A SEMINAR REPORT

ON

FDI(FOREIGN DIRECT INVESTMENT)

SUBMITTED TO: - SUBMITTED BY:-Mr.MUNISH BHATIA MANJIT SINGHLECTURERS AT L.I.M B.B.A (5TH) SEM ROLL NO – 7114241329

LOVELY INSTITUTE OF MANAGEMENTPHAGWARA

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TABLE OF CONTENTSR.NO NAME PAGE NO

1) INTRODUCTION 3 - 6 2) CLASSIFICATION 7 - 8 3) FDI AMONG COUNTRIES 9 - 10 4) LOW INCOME IN GLOBAL FDI RACE 11 - 12 5) BENEFITS or ADVATAGES OF FDI 13 - 16 6) DISADVANTAGES 17 - 18 7) DETERMINATION 19 – 20 8)

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Foreign Direct Investment

foreign direct investment

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest

in enterprises operating outside of the economy of the investor."[1] The FDI relationship,

consists of a parent enterprise and a foreign affiliate which together form a transnational

corporation (TNC). In order to qualify as FDI the investment must afford the parent

enterprise control over its foreign affiliate. The UN defines control in this case as owning

10% or more of the ordinary shares or voting power of an incorporated firm or its

equivalent for an unincorporated firm; lower ownership shares are known as portfolio

investment.

History

In the years after the Second World War global FDI was dominated by the United States,

as much of the world recovered from the destruction brought by the conflict. The US

accounted for around three-quarters of new FDI (including reinvested profits) between

1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no

longer the exclusive preserve of OECD countries. FDI has grown in importance in the

global economy with FDI stocks now constituting over 20 percent of global GDP..

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

flexibility are all the factors that help increase the inflow of Foreign Direct Investment or

FDI. FDI or Foreign Direct Investment is any form of investment that earns interest in

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enterprises which function outside of the domestic territory of the investor. FDIs require a

business relationship between a parent company and its foreign subsidiary. Foreign direct

business relationships give rise to multinational corporations. For an investment to be

regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of

its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting

power in a business enterprise operating in a foreign country.

US International Direct Investment Flows[2]Period FDI Outflow FDI Inflows Net1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn1980-89 $ 206.27 bn $ 329.23 bn

- $ 122.96 bn

1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn2000-07 $ 1,629.05 bn $ 1,421.31 bn

+ $ 207.74 bn

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

Definition of Foreign Direct Investment

Foreign direct investment is that investment, which is made to serve the business interests

of the investor in a company, which is in a different nation distinct from the investor's

country of origin. A parent business enterprise and its foreign affiliate are the two sides of

the FDI relationship. Together they comprise an MNC. The parent enterprise through its

foreign direct investment effort seeks to exercise substantial control over the foreign

affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to

10% of ordinary shares or access to voting rights in an incorporated firm. For an

unincorporated firm one needs to consider an equivalent criterion. Ownership share

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amounting to less than that stated above is termed as portfolio investment and is not

categorized as FDI.

FDI

Foreign Direct Investment (FDI) inflows to developing countries are estimated to have

gone up to U.S.$ 149 billion in 1997 from U.S.$ 130 billion in 1996. India’s share of

global FDI flows rose from 1.8 per cent in 1996 to 2.2 per cent in 1997. On the other

hand, India’s share in net portfolio investment flows to the developing countries declined

to 5.1 per cent in 1997 after increasing to 8.7 per cent in 1996. FDI in India in 1997-98

was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of

a decline in portfolio investment (Table 6.9). Although foreign direct investment (FDI)

increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in

1997- 98, portfolio investment declined from U.S.$ 3,312 million in 1996-97 to U.S.$

1,828 million in 1997- 98. This decline in portfolio investment is mainly attributable to

the contagion from the East Asian crisis, which adversely affected capital flows to all

emerging markets. International developments continue to affect capital flows into India

in 1998-99 as well. The provisional estimate of total foreign investment at U.S.$ 880

million during April-December, 1998 was sharply lower compared to the inflow of U.S.$

4253 million during the corresponding period in the previous year. Although FDI flows

were weaker, this overall decline in capital flows was mainly attributable to a net outflow

in portfolio investment of U.S.$ 682 million during April-December, 1998 as against an

inflow of U.S.$ 1742 million during the same period in 1997. Trends in approvals and

actual inflows of foreign direct investment are shown in Table 1 below.Mauritius, as in

the previous two years, was the dominant source of FDI inflows in 1997- 98. U.S.A. and

S. Korea were, respectively, the second and third largest sources of FDI. The striking

feature was that S. Korea increased its flow of investment in India from a meagre U.S.$

6.3 million in 1996-97 (0.2 per cent of total FDI) to U.S.$ 333.1 million in 1997-98 (10.4

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per cent share). On the sectoral side, although the engineering industry witnessed a

decline in inflows in 1997-98, it remained an attractive area for FDI, being the second

largest recipient after electronics & electrical equipment.

Table 1: Foreign Direct Investment : Actual Flows vs Approvals

1991 1992 1993 1994 1995 1996 1997 1998* TOTAL

Approvals in Rs. Crores 739 5256 11189 13590 37489 39453 57149 25103 189968

Approvals in US$ million 325 1781 3559 4332 11245 11142 15752 6132 54268

Actual inflows in Rs Crores 351 675 1786 3009 6720 8431 12085 8433 41490Actual inflows in US$ million 155 233 574 958 2100 2383 3330 2073 11806Actual inflows as percentage of approvals (in US$ terms) 47.7 13.1 16.1 22.1 18.7 21.4 21.1 33.8 21.7

*: Upto September, 1998. Figures are provisional.

Source: Reserve Bank of India

Note: The approval and actual inflows figures include NRI direct investments approved by RBI.

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Classification of Foreign Direct Investment

Foreign direct investment may be classified as Inward or Outward.

Foreign direct investment, which is inward, is a typical form of what is termed as 'inward

investment'. Here, investment of foreign capital occurs in local resources. The factors

propelling the growth of Inward FDI comprises tax breaks, relaxation of existent

regulations, loans on low rates of interest and specific grants. The idea behind this is that,

the long run gains from such a funding far outweighs the disadvantage of the income loss

incurred in the short run. Flow of Inward FDI may face restrictions from factors like

restraint on ownership and disparity in the performance standard. Foreign direct

investment, which is outward, is also referred to as “direct investment abroad”. In this

case it is the local capital, which is being invested in some foreign resource. Outward FDI

may also find use in the import and export dealings with a foreign country. Outward FDI

flourishes under government backed insurance at risk coverage.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This

classification is based on the types of restrictions imposed, and the various prerequisites

required for these investments. An outward-bound FDI is backed by the government

against all types of associated risks. This form of FDI is subject to tax incentives as well

as disincentives of various forms. Risk coverage provided to the domestic industries and

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subsidies granted to the local firms stand in the way of outward FDIs, which are also

known as “direct investments abroad.” Different economic factors encourage inward

FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of

restrictions and limitations. Factors detrimental to the growth of FDIs include necessities

of differential performance and limitations related with ownership patterns. Other

categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when

a multinational corporation owns some shares of a foreign enterprise, which supplies

input for it or uses the output produced by the MNC. Horizontal foreign direct

investments happen when a multinational company carries out a similar business

operation in different nations. Foreign Direct Investment is guided by different motives.

