INTERNATIONAL TRADE AND

FINANCE LAW

Globalisation and FDi in india

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Globalisation and FDI in India

Globalization is what known as integration of economies and
societies through cross country flow of information and ideas,
technology, goods and services, Capital and People. Its a
universal fact that no country can be on the path of
development in isolation therefore its necessary for one to
Globalise. Guy Brainbant in his definition of globalisation says
that the process of globalisation not only includes opening up of
world
trade,
development
of
advanced
means
of
communication, internationalization of financial markets,
growing importance of MNCs, population migrations and more
generally increased mobility of persons, goods, capital, data
and ideas but also infections, diseases and pollution. Mainly
there are two connotations of Globalization concept, i.e
Economic and Non-economic. Economic includes free flow of
goods and services, capital, technology and labour. Whereas
non-economic includes socio cultural and political. The Indian
economy opened up in 1991 within the framework of liberal
economic reforms. The New Economic reform, popularly known
as, Liberalization, Privatization and Globalization (LPG model)
aimed at making the Indian economy as fastest growing
economy and globally competitive. India in the process of
restructuring her economy, with aspirations of elevating herself
from her desolate position in the world that time felt need to
speed up her economic development was even more
imperative. And having witnessed the positive role that Foreign
Direct Investment (FDI) had played in the rapid economic
growth of the most Southeast Asian countries and most notably
China, India has embarked on an ambitious plan to emulate the
success of her neighbours. To the east and is trying to sell
herself as a safe and profitable destination for FDI. My project
will be focusing on one of the economic aspect of Globalization,
through which one country interacts with another by investing
in a company of the other country, which is knows as Foreign
Direct Investment. It will aim at Foreign Direct investment as a
vector of Indian Globalisation. Its growth during years in terms
of both outward and inward flow of FDI. India is becoming very
frequent destination for FDI but also many Indian firms
investing abroad on a very large scale with sometimes, some
stunning takeovers in industrialised countries. The reforms
undertaken since 1991 in India have unleashed the potential
growth of the economy and stimulated international trade,

outsourcing and FDI. At the same time some Indian firms have
become global players. With an aim of making an efficient
economy challenges that India face in opening up its economic
barriers. It will also further discuss if FDI as a vector of Indian
Globalisation will help in economic development which in the
first is the main aim of Globalisation.
What is Foreign Direct Investment
Foreign Direct Investment (FDI) broadly encompasses any longterm investments by an entity that is not a resident of the host
country. Typically, the investment is over a long duration of
time and the idea is to make an initial investment and then
subsequently keep investing to leverage the host countrys
advantages which could be in the form of access to better (and
cheaper) resources, access to a consumer market or access to
talent specific to the host country - which results in the
enhancement of efficiency. This long-term relationship benefits
both the investor as well as the host country. The investor
benefits in getting higher returns for his investment than he
would have gotten for the same investment in his country and
the host country can benefit by the increased know how or
technology transfer to its workers, increased pressure on its
domestic industry to compete with the foreign entity thus
making the industry improve as a whole or by having a
demonstration effect on other entities thinking about investing
in the host country.

Types of FDIs1
By direction

1. Outward FDI:An outward-bound FDI is backed by the

government against all types of associated risks. This form
of FDI is subject to tax incentives as well as disincentives
1 Nikhil Rajan, Project report on FDI inflows and its impact on indian economy

of various forms. Risk coverage provided to the domestic

industries and subsidies granted to the local firms stand in
the way of outward FDIs, which are also known as 'direct
investments abroad.'

