Foreign Investment in India - Analysis of Factors and Policies

MANAGEMENT RESEARCH PROJECT
FOREIGN
INVESTMENT
IN
INDIA
Analysis of Factors &
Policies
FDI and FII - Policies and BRICS

Procedures;
Vs.
Comparative Analysis
DEVELOPED WORLD
across
Developing and
Developed Countries
1
Shradha.Diwan@gmail.com
MANAGEMENT RESEARCH PROJECT
Author:
Shradha Diwan
08 BS 000 3170
Class of 2010
IBS Kolkata
Submitted To:
Prof. Arup Choudhuri

Class of 2010 IBS Kolkata
Date: 11th March, 2010
2
Authorization
“This report is submitted as a partial fulfillment of the requirement of

MBA Program at IBS, Kolkata.”
3
Acknowledgements
I am grateful to Prof. Arup Choudhuri, my ‘Management Research Project’ guide at ICFAI Business School
(IBS), Kolkata, for his constant guidance and encouragement duri ng the entire research and documentation
process of the M anagement Research Project.
4
CONTENTS
I. INTRODUCTION...................................................................................................................8
II. FOREIGN INVESTMENT IN INDIA – THE HISTORICAL SKETCH ................ 12

INDUS VALLEY CIVILIZATION .......................................................................................................................................................13
MAURYAS – THE NORTHERN SILK ROUTE................................................................................................................................14
MUGHAL EMPIRE – TRADE..........................................................................................................................................................15
BRITISH/FRENCH/PORTUGUESE – TRADE................................................................................................................................16
FOREIGN INVESTMENT IN INDIA – POST INDEPENDENCE....................................................................................................17
FOREIGN INVESTMENT IN INDIA – POST LIBERAL IZATION ...................................................................................................19

INDIA’S JOURNEY FROM LICENSE RAJ ERA TO GLOBALIZATION ......................................................................................22
III. COMPARATIVE STUDY OF FOREIGN INVESTMENT IN DEVELOPED AND

DEVELOPING COUNTRIES ............................................................................................... 23
CHINA...............................................................................................................................................................................................24
ECONOMIC OVERVIEW ............................................................................................................................................................24
DISTRIBUTION OF FOREIGN INVESTMENT ...........................................................................................................................25
FOREIGN TRADE ZONES/FREE PORTS ....................................................................................................................................25
INVESTMENT TRENDS AND STATISTICS ................................................................................................................................26
RUSSIA .............................................................................................................................................................................................27
GROWTH RECOVERY ................................................................................................................................................................28
FDI IN RUSSIA – TRENDS AND STATISTICS ............................................................................................................................29
SOUTH AFRICA ...............................................................................................................................................................................31

INVESTMENT OPPORTUNITIES ...............................................................................................................................................32
FOREIGN INVESTMENT – TRENDS AND STATISTICS ............................................................................................................33
BRAZIL ..............................................................................................................................................................................................35
OPENNESS TO FOREIGN INVESTMENT ..................................................................................................................................37
REGULATORY FRAMEWORK FOR FDI ....................................................................................................................................38
FDI – TRENDS AND STATISTICS ...............................................................................................................................................39
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JAPAN...............................................................................................................................................................................................41
OPENNESS TO FDI .....................................................................................................................................................................41
FLOW OF INWARD FDI INTO JAPAN ......................................................................................................................................42
FDI – TRENDS AND STATISTICS ...............................................................................................................................................44
UNITED STATES OF AMERICA .....................................................................................................................................................45

FDI AND THE DOLLAR ...............................................................................................................................................................46
FDI IN USA – 1998 TO 2008 – TRENDS AND STATISTICS ....................................................................................................48
IV. MAJOR FACTORS AFFECTING FOREIGN INVESTMENT ............................... 50

DIFFERENCE BETWEEN FPI AN D FDI ..........................................................................................................................................51
DIFFERENT TYPES OF FDI .............................................................................................................................................................52

BY DIRECTION ............................................................................................................................................................................52
BY TARGET..................................................................................................................................................................................52
BY MO TIVE .................................................................................................................................................................................53
WHY HAS FOREIGN INVESTMENT INCREASED DRAMATICALLY IN THE PAST DECADE? ................................................55
WHERE DOES FOREIGN INVESTMEN T TAKE PLACE? ..............................................................................................................56
FACTORS INFL UENCIN G FOREIGN INVESTMENT DECISION S ...............................................................................................57
V. INVESTING IN INDIA ..................................................................................................... 59

SEBI and RBI Guidelines ...............................................................................................................................................................59
POLICY FRAMEWORK ...................................................................................................................................................................60

INDUSTRIAL PO LICY ..................................................................................................................................................................60
INDUSTRIAL LICENSING............................................................................................................................................................60
FOREIGN INVESTMENT POLICY...............................................................................................................................................60
REGULATIONS AND PROCEDURES .........................................................................................................................................61
AUTOMATIC APPRO VAL RO UTE AND FIPB ROUT E .............................................................................................................61
NEW VENTURES....................................................................................................................................................................61
EXISTING COMPANIES .........................................................................................................................................................62
GOVERNMENT APPROVAL (FIPB ROUTE) .............................................................................................................................62
FOREIGN INVESTMENT IN THE SMALL SCALE SECTOR .......................................................................................................63
FOREIGN INVESTMENT POLICY FOR TRADING ACTVITIES .................................................................................................63
OTHER MODES OF FOREIGN DIRECT INVESTMENTS ..........................................................................................................64
GDR/ADR/FCCB.....................................................................................................................................................................64
STATE LEVEL PROJECT IMPLEMENTATION ...........................................................................................................................64
INVESTMENT INCENTIVES ...................................................................................................................................................64
POWER TARIFF INCENTIVES ...............................................................................................................................................65
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OTHER INCENTIVES ..............................................................................................................................................................65
FDI IN EOUs/SEZs/ INDUSTRIAL PARK/EHTP/STP ...................................................................................................................66

Special Economic Zones (SEZs) ...............................................................................................................................................66
100% Export Oriented Units (EOUs) ......................................................................................................................................66
Industrial Park............................................................................................................................................................................66
Electronic Hardware Technology Park (EHTP) Units...........................................................................................................66
Software Technology park Units ............................................................................................................................................66
ENTRY STRATEGY INTO INDIA ....................................................................................................................................................67
IMPORTANT SECTORS WHERE FDI UPTO 100% IS PERMITTED ...........................................................................................69
SECTORS WHICH ATTRACT CEILING ON FOREIGN OWNERSHIP ..........................................................................................70
SECTOR SPECIFIC GUIDELINES FOR FDI.....................................................................................................................................72
CONCLUSION.......................................................................................................................... 80
REFERENCES.......................................................................................................................... 81
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I. INTRODUCTION
India is believed to be a good investment destination among global investors despite challenging hurdles
like political uncertainty, bureauc ratic hassles, shortages of power facilities, and infrastructural
deficiencies.
At present, the country has a promising potential in terms of growth and diversification possibi lities. India
offers a high growth potential in practically all areas of business. It has slowly trans formed itself from a
highly protected, semi -socialist, autarkic economy since post-independence period int o a country which is
smashing barriers and seeking foreign investments.
Although the country has evolved into a more welcoming destination of foreign investment, investors find
it increasingly difficult to enter Indian markets due to political, bureaucratic, socio -cultural and
demographic complexities of the country. Doing bus iness in India is both challenging and frustrating for
investors at the same time.
This project aims at providing an exhaustive analysis of the various factors that are to be considered by
an investor who chooses to park his money in India. It is important for an investor to develop a good
understanding of the Indian market and the country‘s overall ec onomy before taking a direct plunge into
the economic system.
As India moves ahead on the general trend of globalization and liberalization, and its policies get
increasingly standardized with those of the global economy, it is nevertheless important to understand
specific government policies that exist in relation to a particular area of business and analyze the political
concerns which should be addressed.
India’s Economic Sectors and Foreign Investment
India has a strong information technology sector along with other highly promising sectors like the auto
components, chemicals, apparels, pharmaceuticals, and jewellery. Rigid FDI policies of the country pose
a severe hindrance to foreign investment in these and other growing sectors. FDI caps in most sectors
are being relaxed or removed in the wake of the growing liberalization of the world economy.
India‘s recent FDI policy allows up to 100% foreign stake in certain vent ures. Industrial licensing
requirements have been substantially reduced through recent industrial policy reforms. The real estate
sector owes its upward moving growth to a booming economy and relax ed FDI norms and policies. The
approval of 100% FDI in the construction sector by the government in 2005 and this automatic route has
been permitted in townships, housing, built-up infrastructure and construction development projects
8
including housing, commercial premis es, hotels, resorts, hospitals, educational institutions, recreational
facilities, and city- and regional-level infrastructure.
However, fields which are in severe need of foreign investment include:
Civil aviation
Construction development
Industrial parks
Petroleum and natural gas
Commodity exchanges
Credit-information insuranc e
Mining
Retailing
The project addresses the route that i s followed by Foreign Investment as it flows into the count ry
directly and indirectly. The project deals with the various policies and procedures that are to be
considered while investing in India.
Some of the policies that will be addressed include:
1. The Industrial Policy
2. Foreign Direct Investment
3. Investment by non-resident Indians and overseas corporate bodies
4. Foreign technology agreements
5. 100% Export Oriented Units/ Export Processing Zones/ Special Economic Zones
6. Electronic Hardware Technology Park and Software Tec hnology Park Schemes
7. Sector specific policies on FDI
The Proc edures of approval of foreign investment in the country shall also be addressed.
The project would further deal with an analysis of the country in terms of
1. Economic factors
9
2. Socio-cultural factors
3. Demographic factors
4. Political factors
5. Bureaucratic factors
These are some crucial aspects that need to be thoroughly analyzed to determine the ease of investing in
a particular sector of the Indian economy.
International capital flows perform a variety of functions in the world economy. For example, they permit
levels of domestic investment in a c ount ry to exceed the count ry‘s level of saving. For rapidly growing
economies, inflows of foreign investment permit faster growth or growth with less sacrifice of current
consumption, than could otherwise take place. For countries generating large amounts of saving,
international capital flows provide a means to invest where returns are higher than at home, as was the
case for Great Britain in the nineteenth century and for Japan more recently.
These are long-t erm uses of what are, in some cases, prolonged periods of flow of capit al into or out of
the particular countries. S horter periods of capital flow may serve some different functions, such as
smoothing various types of cyclical or economic fluctuations. Countries heavily dependent on particular
crops need capital flows to finance periods when crops fail or when crop prices fall drastically, permitting
consumption, and perhaps capital formation, to be at least partially sheltered. International capital flows
can also help to finance periods of war or reparations, sometimes resulting from defeat in wars.
Foreign Direct Investment (FDI) in India in growing rapidly. Foreign direct investment is an integral part of
an open and effective international economic system and a major catalyst to development. FDI is highly
beneficial for a count ry like India. Empirical studies suggest that FDI triggers technology spillovers, assists
human capital formation, contributes to international trade integration, helps c reat e a more competitive
business environment and enhanc es enterprise development. All these factors contrib ute to higher
economic growth and consequently aid in alleviating poverty. Apart from bestowing economic benefits
FDI may also help improve environmental and social conditions by trans ferring "cleaner" technologies and
leading to more socially responsible corporate policies.
India‘s foreign investment policies are being liberalized considerably in the present scenario. This is
proven by the fact that the government is seeking to approve 100% Foreign Direct Investment (FDI) in the
education sector of the country. This further calls for an analysis of the various opport unities and hurdles
of entering the Indian ec onomic system through this rout e.
India ranks at position 122 among 181 countries in t erms of the ease of doing business in the country. A
critical factor in det ermining India's continued economic growth and realizing t he potential t o be an
10
economic superpower is going to depend on how t he government can c reat e incentives for FDI flow
across a large number of sectors in India.
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II. FOREIGN INVESTMENT IN INDIA – THE HISTORICAL SKETCH
India's economic history can be broadly compartmentalized into three eras, beginning with the pre -
colonial period lasting up to the 17th century. The advent of British colonization of the Indian subcontinent
started the colonial period in the 17t h century, which ended with the I ndian independenc e in 1947. The
third period is the post-independenc e period after 1947.
The people of India have had a continuous civilization since 2500 B.C.E., when the inhabitants of the
Indus River valley developed an urban culture based on commerce and sustained by agricultural trade.
The Harappan Civilization, as it came t o be known, declined around 1500 B. C.E., most likely due to
ecological changes.
During the second millennium B.C.E., pastoral, A ryan-speaking tribes migrated from the northwest into
the subcontinent, settled in the middle Ganges River valley, and adapted to antecedent cultures.
Alexander the Great expanded across Central Asia during the 4th century B.C.E., exposing India to
Grecian influences. The Maurya Empire came to dominate the Indian subc ontinent during the 3rd century
B.C.E., reaching its greatest height under Emperor Ashoka. In the 4th and 5th centuries C.E., northern
India was unified under the Gupta Dynasty. During this period, known as India's Golden Age, Hindu
culture and political administration reached new heights.
Islam spread across the subcontinent over a period of 700 years. In the 10th and 11th centuries, Turks
and A fghans invaded India and established the Delhi Sultanate. In the early 16th century, Babur, a
Turkish-Mongol adventurer and distant relative of Timurlane and Genghis Khan, established the Mughal
Dynasty, which lasted for 200 years.
The first British outpost in South Asia was established by the English East India Company in 1619 at
Surat on the northwestern coast. Later in the century, the Company opened permanent trading stations at
Madras (now Chennai), Bombay (now Mumbai), and Calcutta (now Kolkata), each under the prot ection of
native rulers. Imperial India became the “crown j ewel” of the rapidly expanding B ritish Empire.
On August 15, 1947, India became a dominion within the Commonwealth, with Jawaharlal Nehru as
Prime Minister. Strategic colonial considerations, as well as political tensions between Hindus and
Muslims, led the British to partition British India int o two s eparate states: India, with a Hindu majority; and
Pakistan, which consisted of two "wings," East and West Pakistan--currently Banglades h and Pakistan--
with Muslim majorities. India became a republic, but chose to continue as a member of the B ritish
Commonwealth, after promulgating its constitution on January 26, 1950.
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INDUS VALLEY CIVILIZATION
The Indus Valley Civilization (IV C) was a Bronze

Age civilization (mature period 2600–1900 B CE) which
centered mostly in the western part of the Indian
Subcontinent or South Asia and flourished around the Indus
river basin. Historically part of Ancient India, it is one of the
world's earliest urban civilizations along
with Mesopotamia and Ancient Egypt.
The Indus civilization‘s economy was primarily dependent on trade,

which was facilitated by major advances in transport technology.
Internal Trade Commodities: The economic history of India since Indus Valley Civilization to 1700
Cotton AD can be categorized under the Pre-colonial phase. During Indus

