Foreign direct investment

Foreign direct investment (FDI) is direct investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive for investment or to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio which is a passive investment in the securities of another country such as stocks and bonds. As a part of the national accounts of a country FDI refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. 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) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements.

History
The figure below shows net inflows of foreign direct investment in the United States. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). US International Direct Investment Flows: Period FDI Inflow FDI Outflow Net Inflow $ 5.13 bn $ 40.79 bn $ 329.23 bn $ 907.34 bn + $ 37.04 bn + $ 81.93 bn $ 122.96 bn + $ 43.13 bn

196069 $ 42.18 bn 197079 $ 122.72 bn 198089 $ 206.27 bn 199099 $ 950.47 bn 200007 $ 1,629.05 bn Total $ 2,950.72 bn

$ 1,421.31 bn + $ 207.74 bn $ 2,703.81 bn + $ 246.88 bn

Types

1. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. 2. Platform FDI 3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.

Whereas Horizontal FDI decrease international trade as the product of them is usually aimed at host country, the two other types generally act as a stimulus for it.

Methods
The foreign direct investor may acquire 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: low corporate tax and individual income tax rates

tax holidays other types of tax concessions preferential tariffs special economic zones EPZ Export Processing Zones Bonded Warehouses investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation
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infrastructure subsidies R&D support

Global foreign direct investment

The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 & 2007. Foreign direct investment in the United States The United States is the worlds largest recipient of FDI. U.S. FDI totaled $194 billion in 2010. 84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. The $2.1 trillion stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of U.S. gross domestic product (GDP). Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs have been created by foreign companies, resulting in close to $314 billion in investment.US affiliates of foreign companies have a history of paying higher wages than US corporations. Foreign companies have in the past supported an annual US payroll of $364 billion with an average annual compensation of $68,000 per employee. Increased US exports through the use of multinational distribution networks. FDI has resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US.

Affiliates of foreign corporations spent more than $34 billion on research and development in 2006 and continue to support many national projects. Inward FDI has led to higher productivity through increased capital, which in turn has led to high living standards.

Foreign direct investment in China FDI in China, also known as RFDI (Renminbi foreign direct investment), has increased considerably in the last decade reaching $185 billion in 2010. China is the second largest recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial Crisis (global macroeconomic factors) but rebounded in 2010.

Foreign direct investment in India Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. According to Ernst and Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an increase of 25% to $50.8 billion. The worlds largest retailer Wal-Mart has termed Indias decision to allow 51% FDI in multi-brand retail as a first important step and said it will study the finer details of the new policy to determine the impact on its ability to do business in India. However this decision of the government is currently under suspension due to opposition from multiple political quarters.
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Foreign direct investment and the developing world FDI provides an inflow of foreign capital and funds, investment 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 suggest that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.

WHAT IS FII?
Foreign Institutional Investor (FII) is used to denote an investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). FIIs are involving in all sort of investments such as Bonds,equities,Mutual funds and various bills.FII is nothing but Foreign Institutional Investors. Below entities are called FIIs 1. Pension Funds 2. Mutual Funds 3. Insurance Companies 4. Investment Trusts 5. Banks 6. University Funds 7. Endowments 8. Foundations 9. Charitable Trusts 10. Asset Management Companies 11. Institutional Portfolio Managers 12. Trustees 13. Power of Attorney Holders

FDI VS FII

FDI FDI is an investment that a parent company makes in a foreign country FDI cannot enter and exit that easily Foreign Direct Investment targets a specific enterprise Foreign Direct Investment is considered to be more stable. FII FII is an investment made by an investor in the markets of a foreign nation. FII can enter the stock market easily and also withdraw from it easily. FII increasing capital availability in general FII is considered to be less stable.

TYPES OF ENTRY IN FOREIGN MARKET Exporting

Exporting is the process of selling of goods and services produced in one country to other countries. There are two types of exporting: direct and indirect. Direct exports Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in production concentrated in the home country and affording better control over distribution. Direct export works the best if the volumes are small. Large volumes of export may trigger protectionism. Types of Direct Exporting.

Sales representatives represent foreign suppliers/manufacturers in their local markets for an established commission on sales. Provide support services to a manufacturer regarding local advertising, local sales presentations, customs clearance formalities, legal requirements. Manufacturers of highly technical services or products such as production machinery, benefit the most form sales representation.

Importing distributors purchase product in their own right and resell it in their local markets to wholesalers, retailers, or both. Importing distributors are a good market entry strategy for products that are carried in inventory, such as toys, appliances, prepared food.

Advantages of direct exporting:

Control over selection of foreign markets and choice of foreign representative companies Good information feedback from target market Better protection of trademarks, patents, goodwill, and other intangible property Potentially greater sales than with indirect exporting.

Disadvantages of direct exporting:

Higher start-up costs and higher risks as opposed to indirect exporting Greater information requirements Longer time-to-market as opposed to indirect exporting.

Indirect exports An indirect export is the process of exporting through domestically based export intermediaries. The exporter has no control over its products in the foreign market. Types of indirect exporting:

Export trading companies (ETCs) provide support services of the entire export process for one or more suppliers. Attractive to suppliers that are not familiar with exporting as ETCs usually perform all the necessary work: locate overseas trading partners, present the product, quote on specific enquiries, etc.

Export management companies (EMCs) are similar to ETCs in the way that they usually export for producers. Unlike ETCs, they rarely take on export credit risks and
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carry one type of product, not representing competing ones. Usually, EMCs trade on behalf of their suppliers as their export departments.[8]

Export merchants are wholesale companies that buy unpackaged products from suppliers/manufacturers for resale overseas under their own brand names. The advantage of export merchants is promotion. One of the disadvantages for using export merchants result in presence of identical products under different brand names and pricing on the market, meaning that export merchants activities may hinder manufacturers exporting efforts.

Confirming houses are intermediate sellers that work for foreign buyers. They receive the product requirements from their clients, negotiate purchases, make delivery, and pay the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes the product it may become a trade representative. A potential disadvantage includes suppliers unawareness and lack of control over what a confirming house does with their product.

Nonconforming purchasing agents are similar to confirming houses with the exception that they do not pay the suppliers directly payments take place between a supplier/manufacturer and a foreign buyer.

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Advantages of indirect exporting:

Fast market access Concentration of resources for production Little or no financial commitment. The export partner usually covers most expenses associated with international sales

Low risk exists for those companies who consider their domestic market to be more important and for those companies that are still developing their R&D, marketing, and sales strategies.

The management team is not distracted No direct handle of export processes.

Disadvantages of indirect exporting:

Higher risk than with direct exporting Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting Inability to learn how to operate overseas Wrong choice of market and distributor may lead to inadequate market feedback affecting the international success of the company

Potentially lower sales as compared to direct exporting, due to wrong choice of market and distributors by export partners.

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Those companies that seriously consider international markets as a crucial part of their success would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who would want to avoid financial risk as a threat to their other goals.

Licensing
An international licensing agreement allows foreign firms, either exclusively or non-exclusively to manufacture a proprietors product for a fixed term in a specific market. Summarizing, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor earnings usually take forms of one time payments, technical fees and royalty payments usually calculated as a percentage of sales. As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government show for intellectual property and on the ability of the licensor to choose the right partners and avoid them to compete in each other market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both, licensor and licensee.

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Following are the main advantages and reasons to use an international licensing for expanding internationally:

Obtain extra income for technical know-how and services Reach new markets not accessible by export from existing facilities Quickly expand without much risk and large capital investment Pave the way for future investments in the market Retain established markets closed by trade restrictions Political risk is minimized as the licensee is usually 100% locally owned Is highly attractive for companies that are new in international business.

On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it as:

Lower income than in other entry modes Loss of control of the licensee manufacture and marketing operations and practices dealing to loss of quality

Risk of having the trademark and reputation ruined by a incompetent partner The foreign partner can also become a competitor by selling its production in places where the parental company is already in.

