Global Journal of Finance and Management

ISSN 0975 - 6477 Volume 2, Number 2 (2010), pp. 245-259

© Research India Publications
http://www.ripublication.com/gjfm.htm

Foreign Direct Investment Inflows in India-

Opportunities and Benefits

Syed Khaja Safiuddin

Assistant Professor, Department of Management and Commerce

Maulana Azad National Urdu University, Gachibowli,
Hyderabad, Andhra Pradesh, India
Email: [email protected]

Abstract

Since the last decade of the twentieth century, due to liberalization of policies
and globalisation, the Foreign Direct Investment (FDI) inflows are on an
increasing trend. Foreign Direct Investment (FDI) and liberalization/
globalisation has been one of the most fascinating and hot topics among
researchers in the field of international trade and commerce. It is an important
form of fast international expansion to increase ownership of assets, drive
location-specific advantages and acquire additional knowledge. FDI in
industrial sectors in India has become a point of discussion due to various
reasons. Starting from the service sector, information technology,
telecommunication sector, manufacturing etc there is a continuous fluctuation
in FDI inflows over the years. Earlier FDI was the target for manufacturing
industries, automobile industries, transportation industry etc., but since a
couple of years Service Sector has been seen attracting the highest FDI
inflows The present study is conducted to study the Sector-wise FDI inflows
in India and the reasons for industrial sectors attracting the highest FDI
inflows. The study is conducted from 2000-2009.

Introduction
Foreign direct investment (FDI) inflows in India is a defining feature of free market,
liberalisation and globalization. The important aspect is that how and through what
channels impact of FDI inflows affect the performance of companies in developing
countries.One major channel through which inflows of foreign capital, of foreign
direct investment (FDI) in particular, affect labour markets in developing countries is
economic growth. If capital inflows enable the recipient developing countries to
increase the investment rate beyond what they could sustain with their domestic
246 Syed Khaja Safiuddin

savings, they should achieve accelerated economic growth with favourable

consequences for employment, wages and labour productivity.
Emerging markets possess a lot of potential for foreign direct investment (FDI).
FDI in India is on the increase but the country has not experienced a rapid growth of
FDI inflow. Theories of FDI suggest that firm size, profitability, trade, interest rates,
economy and inflation wield significant influence in attracting FDI. This study
explores the factors that contribute to the explanation of FDI in India and tests
whether the variables do really influence the flow of FDI into India.

Review of Literature
A brief review of literature on FDI and related aspects is provided below
Hymer (1960), Caves (1996), Dunning (1993) found that MNEs have both
tangible and intangible resources, or explicit and tacit knowledge, in the form of
technologies, managerial skill, international networks, capital, and brand names and
goodwill (Hymer 1960, Caves 1996, Dunning 1993).
Teece (19770 stated that the MNEs can supply these resources to local firms in
equity joint ventures (intra-firm), in non-equity strategic alliances, or in arm’s-length
transactions through the external market. The transfer mechanism through the market
or intra-firm depends on transaction costs (Teece 1977).
Lucas (1990) has also analyzed the issue by examining the question of why capital
does not flow from rich to poor countries and critically explored some candidate
answers that are based on human capital and capital market imperfections. With
regard to human capital, he shows that the rich country’s optimal policy is to retard
capital flows so as to maintain real wages at artificially low levels in the poor
country. As far as capital market imperfections are concerned, Lucas’s paper analyzes
a borrowing contract between poor and rich countries. In this paper, the focus is on
linkages and on the rational behavior of different foreign investors in the face of
reform uncertainty.
Cheng, (1993) noted the growing importance of cross-border R & D activities and
suggested that additional research on FDI should be done on why firms
internationalize their R & D
Anand and Delios (1996) documented that the relatively slow growth of FDI
from Japanese MNCs in India as compared to China is attributed to the desire to gain
only market access in India.
Garg, et al. (1996) documented that along with the regulation of product prices,
since 1986 the Indian government has limited the profits pharmaceutical companies
can earn to approximately 6 percent of sales turnover. From 1970 through the early
1990s, industry pre-tax profitability as a percent of sales declined consistently, one
reason for which was the rate of return constraint. Indeed, in 1977- 1978 industry
profitability 11.7 percent. In 1982-1983 this dropped to 7.5 percent, further declining
to 3.5 percent in 1987-1988. Since 1992, industry profitability has been rising, and by
1996 it had reached approximately 10 percent of sales (Garg, et al., 1996).
Lee and Mansfield (1996) found that the developing country technology polices
have often favored the objective of national self-determination at the expense of
Direct Investment Inflows in India- Opportunities and Benefits 247

