Unit 5 : FDI

FDI
Flow of funds into facilities from one destination to
another, for any activity as industrial development,
infrastructure & manufacturing.
Forms of FDI

i. Greenfield Investment: Establish entirely new operation

in a nation
ii. Acquire/ merge with existing firm in foreign nation:
Acquisitions can be minority (foreign interest of 10-49%) &
Majority (foreign interest of 50-99%) or full outright
stake(foreign interest of 100%)
Prof Purshottam Patil IB 2014

FDI : Concept
Re-investing earnings of FDI Enterprises are also FDI.

Foreign investment useful if focus is more on projects than equity of Cos. as

investments into equity are hot money that leaves at first sign of trouble. E.g.
Crisis in S. Korea, S. Africa & Argentina were partially due to these problems.
Hence, FDI excludes Foreign Investment in stock markets.

Investment Outflow: Investment from home nation to other nation

Investment Inflow : Investment from other nation to home nation

Prof Purshottam Patil IB 2014

FDI : Concept
To establish in N. American Market, Japanaese
car maker Toyota had to options: exports or
FDI?
Although it was successfully exporting, it
increasingly turned to FDI.
Now, Toyota has capability to produce 1.45
million cars yearly, only in N. America.
Prof Purshottam Patil IB 2014

FDI : Concept
Need of FDI:

For Developing Nations :

Housing, Power
Generation,
Infrastructure,
Healthcare, Explore &
Produce Primary Goods.

Prof Purshottam Patil IB 2014

For Developed Nations :

Modernization & Further
Develop Technology

FDI : Concept
1. Follow Competitors
5. Assured R.O.I.
R&D, futuristic
projects enable
investor better
success & revenues.
Swiss global
healthcare Co. Roche
invested heavily in
Genentech,
California for
innovative products.

Strategic approach to follow one's

competitors
e.g. American Motor Co.( AMC)
invested in Shanghai Motor Co. in
China. Then Cos. in US, Japan & S.
Korea followed investment in China.

2. International PLC

FDI Patterns

Cost cut by shifting

production to
developing nations
e.g. Essel Propack
moved to China

4. Contract
Manufacturing
Reduce manu. costs
to improve
competency
e.g. Honda Motors
manufactures its
vehicles in Europe.

Prof Purshottam Patil IB 2014

3. Location
At times, FDI better vis-a-vis
exporting / licensing
e.g. Mahindra tractors
manufactured in N. America
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FDI : Concept
FDI: Types
Horizontal FDI

Vertical FDI

In same industry operating at

home
e.g. Cemex, Mexican largest
Cement Manufacturer,
acquired RMC in Britain(2004)

In industry providing inputs for firms

domestic operations or selling
outputs of firms domestic operations.
2 types, viz.,
Backward VFDI: e.g. extractive
industries providing inputs for
domestic processes, as oil extraction,
copper mining, etc
Forward VFDI: sells output of
domestic production e.g. e.g.
Volkswagen acquired many dealers
when it entered US, instead of
distributing its cars through
independent dealers.

Prof Purshottam Patil IB 2014

FDI : Concept
Flow of FDI
Amount of FDI
undertaken over given
time(usually yearly)

e.g. Average annual FDI

outflow ^sed from $25 Bln
(1975) to $1.2 Trillion (2001)
before falling back to
$620Bln(2004).

Prof Purshottam Patil IB 2014

Stock of FDI
Total accumulated
value of foreign
assets at given time
By 2003 global FDI stock
exceeded $8.1Tln. 61,000 parent
Cos. Had 9,00,000 affiliates in
foreign markets, collectively
employing 54 Mln people &
accounting for 1/10th global
growth.
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FDI : Benefits & Costs

Host Country: Benefits
1. Capital: long term
MNCs investment in
projects yields profits

4. Increase in
domestic investt: Rise
in FDI flow enhances
national investors
investt

7. Social Effects: Due to

FDI, employment,
infrastructure, literacy &
healthcare improves.

2. Technology: FDI drives rate of

technology development,
diffusion & transfer. Transfer of
technology through FDI
contributes +vely to national
productivity.