FDIs that are undertaken to strengthen the existing market structure or explore the

opportunities of new markets can be called “market-seeking FDIs.” “Resource-seeking

FDIs” are aimed at factors of production which have more operational efficiency than

those available in the home country of the investor. Some foreign direct investments

involve the transfer of strategic assets. FDI activities may also be carried out to ensure

optimization of available opportunities and economies of scale. In this case, the foreign

direct investment is termed as “efficiency-seeking.”

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Foreign Direct Investment among Countries

Movement of Foreign Direct Investment across countries in the world in the last couple

of years presents an interesting phenomenon. FDI increased by 5% worldwide in the year

2007. Ireland recorded a drop of 5% in new Foreign Direct Investment projects. The

corresponding fall for jobs created was 40%. As per data released by a global consultancy

firm, cross-border FDI flow increased by 5.1% the world over in 2007 and stood at

US$947 billion. Estimates put the number of FDI projects announced in 2007 at 11,574.

In Ireland 87 companies announced 98 investment projects in 2007. It was a 5% slid from

comparable 2006 figures. Ireland attracted foreign capital investment to the tune of $2.06

billion in 2007. IT services and Software were the key areas accounting for a lion's share

of the FDI flow into Ireland in 2007. The big players in the field of FDI flow to Ireland in

2007 comprised Royal Bank of Scotland, Wyeth and IBM. Dublin, Shannon and Cork

roped in most of the inward investments in Ireland. In 2007 Ireland recorded a new trend,

of high value sectors of the economy registering an increased investment flow. In 2007

China succeeded in retaining its 2006 ranking as the country in the world, which attracted

the highest level of multinational investment. The number of FDI related projects stood at

1,171. The level of investment in 2007 stood at US$90 billion in comparison to the

US$116 billion that was registered in 2006. China also recorded substantial job creation

in 2007. Out of an estimated 1.2 million jobs created in the Asia-Pacific region, 366,000

were credited to China. In 2007 USA stood second in terms of number of projects, which

stood at 783. It was however placed in the third position in regards to the associated

investment value, which stood at US$46.8 billion. In terms of jobs created USA was way

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back in the sixth position with a figure of 107,141. As compared to 2006 India slid one

place to the third position in terms of projects, which numbered 676. In terms of jobs

created India dropped to the second position in 2007 from being the first in 2006. Jobs

created stood at 246,361. In comparison to 2006 it was a 45% decline in job creation for

the Indian job market in 2007. UK was at fourth position in terms of number of projects,

which were 622 in 2007. In comparison to 2006, 2007 saw a sharp decline in the

projected investment value (which stood at US$18.7 billion) and in the number of

employment generated (which was 50,000). The two UK regions accounting for the

highest amount of FDI flow in 2007 were South East England and London. They

accounted for over 300 projects in that period. 2007 effectively saw UK regaining its

hold as knowledge based economy. The emphasis shifted from factors like incentives and

low costs to issues like skills, business opportunities, R&D and regulatory environment.

The same kind of trend was reflected by other front ranking Western European nations

like Germany and France. Growth of investment in Europe in 2007 was largely powered

by the Eastern European nations and stood at US$291 billion. In 2007 Russia retained its

position as the leading destination in Europe for FDI regarding investment and job

creation. Spain, Poland and Romania were the other European nations, which gave a

good performance in 2007 and were enlisted within the top 10 performing nations. With

the global economy facing the brunt of financial instability in 2008, FDI is projected to

become an important instrument for fostering global job creation and investment of

capital. The challenge for policy makers in 2008 is to build up a business environment,

which is competitive as well as flexible. Economic policies of nations need to be

conducive for investment. Side by side they need to possess an efficient regulatory

framework for the promotion of market security as well as the disbursement of long run

economic benefits among the populace

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Low Income Countries in Global FDI Race

The situation of foreign direct investment has been relatively good in the recent times

with an increase of 38%. Normally, the foreign direct investment is made mostly into the

extractive industries. However, now the foreign direct investors are also looking to pump

money into the manufacturing industry that has garnered 47% of the total foreign direct

investment made in 1992. However, the situation has not been the same in the countries

with a middle income range. The middle income countries have not received a steady

inflow of foreign direct income coming their way. The situation is comparatively better in

the low income countries. They have had an uninterrupted and continually increasing

flow of foreign direct investment. It has been observed that the various debt crises, as

well as, other forms of economic crises have had less effect on these countries. These

countries had lesser amounts of commercial bank obligations, which again had been

caused by the absence of proper financial markets, as well as the fact that their economies

were not open to foreign direct investment. During the later phases of the decade of 70s

the Asian countries started encouraging foreign direct investments in their economies.

China has received the most of the foreign direct investment that was pumped into the

countries with low income. It accounted for as much as 86% of the total foreign direct

investment made in the lower income countries in 1995. The economic liberalization in

China started in 1979. This led to an increase in the foreign direct investment in China. In

the years between 1982 and 1991 the average foreign direct investment in China was US$

2.5 billion. This average increased by seven times to become US$ 37.5 billion during

1995. A significant amount of the foreign direct investment in China was provided in the

industrial sector. It was as much as 68%. Around 20% of the foreign direct investment of

China was made in the real estate sector. During the same period Nigeria had been the

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second best in terms of receiving foreign direct investment. In the recent times India has

risen to be the third major foreign direct investment destination in the recent years.

Foreign direct investment started in India in 1991 with the initiation of the economic

liberation. There were more initiatives that enabled India to garner foreign direct

investments worth US$ 2.9 billion from 1991 to 1995. This was a significant increase

from the previous twenty years when the total foreign direct investment in India was

US$1 billion. Most of the foreign direct investment made in India has been in the

infrastructural areas like telecommunications and power. In the manufacturing industry

the emphasis has been on petroleum refining, vehicles and petrochemicals. Vietnam is a

low income country, which is supposed to have the same potential as China to generate

foreign direct investment. The foreign direct investment laws were introduced in Vietnam

in 1987-88. This led to an increase in the foreign direct investment made in the country.

The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This

amount increased by 3 times after the USA removed its economic sanctions in 1994. The

gas and petroleum industries were the biggest beneficiaries of the foreign direct

investment. Bangladesh started receiving increasing foreign direct investment after 1991,

when the economic reforms took place in the country. After 1991 it was possible for

foreign companies to set up companies in Bangladesh without taking permission

beforehand. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125

million in 1995. As per the available statistics the manufacturing industry, comprising of

clothing and textiles took up 20% of the total approved foreign direct investment. Food

processing, chemicals and electric machinery were also important in this regard. The

increase in the foreign direct investment in Ghana was remarkable as well. The figures

increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201 million,

on an average, from 1993 to 1995. This improvement was brought about by the

privatization of the Ashanti Goldfields.

