Foreign Direct Investment or FDI

Is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities of
a firm in another country (the host country). The international monetary fund’s balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest
in an enterprise operating in an economy other than that of the investor. The investors’
purpose being to have an effective voice in the management of the enterprise’. The
united nations 1999 world investment report defines FDI as ‘an investment involving a
long term relationship and reflecting a lasting interest and control of a resident entity in
one economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise
or foreign affiliate).

Foreign direct investment: Indian scenario

FDI is permitted as under the following forms of investments:

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

Forbidden Territories:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper,
zinc.

Foreign Investment through GDRs (Euro Issues):

Indian companies are allowed to raise equity capital in the international market through
the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and
are designated in dollars and are not subject to any ceilings on investment. An applicant
company seeking Government’s approval in this regard should have consistent track
record for good performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB:

There is no restriction on the number of Euro-issue to be floated by a company or a group
of companies in the financial year. A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment after
a proposed Euro issue is likely to exceed 51% or which is implementing a project not
contained in Annex-III, would need to obtain prior FIPB clearance before seeking final
approval from Ministry of Finance.

Use of GDRs:

The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes:

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.

The FIPB Route – 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.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT - October 8th, 2010

Private foreign investment plays an important role in the economic development of the
recipient countries.

1. Private foreign investment goes directly into capital formation and thus it
constitutes a net addition to investible resources in the recipient country. Thus it helps in
pushing up the rate of growth of the economy.

2. Being subject to business calculation of private profit it is likely to be employed

more productively as compared to public financial aid.

3. Foreign investment may also induce more domestic investment. For instance,
ancillary domestic units can be set up to ‘feed’ the main industrial unit set by the foreign
investor.
4. By setting an example, and through the training that they sponsor, foreign
direct investments contribute to the transfer of technology to the underdeveloped
countries and in encouraging the growth of skills.

5. Since returns on foreign are linked to the profits earned by the firm, it is more
‘flexible’ as compared to foreign loans which are guided by rigid interest and other
requirements.

The flow of direct foreign investment to India has been comparatively limited because of
the type of industrial development strategy and the very cautions foreign investment
policy followed by the nation.

Direct foreign investment (private) in India was adversely affected by the following
factors.

The public sector was assigned a monopoly or dominant position in the most important
industries and therefore, the scope of private investment, both domestic and foreign, was
limited.

When the public sector enterprises needed foreign technology or investment, there was a
marked preference for the foreign government sources.

Government policy towards foreign capital was very selective. Foreign investment was
normally permitted only in high technology industries in priority areas and is export-
oriented industries.

Foreign equity participation was normally subject to celeing or 40%, although exceptions
were allowed on merit.

Payment of dividends aboard, repatriation of capital etc as well as inward remittances

were subject to strigent laws like the foreign Exchange Regulations Act (FERA), 1973.
These discouraged foreign investment.

Corporate taxation was high and tax laws & procedure were Complex.

Those factors either limited the scope of or discouraged the foreign investment in India.

Government Policy.:- India was following a very restrictive policy towards foreign capital
and Technology. Foreign collaboration was permitted only in fields of high priority and in
also where the import of foreign technology was considered necessary. Import of
technology was considered on merits if substantial exports were guaranted over a
powered of 5 to 10 years and if there were reasonable proposals for such exports. The
government had issued list of industries where:

Foreign investment may be permitted.

Only foreign technical collaboration may be permitted.

No foreign collaboration either financial or technical was considered necessary.

The government policy on foreign equity participation was selective. This type of
participation had to be justified w.r.t. factors like nature of Technology involved. Foreign
share capital was to be by way of cash without being liked to wed Imports of machinery
and equipment or to payments for trademark brandnames etc.

The Foreign Exchange Regulation Act (FERA) served as a too for implementing the
national policy on foreign private investment in India. The FERA empowered the Reserve
Bank of India to regulate or exercise direct control over the activities of foreign
companies and foreign nationals in India.

According to FERA, non-residents, foreign citizens resident in India and foreign companies
required the permission of the RBI to accept appointment as agents or technical
management advisers in India.

The trading, commercial and industrial activities in India of persons resident abroad,
foreign citizens in India and foreign companies were regulated by The FERA. They had to
obtain permission from the RBI for carrying on in India any activity of a trading,
commercial and industrial nature, opening branches or other places of business in India
acquiring any business undertaking in India and purchasing shares of India companies.

The New Policy:- The industrial policy statement of July 24, 1991, which observes that
while freeing the Indian economy from official controls, opportunities for promoting
foreign investment in India should also be fully exploited has liberalized and Indian policy
towards foreign investment & technology. In pre-liberalisation era, foreign equity
participation was restricted to 40% and foreign investment and technology agreements
needed prior approval. New policy has allowed majority foreign equity with automatic
approval in a large no of industries.

The new policy also made the import of capital goods automatic provided the foreign
exchange requirement for such import is ensured through foreign equity.

Salient features of initiatives under new policy includes the following:-

The automatic route has subsequently been expanded very significantly & now there are
different categories of industries on the basis of the celing of foreign equity participation.