foreign technology transfer. In particular, host country policies of weak intellectual

property protection and forced licensing of technology, although intended to facilitate
technology spillovers, are more likely to discourage FDI and the transfer of leading-
edge technologies by MNCs (Lee and Mansfield, 1996).
Dijkstra (2000), Tybout (2000) and Vachani (1997) found that investment policy
liberalisations have major impacts on firms in less developed countries (LDCs)
where the pre-liberalisation level of protection was high. Not all firms are affected
equally; some will be losers while others will be winners, depending on their
characteristics
Feinberg & Majumdar (2001) found that Liberalisation of FDI policies offers
opportunities for firms as well as threats. If FDI (and trade) liberalisation results in
faster growing national economies, then firms face larger, faster-growing markets
domestically.
The studies of FDI in the US, Japan and Europe have been prevalent, similar
research on FDI in India is however limited. Restricted policy environment towards
FDI and weak property protection rights have been described to cause significant
R&D spillovers in Indian pharmaceutical sector [Feinberg and Majumdar 2001].
Aditya K.R. Bajaj and Swastik Nigam (2007) in this work made an attempt to
analyze and study the impact of globalization in the pharmaceutical industry and FDI
spillovers in various forms to the domestic pharmaceutical industry in terms of
domestic productivity and competitiveness etc. The analysis of the study reveals that
the spillover effects have had a manifold impact on the Indian pharmaceutical
industry, with the new WTO patent regime introduced in 2005, the foreign players
have found greater security in operating in India and due to the spillover effects of a
competitive environment, the domestic players have substantially increased their
productivity, probability and hence compete on stranger footing with the incoming
pharma firms.
Jaya Gupta(2007) in his paper made an attempt to review the change in sectoral
trends in India due to FDI Inflows since liberalization. This paper also examines the
changed policy implications on sectoral growth and economic development of India
as a whole.
Jayashree Bose(2007) in his book studied the sectoral experiences faced by India
and China in connection with FDI inflows. This bookprovides information on FDI in
India and China, emerging issues, globalization, foreign factors, trends and issues in
FDI inflows, FDI inflows in selected sectors. A comparative study has also been
conducted on FDI outflows from India and China. This book also revealed the
potential and opportunities in various sectors in India that would surpass FDI inflows
in India as compared to China.
Sudershan K (2007) in his thesis made an attempt to examine the impact of FDI
inflows on financial performance and export performance of select pharmaceutical
companies and the financing pattern of FDI and Non-FDI based select pharmaceutical
companies. The study is conducted for a period of 15 years i.e. from 1991 to 2005 and
the data analysis is done using both traditional methodologies, such as common size
statements, trend analysis and ratio analysis and econometric modeling such as pooled
cross section time series analysis or panel data analysis. Based on the results, the
248 Syed Khaja Safiuddin

study reveals that higher proportion of FDI will result into better performance of
companies. As far as export performance is concerned, the performance of FDI based
pharmaceutical companies in India.
Tanay Kumar Nandi and Ritankar Saher (2007) in their work made an attempt to
study the Foreign Direct Investment In India with a special focus on Retail Trade.
This paper stresses the need of FDI in India in retail sector and uses the augment that
FDI is allowed in multiple sectors and the effects have been quite good without
harming the domestic economy. The study also suggests that FDI in retail sector must
be allowed.
The review of literature reveals that on a particular sector FDI has a direct impact
and on a particular sector it has an indirect impact. A study on the impact of FDI on
manufacturing sector reveals that FDI inflows in chemicals, electrical and electronics
shows direct impact and FDI inflow in drugs and pharmaceutical sectors shows
indirect impact (spillover effects). (Rajit Kumar Sahoo, 2005)