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Franchising
The Franchising system can be defined as: A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually includes: equipments, managerial systems, operation manual, initial trainings, site approval and all the support necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is limited to trademarks and operating know-how of the business. Advantages of the international franchising mode:

Low political risk Low cost Allows simultaneous expansion into different regions of the world Well selected partners bring financial investment as well as managerial capabilities to the operation.

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Disadvantages of the international franchising mode:

Franchisees may turn into future competitors Demand of franchisees may be scarce when starting to franchise a company, which can lead to making agreements with the wrong candidates

A wrong franchisee may ruin the companys name and reputation in the market Comparing to other modes such as exporting and even licensing, international franchising requires a greater financial investment to attract prospects and support and manage franchisees.

The key success for franchising is to avoid sharing the strategic activity with any franchisee especially if that activity is considered importance to the company. Sharing those strategic activities may increase the potential of the franchisee to be our future competitor due to the knowledge and strategic spill over.

Turnkey projects
A turnkey project refers to a project in which clients pay contractors to design and construct new facilities and train personnel. A turnkey project is way for a foreign company to export its process and technology to other countries by building a plant in that country. Industrial companies that specialize in complex production technologies normally use turnkey projects as an entry strategy.

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One of the major advantages of turnkey projects is the possibility for a company to establish a plant and earn profits in a foreign country especially in which foreign direct investment opportunities are limited and lack of expertise in a specific area exists. Potential disadvantages of a turnkey project for a company include risk of revealing companies secrets to rivals, and takeover of their plant by the host country. By entering a market with a turnkey project proves that a company has no long-term interest in the country which can become a disadvantage if the country proves to be the main market for the output of the exported process.

Wholly owned subsidiaries (WOS)

A wholly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. Greenfield investment and acquisition include both advantages and disadvantages. To decide which entry modes to use is depending on situations. Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to full control to the firm and has the most potential to provide above average return. Wholly owned subsidiaries and expatriate staff are preferred in service industries where close contact with end customers and high levels of professional skills, specialized know how, and customizations are required. Greenfield investment is more likely preferred where physical capital intensive plants are planned. This strategy is attractive if there are no competitors to buy or the transfer competitive advantages that consists of embedded competencies, skills, routines, and culture. Greenfield investment is high risk due to the costs of establishing a new business in a new country. A firm may need to acquire knowledge and expertise of the existing market by third
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parties, such consultant, competitors, or business partners. This entry strategy takes much time due to the need of establishing new operations, distribution networks, and the necessity to learn and implement appropriate marketing strategies to compete with rivals in a new market. Acquisition has become a popular mode of entering foreign markets mainly due to its quick access Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative. Acquisition has been increasing because it is a way to achieve greater power. The market share usually is affected by market power. Therefore, many multinational corporations apply acquisitions to achieve their greater market power require buying a competitor, a supplier, a distributor, or a business in highly related industry to allow exercise of a core competency and capture competitive advantage in the market. Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition can be estimated more easily and accurately. In overall, acquisition is attractive if there are well established firms already in operations or competitors want to enter the region. On the other hand, there are many disadvantages and problems in achieving acquisition success.

Integrating two organizations can be quite difficult due to different organization cultures, control system, and relationships. Integration is a complex issue, but it is one of the most important things for organizations.

By applying acquisitions, some companies significantly increased their levels of debt which can have negative effects on the firms because high debt may cause bankruptcy.

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Too much diversification may cause problems. Even when a firm is not too over diversified, a high level of diversification can have a negative effect on the firm in the long term performance due to a lack of management of diversification.

Joint venture
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when:

The partners' strategic goals converge while their competitive goals diverge The partners' size, market power, and resources are small compared to the Industry leaders

Partners are able to learn from one another while limiting access to their own proprietary skills

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include:

Conflict over asymmetric new investments Mistrust over proprietary knowledge Performance ambiguity - how to split the pie
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Lack of parent firm support Cultural clashes If, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Strategic alliance
A strategic alliance is a term used to describe a variety of cooperative agreements between different firms, such as shared research, formal joint ventures, or minority equity participation. The modern form of strategic alliances is becoming increasingly popular and has three distinguishing characteristics: 1. They are frequently between firms in industrialized nations 2. The focus is often on creating new products and/or technologies rather than distributing existing ones 3. They are often only created for short term durations

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Advantages of a strategic alliance Technology Exchange

This is a major objective for many strategic alliances. The reason for this is that many breakthroughs and major technological innovations are based on interdisciplinary and/or inter-industrial advances. Because of this, it is increasingly difficult for a single firm to possess the necessary resources or capabilities to conduct their own effective R&D efforts. This is also perpetuated by shorter product life cycles and the need for many companies to stay competitive through innovation. Some industries that have become centers for extensive cooperative agreements are:

Telecommunications Electronics Pharmaceuticals Information technology Specialty chemicals

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Global competition

There is a growing perception that global battles between corporations be fought between teams of players aligned in strategic partnerships.[35] Strategic alliances will become key tools for companies if they want to remain competitive in this globalized environment, particularly in industries that have dominant leaders, such as cell phone manufactures, where smaller companies need to ally in order to remain competitive.

Industry convergence

As industries converge and the traditional lines between different industrial sectors blur, strategic alliances are sometimes the only way to develop the complex skills necessary in the time frame required. Alliances become a way of shaping competition by decreasing competitive intensity, excluding potential entrants, and isolating players, and building complex value chains that can act as barriers.[36]

Economies of scale and reduction of risk

Pooling resources can contribute greatly to economies of scale, and smaller companies especially can benefit greatly from strategic alliances in terms of cost reduction because of increased economies of scale.

In terms on risk reduction, in strategic alliances no one firm bears the full risk, and cost of, a joint activity. This is extremely advantageous to businesses involved in high risk / cost activities such as R&D. This is also advantageous to smaller organizations which are more affected by risky activities.

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Alliance as an alternative to merger

Some industry sectors have constraints to cross-border mergers and acquisitions, strategic alliances prove to be an excellent alternative to bypass these constraints. Alliances often lead to full-scale integration if restrictions are lifted by one or both countries.

Disadvantages of strategic alliances Some strategic alliances involve firms that are in fierce competition outside the specific scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an advantage over the other. The benefits of this alliance may cause unbalance between the parties, there are several factors that may cause this asymmetry:

The partnership may be forged to exchange resources and capabilities such as technology. This may cause one partner to obtain the desired technology and abandon the other partner, effectively appropriating all the benefits of the alliance.

Using investment initiative to erode the other partners competitive position. This is a situation where one partner makes and keeps control of critical resources. This creates the threat that the stronger partner may strip the other of the necessary infrastructure.

Strengths gained by learning from one company can be used against the other. As companies learn from the other, usually by task sharing, their capabilities become strengthened, sometimes this strength exceeds the scope of the venture and a company can use it to gain a competitive advantage against the company they may be working with.
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RECENT TRENDS IN FDI

The fall in foreign direct investment (FDI) since 1999, and Chinas growing share, worries most developing countries. But an in-depth look reveals new and promising trends. The decline is largely a one-time adjustment following the privatization boom of the 1990s. FDI is coming from more countriesand going to more sectors. The conditions for attracting FDI vary by sector : in labor-intensive manufacturing, for example, efficient customs and flexible labor markets are key, while in retail access to land and equal enforcement of tax rules matter most. Sorting out the microeconomic issues by sector will be good not only for FDI but also for domestic investors. The flows of foreign direct investment (FDI) to developing countries have declined by 26 percent since 1999, while Chinas share has increased from 21 percent to 39 percent (figure 1). The large flows of FDI to banks and utilities dwindled following a series of disappointments for both investors and governments. China now has a commanding lead in manufacturing, with a large, qualified, low-cost, and flexible workforce. India seems to be following suit in the promising offshore services sector. As a result of all this, many developing countries regard their prospects for FDI as bleak. The gloom is particularly strong among Latin American and Southeast Asian countries, once the darlings of foreign investors. FDI levels in Africa, the Middle East, and South Asia have remained low. Eastern European countries are counting on integration with the European Union to help renew FDI flows.
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Reasons for hope