Valley Civilization Indian economy was very well developed. It had
Lumber very good trade relations with other parts of the world, which is
Grain Livestock evident from the coins of various civilizations found at the site of
Indus valley. Before the advent of East India Company, each village
Food Commodities in India was a self sufficient entity. Each village was economically
External Trade- regions independent as all the economic needs were fulfilled with in the
village.
Central Asia
The Indus cities were connected with rural agricultural communities
Arabian Gulf Region
and distant resource and mining areas through strong trade
Distant Mesopotamia systems. They us ed pack animals, river boats, and bullock carts for
transport.
Northern Afghanistan
Cotton, lumber, grain, livestock, and other food stuffs were the
major c ommodities of this internal trade. There was also external
trade wit h Cent ral Asia, the Arabian Gulf region, and the distant Mesopotamian cities, such as S usa and
Ur. Trade also existed with Nort hern Afghanistan from where the Harappans bought the famous blue
gemstones, ‗Lapis Lazuli‘.
13
MAURYAS – THE NORTHERN SILK ROUTE
The Mauryan Empire was one of the largest empires to rule the Indian subcontinent. Its decline began 60
years after Ashoka's rule ended, and it dissolved in 185 BC with the foundation of the Sunga Dynasty in
Magadha.
Under Chandragupt a, the Mauryan Empire conquered the trans -Indus region, which was under
Macedonian rule. Chandragupta then defeated the invasion led by Seleucus I, a Greek general from
Alexander's army. Under Chandragupta and his successors, both internal and external trade, and
agriculture and economic activities, all thrived and expanded acros s India thanks to the creation of a
single and efficient system of finance, administration and security. After the Kalinga War, the Empire
experienced half a century of peace and security under Ashoka: India was a prosperous and stable
empire of great economic and military power whose political influence and trade extended ac ross
Western and Central Asia and Europe. Mauryan India also enjoyed an era of social harmony, religious
transformation, and expansion of the sciences and of knowledge.
The Silk-Road is a unique example

from history, of inter-continental
cooperation and collaboration not
only in the field of trade and
commerce but also in the realm of
ideas and culture. The Silk Road
spanned a distance of almost 7000
miles from China through Central
Asia, northern India and Parthian
Empire, to the Roman Empire during
th
the period of 200 BC to 14 century
AD circa. It connected the Yellow River valley in China to the Mediterranean Sea, virtually connecting two
continents, Asia and E urope, the east and the west. The German Baron Ferdinand von Richthofen coined
the term ―Silk Road‖ in the 1870s to describe what was, at its peak, one of the most important and
dynamic centers of economic activity in the world, and the great est trade route linking East to West. It was
more than just a single route; rather, it was a river of connections stretching from south to north, and from
East Asia to as far West as Europe, Egypt and ot her countries in Africa.
14
MUGHAL EMPIRE – TRADE
The political economy of the Mughal Empire and of the European trade with India clearly marks out the
age of Mughal rule as a distinct phase in the count ry's economic history. The centralized authority created
by the Mughals had manifold implication for the economic life of the Indian people. The Mughals rendered
possible a very substantial expansion in inter -regional t rade, anticipating the emergence of an integrated
market. In course of time the trade contributed to an undoubt ed increase in the absolute volume of India's
exports and imports, stimulated Indian participation in overseas commerce and induced some positive
developments in the manufacturing section of t he ec onomy and affected the fort unes of the Indian
merchants in different ways by the patterns of competition and collaboration with the traders from abroad.
The nature of India‘s trade, inland and foreign, has practically been the same in the ancient and medieval
ages. During the medieval period t he whole of Northern and Western India had commercial relations with
West Asia and extending through it to the Mediterranean world, as also to Central Asia, South-E ast Asia
and China both oversea and overland rout es.
Throughout the Mughal period, the volume of Indian export through the nort h-western land routes
continued fluctuating according to the atmosphere of amity or hostility prevailing between India and
Persia on t he question of the possession of Qandahar and sometimes on the relations between the
Mughal government and the Portuguese.
15
BRITISH/FRENCH/PORTUGUESE – TRADE
The period spanning a hundred and fifty years, between the deat h of the Mughal emperor Aurangzeb in
1707 AD, and the Sepoy mutiny in 1857 witnessed the gradual increase of the European influence in
India. This was the time when the Europeans actually got involved in trade and commerce. Prior to this
period, Europeans did arrive in India from time to time but these were no more than isolated incidents.
All historians agree that the Portugue se explorer and adventurer Vasco da Gama was the first known
European to reach India in 1498. It is believed that Gama had landed at Calicut (modern K erala) in quest
of spices and the famous Calico (fine cotton) cloth. The other P ortuguese nationals who accompanied
him were motivated by eit her missionary zeal or
trading prospects.
The Portuguese eventually settled down to a

very prosperous trade in spices with India. The
Muslim rulers (including the Mughals) were
averse to the idea of a foreign power carrying
on commercial activities on the high seas
bordering India. In Goa, which had become a
Portuguese bastion there were reports of
religious intoleranc e, forced conversions,
devastation of Hindu temples and so forth.
However, Alphonse de Albuquerque (1509-1515), who was the s econd P ortuguese governor in India,
encouraged mixed marriages of the Port uguese with the local people, probably imbued with the idea of
creating a mixed rac e of Catholics, which would be racially and culturally linked to Portugal.
Although the erstwhile French ruler Louis XII had granted letters of monopoly to French traders as early
as 1611, it was only in 1667 that a French company was set up at Surat (Gujarat) with Franci s Caron as
its Director-General. In 1669, another French company was set up in Masulipatnam (Andhra P radesh),
after the then king of Golconda, exempted the French from paying import and export duty.
16
FOREIGN INVESTMENT IN INDIA – POST INDEPENDENCE
The post independence period of economy of India was a litmus test for the economic planners. Having
come out of the shadow of coloni al rule, the nation had a huge challenge of undoing the exploitation of
colonial era. The founding fat hers had to use economic upliftment as a tool for nation building. The
economy then was backward in nature.
Indian economic policy after independence, influenced by the colonial experience (which was seen by
Indian leaders as ex ploitative in nature), and by their exposure to Fabian socialism, bec ame protectionist
in nature, implementing a policy of import substitution, industrialization, state intervention in labor and
financial markets, a large public sector, overt regulation of business, and central planning. Jawaharlal
Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis,
formulat ed and oversaw t he economic policy of independent India. They expected favorable outcomes
from this strategy since it involved both the public and privat e sectors and was based on direct and
indirect state intervention instead of a Soviet-style central command system. The policy of concentrating
simultaneously on capital and technology intensive heavy industry and subsidizing hand based and low -
skilled cottage industries was criticized by economist Milton Friedman, who t hought it would not only
waste bot h capital and labor, but also retard the development of smaller manufacturers.
India's low average growth rate up to 1980 was derisively referred to as the Hindu rate of growt h,
because of t he cont rasting high growth rates in other Asian countries, especially the East Asian Tigers.
The ec onomic reforms that surged economic growth in India after 1980 can be attributed to two stages of
reforms. The pro-business reform of 1980 initiated by Indira Gandhi and carried on by Rajiv Gandhi,
eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate
taxes. The economic liberalization of 1991, initiated by then Indian prime minister P. V. Narasimha Rao
and his finance minister Manmohan Singh in response to a mac roec onomic c risis did away with the
Licence Raj (investment, industrial and import licensing) and ended public sector monopoly in many
sectors, thereby allowing automatic approval of foreign direct investment in many sectors. Since then, the
overall direction of liberalization has remained the same, irres pective of the ruling party at the centre,
although no party has yet tried to take on powerful lobbies like the trade unions and farmers, or
contentious issues like labor reforms and cutting down agricultural subsidies.
Industry was characterized by ill equipped technology and unscientific management. Agriculture was still
feudal in nature and characterized by low productivity. Transport and communication systems were not
properly developed, educational and health facilities insufficient and the complete absence of social
security measures.
17
Poverty was visible and unemployment widespread, resulting in a low standard of living. To guide the
Indian economy towards a pat h of growth and development, the economic planners decided t o adopt a
course of mixed economy, assigning a vital role to public sector enterprises and economic planning.
Privat e enterprise participation was negligible. A system of License Raj developed, by which
entrepreneurs had to seek permission from government to set up manufacturing units. The government
effectively controlled everything. During this period the banks were nationalized between late 1960's and
early 1970's.
India's post-independence economic policy combined a vigorous private sector with state planning and
control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter
the Indian market only if they possessed technology unavailable in India. Almost every aspect of
production and marketing was tightly controlled, and many of the for eign companies that came to India
eventually abandoned their projects.
18
FOREIGN INVESTMENT IN INDIA – POST LIBERALIZATION
By the beginning of 1990‘s, the Indian Economy was under great crisis and faced its stiffest challenge.
India fac ed a serious balance of payment problem and foreign exchange reserves were at record low.
That is when the government decided to alter the course of the Indian economy.
The introduction of reforms in 1991 resulted in sweeping changes in the Indian Economy. The reforms
process consisted of three processes, liberalization, privatization and globalization (LPG model). Under
liberalization markets were deregulated, under privatization privat e participation was encouraged and
many a public sector undertaking (PS U) were privatized and under globalization restrictions on foreign
investments were removed. The Indian economy moved away from its isolation, to be integrated wit h the
global ec onomy and to competitively utilize its advantages to make rapid strides in terms of growt h.
In India today 60% of the population is dependent directly and indirectly on agriculture and agriculture
contribut es 17% of GDP.
The Industrial sector has witnessed massive restructuring by the way of mergers and acquisitions,
process reengineering, foreign joint ventures, technological up gradation. Certain sectors like cement,
steel, aluminium, pharmaceuticals, and automobiles have been witnessing unprecedented growt h.
The service sector has been one of the major beneficiaries of the ec onomic boom. The outsourcing
industry comprising of IT and ITE‘S became the new poster boy of the Indian economy. The huge pool of
engineering talent was absorbed by the IT industry, while graduates could carve out a career in the ITE'S
industry. The purchasing power of the booming middle class was enhanced, who went on a consumption
spree, which in turn allowed the retail sector to flourish. The booming economy also created a wave of
real estate boom ac ross the country.
India is the fourth-largest economy in the world in PPP terms, India is a preferred destination for foreign
direct investments (FDI); India has strengths in telecommunication, information technology and other
significant areas such as auto c omponents, chemicals, apparels, pharmaceuticals, and jewellery. Despite
a surge in foreign investments, rigid FDI policies resulted in a significant hindrance. However, due to
some positive economic reforms aimed at deregulating the economy and stimulating foreign investment,
India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has
a large pool of skilled managerial and t echnical expertise. The size of the middle -class population stands
at 50 million and represents a growing consumer market.
19
India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in vent ures. Industrial policy
reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion
and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving
growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI
regime. In Marc h 2005, the government amended the rules to allow 100 per cent FDI in t he construction
business. This automatic route has been permitted in towns hips, housing, built -up infrastructure and
construction development projects including housing, commercial premises, hotels, resorts, hospitals,
educational institutions, recreational facilities, and city - and regional-level infrastructure.
A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields which
require relaxation in FDI restrictions include civil aviation, construction development, industrial parks,
petroleum and natural gas, commodity exchanges, credit-information servic es and mining. But this still
leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as
insurance and retailing. FDI inflows into India reached a rec ord $19.5 billion in fiscal year 2006-07 (April-
March), according to the government's Secretariat for Industrial Assistance. This was more than double
the total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24
billion and for 2008-09, it is expected to be above $35 billion. A critical factor in determining India's
continued ec onomic growth and realizing the pot ential to be an economic superpower is going t o depend
on how the government can create incentives for FDI flow ac ros s a large number of sectors in India.
The supply of money into the economy has increased steadily due to FDI‘s. (Between April 2008 and
January 2009, India received total foreign investments of US $ 15,545 million).The Foreign Institutional
Investors (FII‘s) have invested heavily in the stock market, resulting in a continual bull run for an extended
period of time. The BSE indices scaled a new peak of 21, 000 in January 2008.
India, post liberalization, has not only opened its doors to foreign investors but al so made
investing easi er for them by implementing the following measures:
o Foreign exchange controls have been eased on the account of trade.

o Companies can raise funds from overseas securities markets and now have considerable
freedom to invest abroad for expanding global operations.
o Foreign investors can remit earnings from Indian operations.
o Foreign trade is largely free from regulations, and tariff levels have come down s harply in the last
two years.
o While most Foreign Investments in India (up to 51 % ) are allowed in most industries, foreign
equity up to 100 % is encouraged in export-oriented units, depending on the merit of the
proposal. In certain specified industries reserved for the small scale sector, foreign equity up to
24 % is being permitted now.
20
As the industry progresses, opportunities abound in India, which has the world's largest middle class
population of over 300 million, is attracting foreign inve stors by assuring t hem good ret urns. The scope
for foreign inve stment in India is unlimited. India offers to foreign investors a well balanced package of
fiscal incentives for exports and industrial investments that includes:
o Complete tax exemptions.

o Investment incentives are offered by both the Central Government and the Government of the
State in which the unit is located.
o India has tax treaties wit h 40 countries.
Moreover, the support of the common man regarding FDI is clearly from the sharp hike in India's gross
expenditure in the past few years.
21
INDIA’S JOURNEY FROM LICENSE RAJ ERA TO GLOBALIZATION
Phase I: (1947-65)
• Focus on government led investments in manufacturing
• Several large PSUs in steel, chemicals, and power were set up
• Many of these companies exist even today and are among the largest companies in their sectors
Phase II: (1965-80)
• Government involvement in industry increased
• Strong licensing laws were introduc ed with a sustained focus on import substitution
• PSUs and formation of several small-scale private sector manufacturing entities grew
Phase III: (1980-90)
• The government partially opened its economy to external trade
o De-lic ensed some key sectors for privat e participation, leading to strong growth in a few
sectors
o Formation of Maruti Suzuki a s government’ s 50:50 Joint Venture with Japan’s

Suzuki Motors
Phase IV: (Since early 1990s)
• The industry was further liberalized
• The scope of licensing was significantly reduced
• Custom duties were slashed
• FDI in various sectors was opened up
Phase V: (2000 onwards)
• Companies began to reap the rewards of the various phases of development learning
Many Indian business enterprises became quit e competitive and looked at taking on global players .
22
III. COMPARATIVE STUDY OF FOREIGN INVESTMENT IN
DEVELOPED AND DEVELOPING COUNTRIES
USA
Russia
JAPAN
China
India
South Africa
Brazil
23
CHINA
ECONOMIC OVERVIEW
An important part of the economic reform process in China has