2. Inward FDIs:Different economic factors encourage inward

FDIs. These include interest loans, tax breaks, subsidies,
and the removal of restrictions and limitations. Factors
detrimental to the growth of FDIs include necessities of
differential performance and limitations related with
ownership patterns.
A. Horizontal FDI- Investment in the same industry abroad as
a firm operates in at home.
B. Vertical FDI Backward Vertical FDI: Where an industry abroad provides
inputs for a firm's domestic production process.
Forward Vertical FDI: Where an industry abroad sells the
outputs of a firm's domestic production.
BY TARGET
Greenfield investment: - Direct investment in new facilities or
the expansion of existing facilities. Greenfield investments are
the primary target of a host nations promotional efforts
because they create new production capacity and jobs, transfer
technology and know-how, and can lead to linkages to the
global marketplace. The Organization for International
Investment cites the benefits of Greenfield investment (or in
sourcing) for regional and national economies to include
increased employment (often at higher wages than domestic
firms); investments in research and development; and
additional capital investments. Disadvantage of Greenfield
investments include the loss of market share for competing
domestic firms. Another criticism of Greenfield investment is
that profits are perceived to bypass local economies, and
instead flow back entirely to the multinational's home economy.

Critics contrast this to local industries whose profits are seen to

flow back entirely into the domestic economy.
Mergers and AcquisitionsTransfers of existing assets from local firms to foreign firm takes
place; the primary type of FDI. Cross-border mergers occur
when the assets and operation of firms from different countries
are combined to establish a new legal entity. Cross-border
acquisitions occur when the control of assets and operations is
transferred from a local to a foreign company, with the local
company becoming an affiliate of the foreign company.
Nevertheless, mergers and acquisitions are a significant form of
FDI and until around 1997, accounted for nearly 90% of the FDI
flow into the United States. Mergers are the most common way
for multinationals to do FDI.
BY MOTIVE
FDI can also be categorized based on the motive behind the
investment from the perspective of the investing firm:
Resource-Seeking
Investments which seek to acquire factors of production those
are more efficient than those obtainable in the home economy
of the firm. In some cases, these resources may not be
available in the home economy at all. For example seeking
natural resources in the Middle East and Africa, or cheap labour
in Southeast Asia and Eastern Europe.
Market-Seeking
Investments which aim at either penetrating new markets or
maintaining existing ones.FDI of this kind may also be
employed as defensive strategy; it is argued that businesses
are more likely to be pushed towards this type of investment
out of fear of losing a market rather than discovering a new
one. This type of FDI can be characterized by the foreign
Mergers and Acquisitions in the 1980s Accounting, Advertising
and Law firms.

Efficiency-Seeking
Investments which firms hope will increase their efficiency by
exploiting the benefits of economies of scale and scope, and
also those of common ownership. It is suggested that this type
of FDI comes after either resource or market seeking
investments have been realized, with the expectation that it
further increases the profitability of the firm

Methods of Foreign Direct Investments2

The foreign direct investor may acquire 10% or more of the
voting power of an enterprise in an economy through any of the
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 or
enterprise

Foreign direct investment incentives may take the

following forms:

Low corporate tax and income tax rates

Tax holidays
Preferential tariffs
Special economic zones
Investment financial subsidies
Soft loan or loan guarantees
Free land or land subsidies
Relocation & expatriation subsidies
Job training & employment subsidies
Infrastructure subsidies
R&D support

2 https.//en.wikipedia//wiki/foreign_direct_investment

Conditions in India
Pre-Independence Reforms:
Under the British colonial rule, the Indian economy suffered a
major set-back. An economy with rich natural resources was left
plundered and exploited to the hilt under the English regime.
India is originally an agrarian economy. Indias cottage
industries and trade were abused and exploited as means to
pave the way for European manufactured goods. Under the
British rule the economy stagnated and on the eve of
independence India was left with a poor economy and the
textile industry as the only life support of the industrial
economy.

Post-Independence Reforms:
Indias struggle post independence has been an excruciating
financial battle with a slow economic growth and development
which were largely due to the political climate and impact of
the economic reforms. The country began it transformation
from a native agrarian to industrial to commercial and open
economy in the post independence era. India in the post
independence era followed what can be best called as a trial
and error path. During the post independence era, the Indian
Economy geared up in favour of central planning and resource
allocation. The government tailored policies that focussed a
great deal on achieving overall economic self-reliance in each
state and at the same time exploit its natural resource. In order
to augment trade and investments, the government sought to
play the role of custodian and trustee by intervening in the
practice of crucial sectors such as aviation, telecommunication,
banking, energy mainly electricity, petrol and gas.
The policy of central planning adopted by the government
sought to ensure that the government laid down marked goals
to be achieved by the economy thereby establishing a regime

