Table Of ContentsForeign direct investment Foreign Direct Investment Types of foreign direct investment Importance of FDI Free Trade

Agreements and FDI Foreign Direct Investment Statistics FDI in INDIA Why is FDI needed? HOW DOES GOVERNMENT ATTRACTS AND MONITORS FDI? Research methodology Any investment flowing from one country to another country is foreign investment . The management of a business enterprise in a foreign country is foreign invest ment.Indian Government classifies foreign investment in the following form Foreign direct investment has many forms. Broadly, foreign direct investment inc ludes "mergers and acquisitions, building new facilities, reinvesting profits ea rned from overseas operations and intra company loans". In a narrow sense, forei gn direct investment refers just to building new facilities. The numerical FDI f igures based on varied definitions are not easily comparable. Definition According to the International monetary fund foreign direct investment, commonl y known as FDI, "refers to an investment made to acquire lasting or long-term in terest in enterprises operating outside of the economy of the investor." The inv estment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influe nce over the foreign enterprise. FDI is a major source of external finance which means that countries with limite d amounts of capital can receive finance beyond national borders from wealthier countries. Exports and FDI have been the two key ingredients in China s rapid econ omic growth. According to the World Bank, FDI and small business growth are the two critical elements in developing the private sector in lower-income economies and reducing poverty. direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in an other economy (the direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direc t investment enterprise and a significant degree of influence on the management of the latter.Direct investment involves both the initial transaction establishi ng the relationship between the investor and the enterprise and all subsequent c apital transactions between them and among affiliated enterprises 4, both incorp orated and unincorporated. Types of FDI By Direction Inward foreign direct investment is when foreign capital is invested in local re sources.Inward FDI is encouraged by:> Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions> The thought is that the long term gain is worth short term loss of income Inward FDI is restricted by:> Ownership rest raints or limits> Differential performance requirements Outward foreign direct i nvestment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources.Outward FDI is encouraged by:> Government-backed insurance to cover risk Outward FDI is restricted by:> Tax incentives or disince

ntives on firms that invest outside of the home country or on repatriated profit s> Subsidies for local businesses. By Target Greenfield investment :Direct investment in new facilities or the expansion of e xisting facilities. Greenfield investments are the primary target of a host nati on s promotional efforts because they create new production capacity and jobs, tra nsfer technology and know-how, and can lead to linkages to the global marketplac e. The Organization for International Investment cites the benefits of greenfiel d investment (or insourcing) for regional and national economies to include incr eased employment (often at higher wages than domestic firms);investments in rese arch and development; and additional capital investments. Criticism of the effic iencies obtained from greenfield investments include the loss of market share fo r competing domestic firms. Another criticism of greenfield investment is that p rofits are perceived to bypass local economies, and instead flow back entirely t o the multinational's home economy. Critics contrast this to local industries wh ose profits are seen to flow back entirely into the domestic economy. Mergers and Acquisitions:Mergers and Acquisitions Transfers of existing assets f rom local firms to foreign firms takes place; the primary type of FDI. Cross-bor der mergers occur when the assets and operation of firms from different countrie s 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 forei gn company, with the local company becoming an affiliate of the foreign company . Unlike greenfield investment, acquisitions provide no long term benefits to th e local economy--even in most deals the owners of the local firm are paid in sto ck from the acquiring firm,meaning that the money from the sale could never reac h the local economy. Nevertheless,mergers and acquisitions are a significant for m of FDI and until around 1997, accounted for nearly 90% of the FDI flow into th e United States. Mergers are the most common way for multinationals to do FDI.Ho rizontal FDI Investment in the same industry abroad as a firm operates in at hom e.Vertical FDI Backward Vertical FDI Where an industry abroad provides inputs fo r a firm's domestic production process.Forward Vertical FDI Where an industry ab road sells the outputs of a firm's domestic production. 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 acq uire factors of production that 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 (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Mid dle East and Africa, or cheap labor 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 i s argued that businesses are more likely to be pushed towards this type of inves tment out of fear of losing a market rather than discovering a new one. This typ e of FDI can be characterized by the foreign Mergers and Acquisitions in the 198 0 s by Accounting,Advertising and Law firms.Efficiency-Seeking Investments which f irms 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 th is type of FDI comes after either resource or market seeking investments have be en realized, with the expectation that it further increases the profitability of the firm.Typically, this type of FDI is mostly widely practiced between develop ed economies;especially those within closely integrated markets (e.g. the EU).St rategic-Asset-Seeking A tactical investment to prevent the loss of resource to a competitor. Easily compared to that of the oil producers, whom may not need the

