FDI IN EARLIER INDIA

In the Indian context till the end of March 1991, FDI was defined to include investment in:

1) Indian companies which were subsidiaries of foreign companies 2) Indian companies in which 40 percent or more of the equity capital was held outside India in one country
3) Indian companies in which 25 percent or more of the equity capital was held by a single investor abroad.

As a part of its efforts to bring about uniformity in the reporting of international transactions by various member countries, the Indian Monitory Fund has provided certain guidelines which enable inter-country comparisons. Reflecting this with effect from March 31, 1992 the objective criterion for identifying direct investment has been modified and is Fixed at 10 percent ownership of ordinary share capital or voting rights. Direct Investment also includes preference shares, debentures and deposits, if any, of those individual investors who hold 10 percent or more of equity capital. In addition to this, direct investment also includes net foreign liabilities of the branches of the foreign companies operating in India. A committee was constituted by the Department of Industrial Policy and Promotion (DIPP) in May 2002 to bring the reporting system of FDI data in India into alignment with international best practices. Accordingly, the RBI has recently revised data on FDI flows from the year 2001 onwards by adopting a new definition of FDI. The revised definition includes three categories of capital flows under FDI; equity capital, reinvested earnings and other direct capital. Previously the data on FDI reported in the Balance of payment statistics used only equity capital. It is the intent and objective of the Government to promote foreign direct investment through a policy framework which is transparent, predictable, simple and clear and reduces regulatory burden. The system of periodic consolidation and updation is introduced as an investor friendly measure. It is the policy of the Government of India to attract and promote productive FDI in activities which significantly contribute to industrialization and socioeconomic development. FDI supplements domestic capital and technology. It has been decided that from now onwards a consolidated circular would be issued every six months to update the FDI policy. This consolidated circular will, therefore, be superseded by a circular to be issued on April 30, 2011.

TYPES OF FDI

1) Inward Foreign Direct Investment: This refers to long term capital inflows into a country other than aid, portfolio investment or a repayable debt. It is done by an entity outside the host country in the home country.

2) Outward Foreign Direct Investment: This refers to a long term capital outflow from a country other than aid, portfolio investment or a repayable debt. It is done by an entity outside the host country in the home country.

3) Horizontal Foreign Direct Investment: This refers to a multi-plant firm producing the same line of goods from plants located in different countries

4) Vertical Foreign Direct Investment: If the production process is divided into upstream (parts and components) and downstream (assembly) stages, and only the latter stage is transferred abroad, then the newly established assembly plants demand for parts and components can be met by exports from home-country suppliers. This is what Lipsey and Weiss (1981, 1984) and other researchers describe as Vertical FDI, whose aim is to exploit scale economies at different stages of production arising from vertically integrated production relationships.

5) Greenfield Foreign Direct Investment: Greenfield FDI is a form of investment where the MNC constructs new facilities in the host country.

6) Brownfield Foreign Direct Investment: Brownfield FDI implies that the MNC or an affiliate of the MNC merges with or acquires an already existing firm in the host country resulting in a new MNC affiliate.

LIKELY BENEFITS OF FDI

1) FDI is less volatile than other private flows and provides a stable source of financing to meet capital needs.

2) FDI is an important and probably dominant channel of international transfer of technology. MNCs, the main drivers of FDI are powerful and effective vehicles for disseminating technology from developed to developing countries and are often the only source of new and innovative technology which is not available in the arms length market. 3) The technology disseminated through FDI generally comes as a package including the capital, skills and managerial knowhow needed to appropriate technology properly.

The resilience of foreign direct investment during financial crises may lead many developing countries to regard it as the private capital inflow of choice. Although there is substantial evidence that such investment benefits host countries, they should assess its potential impact carefully and realistically

Foreign direct investment (FDI) has proved to be resilient during financial crises. For instance, in USA, such investment was remarkably stable during the global recession of 2008-10. In sharp contrast, other forms of private capital flows portfolio equity and debt flows, and particularly short-term flowswere subject to large reversals during the same period The resilience of FDI during financial crises was also evident during the Mexican crisis of 1994-95 and the Latin American debt crisis of the 1980s.This resilience could lead many developing countries to favour FDI over other forms of capital flows, furthering a trend that has been in evidence for many years. Also, when compared to other inflows FDI have proved strong in almost every countries. When compared to the chart below we can clearly see the portfolio investment and loans comparison with the FDI. Bifurcation between developing and emerging market countries is shown below:

FDI versus other flows

LIKELY COSTS OF FDI

Recent years have seen increased public concern that the benefits of FDI have yet to be demonstrated and that, where benefits exist, they may not be shared equitably in the society. The adjustment costs associated with FDI include:

i. Higher short term unemployment due to corporate restructuring

ii. Increased market concentration

iii. Incomplete utilisation of FDI benefits due to incoherent institutional policies and regulatory conditions, unavailability of skilled labour and infrastructure.