of checks and balances. The government also encouraged self

sufficiency with the intent to encourage the domestic industries
and enterprises, thereby reducing the dependence on foreign
trade. Although, initially these policies were extremely
successful as the economy did have a steady economic growth
and development, they werent sustained. In the early, 1970s,
India had achieved self sufficiency in food production. During
the 1970s, the government still continued to retain and wield a
significant spectre of control over key
Economic reforms of 1991:
India has been having a robust economic growth since 1991
when the government of India decided to reverse its socially
inspired policy of a retaining a larger public sector with
comprehensive controls on the private sector and eventually
treaded on the path of liberalization, privatisation and
globalisation.
During early 1991, the government realised that the sole path
to India enjoying any status on the global map was by only
reducing the intensity of government control and progressively
retreating from any sort of intervention in the economy
thereby promoting free market and a capitalist regime which
will ensure the entry of foreign players in the market leading to
progressive encouragement of competition and efficiency in the
private sector. In this process, the government reduced its
control and stake in nationalized and state owned industries
and enterprises, while simultaneously lowered and deescalated
the import tariffs. All of the reforms addressed macroeconomic
policies and affected balance of payments. There was fiscal
consolidation of the central and state governments which lead
to the country viewing its finances as a whole. There were
limited tax reforms which favoured industrial growth. There was
a removal of controls on industrial investments and imports,
reduction in import tariffs. All of this created a favourable
environment for foreign capital investment. As a result of
economic reforms of 1991, trade increased by leaps and
bounds. India has become an attractive destination for foreign
direct and portfolio investment.

Government Approvals for Foreign Companies Doing Business

in India
Government Approvals for Foreign Companies Doing Business
in India or Investment Routes for Investing in India, Entry
Strategies for Foreign Investors India's foreign trade policy has
been formulated with a view to invite and encourage FDI in
India. The Reserve Bank of India has prescribed the
administrative and compliance aspects of FDI. A foreign
company planning to set up business operations in India has
the following options:
1. Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a
period of two weeks (subject to compliance of norms) to all
proposals and permits foreign equity up to 24%; 50%; 51%;
74% and 100% is allowed depending on the category of
industries and the sectoral caps applicable. The lists are
comprehensive and cover most industries of interest to foreign
companies. Investments in high-priority industries or for trading
companies primarily engaged in exporting are given almost
automatic approval by the RBI.
2. The FIPB Route3 Processing of non-automatic approval
cases:
FIPB stands for Foreign Investment Promotion Board which
approves all other cases where the parameters of automatic
approval are not met. Normal processing time is 4 to 6 weeks.
Its approach is liberal for all sectors and all types of proposals,
and rejections are few. It is not necessary for foreign investors
to have a local partner, even when the foreign investor wishes
to hold less than the entire equity of the company. The portion
of the equity not proposed to be held by the foreign investor
can be offered to the public.

3 https://www.calubindia.com/articles/foreign-direct-investment-in-india-fdi

FOREIGN DIRECT INVESTMENT POLICY IN INDIA4

FDI is prohibited in sectors like
(a) Retail Trading (except single brand product retailing)
(b) Lottery Business including Government /private lottery,
online lotteries, etc.
(c) Gambling and Betting including casinos etc.
(d) Chit funds
(e) Nidhi Company
(f) Trading in Transferable Development Rights (TDRs)
(g) Real Estate Business or Construction of Farm Houses
(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes,
of tobacco or of tobacco substitutes
(i) Activities / sectors not open to private sector investment e.g.
Atomic Energy and Railway Transport (other than Mass Rapid
Transport Systems).
Foreign technology collaboration in any form including licensing
for franchise, trademark, brand name, management contract is
also prohibited for Lottery Business and Gambling and Betting
activities.

PERMITTED SECTORS5
In the following sectors/activities, FDI up to the limit indicated
against each sector/activity is allowed, subject to applicable
4 www.rbi.org.in
5 Ibid 4

laws/ regulations; security and other conditionalities.

