This presentation deals with the theory and the practice of Foreign Direct Investment both in global and Indian context.

1. FDI and FDI Indian Policy
Sudhanshu Bhatt (https://www.linkedin.com/in/sudhanshu-bhatt-b3665115/)
MBA –IBA
16.04.2023
References
Bulatov, A. (2023). World Economy and International Business Theories, Trends, and Challenges. In Springer. https://doi.org/10.12737/16614
Hill, C. W. L. (2022). Global Business Today 12e Charles.
Hill, C. W. L. (2023). International Business: Competing in Global Marketplace. In McGraw Hill LLC. https://doi.org/10.4324/9780203879412
Shenkar, O., Luo, Y., & Chi, T. (2022). International Business, Routledge. Routledge.
Images sourced from the internet

2. Q1. What is FDI?
FDI stands for "Foreign Direct Investment". It refers to the
investment made by a company or an individual in a foreign
country by establishing a new business or acquiring an existing
business in that country. FDI involves direct ownership of assets
and control over the operations of the foreign business entity.
• For example, when a company from the United States invests in
facilities to produce or market a product or service in China, it is
considered FDI. The U.S. Department of Commerce defines FDI as
when a U.S. citizen, organization, or affiliated group takes an interest of
10 percent or more in a foreign business entity.

3. Q2. What are different forms of FDI?
1. Greenfield investments involve setting up a new operation in a
foreign country. This can include building new production facilities,
establishing new subsidiaries or joint ventures, and hiring and
training new employees.
2. Acquisitions, on the other hand, involve purchasing or Merging
with an existing firm in the foreign country. This can involve
acquiring a controlling stake or complete ownership of the
company, and gaining access to its strategic assets such as brand
loyalty, customer relationships, patents, and distribution systems.
• Studies show that mergers and acquisitions account for a significant proportion of FDI
inflows, ranging from 40 to 80 percent. However, the percentage of mergers and
acquisitions is lower in developing nations, reflecting the fact that there are fewer
target firms to acquire in these countries.
• Firms prefer to acquire existing assets rather than undertake greenfield investments
for various reasons.
• Acquisitions are quicker to execute, and the target firm already possesses valuable
strategic assets that can be transferred to the acquiring firm. Acquiring a firm with
existing assets is also perceived as less risky than building those assets from
scratch through greenfield investments.

4. Q3. Production Cycle Theory of Vernon
• The production cycle theory by Vernon suggests that a
company's success is determined by four stages of the
production cycle: innovation, growth, maturity, and decline.
• Companies in countries with advanced technology, such as the
US, have an advantage in the first stage.
• As products mature and technology becomes more widespread,
companies may invest in foreign markets to maintain
market share.
• The theory explains why some US companies made foreign
direct investments in Western Europe during the 1950s-1970s.

5. Q4. The Theory of Exchange Rates on
Imperfect Capital Markets
• The theory of exchange rates on imperfect capital markets
explains how foreign exchange rates affect foreign direct
investment (FDI) decisions in markets with imperfect
information.
• It suggests that uncertainty and risk associated with foreign
exchange rates can influence FDI decisions.
• If a foreign currency appreciates, it may reduce FDI by
domestic companies in that market, while if the domestic
currency appreciates, it may stimulate FDI in foreign
markets.
• However, the theory assumes perfect knowledge of exchange
rate movements, which is not always the case, and it cannot
explain simultaneous FDI between countries with different

6. Q5. The Internalisation Theory
• The theory of internationalization, also known as the internalization theory, explains the
growth of transnational companies and their motivations for foreign direct investment
(FDI).
• This theory was first introduced by Coase in 1937 and later developed by Hymer in 1976,
who identified two determinants of FDI - the removal of competition and the advantages
that firms possess in a particular activity.
• Buckley and Casson, along with Hennart, further developed the theory by suggesting that
transnational companies organize their internal activities to develop specific advantages
that can be exploited through FDI.
• Hymer's concept of firm-specific advantages demonstrates that
FDI occurs only if the benefits of exploiting these advantages
outweigh the relative costs of operations abroad.
• However, transnational companies face adjustment costs when
making investments abroad due to market imperfections, information
costs, different treatment by governments, and currency risks.
• Therefore, FDI is a firm-level strategy decision rather than a
financial decision in the capital market.