oil at present, but look to prevent their competitors from having it. Importance of Foreign direct investment AdvantagesFDI has many advantages for both the investor and the recipient. One of the prim ary benefits is that it allows money to freely go to whatever business has the b est prospects for growth anywhere in the world. That's because investors aggress ively seek the best return for their money with the least risk. This motive is c olor-blind, doesn't care about religion or form of government. This gives well-run businesses -- regardless of race, color or creed -- a compet itive advantage. It reduces (but, of course, doesn't eliminate) the effects of p olitics, cronyism and bribery. As a result, the smartest money goes to the best businesses all over the world, bringing these goods and services to market faste r than if unrestricted FDI weren't available. Investors receive additional benefits. Their risk is reduced because they can di versify their holdings outside of a specific country, industry or political syst em. Diversification always increases return without increasing risk. Businesses benefit by receiving management, accounting or legal guidance in keep ing with the best practices practiced by their lenders. They can also incorporat e the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of. By adopting these practices, t hey enhance their employees' lifestyles, helping to create a better standard of living for the recipient country. In addition, since the best companies get rewa rded with these benefits, local governments have less influence, and aren't as a ble to pursue poor economic policies. The standard of living in the recipient country is also improved by higher tax r evenue from the company that received the foreign direct investment. However, so metimes countries neutralize that increased revenue by offering tax incentives t o attract the FDI in the first place. Another advantage of FDI is that it can offset the volatility created by "hot mo ney." Short-term lenders and currency traders can create an asset bubble in a co untry by investing lots of money in a short period of time, then selling their i nvestments just as quickly. This can create a boom-bust cycle that can wreak eco nomies and political regimes. Foreign direct investment takes longer to set up, and has a more permanent footprint in a country. Disadvantages of Foreign Direct Investment Firstly too much foreign ownership of companies can be a concern, especially in industries that are strategically important. Second, sophisticated foreign investors can use their skills to strip the compan y of its value without adding any. They can sell off unprofitable portions of the company to local, less sophistica ted investors. Or, they can borrow against the company's collateral locally, and lend the funds back to the parent company. (Source: IMF, Finance and Development Magazine, Pra kash Loungani and Assaf Razin, How Beneficial Is Foreign Direct Investment for D eveloping Countries?, June 2001)

Free Trade Agreements and FDI The rapid growth of trade and foreign direct investment (FDI) flows in recent de cades has been one of the commonly highlighted characteristics of globalization. This dramatic rise in FDI flows was accompanied by an increase in the number and intensity of regional trade agreements (RTAs)2 since the 1990s, many of which i nclude provisions for investments.There is a variety of channels by which free t rade agreements (FTAs) may drive FDI flows.FTAs could also provide other less ta ngible benefits. Free trade agreements encourage foreign direct investment. For example, the larg est free trade agreement is NAFTA, or the North American Free Trade Agreement. T his increased FDI between the U.S., Canada and Mexico to $594.2 billion. Foreign Direct Investment Statistics Who keeps track of FDI statistics? Apparently, everyone. Here's a guide to the m ost important agencies. United Nations - The United Nations Conference on Trade and Development (UNCTAD) publishes the Global Investment Trends Monitor. This summarizes FDI trends arou nd the world. For example, UNCTAD reported that FDI in 2012 declined to $1.3 tri llion, instead of rising to $1.6 trillion as it had forecast. This was after set ting a record of $1.5 trillion in 2011. OECD - These FDI statistics are released quarterly for the developed countries w ithin the OECD. It reports on both inflows and outflows, so the only statistics it doesn't capture are those between the emerging markets themselves. IMF - In 2010, the IMF published its first Worldwide Survey of Foreign Direct In vestment Positions. This annual worldwide survey is available as an online datab ase. It covers investment positions from 2009 on for 72 countries. The IMF assem bled this information with the help of the European Central Bank, Eurostat, OECD , and UNCTAD. BEA - This agency reports on the FDI activities of foreign affiliates of U.S. co mpanies. This provides the financial and operating data of these affiliates, as well as which U.S. companies were acquired or created by foreign companies. It a lso describes how much investment U.S. companies have made overseas. Multinational Corporation A country that maintains significant operation in multiple countries but manages them from the base in the home country.3 The MNC s are playing an important role in economic development of developing coun tries. First, the investment made by MNC s help in filling the saving investment g ap. Secondly, it fills the foreign exchange or trade gap. Thirdly, the govt. of the developing countries is able to fill up the reserves gap by taxing the profi ts of MNC s. Fourthly, MNC s fill the gaps in management entrepreneurship, technolog y and skills in the developing countries. Foreign Direct investment in INDIA HISTORY OF FDI IN INDIA.

