What is FDI?

FDI is a measure of [ownership] of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. 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.

FDI provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Many of the Four Asian Tigers benefited from investment abroad. A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.

Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control. Consistent economic growth, de-regulation, liberal investment rule, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment or FDI. 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 FDI
1) Green Field Investment: Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry; multinationals are able to produce goods more cheaply (because of advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc). Another downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth. 2) Mergers and Acquisition: These occur when a transfer of existing assets from local firms to foreign firms take place. This is the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries 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 foreign company, with the local company becoming an affiliate of the foreign company. Unlike Greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. 3) Horizontal Foreign Direct Investment: This is the investment in the same industry abroad as a firm operates in at home. 4) Vertical Foreign Direct Investment: This takes 2 forms: (i) Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process. (ii) Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production process.

A foreign direct investor may be classified in any sector of the economy and could be any one of the following: a) An individual

b) A group of related individuals c) An incorporated or unincorporated entity d) A public company or private company e) A group of related enterprises f) A government body g) An estate (law), trust or other social institution h) Any combination of the above.

Various arguments for and against FDI

Arguments for FDI:
1. Receive more foreign exchange

2. Increase employment 3. Increases GDP 4. Development of skills 5. Increase in technology development 6. Increase competitiveness 7. Prices decrease (b/c efficiency increases)

Arguments against FDI:

1. GDP is greater than GNP as MNCs will take money out in the long term. 2. FDI might stop or leave. 3. Foreign companies employ expatriates.

Amount of inflow of FDI to our country in recent years

India ranks second in the world in terms of financial attractiveness, people and skills availability and business environment.

CUMULATIVE FDI EQUITY INFLOWS In Rs Crore Cumulative amount of FDI inflows (From April 2000 to March 2009) Amount of FDI inflows during 2008-9 (From April 2008 to January 2009) Cumulative amount of FDI Inflows (Up to April 2009) In US$ Million

3,93,020

89,819

105,673

23, 885

4,04,728

92,158

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India

FDI Equity Inflows (2008-09)

MONTHS Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 In Rs crore 15005 16563 10244 9627 9995 11676 7284 5305 6626 13347 In US$ Million 3749 3932 2392 2247 2328 2562 1497 1083 1362 2733

Year 2008-09 (Up to January 2009)

105673

23885

Year 2007-08 (Up to January 2008) YOY Growth (%) (+) 81

58203 (+) 65

14466

SOURCE: DIPP, Federal Ministry of Commerce & Industry, Government of India

Amount of FDI inflows ( April-March ) Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 2010-11 (up to March 2011) 2009-10 (up to March 2010) (In Rs. Crore) 9,697 10,135 6,429 8,359 6,196 9,754 6,185 7,328 9,094 4,725 5,785 4,833 88,520 123,120 (In US$ mn) 2,179 2,213 1,380 1,785 1,330 2,118 1,392 1,628 2,014 1,042 1,274 1,074 19,427 25,834

%age growth over last year

( - ) 28 %

( - ) 25 %

Note: Country & Sector specific analysis from the year 2000 onwards available, as Company-wise details are provided by RBI from January 2000 onwards only.

FDIs impact on Indian business units

1) Foreign direct investment (FDI) has risen considerably in post-reform India. The work and category of FDI has changed significantly since India has opened up to world markets. This has fueled high prospect that FDI may serve up as a channel to advanced economic growth. However, it turns out that the development effects of FDI differ extensively across sectors. FDI stocks and production are equally reinforcing the domestic manufacturing sector. 2) Approximately 50 sectors in Indias domestic manufacturing sector grew by 39 percent during the April December 2010 period, achieving the excellent growth category. 3) Exports from Indian SEZs grew by over 68 percent (to US$12.55 billion) as compared to the corresponding period of 2009-10. 4) Doosan Heavy Industries and Construction Co Ltd of South Korea has shown interest in setting up a power equipment manufacturing unit in Haryana to be fully owned by the overseas corporation. 5) India is quickly rising as a worldwide manufacturing hub with a huge number of companies changing their manufacturing base to the country. Furthermore, India has the largest number of companies, outside of Japan, that have been recognized for excellence in quality. 6) The government has issued the new Consolidated Foreign Direct Investment Policy, which came into effect April 1, 2010. 7) The government is also planning to set up National Manufacturing and Investment Zones (NMIZs).

Conclusion
In the post liberalization age, India has taken in a huge amount of FDI in a variety of sectors. The large market for computer hardware in India, coupled with the ease of use of skilled labor force in this sector, has boosted the FDI inflow. Soaring expansion prospects, in terms of increased utilization in India as well as increasing.