FACTORS WHICH ATTRACT FDI IN A COUNTRY

Host countries with a sizeable domestic market, measured by GDP per capita and sustained growth of these markets measured by growth rates of GDP, attract relatively large volumes of FDI. Resource endowments of a host country including natural and human resources are a factor of importance in the investment decision process of the foreign firms. Infrastructure facilities including transportation and communication are important determinants of FDI. An unexplored issue has been the role of information decisions. FDI requires substantial fixed costs of identifying an efficient location, acquiring knowledge of the local regulatory environment and coordination for supplies. Thus access to better information may make FDI to that location more likely. Macroeconomic stability signified by stable exchange rates and low rates of inflation is a significant factor in attracting foreign investors. Political stability in the host countries is an important factor in the investment decision process of foreign firms. A stable and transparent policy framework towards FDI is an attractive factor to potential investors. Foreign firms place a premium on a distortion free economic and business environment. An allied proposition here is that a distortion free foreign trade regime which is neutral in terms of the incentives it provides for Import Substitution (IS) and Export Promoting (EP) industries attracts relatively large volumes of FDI than either an IS or EP regime. Fiscal and monetary incentives in the form of tax concessions do play a role in attracting FDI. MNCs are potentially subject to taxation in both the host and home countries. It is found that the way in which parent country reduces double taxation on their MNCs can have implications for FDI. Trade protection is also found to encourage FDI. It is found that FDI response to these trade actions (tariff jumping FDI) occurs only for firms with previous experience as MNCs. Wages are an important factor determining inward FDI. It is possible that lower wages are associated with higher levels of inward FDI. However, where there is a control for productivity, there could be a positive association found between FDI and the types of labour standards that may raise wages but that ultimately contributes to workers productivity. It is found that FDI is positively correlated to the right to establish unions, to strike, to collective bargaining and to the protection of the union members

FDI TRENDS
Global inflows of foreign direct investment (FDI) fell by 39% from US$1.7 trillion in 2008 to a little over US$1.0 trillion in 2009, based on UNCTAD estimates. The decline in FDI was widespread across all major groups of economies. After experiencing a severe fall in 2008, FDI flows to developed countries continued their dramatic decline in 2009 (by a further 41%). FDI flows to developing and transition economies, which had risen in 2008, declined in 2009 (by 35% and 39%, respectively), as the impact of the global financial and economic crisis continued to unfold. All components of FDI equity capital, reinvested earnings and other capital flows (mainly intra-company loans) were affected by the downturn. However, the decrease was especially marked for equity capital flows, which are most directly related to transnational corporations (TNCs) longer-term investments strategies. Regarding the mode of entry, cross-border mergers and acquisitions (M&As) were the most affected, with a 66% decrease in 2009 as compared to 2008. The number of international greenfield projects also declined markedly, though to a much lesser degree (-23%). After a sharp fall in the first quarter of the 2009, followed by a slight rebound in the second quarter, FDI flows in the third quarter remained relatively stable. UNCTADs Global FDI Quarterly Index declined only slightly, from 113 to 111 (see table below). However, when compared to the corresponding quarter of 2008, global FDI flows in 2009 remained much lower. The Global FDI Quarterly Index in the third quarter in 2009 was 36 points lower than the level in the previous year. Initial indicators for the fourth quarter of 2009 show no signs of a pickup in FDI flows. Global cross-border M&As, which are highly correlated with FDI equity capital flows, plunged in the fourth quarter of 2009 after several quarters of marginal improvement. Nevertheless, it is still likely that a modest rebound in flows will take place in 2010, as investment conditions are improving in many countries. However, there is a huge upward slide in the FDI scenario after post recession period. Global FDI flows in 2010 will exceed $1.2 trillion. The factors in current trends in FDI are:

FDI flows to the developing world are expanding again Regional FDI patterns are shifting in the developing world South-South FDI is significant and growing

 China continues to be the developing worlds FDI magnet Strong commodity prices are boosting FDI for extractive industries Private investment in public infrastructure is surging Efficiency-seeking FDI is an increasing share of all FDI in developing countries The end of global textile/apparel quotas has had mixed impacts on FDI OECDs Policy Framework for Investment is an important new analytical tool