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Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in the economic

development of the particular country where the investment is being made. This is

especially applicable for the economically developing countries. During the decade of the

90s foreign direct investment was one of the major external sources of financing for most

of the countries that were growing from an economic perspective. It has also been

observed that foreign direct investment has helped several countries when they have

faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It was

observed during the financial problems of 1997-98 that the amount of foreign direct

investment made in these countries was pretty steady. The other forms of cash inflows in

a country like debt flows and portfolio equity had suffered major setbacks. Similar

observations have been made in Latin America in the 1980s and in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done basically

in the way of provision of capital inputs. The importance of this factor lies in the fact that

this transfer of technologies cannot be accomplished by way of trading of goods and

services as well as investment of financial resources. It also assists in the promotion of

the competition within the local input market of a country.

The countries that get foreign direct investment from another country can also develop

the human capital resources by getting their employees to receive training on the

operations of a particular business. The profits that are generated by the foreign direct

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investments that are made in that country can be used for the purpose of making

contributions to the revenues of corporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also

helps in increasing the salaries of the workers. This enables them to get access to a better

lifestyle and more facilities in life. It has normally been observed that foreign direct

investment allows for the development of the manufacturing sector of the recipient

country.

Foreign direct investment can also bring in advanced technology and skill set in a

country. There is also some scope for new research activities being undertaken.

Foreign direct investment assists in increasing the income that is generated through

revenues realized through taxation. It also plays a crucial role in the context of rise in the

productivity of the host countries. In case of countries that make foreign direct

investment in other countries this process has positive impact as well. In case of these

countries, their companies get an opportunity to explore newer markets and thereby

generate more income and profits.

It also opens up the export window that allows these countries the opportunity to cash in

on their superior technological resources. It has also been observed that as a result of

receiving foreign direct investment from other countries, it has been possible for the

recipient countries to keep their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The

biggest beneficiaries of these facilities are the small and medium-sized business

enterprises.

Advantages of FDI

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Foreign Direct Investment plays a pivotal role in the development of India's economy. It

is an integral part of the global economic system. Advantages of FDI can be enjoyed to

full extent through various national policies and international investment architecture.

Both the factors contribute enormously to the maximum FDI inflows in India, which

stimulates the economic development of the country.

An Overview of Advantages of FDI-Foreign Direct Investment in India is allowed through four basic routes namely, financial

collaborations, technical collaborations and joint ventures, capital markets via Euro

issues, and private placements or preferential allotments.

FDI inflow helps the developing countries to develop a transparent, broad, and effective

policy environment for investment issues as well as, builds human and institutional

capacities to execute the same.

Benefits of Foreign Direct Investment-Attracting foreign direct investment has become an integral part of the economic

development strategies for India. FDI ensures a huge amount of domestic capital,

production level, and employment opportunities in the developing countries, which is a

major step towards the economic growth of the country. FDI has been a booming factor

that has bolstered the economic life of India, but on the other hand it is also being blamed

for ousting domestic inflows. FDI is also claimed to have lowered few regulatory

standards in terms of investment patterns. The effects of FDI are by and large

transformative. The incorporation of a range of well-composed and relevant policies will

boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest

advantages of FDI enjoyed by India have been listed as under:

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.

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Products of superior quality are manufactured by various industries in India due to

greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment

opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the

outsourcing of knowledge from India especially in the Information Technology sector. It

helps in developing the know-how process in India in terms of enhancing the

technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now

occupying a position in 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.

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Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to

operation, distribution of the profits made on the investment and the personnel. One of

the most indirect disadvantages of foreign direct investment is that the economically

backward section of the host country is always inconvenienced when the stream of

foreign direct investment is negatively affected.The situations in countries like Ireland,

Singapore, Chile and China corroborate such an opinion. It is normally the responsibility

of the host country to limit the extent of impact that may be made by the foreign direct

investment. They should be making sure that the entities that are making the foreign

direct investment in their country adhere to the environmental, governance and social

regulations that have been laid down in the country. The various disadvantages of foreign

direct investment are understood where the host country has some sort of national secret

– something that is not meant to be disclosed to the rest of the world. It has been

observed that the defense of a country has faced risks as a result of the foreign direct

investment in the country. At times it has been observed that certain foreign policies are

adopted that are not appreciated by the workers of the recipient country. Foreign direct

investment, at times, is also disadvantageous for the ones who are making the investment

themselves. Foreign direct investment may entail high travel and communications

expenses. The differences of language and culture that exist between the country of the

investor and the host country could also pose problems in case of foreign direct

investment. Yet another major disadvantage of foreign direct investment is that there is a

chance that a company may lose out on its ownership to an overseas company. This has

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often caused many companies to approach foreign direct investment with a certain

amount of caution.At times it has been observed that there is considerable instability in a

particular geographical region. This causes a lot of inconvenience to the investor.The size

of the market, as well as, the condition of the host country could be important factors in

the case of the foreign direct investment. In case the host country is not well connected

with their more advanced neighbors, it poses a lot of challenge for the investors. At times

it has been observed that the governments of the host country are facing problems with

foreign direct investment. It has less control over the functioning of the company that is

functioning as the wholly owned subsidiary of an overseas company.This leads to serious

issues. The investor does not have to be completely obedient to the economic policies of

the country where they have invested the money. At times there have been adverse

effects of foreign direct investment on the balance of payments of a country. Even in

view of the various disadvantages of foreign direct investment it may be said that foreign

direct investment has played an important role in shaping the economic fortunes of a

number of countries around the world. Foreign direct investment (FDI) in its classic

definition, is defined as a company from one country making a physical investment into

building a factory in another country. Its definition can be extended to include

investments made to acquire lasting interest in enterprises operating outside of the

economy of the investor.[1] The FDI relationship consists of a parent enterprise and a

foreign affiliate which together form a Multinational corporation (MNC). In order to

qualify as FDI the investment must afford the parent enterprise control over its foreign

affiliate. The UN defines control in this case as owning 10% or more of the ordinary

shares or voting power of an incorporated firm or its equivalent for an unincorporated

firm; lower ownership shares are known as portfolio investment.

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Determinants of Foreign Direct Investment

One of the most important determinants of foreign direct investment is the size as well as

the growth prospects of the economy of the country where the foreign direct investment

is being made. It is normally assumed that if the country has a big market, it can grow

quickly from an economic point of view and it is concluded that the investors would be

able to make the most of their investments in that country. In case of foreign direct

investments that are based on export, the dimensions of the host country are important as

there are opportunities for bigger economies of scale, as well as spill-over effects. The

population of a country plays an important role in attracting foreign direct investors to a

country. In such cases the investors are lured by the prospects of a huge customer base.