FDI and Regulatory Framework

Foreign Direct Investment in India is subject to policy guidelines framed by the
Government of India from time to time in accordance with its Industrial Policy. The
year 1991 saw a major liberalisation in the policy by way of the Automatic Route in
terms of which cases concerning foreign collaboration in respect of certain priority
industries and involving not more than 51 per cent of foreign equity were allowed by
the RBI without a reference to the Government of India. After 1991, certain more
areas of foreign investments were opened up such as issuance of global depository
receipts (GDRs) and investment by foreign institutional investors (FIIs). FDI comes
through a) Automatic route and b) Govt approval route. In terms of the guidelines
issued in February 2000 and subsequent amendments, except in certain circumstances,
foreign investment by way of issue of shares/convertible debentures by Indian
companies can be made in India under the Automatic Route without any approval
from the Government of India or the Reserve Bank of India (RBI). In the
circumstances where the Automatic Route is not applicable, the foreign investor or
the Indian company seeking foreign investment would require the approval of the
Foreign Investment Promotion Board (FIPB).

Automatic Route
Under the RBI’s Automatic Route, the Indian companies can issue shares up to
prescribed percentage to persons resident outside India without obtaining prior
permission either of the Government or RBI. These companies must be engaged in the
permissible activities under the FEMA. Companies engaged in manufacture of items
reserved for SSI sector or those manufacturing items requiring industrial license or
engaged in areas such as, defence, atomic energy or aerospace will not be able to avail
of the Automatic Route.

Govt Route (Approvals by SIA/FIPB)

Indian companies may want to issue shares to foreign citizens and companies
Direct Investment Inflows in India- Opportunities and Benefits 249

incorporated outside India and such issuances may not be allowed under the
Automatic Route or any other general/special permissions. In such cases, it will be
necessary to apply to the Foreign Investment Promotion Board (FIPB). Approvals are
granted by FIPB on a case-by-case basis. The Reserve Bank has granted general
permission to Indian companies for issue and export of shares/securities to foreign
investors to acquire such shares in respect of such investments approved by
SIA/FIPB.

Importance of FDI
The importance of FDI extends beyond the financial capital that flows into the
country. In addition, FDI inflows can be a tool for bringing knowledge, managerial
skills and capability, product design, quality characteristics, brand names, channels
for international marketing of products, etc. and consequent integration into global
production chains, which are the foundation of a successful exports strategy.
Facilitating flows of FDI, including the technology transfer associated with it,
may require the direct and active involvement of the home countries of transnational
corporations (TNCs). UNCTAD research has found that providing tax breaks for
small and medium-sized enterprises in developed countries that are willing to invest
in developing countries could stimulate such flows. Home country incentive schemes
to stimulate linkages between foreign affiliates and domestic firms in developing
countries could also help developing countries benefit more from foreign direct
investment.
The liberalisation of government policies that restrict foreign direct investment
(FDI) is a recent phenomenon. Although trade policies have been liberalised for
many years through the elimination of quotas and the reduction of import tariffs,
liberalisation of investment policies is more recent, stimulated by the World Trade
Organisation (WTO) in 1995. Liberalisation of FDI policies offers opportunities for
firms as well as threats. If FDI (and trade) liberalisation results in faster growing
national economies, then firms face larger, faster-growing markets domestically. In
addition, more foreign-invested firms means more potential customers locally with
strong purchasing power, and more chances for linkages with them. If technology
spillovers occur from foreign firms to other firms in the industry, then those firms can
achieve better technical performance.
FDI could benefit both the domestic industry as well as the consumer, by
providing opportunities for technological transfer and up gradation, access to global
managerial skills and practices, optimal utilization of human capabilities and natural
resources, making industry internationally competitive, opening up export markets,
providing backward and forward linkages and access to international quality goods
and services and augmenting employment opportunities. For all these reasons, FDI is
regarded as an important vehicle for economic development particularly for
developing economies. FDI flows are usually preferred over other forms of external
finance because they are non-debt creating, non-volatile19 and their returns depend on
the performance of the projects financed by the investors. In a world of increased
competition and rapid technological change, their complimentary and catalytic role
can be very valuable.
250 Syed Khaja Safiuddin