been the promotion of foreign direct investment (FDI) inflow.
After more than twenty years of economic reform, China has
become one of the most important destinations for cross-border
direct investment.
As a result of the active government promotion t hrough various policy measures, FDI in China has grown
rapidly since t he 1978, especially in the 1990s. From early 1980s to late 1990s, contracted FDI inflo w to
China has grown from about US$ 1.5 billion a year to more than US$ 40 billion a year in 1999. During the
same period, China‘s actual us e of FDI grows from about US$ 0.5 billion to more than US$ 40 billion a
year.
China has been the world‘s largest FDI recipient among developing countries since early 1990s. In recent
years, FDI to China accounts for 1/4 to 1/3 of total FDI inflow to developing countries. Foreign investment
has become an import ant source for China‘s investment in fixed assets. Its share in total annual
investment in fixed assets grew from 3.8% in 1981 to its peak level of 12% in 1996. A fter t he Asian
financial crisis in 1997, FDI inflow fell and its contribution to fixed assets investment also dec reas ed to
about 9% and 7% in 1998 and 1999, respectively.
The growth rate of foreign direct investment (FDI) into China accelerated to 23% in 2008 to $92.3 billion,
according to Ministry of Commerce statistics. American FDI in China grew more than 10% in 2008, the
first year t hat U.S. investment in China rose since 2002. According to the United Nations Conference on
Trade and Development (UNCTA D), in 2007, mainland China was t he world‘s sixth largest FDI recipient,
after the United States, the United Kingdom, France, Canada, and the Netherlands. ( Hong K ong was the
world‘s seventh largest FDI recipient. Together, the two economies would be ranked fourth.)
China also received the most votes in a 2007 UNCTA D poll of attractive investment destinations, followed
by India, the United States, Russia, Brazil, and Vietnam. The American Chamber of Commerce has
reported that American firms‘ operations in China are more profitable than they are in the United States.
Outbound investment from China has recently increas ed significantly as China encourages leading
domestic firms to acquire key technologies, brands, and access to natural resources abroad, although
Chinese investment in U.S. financial institutions has lagged expectations.
While FDI in China shot higher, investors continued to face a range of potential problems that could
expose them to risks in the future. Problems foreign investors face in China include lack of t rans parency,
24
inconsistently enforced laws and regulations, we ak IP R protection, corruption, industrial policies that
protect and promote loc al firms, and an unreliable legal system.
At the moment, China appears to be using the rules to restrict foreign investments that are:
Intended to profit from currency speculation;
In sectors where the government is trying to tamp down aggregat e capital inflows and inflation;
In sectors where China is seeking to cultivate ―national champions;‖
In sectors that have benefit ed historically from state-authorized monopolies or from a legacy of
state investment;
In sectors deemed key to social stability, like foodstuffs and heavily polluting industries; and
Nominally ―foreign‖ investment that is actually Chinese capital that has been exported and re-
imported to take advantage of prefere ntial treatment accorded to foreigners.
DISTRIBUTION OF FOREIGN INVESTMENT
The vast majority of foreign investment is conc entrated in China's more prosperous coastal areas,
including Guangdong, Jiangsu, Fujian, and Shandong provinces, and Shanghai. Foreign investment in
most service sectors lags manufacturing, mainly due to government -imposed restrictions. China is
committed to gradually phasing out barriers in many service industries, but progress has been slow.
FOREIGN TRADE ZONES/FREE PORTS
China's principal duty-free import/export zones are in Dalian, Guangzhou, Shanghai, Tianjin, and Hainan.
Besides these official duty-free zones, numerous free trade and economic development zones and ―open
cities‖ offer similar privileges and benefits to foreign investors. In 2008, China also actively promoted
economic development outside its relatively wealthy coastal area by encouraging multinationals to
establish regional headquarters and operations in Central, Western, and Northeast China. Some analysts
speculate that China will event ually grant full trading and distribution rights nationwide.
China's General Administration of Customs claims to successfully control duty -free imports into the
zones, but the lack of physical barriers between the duty free zones an d surrounding areas makes it
difficult to control the outbound flow of unt axed items.
25
INVESTMENT TRENDS AND STATISTICS
The top sources of FDI in China in 2008 were: Hong Kong, the British Virgin Islands, Singapore, Japan,
the Cayman Islands, South Korea, the United States, Western Samoa, and Taiwan. Of note, some
mainland companies utilize ―roundtrip‖ investment via subsidiaries in the S pecial Administrative Regions
(SAR‘s) of Hong K ong and Macau in order to obtain inc entives available only to foreign inve stors.
Analysts have estimated that mainland Chinese funds flowing through Hong Kong may account for 10 -
30% of Hong K ong's total realized direct investment in China. Hong Kong and Macau statistics are further
skewed because many Taiwan firms invest through them to avoid scrutiny from Taiwan authorities.
Indeed, some obs ervers estimate accumulated stock of FDI inflows from Taiwan is actually two to three
times the amount formally recorded.
The past few years have s een an ups urge in investment from tax -havens like the B ritish Virgin Islands
and Cayman Islands. Anecdot al information suggests these funds originate from companies based in
Organization for Economic Cooperation and Development (OECD) economies, Taiwan, and even China
itself. Some researc hers estimate that as much as one-t hird of nominally ―foreign‖ investment in China is
really of Chinese origin. That is, Chinese investors find ways to send money out of the country so that
they can then re-enter as a ―foreign investor,‖ taking advantage of policies that offer foreign investors
preferential treatment. The elimination of certain tax benefits for foreign investors, described in S ection E,
may lead to a drop in ―round trip‖ investment.
U.S. direct investment abroad is inc reasingly concent rated in developed countries, reflecting a focus on
high-tech and financial services and a move away from basic manufacturing and extractive industries.
U.S. direct investment in China had fallen in line with this trend from 2002 to 2007, but U.S. investment in
China grew in 2008. While China's processing trade exports to the United St ates are booming, U.S.
retailers often buy goods from enterprises whose source of investment is not American, thus de -linking
this trend from U.S. direct investment abroad statistics. Also, it is important to note that Chines e data on
foreign direct investment do not include much of the high-dollar value minority equity stakes that
American financial services firms have t aken in major Chinese lenders. Finally, American -invested
enterprises in China may fund their continued growth by reinvesting locally -generated profits in China.
China does not classify this as new investment.
26
RUSSIA
ECONOMIC OVERVIEW
Russia presents many promising investment opportunities with the

potential for dynamic growth in sales and profits. However, investors
face several significant challenges, including a complex regulatory
and legal system that requires professional help to navigate,
wides pread corruption, a lack of respect for the rule of law, and
immature banking and financial markets. In addition, state-owned
entities have a major presenc e in many economic s ectors, and henc e may be potential competitors of
new investors.
Russia‘s economy is still developing, not diversified, and is largely focus ed on natural resource extraction.
GDP sharply contracted in the last two months of 2008. Although it posted a 7.3 percent growt h rate for
the first nine mont hs of 2008, the final figure for 2008 is expected to be 6.8 to 7. 0 percent, as compared to
8.1 percent in 2007. The numbers for 2009 are expected to be even lower, ranging from 0 percent growth
to 2.5 percent. Fixed capital investment saw an increase of 13. 1 percent January -Sept ember, which was
lower than the 21. 3 percent increase during the same period in 2007. Mos t of the capital investment in the
first nine months of 2008 went to energy, manufacturing, real estate, and transportation.
According to the Central Bank of Russia, foreign direct investment (FDI) inflows exceeded $50 billion in
the first 9 months of 2008, as compared to $38 billion during the same period in 2007. End of year
estimates place FDI at $55 billion. At 4% of GDP, this level of FDI inflow is on par with other emerging
markets. The United Kingdom and the Netherlands continued to be t he top source countries for
investment inflows during the year, reflecting these two count ries‘ heavy investments in Russia‘s energy
sector.
Capit al account liberalization, whic h took effect on July 1, 2006, helped inc rease net inflows to Russia in
2006 ($40 billion) and 2007 ($82 billion). The general economic slowdown stemming from the financial
crisis and shocks to investor confidence, however, have produced a marked shift for 2008, increasing
capital out flow and putting additional pressure on the ruble. As of Octobe r 1, 2008 (latest available data at
this writing), capital out flows were equal to capital inflows. BNP Paribas has estimated that investors
withdrew about $140 billion from August – October 2008. According to the Central B ank of Russia, net
private capital outflow reached $50 billion in October 2008 alone.
Russia is one of the 10 largest economies in the world. Additionally, it is the EU‘s 3rd largest trading
partner, and an essential energy supplier. This recovery mak es Russia an economic – and political –
actor in Europe that cannot be ignored.
27
GROWTH RECOVERY
Since the return of positive and strong growth after the 1998 financial crisis – growth rates averaged 6.7%
of GDP in 1999-2006 and ECFIN‘s last 2007 growth forecast is 7.7%, or t hree and half times the growth
rate of the euro area – Russia is now the largest non-E U economy in Europe and one of the 10 largest
economies in the world. Russia's nominal GDP was worth over EUR 740 billion, or USD 1 trillion in 2006,
roughly the size of Spain‘s. In PPP ter ms, it is almost 70% of Germany‘s (GDP in PPP are available only
in US D). Clearly, Russia has fully recovered from the deep ―transition recession‖ that plagued the count ry
in the 1990s (see Charts 1 and 2).
For most of this period, the growth of Russia‘s output, driven primarily by private consumption, was made
possible by a gradual increase in utilization of t he existing industrial capacity, rather than through a build -
up of new capacities. The investment rate in Russia‘s economy throughout the first years of the current
decade remained essentially stable, at 20 -21% of GDP. The situation seems to have been evolving since
end-2006, with investments growing faster and playing a bigger role as a growth driver. This Count ry
Focus will deal with one single aspect of this process of investment growth in Russia – Foreign Direct
Investment (FDI). Indeed, FDI has been a substantial part of total investments in the count ry, in particular
in some strat egic sectors, like the hydrocarbon industry. It remains of fundament al importanc e for making
the resumption of growth in Russia truly sustainable.
28
FDI IN RUSSIA – TRENDS AND STATISTICS
Per capit a FDI into Russia was, until recently, very disappointing: Russia had since the early 1990s been
significantly under-performing with respect to comparable emerging economies as well as the other
countries that have emerged from the Soviet Union. Chart 3 shows that Russia‘s net FDI per c apita was
substantially lower than the average of the Commonwealth of Independent States (CIS, the loose
association of most of the former Soviet Union republics, bar the Baltic republics). In 2006 this situation
changed abruptly, when net FDI per capita rose by almost 40 times the 2005 value, reaching around E UR
40 billion.
This change reflects primarily a very significant increase in total FDI inflows (see Chart 4 above). FDI into
Russia has grown since 2002 by almost 8.3 times, reaching around E UR 23 billion in 2006, or over 3% of
GDP, which is more than three times the c orresponding figure for 2002, and is comparable t o the FDI
share in China. Correspondingly, the share of Russia in total FDI in
the CIS, which had fallen during most of the 1990s, jumped from
below 40% in 2002 to almost 70% in 2006 (which is, however, still
below Russia‘s current share of the CIS aggregate GDP, at around
76%).
29
E ven more striking is another change observed in 2006 – the reversal of a long tradition of ―capital flight‖
out of Russia and a corresponding switch in the direction of net investment fl ows (see Chart 5 below). Net
inflows of FDI rose from EUR 0.1 billion in 2005 to E UR 5.6 billion in 2006. The total inflow of net FDI and
port folio investment in that year exceeded EUR 15 billion.
This trend seems to have continued in 2007. The estimates made by the Central Bank of Russia (CB R)
indicate that total FDI reached around EUR 21 billion during the first half of 2007, while net FDI was about
EUR 1. 5 billion. The
surplus of the Balance of
Payments' capital and
financial account reached
EUR 45 billion during the
first 9 months of the y ear.
This increase in total
inflows is partially
explained by the launch
of a number of large
Initial P ublic Offers
(IPOs ) in the first half of
2007 (notably those of
the two largest state
owned banks, Sberbank
and V TB, which each
attracted around E UR 6.7
billion) and also by the auction of the remaining assets of Y ukos. The size of capital inflows was forecast
to abate during the remainder of 2007 even before the market turbulenc e of August 2007 (which seems to
have had a very limited impact in capital inflows into Russia), due to more limited IP O-related activities.
Russia has fully recovered from its ―transition recession‖, with a very robust growth record since 1999.
Nevertheless, a key weakness in this impressive gro wth pattern has been the relatively low level of
investment overall and net FDI in particular. However, Russia has recently considerably enhanced its
position as a (net) FDI destination – and even with all the limitations of the available data, it is clear that
the EU, as by far t he largest investor in Russia, has played a major role in this proc ess. This Count ry
Focus argues that to ensure that this increase in net FDI and total net capital inflows is a sustainable
long-run trend and not a temporary blip, Russia must still improve the legal framework for FDI and the
investment climate in the country. This need is especially stronger in some (but not all) natural resource
and energy-linked sectors. The E U, as the major investor in Russia and largely dependent on it for energy
resources, has a clear strategic interest in this.
30
SOUTH AFRICA
ECONOMIC OVERVIEW
Located at the southernmost tip of A frica, South A frica (GMT +2)

is bordered by Namibia, Botswana, Zimbabwe and Mozambique,
and t otally encloses Lesotho. There are currently 11 official
languages in South Africa, but for business purposes, English
and A frikaans are most often used.
Although the economy is in many areas highly developed, there

are some weaknesses, partly because of remaining inequalities between the country's black and white
residents, and partly due to the country's international isolation until the 1990s. The country could, then,
be said to be in a state of transition, as the government seeks to address the inequities of previous
regimes and foster good international trade relationships with other countries.
Efforts so far appear to have been successful, and S outh African business has become increasingly
integrated into the int ernational community; foreign investment int o the area has grow n substantially over
the past few years as a result. With its advantageous location and a government rec eptive to foreign
direct investment, South A frica cert ainly looks as though it is becoming an international force to be
reckoned with.
Busine ss Infrastructure
The S outh African business infrastructure is generally well developed, and could be seen as a model for
other A frican countries to follow. It includes an efficient physical infrastructure of roads, rail and air
transport, a well developed communications net work support ed by reliable electricity supplies, and a
substantial financial support structure for companies established in the country, including a network of
merchant banks, brokers, and financial services specialists. Although the business infrastructure is not
yet able t o compete with those of the most developed western powers, it is certainly forging a pat h for
other emerging markets countries to follow; increasing investment in telecommunications and technology
should see it able to compet e on an international level in the near future.
In common with almost every business jurisdiction, both on- and offshore, South A frica has hopes of
becoming the e-commerce hub of its hemisphere. Although the groundwork has been laid, the industry
still seems to be in the process of developing a coherent legislative framework and e-commerce strategy.
Although it may not be necessarily assumed that South A frica's position at the very bottom of the African
continent would be an advantage in terms of international business opportunities, it actually makes the
country a very good trans-shipment point between the emerging markets of Central and South America
31
and t he newly industrialized nations of South and Far East Asia. South A frica is also ideally placed for
access to countries in the Southern A frican Customs Union (SACU), and the S outhern African
Development Community (SADC), an alliance of 15 countries with a combined population of over 180
million.
INVESTMENT OPPORTUNITIES
The government of South A frica is open to foreign investment, which it views as a means to drive growt h,
improve international competitiveness, and obtain access to foreign markets. Virtually all business sectors
are open to foreign investors. No government approval is required, and there are almost no restrictions on
the form or extent of foreign investment. The Department of Trade and Industry‘s (DTI) Trade and
Investment South Africa (TISA) division provides assistance to foreign investors. The DTI concentrates on
sectors in which research has indicated that the country has a comparative advantage. TISA offers
information on sectors and industries, consultation on the regulat ory environment, facilitation for
investment missions, links to joint vent ure partners, information on incentive packages, assistance with
work permits, and logistical support for relocation.
For both international and domestic investors, there are many investment opportunities available in the
modern S outh A frica: the country is the world leader in several specialized manufacturing areas: it
produces and exports more gold than any ot her international competitor, and also exports considerable
amounts of coal; and it leads in the field of mineral processing to form feralloys and stainless steels.
Several other areas, such as tourism, agriculture and livestock development, construction, and the
service industry are undergoing rapid growth at the moment, and look likely to attract substantial foreign
investment over the next few years.
As previously mentioned, the leadership i s receptive to foreign investment, and S outh A fric a has
made good progress in dismantling its old economic system, which was based on import substitution,
high t ariffs and subsidies, anti-competition meas ures, and widespread government intervention. The
government has substantially reduced its role in the economy, and in the interests of promoting private
sector investment competition, has reduced import taxes and subsidies to local firms, eliminated the
punitive non-resident shareholders tax, removed certain limits on hard currency repatriation, and reduced
the secondary tax on corporate dividends (soon to be replac ed by a new dividends tax in line with
international norms).
Virtually all business activities are open to international investors, although in a few sectors, ceilings have
been placed on the permitted extent of foreign involvement, for example in the banking industry in which
foreign equity investment is limited. At pres ent, foreign investments are treated in essentially the same
way as domestic investments, and receive national treatment for various investment incentives such as
export initiative programmes, tax allowances, and trade regulations.
32
FOREIGN INVESTMENT – TRENDS AND STATISTICS
South A frica's foreign trade and investment were affected by sanctions and boycotts, especially during
the 1980s and early 1990s. These measures inclu ded a volunt ary arms embargo instituted by the United
Nations (UN) in 1963, which was declared mandatory in 1977; the 1978 prohibition of loans from the
United States Export-Import Bank; an oil embargo first instituted by OPEC in 1973 and strengthened in a
similar move by Iran in 1979; a 1983 prohibition on IMF loans; a 1985 cutoff of most foreign loans by
private banks; the United States 1986 Comprehensive Antiapart heid Act, which limit ed trade and
discouraged United States investors; and the 1986 European Economic Community (EEC) ban on trade
and investment. The Organization of A frican Unity (OAU) also discouraged trade with Sout h Africa,
although observers estimated that Afric a's officially unreport ed trade with South Africa exceeded R10
billion per year in the late 1980s.
The most effective sanctions measure was the withdrawal of short -term credits in 1985 by a group of
international banks. Immediate loan repayments took a heavy toll on the economy. More t han 350 foreign
corporations, at least 200 of which were United States owned, sold off their South African investments. In
1991 both the EEC and the United States lifted many official sanctions in view of measures taken by
Pretoria to begin dismantling apartheid. Foreign investors were slow to return to S out h Afric a, however;
most banking institutions considered the country too unstable, and foreign corporations fac ed high labor
costs and unrest if they tried to operat e there.
In 1994 and 1995, many of the Unit ed States companies that had sold off shares or operations in South
Africa in the past decade ret urned to do business there. By early 1996, at least 225 United States
companies employed more than 45,000 South African workers.
During the 1960s, foreign investment in mining and manufacturing grew steadily, reaching over 60
percent of total foreign investment by 1970. After that, foreign investment in South Africa stagnated and in
some cases declined, increasing t he government's reliance on loans rather t han on equity capital to
finance development. In 1984 loans constituted over 70 percent of South Africa's foreign liabilities, as
compared with only 27 percent from direct investments. As a result, when most loans were cut off in
1985, available investment capital dropped sharply, and t he economy suffered. In 1989 a substantial
proportion of gross investment--R39 billion out of R49 billion--represented depreciation.
Although international opposition to South Africa eased in the early 1990s and bans on investment were
lifted, investment as registered on the Johannesburg Stock Exchange (JSE) continued to decline and
South A frican share prices on the JSE and on the London Stock Exchange were low. Industrial shares
fared better t han other sectors, but even t he industrial index showed only sluggish growth throug h 1991.
33
The overall JSE index improved slightly in 1992, and this trend c ontinued after that. In 1993 the index
rose by nearly 50 percent, although
the volume of trade continued to be
low by international standards. By
late 1995, foreign purchases on the
JSE had risen to more than R4.5
billion.
Foreign purchases were primarily