Now if the country has a high per capita income or if the citizens have reasonably good

spending capabilities then it would offer the foreign direct investors with the scope of

excellent performances. The status of the human resources in a country is also

instrumental in attracting direct investment from overseas. There are certain countries

like China that have taken an active interest in increasing the quality of their workers.

They have made it compulsory for every Chinese citizen to receive at least nine years of

education. This has helped in enhancing the standards of the laborers in China.

If a particular country has plenty of natural resources it always finds investors willing to

put their money in them. A good example would be Saudi Arabia and other oil rich

countries that have had overseas companies investing in them in order to tap the

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unlimited oil resources at their disposal. Inexpensive labor force is also an important

determinant of attracting foreign direct investment. The BPO revolution, as well as the

boom of the Information Technology companies in countries like India has been a proof

of the fact that inexpensive labor force has played an important part in attracting overseas

direct investment. Infrastructural factors like the status of telecommunications and

railways play an important part in having the foreign direct investors come into a

particular country. It has been observed that if the infrastructural facilities are properly in

place in a country then that country receives a substantial amount of foreign direct

investment. If a country has extended its arms to overseas investors and is also able to get

access to the international markets then it stands a better chance of getting higher

amounts of foreign direct investment. It has been observed in the recent years that a

couples of countries have altered their stance vis-à-vis overseas investment. They have

reset their economic policies in order to suit the interests of the overseas investors. These

companies have increased the transparency of the legal frameworks in place. This has

been done so that the overseas companies can understand the implications of their

investment in a particular country and take the appropriate decisions.

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Foreign Direct Investment and Economic Development

Foreign direct investment has a major role to play in the economic development of the

host country. Over the years, foreign direct investment has helped the economies of the

host countries to obtain a launching pad from where they can make further

improvements.This trend has manifested itself in the last twenty years. Any form of

foreign direct investment pumps in a lot of capital knowledge and technological resources

into the economy of a country. This helps in taking the particular host economy ahead.

The fact that the foreign direct investors have been able to play an important role vis-a-

vis the economic development of the recipient countries has been due to the fact that

these countries have changed their economic stances and have allowed the foreign direct

investors to come in and improve their economies. It has often been observed that the

economically developing as well as underdeveloped countries are dependent on the

economically developed countries for financial assistance that would help them to

achieve some amount of economical stability. The economically developed countries, on

their part, can help these countries financially by investing in these countries. This

financial assistance can be channelized into various sectors of the economy. The

channelization is normally done on the basis of the requirements of particular sectors.

It has been observed that the foreign direct investment has been able to improve the

infrastructural condition of a country. There is ample scope of technological development

of a country as well. The standard of living of the general public of the host country could

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be improved as a result of the foreign direct investment made in a country. The health

sector of many a recipient country has been benefited by the foreign direct investment.

Thus it may be said that foreign direct investment plays an important role in the overall

economic and social development of a country. It has been observed that the private

sector companies are not always interested in undertaking activities that help in

improving the infrastructure of the country. This is because the gains form these

infrastructural activities are made only in the long term; there are no short term benefits

as such. This is where the foreign direct investment can come in handy. It can also assist

in helping economically underdeveloped countries build their own research and

development bases that can contribute to the technological development of the country.

This is a very crucial contribution as most of these countries are not able to perform these

functions on their own. These assistances come in handy, especially in the context of the

manufacturing and services sector of the particular country, that are able to enhance their

productivity and ultimately advance from an economic point of view. At times foreign

direct investment could be provided in form of technology. Else, the money that comes in

a country through the foreign direct investment can be utilized to buy or import

technology from other countries. This is an indirect way in which foreign direct

investment plays an important part in the context of economic development. Foreign

direct investment can also be helpful in assisting the host countries to set up mass

educational programs that help them to educate the disadvantaged sections of the society.

Such assistance is often provided by the non-governmental organizations in the form of

subsidies. The developing countries can also tackle a number of healthcare issues with

the help of the foreign direct investment.

Foreign Direct Investment Policies

Several measures to boost FDI have been announced in 1998-99. Projects for electricity

generation, transmission and distribution as also roads and highways, ports and harbours,

and vehicular tunnels and bridges have been permitted foreign equity participation up to

100 per cent under the automatic route, provided foreign equity does not exceed Rs. 1500

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crore. FDI permissible under Non-Banking Financial Services now includes "Credit Card

Business" and "Money Changing Business". Regarding equity participation in private

sector banks, multilateral financial institutions have been allowed to contribute equity to

the extent of the shortfall in NRI holdings within the overall permissible limit of 40 per

cent. The Government has also decided to permit FDI up to 49 per cent of the total

equity, subject to license, in companies providing Global Mobile Personal

Communication by Satellite (GMPCS) services. Also, minimum capitalizations norms

earlier required for pure financial consultancy services have been relaxed.GDR/ADR

guidelines have been further liberalized in 1998-99. Unlisted companies are now

permitted to float Euro issues under certain conditions. All end-use restrictions on

GDR/ADR issue proceeds have been removed, except the prevailing restrictions on

investment in stock markets and real estate. The 90-day validity period for final approvals

of GDR/ADR issues has been withdrawn and final approval will continue to be valid,

thereby imparting greater flexibility to issuing companies regarding the timing of issues.

Indian companies are now permitted to issue GDRs/ADRs in the case of Bonus or Rights

issue of shares, or on genuine business reorganisations duly approved by the High Court.

The companies, however, in all such cases, will be required to get approval from the

Department of Economic Affairs for the issue of GDRs/ADRs.

The foreign direct investment policies are the various rules and regulations that have been

laid down by the various countries in order to regulate the overseas investment that is

being made in a country. The foreign direct investment policies take an important part in

determining the amount of foreign direct investment that comes in a country. These

policies play an important part in the decision making process of the foreign direct

investors. They are normally affected by the foreign direct investment policies that are in

place in a country and make their decision based on these policies. If the policies are

suitable enough for the companies they go ahead with their investment. The foreign direct

23

investment policies provide the various conditions under which foreign direct investment

may be made in a country. They also state the various situations where exception would

be made to the allowances that are provided to the foreign direct investors. The foreign

direct investment policies are reviewed on a regular basis. The changes that are made to

the policies are also notified through a variety of means like the press notes for example.