FDI and Economic Development

Foreign Direct Investment (FDI) has been one of the most fascinating and intriguing
topics among researchers in international business. It is one of the significant forms of
rapid international expansion to increase ownership of assets, derive location-specific
advantages and acquire additional knowledge. Many scholars have followed either of
two schools of thought in explaining FDI. The microeconomic approach [Hymer
1976; Caves 1974; Kindleberger 1969] attempts to explain why firms of one country
are successful in penetrating into other markets while the macroeconomic approach
[Aliber 1970; Buckley and Casson 1976; Grosse and Trevino 1995] tries to examine
why firms seek international expansion. Our study follows the latter approach,
focuses on the impact of macroeconomic variables on FDI and seeks to explain the
recent increase of inflow of FDI into India.
Foreign direct investment (FDI) is considered to be the lifeblood and an important
vehicle for economic development as far as the developing nations are concerned. The
important effect of FDI is its contribution to the growth of the economy. FDI has an
impact on country's trade balance, increasing labour standards and skills, transfer of
new technology and innovative ideas, improving infrastructure, skills and the general
business climate. FDI also provides opportunity for technological transfer and up
gradation, access to global managerial skills and practices, optimal utilization of
human capabilities and natural resources, making industry internationally competitive,
opening up export markets, providing backward and forward linkages and access to
international quality goods and services and augmenting employment opportunities.
In 1991, when India liberalized its policy towards foreign investment, there was a
positive response from capital exporting countries. The reliance on FDI is rising
heavily due to its all round contributions to the economy. The important effect of FDI
is its contributions to the growth of the economy. FDI to developing countries since
the 1990s is the leading source of external financing. The rise in FDI volume is
accompanied by a marked change in its composition.

Indian Industrial Sector- An Overview

The service industry in India has become a major destination of FDI inflows. and has
been one of the fastest growing sectors in Indian economy. The computer software
industry has also witnessed a growth of 28 percent CAGR in the past five years. The
total contribution of Information Technology and ITES is estimated to grow by 7
percent by the year 2007-08 as against 4.8 percent in the year 2005-06 to the Gross
Domestic Product of India. The computer hardware industry has occupied about USD
1.4 billion in the entire electronics hardware industry as has been accounted in the
Financial Year 2005. This includes PC, Servers, and Laptops. India constitutes 0.6
percent of the entire international market in terms of manufacturing electronics
hardware. Electronics hardware in India is an USD 11 billion industry. The computer
hardware industry in India has occupied about USD 1.4 billion in the entire
electronics hardware industry as has been accounted in the Financial Year 2005. This
includes PC, Servers, and Laptops.
The telecom sector in India is growing at an alarming pace. India has more than
125 million telephone networks, which is one of the largest communication networks
Direct Investment Inflows in India- Opportunities and Benefits 251

