India, the capital deficient country needs more capital from outside the country.

Capital is one of the significant elements of factors of production. The industrial development of any country fundamentally depends on the availability of capital. Because of shortage of capital, particularly, underdeveloped and developing countries need more capital for their survival and technology for competing with other countries. Inadequacy of capital is a foremost obstacle for industrial growth of developing nations. The role of Foreign Direct Investment (FDI) is very much a significant in the economic development the country. FDI is the total of equity capital and other short term and long term capital shown in the Balance of Payments. There are two types of FDI: inward FDI and outward FDI. The net result is net FDI inflow (positive or negative) and stock of FDI. Stock of FDI is a cumulative value for a given period of time. FDI can take two forms: i.GREENFIELD INVESTMENT which means establishing a new operation in foreign country. ii. ACQUIRING OR MERGING with an existing firm in the foreign country. Acquisitions can be a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firms voting stock), majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent). In India a foreign company can set up operations in following way: i. Incorporation of company under the Companies Act, 1956. (As a Joint Venture or a wholly owned subsidiary) ii. Setting up a Representative Office or a Project Office or a Branch Office of foreign company which can undertake activities after taking permission of Foreign Exchange Management Regulations, 2000. India has become favored destination of Investment for various countries due to many social and economical factors. India has changed its policy of foreign investments to attract investments from every corner of the world. It has liberalized the ways of doing business in India. India has also taken into consideration the Tax laws while deciding upon the rules and policies of foreign investments in India. The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry is assigned the task of promoting Foreign Investments in India and formulating policies for achieving the same. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. It has in lot of ways facilitated India to achieve a certain degree of financial stability, growth and development. This money has endorsed India to focus on the areas that needed a boost and economic attention, and address the various problems that continue to challenge the country. Foreign direct investment is considered to be one of the important measures of increasing economic globalization. Many policy makers and academicians contend that foreign direct investment (FDI) can have important positive effects on a host countrys development effort. FDIs 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 or mining industries. The objective behind allowing FDI is to harmonize and complement domestic investment, for achieving a higher level of economic development and providing more opportunities for upgradation of technologies as well as to have an access to global managerial skills and practices. Therefore Foreign Direct Investment (FDI) has become a battle

ground in the emerging economies. In addition to the direct capital financing it supplies, FDI can be a source of valuable technical know-how while nurturing the linkages with local firms, which can help the economy on the path of the development. Based on these arguments, industrialized and developing countries have offered incentives to encourage foreign direct investments in their economies. Foreign direct investment (FDI) in India has played a very important role in the growth of the Indian economy even during the time of the recession. FDI in India has facilitated India to achieve a definite degree of growth, development and financial stability. FDI has allowed India to centre on the areas that may have required economic attention and many other challenging issues faced by the Indian economy. There are many factors that have attracted investment in India such as stable economic policies, availability of cheap and quality human resources. Last two decades there has been an impressive growth of FDI in the global landscape. This shows a noticeable change in the expansion strategy of both developed and developing countries which has stirred FDI in many ways. There are number of rewards which are linked with FDI as this is a winwin situation both for home and host countries as they derive payback from open vast global network especially to take advantage of research and development from advance countries, increase foreign exchange, Technology diffusion and knowledge transfer, Managerial skills, increase technical know-how, access to markets, skills and practices etc. It is considered as the main explanation for bridging all the scarcities in new economic liberalised global regime and the only way to integrate with the world economy in the track of growth. The objective of the present paper is to analyse the trends and patterns of FDI in developed and developing countries with special reference to India for the period 1991-2011and to find out whether there exists a significant relationship between OECD FDI Regulatory Index (which is a tool for benchmarking countries measuring reforms and assessing its impact on FDI) and FDI stock. The result which is revealed from the study will give more directions to move on the path of liberalisation to further increase the FDI inflows, which is having a significant role to play in the developing countries. This period is very important for a many reasons mainly because we opened our doors to MNCs in a liberalised regime. During this period there was a inclusive change in policy frame work and the outlook of developed and developing countries towards FDI owing to its benefits it has in the host country and was also considered as an important source of external finance. FDI FROM GLOBAL PERSPECTIVE A resurgence in economic uncertainty and the possibility of lower growth rates in major emerging markets risks undercutting this favourable trend in 2012. The United Nations Conference on Trade and Development (UNCTAD) predicts the growth rate of FDI will slow in 2012, with flows leveling off at about $1.6 trillion, the midpoint of a range (figure 1). Leading indicators are suggestive of this trend, with the value of both cross-border mergers and acquisitions (M&As) and greenfield investments retreating in the first five months of 2012. Weak levels of M&A announcements also suggest sluggish FDI flows in the later part of the year.