At the time of independence, the attitude towards foreign capital was one of fea r and suspicion. This was natural on account of the previous exploitative role played by it in draining away resources from this country. The suspicion and host ility found expression in the Industrial Policy of 1948 which, though recognizin g the role of private foreign investment in the country, emphasized that its reg ulation was necessary in the national interest. Because of this attitude expres sed in the 1948 resolution, foreign capitalists got dissatisfied and as a result , the flow of imports of ca[ital goods got obstructed. As a result, the prime m inister had to give following assurances to the foreign capitalists in 1949: No discrimination between foreign and Indian capital. The government o India wi ll not differentiate between the foreign and Indian capital. The implication wa s that the government would not place any restrictions or impose any conditions on foreign enterprise which were not applicable to similar Indian enterprises. Full opportunities to earn profits. The foreign interests operating in India wo uld be permitted to earn profits without subjecting them to undue controls. Onl y such restrictions would be imposed which also apply to the Indian enterprises. Gurantee of compensation. If and when foreign enterprises are compulsorily acqu ired, compensation will be paid on a fair and equitable basis as already announc ed in government s statement of policy.

Though the Prime Minister stated that the major interest in ownership and effect ive control of an undertaking should be in Indian hands, he gave assurance that there would be no hard and fast rule in this matter.

By a declaration issued on June 2, 1950, the government assured the foreign capi talists that they can remit the he foreign investments made by them in the count ry after January 1, 1950. in addition, they were also allowed to remit whatever investment of profit and taken place.

Despite the above assurances, foreign capital in the requisite quantity did now flow into India during the period of the First plan. The atmosphere of suspicio n had not changed substantially. However, the policy statement of the Prime Min ister issued in 1949 and continued practically unchanged in the 1956 Industrial Policy Resolution, had opened up immense fields to foreign participation. In ad dition, the trends towards liberalization grew slowly and gradually more strong and the role of foreign investment grew more and more important. The government relaxed its policy concerning majority ownership in several cases and granted s everal tax concessions for foreign personnel. Substantial liberalization was an nounced in the New Industrial Policy declared by the government on 24th July 199 1 and doors of several industries have been opened up for foreign investment. P rior to this policy, foreign capital was generally permitted only in the those i ndustries where Indian capital was scarce and was not normally permitted in thos e industries which had received government protection or which are of basic and/ or strategic importance to the country. The declared policy of the government w as to discourage foreign capital in certain inessential consumer goods and servic e industries. However, this provision was frequently violated as a number of fo reign collaborations even in respect of cosmetics, toothpaste, lipstick etc. wer e allowed by the government. It was also stated that foreign capital should hel p in promoting experts or substituting imports. The government also laid down t

hat in al those industries where foreign capital investment is allowed, the majo r interest in ownership and effective control should always be in Indian hands ( this condition was also often relaxed). The foreign capital investments and tec hnical collaborations were required to be so regulated as to fit into the overal l framework of the plans. In those industries where foreign technicians and man agers were allowed to operate as Indians with requisite skills and experience we re not available, vital importance was to be accorded to the training and employ ment of Indians in the quickest possible manner. INDIA is: World s largest democracy 2nd most populous country 4th most attractive destination for FDI in the survey's global ranking. UNCTAD survey - 2nd most imp. FDI destination (after China) World s 12th largest economy in market exchange rates 3rd biggest economy in purchasing power parity capital of India - New Delhi financial capital Mumbai

Well trained software professionals and skilled talent is a unique advantage for FDI Starting from a baseline of less than $1 billion 1990 2010 - $44.8 billion & 2011 - $50.8 billion according to Ernst and Young India to see highest foreign remittances in 2011 US $ 58 billion

'Indian economy is capable of absorbing US$ 50 billion in foreign direct investm ent (FDI) per year', said Mr P Chidambaram, the Finance Minister, India. FDI is an economic segment that enjoys intense focus and attention from policy makers o f the highest rank in the administration. The Government relaxed FDI regime in sectors including multi-brand retail, singl e-brand retail, commodity exchanges, power exchanges, broadcasting, non-banking financial institutions (NBFCs) and asset reconstruction companies (ARCs) in 2012 . There were several big-bang reforms and the Government allowed 51 per cent FDI i n multi-brand retail and 49 per cent in the aviation sector. FDI cap was also ra ised from 49 per cent to 74 per cent in broadcasting and ARCs, with an aim to br ing foreign expertise in the segments. Foreign investment has also been allowed in power exchanges while foreign institutional investors (FIIs) have been allowe d to invest up to 23 per cent in commodity exchanges without seeking prior appro val from the Government. Thus, reforms and policies at such a massive level indicate that Indian FDI land scape offers a plethora of opportunities to foreign investors as the economy is booming and vibrant as compared to its global peers.