across the globe. The government of India has taken measures to ensure pro-active
and positive policies to boost the Foreign Direct Investment (FDI) to
telecommunications sector in India. Tremendous growth has taken place in this sector
in recent years.A number of telecom service providers are working in both the private
and public sector. The two most crucial causes behind the huge success of the telecom
sector are the growing demand for mobile phone services and private sector
participation in the telecommunication industry. The private sector participation in the
telecommunication sector in India is increasing at a rapid pace.
Real estate is one of the major sectors under construction activities and also it is
one of the most booming sectors that has contributed leaps and bounds to the Indian
industry. The real estate sector in India is highly fragmented. According to the
estimates of 2004- 2005, the real estate sector in India was worth US$ 12 billion. The
majority of the developers in the real estate sector in India have only a regional
presence. The involvement of large corporations is limited in the real estate sector in
the country. The profit margins are higher in the sector of real estate in India in
comparison to the foreign markets that are developed.
The automobile sector in the Indian industry is one of the high performing sectors
of the Indian economy. This has contributed largely in making India a prime
destination for many international players in the automobile industry who wish to set
up their businesses in India. The automobile industry in India is growing by 18
percent per year. The production level of the automobile sector has increased from 2
million in 1991 to 9.7 million in 2006 after the participation of global players in the
sector.
The power sector in India has grown significantly and is an important part of
infrastructure. Investment potential in the power sector of India is huge due to the
market size and returns on investment capital. Past few years have witnessed an
outstanding growth in the power sector especially the sectors based on renewable
sources of energy. The total installed capacity of the electric power generation
stations in India according to estimates of January 2007 is 128182.47 MW and the
government of India aims at reaching 2, 00,000 MW by the year 2012. The regional
transmission network along with inter-regional capacity to transmit power will be
expanded to ensure this growth. The total power generation in India has increased
from 264.3 Billion Units (BUs) during 1990-91 to 551.7 Billion Units during 2006-
07(up to Jan.'07). The investments required in the execution of this task will be
generated from public-private partnerships in the sector.
The chemicals industry in India was worth more than US$ 40 billion in 2004-
2005. The industry of chemicals in India is an important part of the economy of the
country, for it constitutes around 6% of the country's GDP. The total amount of
exports from the chemicals industry in India stood at US$ 12 billion in 2004- 2005.
The chemicals industry in India produces over 70,000 varieties of products.
As per the estimates of 2004 the drugs and pharmaceuticals industry of India was
worth 8.8 billion US dollars, contributing 1.3% to India's GDP. The domestic market
in the drugs and pharmaceuticals industry in India is worth more than US$ 4.8 billion.
The industry of drugs and pharmaceuticals in India is highly fragmented with more
than 3,000 medium and small sized producers. The major domestic companies in the
252 Syed Khaja Safiuddin

drugs and pharmaceuticals industry of India are Ranbaxy, Dr. Reddy's, and Cipla. The
major international companies having presence in the industry of drugs and
pharmaceuticals in India are Johnson & Johnson, Novartis, Pfizer, and Glaxo
SmithKline.
The electrical equipments industry that includes, electronics and computer
hardware in India, has registered growth in the flow of foreign direct investment,
which has resulted in the growth and development of the industry. The electrical
equipments industry in India produces various kinds of products such as transformers,
electrical motors, switchboards, furnaces, panels, and aluminum conductors.
The metallurgical industries in India generated revenue more than US$ 13 billion
in 2004- 2005 and it provides employment to around one million people. India ranks
among the top ten suppliers of aluminum and steel across the globe.The metallurgical
industries in India are the biggest manufacturers of sponge iron across the world and
they also produce around 35 million tonnes of steel each year. The metallurgical
industries in India are largely dominated by the public sector. The major companies in
the metallurgical industries in India are Tata Steel, Nalco, SAIL, Sterlite, and
Hindalco.
The electronics industry in India is estimated to be worth USD 11 billion. India
has a share of 0.6 percent in the international market in terms of electronics hardware.
The electronics industry in India designs and manufactures a wide range of electronics
hardware namely, consumer electronics, industrial electronics, computers, telecom
equipment, and electronic components. Capacitors, resistors, wound components, CD-
ROMs, color picture tubes, and the like are highly export-oriented products
manufactured by the electronics industry in India. Some leading international players
of electronics industry which have set up manufacturing units in India are Siemens,
Texas Instruments, Matsushita, Alcatel, LG, Samsung, Sharp and Lenovo. Some of
the international players have also established R&D centers in India.
The hotel and tourism industry is growing faster for the past few years, bringing in
large revenues through foreign as well as domestic tourists in various parts of the
country. There was a major surge in inbound tourism in India in 2006. There was a
double-digit rise in the arrival of foreign tourists to India in the same year. The major
rise in the tourist arrivals in India has led to an increase in India's share in world
arrivals from 0.37 percent in 2001 to 0.53 percent in 2006. Tourism industry
contributes to around 5.9 percent of India GDP and provides employment to around
41.8 million people in the country. The foreign tourist arrivals have witnessed a
growth of 12.4 percent during the first ten months of 2007 and touched 3.89 million
as against 3.46 million during the same period in 2006. With the advent of foreign
tourists, the foreign exchange earnings also witnessed a growth of 25.6 percent during
January-October 2007 and reached USD 6.32 billion as against USD 5.03 billion
during January-October 2006. The foreign exchange earnings grew by 14.6 percent in
2006 to reach USD 6.56 billion as against USD 5.73 billion in 2005.