in port folio investment rat her than
direct investment through the mid-
1990s. Most foreign direct
investment was in the form of joint
ventures or buying into existing
enterprises. There was very little
foreign direct investment in new
enterprises, a trend that hit hardest
in the struggling black business
sector in Sout h A frica. Unit ed Stat es
direct investment in South Africa rose during this time, from about US$871 million in 1992 to m ore than
US$1.34 billion in 1995.
South A fricans invested heavily in other African c ount ries, even during the years of declining investments
in South Africa. Tourist facilities were a favorite target for South African investments during the sanctions
era. South A fricans invested in t ourist parks in Madagascar, for example, and in hotel development in the
Comoro Islands and in Mozambique in the early 1990s. South Afric an tourists, banned from many other
tourist locales at the time, then shared in the benefits of these developments.
34
BRAZIL
ECONOMIC OVERVIEW
Brazil has been among the world's leading recipients of foreign direct
investment (FDI) in recent years. The impressive figures reflect the
longstanding presenc e of international companies in prominent areas
of the Brazilian economy such as telecommunications, chemicals,
pharmaceuticals, automobile manufacturing, and many parts of the
service sector.
These investments have been sustained, among other factors, by the

size of the domestic market, political stability, openness and improved macroeconomic conditions,
especially in terms of enhanced fiscal discipline and adjustment, as well as by various economic reforms.
Besides their very positive financial impact on the balance of payments, the inflow of FDI has played a
major role in enlarging industrial capacity and boosting competitiveness.
A research study published in 2004 observed that foreign direct investment in Brazil had played a
significant part in the country 's industrialization process in the past few decades. FDI inflows into Brazil
were attracted mostly by the size of the vast dom estic market and also by favorable government policies.
It has been obs erved that t he FDI inflows into B razil favored the capital intensive or technology intensive
industrial production sectors of the economy. Of late t he Brazilian s ervices sector has als o started
garnering FDI inflows.
In the referenc e period of the research study, the Brazilian FDI regulatory regime was substantially liberal.
It may be noted that, majority of the Brazilian politicians view FDI as an employment generating avenue
and also as a modernizing vehicle for the B razilian ec onomy.
Country Highlights:
Brazil has the largest economy in South America

Brazil, along with India & China has highest rates of growt h
Since 2000 Brazil accounts for 52% of FDI into South America, the 2nd lar gest FDI receiver
In 2002 Brazil had the 12th largest economy
Brazil is cofounder of Mercosur & a key promoter of FTAA – A champion of free trade
Geographic Info:
Brazil is 5th Largest Country by Area
35
A land area of 8.5 million square Kms
A population of 172 Million
Equatorial weather with largest rain forest
Became a republic in 1889
Divided into 5 regions and 26 states
A country of immigrants – Europeans, Africans, Asians & pacific islanders
Brazilian Economy:
Brazil is an emerging industrial-service ec onomy, Agriculture accounts for less than 10% of GDP
Brazil initiated Market reforms since 1990‘s
Inflation has fallen to 9.3% (still high) in 2003 from 2,708% in 1993 – ―Real Plan‖
Real Plan was initiated to stabilize economy in the aftermath of Contagion
Real was devaluated in 2001 & IMF extended $41 Billion loan to bail Brazilian economy
Brazil’s Factor Endowments:
Brazil is rich in natural resources

o Land, minerals, Water, Forests
Brazil has an advanced technology
o Telecom infrastructure
o Skilled labor
o Indigenous technology sector
o Booming Biotech Industry
Brazil has established core sector
o Leading producer of Aluminum & Steel
Brazil has a young & skilled population
o Over 250,000 are enrolled in Graduate program in 2002
Technology Focus
Import Substitution program created a strong local industry

Government encouragement of Aerospace, biotec hnology sectors has built strong tech sector
Brazil has built a strong engineering, Automobile, Aerospace industry
Related and Supporting Industry
Brazil‘s Auto & Engineering industry is benefit ed by steel, rubber & auto parts industry
Brazil has a strong Agribusiness sector with chemicals, pesticides, seeds etc
A strong higher educ ation system supplies industry with talented employees
36
Demand Conditions:
A strong home demand exists in Brazil

A population of 172 Million
A strong demand for consumer products, Autos etc at home supports expansion abroad by
Brazilian companies
Free Trade Area agreement with other South American countries creates a larger market
OPENNESS TO FOREIGN INVESTMENT
Brazil is open to and encourages foreign investment. According to a recent United Nations report, Brazil
is the largest foreign direct investment (FDI) recipient in Latin America, attracting an estimated USD 42
billion in 2008 (The Brazilian Central Bank reports a slightly higher figure of US D 45 billion). The United
States is the number one foreign investor in B razil. FDI is prevalent across Brazil‘s economy, although
certain sectors, notably media and communications, aviation, trans portation and mining, are subject to
foreign ownership limitations. While Brazil is generally considered a friendly environment for foreign
investment, burdensome tax and regulatory requirements exist. In most cases these impediments apply
without discrimination t o both foreign and domestic firms. The Government of Brazil makes no distinction
between foreign and national capital.
With respect to the current global financial crisis, a diversified ec onomy, relianc e on local rat her than
external debt, and investment grade status will help Brazil weather the storm. However, Brazil is not
immune to the crisis and the Central Bank‘s January 2009 market survey revealed a forecasted GDP
growth of 2. 0 percent, a decline from the July 2008 forecast of 4.0 percent growth. The Brazilian
government is pursuing monetary policy and industry support measures to address the impact of the
crisis.
Bilateral Investment Agreements
Brazil does not have a Bilateral Investment Treaty with the United States. While Brazil had signed B ITs
with Belgium and Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, Republic of
Korea, Net herlands, Portugal, Switzerland, United Kingdom and Venezuela, none of these were ratified
by the Brazilian Congress. Brazil also has not ratified the Mercosul investment prot ocol.
Brazil has no double taxation treaty with the United States, but does have such treaties with 24 other
countries, including, among others, Japan, France, Italy, the Netherlands, Canada and Argentina. Brazil
signed a Tax Information Exchange Agreement with the United States in March 2007 that currently awaits
ratification in the Brazilian Congress, where it has been challenged on its constitutionality.
37
Foreign Trade Zones
The federal government has granted tax benefits for certain free trade zones. The most prominent of
these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign
investment, including from U.S. companies. Most of these free trade zones aim to attract investment to
the North and Northeast of Brazil.
REGULATORY FRAMEWORK FOR FDI
E ven in an era when industrialization was synonymous with import substitution, Brazil had a FDI
regulatory regime, which was far from discriminatory. In comparison to the widespread variety of
restrictions impos ed on the count ry's imports, investment activity attracted a small number of horizontal
reservations and some standard sectoral limitations.
FDI flow int o Brazil was encouraged by the existence of a vast, dynamic home market insulated by a hos t
of trade barriers. Since the very beginning the Brazilian government prompted the market seeking
behavior of foreign investments. A protectionist trade policy was put in place to guarantee the profitability
of these investments.
The Brazilian investment scenario in the Import Substitution era was marked by remarkable stability.
1990s were characterized by a host of path breaking liberalizing reforms in the Brazilian economy. In the
year 1991 the Brazilian information -technology sector opened its doors to foreign companies. They were
free to enter and operate in the Brazilian IT sector.
Some restrictions on capital out flow were also done away with. Partial liberalization was brought about in
the financial inflows. A series of constitutional amendments were enacted within 1995 to 1996. They
removed the constitutional distinction among national companies and foreign companies. They also put
an end to the state monopoly in oil, gas and telecommunications.
Cert ain investment policies were formulated in the 90s to attract more FDI in to the country. The Central
Bank of B razil simplified the registration procedure for FDI inflows in the 90s. This led to a decline in the
administrative costs associated with the entry of FDI inflows into Brazil.
In the 90s a platform for promoting investment and technology transfer, SIPRI, was set up as a wing of
the ―Ministry of Foreign Affairs‖ in Brazil. In 2002 Investe Brasil was set up to promote investments in
Brazil.
FDI Incentives:
Government incentives encourage FDI
38
o 70% of FDI are in services, 28% in manufacturing
o Low wages & skilled labor availability
o 34% of banking is done by MNC banks
Investments in Amazon region, Northeast region is tax exempt
Export Processing Zones created to promote FDI and exports
Investments in technology sector is exempt from income tax and has several other benefits
Foreign Trade:
Since 1990, Brazil has enacted radical changes in foreign trade policies
o Computerized trade documentation
o Lowering of tariffs to 5-32%
Custom clearanc e is still cumbersome
Restrictions on import of used cars, machinery & consumers products exist
Import of food & drug products require government clearances
Government purchases favors local production
Import restrictions on servic es
Free Trade Champion:
Founder Member of Mercosur (South American Free Trade area)

Active in promotion & creation of FTAA
FTAA will boost exports from B razil
Brazil exports $60 billion worth goods to US in 2002
o Steel, Chemicals, Soy, Paper & pulp, coffee etc
US accounts for 24% of Brazil‘s exports, Argentina accounts for 10%
Brazil contributes just 0.9% of global trade
FDI – TRENDS AND STATISTICS
According to t he Cent ral Bank's most rec ent foreign -capit al census (2000), the stock of foreign direct
investment in Brazil stood at USD 103 billion as of December 2000. Of this total amount, the United
States had the largest share at about US D 24.5 billion (24 percent). Spain had 11.9 percent (US D 12.2
billion) and The Netherlands 10.7 percent (US D 11.0 billion). Investment inflows from 2000 t o 2006 have
amounted to about USD 117 billion, exclusive of depreciation and capital repatriation. The Central Bank
has not yet published updat ed investment stock figures which were originally expected in early 2007.
39
Cent ral Bank data estimate total FDI in flows were USD 34.6 billion in 2007, and USD 45.0 billion in 2008.
According to the U.S. Bureau of Economic A nalysis, FDI inflows from the United States to Brazil were
USD 4.1 billion in 2007 and Unit ed State‘s FDI stock was USD 41.6 billion as of 2007.
Brazil's Top 20 multinationals have USD 56 billion assets abroad, equivalent to over half of t he country 's
outward FDI stock. A survey released December 3, 2007 by the Columbia Program on International
Investment (CPII) and the Brazil-based Fundacao Dom Cabral (FDC) in New York indicated that Brazil's
top multinational enterprises (MNEs) made t he country the second largest outward investor among
developing countries in terms of foreign direct investment (FDI) outflows in 2006.
FDI in Brazil
Brazil attracts large amount of FDI

o $117 Billion in FDI from 1995-2000
US is the largest investor – Over 40% of FDI
MNC‘s are the major source of FDI
o 80% of Fortune 500 firms have invested in Brazil
Government policies favor FDI & has abolished state monopolies
o Predictable & transparent rules reduces red tape
FDI as a Percentage of GDP: 2003 – 2008
Source: Central Bank of Brazil
40
JAPAN
ECONOMIC OVERVIEW
Japan is the world's second largest economy, the United States'

fourth largest trading partner, and an important destination for
U.S. foreign direct investment (FDI). The Government of Japan
explicitly promotes inward FDI and has established formal
programs to attract it. Since 2001, Japan's stock of FDI, as a percentage of GDP, grew from le ss than
one percent to more than three percent at the end of 2008. Despite the worldwide financial market
turmoil, as of December 2008 Japan continues to attract positive FDI inflows, albeit at a slower pace than
in previous years. It is possible Japan could see a short-term net out flow of FDI in the first half of 2009,
however, as a number of multinational firms, especially non -Japanese financial institutions and
automobile manufacturers restructure overs eas assets in response to changing global credit ris ks and
domestic liquidity problems. Foreign direct investment in Japan displayed some interesting trends in the
recent years. As far back as 2003 the Japanese government realized the importance of FDI in boosting
the growth of the nation's economy. Studies reflected the superior managerial efficiency and productivity
of foreign business companies operating in Japan. This was c onsidered to be a plus point of inward FDI
into Japan.
OPENNESS TO FDI
The Ministry of Economy Trade and Industry (ME TI) and t he quas i-governmental Japan External Trade
Organization (JE TRO) are the lead agencies responsible for assisting foreign firms wishing t o invest in
Japan. Many prefectural and city governments also have active programs to attract foreign investors, but
lack many of the financial tools U.S. states use to attract investment.
Risk s associated with investment in many other count ries, such as expropriation and nationalization, are
not of concern in Japan. The Japanese Government does not impose export balancing requirem ents or
other trade-related FDI measures on firms seek ing to invest in Japan.
Foreign investors seeking a presence in t he Japanese market or to acquire a Japanese firm through
corporate takeover face a number of unique challenges, many of which relate more to business practices,
rather than government regulations. The most notable are:
A highly insular and consensual business culture that is resistant to hostile M&A and prefers to do
business, especially M&A transactions, with familiar corporate partners;
A lack of independent directors on most company boards;
41
Cross-shareholding networks among listed corporations in which shares are held for non-
economic reasons resulting in a minimal float of available common stock relative to total capital;
Exclusive supplier networks and alliances between business groups that can restrict competition
from foreign firms and domestic newcomers,
Cultural and linguistic challenges; and
Labor practices that inhibit labor mobility, suppress productivity, and negatively affect sk ill
development.
Bilateral Investment Agreements:
The 1952 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most
favored nation treatment to U.S. investments in Japan. As of December 2008 Japan has concluded or
signed bilateral investment treaties with fifteen trading partners including E gypt, Sri Lanka, China, Hong
Kong SAR, Turkey, Pakistan, Bangladesh, Russia, Mongolia, Vietnam, the Republic of Korea, and
Cambodia, Laos, Uzbekistan, and Peru. The Japanese Government has announced plans to accelerate
efforts to reach B ITs with countries that are abundant in natural and agricultural resources, beginning with
Qatar, Colombia and Kaz akhstan in 2009, and gradually expanding t he scope to ot her key trading
partners, including China.
Japan has economic partnership agreements (EPA -- analogous to a free trade agreement) c ontaining
investment chapters in force with Singapore, Mexico, Malaysia Thailand and Chile. Japan has also signed
such agreements with the Philippines, Brunei, and Indonesia, but these are not yet in force. A multilateral
EPA with all 10 members of the Association of Southeast Asian Nations (ASEAN) came into effect in
December 2008.
Foreign Trade Zones/Free Ports
Japan no longer has free-trade z ones or free ports. Customs authorities allow t he bonding of
warehousing and processing facilities adjacent to ports on a case-by-case basis.
FLOW OF INWARD FDI INTO JAPAN
Japan witnessed augment ed FDI flows since the 1990s. The FDI figures for the time period 1990 to 1996
stood at around $1 billion yearly, on an average. This figure climbed to $3 billion in 1997 and further stood
at $12.7 billion for the year 1999.
This FDI inflow suffered a moderate decline subsequently and hovered within the $6 billion to $9 billion
range per year. Inward FDI flow for Japan recorded an increase of 86% in 2005 (within the first quarter).
42
A host of factors contributed towards this increment in inward FDI flow for Japan in 2005. They are stated
below:
Deregulation lead to an opening up of t he various sectors of the Japanese economy for

investment of foreign capital
The appreciating Yen rendered Japanese assets more valuable
An increased occurrence of corporate bankruptcies resulted in foreign acquisition of many
business companies in Japan
The global thrust on industry reorganization encouraged foreign firms to enter Japan
Mergers and Acquisitions were facilitated by the setting up of the requisite legal framework
An increasing number of shares were available in the market due to a fall in cross-shareholding
Since different nations differ in area, comparison of the absolut e figures for FDI is not likely to yield
unbiased res ults. A research study made us e of relative indexes for making these inter count ry
comparis ons.
For t he year 2003, t he ratio of inward Foreign Direct Investment to outward Foreign Direct
Investment for the Japanese economy bore a value of 0.27. While t he comparable ratios in the same
reference period for U.S, France, Britain and Germany ranged from 0.6 to 0.9.
The result implied that in 2003 Japan's inward FDI was way behind its outward FDI. Of the t wo it is the
inward FDI, which is effective in boosting the growth of the domestic economy.
43
FDI – TRENDS AND STATISTICS
Between 1998 and December 2007, Japan's stock of FDI increased from 3.0 trillion yen to 15.4 t rillion
yen. In the same period investment inflows were generally strong. All dat a in the tables below are current
as of December 2007. Negative figures indicate net outflow.
Table: Net FDI Inflows (Unit: billion dollars; balance-of-payment basis)