But a more in-depth look suggests a more complex and hopeful story. Despite the decline in FDI since 1999, its growth over the past 13 years has been phenomenal, averaging more than 17 percent annually in dollar terms. The decline since 1999 is due mostly to the drop in FDI following the boom in huge (one-time) privatization deals in the infrastructure, financial, and petroleum sectors in the 1990s. FDI in other sectors remained fairly constant (figure 2). This cyclical effect is confirmed by the much starker rise and fall pattern in FDI flows to industrial

countries over the same period. Another (hopefully one-time) factor driving the decline has been the macroeconomic crisis and uncertainties affecting Latin America. Positive impact on development While many observers believe that much of the FDI in the financial and infrastructure sectors yielded little impact, this perception does not stand up to in-depth analyses such as those by Luis
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Guasch (2002), Clive Harris (2003), and the McKinsey Global Institute (2003). These studies have shown that in almost all cases FDI had a largely positive impact on productivity (the key criterion for assessing long-term economic performance) and on the coverage of services. But ill-designed privatization processes, contracts, and regulations have often led to poor returns on investments or, in some cases, to excessive returns. The financial and infrastructure sectors are tricky to regulate as quasi natural monopolies, but FDI is not to blame for government shortcomings.In sectors where competition is stronger, FDI has had a much more obvious positive impact. A study of India by the McKinsey Global Institute (2001) showed that the removal of FDI restrictions in the automotive sector unleashed competition and investments, resulting in a threefold increase in productivity that translated into a threefold increase in output due to falling prices (figure 3). Employment also rose. So, once adjusted for the one-time events and government shortcomings, the fundamental picture of FDI is quite positive. China in perspective Chinas commanding FDI performance also should be put into perspective. While China accounts for 39 percent of the FDI to developing countries, it also accounts for almost 30 percent of the developing worlds population. In fact, relative to GDP, Chinas performance in attracting FDI is good but not extraordinary, with FDI at 3.8 percent of GDP in 19992002. Nineteen developing countries did better over the same period. Chinas performance looks even less extraordinary if adjusted for the round-tripping of FDI through Hong Kong (China), which some estimates suggest may account for as much as 30 percent of total FDI to China.

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New diversity in sources and destinations Another reason for hope is that the sources of FDI are increasingly varied. South-south FDI flows are expanding rapidly; they now account for more than 30 percent of FDI to developing countries, up from 17 percent in 1995. China and South Africa are becoming major players in Africa, for example, with about US$2.7 billion and US$1.6 billion of FDI there by 2001, the latest year for which statistics are available. That developing country are growing sources of FDI is doubly good news because these new players tend to be better equipped to invest in difficult and remote markets and to develop products and services better adapted to

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developing country consumers. The Turkish conglomerate Koc was the first company toopen hypermarkets in the Russian Federation with great success. Chinese electronics producers such as TCL know how to produce US$50 color televisions in India and Vietnam, while Maruti Suzuki in India is ready to export cars for US$2,000. These are low-spec products, but they are exactly what consumers in developing countries need, as they often face the unhappy choice between high-spec but unaffordable Western products and very low-spec but relatively expensive traditional products. Yet another reason to be hopeful is that the destination sectors of FDI also are becoming more varied. FDI has evolved from focusing primarily on natural resources, infrastructure, and manufacturing (export-driven or tariff jumping investment) to also covering banking, retail, construction, tourism, and offshore services. Cumulative FDI flows to the retail trade sector in the 20 largest developing countries amounted to US$45 billion in 19982002 (about 7 percent of the total to these countries). That too is good news, since more and more countries can hope to develop comparative advantages in a few of these new sectors. Moreover, FDI is increasingly market seeking rather than efficiency seeking (that is, export driven), offering opportunities to any country willing to open its markets or integrate with its

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neighbors. These encouraging FDI trends in the developing world should be expected to continue, since they mirror what has happened in the industrial world. Implications for governments So there is no reason for developing countries to despair. But in an increasingly competitive market, getting their fair share of FDI flows and benefits will be hard work. Attracting FDI will require a shift in mind-set for most developing country governments. Broadening the scope of FDI To start with, the scope of efforts to attract FDImust encompass all economic sectors. The tendency in the past was to focus almost exclusively on infrastructure and on efficiency-seeking and tariff-jumping FDI in manufacturing. In the future more and more FDI will be market seeking investment in service sectors as well as Investment in tourism and offshore services. Most developing countries continue to restrict FDI in service sectors (for example, India does not allow FDI in retail), yet are ready to waste fortunes to attract efficiency-seeking FDI for manufacturing in an uphill battle against China. There is a general misconception that Market-seeking FDI in domestic sectors such as retail yields little development impact. The opposite is true. FDI in retail has been a key driver of productivity growth in Brazil, Poland, and Thailand, resulting in lower prices and higher consumption. Large-scale foreign retailers are also forcing wholesalers and food processors to improve. And they are now becoming important sources of exports: Tesco in Thailand and Wal-Mart in Brazil are increasingly turning to local products to feed their global supply chains. Retail also happens to be a pillar of the tourism industry. The misconceptions about FDI are made worse by political economy factors: while attracting efficiency-seeking FDI does not affect incumbents, attracting market-seeking FDI usually does.

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Tackling microeconomic issues In addition to broadening the scope of efforts, countries must recognize that the battle for FDI will increasingly be fought at the microeconomic level sector by sector. Of course, foreign investors will continue to insist on basic political and macroeconomic stability, but this should become less important as a differentiating factor. Investors will look increasingly at microeconomic conditions, and what they look for will vary significantly from one sector to another. The requirements for efficiency-seeking investment in manufacturing are increasingly well understoodlow factor costs, a flexible labor market, a small regulatory burden, efficient infrastructure and customs. Less obvious factors include easy access to a competitive supplier base and business service providers. The factors required to attract FDI in domestic services are vastly differenta stable and smart regulatory environment for quasi-natural monopolies (a hard-won lesson from the 1990s), functioning land markets for retail, hotels, and construction. In addition, unfair competition from tax-evading, low-productivity informal players has been found to be among the biggest constraints to FDI growth in domestic services in most developing countries, and it tends to get worse over time. Resolving the microeconomic issues sector by sector will be good for FDI as well as fordomestic private investorsand thus key to boosting growth and reducing poverty. But most developing countries have a long way to go.

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ECONOMIC STRUCTURE OF INDIA

Indias economy: growing rapidly and unequally In 2010, Indias GDP in PPP terms was $3.92 trillion. By this reckoning, India.

Citi Investment Research and Analysis estimates that in a decade India will be the third-largest economy. Between 200001 and 200708, Indias real GDP growth averaged 7.3 per cent per annum. Growth rates have recently been around 9 per cent and sometimes in excess of 9 per cent, except for the period since 200809. In that year, GDP growth fell to 6.7 per cent in the face of the global financial crisis. GDP growth rate picked up the following year to 8 per cent. In 201011, real GDP growth is estimated to be 8.6 per cent and in 201112, to return to 9 per cent. With a population growth rate of about 1.7 per cent per annum (according to the latest Census of India), real GDP growth per capita has been in excess of 7 per cent per annum for several years. At this rate, real GDP per capita will double in about 10 years. Since the 1970s, average decadal growth rates of real GPD have gone up, even as the standard deviation of yearto-year growth has gone down (Table 1).
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TABLE 1 Average growth rate (% per Decade 1960-61 to 1969-70 1970-71 to 1979-80 1980-81 to 1989-90 1990-91 to 1999-2000 2000-01 to 2009-10 annum) 4.0 3.0 5.6 5.7 7.3 YtoY SD of growth rate 3.674007803 4.185225336 2.289323044 1.841768474 2.08019764

Source: Computed from Reserve Bank of India: Handbook of Statistics on the Indian Economy. Structure of economic growth in India The structure of Indias GDP has undergone immense transformation in the face of such rapid economic growth and has, in turn, contributed to it. During the 1960s, agricultural value added, as a percentage of GDP, was 42.5 per cent. Corresponding magnitudes for industry, manufacturing and services were, respectively, 20.3 per cent, 14.3 per cent and 37.2 per cent. In 2008, agriculture contributed 17.6 per cent of GDP, whereas the contributions of industry, manufacturing, and services were 29 per cent, 16 per cent and 53.4 per cent, respectively. This is an indicator both of Indias potential for further economic growth as well as that of a fundamental problem facing the economy how does one sector (agriculture), which contributes