There is also some mention in the policies about the various ways in which foreign direct

investment may be made in various sectors. There are certain conditions where the

investors need to seek permission from the various authoritative figures like the national

government or any other entity that is responsible for looking after the various affairs that

are related to foreign direct investment. The foreign direct investment policies are made

mainly by entities that are responsible for looking after the matters related to foreign

direct investment in a country. The policies may also be formulated by organizations that

are meant to promote the country as foreign direct investment destination. There are

certain objectives behind the foreign direct investment policies. The makers of these

policies have two broad objectives – to promote the investment opportunities that are

present in the country to the overseas investors and strike a balance between the overseas

and local investors. These policies also have various proposals that are made in order to

improve the policies that are in place for administering the foreign direct investment

policies. These proposals are important as they help in improving the foreign direct

investment policy situations and amend them so that they can appeal to the overseas

investors. This would lead to an increase in the foreign direct investment that is coming

into the country. The foreign direct investment policies also state the various areas where

a country's government would not allow foreign direct investment to be made. Some of

those areas are real estate and housing, gambling, lottery business, betting and chit funds

for example. Certain countries have formulated a number of foreign direct investment

acts. These acts lay down the various conditions where certain companies have to seek

permission from important authorities in order to receive foreign direct investment of any

form and shape. There are certain companies that are granted such permissions but only

after they complete certain formalities. These formalities also need to be observed even

after the permission has been provided to these companies as far as foreign direct

investment is concerned. The various options in which an overseas investor can gain

24

entry into the market of a country for the purposes of making foreign direct investment

are also mentioned in these foreign direct investment policies.

Foreign Direct Investment and Infrastructure Development

One of the many areas in which foreign direct investment can benefit a country or any

entity, for that matter, is that of development of infrastructure. It has been observed over

the years, that a lot of countries as well as other recipients of direct investment from

overseas entities have used that money in order to develop the infrastructural facilities at

their disposal. All the various types of infrastructure that are at the disposal of a country

like health or education, for example, may be benefited by foreign direct investment.

Technological infrastructure is one of the many areas in which foreign direct investment

is meant to benefit a country. With the help of foreign direct investment being made in a

country the government can construct, as well as, improve the existing technological

tools at their disposal. This in turn also plays a very crucial role in the economic

development of a country as this technological advancement assists a country in

upgrading its industries and thus helps them to face the challenges of the contemporary

global economy.

Foreign direct investment is also capable of upgrading the

health infrastructure of a particular country. This could be done by way of providing

high-end equipments or medicines. Such investment is normally made by the world level

organizations in countries that are economically backward and have no or little medical

infrastructure to speak of. For years, the World Health Organization, as well as the World

Bank and the International Monetary Fund have been providing a number of the

economically backward countries, all over the world and especially in Africa, with

money and medicines in order to eradicate critical diseases or improve the medical

infrastructure in place. They have also been sponsoring public health awareness programs

that make people aware about critical diseases that need to be eradicated. In India, for

25

example, pulse polio and HIV prevention measures have been at the center of such

activities. Communication infrastructure is an important area where the foreign direct

investment can come in handy. The money that is invested in a country by overseas

entities can be used for the construction of roads, railways and bridges. These facilities

are used for establishing connections with the remote areas of a country and for

transporting important services to these parts like medicines and aids at times of floods or

other natural disasters.

A lot of construction groups are taking active interest in

developing the communicational infrastructure of other countries. Foreign direct

investment is also used for the purpose of educating the unskilled labor force that is

present in a country. In India during the later stages of 80s and 90s there was a situation

whereby there was a huge labor force but it was mostly unskilled and was employed in

the unorganized sector. It was possible with the help of the financial assistance from the

overseas direct investors to train these people so that they may be capable of being

recruited into the industry. Foreign direct investment is also useful for executing mass

educational programs that can educate those people who remain out of the bounds of

conventional and institutional education as they are not able to afford it or it may not be

available in their areas.

Inflows in Foreign Direct Investment

The United States of America has been doing well as far as foreign direct investment is

concerned. It is presently one of the major recipients of foreign direct investment in the

world. However, this position of the USA is corroborated by the decent performance of

the economically developed countries as far as receiving foreign direct investment is

concerned. During the year 2006 the foreign direct investment made in the economically

developed countries has been $800 million. This has been an improvement of 48%.The

amount of foreign direct investment made in the United Kingdom has also been on the

26

higher side compared to the previous years. The 25 members of the European Union have

received 45% of the total foreign direct investment made in the year 2006. The foreign

direct investment in the members of the Organization for Economic Co-operation and

Development has been far from being impressive. The foreign direct investments made in

these countries have been on a downward slope since 2003. This situation has been

brought about by the relatively unimpressive economic performance of the significant

members of this association in the recent times. Such a recession in the performance has

acted as a hindrance to the external and the internal investors. The foreign direct investors

have not been interested in the companies of these countries. With regards to foreign

direct investment the condition of Japan has been critical in the recent times. In the year

2006 Japan experienced its first negative cash inflow in 17 years. In Africa the foreign

direct investment has touched new heights. More than $38 billion has been invested in

the recent years and this is a record in itself. This has happened owing to the increase in

the foreign direct investment that is being made in countries that have high oil and other

natural resources. It has been observed that these countries have been receiving foreign

direct investment from the economically developed, as well as developing countries. The

mergers and acquisitions in the first six months of 2006 have also been three times higher

than what they were in the similar time in 2005.

However, it has also been seen that countries

that have lesser natural resources have lesser foreign direct investment. In the Caribbean

and the Latin American region the rate of foreign direct investment has been on the wane.

Mexico and Brazil are the leading countries in this region as far as foreign direct

investment is concerned. The inflows have increased by 6% in Brazil and in Mexico the

rate has been steady.Chile has experienced a 48% increase in the foreign direct

investment being made in their country. This has been owing to the fact that the mining

industry of Chile has had the lion's share of the reinvested earnings. However, the foreign

direct investments made in Argentina and Chile have gone down by 30% and 52%

respectively.In the countries like Bolivia, Venezuela and Ecuador the governmental

stance towards the extractive industries has changed. They are now pushing for increased

revenues, as well as governmental control. This is expected to have a negative effect on

the investors. In Asia and Oceania the foreign direct investment has been on the higher

27

side. The figure for 2006 was $230 billion and this was an improvement of 15% from

2005. China, Hong Kong and Singapore have been the leading investment destinations in

this area. In the South Asian region, China and India have been the leading investors.

India has invested twice that what it did in 2005. India has also experienced

unprecedented levels of foreign direct investment in the country. In the West Asian

region, countries like Turkey and others that have vast oil reserves have also been

receiving high foreign direct investment.

Foreign Direct Investment in 2007

In the year 2007, world has witnessed an improvement in the total foreign direct

investment by 17.8% compared to 2006. In 2006 the figure was 1305.9 billion dollars and

in 2007 the figure became 1537.9 billion dollars. Among the developed economies of the

world Netherlands has had the highest percentage increase in the foreign direct

investment received. It got 104.2 billion dollars in 2007 compared to 4.4 billion dollars in

2006. This was an improvement of 2285.1 % . The second in this case has been France,

which has collected foreign direct investments worth 123.3 billion dollars, compared to

81.1 billion dollars in 2006. This is an improvement of 52.1%. The economically

developing countries have also been doing well in the recent years in the context of

receiving foreign direct investment. In the year 2006 they received 379.1 billion dollars

through foreign direct investment and in 2007 the amount went up to 438.4 billion

dollars. This was an increase of 15.7%. The highest grosser in Africa was Morocco, who

got 5.2 billion dollars in 2007 compared to 2.9 billion. This was an increase of 78.6%

from 2006. However, the African continent has received only 35.6 billion dollars in 2007

compared to 35.5 billion dollars in 2006.This has meant an improvement of only 0.1%. In

Africa the second country in terms of foreign direct investment has been Egypt. It has

earned 10.2 billion dollars in 2007 and in 2006 it had earned 10 billion dollars by way of

foreign direct investment.