3. Market Access:
Investors provide export
markets access &
enhances exports

5. Employment
Generation: FDI enhances
direct & indirect
employment opportunities
in host country

6. Infrastructure: To facilitate
FDI, host nation focuses on
infrastructure dev. e.g. MBP in Navi
Mumbai, Silver valley in Bangalore,
Hitech City in Hyderabad & Tidel
Park in Chennai.

8. Formation of Clusters:
groups where R &D,
training & pollution
control systems provided
to competing companies.
worked well in Italy, Brazil
& India

9. Spin-Offs: Individuals trained in

cos. start own ventures. e.g.: spin-offs
of Silicon Valley, US. Fairchild: spinoff & now competitor of Intel. Several
Machine tool industries in Pune,
Ludhiana & Bangalore are spin-offs of
SKF, Bosch & MICO

Prof Purshottam Patil IB 2014

FDI : Benefits & Costs

Host Country: Costs

1. Investing Cos. may not

serve the interest of host
nation

2. Outflow of earnings
due to repatriation to
home nation

3. Import of substantial
inputs from investor's
home nation

4. Cos will hire

expartiate managers
for management
positions

5. ^ expensive
Controlling
technologies of investor
Co. not in interest of
host nation

6. Home nation
producers lack money /
technical expertise,
hence incompetent &
may get wiped out.

Prof Purshottam Patil IB 2014

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FDI : Benefits & Costs

Home Country: Benefits

1. Inflow of
earnings on a
long term basis

2. High salaries
for employees

3. Exposure to
foreign
markets
Prof Purshottam Patil IB 2014

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FDI : Benefits & Costs

Home Country: Costs

1. Initial extremely
large capital
outflow

2. Exports may
decrease

3. Imports may ^ if
FDI intended to
serve home nation

4. Home nation
looses employment
opportunity

5. Profits are
repatriated abroad,
if not re-invested in
home nation

6. Major tax
heavens enjoy
money at the cost
of home nation

Prof Purshottam Patil IB 2014

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FDI: FIs in India

Automatic Route :
Foreign Investors do not need mandatory FIPB (Foreign Investt. Promotion

Board) of RBI permission for 100% ownership, for categories below:

1. where sophisticated
technology is proposed to
be brought in.

2. where min. 50%

production is to be
exported

4. where Co. offers

proposals for power,
roads, ports & industrial
model towns / industrial
parks/estates

3. where Co. offers for

consultancy services

5. where Co seeks to
establish SEZs, AEZs (Agri.
Export Zone) Techno
Parks & EOUs

Such above units enjoy 100% profit repatriation to their home nations.
Prof Purshottam Patil IB 2014

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FDI: FIs in India

Strategies for Indian Cos. to raise funds:

2. ADRs (
American
Depository
Receipts
1. GDRs (
Global
Depository
Receipts)

3. FCCBs
(Foreign
Currency
Convertible
Bonds)
Strategies
for Indian
Cos. to raise
funds

Prof Purshottam Patil IB 2014

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FDI: FIs in India

No ceilings on investment & no. of GDRs, ADRs & FCCBs to be
floated by Co. in a financial year.

No end use restrictions on GDRs/ADRs issue proceeds, except a

ban on invest. in real estate & stock market.
25% FCCB proceeds may be used for general corporate
restructuring(redesigning one/more aspects of a company as
spinning off depts. or take advantage of tax breaks)

Co. seeking Govt. approval to have min. 3 years sound financial

performance record. This may be relaxed for infrastructure
projects as power generation, telecommunication, petroleum
exploration & refining, ports, airports & roads.
Prof Purshottam Patil IB 2014

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FDI Policy

Policy Implications:
Liberal policies helped NRI
investt. in India grown 20%<
annually since 2001, until 2007.
NRIs from Middle East & Europe
invested ^ly in real estate & SEZs
Prof Purshottam Patil IB 2014