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less than 18 per cent of GDP, support more than 60 per cent of Indias population? Within manufacturing, India has increasingly specialized in higher value added manufacturing. Contributors to Indias higher economic growth In a growth accounting sense, capital, labour and productivity growth have all contributed to enhanced rates of economic growth in India. Savings rates have gone up to about 34 per cent and investment to about 36 per cent, particularly since the 1990s. There is a very strong demographic dividend as the median age of the Indian population is around 25, indicating that the country is home to more than 600 million people below the age of 25. Further, this labour force is getting better trained (literacy rates are up to 74 per cent in the 2011 census). There is evidence that Total Factor Productivity in the production of aggregate GDP and in the manufacturing and services sectors has gone up, particularly since 1994. Agricultural productivity has not grown very quickly. Openness to trade and investment went up sharply, particularly during the period 200207. Even after the global financial crisis, India continued its policy of trade liberalization, with average manufacturing sector tariffs now down to 12 per cent or less. All these factors imply that economic growth rates in India will stay high and, given the increasing demographic dividend, may even accelerate.

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Short-term issues with economic growth Drought in 200809, following the sharp global rise in food prices in 2007, led to high food inflation, which has now been passed on to the general price level, particularly in light of recurrent commodity price shocks. Anti-inflation policy in the form of higher lending rates has tended to dampen investor sentiments. Economic growth and poverty alleviation in India High rates of economic growth in India imply that there has been a substantial reduction in levels of poverty. But the elasticity of poverty reduction with respect to economic growth is lower in India than in many Asian countries, essentially because of the structure of economic growth. This implies that inequality (both personal as well as spatial) has increased, particularly of incomes (as opposed to consumption where inequality is lower), but is still well below that of many emerging economies.

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ECONOMIC STRUCTURE OF CHINA

Structural changes in Chinas economy gave more authority to local officials and plant managers, and permitted a wide variety of small-scale enterprises in the service and light manufacturing sector to boom. Due to its increasing openness to foreign trade and investment, in 1999, China became the second largest economy of the world after the USA. Since 1978, China has been moving towards a market oriented economy. China de-collectivized agriculture, yielded tremendous gains in production. Driven by a sharp rise in the procurement price paid for crops and what amounted to the semi-privatization of agriculture. The share of agricultural output in total GDP rose from 30 percent in 1980 to 33 percent three years later. However, the share of agriculture started falling shortly after, and by 2002 it accounted for only 15.4 percent of GDP. In 2010, the agriculture sector accounted for 10.9 percent of GDP, 48.6 percent from industry and 40.5 percent from services. 39.5 percent of the 812.7 million labor force is employed in agriculture, 27.2 percent in industry and 33.2 percent in services. Most of China's agricultural production is restricted to the east of the country. China is the world's largest producer of rice and wheat - for cash crops, China ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and sugar beets. China also ranks first in world production of red meat (including beef, veal, mutton, lamb, and pork). Due to improved technology, the fishing industry has grown considerably since the late 1970s.
35

Apart from crops and food products, China is one of the world's major mineral-producing countries. Coal is the most abundant mineral (China ranks first in coal production). There are also extensive iron-ore deposits in China; the largest mines are at Anshan and Benxi, in Liaoning province. Oil fields were discovered in the 1960s and turned China into a net exporter, and by the early 1990s, China was the world's fifth-ranked oil producer. Growing domestic demand beginning in the mid-1990s however, has forced the nation to import increasing quantities of petroleum. Coal is the single most important energy source; coal-fired thermal electric generators provide over 70 percent of the country's electric power. China also has extensive hydroelectric energy potential. ROLE OF STATE vs MARKET IN CHINA Until 1978, industrial output was dominated by large state-owned enterprises (SOEs). Gradually, the share of state-owned and state-holding enterprises in gross industrial output value had shrunk; in 2002 it was around 41 percent. However, state-owned companies, controlled by economic ministries in Beijing (Capital of China), represented only 16 percent of industrial output. State-holding enterprises may control large numbers of state firms, and are not 100 percent state-owned. The changes in economic policy, including decentralization of control and the creation of "special economic zones" to attract foreign investment, led to considerable industrial growth, especially in light industries that produce consumer goods.

36

2010 Chinas Economic Indicators at a Glance: Geography: Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South China Sea, between North Korea and Vietnam Terrain: mostly mountains, high plateaus, deserts in west; plains, deltas, and hills in east Climate: extremely diverse; tropical in south to subarctic in north Natural Resources: coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, rare earth elements, uranium, hydropower potential (world's largest) Population: 1.341 billion Age groups: 0-14 years: 19.8%; 15-64 years: 72.1%; 65 years and over: 8.1% Labor Force: agriculture: 39.5% industry: 27.2% services: 33.2% Unemployment: 4.1 %.

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ECONOMIC STRUCTURE OF MEXICO

Mexico is the 12th largest economy in the world, with an estimated GDP (PPP) of US$1.567 trillion in 2010. Throughout history, Mexico has gone through several crisis, but the most notable ones that they suffered greatly is during the 1994 Mexican Peso crisis, and the 2008 global financial crisis.

The Mexican Peso crisis in 1994 was caused by the Mexico's government decision to devalue the peso. This resulted in a financial crisis that cut the value of peso into half, create high inflation and set forth a severe recession in Mexico. The country is hit with massive lay-offs and loss of foreign investments. GDP (Constant Prices, National Currency) in 1995 contracts by 6.22 percent, the worst decline in the country history. Mexico's economy recovered with the aid of a US$50 billion bailout from the United States, the IMF and the Bank for International Settlements.

In 2008, the global financial crisis caused severe economic downturn in many countries, with Mexico one of the greatest hit country in Latin America. GDP (Constant Prices, National Currency) contracted by 6.11 percent, the highest contraction since the 1994 Mexican Peso crisis. As the Mexico's economy is heavily depended on U.S.'s, with 45 percent of Mexico's foreign investment come from US and 80.5 percent of Mexico's exports going to US, a fall in US demand for exports results in decreasing exports and rising unemployment in Mexico.

Mexico has signed numerous free trade agreements with more than 40 countries, with the most important FTA is the North American Free Trade Agreement (NAFTA) signed with the U.S. in 1994, that increased significant trade between Mexico and North America countries, the United

38

States and Canada. Mexico is also a member of the World Trade Organization (WTO), G-20, Organization for Economic Cooperation and Development (OECD), Asia Pacific Economic Cooperation (APEC) and the Caribbean Community (CARICOM).

Economic Geography

Mexico has a land area of 1.943 million square kilometers, with 12.66 percent of arable land. With only a small percentage of arable land, Mexico generates significant revenue from the production of crops such as corn, tomatoes, sugar cane, dry beans and avocados, and also the production of beef, poultry, pork and dairy products too.

Mexico is also the world's 7th largest oil producer in 2009, with 3.001 million barrels produced per day, and they are the 2nd largest oil supplier to US. The country is also rich in natural resources, namely silver, copper, gold, lead, zinc and timber.

Population and Labour Force

Mexico has a population of 108.627 million people as of 2010, with a labor force of 46.99 million people. In 2010, the unemployment rate in Mexico is 5.373 percent.

Mexico's labour force includes a growing informal sector, which is mostly poor workers, is estimated to make up 28.8 percent of the total labour force. It is observed that there is an increasing trend of growth in the informal sector, even with a decline in unemployment rate. Hence, it is likely that due to the economic crisis in 2008 that more people have moved from the formal to the informal sector.

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Mexico also has a net emigration rate at negative 3.24 migrants/1,000 population. The figure reflects the excess number of persons leaving the country. It is estimated that 10 percent of Mexico's population and 15 percent of its labor force is working in the United States. The high migration rate has also generated a huge inflow of foreign income into Mexico. In 2009, Mexicans working in the United States have sent a total of US$21.5 billion back home, contributing to 2.4 percent of Mexico's GDP.