Source: UNCTAD, World Investment Report 2012 Figure 1: Global FDI flow 2002-2011 and projection 2012-2014 (Billions of dollars) UNCTAD projections for the medium term based on macroeconomic fundamentals continue to show FDI flows increasing at a moderate but steady pace, reaching $1.8 trillion and $1.9 trillion in 2013 and 2014, respectively, barring any macroeconomic shocks. Investor uncertainty about the course of economic events for this period is still high. Results from UNCTADs World Investment Prospects Survey (WIPS), which polls TNC executives on their investment plans, reveal that while respondents who are pessimistic about the global investment climate for 2012 outnumber those who are optimistic by 10 percentage points, the largest single group of respondents - roughly half - are either neutral or undecided. Responses for the medium term, after 2012, paint a gradually more optimistic picture. When asked about their planned future FDI expenditures, more than half of respondents foresee an increase between 2012 and 2014, compared with 2011 levels. FDI flows to developed countries grew robustly in 2011, reaching $748 billion, up 21 per cent from 2010. Nevertheless, the level of their inflows was still a quarter below the level of the pre-crisis three-year average. Despite this increase, developing and transition economies together continued to account for more than half of global FDI (45 per cent and 6 per cent, respectively) for the year as their combined inflows reached a new record high, rising 12 per cent to $777 billion (table 1). Reaching high level of global FDI flows during the economic and financial crisis it speaks to the economic dynamism and strong role of these countries in future FDI flows that they maintained this share as developed economies rebounded in 2011.

Table 1: FDI flows by Region 2009-2011 (Billions of dollars and per cent)

Rising FDI to developing countries was driven by a 10 per cent increase in Asia and a 16 per cent increase in Latin America and the Caribbean. FDI to the transition economies increased by 25 per cent to $92 billion. Flows to Africa, in contrast, continued their downward trend for a third consecutive year, but the decline was marginal. The poorest countries remained in FDI recession, with flows to the least developed countries (LDCs) retreating 11 per cent to $15 billion. Indications suggest that developing and transition economies will continue to keep up with the pace of growth in global FDI in the medium term. TNC executives responding to this years WIPS ranked 6 developing and transition economies among their top 10 prospective destinations for the period ending in 2014, with Indonesia rising two places to enter the top five destinations for the first time. FDI IN DEVELOPING COUNTRIES In the case of developing countries the domestic capital is insufficient hence it is unavoidable to invite foreign funds. Most of the developing nations of the world are mainly depending on foreign capital for the development of their industrial development. They get foreign capital in the form of Foreign Direct Investment, Foreign Collaboration, Inter-government loans, and loans obtained from international institutions and commercial barrowings. In July 1991by confirming the need of the foreign capital, the Indian Government adopted the new economic policy. Till 1991, the growth of FDI inflows was not large but after the implementation of the new economic policy in 1991, it has been playing an important role in the economic development. The