7. Q6. The Eclectic Paradigm
• The Eclectic Paradigm, also known as O-L-I theory, was developed
by Dunning to explain direct foreign investments.
• The theory consists of three elements: Ownership advantages (O),
Location advantages (L), and Internalization advantages (I).
I. Ownership advantages refer to a company's intangible assets that can be
used to enter a foreign market, such as technology or economies of scale.
II. Location advantages of different countries play a crucial role in
determining which countries become host countries for the activities of the
transnational corporations.
III. Internalization advantages refer to the benefits of cross-border market
internalization, leading the firm to engage in foreign production (outsourcing
route)
• The OLI parameters differ from company to company and depend on
the context and reflect the economic, political, and social
characteristics of the host country.

8. Q7. The Decision Framework
Source: Hill, C. W. L. (2023). International Business:
Competing in Global Marketplace. In McGraw Hill
LLC. https://doi.org/10.4324/9780203879412

9. Q8. Political Ideology and FDI
1.Radical View:
• Rooted in Marxist theory.
• MNEs seen as instruments of imperialist domination that exploit host countries.
• FDI by MNEs keeps less developed countries dependent on advanced capitalist nations.
• Countries that adopted radical position: communist and socialist countries, and countries
with nationalistic ideologies.
• Radical view in retreat due to poor economic performance and belief that FDI can
stimulate economic growth.
2.Free Market View:
• Rooted in classical economics and international trade theories.
• MNEs are instruments for dispersing production to most efficient locations
globally.
• FDI increases efficiency of world economy.
• Resource transfers benefit host country and stimulate economic growth.
• FDI benefits both source and host country.
3.Pragmatic Nationalism:
• FDI has both benefits and costs.
• Benefits: bring capital, skills, technology, and jobs.
• Costs: profits go abroad, import of components negatively affects balance-of-payments
position.
• Pursue policies to maximize national benefits and minimize costs.

10. Q9. Benefits of Foreign Direct Investment:
Home Country:
1.Increased employment opportunities for domestic workers through the
establishment of new companies or expansion of existing ones.
2.Access to new markets and resources, such as raw materials or
technology, which can enhance the competitiveness of domestic firms.
3.Improved balance of payments as foreign direct investment brings in
capital inflows that can help to finance domestic investment and reduce
reliance on borrowing.
4.Knowledge transfer and technology spillovers as domestic firms may
learn new skills and gain access to advanced technologies.
Host Country:
1.Increased capital inflows that can help finance domestic investment.
2.Employment opportunities for local workers.
3.Technology transfer and knowledge spillovers as foreign firms may
introduce new production methods and management practices.
4.Access to international markets and networks that can enhance the
competitiveness of domestic firms.

11. Q10. Costs of Foreign Direct Investment:
Home Country:
1.Capital outflows that can reduce the availability of capital for domestic
investment.
2.Job displacement as some firms may move operations overseas to take
advantage of lower labor costs.
3.Loss of control over key industries or resources that can have strategic
importance for the country.
4.Reduced tax revenue as some firms may use tax havens to avoid paying
taxes in the home country.
Host Country:
1.Dependence on foreign investors who may prioritize their own interests
over the interests of the host country.
2.Negative effects on the environment, including pollution and natural
resource depletion.
3.Potential for exploitation of workers in low-wage countries.
4.Risk of a "resource curse" in countries with valuable natural resources,
where foreign firms may extract resources without providing sufficient
benefits to the host country.