Industry Sector

The industry of Mexico contribute 33.3 percent of the country's GDP in 2010. One of the most important sector in Mexico's industry is the automotive industry. Many major car manufactures set up their operations in Mexico, including General Motors, Ford, Chrysler, BMW, Toyota, Honda, Volkswagen and Mercedes Benz. Instead of just functioning as an assembly manufacturer, the automotive industry also functions as a center for research and development for car manufacturing companies.

Electronics is one of the fastest growing sector in Mexico and it is the 2nd largest supplier of electronics to the U.S. after China. In 2007, Mexico is the largest producers of televisions, ahead of China and South Korea, and also became the world's largest producer of smartphones. In 2009, the Mexican government's initiative of the PCIEAT, Program for the Electronics and High Technology Industry Competitiveness, aims to make Mexico one of the top 5 global exporter of electronic goods.

In 2010, services in Mexico contributes 62.5 percent to the nation's overall GDP, with two of its most important sectors coming from the tourism and financial and banking services.
40

Mexico came in the first in the number of foreign tourists among Latin America countries, second in the Americas, and tenth in the world, with more than 21.45 million visitors in 2009. Tourism in Mexico is supported by 3.254 million jobs in the country, which makes up 7.3 percent of total labour force, and expects to contribute 13 percent to the overall GDP in 2011.

Mexico has a banking system which is financially strong with banks which are well-capitalized. More foreign companies are entering its banking sector with an increasing number of foreign institutions merging with local companies. The acquisitions and mergers of foreign institutions with local companies have helped Mexico recover from its currency crisis in 1994.

The Mexican Stock Exchange is the second largest stock exchange in Latin America, and forth largest in North America, with a value estimated at US$700 billion. It's stock exchange is also closely related to the US market. Hence, Mexico's stock exchange is highly influenced by any movements and developments in the New York and Nasdaq stock exchanges, as well as any interest rate changes in the US.

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INDIA
RECENT TRENDS IN INDIA Indias FDI Trends and Analysis India has emerged as the preferred destination for many foreign international enterprises due to constructive factors such as high economic growth, fast population growth, English speaking people, and lower costs for workers.

Location determinants of foreign direct investment Location-specific rewards are further classified by three types of FDI motives. 1. Market-seeking investment is undertaken to uphold existing markets or to exploit new markets. For example, due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting 2. When firms invest abroad to obtain resources not available in the home country, the investment is called resource- or asset-seeking. Resources may be natural resources, raw materials, or low-cost inputs such as labor 3. The investment is streamlined or efficiency-seeking when the firm can gain from the general governance of organically dispersed activities in the presence of economies of scale and scope The host country factors or fundamentals can be grouped in two categories: the first group comprises of natural resources, most kinds of labor, and proximity to markets. The second group include of a range of environmental variables that act as a function of political, economic, legal, and infra-structural factors of a host country.

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Indias inward investment rule went through a series of changes since economic reforms were escorted in two decades back. The expectation of the policy-makers was that an investor friendly command will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after 200506, official statistics started reporting steep increases in FDI inflows. Portfolio investors and round-tripping investments have been important contributors to Indias reported FDI inflows thus blurring the distinction between direct and portfolio investors on one hand and foreign and domestic investors on the other. These investors were also the ones which have exploited the tax haven route most.

Inward investments have been constantly rising since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups apart, foreign investors see huge long-term growth potential in the country. As much as 75 percent of global businesses already present in the country are looking to considerably expand their operations going forward according to the Indian attractive survey by Ernst & Young. This also confirms that India is undergoing a changeover, both in terms of investor perception of its market potential, and in reality.

With GDP growth anticipated to surpass 8 percent yearly and the number of people in the Indian middle class set to triple over the next 15 years, with an equivalent impact on disposable income, domestic demand is expected to grow exponentially. Indias young demographic profile also helps it in providing an increasingly well-educated and cost-competitive labor force. These factors put India in a good position to attract an increasing proportion of global FDI.
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As project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a steady, if not dramatic, upward movement. Generally project numbers in 2010 were up 60 percent over 2003 and the number of jobs created up 30 percent. The strong domestic market enabled India to deliver a flexible performance during the global economic slowdown. India today is rising as a manufacturing destination, both for the domestic and global markets. As business leaders battle for growth in the new economy, there is a sense of urgency among leading players to grab the prospects offered by the Indian market.

With the liberty of the simplified compendium on foreign direct investment, numerous processes on FDI and associated routes of investment too are being ratified with a view to speed up the process of inflows into India.

The out of the country Indian investors too would find it simpler to entry nodal bodies and invest in India. Though, a note of caution the Reserve Bank of India too is attempting to legalize certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to invest in India. Its argument is that NRIs tend to invest much more than the cap allowed in the sectors through these other routes, thereby exceeding allowed limits for FDI. The government may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc.

More reforms to make investing in India a simpler process, such as FDI in multi-brand retail, defense production, and agriculture, are in the discussion stage and the government intends to bring out tangible policies in this direction. Proposals can also be sent to DIPP online. This facility will allow all abroad investors to speed up their investment proposals.

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Tax incentives to SEZ developers Income tax

Deduction from profits and gains from export of goods/services as follows (Section 10AA) 100 percent income tax exemption for first five years 50 percent income tax exemption for next five years Income tax exemption for next five years to the extent of profits Reinvested (maximum 50 percent) Capital gains tax exemption on relocation to SEZ (Section 54GA): This is a controversial issue as to be eligible for income tax exemption; the unit should be a new unit. Further, a press statement from Hon. Minister for Commerce and Industry, Mr. Kamal Nath, mentions that SEZs are basically for fresh investments

No TDS by overseas banking units on interest on deposits/borrowings from non-resident or person not ordinarily resident

No minimum alternate tax Transferee developer enjoys 100 percent income tax exemption for balance period of 10 assessment years

Indirect tax

SEZ units may import or procure from domestic sources duty free, all their requirements of capital goods, raw materials, consumables, spares, packaging materials, office equipment, DG sets for implementation of their project in the zone without any license or specific approval

No import duty on these goods imported

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No excise duty on these goods procured from domestic tariff area No service tax on services availed from domestic tariff area No value added tax and central sales tax on goods procured from domestic tariff area On goods procured from DTA, drawback under section 75 allowed to SEZ unit Goods imported/procured locally duty free could be utilized over the approval period of five years

Other incentives A foreign institutional investor investing in shares and securities in India would be accountable to tax at 10 percent on its long-term capital gains and 30 percent on short-term capital gains. The least amount period of investment in the case of equity shares would be more than one year to be considered long term, and three years in the case of other securities. Dividends, interest or longterm capital gains of an infrastructure capital fund or infrastructure Capital Company that earns from investments made on or after June 1, 1998 in any venture engaged in the business of developing, maintaining and working any infrastructure facility, and which has been permitted by the central Government, is not liable from tax. Dividends paid by local players to their shareholders are excused from tax. Though, the domestic corporation would have to pay an extra tax termed as tax on circulated profits which is computed at the rate of 10 percent of the amounts spread as dividends by the local company.

46

Current statistics Indian has been attracting foreign direct investment for a long period. The sectors like telecommunication, construction activities and computer software and hardware have been the major sectors for FDI inflows in India. As per the fact sheet on FDI, there was Rs. 6,30,336 crore FDI equity inflows between the period of August 1991 to January 2011. Top 10 investing FDI investing countries in India are Mauritius, Singapore, United States, UK, Netherlands, Japan, Cyprus, Germany, France and UAE. According to media reports, the decline in the FDI inflows would be a major concern for the economy, as the Indian economy is heading to reach the 9 percent growth rate.

The trend of declining FDI tells us very little about statistics of FDI as it refers to FDI equity inflows. Though, equity inflow is a better indicator of portfolio investment (also known as FII inflows) than of FDI. To understand this, it is essential to define FDI.

Definition of FDI is complex. The main reason is that unlike portfolio investment, FDI involves a bunch of activities like managerial inputs, technology infusion etc which are not measured in the equity definition of FDI.