JFY 1998 JFY 1999 JFY 2000 JFY 2001 JFY 2002
3.27 12.31 8.23 6.19 9.09
6.24 7.81 3.22 -6.78 22.18
Table: Ratio of Inward to Outward FDI (balance-of-pa yment basis)
1 : 7.5 1 : 1.8 1 : 3.8 1 : 6.2 1 : 3.5
1 : 4.6 1 : 4.0 1 : 14.1 1 : 9.4 1 : 3.3
Table: FDI Inflow Relative to GDP (balance-of-payment basis)

CY2003 CY2004 CY2005 CY2006 CY2007
(a) GDP/Nom (trillion yen) 490.3 498.3 501.7 508.9 515.7
(b) FDI Inflow (trillion yen) 0.73 0.85 0.31 -0.76 26.55
b/a (pct) 0.15 0.17 0.06 -0.15 5.15
44
UNITED STATES OF AMERICA
ECONOMIC OVERVIEW
The largest and still the most important market in the world, t he United
States of America‘s economy is driven by consumers but is troubled by
high debt levels. The United States has the largest and most
technologically advanced ec onomy in the world, with a per capit a GDP of
approximately $45, 000. The U.S. systems of regulation and taxation give unparalleled operational
freedom to foreign investors. In addition, the United States consistently ranks at or near the top of most
major indicators of an attractive business and investment climate. The United Stat es is the most
consistently competitive, innovative, and open economy in the world. In its 2006 Business
Competitiveness Index, the World Economic Forum (WEF) ranked the United States first, looking at
business environment conditions and sustainability of national prosperity.
The United States is unique in that it is the largest foreign direct investor in the world and also the largest
recipient of foreign direct investment. This dual role means that globalization, or the spread of economic
activity by firms across national borders, has bec ome a prominent feat ure of the U.S. economy. Through
direct investment the U.S. economy has become highly enmeshed into the broader global economy.
Some observers are concerned that the depreciation in the value of the dollar relative to a number of
major currencies could lead to a ―fire sale‖ of U.S. firms. Direct investment commonly refers to investment
in new or established businesses and real estate, compared with portfolio investment, whic h refers to
investment in U.S. government securities and corporate stocks and bonds.
In common with most developed countries, Services is the key sector of the economy. In 2007, services
made up 78.5% of GDP, industry 20.5% and agriculture less than 1%. Around two-thirds of the total
production of the country is driven by personal consumption. Although the US is often referred to as a
free market economy, this is not entirely true, since there are government regulations protecting certain
sectors, notably energy and agriculture. It can be more accurately described as a ‗consumer economy‘.
Since the US economy is also the largest economy in the world, and the US consumer drives two thirds
of the US economy, the US consumer is also a big driver of global economic act ivity.
The forces of supply and demand directly drive the price levels of goods and services. What to produce,
and how much of it is to be produced depends on the price level fix ed by the interaction of s upply and
demand.
The role of government in the US economy is crucial when it comes to decision-making regarding
45
monetary and fiscal policies. The federal government takes all the necessary initiatives to ensure the
growth and stability of the United States. The US government makes full use of economic tools such as
money supply, tax rates, and credit cont rol, among other things, to adjust the rate of economic growt h.
For the most part, the US Federal Government also regulates the operations of private business concerns
in order to prevent monopolies. The government renders a number of direct services in the form of
providing support for national defense, monetary aid for research and development programs, and funds
for highway construction & infrastructure in general.
The question of national debt is a controversial one within the US. At the start of 2008, the US federal
debt stood at $9.2 trillion. This is a worrying 67% of GDP and equates to $79,000 for each American
taxpayer, a number just over 117 milli on people. To add to the concern, American consumers are also
increasingly dependent on debt and have been re -mortgaging their houses to higher loan amounts, and
using the extra cash to fund
high street purchases.
This debt figure is the

largest in the world in
absolute terms, but as a
percentage of GDP it is less
than Japan and similar to
several E uropean
countries.
Most of the debt is funded
by central banks and
sovereign wealth funds from
Asia, Europe and the Middle
East.
The United Stat es welcomes foreign direct investment (FDI) and is the most important, dynamic economy
in the world. Furthermore, the United States recognizes FDI‘s positive impact on ec onomic growth and job
creation. U.S. affiliates of foreign companies employ over five million U.S. workers and support millions
more indirectly.
FDI AND THE DOLLAR
Since 2002, the dollar has depreciated against a broad basket of currencies and against the euro. This
depreciation has prompted some observers to question whet her the ―cheap‖ nominal dollar is leading to a
46
―fire sale‖ of U.S. firms, especially of those firms that can be identified as part of the Nation‘s defense
industrial base. While some aspects of foreign investment have been studied extensively by academics
and others, relatively few economic studies have addressed the linkage between direct investment and
movements in the exchange rat e and even those studies have produced mixed results.
In general terms, most economists argue that depreciation in the exchange value of the dollar is not the
key factor that drives the decision by most foreign firms to invest in the United Stat es, although the
corresponding appreciation of foreign currencies would lower the cost of assets acquired in the United
States. The lower value of the dollar, however, means that the value of return from U.S. assets is reduced
as well, which would leave the overall rate of return on such investments unchanged. In one study, two
economists argue that an appreciation of foreign currencies relative to the dollar could boost foreign direct
investment in the United States, because the appreciation leads to increased wealth for foreign firms
relative to their U.S. counterparts and greater access to low-cost funds in local markets.
Another economist argues that appreciation of the yen in the 1980s provided s ome impetus for Japanese
firms to increase their direct investments in the United States, because the appreciated yen lowered the
price of cert ain firm -specific assets, such as technology and managerial skills, but that it did not
necessarily improve the nominal returns to Japanese firms. Actual and expected changes in the
exchange rate of the dollar may well influence the timing and the magnitude of foreign investors‘
decisions, but little research has been done on this issue.
The depreciation of the dollar has raised concerns that the lowered value dollar would lead to a ―fire sale‖
of U.S. firms. Such an increase of foreign direct investment would be of concern to Congress, which has
shown a height ened level of interest in the role and presence of foreign -owned firms in the economy
since September 11, 2001. There is little academic research and much still to be learned about the role of
the exchange rat e in the decision-making process of U.S. and foreign multinational firms, but movements
in the exchange rate do not appear t o be a major factor in driving those investment decisions. While U.S.
and foreign direct investment were both higher in 2006 than they were in 2005, neither U.S. direct
investment abroad nor foreign direct investment in the United States seems to be tied too strongly to the
depreciation of the dollar. There does appear to be a complex set of relationships that connect direct
investment, the relative rate of growt h in the economy, and movements in the exchange rate, but it is
difficult to unwind these relationships to determine the relative importance of each factor. A cursory
examination of the available data seems to indicate that the relative rates of growt h bet ween the U.S. and
foreign economies likely is the most important factor in driving direct investment transactions.
As U.S. and foreign firms become more adept at utilizing foreign capit al markets and foreign currency
derivatives, they likely are reducing the importance of fluctuations in currencies as a major factor in some
of their investment decisions. Nevertheless, firms likely do consider t he movements in currencies and the
relative values of currencies as they determine the disposition of corporate earnings. In some cases, the
47
depreciation of the dollar relative to t he euro caused foreign firms operating in the United States to retain
the earnings from those operations to invest in the Unit ed States rather than to return those profits to the
parent company at a depreciat ed value. Over the near term, more developing count ries are expected to
reduce national restrictions to foreign direct investment and more firms from both developed and
developing countries are expected to engage in the direct investment process. As a result, these firms
likely will participate more extensively in international capit al mark ets and place added pressure on global
and local capital markets as sources of funds and likely act as agents of reform in the capital markets of
developing count ries. In addition, the proliferation of financial techniques, communications technology,
and currency hedging strategies means that it will become even more challenging to unt angle the direct
and indirect factors that might determine specific cause-effect linkages between direct investment and
movements in exchange rates.
FDI IN USA – 1998 TO 2008 – TRENDS AND STATISTICS
Foreign direct investment in the United St ates in 2008 totaled $325.3 billion, up by 37 percent
compared to the $237.5 billion in 2007.
The $325.3 billion in foreign direct investment recorded in 2008 is an all -time record high, beating
the previous record of $321. 3 billion in 2000.
The growth rate of 37 percent between 2007 and 2008 stands in stark contrast to the 2 percent
decline recorded for the previous year.
Over ten years, foreign direct investment increased from $179 billion in 1998 to $325.3 billion in
2008, up by 82 percent.
The growth in investment by foreigners last year is extraordinary given the slow U.S. economic
growth overall (real gross domestic product (GDP ) increased by only 1.1 percent in 2008).
Net equity capital inflows, consisting of net increases in foreign parents‘ equity in their U.S.
affiliates, increased from $147.4 billion in 2007 to $233.6 billion in 2008, a 58 percent increase.
The United Kingdom was the leading foreign investor in the United States in 2008, investing more
than $57 billion last year, closely followed by Belgium at $56.5 billion and S witzerland at $39
billion.
Other leading count ries by foreign direct investment in the Unite d States in 2008 were Japan, the
Netherlands, Canada, and Spain.
These seven countries repres ented 76 percent of all foreign direct investment in the United
States in 2008.
Foreign direct investment from the United Kingdom into the United States more than quadrupled
between 2007 and 2008, rising from $13 billion to $57 billion.
Foreign direct investment capital inflows from B elgium into the United States increased by 480
percent between 2007 and 2008, jumping from $9. 7 billion to $56.5 billion.
48
Investment inflows from large emerging markets like India, Brazil, and China totaled $1.9 billion,
$1.6 billion, and $362 million, respectively, in 2008.
Foreign direct investment in the United States from India inc reased 28 percent last year, growing
from $1.5 billion in 2007 to $1.9 billion in 2008.
Foreign investment from Brazil more than quadrupled between 2007 and 2008, rising from $373
million to $1.6 billion, based on preliminary 2008 statistics.
LEADING COUNTRIES BY FDI IN USA (2008)
49
IV. MAJOR FACTORS AFFECTING FOREIGN INVESTMENT
Natural and created locational characteristics of a count ry can have a major influenc e on a firm‘s decision
to invest in the country. The attractiveness of a country may also vary from one firm to another depending
on its organizational cont ext. The eclectic paradigm includes the likely interaction among ownership
advantages, internalization and location advant ages in guiding a firm‘s FDI decisions. Each firm may
evaluate a country‘s attractiveness as a possible investment site according to criteria specific to the firm.
Natural and created locational characteristics of a count ry can have a major influenc e on a firm‘s decision
to invest in the country (Mallampally and S auvant, 1999). Based on a literature review, this research
incorporates seven groups of loc ation-s pecific factors which may influence FDI attractiveness of a
country. These are as follows:
a. Economic/Financial Factors: The country‘s GDP growth rate; Conditions for FDI resulting
from the country‘s economic policies; Infrastructure facilities; Economic incentives for
FDI; Stability of its currency; and Expected returns on investment.
b. Political/Legal Factors: Political stability; Integrity of its legal system; and Ease of
protecting intellectual property rights in the country.
c. Cultural Factors: Cultural similarity of the country to a firm‘s home country.
d. Market Factors: Current market size; Expected market growth rate; and Proximity to other
countries to facilitate exports from the FDI venture.
e. Resource Factors: A vailability of skilled workers; Lower labour costs (after including the
effect of labour productivity); A vailability of competent management staff; and A vailability
of raw materials.
f. Factors relating to IJV Formation: E ase in finding suitable IJV partners; and
trustwort hiness of IJV partners in maintaining long-term relationship.
50
DIFFERENCE BETWEEN FPI AND FDI
One of the most important distinctions between portfolio and direct investment to have emerged from this
young era of globalization is that port folio investment can be much more volatile. Changes in the
investment conditions in a country or region can lead to dramatic swings in port folio investment. For a
country on the rise, FP I can bring about rapid development, helping an emerging ec onomy move quickly
to take advantage of economic opportunity, creating many new jobs and significant wealth. However,
when a country 's economic situation takes a downturn―s ometimes just by failing to meet the
expectations of international investors―the large flow of money into a country can turn into a stampede
away from it. By contrast, because FDI implies a controlling stake in a business, and often connotes
ownership of physical assets such as a equipment, buildings, and real estate, FDI is more difficult to pull
out or sell off. Consequently, direct investors may be more committed to managing their international
investments, and less likely to pull out at the first sign of trouble. This volatility has effects bey ond the
specific industries in which foreign investments have been made. Because c apital flows can also affect
the exchange rate of a nation's currency, a quick withdrawal of investment can lead to rapid decline
in the purchasing power of a currency, rapidly rising prices (inflation) and then panic buying to avoid still
higher pric es. In short, such quick withdrawals can produce widespread economic crisis. This was partly
the case in the Asian economic crisis that began in 1997. Although the economic turmoil began as a
result of some broader shifts in international economic policy and some serious problems within the
banking and financial sectors of the affected East Asian nations, the capit al flight that ens ued —some
compared it to t he great financial panics which took place in the United States during the 19th century —
significantly exacerbated the crisis.
Example of FPI: John Yamas hita, a Japanese citizen, purc hases one hundred shares of stock in General
Motors (GM). John now owns part of a U.S. corporation, the shares of which are part of his pers onal
investment port folio. John is eligible to receive dividend payments from GM, participate in shareholder
decisions, or sell the stock for a profit/loss. John‘s share of GM is very minor, and his chief concern is not
the long-term profitability of the company but the short-term value of his stock. He might therefore sell his
share quickly if the share price goes up or down significantly.
Example of FDI: Hungry Dragon Toys, a Chinese company, is sitting on a lot of c ash. The company‘s
board of directors decides to take s ome of that money and purc hase Cooperative Chemical, a plastics
company in New Jersey. Hungry Dragon, a foreign investor, now owns a U.S. subsidiary company. Unlike
John Yamashita‘s small investment in GM, Hungry Dragon‘s ownership of Cooperative Chemic al is
substantial and more likely to be long term. Hungry Dragon is unlikely to s ell if the U.S. economy faces a
temporary downturn. A comparison of FP I and FDI is useful to illustrat e why some kinds of foreign
investment tend to be more volatile than others.
51
DIFFERENT TYPES OF FDI
BY DIRECTION
Inward:
Inward foreign direct investment is a particular form of inward investment when foreign capit al is invested
in local resources.
Inward FDI i s encouraged by:
Tax breaks, subsidies, low interest loans, grants, lifting of certain restrict ions
The thought is that the long term gain is worth more than the short term loss of income
Inward FDI i s re stri cted by:
Ownership restraints or limits
Differential performance requirements
Outward:
Outward foreign direct investment, sometimes called "dir ect investment abroad", is when local capital is
invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign
commodity country.
Outward FDI is encouraged by:
Government-backed insurance to cover risk
Outward FDI is re stri cted by:
Tax incentives or disincentives on firms that invest outside of the home country or on repatriated
profits
Subsidies for local businesses
Leftist government policies that support the nationalization of industries (or at least a modicum of
government control)
Self-interested lobby groups and societal sectors who are supported by inward FDI or state
investment, for example labour markets and agric ulture.
Security industries are often kept safe from out wards FDI to ensure localised state contr ol of the
military industrial complex
BY TARGET
Greenfield investm ent
Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the
primary target of a host nation‘s promotional efforts because they create new production capacity and
52
jobs, transfer technology and know-how, and can lead to linkages to the global market place. The
Organization for International Investment cites the benefits of greenfield investment (or insourcing) for
regional and national economies to include increased employment (often at higher wages than domestic
firms); investments in research and development; and additional capital investments. Criticism of the
efficiencies obtained from greenfield investments include the loss of market share for competing domestic
firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies,
and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries
whos e profits are seen to flow back entirely into the domestic economy.
Mergers and Acqui si tions
Trans fers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross -
border mergers occur when the assets and operation of firms from different countries are combined to
establish a new legal entity. Cross-border acquisitions occur when the cont rol of assets and operations is
transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign
company. Unlike greenfield investment, acquisitions provide no long t erm benefi ts to the local economy--
even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the
money from the sale could never reac h the local economy. Nevertheless, mergers and acquisitions are a
significant form of FDI and until around 1997, account ed for nearly 90% of the FDI flow into the United
States. Mergers are the most common way for multinationals to do FDI.
Horizontal FDI
Horiz ontal FDI occurs when the multinational undertakes the same production to activities in multiple
countries.
Vertical FDI
Backward Vertical FDI
Where an industry abroad provides inputs for a firm's domestic productions.
Forward Vertical FDI
Where an industry abroad sells the outputs of a firm's domestic production.
BY MOTIVE
FDI can also be categorized based on the motive behind t he investment from the pers pective of the
investing firm:
Resource-S eeking
Investments which seek to acquire factors of production that are more efficient than thos e obtainable in
the home economy of the firm. In some cases, these res ources may not be available in the home
economy at all (e.g. cheap labor and natural resourc es). This typifies FDI into developing countries, for
example seeking natural res ourc es in the Middle East and A frica, or cheap labor in Southeast Asia and
Eastern Europe.
Market-Seeking
Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind
may also be employed as defensive strategy; it is argued that businesses are more likely to be pushe d
53
towards this type of investment out of fear of losing a market rather than discovering a new one. This type
of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980‘s by Accounting,
Advertising and Law firms.
Efficiency-S eeking
Investments which firms hope will inc rease their efficiency by exploiting t he benefits of economies of
scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after
either resource or market seeking investments have been realized, with the expectation that it further
increases the profitability of the firm.
Strategic-A sset-S eeking
A tactical investment to prevent the gain of resource to a competitor. Easily compared to that of the oil
producers, whom may not need the oil at present, but look to prevent their competitors from having it.
54
WHY HAS FOREIGN INVESTMENT INCREASED DRAMATICALLY IN THE PAST
DECADE?
International investment levels have exploded in recent decades. These increases in the flows of foreign
investment have t hemselves marked a new and distinct phenomenon in the era of globalization. Several
factors have helped drive this growth:
1. Technology:
Telecommunications and transportation advances have simply made it easier to do business across large
distances. As former President Clinton once pointed out, in the 1960s, transatlantic telephone lines could
only accommodate 80 simultaneous calls between Europe and the United Stat es. Today, satellites and
other telecommunications infrastructure can handle one milli on calls at one time.
Fax machines, email and the drop in the cost of air travel have also contributed significantly to the growth
of FDI. The 21st century has brought even greater changes with the development of Bluetooth
technology, better satellite reception, and increased flexibility in telecommuting and teleconferencing.
2. The lure of higher profits:
In the 1980s and early 1990s, a number of count ries in East Asia (Hong Kong, Indonesia, Japan, South
Korea, Malaysia, Singapore, Taiwan, and Thailand) began to experience enormous economic growth
rates― in some cases piling up double -digit expansions in their GDP per capit a year after y ear. These
countries had built their phenomenal growth on a foundation based on greater integration into the
international economy. In particular, they began emphasizing export -led growth. Investors from around
the world realized t hat access to East Asian mark ets and their t rading partners might help them attain
much higher returns on their investments than they could obt ain at home.
3. The fall of the Berlin Wall:
The end of the Cold War had an important impact on international financial liberalization. First, many
developing count ries that had previously been committed to socialist models of economic planning began
to turn toward market economies. The resulting efforts to privatize state-owned ent erprises and changes
in economic policies that were more favorable to capital investment made these ec onomies much more
attractive to potential investors. In addition, the demise o f the Soviet Union also gave many investors
much more confidence in the political stability of developing countries in general. Fears that a government
might be overthrown or voted out in favor of one that might expropriate foreign assets declined.
4. Financial liberalization:
Prior to the 1970s, many countries, including the United States, imposed strict limits on the rights of
companies and individuals to invest overseas, to purchase foreign sec urities, or even to hold foreign
currencies, following the Great Depression of the 1930s, which had produced volatile movements of
capital, triggering financial panics in some cases. However, in the early 1970s, the United States went off
the gold standard and the previous system of fixed exchange rates between foreign currencies was
abandoned. Many restrictions were lifted on the flows of international capital, making it much easier for
investors to purchase foreign securities. Financial liberalization has been the most direct, and probably
the single biggest, factor accounting for the growt h of international investment flows over t he past several
decades.
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WHERE DOES FOREIGN INVESTMENT TAKE PLACE?
One of the most disturbing accusations about globalization is the charge that foreign investment t akes
place largely so that developed country industries can transfer their production overseas, especially to
poorer developing countries, to take advantage of lower wages and other less stringent regulatory
environments. To be s ure, some companies have s ought to move t heir pr oduction facilities overseas with
such goals. But a look at the overall statistics on where foreign investment goes illustrates that this factor
cannot be the primary objective of most companies. In fact, the great majority of global FDI takes place
among developed countries. In the year 2008, the amount of world FDI given to developed count ries grew
by 33% t o US$1.248 trillion (UNCTA D 2008 World Investment Report). The top three recipients received
the greatest amounts of all the world FDI inflows: United States, United Kingdom, and France.
According t o UNCTAD 2008 World Investment Report, developing countries attracted over $500 billion in
FDI in 2007. On the ot her end of the scale, the poorest countries in the world—t hose which comprise
roughly 85 perc ent of humanity— draw less than 30 percent of world FDI. Although FDI flows have been
increasing at a great rate over the past decade, developing countries in Southern A frica have actually
been losing their share of global investment. These countries received a peak of world FDI inflows in
2001. When viewed this way, one might conclude that Sub-Saharan Africa is being left behind by
globalization. On the other hand, the FDI inflows for the rest of the developing world have been increasing
over the page decade as well, especially China.
One of the reasons why foreign investment in developing countries is small is that low labor costs are a
factor of diminishing importance to most investors. Certain sectors, especially such as agriculture, textile
and apparel, do c ontinue to seek out cheap labor sources, but these sectors comprise an increasingly
small fraction of the global production of goods and services. With the service sector becoming more
prominent worldwide, labor costs and c osts of production are becoming less of an issue for many
investors. More international investors seek higher productivity workforces as opposed t o low wage ones,
and thus look for countries with more skilled workers, despite the higher wages associated with those
skills. Nonetheless, these facts do not diminish the import ance of foreign investment for the less
developed world.
According to International Monetary Fund regional statistics, nations in Latin America, t he Middle East,
and Europe relied mostly on FP I as the source for capital flows, Asia received most of its investment from
FDI, and Africa receives most of its capital inflows from development assistance.
56
FACTORS INFLUENCING FOREIGN INVESTMENT DECISIONS
It is important to understand the ot her factors that influence where and why companies decide to invest
overseas. These other factors relate not only to the overall ec onomic outlook for a country, but also to
economic policy decisions taken by foreign governments —aspects that can be very political and
controversial. The policy frameworks relating to FDI and FP I are relatively similar, although there are a
few differences.
Direct investors tend to look at a number of factors relating to how they will be able to operate in a foreign
country:
the rules and regulations pertaining to the entry and operations of foreign investors
standards of treatment of foreign affiliates, compared to "nationals" of the host country
the functioning and efficiency of local markets
trade policy and privatization policy
business facilitation measures, such as investment promotion, incentives, improvements in

