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FOREIGN DIRECT INVESTMENT

1.1. FOREIGN INVESTMENT
Any investment flowing from one country to another country is foreign investment. The management of a business enterprise in a foreign country is foreign investment. Indian Government classifies foreign investment in the following form: Foreign direct investment (FDI) Foreign institutional investment (FII) Non-resident Indian (NRI) investment

1.2. ENTRY OPTIONS FOR FOREIGN INVESTORS

A foreign company planning to set up business operations in India has the following options: Incorporate a company under the Companies Act, 1956 through: Joint Venture or Wholly owned Subsidiary Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the sector/area of activities under the FDI policy. Enter as a Foreign Company through: Liaison Office/Representative Office Project Office Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management Regulations, 2000 (Establishment in India of branch or office of other place of business).

1.3. DIFFERENCE BETWEEN FDI AND FII

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor."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 UN 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. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment. FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built.
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FII generally means portfolio investment by foreign institutions in a market which is not their home country. These institutions are generally Mutual Funds, Investment Companies, Pension Funds, and Insurance Houses. Their investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs.

1.4. DIFFERENT TYPES OF FDI IN INDIA

Foreign direct investment (FDI) is permitted in India as under the following form: Financial collaborations Joint ventures and technical collaborations Capital markets via Euro issues Private placements or preferential allotments

1.5. COUNTRY CONTRIBUTION LIST OF FDI IN INDIA

The major countries contributing to the FDI inflow in India are Mauritius, USA, UK, Singapore etc. Mauritius is the largest contributor in the cumulative FDI flow during the period of 20002009 as shown in Pie-chart and table given below.

PERCENTAGE
MAURITIUS SINGAPORE U.S.A. U.K. NETHERLANDS JAPAN CYPRUS GERMANY FRANCE

Top ten investing (FDI Equity) countries (In Rs. Crore) Ranks Country 2006-07 2007-08 2008-09 (April(April(AprilMarch) March) March)

2009-10 (AprilSept. 09)

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

MAURITIUS SINGAPORE U.S.A. U.K. NETHERLA NDS JAPAN CYPRUS GERMANY

28,759 (6,363) 2,662 (578) 3,861 (856) 8,389 (1,878) 2,905 (644) 382 (85) 266 (58)

540 (120) 9. FRANCE 528 (117) 10. U.A.E. 1,174 (260) TOTAL FDI INFLOWS 70,630 (15,726)

44,483 (11,096) 12,319 (3,073) 4,377 (1,089) 4,690 (1,176) 2,780 (695) 3,336 (815) 3,385 (834) 2,075 (514) 583 (145) 1,039 (258) 98,664 (24,579)

50,794 (11,208) 15,727 (3,454) 8,002 (1,802) 3,840 (864) 3,922 (883) 1,889 (405) 5,983 (1,287) 2,750 (629) 2,098 (467) 1,133 (257) 122,919 (27,329)

31,761 (6,520) 5,763 (1,187) 5,991 (1,244) 1,364 (282) 2,761 (571) 3,857 (793) 3,871 (794) 1,815 (375) 891 (185) 2,344 (484) 74,378 (15,312)

Cumulati ve Inflows (April 00 to Sept. 09) 193,034 (43,385) 39,615 (8,998) 33,951 (7,579) 24,268 (5,508) 18,614 (4,161) 15,082 (3,324) 13,920 (3,067) 11,304 (2,548) 6,373 (1,412) 6,350 (1,404) 467,504 (105,153 )

%age to total Inflows (in terms of rupees) 44 % 9% 8% 5% 4% 3% 3% 3% 1% 1% -

2. RELATIONSHIP OF FOREIGN DIRECT INVESTMENT WITH MACRO ECONOMIC FACTORS

2.1. FOREIGN DIRECT INVESTMENT AND GDP OF INDIA

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 correlation

FDI ('000 US $ millions) 2.401 5.181 6.789 8.151 6.014 15.699 15.366 21.453 29.082 34.36 0.938670291

GDP ('00000 In Rs Crore) 17.86525 19.25017 20.97726 22.61415 25.38171 28.77706 23.82068 27.46928 43.03654 50.234

60 50 40 30 20 10 0 Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 FDI ('000 US $ millions) GDP ('00000 In Rs Crore)

Foreign direct investment shows a strong correlation with GDP in the last decade (1998-2007). The correlation value for the same is 0.9386. Please refer to above table for detailed data. FDI shows a strong linear correlation with the GDP of India. Correlation value of 0.9386 shows the strength of the correlation between the two parameters.