For developing countries like India, the most important reason to attract FDI is the availability of better technology. This does not mean that overseas companies transfer technology. All studies stated that the presence of foreign companies which positively impacts productivity of domestic firms through learning the use of new technologies. This is really important than obtaining technology through purchases of drawings and designs. If we accept this, then a better indicator of FDI interest is the long term trends of FDI in India.

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Real FDI is increasing in India An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to around US$37 billion by 2009-10. It is now clear that FDI was related to the recessionary conditions in the western economies. In other words, the stock of FDI has jumped by almost US$100 billion since 2006-07. The recent flattening of monthly FDI flows is a sign more of recovery in the western economies than any loss of long term interest in the Indian economy. The monthly figure only shows that the incremental FDI is going back to the prerecession years rather than indicating decline of FDI into India. In fact, a monthly inflow of US$1.1 billion is about 30 percent higher than pre-recession years. Also, FDI is all about long term investment. Companies have already invested in to India and are unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue to inch upwards.

The crucial test for India is how to move from US$10-12 billion FDI economy to one where investment levels are US$30-40 billion.

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FDI INFLOWS IN INDIA FROM 1992-2010 TABLE 2

COUNTRY :-INDIA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 276,512,438.97 550,019,384.37 890,688,166.02 2,026,439,031.09 2,186,732,315.38 3,464,411,051.97 2,587,058,630.28 2,089,233,597.06 3,074,684,332.48 4,073,961,343.30 3,947,895,991.54 2,444,138,426.16 3,592,188,066.41 4,628,652,265.34 5,992,285,935.50 8,201,628,957.62 24,149,749,829.71 19,668,790,288.40 11,008,159,606.75

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TOTAL GDP OF INDIA YEAR WISE TABLE 3

COUNTRY :-INDIA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP (current US$) 245553170107.80 276037365895.65 323506143586.02 356298991324.31 388343910827.92 410915167039.78 416252442323.14 450476199267.53 460182031503.10 477848859030.57 507189954396.40 599461389810.15 721573248762.03 834035801005.14 951339358745.93 1242426253335.13 1215992812023.52 1377264718250.63 1727111096363.26

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GDP PER CAPITA INCOME OF INDIA TABLE 4

COUNTRY :-INDIA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP per capita (current US$) 278.1460456 306.9370229 353.2895091 382.2212355 409.3178258 425.6299684 423.8035786 450.9198997 452.9693998 462.8195234 483.6641802 563.1925702 668.2959016 761.9667042 857.2083286 1104.58803 1066.693175 1192.078146 1474.980824

51

CHINA
RECENT TRENDS IN CHINA An important part of the economic reform process in China has been the encouragement of foreign direct investment (FDI). Over the past decade, China has established itself as the top recipient of FDI among developing countries and second in the world after the United States. In 2006, inflows to China reached an estimated $69 billion, which represented 10% of world FDI flows. Investment began to pour into China after 1992, and annual inflows have been over 40 billion dollars since 1996. Trending steadily upward, FDI inflows were at 63 billion dollars in both 2004 and 2005. These inflows are by far the largest of any developing country and have remained remarkably stable and robust despite substantial fluctuations in the Asian and global economies. China has accounted for about one-third of total developing-country FDI inflows in recent years. China is not just a magnet for FDI but it is increasingly also a source of FDI. Although its outward investment is still small in absolute terms, especially compared to the huge inward flow, Chinas overseas enterprises have been quietly gaining importance as new sources of international capital. Chinas FDI outflows grew 32% to $16.1 billion in 2006. The recent merger of the television and DVD operations of TCL and Thomson as well as the acquisition

52

of IBMs personal computer division by Lenovo, highlight this trend. This essay takes a closer look at the structure, determinants and effects of Foreign Direct Investments into and from China. It traces the development of Chinas economic policy regarding FDI and the resulting changes in both inflows and outflows. The objective is also to discuss the determinants and impact of FDI on Chinas economic development. The expansion of FDI into and from China has been accompanied by a rapid economic growth and an increasing openness to the rest of the world. It is equally important to 2 understand why China has become one of the largest beneficiaries of FDI in the world and what drives the more recent progress of Chinas outward FDI. Trends and patterns of FDI A. Inward FDI 1- Inward FDI: trends and policies FDI flows to China have increased massively in recent years, reaching an estimated $69 billion in 2006, which represented 10% of world FDI flows (UNCTAD, 2006, p. 51). Since economic reforms launching in 1979, China has received a large part of international direct investment flows.China decided to accept foreign investment in 1978 and broke sharply with socialist orthodoxy in establishing Special Economic Zones (SEZ) in 1979 and

53

1980. Nationwide the impact of FDI was moderate until the early 1990s. As Figure 1 shows, beginning in 19921993, the stream of incoming FDI turned into a flood. China moved from restrictive to permissive policies in the early 1980s, then to policies encouraging FDI in general in the mid-1980s to policies encouraging more high-tech and more capital intensive FDI projects in the mid-1990s (Fung et al., 2004). During the permissive period, the Chinese government established four Special Economic Zones (SEZs) in Guangdong and Fujian provinces and offered special incentive policies for FDI in these SEZs. While FDI inflows were highly concentrated within these provinces, the amounts remained rather limited (Cheung and Lin, 2004). After 1984, Hainan Island and fourteen coastal cities across ten provinces were opened, and FDI levels really started to take off. The realized value of inward FDI to China reached US $3.49 billion in 1990. This kind of For an in depth presentation of FDI trends in China, refer to OECD (2000). preferential regimes policies resulted in an overwhelming concentration of FDI in the east. The expected spillover effects from coastal to inland provinces failed to materialize. In reaction to the widening regional gap, more broadly-based economic reforms and open door policies were pushed forward in the 1990s. In the spring of 1992, Deng Xiaoping adopted a new approach which turned away from special regimes toward more nation-wide implementation of open policies for FDI inflows. New policies and regulations encouraging FDI inflows were implemented and produced remarkable results. Since 1992 inward FDI in China has accelerated and reached the

54

peak level of US$45.5 billion in 1998. After a drop due to the Asian crisis, FDI inflows into China surged again, so that by 2003 China received US $53 billion in FDI, surpassing the United States to become the world's largest single recipient of FDI. The peak of $72 billion recorded in 2005 is partly related to changes in the methodology underlying Chinese FDI statistics for the first time data on Chinese inward FDI include inflows to financial industries (UNCTAD, 2006, p51). In 2005, non-financial FDI alone was $60 billion, and it registered a slight decline after five years of increase. FDI into financial services surged to $12 billion, driven by large-scale investments in Chinas largest State-owned banks. However, a significant share of Chinas inward FDI might be the result of round-tripping. FDI to China may be overstated by between 10% and 25%. The United Nations put Chinas stock of inward FDI close to $400 billion, around 16% and 43% of Chinas GDP and Gross Fixed Capital Formation respectively. Inward FDI: main features Naughton (2007) emphasizes that three distinctive characteristics have marked investment in China over the past decade and that each of these characteristics reflects the dominant role played by the cross-border restructuring of export-oriented production networks that originally developed in other, neighboring East Asian economies. The first specificity stressed by Naughton (2007) is that foreign direct investment has been the predominant form in which China has accessed global capital (as opposed to portfolio capital or bank loans). Between Round tripping refers to domestic investment in China (Mainland) being routed through Hong Kong and back into the Mainland to take advantage of preferencial policies available only to