Industries in which FDI does not exceed 26%.

Industries in which FDI does not exceed 50%.

Industries in which FDI does not exceed 51%.

Industries in which FDI does not exceed 74%.

Industries in which upto 100% foreign equity is permitted.

In Feburary 2000, government took a major decision to place all items under the
automatic route for FDI/NRI/OCB (Overseas Corporate Bodies) Investment except for a
small negative list which include:

Automatic Approval by RBI is available for any proposal with lumpsum payment not
exceeding us $2 million and royaltly of upto 5% on domestic sales & eight percent on
exports.

In all other cases, the Project Approval Board (PAB) considers the proposals and makes
recommendations to the Industry Ministry regarding approval.

Foreign direct investment (International Marketing)

FDI is the ownership and control of foreign assets in practice, FDI usually involves the
ownership of the whole or partial of a company in the foreign country, this equity
investment can take the variety of forms

Individuals

Group of related individuals

An Incorporated

An Unincorporated

Public or Private Companies

Group of Related Enterprises

A Government Body

Foreign direct investment

Foreign direct investment (FDI) refers to long term participation by country A into country
B. It usually involves participation in management, joint-venture, transfer of technology
and expertise. There are two types of FDI: inward foreign direct investment and
outward foreign direct investment, resulting in a net FDI inflow (positive or negative).

Inward FDI for an economy can be defined as the capital provided from a foreign direct
investor (i.e. the coca cola company) residing in a country, to that economy, which is
residing in another country. (i.e. China's economy).

EXAMPLE: General Motors decides to open a factory in Malaysia. They are going to need
some capital. That capital is inward FDI for Malaysia.

Outward FDI is contrast with Inward FDI

History

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets,

such as factories, mines and land. Increasing foreign investment can be used as one
measure of growing economic globalization. Figure below shows net inflows of foreign
direct investment as a percentage of gross domestic product (GDP). The largest flows of
foreign investment occur between the industrialized countries (North America, Western
Europe and Japan). But flows to non-industrialized countries are increasing sharply.

US International Direct Investment Flows:

Period FDI Outflow FDI Inflows Net

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn

1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn

1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn

1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn

2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn

Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Types

A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:[citation needed]

an individual;

a group of related individuals;

an incorporated or unincorporated entity;

a public company or private company;

a group of related enterprises;

a government body;

an estate (law), trust or other societal organisation; or

any combination of the above.

Methods

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:[citation needed]

low corporate tax and income tax rates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ - Export Processing Zones

Bonded Warehouses

Maquiladoras

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

derogation from regulations (usually for very large projects)

Foreign Direct Investment

INTRODUCTION

Consistent economic growth, de-regulation, liberal investment rules, and operational

flexibility are all the factors that help increase the inflow ofForeign direct investment or
FDI.FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor. FDIs require a
business relationship between a parent company and its foreign subsidiary. Foreign direct
business relationships give rise to multinational corporations. For an investment to be
regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of
its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power
in a business enterprise operating in a foreign country.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This
classification is based on the types of restrictions imposed, and the various prerequisites
required for these investments. 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 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." Different economic factors encourage inward FDIs.
These include interest loans, tax breaks, grants, 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. Other
categorizations of FDI exist as well.

Vertical Foreign Direct Investment

Vertical Foreign Direct Investment takes place when a multinational corporation owns
some shares of a foreign enterprise, which supplies input for it or uses the output
produced by the MNC.

Horizontal foreign direct investments

Horizontal foreign direct investments happen when a multinational company carries out a
similar business operation in different nations. Foreign Direct Investment is guided by
different motives. FDIs that are undertaken to strengthen the existing market structure or
explore the opportunities of new markets can be called "market-seeking FDIs."
"Resource-seeking FDIs" are aimed at factors of production which have more operational
efficiency than those available in the home country of the investor. Some foreign direct
investments involve the transfer of strategic assets. FDI activities may also be carried out
to ensure optimization of available opportunities and economies of scale. In this case, the
foreign direct investment is termed as "efficiency-seeking."

Benefits of Foreign Direct Investment

* Growth of capital stock

* Incorporated technologies

* Possibilities to gain managerial and labor skills

* Higher incomes and economic development. (Taxation for public sector)

- Finance education

- Finance health

- Finance infrastructure development, etc.

- Resource -transfer

- Employment

- Balance-of-payment (BOP)
 * Import substitution

* Source of export increase

Costs of Foreign Direct Investment

* Adverse effects on the BOP

- Capital inflow followed by capital outflow + profits

- Production input importation

* Threat to national sovereignty and autonomy

- Loss of economic independence

Advantages

Economic development

Foreign direct investment is that it helps in the economic development of the particular
country where the investment is being made. This is especially applicable for the
economically developing countries. During the decade of the 90s foreign direct
investment was one of the major external sources of financing for most of the countries
that were growing from an economic perspective. It has also been observed that foreign
direct investment has helped several countries when they have faced economic
hardships. An example of this could be seen in some countries of the East Asian region. It
was observed during the financial problems of 1997-98 that the amount of foreign direct
investment made in these countries was pretty steady. The other forms of cash inflows in
a country like debt flows and portfolio equity had suffered major setbacks. Similar
observations have been made in Latin America in the 1980s and in Mexico in 1994-95.