Sector-wise FDI inflows in India – Opportunities and Potential

India has been a major recipient of FDI Inflows in the majority of sectors. There has
been an unnerving upsurge in the economic developments of the country. In the post-
Direct Investment Inflows in India- Opportunities and Benefits 253

liberalization era, India is known to have attracted a quantum amount of Foreign

Direct Investment, especially after the liberalization. The huge market for computer
hardware in India, coupled with the availability of skilled workforce in this sector has
boosted the inflow of FDI. High growth prospects, in terms of increased consumption
in the India as well as increasing demand for exports are expected to lead to more
Foreign Direct Investments in this sector.
FDI opportunities in the telecommunication sector in India exist in the areas of E-
commerce, Manufacturing of equipments and components, Tele-education, Tele-
banking, Exports of telecom equipment and services, Tele-medicine, Setting up a
national long distance bandwidth capacity in the country
Construction projects which have received the maximum FDI include, housing,
commercial premises, hotels, resorts, hospitals, educational institutions, recreational
facilities, city and regional level infrastructure. FDI Inflows in the construction
industry in India are permissible under automatic route to ensure flexibility in
construction activities which will boost the Indian economy. In the real estate sector,
the foreign investors are not allowed to sell undeveloped land, such as, lands which do
not have proper facilities of roads, water, electricity, drainage and all other basic
requirements for inhabitation.
The huge size of the market in the power sector in India and high returns on
investment are important factors in boosting FDI inflows to power.There are huge
opportunities of FDI in power sector in India. Opportunities of Foreign Direct
Investment (FDI) in the Power Sector in India exist in Hydro Projects, Captive Power,
Ultra Mega Power Projects, Nuclear Power, National Grid Program, Rural
Electrification, Trading, Renewables etc
Important factors which are conductive to FDI Inflows to Electronics are the
availability of low-cost, efficient, and technically skilled workforce, opportunities for
the manufacturing of consumer electronic goods and mobile handsets are high given
the growing demand in the domestic electronics market, electronics hardware is
growing leaps and bounds globally, large-scale manufacturing units of electronics
hardware will be set up in the special economic zones with a total exemption of duties
and taxes, India has high chances to acquire a size USD 11 billion in terms of contract
manufacturing out of USD 500 billion by 2010, Designing of electronics will touch
USD 7 billion by 2010, component exports will touch USD 5 billion by 2010, Nokia
and Elcoteq Network are planning to set up manufacturing operations in India.

Objectives of the study

The main objective of the study is to analyse the FDI inflows in India with special
reference to Sector-wise inflows. The other objectives of the study are
1. To study the sector-wise FDI inflows in India.
2. To identify the sectors attracting highest FDI inflows.
3. To rank the sectors based upon FDI inflows.
4. To explore the opportunites for FDI inflows into various sectors and to find
out the benefits of FDI inflows to the various sectors in the Indian Industry.
254 Syed Khaja Safiuddin

Methodology of the study

The study is based on secondary data and the facts and figures collected from various
sources such as Fact Sheets on FDI, Department of Industrial Policy and Promotion
(DIPP), Ministry of Commerce and Industry, Government of India(GOI).