In the Latin America and the Caribbean region there has been a

marked improvement in the foreign direct investment received by the country. In 2006

28

the figure was 83.8 billion dollars and in 2007 the amount was 125.8 billion dollars.The

leader in this zone has been Brazil with a 99.3% increase in the foreign direct investment

received by Brazil. In 2006 the amount was 18.8 billion dollars and in 2007 the amount

was 37.4 billion dollars. In this area Mexico has been the second highest grosser with a

92.9% increase in the foreign direct investment. It had earned 36.7 billion dollars in 2007

compared to 19 billion dollars in 2006. In the Asia and Oceania area there was an

improvement of 6.6%. In 2006 the foreign direct investment was 259.8 billion dollars and

in 2007 the amount was 277 billion dollars. Malaysia has been the leader in Asia and

Oceania with foreign direct investment worth 9.4 billion dollars compared to the 6.1

billion dollars in 2006. This has meant an improvement of 54.4%. As far as the

transitional economies are concerned the foreign direct investment received by them has

been on the higher side in 2007 compared to 2006. In the year 2006 the amount was 69.3

billion dollars and in 2007 the amount stood at 97.6 billion dollars. This was an

improvement of 40.8 billion dollars. The Russian Federation has been the highest grosser

in this region. It had earned 28.7 billion dollars in 2006 and in 2007 it earned 48.9 billion

dollars by way of foreign direct investment. This was an improvement of 70.3%.

FDI IN INDIA AND US

India and the US have multi faceted relations in the field of politics, economics and

commerce. India-US economic relations in the form of bilateral investments and trade

constitute important elements in India-US bilateral relations particularly because India is

now the second fastest growing economy in the world and USA is the world's largest

economy. Economic Reforms introduced since 1991 have radically changed the course of

the Indian economy and has led to its gradual integration with the global economy. The

effect of this reform process on trade and investment relation with US is profound. USA

is the largest investing country in India in terms of FDI approvals, actual inflows, and

portfolio investment. US investments cover almost every sector in India, which is open

for private participants. India's investments in USA are picking up. USA is also India's

largest trading partner. By 2003, India became the 24th largest export destination for the

US. In terms of exports to the US, India now ranks eighteenth largest country.

29

US investment in India

With regards to FDI U.S. is one of the largest foreign direct investors in India. The stock

of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as

on August 2004 recording an increase at a compound rate of 57.5 percent per annum. The

FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into

India. Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%),

Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%)

Electrical Equipment (including Computer Software & Electronics) (9.50%), Food

Processing Industries (Food products & marine products) (9.43%), and Service Sector

(Fin. & Non-Fin. Services) (8.28%).

India's investment in US

India's direct investment abroad was initiated in 1992. Streamlining of the procedures and

substantial liberalization has been done since 1995. As of now, Indian

corporate/Registered partnership firms are allowed to invest abroad up to 100% of their

net worth and are permitted to make overseas investments in business activity. The

overall annual ceiling on overseas investment and also the requirement of prior approval

of RBI for diversification of activity and for transfer by way of sales of shares have been

done away with. The need for opening up the regime of Indian investments overseas has

been the need to provide Indian industry access to new markets and technologies with a

view to increasing their competitiveness globally.

Since 1996 and up to September 2004,

the total approved Indian investment abroad amounts to US $ 11083.11 mln, of which

60.9% has been the actual outflow. US share ($ 2080.367 mln.) constitutes 18.77% of the

total approval. Since 1996, USA attracted highest Indian direct investments (US$

2080.367 mn) followed by Russia (US$ 1751.39 mn), Mauritius (US$ 948.864 mn) and

Sudan (US$ 912.03 mn). India's outgoing investments has been largest in the field of

manufacturing (54.8%) followed by non-financial services including software

development (35.4%). In the current financial year 2004-05(April- August, 2004) actual

30

outflows from India on account of overseas investment was US$ 575.14 million as

compared to US$ 384.49 million in the corresponding period of last year. In the current

year, USA attracted highest Indian direct investments (US$ 125.4 mn) followed by

Australia (US$ 116.33 mn), Kazakhstan (US$ 39.05 mn) and Hong Kong (US$ 28.49

mn). India's outgoing investments was largest in the field of manufacturing at US$

279.07 million followed by non-financial services (including software development) at

US$ 75.27 million, Others at US$ 61.27 million and Trading Sector at US$ 30.3 million.

The returns on account of repatriation of dividend, royalty, consultancy fee etc. from

overseas JV/WOS during April-August, 2004 amounted to US$ 40.87 million. The US

investor community is increasingly sharing confidence in the future of the Indian

economy presently. The growing synergy between the two countries in the technology

sectors and mutually shared respect for democracy, rule of law and well established

business practices have considered the two countries natural business partners from time

to time.

Foreign Direct Investment in India

FDI has helped the Indian economy grow, and the government continues to encourage

more investments of this sort – but with $5.3 billion in FDI in 2004 India gets less than

10% of the FDI of China. Foreign direct investment (FDI) in India has played an

important role in the development of the Indian economy. FDI in India has – in a lot of

ways – enabled India to achieve a certain degree of financial stability, growth and

development. This money has allowed India to focus on the areas that may have needed

economic attention, and address the various problems that continue to challenge the

country. India has continually sought to attract FDI from the world’s major investors. In

1998 and 1999, the Indian national government announced a number of reforms designed

to encourage FDI and present a favorable scenario for investors. FDI investments are

permitted through financial collaborations, through private equity or preferential

allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is

not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number

31

of projects have been announced in areas such as electricity generation, distribution and

transmission, as well as the development of roads and highways, with opportunities for

foreign investors. The Indian national government also provided permission to FDIs to

provide up to 100% of the financing required for the construction of bridges and tunnels,

but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.

Currently, FDI is allowed in financial services,

including the growing credit card business. These services include the non-banking

financial services sector. Foreign investors can buy up to 40% of the equity in private

banks, although there is condition that stipulates that these banks must be multilateral

financial organizations. Up to 45% of the shares of companies in the global mobile

personal communication by satellite services (GMPCSS) sector can also be purchased.

By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but

less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable

democracy and a smoother approval process, lag so far behind China in FDI amounts?

Although the Chinese approval process is complex, it includes both national and regional

approval in the same process. Federal democracy is perversely an impediment for India.

Local authorities are not part of the approvals process and have their own rights, and this

often leads to projects getting bogged down in red tape and bureaucracy. India actually

receives less than half the FDI that the federal government approves.

