1. Foreign Direct Investment
St. Xavier's Catholic College of Engineering, Chunkankadai, Nagercoil
Foreign Direct Investment
The foreign direct investment is profitable both to the country receiving investment
(foreign capital and funds) and the investor. For the investor company FDI offers an exclusive
opportunity to enter into the international or global business, new markets and marketing
channels, elusive access to new technology and expertise, expansion of company with new or
more products or services, and cheaper production facilities. While the host country receives
foreign funds for development, transfer of new profitable technology, wealth of expertise and
experience and increased job opportunities. The investing company may make its overseas
investment in a number of ways - either by setting up a subsidiary or associate company in the
foreign country, by acquiring shares of an overseas company, or through a merger or joint
venture. The accepted threshold for a foreign direct investment relationship, as defined by the

2. OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or
ordinary shares of the.
An example of foreign direct investment would be an American company taking a
majority stake in a company in China. Another example would be a Canadian company setting
up a joint venture to develop a mineral deposit in Chile.
The most profound effect has been seen in developing countries, where yearly foreign
direct investment flows have increased from an average of less than $10 billion in the 1970s to
a yearly average of less than $20 billion the 1980s. From 1998 to 1999 itself, FDI grew from
$179 billion to $208 billion and now comprise a large portion of global FDI. According to
UNCTAD, spurred on by mergers and acquisitions and the internationalization of production in
a range of industries, inward FDI for developing countries rose from $481 billion in 1998 to
$636 billion in 2006.
Types
 Horizontal FDI arises when a firm duplicates its home country-based activities at the
same value chain stage in a host country through FDI.
 Platform FDI
 Vertical FDI takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.
Whereas Horizontal FDI decrease international trade as the product of them is usually
aimed at host country, the two other types generally act as a stimulus for it.
Methods
The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:
 By incorporating a wholly owned subsidiary or company
 By acquiring shares in an associated enterprise

3.  Through a merger or an acquisition of an unrelated enterprise
 Participating in an equity joint venture with another investor or enterprise
Trends in Foreign Direct Investment (FDI)
Historically, FDI has been directed at developing nations as firms from advanced
economies invested in other markets, with the US capturing most of the FDI inflows. While
developed countries still account for the largest share of FDI inflows, data shows that the stock
and flow of FDI has increased and is moving towards developing nations, especially in the
emerging economies around the world.
Aside from using FDIs as investment channel and a method to reduce operating costs,
many companies and organizations are now looking at FDI was a way to internationalize. FDIs
allow companies to avoid governmental pressure on local production and cope with
protectionist measures by circumventing trade barriers. The move into local markets also
ensures that companies are closer to their consumer market, especially if companies set up
locally-based (national) sales offices.
In recent years, FDI has been used more as a market entry strategy for investors, rather
than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at
a higher rate than the level of world trade as businesses attempt to circumvent protectionist
measures through direct investments. With globalization, the horizons and limits have been
extended and companies now see the world economy as their market.
One of the advantages of foreign direct investment is that it helps in the economic
development of the particular country where the investment is being made.
An example of this can be seen in some countries in the East Asian region. It was
observed during the 1997 Asian financial crisis that the amount of foreign direct investment

4. made in these countries was held steady while other forms of cash inflows suffered major
setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico
in 1994-95.
Additionally for investors, FDI provides the benefits of reduced cost through the
realization of scale economies, and coordination advantages, especially for integrated supply
chains. The preference for a direct investment approach rather than licensing and franchising
can also been viewed in terms of strategic control, where management rights allows for
technological know-how and intellectual property to be kept in-house.
Advantages of FDI
 Integration into global economy - Developing countries, which invite FDI, can gain
access to a wider global and better platform in the world economy.
 Economic growth - This is one of the major sectors, which is enormously benefited from
foreign direct investment. A remarkable inflow of FDI in various industrial units in India
has boosted the economic life of country.
 Trade - Foreign Direct Investments have opened a wide spectrum of opportunities in the
trading of goods and services in India both in terms of import and export production.
Products of superior quality are manufactured by various industries in India due to
greater amount of FDI inflows in the country.
 Technology diffusion and knowledge transfer – FDI apparently helps in the outsourcing
of knowledge from India especially in the Information Technology sector. Developing
countries by inviting FDI can introduce world-class technology and technical expertise
and processes to their existing working process. Foreign expertise can be an important
factor in upgrading the existing technical processes.
For example, the civilian nuclear deal led to transfer of nuclear energy know-how
between the USA and India.

