Foreign Direct Investment- Indian view

33
Foreign Direct Investment Presentation By- Dhananjay Kale AFMI, Mysore 27 th Jan,2011

description

 

Transcript of Foreign Direct Investment- Indian view

Page 1: Foreign Direct Investment- Indian view

Foreign Direct Investment

Presentation By- Dhananjay KaleAFMI, Mysore

27

th

Jan

,2011

Page 2: Foreign Direct Investment- Indian view

Outline -

• Definition• Forms of FDI• Reasons for FDI in India• FDI Approval• Permitted & Prohibited sectors for FDI• Government attitude towards FDI• Effects on host country• Effect of FDI on domestic productivity• Advantages of FDI• conclusion

Page 3: Foreign Direct Investment- Indian view

Definition -

• FDI- Foreign Direct Investment is the purchase

by the investors or corporations of one country of non-financial assets in another country. This involves a flow of capital from one country to another to build a factory, purchase a business or buy real estate.

OR

company from one country making a physical investment into building a factory in another country.

Page 4: Foreign Direct Investment- Indian view

Forms of FDI -

Green-Field Investment • establishing a new operation in a foreign

country

Acquiring or Merging (or joint venture) • with an existing firm in the foreign country• can be a minority, majority or outright stake

of firm

Page 5: Foreign Direct Investment- Indian view

Reason for FDI in India -

• Stable democratic environment over the 60 year of independence.

• Large and growing market• World class scientific, technical and

managerial manpower.• Cost effective highly skilled labor.• Abundance of natural resources.

Page 6: Foreign Direct Investment- Indian view

Cont…..

• Well established legal system with independent judiciary.

• Developed banking system with vibrant capital market.

• One of the fast growing economy and top three investment hot spot in world.

Page 7: Foreign Direct Investment- Indian view

FDI Approval in India -

FDI approved in India through three route –

1. Automatic approval by RBI

2. The FIPB route

3. CCFI route

Page 8: Foreign Direct Investment- Indian view

8

FDI Approval Procedure

Government Route for few sectors

Automatic Route in most Sector

RBI FIPB

No permission required, only to notify RBI within 30 days of issue of shares to foreign investors

Approval is granted generally in 30 days

Page 9: Foreign Direct Investment- Indian view

Permitted through -

• Financial collaboration

• Joint venture and technical collaboration

• Capital market

• Branch office with approval of RBI

Page 10: Foreign Direct Investment- Indian view

0%

20%

40%

60%

80%

100%

120%

Sectoral Caps

sectoral caps

Page 11: Foreign Direct Investment- Indian view

Prohibited sector for FDI -

• Gambling and betting • Lottery business• Atomic energy • Retail trading• Agriculture or Plantation Activities in Agriculture• Railway • Arms and animation • Coal and lignite.• Mining of iron, manganese, chrome, gypsum, sulphur,

gold, diamonds, copper, zinc.

Page 12: Foreign Direct Investment- Indian view

Goverment’s attitude towards FDI

How do Government like FDI?In the 1970s…

•As FDI has become more significant, attitude towards FDI have changed substantially during the last three – four decades or so…•During 70s MNCs were commonly seen by many economists and policy makers as detrimental to the host economies, because: They were thought to create Monopoly situations.• In those days there was political sensitivity towards FDI

Page 13: Foreign Direct Investment- Indian view

13

Goverment’s attitude towards FDI

But, In 1990s Government stimulated FDI…

•Regulations moved from restrict to promote and give guarantees•Most host economies have reduced barriers to FDI, and many industrializing countries have created infrastructure and special concessions to attract it•Concessions include extension to taxes, exemption from import duties and direct subsidies

Page 14: Foreign Direct Investment- Indian view

14

Effects on the host country

• Governments spend part of their budgets in attracting FDI because they believe that FDI will generate positive effects on their country

• What happens when multinational companies invest in a host country?– How does it contribute to the country’s economic

growth and prosperity?– Important for host countries that are poor or in an

industrialisation phase• Type of effects

– Economic effects – Other effects on society and environment

Page 15: Foreign Direct Investment- Indian view

15

Economic effects

• Operations and behaviour of the subsidiary– Higher Wages – Higher efficiency – Higher exports

• Effects of the subsidiary on domestic firms – Wage Spillovers– Productivity & Knowledge Spillovers– Export Spillovers

– Start up of new industries– Spillover= unintentional effect generated by firm A on firm B as a result of an economic behaviour by A (B has not paid for that effect or invested to have it)

Page 16: Foreign Direct Investment- Indian view

16

Wages

• MNC typically pay higher wages than local firms – esp. in developing countries

• In 1931 a study documented that– “…Colombian labor…is better remunerated and

granted more sanitary living quarters by foreigners than by natives, but the foreigners probably extract more systematic and strenuous effort”

• Initial studies did not take into account: – The quality of workers employed – The size of the firms – The sophistication of the activities

Page 17: Foreign Direct Investment- Indian view

17

Wages

• Some studies find that MNC pay higher prices for people with higher education (higher quality), while for blue collar differences are minimal

• Why would a firm pay more wages than its competitors in the host country?

