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FOREIGN INVESTMENT IN INDIA: RISKS AND RETURNS

By

Prof.Shalini Srivastav Research Scholar Email : shalini_77@sify.com Mobile : 9873965507

ABSTRACT

With a control free economy, supported by expert banking facilities, Indian capital market offers a plethora of investment options both for residents and NRIs. As per the investment plan an investor should thoughtfully select the best option available in the capital market that meets his requirements. Foreign investments are always risk oriented. There are several risk factors that affect your investment through some way or the other. To name a few: Currency Risk, Political Risk, Government Policies, Local Tax Policies, Environmental Uncertainities etc. are the risks associated with international investments. The major of all is Exchange Rates Fluctuations as the investor has to convert the return into domestic currency before actually enjoying the profit. Foreign Direct Investment (FDI) is the outcome of the mutual interest of multinational firms and host countries. While multinational firms with the expectation of earning relatively higher rate of return on their investments, invest in foreign markets, such investments have proved to be playing an important role in the development of economy. This paper examines the various aspects of FDI from investing firms as well as from receiving countries' point of views. The paper mainly focuses on the risk and return from firms' perspective and on the strategies to attract FDI from host countries' point of view.

KEYWORDS
Foreign direct investment , globalization, , return , currency risk , political risk.

INTRODUCTION

Foreign direct investment (FDI) is a direct investment into production or business in a country by a company 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 in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intercompany loans" In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. (1)FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. [2] FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. [3] FDI is one example of international factor movements. Types of FDI:

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

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