In
sectors/activities not listed below, FDI is permitted upto 100%
on the automatic route, subject to applicable laws/ regulations;
security and other conditionalities.
Wherever there is a requirement of minimum capitalization, it
shall include share premium received along with the face value
of the share, only when it is received by the company upon
issue of the shares to the non-resident investor. Amount paid
by the transferee during post-issue transfer of shares beyond
the issue price of the share, cannot be taken into account while
calculating minimum capitalization requirement;

Table 1.1: FDI policies in permitted sectors in India 6

Sl.N
o

Sector/Activity

% of FDI Entry
Cap/Equity Route

AGRICULTURE
1

Agriculture & Animal 100%

Husbandry

Automatic

a)
Floriculture,
Horticulture, Apiculture
and
Cultivation
of
Vegetables
&
Mushrooms
under
controlled conditions.
b) Development and
production of Seeds
and planting material.
c) Animal Husbandry,
6 Gautam Raj, Report on Foreign Direct Investment, MSR institute of
Management

Pisciculture,
Aquaculture
under
controlled
conditions
and
d) services related to
agro and allied sectors
NoteBesides
the
above, FDI is not
allowed in any other
agricultural
sector/activity
2

Tea Plantation
Tea sector including tea 100%
plantations.
NoteBesides
the
above, FDI is not
allowed in any other
plantation
sector/activity

Governme
nt

Other conditions: 1) Compulsory divestment of

26% equity of the company in favour of an Indian
partner/Indian public within a period of 5 years
3

Mining

a)

Mining
and
Exploration of metal
and non metal ores
including
diamond,
gold,
silver
but
excluding
titanium
bearing minerals and
its ores; subject to
Mines and Minerals
(Development
&
Regulation) Act, 1957.

b)

Coal and Lignite

100%

Automatic

c)

1) Coal and Lignite 100%

mining
for
captive
consumption by power
projects, iron & steel
and cements units and
other eligible activities
permitted under and
subject to provisions of
Coal
and
Mines
(Nationalization)
Act,
1973

Automatic

2) Setting up coal 100%

processing plants like
washeries subject to
the condition that co.
shall
not
do
coal
mining and shall not
sell washed coal from
its processing unit in
open market

Automatic

Mining and mineral separation of titanium

bearing minerals and ores, its value
addition and integrated activities.
Mining and mineral 100%
separation of titanium
bearing minerals and
ores, its value addition
and
integrated
activities.

Petroleum & Natural

Gas

Governme
nt

Exploration activities of 100%

oil and natural gas
fields,
infrastructure
related to marketing of
petroleum
products
and
natural
gas,
marketing of natural
gas
and
petroleum
products,
petroleum
product
pipelines,
natural gas/pipelines,
LNG
Regasification
infrastructure, market
study and formulation
and Petroleum refining
in the private sector,
subject to the existing
sectoral
policy
and
regulatory framework
in the oil marketing
sector and the policy of
the Government on
private participation in
exploration of oil and
the discovered fields of
national oil companies

Automatic

Petroleum refining by 49%

the
Public
Sector
Undertakings
(PSU),
without
any
disinvestment
or
dilution of domestic
equity in the existing
PSUs.

Governme
nt

Manufacturing
Manufacture of items reserved for production in

Micro and Small Enterprises (MSEs)

FDI in MSEs will be subject to the sectoral caps,
entry routes and other relevant sectoral
regulations. Any industrial undertaking which is
not a Micro or Small Scale Enterprise, but
manufactures items reserved for the MSE sector
would require Government route where foreign
investment is more than 24% in the capital. Such
an undertaking would also require an Industrial
License under the Industries (Development &
Regulation) Act 1951, for such manufacture. The
issue of Industrial License is subject to a few
general conditions and the specific condition that
the Industrial Undertaking shall undertake to
export a minimum of 50% of the new or
additional annual production of the MSE reserved
items to be achieved within a maximum period of
three years. The export obligation would be
applicable from the date of commencement of
commercial production and in accordance with
the provisions of section 11 of the Industries
(Development & Regulation) Act 1951.
6