5.  Increased competition - FDI increases the level of competition in the host country.
Other companies will also have to improve on their processes and services in order to
stay in the market. FDI enhanced the quality of products, services and regulates a
particular sector. Linkages and spillover to domestic firms- Various foreign firms are now
occupying a position in the Indian market through Joint Ventures and collaboration
concerns. The maximum amount of the profits gained by the foreign firms through
these
Joint venture is spent on the Indian market.
 Human Resources Development - Employees of the country which is open to FDI get
acquaint with globally valued skills.
 Employment - FDI has also ensured a number of employment opportunities by aiding
the setting up of industrial units in various corners of India.
Retail Industry:
Definition of Retail
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption
in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate
consumer.
Thus, retailing can be said to be the interface between the producer and the individual
consumer buying for personal consumption. This excludes direct interface between the
manufacturer and institutional buyers such as the government and other bulk customers
retailing is the last link that connects the individual consumer with the manufacturing and
distribution chain. A retailer is involved in the act of selling goods to the individual consumer at
a margin of profit.
Division of Retail Industry – Organized and Unorganized Retailing

6. The retail industry is mainly divided into:-
1) Organized and
2) Unorganized Retailing
Organized retailing refers to trading activities undertaken by licensed retailers, that is,
those who are registered for sales tax, income tax, etc. These include the corporate-backed
hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganized retailing, on the other hand, refers to the traditional formats of low-cost
retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops,
convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run
by the unorganized retailers. The organized retail however is at a very nascent stage. The sector
is the largest source of employment after agriculture, and has deep penetration into rural India
generating more than 10 per cent of India’s GDP
Overview
Retail industry, being the fifth largest in the world, is one of the sunrise sectors with
huge growth potential and accounts for 14-15% of the country’s GDP. Comprising of organized
and unorganized sectors, Indian retail industry is one of the fastest growing industries in India,
especially over the last few years.
According to the Global Retail Development Index 2012, India ranks fifth among the top
30 emerging markets for retail. The recent announcement by the Indian government with
Foreign Direct Investment (FDI) in retail, especially allowing 100% FDI in single brands and
multi-brand FDI has created positive sentiments in the retail sector.
Most of the world’s largest retailers positioned in the top half of the list moved very
little in their rankings, if at all. Wal-Mart is still, by far, the largest retailer in the world. France’s

7. Carrefour is still in second position. Germany’s Metro AG overtook the United Kingdom’s Tesco
chain and claimed the third position on the list. The top retailers in the top countries managed
to maintain relative stability on the global retailing stage. There were a few big notable shifts in
the world’s largest retailers, however. Iceland fell off the list completely after its Baugur group
became a recession casualty.
Russia fell from the fifteenth position to the 107th position, the largest drop for any one
country. China’s ranking fell from 63rd to 90th
position, and a new largest retailer emerged in
that country. Spain, Finland, Chile, South Korea, and Brazil also had new retail companies
assume the position of being their country’s largest retailer.
Emerging Areas
Some sectors that occupy a prominent position with the retail industry are:
 Apparel Retail: Everybody understands the impact of fashion and textiles on the
environment. Almost $19.5 billion were spent on online apparel shopping in the year
2009 and increasing since then.
 Fashion & Lifestyle Retail: In India the vast middle class and its almost untapped retail
industry are the key attractive forces for global retail giants wanting to enter into newer
markets, which in turn will help the retail to grow faster.
 Food & Beverage Retail: Backed by huge potential and changing lifestyles, the food and
beverage retail market is growing at a robust 30-35 per cent per year.
 Pharmaceutical Retail: Driven by therapies like anti-diabetic, vitamin, anti-infective and
dermatology, it accounted for a robust 15% growth in 2011.
 E-commerce or E-tailing – the next big revolution: With the advent of e-commerce in
the retail industry, retail stores are facing stiff competition from e-stores. The rising
demand for e-shopping has lead to a new debate cropping up in the world.
Foreign Direct Investment in Retail Industry