12. Q11. Indian FDI Policy
• India has a liberal FDI policy, with FDI up to 100% permitted under the automatic
route in most sectors/activities.
• The Department for Promotion of Industry and Internal Trade (DPIIT) under the
Ministry of Commerce and Industry is responsible for the formulation of the
Government's FDI policy and manages data on inward FDI into India.
• The DPIIT has launched various initiatives and reforms, such as the Make in India
campaign, supporting champion sectors and subsectors, and creating an
Empowered Group of Secretaries (EGoS) and Project Development Cells to
facilitate investment.
• The FDI Policy framework is embodied in the Consolidated FDI Policy Circular,
which details the sectoral caps for FDI and the entry routes for investment.
• No prior approval is required for FDI under the automatic route, while foreign
investment proposals not covered under the automatic route are considered for
governmental approval hence called Government Route. .
• The Government reviews the FDI Policy from time to time, with amendments
introduced through Press Notes issued by the DPIIT.
• The currently effective Consolidated FDI Policy Circular was issued on October 15,
2020, and the amendments introduced since then aim to improve the ease of doing
business in India - https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-

13. Automatic Route FDI
In the automatic route, the foreign entity does not require the prior approval of the government or the RBI.
Examples:
• Medical devices: up to 100%
• Thermal power: up to 100%
• Services under Civil Aviation Services such as Maintenance & Repair Organizations
• Insurance: up to 49%
• Infrastructure company in the securities market: up to 49%
• Ports and shipping
• Railway infrastructure
• Pension: up to 49%
• Power exchanges: up to 49%
• Petroleum Refining (By PSUs): up to 49%

14. Government Route FDI
Under the Government route, the foreign entity should compulsorily take the approval of
the government. It should file an application through the Foreign Investment Facilitation
Portal, which facilitates single-window clearance. This application is then forwarded to the
respective ministry or department, which then approves or rejects the application after
consultation with the DPIIT.
Examples:
• Broadcasting Content Services: 49%
• Banking & Public sector: 20%
• Food Products Retail Trading: 100%
• Core Investment Company: 100%
• Multi-Brand Retail Trading: 51%
• Mining & Minerals separations of titanium bearing minerals and ores: 100%
• Print Media (publications/printing of scientific and technical magazines/speciality journals/periodicals and a
facsimile edition of foreign newspapers): 100%
• Satellite (Establishment and operations): 100%
• Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news &
current affairs): 26%

15. Sectors where FDI is prohibited
There are some sectors where any FDI is completely prohibited:
• Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries,
tea plantations, Pisciculture, animal husbandry, etc.)
• Atomic Energy Generation
• Nidhi Company
• Lotteries (online, private, government, etc.)
• Investment in Chit Funds
• Trading in TDR’s
• Any Gambling or Betting businesses
• Cigars, Cigarettes, or any related tobacco industry
• Housing and Real Estate (except townships, commercial projects, etc.)

16. FDI Regulations and Regulators in India
Regulations / laws Regulators / Govt. Bodies
1. Companies Act
2. Securities and Exchange Board of India Act, 1992 and
SEBI Regulations
3. Foreign Exchange Management Act (FEMA)
4. Foreign Trade (Development and Regulation) Act, 1992
5. Civil Procedure Code, 1908
6. Indian Contract Act, 1872
7. Arbitration and Conciliation Act, 1996
8. Competition Act, 2002
9. Income Tax Act, 1961
10. Foreign Direct Investment Policy (FDI Policy)
1. Foreign Investment Promotion Board (FIPB)
2. Department for Promotion of Industry and Internal Trade
(DPIIT)
3. Reserve Bank of India (RBI)
4. Directorate General of Foreign Trade (DGFT)
5. Ministry of Corporate Affairs, Government of India
6. Securities and Exchange Board of India (SEBI)
7. Income Tax Department
8. Several Ministries of the GOI such as Power, Information
& Communication, Energy, etc