Defence
Defence
Industry 26%
subject to Industrial
license
under
the
Industries
(Development
&
Regulation) Act 1951

Service Sector

a)

Broadcasting
Terrestrial
Broadcasting
FM
(FM Radio) subject to
such
terms
and

Governme
nt

26%
(FDI, Governme
NRI & PIO nt
investments
and

conditions as specified portfolio

from time to time by investment)
Ministry of Information
and Broadcasting for
grant of permission for
setting up of FM Radio
Stations
Cable
Network,
subject
to
Cable
Television
Network
Rules, 1994 and other
conditions as specified
from time to time by
Ministry of Information
and Broadcasting

49%
(FDI, Governme
NRI & PIO nt
investments
and
portfolio
investment)

Directto-Home subject
to
such
guidelines/terms
and
conditions as specified
from time to time by
Ministry of Information
and Broadcasting

49%
(FDI, Governme
NRI & PIO nt
investments
and
portfolio
investment)
Within this
limit,
FDI
component
not
to
exceed
20%

Headend-In-The-Sky (HITS) Broadcasting Service

refers to the multichannel downlinking and
distribution of television programme in C-Band or
Ku Band wherein all the pay channels are
downlinked at a central facility (Hub/teleport) and
again uplinked to a satellite after encryption of
channel. At the cable headend these encrypted
pay channels are downlinked using a single
satellite antenna, transmodulated and sent to the
subscribers by using a land based transmission

system
comprising
of
cable/optical fibres network.

FDI limit in (HITS)

Broadcasting Service is
subject
to
such
guidelines/terms
and
conditions as specified
from time to time by
Ministry of Information
and Broadcasting.

infrastructure

74% (total
direct and
indirect
foreign
investment
including
portfolio
and FDI

of

Automatic
up to 49%
Governme
nt
route
beyond
49% and
up to 74%

Setting up hardware
facilities such as uplinking, HUB etc.
1) Setting up of Up- 49% (FDI & Governme
linking HUB/ Teleports
FII)
nt
(2) Up-linking a Non- 100%
News & Current Affairs
TV Channel

Governme
nt

(3) Up-linking a News & 26% (FDI & Governme

Current
Affairs
TV FII)
nt
Channel subject to the
condition
that
the
portfolio
investment
from FII/ NRI shall not
be persons acting in
concert
with
FDI
investors, as defined in
the
SEBI(Substantial
Acquisition of Shares
and
Takeovers)
Regulations, 1997

b)

c)

Print Media
Publishing
of
Newspaper
and
periodicals dealing with
news
and
current
affairs

26%
(FDI Governme
and
nt
investment
by
NRIs/PIOs/FI
I)

Publication of Indian
editions
of
foreign
magazines dealing with
news
and
current
affairs

26%
(FDI Governme
and
nt
investment
by
NRIs/PIOs/FI
I)

Publishing/printing
of 100%
Scientific and Technical
Magazines/specialty
journals/
periodicals,
subject to compliance
with
the
legal
framework
as
applicable
and
guidelines issued in
this regard from time
to time by Ministry of
Information
and
Broadcasting.

Governme
nt

Publication of facsimile 100%

edition
of
foreign
newspapers

Governme
nt

Civil Aviation
Airports
(a) Greenfield projects

100%

Automatic

(b) Existing projects

d)

Air
Services

100%

Transport

1)
Scheduled
Air 49%
Transport
Service/ (100%
Domestic
Scheduled NRIs)
Passenger Airline

FDI
for

(2) Non-Scheduled Air 74%

Transport Service
(100%
NRIs)

FDI Automatic
for up to 49%
Governme
nt
route
beyond
49% and
up to 74%

(3)
Helicopter 100%
services/seaplane
services
requiring
DGCA approval
e)

Automatic
up to 74%
Governme
nt
route
beyond
74%

Automatic

Automatic

Other services under Civil Aviation sector

(1) Ground Handling 74%
Services
subject
to (100%
sectoral
regulations NRIs)
and security clearance

