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FOREIGN DIRECT INVESTMENT

Meaning:-
An investment made by a company or entity based in one country, into a company or entity
based in another country. Foreign direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas institutions invest in equities listed on
a nation's stock exchange. Entities making direct investments typically have a significant
degree of influence and control over the company into which the investment is made. Open
economies with skilled workforces and good growth prospects tend to attract larger
amounts of foreign direct investment than closed, highly regulated economies.

According to the International Monetary Fund, foreign direct investment, commonly known
as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises
operating outside of the economy of the investor. The investment is direct because the
investor, which could be a foreign person, company or group of entities, is seeking to
control, manage, or have significant influence over the foreign enterprise.

Strategically FDI comes in three types:
1.) HORIZONTAL:
Where the company carries out the same activities abroad as at home.
For example, Toyota assembling cars in both Japan and the UK.

2.) VERTICAL:
When different stages of activities are added abroad.

Forward vertical FDI is where the FDI takes the firm nearer to the market .
For example, Toyota acquiring a car distributorship in America.
Backward Vertical FDI is where international integration moves back towards raw materials.
For example, Toyota acquiring a tyre manufacturer or a rubber plantation.

3.) CONGLOMERATE:
Where an unrelated business is added abroad. This is the most unusual form of FDI as it
involves attempting to overcome two barriers simultaneously - entering a foreign country
and a new industry. This leads to the analytical solution that internationalisation and
diversification are often alternative strategies, not complements.
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FDI can take the form of Greenfield entry or takeover.
Greenfield entry implies assembling all the elements from scratch as Honda did in the UK,
whereas foreign takeover means the acquisition of an existing foreign company - as Tatas
acquisition of Jaguar Land Rover illustrates.

Foreign takeover is often covered by the term 'mergers and acquisitions (M&As) but
internationally, mergers are vanishingly small, accounting for less than 1 per cent of all
foreign acquisitions.

This choice of entry mode interacts with ownership strategy the choice of wholly owned
subsidiaries versus joint ventures to give a 2x2 matrix of choices Greenfield wholly owned
ventures, Greenfield joint ventures, wholly owned takeovers and joint foreign acquisitions -
giving foreign investors choices that they can match to their own capabilities and foreign
conditions.

Companies who invest abroad are mainly looking to take advantage of cheaper wages,
advanced infrastructure and skilled workforce and a less regulated business environment, in
other words, a business friendly environment which allows greater freedom for businesses
and finally, they want to be able to freely buy and sell goods and services freely without any
restrictions so in other words, a non protectionist economy. Therefore, in order to boost
FDI, we need to create an attractive environment for businesses to come and invest.

In an advanced economy, the government should not be the provider, but it should be the
enabler. Government should create a stable and business friendly environment by achieving
macroeconomic stability and fostering policies which favour investment and make job
creation much easier.

Main factors that affect FDI:
1. Macroeconomic stability:
This is the first thing which firms will look at when deciding where to invest. Stability is
very important because it make investment easier since when inflation is stable, firms
will be able to take into account the anticipated inflation into their future costs where as
if inflation is out of control, firms will hold their investment or won't even invest at all.
So government need to foster a stable environment for business investment



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2. Lower Corporate Taxes:
Level of taxation is very important.If taxes are high in a country, firm will not invest
because a large proportion of their profits will be confiscated by the state so this is a
very strong disincentive to invest. Also, to corporations, corporate taxes are a cost so
they will pass it on to consumers through higher prices which lead to a general rise in
price levels so lower corporate taxes will make a country more attractive for investment.

3. Skilled Workforce:
Skilled workforce is very important to a firm who is transferring its capital to a different
place/country because if a country's labour is unskilled, firms who want to invest will
have to spend a fortune on training and education of their workforce which costs a lot
and will outweigh the likely benefit of moving their production plant/capital to a new
country.Also, their costs will also rise due to low productivity which at the end affects
their profitability.

4. Minimum Wage:
Firms look at labour as a cost and a production unit. When the government imposes a
minimum wage, they simply interfere in the labour market and mass unemployment will
be the result. Not only minimum wage hurts workers because firms have to lay workers
off, but it also leads to a rise in costs which lowers firms profitability and firms have to
pay workers the minimum wage regardless of their productivity which leads to lower
productivity in general because whatever the worker produces in one hour, he will get
the minimum wage. No wonder why United Kingdom has a very low productivity among
its European trading partners which again leads to a rise in prices. So abolishing
minimum wage is a great job creator and makes firms more inclined to invest and
unemployment will fall of course. Its very important to know that there is a direct
relationship between wage levels and levels of unemployment.

