Introduction to FDI q FDI is a kind

Introduction to FDI…. . q. FDI is a kind of investment in which residents of one country invest in a firm present in another country and join a joint venture with the foreign firm. q. A firm that engages in FDI becomes a multinational enterprise (MNEs).

Difference between FDI and FPI BASIS OF DIFFERENCE 1. OBJECTIVE 2. INVOLVEMENT 3. NATURE FOREIGN DIRECT INVESTMENT FOREIGN PORTFOLIO INVESTMENT It is done with the primary Done with the intention to objective to manage the acquire an income stream asset. without the operational control. Direct involvement in management and ownership control. No active involvement in management. More permanent in nature More liquid in nature as it is difficult to sell off or is easy to sell securities put out. and pull out.

4. SOURCE Most of FDI is done by Multinational Companies. Comes from more diverse sources, from large multinational to small companies, banks 5. ASSETS TRANSFERRED Along with physical and financial assets there is also transfer of non-financial assets. Involves investment of financial assets only. 6. TIME PERIOD It is generally for long term in nature. It is temporary and is of relatively short term. 7. TARGET MARKET Flows into primary market. Flows into secondary market.

HISTORY OF FDI IN INDIA At the time of independence the attitude towards foreign capital was one of fear and suspicion. This was natural on account of the previous exploitative role played by it in “draining away” resources from this country. As a result, then prime minister had to give following assurances to foreign capitalists in 1949 : • No discrimination between foreign and Indian capital. • Full opportunities to earn profits. • Guarantee of compensation.

SHARE OF DIFFERENT SECTORS IN FDI IN INDIA FDI act as along term of source of capital as well as a source of advanced and developed technologies. There are various sectors that attract high FDI inflows in India. Some of them are: - hotel and tourism industry, insurance sector, retail, telecommunication, real estate, power, drugs, financial services, pollution control and infrastructure, etc.

KEY STATISTICS

Facts …

FACTOR EFFECTING FDI FLOWS IN HOST COUNTRY

Market size : Host country with larger market size will attract more market oriented FDI q. Differential rate of return: The flow of capital will be in those countries which ensure the highest possible rate of return on

• Internationalization: Need for internationalization of traction cost determines the FDI flows. • Openness: More an emerging market tries to open its economy to outside external trade, the more this host country can attract FDI. • Government regulations: Open policies are basically intended to induce FDI while restrictive policies such as sweeping

üTax policies: A country with lower tax rates should stand a greater chance of attracting FDI project than a country with higher rates. üThe level of external

• Political stability: the reliability and political stability determines the FDI inflows. TNCs prefer stable government so that their investment is protected. • Foreign exchange reserves : A positive relationship is postulated b/w the foreign

• Portfolio diversification: The appropriate mix of bonds , debentures, Securities, stock etc is called portfolio. Investors are able to invest in or take out their capital for diversification of their portfolio assets due to perceived risk in the country. • Industrial organization: Industrial organization theory states that firm specific advantages , competition ,

ØForeign exchange rate: High volatility of the exchange rate of the currency in the host country discourages investment by the foreign firms. ØInflation : Changes in inflation rates of the domestic or foreign country are anticipated to alter the net returns and optional investment

It is well established fact that FDI can compliment local development efforts in a number of ways, including boosting export competitiveness generating employment ; enhancing skills and technological capabilities; etc…. In this view India should continue to take steps to ensure an enabling business environment to improve India’s

q Removal of restriction on FDI in the services sector : • • Performance requirement. Advertisement restriction. International agency may not use the name until they are not professionally used in India. Govt. project financed by foreign company must make payment only in foreign currency.