Furthermore, favourable demographics and growth opportunities keep India an 'att ractive' destination for merger and acquisition (M&A) activities across diverse sectors including consumer goods and pharmaceuticals, according to global consul tancy Ernst & Young. Important Developments The Indian Government, in consultation with the Foreign Investment Promotion Boa rd (FIPB), has recently cleared 12 FDI proposals amounting to Rs 2, 609 crore (U S$ 478.47 million). These included the proposal of Decathlon Sports India's prop osal for infusion of foreign equity worth Rs 700 crore (US$ 128.37 million) to e ngage in single brand retail. The biggest proposal cleared was Ahmedabad-based C laris Otsuka Ltd's plan to accumulate its infusions in business into a new joint venture (JV) with FDI worth Rs 1,050 crore (US$ 192.56 million). The board also cleared Mumbai-based Glynwed Pipe System's proposal to receive foreign investme nt worth Rs 800 crore (US$ 146.74 million) for making downstream investment. Other proposals to have received green signal included that of Promod S.A.S, Fra nce, to induct foreign equity worth Rs 29.69 crore (US$ 5.45 million) into an In dian JV company to be engaged in single brand retail trading and Fossil India an d Le Creuset Trading's for setting up of single brand retail stores as a whollyowned subsidiary (WoS) of a foreign company Japanese firm Mitsubishi has formed a JV with Dubai-based ETA Group to set up Mi tsubishi Elevators ETA India Pvt Ltd, to manufacture, distribute, install and ma intain elevators for premium residential apartment complexes and industrial buil dings in India. The company, which was already present in India focusing on the premium commercial segment, will now focus on the premium residential segment an d the middle segment in Tier 2 and Tier 3 cities Meanwhile, French companies are showing keen interest to park their investments in India, pertaining to segments like defence, space, urban development and infr astructure Policy Initiatives The Indian Government is all-set to advertise in the world in the pursuit of ref orms it has undertaken to woo foreign investments. While the Government is contemplating to raise FDI cap in defence sector to at l east 49 per cent from the current 26 per cent, Mr P Chidambaram has expressed co nfidence that the similar amendment could be introduced to the Insurance Bill ve ry soon. The RBI will come out with a discussion paper by April 20, 2013 on redefining FD I and portfolio investment i.e. FII so as to remove ambiguities. The paper will have clarifications on legal and taxation issues involved in the implementation of the new definition, how the different instruments of foreign investments woul d be treated and how it would impact investments in listed and unlisted firms. Also, the DIPP has released its latest edition of consolidated FDI policy which has incorporated in itself the changes made in the regulations over the past one year. The DIPP is the nodal agency on FDI related matters and with a view to ma ke India's FDI regime simple and easy to understand for investors, it had compil ed all the related policies into a single document. Why is FDI needed? FDI plays a major role in developing countries like India. They act as a long te rm source of capital as well as a source of advanced and developed technologies. The investors also bring along best global practices of management. As large am ount of capital comes in through these investments more and more industries are set up. This helps in increasing employment. FDI also helps in promoting interna

tional trade. This investment is a non-debt, non-volatile investment and returns received on these are generally spent on the host country itself thus helping i n the development of the country. Some of the sectors that attract high FDI inflows in India are the hotel and tou rism industry, insurance sector, telecommunication, real estate, retail, power, drugs, financial services, infrastructure and pollution control etc. FDI is not permitted in the following sectors: Railways Atomic energy Defence Coal and lignite An investor has to take a decision regarding the following aspects while investi ng: Exchange Rate - The stronger the foreign currency is in comparison to that of th e host country, lesser will be the amount of investment required. In other words , depreciation of currency in the host country will lead to more investments. Market Size - This refers to the GDP growth. Developing and emerging countries a re more likely to attract investments. Infrastructure - Investors will invest in a country if they think that the count ry has suitable infrastructure to support the business. Tax regime - MNCs are subject to tax in both the parent as well as host country. The host country which attempts to reduce this double taxation of MNCs will att ract more FDI. Labour market conditions - The educational levels of the labour as well as the w age rates also play a major role in determining the flow of FDI. Financial and economic stability Political stability Following are some of the sectors in our country which attract massive FDI inves tments: Retail Sector This industry accounts for 13% of country s GDP. Retail outlets acts as an interfa ce between the producers and the consumers of a good. Indian government liberali zed FDI in 2005 in this sector to 100%, thus enabling foreign investors to set u p retail companies in India. Retail industry is divided into organised and unorganised sectors. Organised sec tors include hypermarkets and retail chains whereas unorganised sector include l ocal kirana shops (mom and pop stores). The latter is more prevalent in India. D