5. Regulation:
Some regulations are good and need to be in place but most of the regulations are very
costly and often seen as unnecessary to firms. Small businesses will get hit the hardest
and often due to these heavy regulations, businesses wont start in the first place. In the
case of big firms, they might not be hit as hard but this adds to their costs and these
costs are passed on to consumers since corporations wont lower their profit margins so
regulations wont in some cases help the consumer but in fact, it hurts them.
Employment regulations will actually lead to firms not employing workers in the first
place because it costs a lot for firms and the fact that firms won't be able to get rid of
workers easily scares them away from the beginning so they just won't hire from the
beginning. Some employment regulations are good such as anti discrimination act
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which stops employers from discriminating on the basis of gender, race and disability.
Another good regulation is basic health and safety, not the one we currently have.

6. Free Trade:
Free trade allows firms to move capital around freely and export their products to
wherever they want and also import whatever they want. For the sake of this topic, free
trade allows firms to freely trade with no restrictions. Let me give you an example:
Imagine a firm in a protectionist country they cant trade freely due to tariffs, quotas
and embargoes. This affect their costs when trying to trade and in some cases, not being
able to trade with the world markets means they will have a substantially smaller
market to sell their products which minimises their profit levels and they won't be able
to achieve economies of scale.

7. National Debt:
If a country has high levels of national debt, this means that the real interest rates are
high and if the government doesn't deal with its debts, the investor confidence will fall.
Also high levels of taxation will soon follow because the debts will have to be paid of
eventually. Now as I mentioned earlier, high taxes are a disincentive to investment and
high interest rates will mean lower borrowing which again puts investment off because
it costs a lot to borrow so firms will not invest.

Why Countries Seek FDI?
1. The countries do not have enough capital that is required to fulfil the purpose.
2. Foreign capital is usually essential, at least as a temporary measure, during the
period when the capital market is in the process of development.
3. Foreign capital usually brings it with other scarce productive factors like technical
know how, business expertise and knowledge.

What are the major benefits of FDI :
1. Forex position of the country improves.
2. Employment generation and increase in production.
3. Help in capital formation by bringing fresh capital.
4. Helps in transfer of new technologies, management skills, intellectual property.
5. Increases competition within the local market and this brings higher efficiencies.
6. Helps in increasing exports.
7. Increases tax revenues.

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Why FDI is Opposed by Local People or Disadvantages of FDI :
1. Large giants of the world try to monopolise and take over the highly profitable
sectors.
2. Domestic companies fear that they may lose their ownership to overseas company.
3. Small enterprises fear that they may not be able to compete with world class large
companies and may ultimately be edged out of business.
4. Foreign companies invest more in machinery and intellectual property than in wages
of the local people.
5. Government has less control over the functioning of such companies as they usually
work as wholly owned subsidiary of an overseas company.

FDI is prohibited in the following sectors:
i) Atomic Energy
ii) Lottery Business
iii) Gambling and Betting
iv) Business of Chit Fund
v) Nidhi Company
vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled
conditions and services related to agro and allied sectors) and Plantations activities (other
than Tea Plantations)
vii) Housing and Real Estate business (except development of townships, construction of
residen-tial/commercial premises, roads or bridges to the extent specified in notification
viii) Trading in Transferable Development Rights (TDRs).
ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco
substitutes.
But on the other hand
(A) 26% FDI is permitted in

Defence (In July 2013, there has been no change in FDI limit but higher investment
may be considered in state of the art technology production by CCS)

Newspaper and media

Pension sector (allowed in October 2012 as per cabinet decision)

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Courier Services (through automatic route)

Tea Plantation (upto 49% through automatic route; 49-100% through FIPB route)

(B) 49% FDI is permitted in :

Banking

Cable network

DTH

Infrastructure investment

Telecom

Insurance (in July 2013 it was raised to 49% from 26% subject to Parliament
approval)

Petroleum Refining (49% allowed under automatic route)

Power Exchanges (49% allowed under automatic route)

Stock Exchanges, Depositories allowed under automatic route upto 49%

49% (FDI & FII) in power exchanges registered under the Central Electricity
Regulatory Commission (Power Market) Regulations 2010 subject to an FDI limit of
26 per cent and an FII limit of 23 per cent of the paid-up capital is now permissible.
[Permitted in September 2012]

(C ) 51% is Permitted in
Multi-Brand Retail (Since September 2012)

Petro-pipelines


(D) 74% FDI is permitted in
Atomic minerals

Science Magazines /Journals
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Petro marketing

Coal and Lignite mines

Credit information comanies (raised from 49% to 74% in July, 2013)


(E) 100% FDI is permitted in
Single Brand Retail (100% FDI allowed in single brand retail; 49% through automatic
route; 49-100% through FIPB)