Sectoral Performance through Inflows of Foreign Direct Investment

As per the reports of the UNCTAD or United Nations Conference on Trade and

Development, it is pretty clear that the sectoral performance of the inflows of foreign

direct investment is not always as good as it is expected to be.For example, in 1999 the

foreign direct investment in India went down to 2.2 billion dollars compared to 2.6 billion

dollars in 1998. This should not have been the case as the economic liberalizations had

been effected and a better performance was being expected on the foreign direct

32

investment front. This is all the more surprising in the context of the fact that the foreign

direct investment made in India had gone up from 2.4 billion dollars in 1996 to 3.6 billion

dollars in 1997. During the same period in 1998, the total foreign direct investment made

in the world has experienced a major rise. The amount had gone up to 644 billion dollars

and this was an increase of 40%. In 1999 the total foreign direct investment of the world

reached 865 billion dollars. It was an increase of 27%. The foreign direct investment in

the health sector has picked up in the recent years. This has been, to a large extent, owing

to the General Agreement on Trade in Services, which has sought to liberalize the trading

of services.This agreement recognizes the foreign direct investment to be an important

part of the trade agreements. However, there are some important areas in this case that

need to be looked at and considered carefully. The various details of the agreement like

the commodities and type of negotiation are extremely important in this case and the

performance of the foreign direct investment would depend highly on these factors.

There has been a huge amount of foreign direct investment in the power markets around

the world. This is applicable for the economically developing as well as developed

countries. As far as the economically developing countries are concerned the Chinese

power sector has been one of the major names.

During 2002 the Chinese power sector received 52.7

billion dollars in foreign direct investment. The United States of America is one of the

leading names when it comes to receiving foreign direct investment in the economically

developed countries is concerned. However, it is expected that in the near future China

would leave the USA behind in terms of receiving foreign direct investment in the power

sector. The sectoral performance of the foreign direct investment in case of the service

sector has been comparatively limited in the economically developing countries. This is

all the more applicable for the countries in the South-East Asian region like Sri Lanka,

Bangladesh, India, Nepal, and Pakistan. All of these countries, with the exception of

Nepal, have liberalized certain sections of their service sectors for the foreign direct

investors. This has also reflected in the sectoral performance statistics of the foreign

direct investors in the country. Overall, in 2005 the South-East Asian countries have

received 30 billion dollars in foreign direct investment and the investments have mostly

been in the financial, telecommunications, construction and transportation service sectors.

33

Trends in Global Foreign Direct Investment

Flow of Foreign Direct Investment has grown faster over recent past. Higher flow of

Foreign Direct Investment over the world always reflect a better economic environment

in the presence of economic reforms and investment-oriented policies. Global flow of

foreign direct investment reached at a record level of $ 1,306 billions in the year 2006.

Increase in FDI was largely fuelled by cross boarder mergers and acquisitions (M&As).

FDI in 2006 increased by 38% than the previous year.

Most of the developing and least developed countries worldwide equally participated in

the process of direct investment activities.

• FDI inflows to Latin American and Caribbean region increased by 11 percent on an

average in comparison to previous year.

• In African region FDI inflows made a record in the year 2006.

• Flow of FDI to South, East and South East Asia and Oceania maintained an upward

trend.

• Both Turkey and oil rich Gulf States continued to attract maximum FDI inflows.

• United States Economy, being world’s largest economy also attracted larger FDI

inflows from Euro Zone and Japan.

The following diagram shows the annual Growth of FDI inflows over the world:

Higher inflows of FDI to a country largely generates employment in the nation. FDI in

manufacturing sector creates more employment opportunities than to any other sectors.

For the year 2006, countries such as Luxembourg, Hong Kong China, Suriname, Iceland

and Singapore ranked in the top of Inward performance Index Ranking of the UNCTAD.

Over recent years most of the countries over the world have made their business

environment investment friendly for absorbing global opportunities by attracting more

investable funds to the country

Steps to attract FDI

34

Promotional efforts to attract foreign direct investment (FDI) have become the important

point of competition among developed and developing countries. This competition is also

maintained when countries are adopting economic integration at another level. While

some countries lowering standards to attract FDI in a "race to the bottom," others praise

FDI for raising standards and welfare in recipient countries. There are several trends,

which are reinforcing traditional impulses for foreign direct investment that is access to

natural resources, markets, and low-cost labor. With the rise of globalization

technological progress allows for the separation of production into more discrete phases

across national barriers. Expansion in Information and communication technologies,

Improvement in logistics necessarily allows production to be close to markets while

taking advantage of the specific characteristic of individual production locations.

Countries have adopted their respective policies for attracting more investment. Some

countries rely on targeted financial concessions like tax concessions, cash grants and

specific subsidies. Some countries focus on improving the infrastructure and skill

parameter and creating a base meet the demands and expectations of foreign investors.

Others try to improve the general business climate of a country by changing the

administrative barriers and red tapism. Many governments have created state agencies to

help investors through this administrative paperwork. Finally most of the countries have

entered into international governing arrangements to increase their attractiveness for

more investment.

"Better Investment Climate" Need of the Hour.

Sound investment climate is crucial for economic growth. Microeconomic reforms aimed

at simplifying business regulations, strengthening property rights, improving labor

market flexibility, and increasing firms' access to finance are necessary for raising living

standards and reducing poverty in a country. Reform is necessary for creating an

investment-oriented climate. Reform management matters as investment climate reforms

are done politically. They often favor unorganized over organized groups and the benefits

tend to accrue only in the long term, while costs are felt up front. Political decisions play

a significant role in this context. Each and every countries over the globe are stepping

35

forward to change the climate for attracting more investment. Opening up of doors by

most of the nations have compelled them for adopting reforms.

Foreign Direct InvestmentLast Updated: July-September 2008 -1

The rapid growth of the economy, favourable investment regime, liberal policy changes

and procedural relaxations, has resulted in a horde of global corporations investing in

India. The generous inflow of FDI is playing a significant role in the economic growth of

the country. In 2007-08, India's FDI touched US$ 25 billion, up 56 per cent against US$

15.7 billion in 2006-07, and the country's foreign exchange reserves had crossed US$ 341

billion as on May 21, 2008. In 2005-06, the growth was even sharper at 184 per cent, up

from US$ 5.5 billion in 2004-05. Projections say that the country will attract US$ 35

billion in FDI in 2008-09 (as per data released by the Ministry of Commerce and

Industry).

India: A much favoured destination

India has been rated as the fourth most attractive investment destination in the world,

according to a global survey conducted by Ernst and Young in June 2008. India was after

China, Central Europe and Western Europe in terms of prospects of alternative business

locations. With 30 per cent votes, India emerged ahead of the US and Russia, which

received 21 per cent votes each.

According to a report by the National Council of Applied Economic Research (NCAER),

"In the first nine months of 2007-08, the net capital flows rose to US$ 83 billion from

US$ 30 billion the country received during the corresponding period of the previous

year." The funds coming in as foreign direct investment (FDI) or external commercial

borrowing, had also upped portfolio funds, as between FY 2004 and FY 2008, the

reserves increased by more than US$ 150 billion. The influx of foreign funds during the

36

period was sufficient to finance the current account deficit, the report further said. As per

the global survey of corporate investment plans carried out by KPMG International,

released in June 2008, (a global network of professional firms providing audit, tax, and

advisory services), India will see the largest overall growth in its share of foreign

investment, and it is likely to become the world leader for investment in manufacturing.