available data show that, the inflow of FDI into India has been increased from US $ 4029 million in 2000-01 to US $ 37838 million and registered a declining trend in recent years. India, the capital deficient country needs more capital from outside the country. The role of Foreign Direct Investment is very much a significant in the economic development the country. By December 2010, India attracted FDI equity inflows of US $ 2,014 million. According to the data released by the Department of Industrial Policy and Promotion (DIPP), the cumulative FDI equity inflows stood at 186.79 billion US dollar from April 2000 to December 2010. The amount of FDI, compared to China and other developed countries is quite less, but it has helped in economic transformation of India. The Indian Government has reviewed policy to attract more FDI and these policy measures boosted the FDI inflows and out flows. But in the recent years, the amount of FDI has been declining. The percentage growth over previous years has shown a negative sign. The inflows of FDI increased in the last decade and inspired the performance of the industries in India and it has new opportunities in India. Both India and China are fast developing economies of the world and enjoy the strong economic growth rate. But, India is under performer as for as FDI is concerned if compared with China. The procedures for FDI approval, environmental clearance, legal aspect, etc., are time consuming. The FDI inflow is being hampered due to the political uncertainty at the central and state as well. The reforms in infrastructure need to be quickened, mergers and acquisition process must be rationalized. Above and beyond all these, India is suffering from problem of corruption to attract more FDI. A perusal of Indias FDI policy and other major emerging market economies (EMEs) reveals that though Indias approach towards foreign investment has been relatively conservative to begin with, it progressively started catching up with the more liberalised policy stance of other EMEs from the early 1990s onwards, inter alia in terms of wider access to different sectors of the economy, ease of starting business, repatriation of dividend and profits and relaxations regarding norms for owning equity. This progressive liberalisation, coupled with considerable improvement in terms of macroeconomic fundamentals, reflected in growing size of FDI flows to the country that increased nearly 5 fold during first decade of the present millennium. Though the liberal policy stance and strong economic fundamentals appear to have driven the steep rise in FDI flows in India over past one decade and sustained their momentum even during the period of global economic crisis (200809 and 2009-10), the subsequent moderation in investment flows despite faster recovery from the crisis period appears somewhat inexplicable. Survey of empirical literature and analysis presented in the paper seems to suggest that these divergent trends in FDI flows could be the result of certain institutional factors that dampened the investors sentiments despite continued strength of economic fundamentals. Findings of the panel exercise, examining FDI trends in 10 select EMEs over the last 7 year period, suggest that apart from macro fundamentals, institutional factors such as time taken to meet various procedural requirements make significant impact on FDI inflows.

FDI Policy Framework in India Policy regime is one of the key factors driving investment flows to a country. Apart from underlying overall fundamentals, ability of a nation to attract foreign investment essentially depends upon its policy regime - whether it promotes or restrains the foreign investment flows. This section undertakes a review of Indias FDI policy framework. There has been a sea change in Indias

approach to foreign investment from the early 1990s when it began structural economic reforms about almost all the sectors of the economy. a) Pre-Liberalisation Period Historically, India had followed an extremely careful and selective approach while formulating FDI policy in view of the governance of import-substitution strategy of industrialisation. The regulatory framework was consolidated through the enactment of Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a joint venture was allowed only up to 40 per cent. Subsequently, various exemptions were extended to foreign companies engaged in export oriented businesses and high technology and high priority areas including allowing equity holdings of over 40 per cent. Moreover, drawing from successes of other country experiences in Asia, Government not only established special economic zones (SEZs) but also designed liberal policy and provided incentives for promoting FDI in these zones with a view to promote exports. The announcements of Industrial Policy (1980 and 1982) and Technology Policy (1983) provided for a liberal attitude towards foreign investments in terms of changes in policy directions. The policy was characterised by de-licensing of some of the industrial rules and promotion of Indian manufacturing exports as well as emphasising on modernisation of industries through liberalised imports of capital goods and technology. This was supported by trade liberalisation measures in the form of tariff reduction and shifting of large number of items from import licensing to Open General Licensing (OGL). b) Post-Liberalisation Period A major shift occurred when India embarked upon economic liberalisation and reforms program in 1991 aiming to raise its growth potential and integrating with the world economy. Industrial policy reforms slowly but surely removed restrictions on investment projects and business expansion on the one hand and allowed increased access to foreign technology and funding on the other. A series of measures that were directed towards liberalizing foreign investment included: 1) Introduction of dual route of approval of FDIRBIs automatic route and Governments approval (SIA/FIPB) route. 2) Automatic permission for technology agreements in high priority industries and removal of restriction of FDI in low technology areas as well as liberalisation of technology imports. 3) Permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors. 4) Hike in the foreign equity participation limits to 51 per cent for existing companies and liberalisation of the use of foreign brands name. 5) Signing the Convention of Multilateral Investment Guarantee Agency (MIGA) for protection of foreign Investments. These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. In 1997, Indian Government allowed 100% FDI in cash and carry wholesale and FDI in single brand retailing was allowed 51% in June, 2006. After a long debate, further amendment was made in December, 2012 which led FDI to 100% in single brand retailing and 51% in multiple brand retailing. An Indian company may receive Foreign Direct Investment under the two routes as given under: Automatic Route: FDI under the automatic route does not require any prior approval either by the Government or the Reserve Bank. The investors are only required to notify the concerned

regional office of the RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issuance of shares to foreign investors. Government Route/FIPB Route: Under this Route, FDI approval is made by three institutions, viz., the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Implementation Authority (FIIA).Under the approval route, the proposals are considered in a time-bound and transparent manner by the FIPB. Approvals of composite proposals involving foreign investment/ foreign technical collaboration are also granted on the recommendations of the FIPB.

Foreign Direct Invested in India is permitted under the following forms of Investments: Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro Issues. Through private placements or preferential allotments. Sectors where FDI is Banned Atomic Energy, Lottery Business including Government / private lottery, online lotteries, Gambling and betting including casinos, Business of chit fund, Nidhi Company, Trading in Transferable Development Rights (TDRs), Activities/sector not opened to private sector investment, Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Piscicultureand cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations), Real estate business, or construction of farm houses, Manufacturing of Cigars, cheroots, cigarillos and cigarettes of tobacco or of tobacco or of tobacco substitutes are the sectors where FDI is not permitted. TRENDS IN FDI INFLOWS TO INDIA With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalisation of the economy since the early 1990s as well as gradual opening up of the capital account. As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year.

TRENDS AND PATTERNS OF FDI FLOW IN INDIA Economic reforms taken by Indian government in 1991 makes the country as one of the prominent performer of global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market based system from a closed economy characterized by extensive regulation, protectionism, public ownership which leads to pervasive corruption and slow growth from 1950s until 1990s. In fact, Indias economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus per cent growth. The exports in 2008 were $175.7 bn and imports were $287.5 bn. Indias export has been consistently rising, covering 81.3% of its imports in 2008, up from 66.2% in 1990-91. Since independence, Indias BOP on its current account has been negative. Since 1996-97, its overall BOP has been positive, largely on account of increased FDI and deposits from Non Resident Indians (NRIs), and commercial borrowings. The fiscal deficit has come down from 4.5 per cent in 2003-04 to 2.7 per cent in 200708 and revenue deficit from 3.6 per cent to 1.1 per cent in 2007-08. As a result, Indias foreign exchange reserves shot up 55 per cent in 2007-08 to close at US $309.16 billion an increase of nearly US $110 billion from US $199.18 billion at the end of 2006-07. Domestic saving ratio to GDP shot up from 29.8% in 2004-05 to 37.7% in 2007-08. For the first time Indias GDP crossed one trillion dollars mark in2007. As a consequence of policy measures (taken way back in 1991) FDI in India has increased manifold since 1991 irrespective of the ruling party over the years, as there is a growing consensus and commitments among political parties to follow liberal foreign investment policy that invite steady flow of FDI in India so that sustained economic growth can be achieved. Further, in order to study the impact of economic reforms and FDI policy on the magnitude of FDI inflows, quantitative information is needed on broad dimensions of FDI and its distribution across sectors and regions. The IT industry is one of the booming sectors in India. At present India is the leading country pertaining to the IT industry in the Asia -Pacific region. With more international companies entering the industry, the Foreign Direct Investments in India has been phenomenon over the year. The rapid development of the telecommunication sector was due to the FDI inflows in form of international players entering the market and transfer of advanced technologies. The telecom industry is one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. The IT industry is one of the booming sectors in India. At present India is the leading country pertaining to the IT industry in the Asia -Pacific region. With more international companies entering the industry, the Foreign Direct Investments in India has been phenomenon over the year. The rapid development of the telecommunication sector was due to the FDI inflows in form of international players entering the market and transfer of advanced technologies. The telecom industry is one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world.

The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. The options have increased with quality products from foreign car manufacturers. The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector. For the past few years the Indian Pharmaceutical Industry is performing very well. The varied functions such as contract research and manufacturing, clinical research, research and development pertaining to vaccines are the strengths of the Pharma Industry in India. Multinational pharmaceutical corporations outsource these activities and help the growth of the sector. The Indian Pharmaceutical Industry has been experiencing a vast inflow of FDI. The FDI inflow in the Cement Industry in India has increased with some of the Indian cement giants merging with major cement manufacturers in the world such Holcim, Heidelberg, Italcementi, Lafarge, etc. The FDI in Semiconductor sector in India were crucial for the development of the IT and the ITES sector in India. Electronic hardware is the major component of several industries such as information technology, telecommunication, automobiles, electronic appliances and special medical equipments.