55

foreign investors. After its accession to the World Trade Organization (WTO) in 2001, China has removed many of the incentives, but there are still differences in treatment between domestic and foreign investors; for example, the corporate tax is still levied at lower rates on foreign firms than on domestic firms (normally 5%-13% on the former, compared with 25% on the latter) (see UNCTAD 2006, p.12). Estimates vary from 25% to about 50% . 1979 and 2000, Chinas actual usage of foreign capital amount to more than $500 billion of which more than two third are in the form of direct investment .The second specificity is that an unusually large proportion of Chinese FDI inflows are in manufacturing industry, as opposed to services or resource extraction. The third specific characteristic of Chinas FDI inflows is the predominance of other East Asian economies, especially Hong Kong, Taiwan and Macao as sources. An additional important feature of Chinas FDI inflow is that they are mostly concentrated in the eastern coastal regions. Some regions of China are in fact even more open to FDI than a typical Southeast Asian nation. Inflows into Guangdong and Fujian, scaled to GDP, were of course well above the Chinese national average. For the 11 years from 19932003 the average annual incoming FDI/GDP ratio was 13% for Guangdong and 11% for Fujian. Other open coastal areas were only a step behind Guangdong: Inflows to Shanghai averaged 9% of GDP, and those to Jiangsu and Beijing averaged 7%. As noted by Naughton (2007), these inflows were sufficiently large to transform these regional economies. The contractual forms in which FDI is embodied in China have evolved steadily toward modes that permit the foreign investor a higher level of control. In the early 1980s, FDI was dominated by contractual joint ventures (JVs) and joint development projects. After the mid 1980s, China began to strongly encourage the use of equity joint ventures (EJVs), which became the dominant mode of investment. As China evolved toward a market economy, the share of FDI in the form of wholly owned subsidiaries of

56

foreign companies has climbed steadily, and in 2005 it accounted for exactly two-thirds of total realized FDI inflows. Foreign-invested enterprises (FIEs) play a large role in China's economy, accounting for 27% of value-added production, 4.1% of national tax revenue, more than 58% of foreign trade in 2005, and 88% of high-technology exports, nearly all under Export Processing arrangements. Companies from 190 countries and regions have invested in China, including 450 of the world's Fortune 500 companies. By the end of 2005, FIEs in China employed more than 24 million workers. Manufacturing accounted for 63% of registered foreign capital at the end of 2005 To a large extent, this emphasis is explainable in terms of the restrictions that China has maintained on foreign entry into the most important service sectors . While large proportions of FDI inflows in all developing countries typically go to wholesale and retail trade, transport and telecommunications and finance, wholesale and retail trade, they are clear underperformers in China. Naughton (2007) notes that these three sectors together account for 27% of world developing-country inflows (including China) but only 4% of inflows into China itself. In China, by contrast, incoming FDI in the service sector is highly concentrated in real estate, specifically in property development. This sector accounted for 11% of total investment in 2005. The real estate industry has indeed become a hot spot for FDI. FDI in real estate could be as high as $9 billion. According to SAFE estimates, FDI now accounts for 15% of China's real estate market. The high tech sector has just begun to catch up and cross border M&A barely took form. In these areas, there is still a large gap between China
57

and developed countries. It seems nevertheless that FDI in Chinas manufacturing sector is shifting towards more advanced technologies. The number of foreign-invested R&D centers has risen to 750 in China by the end of 2005 with at least 107 set between October 2004 and September 2005. Examples in the automotive industry are numerous and include Nissan Motor, Toyota Motor, Honda Motor, Hyundai and DaimlerChrysler.

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FDI INFLOWS IN CHINA FROM 1992-2010 TABLE 5

COUNTRY :-CHINA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 11156000000.00 27515000000.00 33787000000.00 35849200000.00 40180000000.00 44237000000.00 43751000000.00 38753000000.00 38399300000.00 44241000000.00 49307976629.16 47076718733.06 54936483255.05 117208286228.85 124082036118.51 160051835203.20 175147650311.57 114214527413.25 185080744436.04

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TOTAL GDP OF CHINA YEAR WISE TABLE 6

COUNTRY :-CHINA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP (current US$) 422660918111.41 440500898964.60 559224707280.73 728007199936.41 856084729312.25 952652693079.14 1019458585326.15 1083277930359.88 1198474934198.78 1324806914358.35 1453827554714.01 1640958732775.07 1931644331142.47 2256902590825.33 2712950886698.27 3494055944791.32 4521827288303.98 4991256406734.99 5926612009749.61

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GDP PER CAPITA INCOME OF CHINA TABLE 7

COUNTRY :-CHINA YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP per capita (current US$) 362.808414 373.8000229 469.2131942 604.2280606 703.1207994 774.467161 820.8630768 864.7303144 949.1780621 1041.637704 1135.44795 1273.640743 1490.380056 1731.125235 2069.343631 2651.260121 3413.588661 3748.934494 4428.464599

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MEXICO
RECENT TRENDS IN MEXICO Mexico is a populous Latin American nation. It possesses an open trade regime thanks to the North American Free Trade Agreement (NAFTA). Foreign direct investment in Mexico is reported to have recorded a 21% increase in the year 2007. It amounted to US$23.2 billion or 15.7 billion. This was the second highest in the country's history. It was only next to the US$29.5 billion investment made in 2001. About half of the FDI investment to Mexico came from USA. Holland and Spain followed suit with an investment percentage of 15% and 10% respectively. FDI inflow within September 2007 for Mexico amounted to $18.4 billion. It was 30.3% higher in comparison to figures for the same time period in 2006. Half of the capital investment in the form of FDI was meant for the manufacturing sector. It implied an increased availability of remunerative jobs for the Mexican populace. Analysts have considered 2008 to be an irregular year with the US economy suffering from multiple effects of recession. It may be noted that, Mexico is highly dependent and interlinked with the US economy through various trade relations. Mexico's expected foreign direct investment stands to the tune of $20 billion for 2008. This is a scaling down from the 2007 estimate of $23 billion. FDI Trend in Mexico, Performance during the 1990s In this era the focus was on foreign direct investment is normally executed through the engine of TNCs or transnational corporations. The share of global FDI flows destined for Latin America increased from 32 % in the year 1990 to 43% in the year 1998. Most of these were meant for the Latin American countries like Argentina, Mexico, Brazil and Chile.
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A host of factors were responsible for this increased inflow of FDI to these Latin American countries in general with particular reference to Mexico. Prime among them was the countrywide implementation of privatization policies and programs of debt conversion. Other important policy changes that were effected involved trade able sector liberalization repeal of restrictive FDI regulations regarding issues like profit repatriation, need for prior authorization for investments and various sectoral regulations. In addition to the above deregulations, the fairly good performance of various macroeconomic stabilization measures for the Mexican economy boosted the confidence of foreign as well as domestic investors in the country's economy. It may be noted that FDI inflows are crucial for the modernization of the Mexican economy. It is also considered to be one of the employment generating avenues for the Mexican economy. It may be noted that, robust FDI flows into Latin America in recent years were propelled mostly by Greenfield investments, which comprise expansions and new investments in place of cross border merger and acquisitions. This trend was a reflection of the robust local economic growth and high corporate profits (earned mostly due to a commodity price hike). Analysts estimate that, Mexico might register an increase in its FDI in recent future if the country persists with its policy of opening up the domestic telecommunications sector to foreign investment. As per the estimates of an analyst, in the coming 4 years Mexico may register FDI to the tune of $7 billion yearly from foreign telephone companies in the arena of telephone line businesses with fixed lines.
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FDI INFLOWS IN MEXICO FROM 1992-2010 TABLE 8

COUNTRY :-MEXICO YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 4393000000 4389000000 10972500000 9526290000 9185600000 12829800000 12707000000 13869200000 18109779299 29848454770 23782995655 16242553245 24800226639 24121689927 20052002334 29734289650 26295379217 15333812446 18679273363

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TOTAL GDP OF MEXICO YEAR WISE TABLE 9

COUNTRY :-MEXICO YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP (current US$) 363609268789.42 403195508733.87 421725049057.94 286698251724.02 332908981435.72 401480129436.30 421214803220.42 481202434426.85 581426421971.45 622092637151.16 649075575301.68 700324664926.97 759777472170.45 848947464608.98 952276430546.77 1035929522496.48 1094480339421.64 879703353504.56 1034804491265.37

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GDP PER CAPITA INCOME OF MEXICO TABLE 10

COUNTRY :-MEXICO YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 GDP per capita (current US$) 4154.426906 4524.709377 4650.114233 3107.073918 3546.928961 4206.564036 4342.334118 4884.625014 5816.614481 6139.301715 6324.167505 6740.20548 7223.869614 7972.553641 8830.844748 9484.731556 9893.414594 7852.154776 9123.405857

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Advantages of FDI
Integration into global economy - Developing countries, which invite FDI, can gain access to a wider global and better platform in the world economy.