Its share of international corporate investment is likely to increase by 8 per cent to 18 per

cent over the next five years, helping it rise to the fourth, from the seventh position, in the

investment league table, pushing Germany, France and the UK behind. According to the

AT Kearney FDI Confidence Index 2007, India continues to be the second most preferred

destination for attracting global FDI inflows, a position it has held since 2005. India

topped the AT Kearney's 2007 Global Services Location Index, emerging as the most

preferred destination in terms of financial attractiveness, people and skills availability and

business environment. Similarly, UNCTAD's World Investment Report, 2005 considers

India the 2nd most attractive investment destination among the Transnational

Corporations (TNCs). A recent survey conducted by the Japan Bank for International

Cooperation (JBIC) shows that India has become the most-favored destination for long-

term Japanese investment.

Sector-wise FDI

A large portion of the FDI has been flowing into the skill-intensive and high value-added

services industries, particularly financial services and information technology. India, in

fact, dominates the global service industry in terms of attracting FDI with its unassailable

mix of low costs, excellent technical and language skills, mature vendors and liberal

supportive government policies.

Foreign Direct InvestmentLast Updated: July-September 2008 - 2

37

Now, global investors are also evincing interest in other sectors like telecommunication,

energy, construction, automobiles, electrical equipment apart from others.

• Leading Japanese, Korean, European, French, and American automobile

companies have set up their manufacturing base in India.

• Currently, FDI inflows into the Indian real estate sector are estimated to be

between US$ 5 billion and US$ 5.50 billion. Investment in the Indian realty market is set

to increase to US$ 20 billion by 2010. Prominent foreign players include Emaar

Properties (Dubai), IJM Corp (Malaysia), Lee Kim Tah Holding (Singapore) and Salim

Group (Indonesia).

• Many big names in international retail are also entering Indian cities. Global

players, such as Wal Mart, Marks & Spencers, Roseby, etc, have lined up investments to

the tune of US$ 10 billion for the retail industry.

• According to Mines Minister, Sis Ram Ola, "FDI of about US$ 2.5 billion per

annum is expected in the mining sector from the fifth year of implementation of the new

National Mineral Policy (NMP)."

• The surge in mobile services market is likely to see cumulative FDI inflows worth

about US$ 24 billion into the Indian telecommunications sector by 2010, from US$ 3.84

billion till March 2008.

Aggressive Investment Plans

The surging economy has resulted in India emerging as the fastest growing market for

many global majors. This has resulted in many companies lining up aggressive

investment plans for the Indian market.

• Panasonic is planning to line up US$ 200 million investment in India over the

next 3 years for setting up new units, brand positioning and upgrading its facilities.

• Japanese engineering major, Toshiba plans to put up a power boiler plant at

Ennore, north of Chennai with an initial investment of around US$ 232.91 million.

• Dell would be investing more in India to commensurate with the growth of its

products.

• Intel Corp will invest US$ 40 billion in partnership with Indian IT companies to

create an end-to-end IT solution for the health sector in the country.

38

• Cairn India, the Indian arm of British oil and gas company Cairn Energy, will

invest about US$ 2 billion over the next 18 months for the development of oil fields and

building a pipeline.

• HPCL and Mittal Energy will together put in US$ 81.94 billion worth investment

in developing a petrol hub.

• Havells India will bring in US$ 64.92 million as issue of shares and convertible

warrants.

• Essar Power will infuse up to US$ 2 billion as foreign equity for undertaking

various downstream projects, including power and coal mining.

• Coca Cola India plans to invest US$ 250 million over the next three years in

equipment purchases, brand promotion and marketing.

• Goldman Sachs (Mauritius) NBFC LLC will invest US$ 46.51 million in NBFC

activities.

• A Merrill Lynch & Co entity had bought 49 per cent equity in seven residential

projects in Chennai, Bangalore, Kochi and Indore for US$ 345.78 million.

• Zoom Entertainment Network will bring in US$ 28.02 million through induction

of foreign equity.

• Toyoda Gosei Company Ltd of Japan will set up a wholly owned subsidiary

worth US$ 10.51 million to manufacture automobile safety systems, body sealing and

steering parts.

• Another Japanese company, T S Tech Company, will invest US$ 3.50 million to

set up a joint venture firm to manufacture seats and interior of doors for cars.

• UAE mobile retailer, Cellucom, will invest US$ 116.79 million for rolling out

500 stores across India by the end of 2009.

Foreign Direct InvestmentLast Updated: July-September 2008 -3

Government Initiatives

39

The Indian Government's approach towards foreign investment has changed considerably

during the past decade. Foreign investment, which was permitted only in restricted

industries under exceptional conditions, has been liberalised across the board, excluding

certain restricted or prohibited industries. The sweeping economic reforms undertaken by

the government aimed at opening up the economy and embracing globalisation have been

instrumental in the surge in FDI inflows.

The government has taken various steps to further facilitate and augment the inflow of

foreign investment into India.

• The government would soon remove the compulsory disinvestment clause on

overseas companies in major sectors like food processing and chemicals, a move aimed at

simplifying foreign direct investment (FDI) rules further. The finance ministry is

weighing the proposal after the Department of Industrial Policy and Promotion (DIPP,

which formulates FDI policy) suggested waiving the clause for all companies that have

decided on divestment.

• The government may allow 49 per cent FDI in segments such as gems &

jewellery and apparel after National Council of Applied Economic Research (NCAER),

which studies the effects of multi-brand retail in India, submits its report.

• Restructuring the Foreign Investment Promotion Board (FIPB).

• Shri Kamal Nath, Union Minister of Commerce & Industry, has stated that

Foreign Direct Investment (FDI) up to 100 per cent is permitted under the automatic

route in most of the sectors.

• Establishment of the Indian Investment Commission to act as a one-stop shop

between the investor and the bureaucracy.

• Progressively raising the FDI cap in other sectors like telecom, aviation, banking,

petroleum and media sectors among others.

• Removal of the investment cap in the small scale industries (SSI) sector.

• Companies will now require only an FIPB approval for investments up to US$

231.90 million (Rs 1,000 crore). Clearance from Cabinet Committee of Economic Affairs

(CCEA) will be imperative only for investments above US$ 231.90 million (Rs 1,000

crore).

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These measures will greatly enhance the global community's confidence in the

fundamentals of the Indian economy, and reflect the efforts of the Indian Government to

integrate with the global economy. With government planning more liberalisation

measures across a broad range of sectors and continued investor interest, the inflow of

FDI into India is likely to further accelerate. Already, upbeat due to the buoyant FDI

growth in the country, the government has put a target of US$ 35 billion in FDI, in 2008-

09.

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