8. Retailing is one of the world’s largest private industries. Liberalizations in FDI have
caused a massive restructuring in retail industry. The benefit of FDI in retail industry
superimposes its cost factors. Opening the retail industry to FDI will bring forth benefits in
terms of advance employment, organized retail stores, availability of quality products at a
better and cheaper price. It enables a countries product or service to enter into the global
market. FDI is not allowed in the retail sector and this is the reason why many prominent global
players like Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony, Sharp, and
Kodak etc are entering the retail market via licensee or franchisee. The opening up of the
economy to FDI in the retail sector is also expected to generate employment. FDI can be a
blessing instead of curse only if it produces backward linkages relating to production and
manufacturing. It may also, in the process help to push up domestic production as well as
exports.
In the present scenario, 51% Foreign Direct Investment is permitted in India only
through single brand retailing. The international retailers are entering the market through
licensees just as Wal-Mart has entered through the franchisee, Bharti Enterprises, while
Carrefour runs wholesale stores. Tesco on the other hand has a tie-up with the Tata group and
supports the Indian firm in the running of Star Bazaar chain of retail outlets.
 Cheaper production facilities:
FDI will ensure better operations in production cycle and distribution. Due to
economies of operation, production facilities will be available at a cheaper rate thereby
resulting in availability of variety products to the ultimate consumers at a reasonable
and lesser price.
 Availability of new technology:
FDI enables transfer of skills and technology from overseas and develops the
infrastructure of the domestic country. Greater managerial talent inflow from other

9. countries is made possible. Domestic consumers will benefit getting great variety and
quality products at all price points.
 Long term cash liquidity:
FDI will provide necessary capital for setting up organized retail chain stores. It is
a long term investment because unlike equity capital, the physical capital invested in the
domestic company is not easily liquidated.
 Lead driver for the country’s economic growth:
FDI would create a competition among the global investors, which would
ultimately ensure better and lower prices thus benefiting people in all sections of the
society. There would be an increase in the market growth and expansion. It will increase
retail employment and suppress untrained manpower and lack of experience. It will
ensure better managerial techniques and success. Higher wages will be paid by the
international companies. Urban consumers will be exposed to international lifestyles.
FDI Success story China:
China is the world’s largest FDI recipient, and has used it deftly to increase its exports. It
started off with an FDI investment of $19 billion in 1990, and reached $300 billion in 1999. 40
retailers now have a secured approval in the Chinese market. FDI has created an encouraging
effect in both traditional as well as modern formats of retail business in China.
Carrefour from France, Tesco from England, Metro from Germany, and Wal-Mart from
US have entered the Chinese retail sector and has uplifted the country’s economy. Initially
during 1992, China allowed FDI only in a few selected cities and also restricted the ownership
by 26 percent. Later on as the exports of the country progressively increased, by 2002, the
Government increased the FDI cap to 49 percent. China continues to hit new records. More

10. than 28 million people and approximately 10 percent of Chinas total population are working in
companies funded with FDI.
China, in fact, is a really interesting example of how it transformed Wal-Mart USA. As China
ramped up its own manufacturing sector, through subsidies, special economic zones and other
perks, as many as 15,000 Chinese suppliers were serving Wal-Mart China in 2010; the company
had expanded its presence to 352 supermarkets in 130 cities across China. Exports to the US
amounted to $60 billion annually. Wal-Mart China now claims that 95 per cent of its goods sold
in China are sourced locally.
FDI opens new doors for Franchising:
Restrictions on FDI are considered as trade barriers as they deny direct market access to
foreign firms. Retail giants who are at their wings, seeking entry into foreign market look for
other available alternatives. These restrictions on the global retailers regarding the inflow of
Foreign Direct Investment, leads them towards acquiring the market entry through franchises.
Thus, countries which offer promising market potentialities for retail growth offers substantial
growth in the franchising sector as well.
In a major reform drive and signaling that it is shrugging off its policy paralysis, the
government has pushed through the move that will allow 51% foreign direct investment in
multi-brand retail. It has also relaxed norms for foreign direct investment in the aviation sector,
allowing international airlines to invest in domestic peers and cleared a slew of other reform-
oriented measures - an increase of foreign direct investment in some broadcasting services
from 49% to 75% and disinvestment in four key profit-making public sector units.
Importantly - and the government has underscored this provision - the policy allows
state governments to decide whether to allow FDI in multi-brand retail or not. So, the
government says, if some parties don't want the FDI, they can make that choice. The Trinamool
Congress, wants the decision withdrawn. It has already said it will not implement it in West
Bengal, which Mamata Banerjee rules.

