Foreign Direct Investment (FDI)

Meaning of FDI

• Foreign Direct Investment (FDI) is a type of investment in

to an enterprises in a country by another enterprises located
in another country by buying a company in the target
country or by expanding operations of an existing business
in that country
• Foreign capital is seen as a way of filling in gaps between
domestic savings and investment.
 FDI inflow routes

1. Automatic Route: FDI in sectors /activities to the extent

permitted under the automatic route does not require any
prior approval either of the Government or the Reserve
Bank of India.
2. Government Route: FDI in activities not covered under the
automatic route requires prior approval of the Government
which are considered by the Foreign Investment Promotion
Board (FIPB), Department of Economic Affairs, and
Ministry of Finance.
• Government of India in its Cabinet Note in October,
2014, proposed numerous amendments to the
consolidated FDI policy, 2014 (FDI Policy), aimed at
increasing inflows and opportunities for growth and
employment.
• In the year 1991, economic reforms were introduced and
FDI came into existence under Foreign Exchange
Management Act (FEMA). It has been found that FDI
increases swiftly from 2006-07 onwards as India allowed
100 percent FDI through automatic route.
• In the year 2013 June 18th due to continuous devaluation of
Indian rupee central government relaxed the norms and
permitted FDI in 12 areas of operation including
telecommunication sector, defence, public sector oil
refineries, stock exchange, power and electric sector.
• Government prohibited FDI only in tobacco and of its
substitutes.
• Leading nations who invested in Indian economy are
Mauritius, Singapore, US and UK and biggest beneficiaries
sectors are tourism, pharmaceuticals, services, chemicals
and construction
• Government of India in order to attract more FDI living no
stone unturned and putting all kind of measures to generate
inflow.
• It raises the ceiling of investment in important sector like
broadcasting and defence.
• It rationalised and simplified required procedure and
launched Make in India initiative.
• The impact of these initiatives was found positive and net
inflows of FDI surged to 36 billion US dollars in the year
2015-16 which was 15 percent higher than the previous
year’s annual inflow.
 Positive Impact of FDI
• FDI provides capital which is usually missing in the target
country-Long term capital is suitable for economic
development.
• Foreign investors are able to finance their investments
projects better and are often cheaper.
• Foreign corporations create new workplaces.
• FDI bring new technologies that are usually not available in
the target country
• There is empirical evidence that there are spill-over effects
as the new technologies usually spread beyond the foreign
corporations.
• Foreign corporations provide better access to foreign markets
• Foreign corporations bring new know-how and managerial
skills into the target country.
• It can help to change the economic structure of the target
country with a good economic strategy
• Governments can attract companies from promising and
innovative sectors.
• Foreign corporations improve the business environment of the
target country-Ethical business or rules of conduct
• Foreign corporations usually help increase the level of wages
in the target economy.
• Foreign corporations usually have a positive effect on the
trade balance.
• The impact of FDI on Nations economic activities and
growth is positive. All the respective sectors in which
amendments are been made are performing with growth.
Employment, productivity and purchasing power has grown
with economic growth.
• The study found that in the year 2015-16, India dominated
in green field investment and replaced China as the top
destination for green field FDI.
• There is direct and positive relationship between FDI
and employment
 Negative Impacts

• “Crowding out” effect- if the foreign corporations target the

domestic market and domestic corporations are not able to
compete with these corporations.
• Foreign corporations have a tendency to use their usual
suppliers which can lead to increased imports.
• Repatriation of the profits can be stressful on the balance of
payments.
• The high growth of wages in foreign corporations can
influence a similar growth in the domestic corporations which
are not able to cover this growth with the growth of
productivity- The result is the decreasing competitiveness of
domestic companies
 PROBLEMS FOR LOW FDI FLOW TO INDIA

• Lack of adequate infrastructure

• Stringent labor laws
• Corruption:
• Lack of decision making authority with the state
governments
• Limited scale of export processing zones
• Indecisive government and political instability
 Methods of FDI

• By incorporating a wholly owned subsidiary or

company anywhere
• 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 or enterprise
 Determinants of FDI In India
• Stable policies of India
• Economic factors: different economic factors encourage
inward FDI. These include interest loans, tax breaks, grants,
subsidies and the removal of restrictions and limitation.
• Cheap and skilled labor
• Basic infrastructure
• Unexplored markets
• Availability of natural resources
 Need for FDI In India
• Sustaining a high level of investment
• Technological gap
• Utilisation of natural resources
• Understanding the initial risk
• Development of basic economic infrastructure
• Improvement in the balance of payments position
• Foreign firm’s helps in increasing the competition
• 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%
• 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%
Sectors where FDI is prohibited
• There are some sectors where any FDI is completely prohibited. They are:
• 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.)
 Regulatory Framework for FDI in India

• In India, there are several laws regulating FDI inflows. They are:
• Companies Act
• Securities and Exchange Board of India Act, 1992 and SEBI
Regulations
• Foreign Exchange Management Act (FEMA)
• Foreign Trade (Development and Regulation) Act, 1992
• Civil Procedure Code, 1908
• Indian Contract Act, 1872
• Arbitration and Conciliation Act, 1996
• Competition Act, 2002
• Income Tax Act, 1961
• Foreign Direct Investment Policy (FDI Policy)