Reasons for the restrictions § To avoid the risk of competition of foreign investors and domestic investor. § Domestic country may not provide the required services. §Sale of public utilities to the foreign firms may comprise of complex issue related to privatization and regulation of natural monopolies. §Entry by large organization involve company policy many host country may not feel free to deal with legal and technical issue. So removal on these restriction help in the easy transaction between the consumers and business.

q. Image building in manufacturing sector: - Promote the manufacturing hub. Grant subsidy on manufacturing in India. MAKE IN INDIA : - Started in Mid-2014 by Prime minister Narendra Modi to increase the manufacturing in India. q. Well developed financial markets: - Provide Corporate liquid debt market(is a market in which trade can be executed easily and quickly because large number of buyers and seller supply and demand has small impact on prices)

q. Investment promotion policies: -Govt. should make those policy and procedure which promote our country as a investment destination. FIPB(Foreign Investment Promotion Board) make policies regarding FDI. q. Fiscal and Financial incentives: Fiscal Incentives : - Tax exemption Accelerated Depreciation Investment allowance Reduced corporate income tax

Financial incentives: - Grants Subsidized loan Credit facilities Subsidies q. Focus on Quality Rather than on quantity: - Focus should be on quality rather than on quantity which means that our focus should be on the type of investment like technology , methodologies not on the inflows.

q. Skilled Manpower: - Increase the pool of talented manpower in terms of improved qualification improving skill base. So that foreigner found cheap and skilled labour and get attracted towards the country for investment. q. Co-ordination Between the centre and state: -Both the centre and state should agree with each other’s policies and coordinate with each other.

q. Govt. initiatives: -Govt. should also take initiative to attract FDI to country make such policy and form regulation that have an influence on the foreign investors and they look at our country as the investment destination. q. Investment-promotion policies: -Over and above the creation of a business-friendly environment, it may be important for a potential host country to actively undertake investment-promotion policies to fill in information gaps or correct perception gaps that may hinder FDI inflows.

Benefits of fdi

FDI plays an important role in the growth of global business. FDI suggests many benefits as inward FDI in host economies suggest that FDI friendly policies could be a useful component of an integrated policy for development. When designing policies to promote FDI, policy makers should take

ØAccess to capital : FDI provides capital which is usually missing in the target country. Long term capital is suitable for economic development and long term growth of an economy. ØAvailability of scarce factors of production : Foreign investors are able to finance their investment projects better and cheaper.

ØFDI fosters competition : FDI enhances the competition by adopting new technologies, skills, etc. ØEnhancement of the host country : FDI enhances the global presence of host country. ØImprovement in the balance of payments : Foreign Corporations usually have a positive effect on the trade

ØFDI impacts foreign trade; More and more FDI impacts foreign trade. ØBuilding economics & social infrastructure: Foreign corporations can help to change the economic and social structure of the target country. ØFDI promotes research: It promotes research and development in host country.

ØFoster economic linkage; FDI helps to build better economic linkages and relations with other countries so as to attract more and more Fdi in country and to bring additional investors into the target country (example their usual subcontractors ). Hence employment also increases.

WHY DO FIRMS INVEST ABROAD? ØTo reduce cost of production ØTo have diversified sourcing facilities ØTo gain economics of scale ØTo promote knowledge sharing ØTo retain domestic customers

Evaluation of FDI and Incentives for FDI in India

Evaluation of FDI ……. Foreign Direct Investment plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, new technology, etc. The Positive effects of inward FDI in host economies suggest FDIfriendly policies. There are two types of implications i. e. positive and negative implications.

• PROVIDE CAPITAL • ABLE TO FINANCE • EFFICIENCY TECHNIQUES • NEW TECHLONOGIES • MANAGERIAL SKILLS

• CHANGES THE ECONOMIC STRUCTURE. • INCREASES EMPLOYMENT. • IMPROVES THE BUSINESS ENIVRONMENT. • IMPROVE THE ENVIRONMENTAL CONDITIONS. • INCREASE THE LEVEL OF WAGES.

NEGATIVE IMPLICTIONS • • MONOPOLY CROWDING OUT EFFECT LEAD TO UNEMPLOYMENT TENDENCY TO USE SUPPLIERS MISSING TAX REVENUES DUAL ECONOMY ENVIRONMENTAL DAMAGE DECREASING COMPETITIVENESS OF DOMESTIC COMPANIES

INCENTIVES FOR FDI IN INDIA • RATIONALISATION OF INVESTMENT PROCEDURES: • INFRACTRUCTURE DEVELOPMENT: • CREATION OF SPECIAL ECONOMIC ZONES: • PROMOTE INDIA AS A INVESTMENT DESTINATION: • FISCAL INCENTIVES: • FINANCIAL INCENTIVES: • FAVOURABLE LABOUR LAWS: • AMENDMENT TO VARIOUS ACTS: