Introduction Types of FDI FDI routes in India Advantages of FDI Disadvantages of FDI Sectors - FDI permitted Sectors – FDI not permitted Potential Sectors in India Trend of FDI in past years Challenges Recent Developments Conclusion
Its net inflows of investment to acquire a lasting managementinterest (10 percent or more of voting stock) in an enterpriseoperating in an economy other than that of the investor. Voting power of an enterprise in an economy through any ofthe following methods: - by incorporating a wholly owned subsidiary or company - by acquiring shares in an associated enterprise - through a merger or an acquisition of an unrelated enterprise - participating in an equity joint venture with another investor orenterprise. The United States is the world’s largest recipient of FDI. FDI in india started from a baseline of less than $1 billion in1990.
Indian companies can receive FDI through two mainroutes:1. Automatic Route: It allows up to 100% FDI inallowed sectors. This route does not requireGovernment approval.2. Government Route: It covers FDI in activitiesnot covered under the automatic route.Applications have to be made to the ForeignInvestment Promotion Board to gain approval.
By DirectionInward:Inward foreign direct investment is a particular form of inwardinvestment when foreign capital is invested in local resources.Outward:Outward foreign direct investment is when local capital is invested inforeign resources. Yet it can also be used to invest in imports and exportsfrom a foreign commodity country.By TargetGreenfield investmentDirect investment in new facilities or the expansion of existing facilities.Mergers and AcquisitionsTransfers of existing assets from local firms to foreign firms takes place;the primary type of FDI.
By MotiveResource-SeekingInvestments which seek to acquire factors of production that are moreefficient than those obtainable in the home economy of the firm.Market-SeekingInvestments which aim at either penetrating new markets or maintainingexisting ones.Efficiency-SeekingInvestments which firms hope will increase their efficiency by exploiting thebenefits of economies of scale and scope, and also those of commonownership.Strategic-Asset-SeekingA tactical investment to prevent the gain of resource to a competitor.
It helps in the economic development of the particular country where theinvestment is being made. Foreign direct investment also permits the transfer of technologies. It can also develop the human capital resources by getting theiremployees to receive training on the operations of a particular business. Foreign direct investment helps in the creation of new jobs in a particularcountry. Foreign direct investment can also bring in advanced technology and skillset in a country. Foreign direct investment assists in increasing the income that isgenerated through revenues realized through taxation.
The economically backward section of the host country is alwaysinconvenienced when the stream of foreign direct investment is negativelyaffected. Sometimes, the defense of a country has faced risks as a result of theforeign direct investment in the country. At times, certain foreign policies are adopted that are not appreciatedby the workers of the recipient country. Foreign direct investment may entail high travel and communicationsexpenses. There is a chance that a company may lose out on its ownership to anoverseas company. There have been adverse effects of foreign direct investment on thebalance of payments of a country.
FICCI’s 2010 FDI Survey found that the three main challenges forforeign investors lie in procedural delays, the tax regime and labourlaws. Recommendations from the survey to Government include:• Rationalizing the tax structure.• Modernizing government systems and reducing bureaucracy.• Improving infrastructure facilities.• Rationalizing labour laws.• Liberalizing employment visa rules. Public transport is a particular infrastructure challenge; in Bangalore,for example, Infosys Technologies spends US$5 million a year totransport its 18,000 employees to their place of work. FICCI’s survey also suggests that power supply also presents agenuine challenge. Other challenges include income disparities, bureaucracy,environmental impact of development , and corruption.
FDI in 2009-10 was $24.2 billion, a significant decrease from both2007-08 and 2008-09. In the first two months of 2010–11 fiscal, FDI inflow into India was atan all-time high of $7.78 billion up 77% from $4.4 billion during thecorresponding period in the previous year. A recent UNCTAD survey projected India as the second mostimportant FDI destination (after China) for transnational corporationsduring 2010–2012. According to the recent reports, India is targeting annual foreigndirect investments worth $50 billion by 2012. It would double the inflowsby 2017.
Depending on the industry sector and type of business, a foreigndirect investment may be an attractive and viable option. With rapidglobalization of many industries and vertical integration rapidly takingplace on a global level, at a minimum a firm needs to keep abreast ofglobal trends in their industry. The world’s largest retailer WalMart has termed India’s decision toallow 51% FDI in multi-brand retail as a “first important step” and said itwill study the finer details of the new policy to determine the impact onits ability to do business in India. However this decision of thegovernment is currently under suspension due to opposition frommultiple political quarters.