amenities and other measures to reduce the cost of doing business. For example, some countries
set up special export processing zones, which may be free of customs or duties, or offer special
tax breaks for new investors
restrictions, if any, on bringing home ("re-patriating") earnings or profits in the form of dividends,
royalties, interest, or other payments
The determinants of FP I are somewhat more complex, however. Because portfolio investment earnings
are more likely to be tied to the broader macroec onomic indicators of a country, such as overall market
capitalization of an economy, they can be more sensitive to factors such as:
high national economic growth rates
exchange rat e stability
general macroeconomic stability
levels of foreign exchange reserves held by the central bank
general healt h of the foreign banking system
liquidity of the stock and bond mark et
interest rates
In addition to these general economic indicat ors, port folio investors also look at the economic policy
environment as well, and especially at factors such as:
the ease of repat riating dividends and capital
taxes on capital gains
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regulation of the stock and bond markets
the quality of domestic accounting and disclosure systems
the speed and reliability of dispute settlement systems
the degree of protection of investor's rights
58
V. INVESTING IN INDIA
SEBI and RBI Guidelines
India, among t he E uropean investors, is believed to be a good

investment despite political uncertainty, bureaucratic hassles,
shortages of power and infrastructural deficiencies. India presents a
vast potential for overseas investment and is actively encouraging
the entrance of foreign players into the market. No company, of any size, aspiring to be a global player,
can for long, ignore this country which is expected to bec ome one of the top three emerging economies.
India has in the recent years emerged as a favored destination for investment in various sectors like
Power generation, Heavy Machinery, Infrastructure project, Telecom, Communication, Software etc.
Various hurdles that existed in the economy earlier have been removed as a result of the winds of
liberalization sweeping the country. India has now opened its doors to foreign investment in a major wa y.
Non-Resident Indians and Multinational Companies have to follow certain rules and regulations prior to
investment.
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POLICY FRAMEWORK
INDUSTRIAL POLICY
The Indian Government‘s market liberalization and economic policy reforms program aims at rapid and
substantial economic growth and integration of the country‘s economy with the global economy. The
industrial policy reforms have eliminat ed the industrial licensing requirements except for cert ain selected
sectors. It also removed restrictions on investment and expansion and facilitated easy access to foreign
technology and direct investment.
The Industrial Policy Resolution of 1956 and the Statement on Industrial P olicy of 1991 provide t he basic
framework for the Government‘s overall industrial policy. The procedures for obtaining government
approvals have been progressively simplified and quickened. Normal FDI proposals are cleared within a
month. Areas earlier reserved for public sector have mostly been opened for private sector partic ipation
also.
INDUSTRIAL LICENSING
All industrial undert akings are exempt from obt aining an industrial license to manufacture, except for the
following:
• Industries reserved for the Public Sector;
• Industries ret ained under compulsory licensing;
• Items of manufacture reserved for the small scale sector; and
• Any proposal attracting locational restriction.
Industrial undert akings exempt from obtaining an industrial licens e are required t o file an Industrial
Entrepreneur Memoranda (IEM) with the S ecretariat of Industrial Assistance (S IA), Department of
Industrial Policy and Promotion.
FOREIGN INVESTMENT POLICY
Foreign investment is permitted in virt ually every sector, except those of strat egic concern such as
defense (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to
set up 100 per cent subsidiaries in India. No prior approval from the exchange control aut horities (RB I) is
required, except for certain specified activities. The investment should be in accorda nce with the
prescribed guidelines and the details of the investment should be filed with the authorities within the
prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies
and not for purchase of shares from the existing shareholders. This investment procedure is commonly
known as the "automatic approval route".
Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote
inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent
procedures and guidelines for investment promotion and to consider and approve/recommend proposals
for foreign investment.
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Secretariat for Industrial Assistance (SIA ) has been s et up by the Gove rnment of India in the Department
of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window
service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which
require Government approval, conveying Government decisions on applications filed, assisting
entrepreneurs and investors in setting up projects (including liaison with other organisations and State
Governments) and in monitoring implement ation of projects. It also notifies all Government Policy
decisions relating to investment and technology, and collects and publishes monthly production data for
select industry groups. In order to give further impetus to facilitation and monitoring of investment, as well
as for better coordination of infrastructural requirements for industry, a new c ell called the " Investment
Promotion and Infrastructure Development Cell" has been created.
REGULATIONS AND PROCEDURES
Procedures for obtaining government approvals have been considerably simplified. Approval procedures
have been laid out for undertakings that are
• exempt from industrial licensing requirements (including existing units undertaking

substantial expansion);
• subject to compulsory industrial licensing; and
• small scale units exceeding the prescribed limit of investment in plant and machinery and
continuing to manufacture small scale reserved item(s) or, in cases where exemption
from industrial licensing granted for any item, is withdrawn.
AUTOMATIC APPROVAL ROUTE AND FIPB ROUTE
Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the
Government of India and the Foreign Exchange Management Act, 1999 (FEMA ). With increasing
liberalization of the Indian economy, generally, there is no nee d to obtain prior approval of the
Government of India for a fres h investment to be made into an Indian company (only procedural filings
have to be made wit h the Reserve B ank of India (RBI), the Indian cent ral bank). In certain cases,
however, and also for investment in certain specified sectors, prior approval is required. Further,
investment in certain specified sectors is subject to foreign equity caps.
NEW VENTURES
All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas Corporate B odies (OCB)
fall under the Automatic Route except those that expressly require a prior Government approval.
An investor may, if so preferred, choose to make an application to the FIPB and not avail of the automatic
route.
Investment in Public Sector Units as also for units located in Export Oriented Units (EOU)/Export
Processing Zones (EP Z)/Special Economic Zones (SE Z)/Electronic Hardware Technology Parks (EHTP )/
Software Technology Parks (S TP) would also qualify for the Automatic Route. Investment under t he
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Automatic Route is governed by the notified sectoral policy and equity caps and RB I ensures compliance
of the same.
Any change in sectoral policy/sectoral equity cap is notified by the SIA in the Department of Industrial
Policy & Promotion.
EXISTING COMPANIES
Besides new companies, automatic route for FDI/ NRI/OCB investment is also available to the existing
companies to induct foreign equity. For existing companies with an expansion programme, the additional
requirements are that:
• the increase in equity level must result from the expansion of the equity base of the
existing company without acquisition of existing shares by NRI/OCB/ foreign investors;
• the money to be remitted should be in the sector(s) under the automatic route.
Otherwise the proposal would need Government approval through the FIPB. For this, the
proposal must be supported by a Board Resolution of the existing Indian company.
For existing companies without an expansion programme, the additional requirements for
eligibility for automatic route are that:
• they are engaged in the industries under automatic route (including additional activities
covered under the automatic rout e regardless of whether the original activities were
undertaken with Government approval or by accessing the automatic route);
• the increase in equity level must be from expansion of the equity base; and
• the foreign equity must be in foreign currency.
Equity participation by international financial institutions in domestic companies is permitted through