Advertizement

Airports

Cold-storage

BPO/Call centres

E-commerce

Energy (except atomic)

export trading house

Films

Hotel, tourism

Metro train

Mines (gold, silver)

Petroleum exploration

Pharmaceuticals

Pollution control

Postal service

Roads, highways, ports.
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Township

Wholesale trading

Telecom (raised from 74% to 100% in July, 2013 by GOI)

Asset Reconstruction Companies (increased from 74% to 100 in July, 2013. Out of
this upto 49% will be under automatic route)


CURRENT SCENARIO

FDI flows into India grew 17 per cent in 2013 to USD 28 billion despite unexpected capital
outflows in the middle of the year, according to a United Nations report. It also said foreign
direct investment across the world rose to levels not seen since the start of the global
economic crisis in 2008. India ranked 16th among the top 20 global economies receiving the
most FDI, witnessing a 17 per cent growth to USD 28 billion.

Global FDI increased by 11 per cent in 2013 to an estimated USD 1.46 trillion, with the lion's
share going to developing countries, according to the UN Conference on Trade and
Development (UNCTAD) report.

UNCTAD forecasts that FDI flows will rise gradually in 2014 and 2015, to USD 1.6 trillion and
USD 1.8 trillion, respectively.

As global economic growth gains momentum, this may prompt investors to turn their cash
holdings into new investments.

However, uneven levels of growth, fragility and unpredictability in a number of economies
and risks related to the tapering of quantitative easing could dampen the FDI recovery.






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VIEWPOINT

Political instability majorly affects the FDI in the country.

Different political parties have different views regarding FDI. The investors are never
sure about which party will come to power and what will be their policies.

AAP is against FDI as they believe that its the foreign investors that ultimately
benefit from it and the common man is always at a loss.

Congress supports FDI. They believe that if the country does not have the money to
do business on its own, there is no harm in getting it from outside.

BJP is also against FDI.

In the current election congress does not hold a strong position. BJP seems to be
strong but with the growing popularity of AAP no one can say that which party will
form the government with majority seats.

This uncertainity is restricting the investors.Once the election is over and a stable
government comes into existence, a considerable increase in FDI can be expected.

China receives $ 116 Billion as FDI inflow and considered as one of the best FDI
destinations and the main reason is it has increased its integration with the world
and has taken a path to true progress. Whilst India suffers from economic and FDI
stagnation due political friction as it receives only $ 16 Billion FDI inflow and that too
has got a downward trend as foreign investors lose faith in Indian market and
politics.

Political and social situation of the country is alienated with prejudices such as
decline of small retail shops and increase in unemployment. This serves as biggest
hurdle in economic development.

It would increase quality of product and services to consumers and would serve as
an effective measure for the elimination of those middlemen who are parasites
thriving on the cost of consumers.

It would give impetus to globalization and appreciate employment opportunities in
MNCs, BPO and KPO sector.


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It would act as an incentive for technological progress and would keep India at par
with the latest trends in technology.

It would increase internal competitiveness of the economy and an apt old saying
goes with it. "Competition appreciates performance".

It would provide India a voice in international forums and market and increase its
importance at global level.

In edible sector only when McDonalds and Kentucky Fried Chicken (KFC) came into
India. Intrinsic Indian industries such as Haldirams and Bikanerwala had gone global
to acquire foreign markets.

China being largest recipient of FDI. Neither did it lose small businesses or cottage
industries nor it became a slave of other countries. A well controlled and cleanly
managed FDI operates in China which has accelerated its economic growth rate.

India is the 3rd largest economy of the world in terms of purchasing power parity
and thus looks attractive to the world for FDI. Even Government of India, has been
trying hard to do away with the FDI caps for majority of the sectors, but there are
still critical areas like retailing and insurance where there is lot of opposition from
local Indians / Indian companies.


Some of the major economic sectors where India can attract investment are as
follows:-
Telecommunications
Apparels
Information Technology
Pharma
Auto parts
Jewelry
Chemicals

In last few years, certainly foreign investments have shown upward trends but the strict FDI
policies have put hurdles in the growth in this sector. India is however set to become one of
the major recipients of FDI in the Asia-Pacific region because of the economic reforms for
increasing foreign investment and the deregulation of this important sector. India has
technical expertise and skilled managers and a growing middle class market of more than
300 million and this represents an attractive market.

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In conclusion, I could say that what India needs in FDI appreciation with NECESSARY and
SUFFICIENT degree of control over it. Here the words SUFFICIENT and NECESSARY means a
lot as it advocates both welfare and also relaxation of meaningless restrictions to take a
path and initiative of true progress.