Economic growth - This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. Trade - Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Technology diffusion and knowledge transfer FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. Developing countries by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process. Foreign expertise can be an important factor in upgrading the existing technical processes. For example, the civilian nuclear deal led to transfer of nuclear energy know-how between the USA and India. Increased competition - FDI increases the level of competition in the host country. Other companies will also have to improve on their processes and services in order to stay in the market. FDI enhanced the quality of products, services and regulates a particular sector. Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in

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the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

Human Resources Development - Employees of the country which is open to FDI get acquaint with globally valued skills.

Employment - FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Disadvantages of Foreign Direct Investment

While all these advantages are well and good, the fact is that there are certain cons that come along with them as well. Every industry, and every country, deals with these cons differently, and are also affected in varying degrees, so they are not meant to discourage foreign investors in any way. But every parent enterprise should mandatorily be aware of these points.

Foreign investments are always risky because the political situation in some countries can change in an instant. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high.

In certain cases, political changes could lead to a situation of 'Expropriation'. This refers to a scenario where the government can take control of a firm's property and assets, if it feels that the enterprise is a threat to national security.

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Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to the advantages and disadvantages of globalization as well.

Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases.

From the point of view of foreign affiliates, FDI is ill-advised because they lose their national identity. They have to deal with interference from a group of people who do not understand the history of the company. They have unreal expectations placed on them, and they have to handle several cultural clashes at the same time.

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RESEARCH METHODOLOGY
Research is something that people undertake in order to find out things in a systematic way, by increasing their knowledge. Two phases are important in the research, systematic research and to find out things. Systematic suggests that research is based on logical relationship and not just beliefs. As part of this, research will involve an explanation of the methods used to collect the data, will argue why the results obtained are meaningful, and will explain any limitations that are associated with them. To find out things suggest there may be multiplicity of possible purposes for the research. These may include describing, explaining, understanding, criticizing and analysing. Research methodology is a way to systematically solve the research problem. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. It is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem.

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Objectives of the Research Project

To find out the most favorite destinations for FDIS To know about the economic structure of developing countries To find out the co-relation between FDI and Economic Development.

Research Design: - Descriptive Research DESCRIPTIVE STUDIES Descriptive studies are the ones that aim at describing accurately the characteristics of a group, community or a people. Descriptive study often provide jumping pad for the studies of new areas. This research design was appropriate for such studies because it was flexible enough.: -

In providing opportunity for considering different aspects for a problem under the study. In prcising formulation of problem. In providing knowledge about the problem environment. In establishing priorities for further research.
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Data collection method used: - Secondary Data SECONDARY DATA: In may research, I have collected secondary data from Published sources and websites. In published sources, the information was collected from business magazines, relevant official document articles etc.In websites sources, major data is taken from www.worldbank.org & www.rbi.org.in.

Statistical tools used: - Correlation analysis

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ANALYSIS AND INTERPRETATION

COMPARISON CHART Foreign direct investment, net inflows (% of GDP)

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

India China Mexico

GRAPH 1

INTERPRETATION: China has the highest contribution towards its GDP from FDI inflows in last 18 years. In India, FDI inflows are increasing year after year.

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COMPARISON CHART GDP Per Capita (US $)

12000 10000 8000 6000 4000 2000 0 India IND China CHN Mexico MEX

1994

1991

1992

1993

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GRAPH 2

INTERPRETATION: Mexico per capita income is highest among all three countries.

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2010

COMPARISON CHART FDI Net Inflows (current US $)

200,000,000,000.00 180,000,000,000.00 160,000,000,000.00 140,000,000,000.00 120,000,000,000.00 100,000,000,000.00 80,000,000,000.00 60,000,000,000.00 40,000,000,000.00 20,000,000,000.00 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 India IND China CHN Mexico MEX

GRAPH 3

INTERPRETATION: In China, FDI inflows is highest among all. In last 5 years, India shows a rapid increasing trend in FDI inflows.

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GDP GROWTH RATE (%)

20

15

10 India IND 5 China CHN Mexico MEX 0

-5

-10

GRAPH 4

INTERPRETATION: India shows an upward GDP growth rate in last 8 years, except 2008. Mexico shows a negative growth rate in GDP in year 1995 and 2009 because of recession in American continent.

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Correlation between FDI Net Inflows and GDP FOR INDIA:TABLE 11

COUNTRY :-INDIA
YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 276,512,438.97 550,019,384.37 890,688,166.02 2,026,439,031.09 2,186,732,315.38 3,464,411,051.97 2,587,058,630.28 2,089,233,597.06 3,074,684,332.48 4,073,961,343.30 3,947,895,991.54 2,444,138,426.16 3,592,188,066.41 4,628,652,265.34 5,992,285,935.50 8,201,628,957.62 24,149,749,829.71 19,668,790,288.40 11,008,159,606.75 GDP (current US$) 245553170107.80 276037365895.65 323506143586.02 356298991324.31 388343910827.92 410915167039.78 416252442323.14 450476199267.53 460182031503.10 477848859030.57 507189954396.40 599461389810.15 721573248762.03 834035801005.14 951339358745.93 1242426253335.13 1215992812023.52 1377264718250.63 1727111096363.26

Correlation Value between FDI inflows and GDP = 0.787433

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FOR CHINA:TABLE 12
COUNTRY :-CHINA
YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 11156000000.00 27515000000.00 33787000000.00 35849200000.00 40180000000.00 44237000000.00 43751000000.00 38753000000.00 38399300000.00 44241000000.00 49307976629.16 47076718733.06 54936483255.05 117208286228.85 124082036118.51 160051835203.20 175147650311.57 114214527413.25 185080744436.04 GDP (current US$) 422660918111.41 440500898964.60 559224707280.73 728007199936.41 856084729312.25 952652693079.14 1019458585326.15 1083277930359.88 1198474934198.78 1324806914358.35 1453827554714.01 1640958732775.07 1931644331142.47 2256902590825.33 2712950886698.27 3494055944791.32 4521827288303.98 4991256406734.99 5926612009749.61

Correlation Value between FDI inflows and GDP = 0.921055

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FOR MEXICO:TABLE 13
COUNTRY :-MEXICO
YEAR 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Foreign direct investment, net (BoP, current US$) 4393000000 4389000000 10972500000 9526290000 9185600000 12829800000 12707000000 13869200000 18109779299 29848454770 23782995655 16242553245 24800226639 24121689927 20052002334 29734289650 26295379217 15333812446 18679273363 GDP (current US$) 363609268789.42 403195508733.87 421725049057.94 286698251724.02 332908981435.72 401480129436.30 421214803220.42 481202434426.85 581426421971.45 622092637151.16 649075575301.68 700324664926.97 759777472170.45 848947464608.98 952276430546.77 1035929522496.48 1094480339421.64 879703353504.56 1034804491265.37

Correlation Value between FDI inflows and GDP = 0.744711

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CONCLUSION

China and India are the major countries in Asia, and Mexico in America because of their economic structure and governmental policies these are the most favorable destinations. Due to FDIs Inflows GDP growth and per capita income of these countries increasing rapidly. Correlation between FDI Net Inflows and GDP of India, China and Mexico shows a highly positive correlation. Out of these three countries , China is the most favorite destination from FDI point of view.

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BIBLOGRAPHY
Books & Magazines

Research Methodology- C.R.Kothari Gupta C B, Gupta V - An Introduction to Statistical Methods (Vikas1995, 23rd Edition). Business Outlook Business World Business Today

Websites

http://www.worldbank.org.in/ http://www.worldbank.org/ http://www.rbi.org.in/ http://www. fdi.net http://www.miga.org/news/index.cfm?aid=3119 http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan014359.pdf http://business.mapsofindia.com/fdi-india/advantages.html http://www.buzzle.com/articles/advantages-and-disadvantages-of-fdi.html

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