automatic route subj ect to Securities Exchange Board of India (SEBI) /RBI regulations and sector
specific caps on FDI.
Indian companies are required to notify the RB I of receipt of inward remittances within 30 days of such
receipt and file required documentation within 30 day s of issue of shares to Foreign Investors. This facility
is available to NRI/OCB investment also.
GOVERNMENT APPROVAL (FIPB ROUTE)
For the following c ategories, Government approval for FDI/NRI/OCB through the FIPB shall be
necessary:
• All proposals requiring an Industrial Lic ense.
• All proposals in which the foreign collaborator has a previous venture/tie-up in India in the
same or allied field. However, this condition is not applicable for proposals in the
Information Technology industry.
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• All proposals relating to acquisition of shares in an existing Indian company.
• All proposals falling outside notified sectoral policy/caps or under sectors for which FDI is
not permitted and/ or whenever any investor chooses to make an application to the FIPB
and not to avail of the automatic route.
Indian companies getting foreign investment approval through FIPB route do not require any further
clearance from RB I for the purpose of receiving inward remittance and issue of shares to the foreign
investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days
of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.
FOREIGN INVESTMENT IN THE SMALL SCALE SECTOR
Small Scale Undertakings (SS Us) are defined as units having investments in fixed assets in plant and
machinery of not more than INR 10 million. Under the small scale industrial policy, equity holding by other
units including foreign equity in a small scale undert aking is permissible up to 24 per cent. However there
is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale
status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small
scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be
obtained.
A SSU manufacturing small scale reserved item(s), on exceeding t he small -scale investment ceiling in
plant and machinery by virtue of natural gr owth, needs to apply for and obtain a Carry-on-Business (COB)
License. No export obligation is fixed on the capacity for which the COB license is granted. However, if
the unit expands its capacity for the small scale reserved item(s) furt her, it needs to apply for and obtain a
separate industrial license.
FOREIGN INVESTMENT POLICY FOR TRADING ACTVITIES
Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and
beyond this by the Government through FIPB. For appr oval through the automatic rout e, the requirement
would be that it is primarily export activities and t he undertaking concerned is an export house/trading
house/ super t rading house/star trading house registered under the provisions of the Export and Import
policy in forc e. However, under t he Government route, 100% FDI is permitted in c ase of trading activities
carried out in cert ain specified sectors such as hi-tech medical and diagnostic items, items for social
sector, exports, bulk imports, to name a few.
FDI up to 100% is also permitted for E-commerce activities subject to the condition that such companies
would divest 26% of their equity in favor of the Indian public in five years, if thes e companies are listed in
other parts of the world.
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OTHER MODES OF FOREIGN DIRECT INVESTMENTS
GDR/ADR/FCCB
Indian companies are allowed to rais e equity capit al in the international market through the issue of
GDRs/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking
Government‘s approval in this regard should have a consistent track record for good performance
(financial or otherwise) for a minimum period of 3 years.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a c ompany or a group of

companies in a financial year. A company engaged in the manufacture of items covered under Automatic
Rout e whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the
prescribed percentage for automatic approval, or which is implementing a project not contained in project
falling under Government Approval route, would need to obtain prior Government approval. Foreign
investment through preference shares is also treated as foreign direct investment.
STATE LEVEL PROJECT IMPLEMENTATION
India has evolved a comprehensive organiz ational structure at the state level for industrial development.
In most states the organizations present to assist and promote industries are:
• Investment Promotion Agencies (IPA)
• State Industrial Development Corpo ration (SIDC)
• Small Scale Industries Development Corporation (SSIDC)
• State Financial Corporation (SFC)
• District Industries Cent re (DIC)
• Single Window Service and Escort Service
Several state governments have set up single window services (SWS) and investor escort services (ES ).
SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get
the required approvals. ES is targeted at large and medium sized projects and one individual is assigned
from one of the state government agencies to the investor. ES seeks to help the investor in information
collection, identification of project sites, arranging feasibility studies, clearance of the project by financial
institutions, etc.
INVESTMENT INCENTIVES
The state finances a part of the fixed c apital cost of the project. Various states have designated areas as
‗A‘, ‗B‘ and ‗C‘ according to their levels of development. The level of incentive provided by a state varies
and is generally larger for investment in backward areas. Further, t he t erms and ceiling of the incentives
vary across states, depending on the nature of industry that the state is trying to promote.
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POWER TARIFF INCENTIVES
Power tariff incentives are extended by state governments in different ways, such as exemption from the
payment of electricity duty, freez e on the tariff charged for new units for a few years after commencement
of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain
conditions and fiscal incentives for purc hase and installation of captive power generation sets.
The actual incentives given vary across states and from industry to industry and are also dependent upon
the area in which this unit is set up. S ome states specify a list of industries, which do not qualify for some
of these incentives.
OTHER INCENTIVES
Some states extend other incentives to small -scale units or priority industries as defined in their industrial
policy statements. Such incentives include concessional loans granted by State Financial Corporations,
price preference on goods made by Small Scale Industries (SSIs ) in purchases made by government and
semi government organizations, exemption from the payment of octroi (entry tax) for a certain specified
period, preferential allotment of land and sheds in industrial areas to SS Is and grant of interest free loans
in lieu of deferred sales tax.
A few states have taken the initiative t o streamline the investment approval process by introducing
common application forms for various approvals. A ‗green channel facility‘, has been int roduced in some
states, where applications required for clearances will be received and processed through various
institutional offices on a time bound basis.
Most FDI activities permitted for foreign dir ect investment are placed on the automatic route. Under this
the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of
funds and again within 30 days of issuing shares to the non -resident investor. Some s alient features of
the FDI policy are:
• Original investment as also the returns on investment are fully reportable.
• Payment of fee and royalty to foreign technology provider is permitted including that by a
wholly owned subsidiary to its off-shore parent company
• Payment of royalty and use of trade marks and brand name without transfer of
technology is also permitted
• FDI is not permitted in the areas of agriculture and plantations other than the tea sector,
real estate business other than development of integrate d townships and settlements,
retail trading, atomic energy, lottery business, gambling and betting sectors.
65
FDI IN EOUs/SEZs/INDUSTRIAL PARK/EHTP/STP
Special Economic Zones (SEZs)

100% FDI is permitted under automatic route for setting up of special Ec onomic Zone.
Units in SEZ qualify for approval through automatic rout e subject to sectoral norms. Details about the type
of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce.
Proposals not covered under the automatic route require approval by FIPB.
100% Export Oriented Units (EOUs)

100% FDI is permitted under aut omatic route for setting up 100% EOU, subject to sectoral norms.
Proposals not covered under the automatic route would be considered and approved by FIPB.
Industrial Park
100% FDI is permitted under automatic route for setting up of Industrial Park
Electronic Hardware Technology Park (EHTP) Units

All proposals for FDI/ NRI investment in EHTP Units are eligible for approval under aut omatic route. For
proposals not covered under automatic route, the applicant should seek separate approval of the FIPB.
Software Technology park Units

All propos als for FDI/ NRI investment in S TP Units are eligible for approval under automatic route. For
proposals not covered under automatic route, the applicant should seek separate approval of the FIPB
66
ENTRY STRATEGY INTO INDIA
A business presence in India may be established by a foreign entity through:
o Company
A company may be incorporated, inter alia, using the following modes:
• Incorporating an Indian company with 100% foreign equity, operating as a wholly owned subsidiary;
• Incorporating a Joint V enture Company (JV C) with an Indian partner and/or with the general public and
operating as a listed company; or
• Incorporating a JVC with an Indian partner and operating as an unlisted company.
o Branch Office
A branch would mean an establishment carrying on substantially the same activity as its Head Office.
Foreign companies intending to open a B ranch Office (BO) in India need to obt ain prior permission of RBI
which would encompass even approval to the scope of activities t hat are intended to be carried out in
India. As per the guidelines laid down by the RB I, the BO in India is allowed to carry on only the following
activities:
• Export / Import of goods;
• Rendering professional or consult ancy services;
• Carrying out research work, in which the parent company is engaged;
• Promoting t echnical or financial collaboration bet ween Indian companies and parent or overseas group
company;
• Representing the parent company in India and acting as buying / selling agent in India;
• Rendering services in Information Technology and development of software in India;
• Rendering technical support to the products supplied by parent / group com panies;
• Foreign airline / shipping company
o Liaison Office
A Liaison Office (LO) is in the nature of a representative office set up primarily to explore and understand
the business and investment climat e. A LO is not permitted to undert ake any commercial / t rading /
industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received
from abroad through normal banking channels. The LO is permitted to undertake only the following
activities:
• Representing in India the parent Company / group Company;
• Promoting export/ import from/ to India
67
• Promoting technical / financial collaborations between the parent / group companies and companies in
India;
• Acting as a communication channel between the parent Company and Indian companies.
Any company int ending to open a LO in India is required t o obtain prior approval from the RBI, the apex
foreign exchange management authority in India. Approval is usually granted for three years and c an be
renewed on expiry thereof.
o Project Office
Foreign companies can establish Project Offices (POs ) in India specifically for the purpos e of execution of
specific projects. A PO is similar to a branch office opened for the limited purpose of executing a
particular contract. As POs are opened for undertaking a specific activity they cannot perform any other
function or undert ake any ot her activity. Generally, companies engaged in turnkey projects or installation
projects set up POs. All expenses of POs must be met through inward foreign c urrency remittances if the
rupee component of t he contract, if any, is not sufficient to meet the said expenses. RBI approval is
required to open a PO.
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IMPORTANT SECTORS WHERE FDI UPTO 100% IS PERMITTED
Automatic route
Most manufacturing activities
Non-banking financial services
Infrastructure such as roads and highways, ports and harbours, electricity generation
transmission and distribution, mass rapid transit systems, LNG projects, etc.
Drugs and pharmaceuticals that do not attract compulsory licensing or involve use of recombinant
DNA technology
Hotels and tourism
Food processing
Electronic hardware
Software Development
Film industry
Advertising
Hospitals
Oil refineries
Pollution control and management Exploration and mining of minerals other than diamonds and
precious stones
Management consultancy
Venture capital funds/ companies
Setting up/ development of industrial park/ industrial model town/ SE Z
Government route
Airports (beyond 74% )
B2B e-commerce
Trading companies within notified policy
Drugs and pharmac euticals not falling under the automatic route
Integrated township development
ISPs without gateways, electronic mail and voice mail beyond 49 per cent
Courier services other than distribution of letters
TV software production for Broadcasting
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SECTORS WHICH ATTRACT CEILING ON FOREIGN OWNERSHIP
Telecom
Coal and lignite
Mining
Privat e sector banking
Insuranc e
Domestic airlines
Petroleum (other than refining)
Investing companies/ Services sector
Atomic minerals
Defence industry sector
Broadcasting
Setting up hardware facilities such as up linking, HUB, etc.
Cable net work
Terrestrial Broadcasting FM
Small scale industries (SS I) sector
Satellites
Tea sector
Print Media
Acti vities
Basic, cellular, value-added services, global mobile personal communications by satellite I
Internet service providers with gateways, radio -paging, end-to-end bandwidth
Public sector undertakings
For exploration and mining of coal or lignite for captive consumption
Exploration and mining of diamonds and precious stones
Privat e banking sector
Insuranc e sector (subject to obtaining license from IRDA)
No direct or indirect equity participation by foreign airlines
In un-inc orporated joint venture
70
In incorporat ed joint vent ure
Petroleum products and pipeline sector
In infrastructure related marketing and marketing of petroleum products
For public sector undert akings
Investment through such vehicle is treated as resident equity
o mining and mineral separation
o value addition
o integrated activities
For arms and ammunition and allied items of defense equipment, defense aircraft and warships
Privat e companies incorporated in India with permissible FII/ NRI/ OCB/ PIO equity within the
limits to set up linking hubs (teleports) for leasing or hiring out their facilities to broadcasters.
As regards satellite broadcasting, all TV channels irrespective of the ownership or management control to
uplink from India provided they undertake to comply wit h the broadcast (programme and advertising)
code. Foreign investment allowed up to 49 per cent (inclusive of both FDI and port folio investment) of
paid up share capital.
Companies with minimum 51 per cent of paid up share capital held by Indian citizens are eligible under
the Cable Television Network Rules (1994) to provide cable TV services. Companies with a maximum of
foreign equity including FDI/ NRI/ OCB/ FII of 49 per cent would be eligible to obtain DTH Licens e. Within
the foreign equity, the FDI com ponent not to exceed 20 per cent
The licensee shall be a company registered in India under the Companies Act. All share holding should
be held by Indians except for the limited portfolio investment by FII/ NRI/ PIO/ OCB subject to such ceiling
as may be decided from time t o time. Company shall have no direct investment by foreign entities, NRIs
and OCBs. As of now the foreign investment is permissible to the extent of 20 per cent port folio
investment. No private operator is allowed in terrestrial TV transmission.
If FDI in an SS I unit exceeds 24 per cent of the paid up c apital, the company looses its SSI status.
Further, if the item/s of manufacture is/ are res erved for the SS I sector, t he company has to obtain an
industrial license and undert ake a minimum export obligation of 50 per cent of annual production on such
products.
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SECTOR SPECIFIC GUIDELINES FOR FDI
Sl.No. Sector Guidelines
1. Banking NRI holding may be up to 40%, inclusive of equity participation by other

foreign investors. Foreign investment of up to 20% is permitted by foreign
banking companies or finance companies including multilateral financial
institutions. Multilateral institutions are allowed to invest within the overall
foreign direct investment cap of 40% in case of shortfall in foreign direct
investment contribution by NRIs.
The automatic route is not available.
Non-Banking FDI/ NRI/OCB investments allowed in the following 17 NBFC activities

Financial shall be as per levels indicated below
Companies
i. Merchant banking
(NBFC)
ii. Underwriting
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Vent ure Capital
ix. Custodial Servic es
x. Factoring
xi. Credit Reference Agencies
xii. Credit rating Agencies
xiii. Leasing & Finance
xiv. Housing Financ e
xv. Forex Broking
xvi. Credit card business
xvii. Money changing Business
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b. Minimum Capitalization Norms for fund based NBFCs:
For FDI up to 51% - US $ 0.5 million to be brought upfront
For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
For FDI above 75% and up to 100% - US $ 50 million out of which US $

7.5 million to be brought upfront and the balance in 24 months
100% NBFC with a minimum capital of US $ 50 million allowed to set up

100% downstream subsidiary to undertake specific NBFC activities. Such
a subsidiary, however, would be required to dis-invest its equity to the
minimum extent of 25%, through a public offering only, within a period of 3
years.
c. Minimum capitalization norms for non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in respect of

all permitted non-fund based NBFCs with foreign investment.
2. Civil A viation In the domestic Airlines sector:

(detailed guidelines
have been issued i. FDI up to 40% permitted subject to no direct or indirect equity
by Ministry of Civil participation by foreign airlines is allowed.
A viation)
ii. 100 % investment by NRIs/OCBs.
iii. The automatic route is not available.
3. Telecommunication i. In basic, Cellular Mobile, paging and V alue Added service, and Global
Mobile Personal Communications by S atellite, FDI is limited to 49%
subject to grant of licence from Department of Telecommunications and
adherence by the companies (who are investing and the companies in
which investment is being made) to the licence conditions for foreign
equity cap and lock in period for transfer and addition of equity and other
licence provisions.
ii. No equity cap is applicable to manufacturing activities.
4. Information FDI up to 100% permitted for E-commerce activities subject to the

Technology condition that such companies would divest 26% of their equity in favour
of the Indian public in five years, if these companies are listed in other
73
parts of the world. Such companies would engage only in business to
business (B 2B) e-commerc e and not in retail t rading, inter alia, implying
that existing restrictions on FDI in domestic trading would be applicable to
e-commerce as well.
5. Petroleum a. Under the exploration policy, FDI up to 100% is allowed for small
fields through competitive bidding; up to 60% for unincorporat ed JV; and
(other than up to 51% for incorporat ed JV with a No Objection Certificat e for medium
Refining) size fields.
b. For petroleum products and pipeline sector, FDI is permitted up to

51%.
c. FDI is permitted up t o 74% in infrastructure related to mark eting and

marketing of petroleum products.
d. 100% wholly owned subsidiary (WOS ) is permitted for the purpose of

market study and formulation.
e. 100% wholly owned subsidiary is permitted for investment/Financing.
f. For actual trading and marketing, minimum 26% Indian equity is

required over 5 years.

