UNIT 5

CHHAVI JAIN

Foreign Investment
Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature.

Why The Need For Foreign Investment?

In most developing countries like ours, domestic capital is inadequate to meet the purpose of economic growth. The inflow of foreign capital helps in removing the balance of payment over time. By taxing the profits of foreign enterprise, the developing countries mobilize funds for development projects. Foreign capital contributes to the generation of employment. Foreign investment fills the gaps in management, entrepreneurship, technology and skill.

Forms of Foreign Investment

It includes foreign direct investment (FDI) and foreign portfolio investment (FPI) Foreign direct investment is the investment in physical assets by foreign individuals, companies or financial institutions. Foreign portfolio investment in the investment made in financial assets. It includes investments made by foreign institutional investors.

 Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that 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 to gain tariff-free access to the markets of the country or the region.

 Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Platform FDI 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.

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.

Foreign direct investment in India

As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI.

Foreign direct investment in India

According to Ernst and Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an increase of 13% to $50.8 billion. India has seen an eightfold increase in its FDI in March 2012.

Foreign direct investment in India

India disallowed OCB's i.e. Overseas Corporate Bodies to invest in India . On 14 September 2012, Government of India allowed FDI; in aviation upto 49%, in Broadcast sector upto 74%, in multi-brand retail upto 51% and in single-brand retail upto 100%.

Why FDI Preferred?

It is of non-debt creating nature. It is also less prone to quick reversals. South-east Asian crisis emanated due to the reversals of short-term capital inflows.

Forms of FDI
There are two types of FDI Greenfield Investment : It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries. Mergers and Acquisition : It occurs when a transfer of existing assets from local firms takes place.

Foreign Investment Promotion Board (FIPB)

The Foreign Investment Promotion Board (FIPB) is a government body that offers a single window clearance for proposals on Foreign Direct Investment (FDI) in India that are not allowed access through the automatic route.

 FIPB is mandated to play an important role in the administration and implementation of the Governments FDI policy.