FDI flows to the developing world are expanding again

Worldwide FDI flows peaked in 2000, and then in an environment of global economic recession and uncertainty declined through 2003 for both developed and developing countries and we saw again a decline at the time of global recession period of 2008. Since that low point, however, FDI inflows have again begun to grow. In the developing world the increase has been dramatic: in 2009/2010 FDI inflows rose by 30 percent from the 2008/2009 trough. Reports suggest that in developing countries the flow of FDI is more rapid than in high income countries. For 2009, early reports indicate that developing countries experienced a third consecutive year of FDI expansion, albeit a modest one. And for the rest of the decade, forecasts suggest that FDI flows to developing countries will rise sharply. It is widely known that capital flows into developing economies like India have risen sharply in nineties and has, therefore, become a self propelling and dynamic actor in the accelerated growth of the economies. This study focuses on FDI as a vector of Indian globalisation. Recently not only did India become a more frequent destination for FDI, but also many Indian firms have started investing abroad in a big way. Thus we find a surge in both inward and outward FDI flows. The impassioned advocacy of increased FDI flows (inward and outward) is based on the well worn arguments that FDI is a rich source of technology and knowhow; it can invigorate the labour oriented export industries of India, promote technological change in the industries and put India on a higher growth path. This exuberance of FDI needs to be based on analytical review of Indias needs and requirements and her potential to participate in huge investment flows. Thus there is a definite need to incorporate the various dimensions of FDI into a

theory of open economy development so as to explain in one integrated theoretical paradigm, the undercurrents of both inward and outward FDI flows. Comparison between FDI flow in developed and developing country is given below:

Regional FDI patterns are shifting in the developing world

FDI inflows increased in all regions of the developing world, reaching new highs in all regions. FDI inflows to developing countries are expected to rise 17% in 2010 , supported by low funding costs. In contrast, FDI flows to high-income countries are expected to fall 4%, reflecting weaker short and medium-term growth prospects. Major focus of FDI inflow and outflow is in Asia, wherein China is playing the major role in this area. The amount of foreign direct investment (FDI) that flowed into China in July 2010 rose 29.2 percent year on year to 6.924 billion U.S. dollars, a Ministry of Commerce (MOC) spokesman said Tuesday. The figure brought FDI inflow to China in the first seven months of the year to 58.35 billion U.S. dollars, an increase of 20.65 percent from a year earlier, ministry spokesman Yao Jian said. Yao said on a month-on-month basis, FDI inflow had increased by more than 20 percent for two straight months, reflecting the solid recovery in FDI flows into China. The manufacturing sector received 47.94 percent of the July FDI inflow and the services industry got 45.09 percent. A total of 14,459 foreign-invested companies were approved for establishment in China during the first seven months of the year, up 17.9 percent year on year. On the other hand, during the first seven months of the year, Chinese entities invested 26.75 billion U.S. dollars in overseas markets, excluding financial investment, bringing total outbound investment by the end of July to 226.5 billion U.S. dollars, the MOC data showed without giving year-on-year comparisons. China's Hong Kong, the Cayman Islands, Sweden, Canada, Australia, the United States and Brazil were the main overseas destinations of Chinese FDI. The aggregate cost of 32 domestic mergers and acquisition (M&A) agreements in India in January 2010 stood at US$ 2,167 million against 8 deals amounting to US $ 1,324 million and 28 deals amounting to US$ 223 million in 2009 and 2008, respectively. In the fiscal year 2009, developing economies gained a massive share of 51.6% FDI, more than what the developed nations gained, as per the survey by Ernst & Young on globalization. This was chiefly because of major decline in FDI into industrial markets, that was 50% less than FDI in 2008. From 4% of 2004 to 8% of 2005, the nation's endowments in infrastructure industry doubled, as per the report by Planning Commission of India. With the fiscal structure gaining momentum, endowment proposals in India Inc witnessed an upsurge of around 16% in 2009 to US$ 345.3, as per the report conducted by a premiere sectoral body. In 2009, nine tenders contributing total FDI of US$ 112.25 million was sanctioned by the central administration. Among

the sanctioned tenders, Mitsui and Company of Japan is expected to contribute US$ 69.83 million to set-up a fully governed subsidiary in the warehousing industry. In 2010, the Indian government gave its consent to 14 FDI tenders which are likely to bring foreign investment amounting to US $ 157.89 million. These encompass:

US$ 58.82 million worth FDI tender by Asset Reconstruction Company FDI valuing US$ 44.39 million by Standard Chartered Bank that is likely to elevate to 100% from 74.9% in its portfolio management arm Tenders by SaharaOne, KS Oils and NDTV Imagine NDTV Lifestyle tender worth US$ 54.28 million Tender by India Infrastructure Development Fund based in Mauritius that is likely to bring US$ 517.29 million Asianet's proposal worth US$ 91.7 million to undertake the business of broadcasting non-news and current affairs television channels. Global media magnate Rupert Murdoch-controlled Star India holdings' investment of US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky. AIP Power will set up power plants either directly or indirectly by promotion of joint ventures at an investment of US$ 24.4 million.

Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake in the 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation India Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 235.1 million. Cinepolis, a Mexico-based multiplex operator, is looking at expanding its footprint in India. The company which started operations in India last year plans to invest US$ 350 million in the next five years to operate 500 screens in 40 cities. According to a study released by global consultancy Bain & Company, private equity (PE) and venture capital (VC) investments are projected to reach US$ 17 billion in 2010. The report includes a survey conducted across leading PE investors globally. The survey revealed number of respondents planning to invest in the range of US$ 200-500 million in 2011 has risen nearly four-fold to 27 per cent. Further, as per figures released by Grant Thornton, the food processing and agri-based companies have attracted US$ 300 million PE investments during January-June 2010. In 2009, PE investments in these sectors were about US$ 398 million. IL&FS Investment Managers (IIML) plans to invest US$ 300 million, in real estate and urban infrastructure projects by the end of 2010. We are in the advance stages of finalising 3-4 deals in residential real estate and urban infrastructure space like roads and hospitality, said Shahabad Dalal, Vice Chairman and MD, IIML.

Investments by French companies in India is expected to touch US$ 12.72 billion by 2012, and would focus on automobile, energy and environment sectors among others, according to Jean Leviol, Minister Counsellor for Economic, Trade and Financial Affairs, French Embassy in India. Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million in India to expand its manufacturing capacity and research capabilities. The investment will be used for increasing the manufacturing capacity of Active Pharmaceutical Ingredients (APIs) and product research at the Eisai Knowledge Centre in Visakhapatnam. Japan's Kobelco Cranes, a subsidiary of Kobe Steel, is planning to invest US$ 12.7 million to set up a plant near Chennai to produce crawler cranes. The plant will begin production in 2011. Franco-American telecom equipment maker, Alcatel-Lucent plans to shift its global services headquarters to India. The headquarters would need about US$ 500 million in investments over three years, according to Ben Verwaayen, Chief Executive Officer, Alcatel-Lucent.

E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial years):

Amount Rupees in crores (US$ in million)

Ranks Country 2008-09 (AprilMarch) 2009-10 (AprilMarch) 2010-11 ( AprilSeptember) Cumulative Inflows (April 00 September 10) 228,626 (51,089) 50,329 (11,329) 40,538 (9,002) 27,507 (6,212) 22,415 (4,985) 19,698 (4,314) 19,447 (4,278) 12,832 (2,878) 8,313 (1,831) 8,152 (1,792) %age to total Inflows (in terms of US $) 42 % 9% 7% 5% 4% 4% 4% 2% 2% 1%

1. 2. 3. 4. 5. 6. 7. 8. 9 10.

MAURITIUS SINGAPORE U.S.A. U.K. NETHERLAN DS CYPRUS JAPAN GERMANY FRANCE U.A.E.

50,899 (11,229) 15,727 (3,454) 8,002 (1,802) 3,840 (864) 3,922 (883) 5,983 (1,287) 1,889 (405) 2,750 (629) 2,098 (467) 1,133 (257)

49,633 (10,376) 11,295 (2,379) 9,230 (1,943) 3,094 (657) 4,283 (899) 7,728 (1,627) 5,670 (1,183) 2,980 (626) 1,437 (303) 3,017 (629)

17,720 (3,849) 5,182 (1,139) 3,349 (724) 1,508 (327) 2,289 (498) 1,921 (415) 2,552 (563) 364 (79) 1,395 (301) 1,129 (243)

TOTAL FDI INFLOWS *

123,025 (27,331)

123,120 (25,834)

50,570 (11,005)

552,268 (123,378)

SOUTH-SOUTH FDI IS SIGNIFICANT AND GROWING

Multinational enterprises based in developing countries have become increasingly important sources of FDI capital for other developing countries. This South-South FDI may have been about 37 percent of total FDI inflows to the developing world in 2003, up from 16 percent in 1995. Russia, China, Brazil, Mexico, Indonesia, and India are key FDI providers. Most South-South FDI is intra-regional China is a major investor in Asia, for example, and South Africa is a major investor in Sub-Saharan Africa but there are also rising inter-regional trends as well, notably Chinese and Indian investment in SubSaharan Africa. Much South-South FDI is directed to entering host-country or regional markets, but some is also natural resource-seeking. South-South FDI will likely to continue to grow in importance over the rest of the decade, multiplying the developing worlds potential FDI sources.