ue to massive development taking place, organised sector is increasing its footh old in the country. Since advanced technology and management structure is used w ith foreign investments the price of the goods in the organised retail industry falls and productivity of the firm increases. Today modern retail outlets provid e everything from basic amenities to luxury goods. They also provide consumer wi th a wide variety. They have become the one-stop shop for customers. This trend is destroying the sales of unorganised retail sector. Therefore on one hand FDI helps in reducing prices of the manufactured goods and on the other, it is rende ring our unorganized retail sector paralyzed. The government has recently made i t mandatory for foreign investors in multi-brand retail sector to do their bulk sourcing from small farmers. With this move government is preventing wipe-out of shopkeepers and small retailers. Manufacturing Sector Government has allowed 100% FDI in this sector except in defence industry and ci garette manufacturing. Foreign investments in this sector will help in employmen t of semi-skilled labour by providing them with access to developed technology. Real Estate, Construction Development and Tourism Any country s growth and development is determined by its infrastructure. Due to i ncreasing population and migration of people from rural to urban areas, the real estate sector is booming. Tourism industry is one of the major earners of forei gn exchange for the country. It has a huge potential for our economy. It is also one of the major sectors in employment. Large amount of investments are needed to build roads, bridges, infrastructure so as to promote overall economic develo pment of the country. Power Sector Power is considered most crucial sector for development. Since public sector alo ne was not able to meet the demands, investments from private and foreign invest ors was encouraged. Power generation, transmission and distribution are main are as of consideration. India has a vast scope of development in hydel power, nucle ar power, solar power, thermal energy as well as in wind energy. Renewable sourc es of energy require vast amount of investments for research and development. HOW DOES GOVERNMENT ATTRACTS AND MONITORS FDI? Foreign Investment Promotion Board FIPB: This specially empowered Board in the office of the Prime Minister is the only a gency dealing with matters relating to FDI as well as promoting investment into the country. It is chaired by Secretary Industry (Department of Industrial Polic y & Promotion).It promotes FDI into India by undertaking investment promotion ac tivities in India and abroad by facilitating investment in the country through i nternational companies, non-resident Indians and other foreign investors. Foreign Investment Promotion Council FIPC: The Government has constituted a Foreign Investment Promotion Council (FIPC) und e rthe chairmanship of Chairman ICICI, to undertake vigorous investment promotio n and marketing activities. The Presidents of the three apex business associatio

ns such as ASSOCHAM, CII and FICCI will be members of the Council. Ministry of I ndustry personnel will be Member-Secretary. Foreign Investment Implementation Authority FIIA: Foreign Investment Implementation Authority (FIIA) has been set up by the govern ment of India in order to encourage the implementation of the proposals for FDI in the country. By doing this, Foreign Investment Implementation Authority (FIIA ) has given a major boost to the Indian economy.

Role of Foreign Investment Implementation Authority (FIIA): To understand and solve the problems of the investors To understand and solve the problems of the approving authorities To refer the cases that have not been resolved at the level of FIA to the agenci es at the higher level To start consultations with multiple agencies Investment Commission: The Investment commission of India is a three-member commission set up in the Mi nistry of Finance in December 2004 by the Government of India. Mr. Ratan Tata is Chairman and Mr. Deepak Parekh and Dr. Ashok Ganguly are members. The Investmen t Commission has been set up to enhance and facilitate investment in India. The Commission makes recommendations to the Government of India on policies and proc edures to facilitate investment, recommends projects and investment proposals th at should be fast tracked/ mentored and promotes India as an investment destinat ion. Research methodology In order to accomplish this project successfully we will take following steps. Data collection: Secondary Data:Internet, Books , newspapers, journals and books, other reports a nd projects, literatures