Scope and Limitations of the Study

The study is confined to sector-wise flows of FDI in India and cumulative FDI
inflows have been taken for the purpose of analysis.

FDI Inflows in India- A Sector-wise analysis of Top twenty (20) sectors

(i). Sector-wise FDI inflows in India from April 2000 – Dec 2009

Industrial Sectors in India Amount of FDI % of total

inflows FDI inflows
Rs. Millions
Service Sector 1015269 21.63
Computer Software and Hardware 423529 9.02
Telecommunication 398094 8.48
Housing and Real Estate 352550 7.51
Construction Activities 327195 6.97
Power 200993 4.28
Automobile Industry 197634 4.21
Metallurgical Industry 131178 2.79
Pertoleum and Natural Gas 112617 2.40
Chemicals 108251 2.31
Electrical Equipments 94888 2.02
Trading 87001 1.85
Hotel and Tourism 80355 1.71
Information and Broadcasting 79569 1.70
Cement and Gypsum Products 74579 1.59
Drugs and Pharmaceuticals 72533 1.55
Agriculture 71231 1.52
Consultancy 68354 1.46
Ports 66675 0.93
Food Processing Industries 43884 0.77
Direct Investment Inflows in India- Opportunities and Benefits 255

Graph showing Top ten sectors attracting FDI inflows in India since April 2000 –
Dec 2009

Sector-Wise FDI inflows in India

3% 3%
4%
6%
32%
6%

10%

11% 13%
12%

Service Sector Computer Software and Hardware

Telecommunication Housing and Real Estate
Construction Activities Power
Automobile Industry Metallurgical Industry
Pertoleum and Natural Gas Chemicals

(ii). Ranking of Sector-wise FDI Inflows in India since April 2000 – Dec2009

Industrial Sectors in India Ranks

Service Sector 1
Computer Software and Software 2
Telecommunication 3
Housing and Real Estate 4
Construction Activities 5
Power 6
Automobile Industry 7
Metallurgical Industry 8
Pertoleum and Natural Gas 9
Chemicals 10
Electrical Equipments 11
Trading 12
Hotel and Tourism 13
Information and Broadcasting 14
Cement and Gypsum Products 15
Drugs and Pharmaceuticals 16
Agriculture 17
Consultancy 18
Ports 19
Food Processing Industries 20
Source: Fact Sheets on FDI, Department of Industrial Policy and Promotion
256 Syed Khaja Safiuddin