Transfer of technologies

Foreign direct investment also permits the transfer of technologies. This is done basically
in the way of provision of capital inputs. The importance of this factor lies in the fact that
this transfer of technologies cannot be accomplished by way of trading of goods and
services as well as investment of financial resources. It also assists in the promotion of
the competition within the local input market of a country.

Human capital resources

The countries that get foreign direct investment from another country can also develop
the human capital resources by getting their employees to receive training on the
operations of a particular business. The profits that are generated by the foreign direct
investments that are made in that country can be used for the purpose of making
contributions to the revenues of corporate taxes of the recipient country.

Job opportunity

Foreign direct investment helps in the creation of new jobs in a particular country. It also
helps in increasing the salaries of the workers. This enables them to get access to a
better lifestyle and more facilities in life. It has normally been observed that foreign direct
investment allows for the development of the manufacturing sector of the recipient
country. Foreign direct investment can also bring in advanced technology and skill set in
a country. There is also some scope for new research activities being undertaken.

Income generation

Foreign direct investment assists in increasing the income that is generated through
revenues realized through taxation. It also plays a crucial role in the context of rise in the
productivity of the host countries. In case of countries that make foreign direct
investment in other countries this process has positive impact as well. In case of these
countries, their companies get an opportunity to explore newer markets and thereby
generate more income and profits.

Export/Import

It also opens up the export window that allows these countries the opportunity to cash in
on their superior technological resources. It has also been observed that as a result of
receiving foreign direct investment from other countries, it has been possible for the
recipient countries to keep their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest.
The biggest beneficiaries of these facilities are the small and medium-sized business
enterprises.

Foreign direct investment leads to increase in profits within different industries as well as
tax cuts and expanded marketability for singularly differing industries. Often times
procurement of properties, buildings, and labor can be obtained at a fraction of the cost
in host countries than would be the case within the company's home country. While this
may seem unfair, it is a good idea to keep in mind the host countries economy and
market. Companies are often forced to abide by local regulations rather than the
regulations of their home country. On the other side of the coin, the host country benefits
due to the increase in jobs it produces in the regional labor market to which the
investment companies reach out to. Often times dying economies can be revived in the
process of becoming a host for certain industries or markets in which that industry or
market had not previously been. This is especially the case with third world countries that
are trying to catch up to industrial nations or who need a boost due to changes in
regional climates or in the advent of recovery from the aftermath of civil or world war.

Foreign direct investment (FDI) in its classic definition, is defined as a company from one
country making a physical investment into building a factory in another country. Its
definition can be extended to include investments made to acquire lasting interest in
enterprises operating outside of the economy of the investor. [1] The FDI relationship
consists of a parent enterprise and a foreign affiliate which together form a Multinational
corporation (MNC). In order to qualify as FDI the investment must afford the parent
enterprise control over its foreign affiliate. The IMF defines control in this case as owning
10% or more of the ordinary shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm; lower ownership shares are known as portfolio
investment.

HISTORY

In the years after the Second World War global FDI was dominated by the United States,
as much of the world recovered from the destruction brought by the conflict. The US
accounted for around three-quarters of new FDI (including reinvested profits) between
1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no
longer the exclusive preserve of OECD countries.

FDI has grown in importance in the global economy with FDI stocks now constituting 28
percent of global GDP.

us international direct inlows

Foreign direct investment (FDI) is an integral part of an open and effective International
economic system and a major catalyst to development. Yet, the benefits of FDI do not
accrue automatically and evenly across countries, sectors and local communities.
National policies and the international investment architecture matter for attracting FDI
to a larger number of developing countries and for reaping the full benefits of FDI for
development. The challenges primarily address host countries, which need to establish a
transparent, broad and effective enabling policy environment for investment and to build
the human and institutional capacities to implement them.

IN India

India Will Achieve its FDI Target This Year

Even as liquidity in the Indian economy is drying up, the government has ssured the
people that enough money is flowing in. Kamal nath, India's commerce and industry
minister, announced that while export grew to 30 percent in October, FDI will rise above
US$35 billion by the end of this year, meeting the governments target. Earlier he had
mentioned that during April-August this year, India had already received US$14.6 billion
in FDI.

"The huge growth in FDI in India despite global economic slowdown shows how sound and
resilient our economy is," Kamal Nath said, adding there was nothing to worry at all. "In
August, FDI growth was 124 % and 219% in July this fiscal, which is an indicator to the
fact that India with its strong fundamentals can tide over global financial crisis, "he told
the Times of India, hinting that India is still an attractive investments destination. Mr Nath
told the Economic Times that FDI increase must be seen as a positive sign in the context
of global slowdown. The manufacturing sector received US$5 bn during April-August, an
year-on-year rise of 41 percent.

Major investments this year involved the Royal bank of Scotland buying shares in
Reliance Ports and Terminals for US$382 million and DE Shaw Composite Investment
pouring in US$384 million in DLF Assets.