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FDI Policy
Recent FDI Policy Initiatives:
Liberalized Policy on Foreign Technology Collaboration:
Cos having foreign technology agreements, allowed to pay royalties
on automatic route to a limit of 8% of Exports & 5% on domestic
sales, without any restrictions on royalty payments.
Foreign Investment in the Banking Sector
FDI limit in private sector banks allowed up to 74% under
automatic route, including investment by FIIs (Foreign Institutional
Investors)
Foreign Bank wholly owned subsidiary in India

By permission to hold 100% paid up capital, if regulated by home

country banking supervisory authority & meeting RBI licensing
criteria.
Scientific & Technical Journal/Magazine Printing
100% FDI permitted
subject to legal compliance & Govt Approvals.
Prof Purshottam Patil IB 2014

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FDI Policy
FDI Policy Initiatives contd..:
Marketing of Petroleum Products
100% FDI allowed on automatic route, subject to
regulatory framework in oil marketing sector
Oil exploration sector
100% FDI permitted on automatic route subject to &
under Govt. policy.
Petroleum Product Pipelines
100% FDI permitted on automatic route for Natural
Gas / LNG(liquefied natural gas) with prior Govt.
approval.

SEZs & EOUs

100% FDI permitted, as a developer. same also
applicable to agricultural zones & techno parks
Prof Purshottam Patil IB 2014

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FDI: India
State wise distribution of Approvals:
The Central Government supplements efforts of state
governments by providing fiscal incentives for
investments in high priority sectors as infrastructure,
IT through schemes as Growth centre schemes, transport
subsidy schemes, the new industrial policy for the
north east & other hill states, the Electronics Hardware
Technology Park (EHTP), the Software Technology Park
(STP), Export Promotion Zones(EPZs) & Special
Economic Zones (SEZs)
During 1991-2004, states accounting for major FDI
investment approvals were Maharashtra, Gujarat, Delhi,
Tamil Nadu, Karnataka, Andhra Pradesh, Madhya
Pradesh, WB & Uttar Pradesh.
Prof Purshottam Patil IB 2014

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FDI : Trends
2000< MNCs from US & Europe invested in
Chinese SEZs & EPZs (Export Processing Zones)
Attractive Destinations: Philippines,
Indonesia, Thailand & Malaysia

L. America, Brazil, Argentina & Columbia are

now attracting investments.
Growth only due to FDI: Malta, Cyprus, Panama
& Mauritius.
Prof Purshottam Patil IB 2014

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FDI : Trends
Between 2000-04 FDI value slumped 50% from $1.2 Tln to 620
Bln.
In 2000, US, being largest FDI recipient ($314 Bln of $1.2Tln in
global FDI, it share dropped to $121 Bln in 2004 .

Developing Nations
1985-90: annual FDI FLOW OF 27.4 Bln (17.4% of
global FDI flow).
2004: 44% global FDI, with share of China as largest,
followed by Mexico & Brazil. In contrast, Africa had
smallest amount of inward FDI flow, of $20Bln.
Prof Purshottam Patil IB 2014

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FDI : Trends
Global Stock: Among 100 largest MNCs (2003), 27% US, 14% French, 12%
German & Britain each, 7% Japanese. In global stock, 25% of US, 14%
Britain, 8% French & German each & 4% Japanese.

Services: In 2003, 67%. Initially focused on Trade & Financial services,

now in electricity, water, telecom & business services as IT are prominent.

Rise in Internet based global telecom networks. E.g. P&G shifted back
office accounting functions to Philippines. Dell has call answering centers
in India. Microsoft & IBM have software developing & testing centers in
India.

Prof Purshottam Patil IB 2014

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India: FDI Trends

FDI inflow ^sed 5 times to USD 15.7 Bln in 2006-07 from USD 2.2 Bln
in 2003-04.

Mauritius was dominant nation investing in India, followed by USA &

UK

Capital inflows via GDRs/ADRs from abroad was USD 5.67 Bln in
Apr-Nov2007 vs. USD 1.85 Bln during corresponding period in 2006.
FDI Global Trends 2013.pptx
Prof Purshottam Patil IB 2014

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