FDI refers to investment made by a company located in one country into business interests located in another country. There are several strategies and theories behind why companies make FDI. Some of the main benefits of FDI include availability of scarce resources, improvements to balance of payments, and economic development in the host country. Recent policy changes in India have opened up additional sectors fully to FDI and increased caps in others like defense and insurance. Cross-border M&A allows companies to expand globally but they must consider regulatory, tax and accounting differences between countries. The US and Europe are large participants in the global cross-border M&A market.

2. What is FDI
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

3. Strategy for FDI
• Firm-Specific Strategy
Offering new kind of product or differentiated product. When
product innovation fails to work, a firm may adopt product
differentiation strategy. This is done through putting trade mark
on the product or branding. Sometimes a firm may adopt
different brands for different markets to make them suitable for
local markets
• Cost –Economic Strategy
Done through lowering cost by moving the firm to the places
where there are cheap factors of production.
The cheapness of these factors of production reduces the cost
of production and maintains an edge over other firms.

4. Benefits of FDI
Availability of scarce factors of production.
Improvement in Balance of Payments through export and import
substitution.
Building of economic and social infrastructure.
Fostering of economic linkages.
Strengthening of the government budget.
Stimulation of national economy. Subsidiaries of Trans-National
Corporations (TNCs), which bring the vast portion of FDI, are
estimated to produce around a third of total global exports
(UNCTAD 1999).

5. MacDougall-Kemp Hypothesis
FDI moves from a capital-abundant economy to a capital-scarce
one till the marginal productivity of capital is equal in both the
countries
Industrial Organisation Theory
An MNC with superior technology moves around to different
countries to supply innovated product making in turn ample gain

6. Location-specific Theory
FDI moves to a country with abundant raw material and cheap
labour force
The Eclectic Paradigm
It is the combination of three advantages- ownership, location and
internalisation that motivates a firm to make FDI

7. Product Cycle Theory
FDI takes place when the product in question achieves a specific stage in
its life cycle
STAGE 1
Innovation stage is characterised with quite newness of product having
price-inelastic demand
STAGE 2
Maturing product stage appears when the product turns price-elastic
along with similar products in the market

8. STAGE 3
Standardised product stage with greater price competitiveness
motivates firm to start production in a low cost location
STAGE 4
De-maturing stage breaks down product standardisation with
sophisticated model of the product being manufactured in high-income
countries

9. Internalisation Approach
Internalisation is a process when an MNC passes on improved
technology to its foreign subsidiary at zero/low cost in order to
grab the market
Political-Economic Theory
A firm moves from a politically unstable country to a politically
stable country

10. Recent Policy Measures
100% FDI allowed in medical devices
Insurance & sub-activities - 26% to 49% FDI
100% FDI allowed in the telecom sector.
100% FDI in single-brand retail.
Removal of restriction in tea plantation sector.
FDI limit raised to 74% in credit information & 100% in asset reconstruction
companies.
Railway sector(Construction, operation and maintenance) - 100% FDI.
FDI limit of 26% in defence sector raised to 49% under Government approval
route.
Foreign Portfolio Investment up to 24% permitted under automatic route.

11. Sectors with Caps
Petroleum Refining by PSU (49%)
Broadcasting content services-
• FM Radio (26%)
•TV channels (26%)
Print Media (26%)
Air transport services
• Scheduled air transport (49%)
• Non-scheduled air transport (74%)
• Ground handling services – Civil Aviation (74%)
Satellites- establishment and operation (74%)

12. Banking Sector
• Private Sector Banking : (74%)
• Public Sector Banking (20%)
Private security agencies (49%)
Commodity exchanges (49%)
Credit information companies (74%)
Infrastructure companies (49%)
Insurance and sub-activities (49%)
Power (49%)
Defence (49%)

13. MEASURES OF CONTROL
The home Govt. can prohibit any investment in, or any technical
collaboration with a particular host country
It can design fiscal and monetary disincentives to deter any
outflow of investment
The home govt. can tighten the approval rules and regulations
ultimately restricting FDI outflow
The govt. can introduce extra territorially provisions and can
interfere with activities of its MNC’s foreign subsidiary
The home govt. can design the anti – trust law that can trim its
MNC’s wings to operate in foreign markets

14. CROSS
BORDER
ACQUISITIONS

15. Objectives behind Cross Border Acquisitions
 Top priority is profit growth and companies.
 Increased opportunities and cheaper alternatives to building companies
internally.
 Increase company’s efficiency in production.
 Easing the process of joining operations in order to share technology
while also reducing costs.
 Creating economic value.
 Additional value comes from the “synergies” created by the
reconfiguration.
 Increasing economies of scale and expanding market reach.
 Releases capital for reinvestment.
Example: Acquisition between Walmart and South-African based Massmart
.

16. Cross Border Acquisition Process

17. Aspects to be concentrated before a cross border acquisition
• Understanding of Globals Accounting Differences (GAAP & IFRS)
• Understanding of Regulatory Environments.
• Understanding of Foreign & Domestic Tax Considerations.
• Understanding of Impact of acquisition on Financial Reporting.

19. Globally - M&A transactions totaled $24.5 trillion from 2004-2013.
$8.7 trillion worth were cross-border transactions
$6.7 trillion were deals in which majority control of the target company
changed hands.
Global volume for cross-border acquisitions, 2004-2013
Billions of nominal dollarsE&Y

20. Source: Valuewalk

21. Largest Target & Acquirer Countries, 2004-2013 (E&Y)

22. Sales versus Purchases by Country, 2004-2013

23. Role of Cross Border Acquisitions on U.S. Economy
US companies are the acquirer in 20% of cross-border M&A by value and the target
in 23% by value. (E&Y 2014-15)
Price premiums paid in M&A transactio

25. Acquirer Target Company Country
targeted
Deal value ($
ml)
Industry
Tata Steel Corus Group plc UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Videocon Daewoo
Electronics Corp.
Korea 729 Electronics
Dr. Reddy's Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
HPCL Kenya Petroleum
Refinery Ltd.
Kenya 500 Oil and Gas
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
Leading Cross Border Acquisitions
India & World