11. AT Kearney (a globally famous international management consultancy) recognized India
as the second most alluring and thriving retail destination of the world, among other thirty
growing and emerging markets. At present, other profitable retail destinations of the world are
China and Dubai of Asia. Diverse foreign direct investment in Indian retail is greatly cherished
by most of the major and leading retailers of USA and European countries, including Wal-Mart
(USA), Tesco (UK), Metro (Germany), and Carrefour (France). Liberalization of trade policy and
loosening of barriers and restrictions to the foreign investment in the retail sector of India, have
collectively made the FDI in retail sector quite easy and smooth. Our services are easily and
economically available for the following ways of FDI in Indian retail.
The FDI in India’s retail business can be made through any of the following routes:
 Joint Ventures
 Franchising
 Sourcing of Supplies from small-scale sector
 Cash and Carry Operations
 Non-Store Formats
Recent News on FDI in India
Metro AG and Shorite are already in operation. Foreign retailers are in search of
investing in wholesale. Wal-Mart as we have mentioned has already joined the retail market of
India. Geant is also expected to start its retailing operations soon in India hence we may
conclude that FDI in retailing in India would require the creation of additional jobs to
compensate the resulting job loss. It would result in the reduction in the Kirana shops and Retail
Stores. The consumers can benefit from such exposures; it would enhance quality, improve on
the supply chain, increase exports, so on and so forth.
Bottlenecks to FDI in Retail Industry

12. According to the Land and Property laws only the Indians have the right to land and
property in India and this law has in a a way inhibited the entry of the foreign players in India.
Again the labour laws are so designed that the store workers can be protected, quite contrary
to the requirements of the modern formats. The tax structure of India is also unfavorable for
the foreign players. The corporate tax rate for the domestic companies is 36.59% whereas it is
41.82% for the foreign companies. The changing sales tax as well as the Value Added Tax is also
not favorable in the case of international companies.
Similarly, foreign investment in the automobile industry ended the long wait for outdated
scooters and cars and led to leading global companies vying to sell the latest models in India.
When Pizza Hut, Domino's, McDonald's, Wimpy, Burger King, KFC and other such
international brands were allowed, there were orchestrated demonstration in many cities; they
were painted as anti-people and anti-Indian enterprises. We were told Haldirams,
Bikanerwalas, Nirulas, Nathus and their ilk will vanish.
All these Indian chains have multiplied their outlets, diversified their production line,
upgraded their packing and presentation, and are doing roaring business. In fact, some of the
largest MNCs like McDonald's, Pizza Hut and Domino's have been forced to Indianise their
offerings. Where else in the world would you find a McDonald burger with paneer and potato
patties and coriander sauce?
While many starve, millions of tonnes of grain rot for want of adequate storage
facilities. Ask how farmers in Punjab feel when their produce is not picked up and lies unsold.
Can they negotiate higher prices? When the mercury rises, fruit don't last more than two days.
Small grocery shops realize the value of home delivery; small stores also reduce a rupee
or two on most items. This demand-and-supply relationship will remain unchanged
notwithstanding the entry of bigwigs like Tesco, Carrefour and Wal-Mart.
Conclusion

13. FDI offers an exclusive opportunity to enter into the international or global business,
new markets and marketing channels, elusive access to new technology and expertise,
expansion of company with new or more products or services, and cheaper production
facilities. While the host country receives foreign funds for development, transfer of new
profitable technology, wealth of expertise and experience, and increased job opportunities. But
there are also disadvantages like all the small shops, stores and vegetable vendor who sits on
almost every street corner will suffer when his customers move over to the big stores.
Neighborhood stores that sell provisions may soon be similarly squeezed.
References
 Apte P.G., International Financial Management, Tata McGraw Hill, 2008.
 P.Subba Rao., International Business, Himalaya Publishing House, 2008.
 http://www.fibre2fashion.com/industry-article/7/604/fdi-in-retailing1.asp
 http://www.economywatch.com/business-and-economy/indian-retail-industry-fdi.html