(2) Maintenance and 100%

Repair
organizations;
flying
training
institutes;
and

FDI Automatic
for up to 49%
Governme
nt
route
beyond
49% and
up to 74%
Automatic

technical
institutions

training

Courier services for 100%

carrying
packages,
parcels and other items
which do not come
within the ambit of the
Indian Post Office Act,
1898 and excluding the
activity relating to the
distribution of letters.

f)

Governme
nt

Construction
Development:
Townships,
Housing, Built-up infrastructure
Townships,
housing, 100%
built-up infrastructure
and
constructiondevelopment projects
(which would include,
but not be restricted
to,
housing,
commercial premises,
hotels,
resorts,
hospitals, educational
institutions,

Automatic

recreational facilities,
city and regional level
infrastructure)
g)

Industrial Parks
new and existing

100%

Automatic

h)

Satellites Establishment and operation

Satellites
74%
Establishment
and
operation, subject to
the sectoral guidelines
of
Department
of
Space/ISRO

Governme
nt

i)

Private
Agencies

Governme
nt

j)

Telecom Services

k)

Trading

l)

Security
49%
74%

Automatic
up to 49%
Governme
nt
route
beyond
49% and
up to 74%

Cash
&
Carry 100%
Wholesale
Trading/
Wholesale
Trading
(including
sourcing
from MSEs)

Automatic

E-commerce
activities

Automatic

100%

m)

Test marketing of 100%

such items for which a
company has approval
for
manufacture,
provided
such
test
marketing facility will
be for a period of two
years, and investment
in
setting
up
manufacturing facility
commences
simultaneously
with
test marketing.

Governme
nt

Single
Brand
product trading
51%

Governme
nt

Financing Services
Foreign investment in other financial services ,
other than those indicated below, would require
prior approval of the Government:

Asset Reconstruction Companies

Asset
Reconstruction
Company (ARC) means
a company registered
with the Reserve Bank
of India under Section
3 of the Securitisation
and Reconstruction of
Financial Assets and
Enforcement
of
Security Interest Act,
2002 (SARFAESI Act).

49%
paid-up
capital
ARC

of Governme
nt
of

n)

Banking Private sector

Banking Private sector 74%
including
investment
by FIIs

BankingSector

Public

Banking- Public Sector

subject
to
Banking
Companies (Acquisition
&
Transfer
of
Undertakings)
Acts
1970/80. This ceiling
(20%) is also applicable
to the State Bank of
India and its associate
Banks.
0)

Policy for
Commodity
Exchange

Automatic
up to 49%
Governme
nt
route
beyond
49% and
up to 74%

FDI

20%
(FDI Governme
and
nt
Portfolio
Investment)

in 49% (FDI & Governme

FII)
nt
[Investment
by
Registered
FII
under
Portfolio
Investment
Scheme
(PIS) will be
limited
to
23%
and
Investment
under
FDI
Scheme
limited
to

26%)

p)

q)

Infrastructure Company in the Securities

Market
Infrastructure
companies in Securities
Markets, namely, stock
exchanges,
depositories
and
clearing corporations,
in
compliance
with
SEBI Regulations

49% (FDI & Governme

FII)
[FDI nt ( For
limit of 26 FDI)
per
cent
and an FII
limit of 23
per cent of
the paid-up
capital ]

Insurance

26%

Automatic

Non-Banking Finance Companies (NBFC)

r)

Foreign investment in 100%

NBFC is allowed under
the automatic route in
only
the
following
activities:
(i) Merchant Banking
(ii)
Under
Writing
(iii)
Portfolio
Management Services
(iv)
Investment
Advisory
Services
(v)
Financial
Consultancy
(vi)
Stock
Broking
(vii) Asset Management

Automatic

(viii) Venture Capital

(ix) Custodian Services
(x)
Factoring
(xi)
Credit
Rating
Agencies
(xii) Leasing & Finance
(xiii) Housing Finance
(xiv)
Forex
Broking
(xv)
Credit
Card
Business
(xvi) Money Changing
Business
(xvii)
Micro
Credit
(xviii) Rural Credit

FDI inflow in India:

