investments are expected.
10. Why FDI?
Foreign investment comes in several forms. Portfolio investment,
foreign loans and foreign direct investment are the three important types. Of these
foreign direct investments in industry and services are the most useful. Foreign
loans are generally used for investment in infrastructure. This is important as a
serious bottleneck for domestic as well as foreign investment is the poor state of
infrastructure. However the development of infrastructure alone would not suffice.
The significance of private FDI is that such investments are risk free to
the country and bring with it the advantages of advanced technology, management
practices and assured markets. In due course there is a technology transfer as the
local workforce gains knowledge of the manufacturing processes and management
practices. The value added in these industries is a contribution to GDP and foreign
exchange earnings. Therefore FDI contributes to foreign exchange earnings,
employment creation and increases in incomes, especially of skilled and semi
skilled workers in these industries.
11. Prospects and preconditions
There is not much point in crying over spilt milk. What is needed is the correct
environment to attract investment in a global context when even developed
countries are vying for foreign investment. Sri Lanka needs to develop the
physical and technological infrastructure, enhance its human capital and improve
its labour market conditions and administrative capabilities to induce higher
levels of foreign investment. There has been progress in the development of
infrastructure. The road network has been improved though urban traffic
congestion remains a problem. The power situation is much better though
electricity tariffs are high. Skills development leaves much scope for
development.
Labour legislation is considered a serious disincentive. It
is unlikely that the government would formulate the necessary labour reforms to
allow for flexibility in the recruitment and discontinuance of workers. This may
continue to be a disincentive for FDI as other countries are far more flexible in
their labour laws allowing workers to be discontinued when business conditions
necessitate a reduction in labour force. Despite peace and political stability
foreign direct investment has not increased.
12. Besides the quantum of FDI, the types of FDI also matter. There are
foreign investments in the hospitality trade but little in industry and
manufactures, investments in manufactures are especially needed. To
attract such investment it is essential to ensure an attractive investment
climate. Consistent macroeconomic stability, guarantee of property rights,
rule of law and absence of corruption are among the conditions required
to attract FDI. Recent events have tarnished the country’s political image
and foreign perceptions of the country. These noneconomic factors too
have an influence on FDI.
CONTROVERSY OVER ALLOWING FOREIGN RETAILERS
Independent stores will close, leading to massive job losses.
Walmart employs very few people in the United States. If allowed to
expand in India as much as Walmart has expanded in the United States,
few thousand jobs may be created but millions will be lost.
13. Walmart's efficiency at supply chain management leads to direct
procurement of goods from the supplier. In addition to eliminating the
"middleman", due to its status as the leading retailer, suppliers of goods
are pressured to drop prices in order to assure consistent cash flow. The
small retailer and the middle man present in the retail industry play a
large part in supporting the local economy, since they typically procure
goods and services from the area they have their retail shops in. This
leads to increased economic activity, and wealth redistribution. With
large, efficient retailers, goods are acquired in other regions, hence
reducing the local economy.
14. ECONOMISTS AND ENTREPRENEURS
Many business groups in India are welcoming the transformation of a long
protected sector that has left Indian shoppers bereft of the scale and variety of
their counterparts in more developed markets.
B. Muthuraman, the president of the Confederation of Indian Industry, claimed
the retail reform would open enormous opportunities and lead to muchneeded
investment in cold chain, warehousing and contract farming.
Organized retailers will reduce waste by improving logistics, creating cold
storage to prevent food spoilage, improve hygiene and product safety, reduce
counterfeit trade and tax evasion on expensive item purchases, and create
dependable supply chains for secure supply of food staples, fruits and vegetables.
They will increase choice and reduce India’s rampant inflation by reducing
waste, spoilage and cutting out middlemen.
15. OBSERVATIONS AND DISCUSSIONS
The Cabinet has approved 51% FDI in multibrand retail, a decision
that will allow global mega chains like WalMart, Tesco and Carrefour to open
outlets in India.
The Cabinet also increased the foreign investment (FDI) ceiling to 100 per
cent from the present 51 per cent in singlebrand retail.
The following are the main issues raised by those in favour of foreign equity
in multibrand retailing and those opposed to it :
✗
Those against :
➢
It will lead to closure of tens of thousands of momandpop shops across the
country and endanger livelihood of 40 million people.
➢
It may bring down prices initially, but fuel inflation once multinational
companies get a stronghold in the retail market.
➢
Farmers may be given remunerative prices initially, but eventually they will
be at the mercy of big retailers.
➢
Small and medium enterprises will become victims of predatory pricing
policies of multinational retailers.
➢
It will disintegrate established supply chains by encouraging monopolies of
global retailers.