Results and Discussions

The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken
place in the service sector including the telecommunication, information technology,
travel and many others. The service sector is followed by the manufacturing sector in
terms of FDI. High volumes of FDI take place in electronics and hardware,
automobiles, pharmaceuticals, cement, metallurgical and other manufacturing
industries.As far as IT Industry is concerned, India is the leading country pertaining to
the IT industry in the Asia-Pacific region. With more international companies entering
the industry, the Foreign Direct Investments (FDI) has been phenomenon over the
year. The rapid development of the telecommunication sector was due to the FDI
inflows in form of international players entering the market and transfer of advanced
technologies. The telecom industry is one of the fastest growing industries in India.
With a growth rate of 45%, Indian telecom industry has the highest growth rate in the
world.The FDI in Automobile Industry has experienced huge growth in the past few
years. The increase in the demand for cars and other vehicles is powered by the
increase in the levels of disposable income in India. The options have increased with
quality products from foreign car manufacturers. The introduction of tailor made
finance schemes, easy repayment schemes has also helped the growth of the
automobile sector. For the past few years the Indian Pharmaceutical Industry is
performing very well. The varied functions such as contract research and
manufacturing, clinical research, research and development pertaining to vaccines are
the strengths of the Pharma Industry in India. Multinational pharmaceutical
corporations outsource these activities and help the growth of the sector. The Indian
Pharmaceutical Industry has been experiencing a vast inflow of FDI.
The FDI inflow in the Cement Industry in India has increased with some of the Indian
cement giants merging with major cement manufacturers in the world such Holcim,
Heidelberg, Italcementi, Lafarge, etc. The FDI in Semiconductor sector in India were
crucial for the development of the IT and the ITES sector in India. Electronic
hardware is the major component of several industries such as information
technology, telecommunication, automobiles, electronic appliances and special
medical equipments. FDI Inflows will improve the quality of construction activities in
India which had always been very rough and opaque. It will create a property market
in India which will be deprived of cash payments .Foreign investors prefer to make
investments through above-the-board cheques from their clients which has
encouraged the economic life of India.FDI Inflows has made the financial markets in
India fast, transparent, and efficient.
FDI Inflows to Construction Activities has led to a phenomenal growth in the
economic life of the country. India has become one of the most prime destinations in
terms of construction activities as well as real estate investments.
The basic advantages provided by India in the automobile sector include,
advanced technology, cost-effectiveness, and efficient manpower. Besides, India has a
well-developed and competent Auto Ancillary Industry along with automobile testing
and R&D centers. The automobile sector in India ranks third in manufacturing three
wheelers and second in manufacturing of two wheelers. Opportunities of FDI in the
Automobile Sector in India exist in establishing Engineering Centers, Two Wheeler
Direct Investment Inflows in India- Opportunities and Benefits 257

Segment, Exports, Establishing Research and Development Centers, Heavy truck

Segment, Passenger Car Segment
The increased FDI Inflows to Chemicals industry in India has helped in the
growth and development of the sector. The increased flow of foreign direct
investment in the chemicals industry in India has helped in the development,
expansion, and growth of the industry. This in its turn, has led to the improvement of
the quality of the products from the industry.
FDI inflows to real estate sector in India have developed the sector.The increased
flow of foreign direct investment in the real estate sector in India has helped in the
growth, development, and expansion of the sector.
The increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has
helped in the expansion, growth, and development of the industry. This in its turn has
led to the improvement in the quality of the products from the drugs and
pharmaceuticals industry.
The increase in the flow of foreign direct investment to electrical equipments
industry in India has helped in the development, growth, and expansion of the
industry. This has led to the improvement in the quality of the products from the
industry.
The increased FDI Inflows to Metallurgical Industries in India has helped to bring
in the latest technology to the industries. Further the increased FDI Inflows to
Metallurgical Industries in India has led to the development, expansion, and growth of
the industries. All this has helped in improving the quality of the products of the
metallurgical industries in India.
Positive effects of FDI inflow into the Indian air transport industry are the
modernization process of the busiest airports of India, the Mumbai and the Delhi
airports have been initiated, Bangalore and Hyderabad to be facilitated with two new
greenfield airports, Jaipur airport has been promoted to the class of international
airport.
Based upon the data given by department of Industrial Policy and Promotion, in
India there are sixty two (62) sectors in which FDI inflows are seen but it is found
that top ten sectors attract almost seventy percent (70%) of FDI inflows.the
cumulative FDIinflows from the above results reveals that service sector in India
attracts the maximum FDI inflows amounting to Rs. 1015269 millions, followed by
Computer Software and Hardware amounting to Rs. 423529 million. These two
sectors collectively attract more than thirty percent (30%) of the total FDI inflows in
India. The housing and real estate sector and the construction industry are among the
new sectors attracting huge FDI inflows that come under top ten sectors attracting
maximum FDI inflows.The automobile industry and the electrical equipment industry
which were among the top three sectors attracting maximum FDI inflows have seen a
gradual decline since a couple of years.
Thus the sector wise inflows of FDI in India shows a varying trend but acts as a
catalyst for growth, quality maintenance and development of Indian Industries to a
greater and larger extend. The technology transfer is also seen as one of the major
change apart from increase in operational efficiency, managerial efficiency,
employment opportunities and infrastructure development.
258 Syed Khaja Safiuddin

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