Petroleum Refining
a. FDI as permitted up to 26% in case of Public Sector Units. PSUs will
hold 26% and balance 48% by public. Automatic rout e is not available.
b. In case of private Indian companies, FDI is permitted up to 100% under

automatic route.
6. Housing & Real No foreign investment is permitted in this sector. NRIs/OCBs are allowed
Estate to invest. The scheme specific to NRIs and OCBs covers the following:
a. Development of servic ed plots and construction of built up residential

premises
b. Investment in real state covering construction of residential and

commercial premises including business centres and offices
c. Development of townships
d. City and regional level urban infrastructure facilities, including both

roads and bridges
e. Investment in manufacture of building materials
74
f. Investment in participatory vent ures in (a) to (e) above
g. Investment in housing finance institutions
7. Coal and Lignite i. Private Indian companies setting up or operating power projects as
well as coal or lignite mines for captive consumption ar e allowed FDI up to
100%.
ii. 100% FDI is allowed for setting up coal processing plants subject to
the condition that the company shall not do coal mining and shall not sell
washed c oal or sized coal from its coal processing plants in the open
market and shall supply the washed or sized coal to those parties who are
supplying raw coal to coal processing plants for washing or sizing.
iii. FDI up to 74% is allowed for exploration or mining of coal or lignite for
captive cons umption.
iv. In all the above cases, FDI is allowed up to 50% under the automatic
route subject to the condition that such investment shall not exceed 49%
of the equity of a PSU.
8. Venture Capital An offshore venture capital company may contribute up to 100% of the
Fund(VCF) and capital of a domestic vent ure capital fund and may also set up a domestic
Venture Capital asset management company to manage the fund.
Company (VCC)
VCFs and V CCs are permitted up to 40% of the paid up corpus of the
domestic unlisted companies. This ceiling wo uld be subject to relevant
equity investment limit in force in relation to areas reserved for SSI.
Investment in a single company by a VCF/VCC shall not exceed 5% of the
paid-up corpus of a domestic VCF/VCC.
9. Trading Trading is permitted under automatic rout e with FDI up to 51% provided it
is primarily export activities, and the undertaking is an export
house/trading house/super trading house/star trading house. However,
under the FIPB route:-
i. 100% FDI is permitted in case of trading companies for the following

activities:
exports;
bulk imports with export/ex bonded warehouse sales;
75
c ash and carry wholesale trading;
other import of goods or services provided at least 75% is for

procurement and sale of goods and services among t he companies of the
same group and for third party use or onward transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to provisions
of E XIM Policy:
a. Companies for providing after sales services (that is no trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level

for such trading companies who wis h to market manufactured products on
behalf of their joint ventures in which they have equity participation in
India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which,
based on technology provided and laid down quality specifications, a
company can market that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for
manufacture provided such test marketing facility will be for a period of
two years, and investment in s etting up manufacturing facilities
commences simultaneously with test marketing.
10. Investing In respect of the companies in infrastructure/service sector, where there is

companies in a prescribed cap for foreign investment, only t he direct investment will be
infrastructure/ considered for the prescribed cap and foreign investment in an investing
service sector company will not be set off against this cap provided the foreign direct
investment in such investing company does not exceed 49% and the
management of the investing company is with the Indian owners. The
automatic route is not available.
11. Atomic energy The following three activities are permitted t o rec eive FDI/NRI/OCB
investments through FIPB (as per detailed guidelines issued by
Department of Atomic Energy vide Resolution No.8/1(1)/97 -PSU/1422
dated 6.10.98):
a. Mining and mineral separation
76
b. Value addition per se to the products of (a) above
c. Integrated activities (comprising of bot h (a) and (b) above.
The following FDI participation is permitted:
i. Upto 74% in both pure value addition and integrated projects.
ii. For pure value addition projects as well as integrated projects with
value addition up to any intermediate stage, FDI is permitted up to 74%
through joint venture companies with Central/State PSUs in which equity
holding of at least one PSU is not less than 26%.
iii. In exceptional cases, FDI beyond 74% will be permitted subject to

clearance of the Atomic Energy Commission before FIPB approval.
12. Defense and No FDI/ NRI/OCB investment is permitted

strategic industries
13. Agriculture No FDI/ NRI/OCB investment is permitted

(including
plantation)
14. Print media No FDI/ NRI/OCB investment is permitted
15. Broadcasting No FDI/ NRI/OCB investment is permitted
16. Power Upto 100% FDI allowed
17. Drugs & i. FDI up to 74% in t he cas e of bulk drugs, their intermediates and f
Pharmaceuticals formulations (except those produc ed by the use of recombinant DNA
technology) would be covered under automatic route.
ii. FDI above 74% for manufacture of bulk drugs will be considered by
the Government on case to case basis for manufacture of bulk drugs from
basic stages and their intermediates and bulk drugs produced by the use
of recombinant DNA technology as well as the specific cell/tissue targeted
formulations provided it involves manufacturing from basic stage.
77
18. Roads & FDI up to 100% under aut omatic rout e is permitted in projects for
Highways, Ports construction and maintenance of roads, highways, vehicular bridges, toll
and Harbors. roads, vehicular tunnels, ports and harbours.
19. Hotels & Tourism 100% FDI is permissible in the sector.
The term hotels include restaurants, beac h resorts, and other tourist
complexes providing accommodation and/or catering and food facilities to
tourists. Tourism related industry includes travel agencies, tour operating
agencies and tourist transport operating agencies, units providing facilities
for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entert ainment, amusement,
sports, and health units for tourists and Convention/Seminar units and
organization.
Automatic route is also available up to 51% subject to the following

parameters.
For foreign technology agreements, automatic approval is granted if
i. up to 3% of t he capital cost of the project is proposed t o be paid for

technical and c onsultancy services including fees for architecture, design,
supervision, etc.
ii. up to 3% of the net turnover is payable for franchising and

marketing/publicity support fee, and
iii. Up to 10% of gross operating profit is payable for management fee,

including incentive fee.
20. Mining. i. For exploration and mining of diamonds and precious stones FDI is
allowed up to 74% under aut omatic route.
ii. For exploration and mining of gold and silver and minerals other than
diamonds and precious stones, metallurgy and processing FDI is allowed
up to 100% under automatic route.
iii. Press Note No. 18 (1998 series) dated 14.12.98 would not be
applicable for s etting up 100% owned subsidiaries in so far as the mining
sector is concerned, subject to a declaration from the applicant that he
has no existing joint venture for t he s ame area and / or the particular
mineral.
21. Postal services Couriers carrying packages, parcels and other items which do not come
within the ambit of Indian Post Offic e Act 1998 shall not be permitted.
78
22. Pollution Control FDI up to 100% in bot h manufacture of pollution control equipment and
and management consultancy for integration of pollution cont rol systems is permitted under
automatic route.
23. Advertising and Automatic approval is available for the following:

films
Upto 74% FDI in advertising sector
Upto 100% FDI in film industry (i.e. film financing, production,

distribution, exhibition, marketing and associated activities relating to film
industry) subject to the following:
i. Companies with an established track record in films, TV, music,

finance and insuranc e would be permitted.
ii. The company should have a minimum paid up capital of US $ 10

million if it is the single largest equity shareholder and at least US $ 5
million in other cases.
iii. Minimum level of foreign equity investment would be US $ 2.5 million

for the single largest equity shareholder and US $ 1 million in other cases.
iv. Debt equity ratio of not more than 1:1, i.e., domestic borrowings shall
not exceed equity.
79
CONCLUSION
India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges,
credit information services and aircraft maintenance operations. The foreign investment limit in Public
Sector Units (PSU) refineries has been raised from 26% to 49%. An additional good point is that the
mandatory disinvestment clause within five years has been done away with. Increasing foreign
investment can be used as a meas ure of growing economic globalization.
Foreign Direct Investment is generally preferred to Foreign Portfolio Investment, commonly referred to as
Foreign Institutional Investment since FDI is expected to be long term whereas FII are viewed as good
weat her friends who would exit the country during the time of t rouble. Moreover, along with financial
investment, FDI brings access to modern technologies and export mark ets. There are other collateral
benefits of FDI. For example when S uzuki ushered in modern cars on Indian roads, it was not just the
automobile industry which benefitted, auto ancillary, servicing and financial sectors also benefitted
simultaneously. On the other hand, FII also allows entrepreneurs to get access to huge amounts of
capital but these flows of port folio can revers e at any time and has a t endency to flow t owards globally
competitive sectors of the economy.
As evidenced by analysis and data the concept and material significance of FDI has evolved from the
shadows of shallow understanding to a proud show of forc e. The government while serious in its efforts to
induce growt h in the ec onomy and country started with foreign investment in a haphazard manner. While
it is accepted that t he government was under compulsion to liberalize cautiously, the understanding of
foreign investment was lacking. A sectoral analysis reveals that while FDI shows a gradual increase and
has become a staple for success for India, the progress is hollow. The Telecommunications and power
sector are the reasons for the success of Infrastructure. This is a throwback to 1991 when Infrastructure
reforms were not attempted as the sector was performing in the positive. FDI has become a game of
numbers where t he justification for growth and progress is the money that flows in and not the specific
problems plaguing the individual sub sectors.
Political parties (Congress, BJP, CP I (M)) have changed their stance when in power and when in
opposition and opposition (as well as public debate) is driven by partisan considerations rather that and
effort to assess the merit of the policies. This is evident is the public posturing of Hindu right, left and
centrist political parties like the Congress. The growing recognition of the importance of FDI resulted in a
substantive policy package but and also the delegation of the same to a set of eminently dispens able
bodies. This is indicative of a mood of promotion counterbalanced by a clear deference of responsibility.
In the comparative studies the notion of Infrastructure as a sector has undergone a definitional change.
FDI in the sector is held up primarily by two sub sectors (telecommunic ations and Power) and is not
evenly distributed. The three major industrial houses (CII, ASSOCHAM, FICCI), World B ank and the
Planning Commission have similar recommendations for FDI and yet despite their c oncurrence, a
comprehensive policy in this respect is still to be formulated after 15 years of India‘s economic reforms.
The Swades hi alternative has receded in public policy debate .
The decisions governing FDI have been spread over many areas and agencies that have to be
streamlined or an overarching regulatory body and practical policy has to be developed. Thus the impact
of the reforms in India on t he policy environment for Foreign Direct Investment pres ents a mixed picture.
The industrial reforms have gone far, though they need to be supplemented by more infrastructure
reforms, which are a critical missing link.
80
REFERENCES
Economic Survey of India
India’s rising growt h pot ential – Goldman Sachs
The Economist
Ministry of Finance, India - Web based information
The Economic Times
India in Business – official website for investment and trade in India
Reserve Bank of India’s dat abase on the Indian Economy
Ernst and Young Report on Doing Business in India
World Bank – Indian Country Overview
Development Policy Review – World Bank
UNCTA D: World Investment Report
Foreign Direct Investment Policy, Ministry of Commerce and Industry, Govt. of India
Foreign Direct Investment and Economic Development of India: A Diagnostic Study, A S Shiralashetti*
and S S Hugar** ICFA I University Press.
Foreign Direct Investment in India – A Critical Analysis of FDI from 1995 t0 2005, Kulwinder Singh, Centre
for Civil Society, New Delhi, Research Int erns hip Program, 2005
Foreign Direct Investment in China: Policy, Trend, and Impac t, K.C.Fung, University of California, Hitomi
Iizaka, University of California, Sarah Tong, University of Hong Kong, June 2002
Foreign Investment in Russia, Lúcio Vinhas de Souza, Economic Analysis from the European
Commission‘s Directorate-General for Economic and Financial Affairs
Privat e Foreign Investment in India - Suma Athreye, Manc hester School of Management, England
Sandeep Kapur, Birkbeck College, University of London, England, August 1999
A Glance at the Foreign Trade of India during the Mughal Age, 1526-1707, Muhammed Idris
Attracting Foreign Direct Investment (FDI) t o India - Ramkishen S. Rajana, Sunil Rongalab and Ramya
Ghosh
Foreign Direct Investment in Brazil: regulation, flows and contribution to development , Pedro da Motta
Veiga
FDI and the Indian Experience, Rajan. R. Gandhi
81
Mark eting a Country as a Destination for Foreign Direct Investment (FDI): An Exploratory Study of India
as Perceived by Australian Firms, Peter K. John, Export Finance Insurance Corporation and Rae Weston,
Macquarie University
Foreign Direct Investment: Effects of a “Cheap” Dollar, James K. Jackson
Major Webpages:
http://en.wikipedia.org/wiki/Economy_of_India
http://business.mapsofindia.com/investment-industry/foreign-investment.html
http://www.experiencefestival.com/economy_of_india_-_post-independence
http://www.tradechakra.com/indian-ec onomy/index.html
http://finance.indiamart.com/investment_in_india/ foreign_investment.html
82

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Foreign Investment in India - Analysis of Factors and Policies

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MANAGEMENT RESEARCH PROJECT

FDI and FII - Policies and BRICS

Prof. Arup Choudhuri

Date: 11th March, 2010

“This report is submitted as a partial fulfillment of the requirement of

II. FOREIGN INVESTMENT IN INDIA – THE HISTORICAL SKETCH ................ 12

MAURYAS – THE NORTHERN SILK ROUTE................................................................................................................................14

MUGHAL EMPIRE – TRADE..........................................................................................................................................................15

FOREIGN INVESTMENT IN INDIA – POST INDEPENDENCE....................................................................................................17

FOREIGN INVESTMENT IN INDIA – POST LIBERAL IZATION ...................................................................................................19

III. COMPARATIVE STUDY OF FOREIGN INVESTMENT IN DEVELOPED AND

SOUTH AFRICA ...............................................................................................................................................................................31

UNITED STATES OF AMERICA .....................................................................................................................................................45

IV. MAJOR FACTORS AFFECTING FOREIGN INVESTMENT ............................... 50

DIFFERENT TYPES OF FDI .............................................................................................................................................................52

WHERE DOES FOREIGN INVESTMEN T TAKE PLACE? ..............................................................................................................56

FACTORS INFL UENCIN G FOREIGN INVESTMENT DECISION S ...............................................................................................57

V. INVESTING IN INDIA ..................................................................................................... 59

POLICY FRAMEWORK ...................................................................................................................................................................60

FDI IN EOUs/SEZs/ INDUSTRIAL PARK/EHTP/STP ...................................................................................................................66

ENTRY STRATEGY INTO INDIA ....................................................................................................................................................67

IMPORTANT SECTORS WHERE FDI UPTO 100% IS PERMITTED ...........................................................................................69

SECTORS WHICH ATTRACT CEILING ON FOREIGN OWNERSHIP ..........................................................................................70

SECTOR SPECIFIC GUIDELINES FOR FDI.....................................................................................................................................72

India’s Economic Sectors and Foreign Investment

However, fields which are in severe need of foreign investment include:

Petroleum and natural gas

Some of the policies that will be addressed include:

1. The Industrial Policy

2. Foreign Direct Investment

3. Investment by non-resident Indians and overseas corporate bodies

4. Foreign technology agreements

7. Sector specific policies on FDI

The Indus Valley Civilization (IV C) was a Bronze

The Indus civilization‘s economy was primarily dependent on trade,

Cotton AD can be categorized under the Pre-colonial phase. During Indus

The Silk-Road is a unique example

The Portuguese eventually settled down to a

o Foreign exchange controls have been eased on the account of trade.

o Complete tax exemptions.

• Focus on government led investments in manufacturing

• Several large PSUs in steel, chemicals, and power were set up

Phase II: (1965-80)

• Government involvement in industry increased

Phase III: (1980-90)

• The government partially opened its economy to external trade

o Formation of Maruti Suzuki a s government’ s 50:50 Joint Venture with Japan’s

Phase IV: (Since early 1990s)

• The industry was further liberalized

• The scope of licensing was significantly reduced

• Custom duties were slashed

• FDI in various sectors was opened up

Phase V: (2000 onwards)

An important part of the economic reform process in China has

Intended to profit from currency speculation;

In sectors where China is seeking to cultivate ―national champions;‖

DISTRIBUTION OF FOREIGN INVESTMENT

FOREIGN TRADE ZONES/FREE PORTS

Russia presents many promising investment opportunities with the

Located at the southernmost tip of A frica, South A frica (GMT +2)

Although the economy is in many areas highly developed, there

Foreign purchases were primarily

These investments have been sustained, among other factors, by the

Brazil has the largest economy in South America