Indias economic reforms way back in 1991 has generated

strong interest in foreign investors and turning india into one of
the favourite destinations for global FDI flows. The below table
explains about inflows of FDI for the period 1991-92 to 2014-15.
The results shown there is large fluctuation in the patter of FDI
inflows. There was slow growth of inflow of FDI to India during
1991-92 to 2000-01. From the year 2001-2001 onwards, there
is a positive increase in the value of FDI inflows due to various
reasons such as heavy demand of Indian consumers, liberalized
government policy, communications facilities but after this
period the value of FDI is decreased. 7 The value of FDI is
increased from the period of 2004 to 2008 but after this value
of FDI is decreased during 2009 to 2011 due to decline in the
money value of rupees. In the year 2012 shows increasing
trends but in 2012-13 once again it declined. But during 201314 it has reached the highest level , an historic figure (Rs.
1,45,518 Crores)
7 Dr.Shoukatali M Magalmani, Foreign Direct Investment and Indian Economy

Source: WIR-2014

Major Sector-wise inflow of FDI (Rs.in Crores)

Services

Construction

Telecommunication

Computer Software & Hardware

Drugs &Pharmaceuticals

Automobile industry

Chemicals

Power

Metallurgical Industry

Hotel & Tourism

Source for values: RBI

The above Pie Chart shows the trend of FDI flows in different sectors from
the period of April 2000-July 2014 in India. The results Revealed the
Maximum contribution (17.73%) of FDI inflows in service sector. After this
investors prefer to invest in construction industry (10.40%),
telecommunication (7.23%) computer software and hardware (5.76) and
drugs & Pharmaceuticals (5.47) because these sectors are more profitable

as compared to others. Service sector includes financial, banking, nonfinancial, outscoring, R&D, courier, tech, testing and analysis.8

FDI and Economic Development

FDI is considered to be the lifeblood and an important vehicle

of 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 important impact on countrys trade balance,
increasing labour standards and skills, transfer of technology
and innovative ideas, 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, access to international quality goods and services and
augmenting employment opportunities.
Here we are trying to show the effect of FDI on economic
growth with the help of Karl Pearson co relation.

Karl Pearson co relation

The Correlation between two variables X and Y, which are
measured using Pearsons Coefficient, give the values between
+1 and -1. When measured in population the Pearsons
Coefficient is designated the value of Greek letter rho (). But,
when studying a sample, it is designated the letter r. It is
therefore sometimes called Pearsons r. Pearsons coefficient
reflects the linear relationship between two variables. As
mentioned above if the correlation coefficient is +1 then there
is a perfect positive linear relationship between variables, and if
it is -1 then there is a perfect negative linear relationship
8 Ibid 6

between the variables. And 0 denotes that there is no

relationship between the two variables.
The degrees -1, +1 and 0 are theoretical results and are not
generally found in normal circumstances. That means the
results cannot be more than -1, +1. These are the upper and
the lower limits.
Pearsons Coefficient computational formula

Here the two variables are FDI(x) and GDPfc (y)

GDP fc: -GDP at Factor cost means, money value of everything
produced in India, without counting Government's role in it i.e.
indirect tax and subsidies.

FDI and GDP(fc)

Year

FDI
(Rs GDP fc (Rs Crores)(y)
Crores) (x)