2.2. FOREIGN DIRECT INVESTMENT AND EMPLOYMENT GROWTH

Total (Public + Private) in millions 37.43 39.14 40.09 40.37 41.34 42 41.17 41.39 40.46 39.35 41.47 FDI in US $ millions 21.44 28.21 35.57 24.62 21.55 40.29 61.3 50.35 43.22 60.51 89.61

Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Correlation

0.40703468

140 120 100 80 60 40 20 0 1999-2000 1995-96 1996-97 1997-98 1998-99 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 FDI in US $ millions Total (Public + Private) in millions

The correlation value is 0.407, signifies that there is no strong correlation between foreign direct investment in India and employment i.e employment doesnt depend only on FDI. For detailed data analysis, please refer to above table and graph.

2.3. FDI AND INFLATION (WPI)

Year WPI

1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 correlation
4000 3500 3000 2500 2000 1500 1000 500 0

121.6 127.2 132.8 140.7 145.3 155.7 161.3 166.8 175.9 187.3 195.6 206.2 215.7

FDI in ('0 US $ millions) 214.4 282.1 355.7 246.2 215.5 402.9 613 503.5 432.2 605.1 896.1 2282.6 3436.2 0.786925483

FDI in ('0 US $ millions) WPI

The correlation derived between Wholesale Price Index (WPI) and FDI is 0.786 which shows the strength of the correlation between the two parameters. For detailed data analysis, please refer to above table and graph.

1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

2.4. FOREIGN DIRECT INVESTMENT AND IIP

Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 correlation
4000 3500 3000 2500 2000 1500 1000 500 0 1999-2000 1995-96 1996-97 1997-98 1998-99 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 FDI in 10 Million IIP

IIP 123.3 130.8 139.5 145.2 154.9 162.6 167 176.6 189 201.8 221.5 247.1 268 0.869082

FDI in 10 Million 214.4 282.1 355.7 246.2 215.5 402.9 613 503.5 432.2 605.1 896.1 2282.6 3436.2

The correlation derived between Foreign direct Investment and Index for Industrial Production (IIP) shows strong relationship with value of 0.869 for a linear correlation. For detailed data analysis, please refer to above table and graph.

3. Sector wise FDI Inflows

Ranks Sector 2006-07 (AprilMarch) 2007-08 (AprilMarch) 2008-09 (AprilMarch) 2009-10 (AprilSept. 09) Cumulati ve Inflows (April 00 to Sept. 09) 97,235 (21,876) % age to total Inflows (In terms of rupees) 22 %

1.

2.

3. 4.

5.

6. 7.

SERVICES SECTOR (financial & nonfinancial) COMPUTE R SOFTWAR E& HARDWA RE TELECOM MUNI HOUSING & REAL ESTATE CONSTRUC TION ACTIVITIE S (including roads & highways) POWER AUTOMOB ILE INDUSTRY METALLU RGICAL INDUSTRI ES PETROLEU M& NATURAL GAS CEHMICAL S (other than fertilizers)

21,047 (4,664)

26,589 (6,615)

28,411 (6,116)

12,782 (2,627)

11,786 (2,614)

5,623 (1,410)

7,329 (1,677)

2,107 (434)

41,603 (9,388)

9%

2,155 2,121 (467) 4,424 (985)

5,103 8,749 (2,179) 6,989 (1,743)

11,727 12,621 (2,801) 8,792 (2,028)

9,815 9,193 (1,894) 4,814 (991)

38,182 32,975 (7,407) 26,991 (6,182)

9% 7%

6%

713 (157) 1,254 (276) 7,866 (173)

3,875 (967) 2,697 (675) 4,686 (1,177)

4,382 (985) 5,212 (1,152) 4,157 (961)

5,805 (1,197) 4,029 (833) 1,273 (263)

19,816 (4,387) 19,096 (4,222) 12,778 (2,987)

4% 4%

8.

3%

9.

401 (89)

5,729 (1,427)

1,931 (412)

1,019 (205)

11,196 (2,598)

3%

10.

930 (205)

920 (229)

3,427 (749)

617 (127)

10,185 (2,261)

2%

PERCENTAGE
SERVICES SECTOR COMPUTER SOFTWARE & HARDWARE TELECOMMUNICATION HOUSING & REAL ESTATE CONSTRUCTION ACTIVITIES POWER

4. Conclusion
From the analysis of above data, FDI is strongly correlated with GDP, WPI and IIP i.e. increase in FDI will result in increase in GDP, WIP, IIP while on the other hand FDI is not strongly correlated with Employment Growth i.e. Employment Growth is not strongly dependent on FDI.

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REFERENCES: FDI, FI, GDP, WPI, Unemployment and Currency statistics are taken from RBIs Indian Statistics Handbook 2009 mentioned below http://www.rbi.org.in. WPI figures from http://www.eaindustry.nic.in FDI inflows figures from http://dipp.nic.in IIP data flows from http://mospi.nic.in

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