1. Host country regulations or home country pressures

2. To maintain “good public relations” with local government and host environment

3. It pays a premium for reducing turn-over 4. To attract better workers

Page 18: Foreign Direct Investment- Indian view

18

Productivity

• Productivity indicates how efficient is the production process – i.e. how much output a firm produces given its inputs

• Economists generally assume that MNC have higher productivity than domestic firms, especially in developing countries

• Several studies document this in a number of developing countries

(E.g. Brazil,Indonesia, Mexico, India etc.)

Page 19: Foreign Direct Investment- Indian view

19

Productivity Spillovers

• Positive: – When the increase of FDI in an industry leads

to an increase in productivity of domestic firms in the same industry (horizontal spillovers) or in industries that are vertically connected (vertical spillovers)

• Negative: – When the increase of FDI in an industry leads

to an decrease in productivity of domestic firms in the same industry (horizontal spillovers) or in industries that are vertically connected (vertical spillovers)

Page 20: Foreign Direct Investment- Indian view

20

Positive Productivity Spillovers

• Locally- owned firms might increase their efficiency by: – Copying the operations of the foreign- owned

firms;– Being forced by competition from foreign-

owned firms to raise their efficiency to survive– Qualify and improve the skills of local human

resources – The transfer of knowledge through backward

linkages with domestic suppliers

Page 21: Foreign Direct Investment- Indian view

21

Negative Productivity Spillovers

• MNC have superior technologies – Higher productivity • Lower prices for a better quality products

– They erode market shares of domestic companies

Page 22: Foreign Direct Investment- Indian view

22

What are the effects on domestic firms?Host country Years considered Results

Mexico 1970 +

Mexico 1970/75 +

Marocco 1985-89 -

Mexico 1970/75 +

Mexico 1970 +

Mexico 1970 +

Uruguay 1970 No significant effect

Venezuela 1976-89 -

Indonesia 1991 +

Taiwan 1991 +

Indonesia 1980-91 +

Indonesia 1980-91 +

Checz Republic 1993-96 -

India 1976-89 -

Page 23: Foreign Direct Investment- Indian view

23

•Why in some cases there are effects and in others not?

Page 24: Foreign Direct Investment- Indian view

24

1. The capabilities of domestic firms

• Even to adopt and imitate countries and firms need a minimum of absorptive capacity– Human resources (training, education)– Investment in experimentation, R&D

Page 25: Foreign Direct Investment- Indian view

25

2. Behaviour of MNC subsidiaries

• Economists almost always conceive MNC subsidiaries as having ‘advanced’ skills/ technologies with respect to domestic firms

• Economists also assume that R&D is centralised in the Headquarters and that subsidiaries are just a ‘passive’ local branch of the MNC

Page 26: Foreign Direct Investment- Indian view

26

3. National Policies

• Is there a need for governments to promote actively the creation and deepening of linkages? …Markets may fail to create efficient linkages, raising the cost to both parties of entering into long-term supply relationships and reducing the ability of domestic firms to become competitive suppliers

• Rules of origin/Local content requirements: preferential treatments based on the level of value added or local content

• Example: the entry of Suzuki in Hungary was done to enjoy duty-free access for car exports to the EU, and it was subject to the creation of local linkages

Page 27: Foreign Direct Investment- Indian view

27

Exports and new industries

• MNC can have two further effects: –Export Spillovers: Because they on

average export more than local firms, they generate export spillovers on domestic firms

–Generation of new industries: • The case of Ireland and Costa Rica and

the generation of new high tech industries

Page 28: Foreign Direct Investment- Indian view

INDIA:YEARWISE FDI INFLOWS

YEAR US $ million

1996-97 28211997-98 35571998-99 24621999-00 21552000-01 40292001-02 61302002-03 50352003-04 43222004-05 60512005-06 89612006-07 228262007-08 348352008-09 351802009-10 37182

Page 29: Foreign Direct Investment- Indian view

INDIA:YEAR WISE FDI INFLOWS

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10(

p)0

5000

10000

15000

20000

25000

30000

35000

40000

Series 1

year

US

$ m

illi

on

Page 30: Foreign Direct Investment- Indian view

Advantages -

• Increase in domestic employment • Increase investment in needed infrastructure• Increase capital investment • Target regional & sartorial development• Improve forex position of the country• Increase in export• Increases tax revenue

Page 31: Foreign Direct Investment- Indian view

Conclusion -

• FDI is a key driver of economic growth and development

• Foreign firms do generate technological development in the host country.

• Crowding out is not a major problem • Benefits increases in terms of competition,

innovation and efficiency.

Page 32: Foreign Direct Investment- Indian view

Literature cited-

• RBI Monthly Bulletin December-2010

Page no.- S1324.• Wikipedia.• www.fdi.com• www.rbi.org.in

Page 33: Foreign Direct Investment- Indian view