The document discusses factors that determine foreign direct investment (FDI) in India, including income, exchange rates, technology, human capital, and openness of the economy. It hypothesizes that FDI is a function of these country-specific factors. The methodology section outlines a model for FDI as a function of these variables. Trend analyses show some correlation between FDI and GDP and limited correlation with exchange rates. The conclusion emphasizes that the growth, size, and openness of the Indian economy as well as currency exchange rates are important determinants of FDI inflows.

1. FDI in India and its
Determinants
Group V , FMS PT

2. FDI
∗ Foreign direct investment (FDI) is direct investment
into production in a country by a company located in
another country, either by buying a company in the
target country or by expanding operations of an
existing business in that country.

4. FDI
Advantages Disadvantages
∗ Inflow of equipment and ∗ Crowding of local industry
technology
∗ Loss of control
∗ Competitive advantage and
∗ Conflicts of codes/laws
innovation
∗ Possible exploitation of
∗ Financial resources for
resources material/wages
expansion
∗ Effect on natural environment
∗ Employment generation
∗ Effect on local culture
∗ Contribution to exports
growth
∗ Access to new
market/distribution channel for
products

5. FDI vs. FII
FDI FII

6. Hypothesis
∗ FDI is a function of the factors specific to a country
such as
∗ Income, Exchange rate,
∗ Technology, Human capital and
∗ Openness in the economy with specific reference to
Indian economy.

7. Methodology
FDI=F(Y,I,ER,T,HC,O,D)
+ – + + + + +
+ + - + + + +
Where FDI = Outward/inward flows of FDI
Y = Real GDP
I = Interest rate
ER = Real Effective Exchange Rate (REER) Index
T = Technology variable.
HC = Human capital variable, approximated by number of education students.
O = Openness of the economy, Net Exports
D = Dummy variable for measuring the impact of liberalization process started in
1991 in the Indian economy. It takes the value 0 for the years between 1980
and 1991 and the value 1 for the years between 1991 and 2005.

8. Income/Real GDP
GDP of the economy.
∗ It is generally observed that the pattern of International Trade in
terms of the composition and direction changes with
development of an economy.
∗ There are changes observed in the internal sectors also such as
increasing share of industry and service sectors, the capital
intensity of production increases, demand patterns move
towards the consumption of differentiated products and
markets grow.
∗ The latter improves the realization of economies of scale
through specialization, the introduction of new technology and
greater volumes of output

9. GDP and FDI
Source: http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian
%20Economy
Foreign
Investment
('000 USD GDP('00000 Crore
Year Millions) INR)
1998-99 2.401 17.86525
1999-2000 5.181 19.25017
2000-01 6.789 20.97726
2001-02 8.151 22.61415
2002-03 6.014 25.38171
2003-04 15.699 28.77706
2004-05 15.366 23.82068
2005-06 21.453 27.46928
2006-07 29.082 43.03654
2007-08 34.36 50.234
Foreign investment shows a strong correlation (polynomial) with
GDP in the last decade(1998-2008).

10. Exchange rate
∗ The appreciation and depreciation of currency does have an
impact on the price of exports and imports making their
comparative position and competitiveness in international
markets fluctuate sometimes towards advantage to the home
country and sometimes disadvantage.

11. FDI and Exchange rate
Source:http://www.rbi.org.in/scripts/AnnualPublications.aspx?
Month- Currency in FDI ('00 USD
year(2008) INR Million)
Sep 45.5635 25.62
oct 48.6555 14.97
nov 48.9994 10.83
dec 48.6345 13.62
jan 48.8338 27.33
feb 49.2611 14.88
mar 51.2287 19.56
apr 50.0619 23.39
may 48.533 20.95
june 47.7714 25.82
july 48.4783 35.16
aug 48.5348 32.68
sep 49.4697 15.12
A trend analysis of the FDI inflows to India and the exchange rates prevailing in
the financial year 2008-09 shows a trend which doesn’t depict a very strong
Correlation between the two chosen parameters.

12. Interest rate
∗ Foreign operations require significant commitment in capital,
especially if they are undertaken in capital intensive sectors
where production is characterized by extensive economies of
scale, as the case is for most FDI.
∗ If there is abundant capital in the home country, that may
become one of the primary reasons for going in for foreign
investment by large firms. Such firms would have adequate
financial means and they would also be able to access the capital
markets much more efficiently than small capital starved firms.
The opportunity cost of capital for such firms also comes down
due to relatively low interest rate which occurs as a result of
capital abundance.

13. Technology
∗ This factor is widely recognized as one factor that
does have a sure and great impact on FDI, in fact the
FDI sometimes may be the cause for increasing
technological progress as it also gets influenced by
the level of technological progress of the economy
∗ The ability of firms to generate technological inputs
of a country is approximated by the number of
patents issued. Thus higher the patents issued higher
would be the outward FDI propensity of the country

14. Human Capital
∗ The availability of the human resources is one factor that plays
an important role in determining the FDI; however the sheer
number does not affect the inflow as the quality of the human
resource does.
∗ The size of labour force may be instrumental in determining the
price of the factor, as low labour cost may increase the cost
competitiveness of the firm.
∗ But in a skill intensive industry, the quality of the labour force
determined by the number of people who are educated and the
number of science and technology professionals that exist
matters. The human capital supply varies depends largely on the
education systems and also the government policies.

15. The Openness of the Economy
∗ The FDI activities of the firms are constrained when
there is protectionist policy followed; therefore these
activities are encouraged when the country embarks
on the path of liberalization.

16. Exports and FDI

17. FDI statistics for India
Source : http://dipp.nic.in/English/Publications/FDI_Statistics

18. IN INDIA
Source : http://dipp.nic.in/English/Publications/FDI_Statistics

19. IN INDIA

20. Conclusion
∗ Growth of the economy: The growth rate of the home economy is an
important determinant of FDI into the country.
∗ Size of the economy: The FDI flows also depend on the size of the home
economy.
∗ Real exchange rate: Any depreciation in the currency of India will make
our country more favorable for foreign investments.
∗ Degree of openness of the economy :Any FDI investment into a country
depends upon how ‘open’ the economy is towards foreign trade (both
imports and exports). We have captured the ‘openness’ of the economy
through the proxy variable, DO (Degree of Openness) where it is given
by DO = (Imports+Exports)/GDP

21. Thanks