2006
-07

56,390

3952241

2007
-08

98,642

4581422

2008
-09

1,23,025

5282086

2009
-10

1,23,120

6133230

2010
-11

88,520

7306990

Calculation of Karl Pearsons co-efficient

XY

56,3
90

3952
241

2,22,86,68,69, 3,17,98,3
990
2,100

1,56,20,20,89,
22,081

98,6
42

4581
422

4,51,92,06,28, 9,73,02,4
924
4,164

2,09,89,42,75,
42,084

1,23, 5282
025
086

6,49,82,86,30, 15,13,51,
150
50,625

2,79,00,43,25,
11,396

1,23, 6133
120
230

7,55,12,32,77, 15,15,85,
600
34,400

3,76,16,51,02,
32,900

88,5
20

6,46,81,47,54, 7,83,57,9
800
0,400

5,33,92,10,28,
60,100

27,26,55,41,6
1,464

15,55,18,68,20
,68,561

7306
990

To 4,89, 2725
tal 697
5969

sum x
sum y/N

X^2

51,03,95,
51,689

*
13347166251393

Y^2

2224527708565.5
0

sum x^2/N 39967191968

sum y^2/N 123814641021493
Numerator

502026452899

Denominat

3510385470771970000 592485060636.30

or

00000

After putting all the value in the equation, we get the value of
Karl Pearson co relation(r) is found to be +.85. It means
that there is high degree positive correlation between the FDI
and GDP at factor cost. Hence it is proved that with increase in
FDI there is increase in GDP of the country and hence economic
development.

Conclusion
Foreign direct investment has continued to play a significant
role in the Indias economy. From the above calculation, the
analysis shows that there is a positive relationship between the
FDI and economic growth, which the relationship is found to be
significant. Economy development of a country can be achieve
by encourage more foreign direct investment, which it can help
to create more employment in the country. In addition, advance
technology in production will trained more skilled labour;
therefore it will enhance the productivity and fulfil the
satisfaction and demand from the consumers. But, there is
negative effect on domestic producer, because they losing the
market power, since the foreign investor become monopoly in
the market. This indirectly will make the domestic producer
facing the difficulties to survive in the market in the long term
as foreign companies can achieve economy of scale with
advance technology. Foreign Direct Investment has thepotential
benefits for less developed countries.
FDI can help the host country improve its export performance
by raising the level of efficiency and the standards of product
quality. Further, because of the international linkages of MNCs,
FDI provides to the host country better access to foreign
markets and also the consumers stand to gain from FDI through
new products, and improved quality of goods at competitive
prices.

FDI has proved to be resilient during financial crisis. For

instance, in East Asian countries such investment was
remarkably stable during the global financial crisis of 1997-98.
In sharp contrast, other forms of private capital flows like
portfolio equity and debt flows were subject to large reversals
during the same crisis. Similar observations have been made in
Latin America and in Mexico.
In addition to risk sharing properties of FDI, it is widely believed
that FDI provides a stronger stimulus to economic growth in the
host countries than other types of capital inflows. It offers
access
to
internationally
available
technologies
and
9
management know-how.
BUT there are some disadvantages also that we need to look
upon, FDI is not an unmixed blessing. Governments in
developing countries have to be very careful while deciding the
magnitude, pattern and conditions of
private foreign
investment. Possible adverse implications of foreign investment
are the following:
1. When foreign investment is competitive with home
investment, profits in domestic industries fall, leading to fall in
domestic savings.
2. Contribution of foreign firms to public revenue through
corporate taxes is comparatively less because of liberal tax
concessions and tariff protection provided by the host
government.
3. Foreign firms increase income inequalities. They create a
small number of highly paid modern sector executives. They
divert resources away from priority sectors to the manufacture
of sophisticated products for the consumption of the local elite.
As they are located in urban areas, they Create imbalances
between rural and urban opportunities.
4. Foreign firms stimulate inappropriate consumption patterns
through excessive advertising and monopolistic market power.
The products made by multinationals for the domestic market
are not necessarily low in price and high in quality. Their

9 www.ukessaya.com/essays/economic/advantages of foreign direct investment

technology is generally capital-intensive which does not suit

the needs of a labour-surplus economy.10
5. Foreign firms able to extract sizeable economic and political
concessions from competing governments of developing
countries. Consequently, private profits of these companies
may exceed social benefits.
6. Continual outflow of profits is too large in many cases,
putting pressure on foreign exchange reserves. Foreign
investors are very particular about profit repatriation facilities.
7. Foreign firms may influence political decisions in developing
countries. In view of their large size and power, national
sovereignty and control over economic policies may be
jeopardized. In extreme cases, foreign firms may bribe public
officials at the highest levels to secure undue favours. Similarly,
they may contribute to friendly political parties and subvert the
political process of the host country.

10 www.economywatch.com

BIBLOGRAPHY
Books: