Foreign Direct Investment

Introduction
Foreign investment refers to investments made by the residents of a country in
the financial assets and production processes of another country. The effect of
foreign investment, however, varies from country to country. It can affect the
factor productivity of the recipient country and can also affect the balance of
payments. Foreign investment provides a channel through which countries can
gain access to foreign capital. It can come in two forms: FDI and foreign
institutional investment (FII). Foreign Direct Investment involves in direct
production activities and is also of a medium-to long-term nature. But foreign
institutional investment is a short-term investment, mostly in the financial
markets. FII, given its short-term nature can have bidirectional causation with the
returns of other domestic financial markets such as money markets, stock
markets, and foreign exchange markets. Hence, understanding the determinants
of FII is very important for any emerging economy as FII exerts a larger impact on
the domestic financial markets in the short run and real impact in the long run.
India, being a scarce country, has taken many measures to attract foreign
investment since the beginning of reforms in 1991.

India is the second largest country in a world, with a population of over 1 billion
people. As a developing country, Indias economy is characterized by wage rates
that are significantly lower than those in most developed countries. These two
traits combine to make India a natural destination for FDI and Foreign
Institutional Investment (FII). Until recently, however, India has attracted only a
small share of global FDI and FII primarily due to government restrictions on
foreign involvement in the economy. But beginning in 1991 and accelerating
rapidly since 2000, India has liberalized its investment regulations and actively
encouraged new foreign investment, a sharp reversal from decades of
discouraging economic integration with the global economy.

Foreign investment plays a significant role in development of an economy as like

India. Many countries provide many incentives for attracting Foreign Direct
Investment (FDI). Need of FDI depends on saving and investment rate in any
country. Foreign Direct Investment act as a bridge to fulfill the gap between
investment and saving. In the process of economic development foreign capital
helps to cover the domestic saving constraint and provide access to the superior
technology that promote efficiency and productivity of the existing production
capacity and generate new production opportunity.

Foreign technology induction can be encouraged through FDI and through foreign
technology collaboration agreements. The sectors which have resources but do
not have the required technology acquire foreign technology collaboration
through RBI or Government approvals. The total number of approvals recorded
for the period 2000 to 2010 by the RBI, SIA and FIPB is 8080. The RBI has
approved 4580 proposal whereas SIA and FIPB have approved 3500. Technical
collaborations have put a positive effect on the domestic firms. It helps in
establishing technology transfers. An Indian company may receive Foreign Direct
Investment under the two routes as given under:

1. Automatic Route: FDI in sectors/activities to the extent permitted under

the automatic route does not require any prior approval either of the
Government or the Reserve Bank of India.
2. Government Route: FDI in activities not covered under the automatic route
requires prior approval of the Government which is considered by the
Foreign Investment Promotion Board (FIPB), Department of Economic
Affairs, and Ministry of Finance.

FDI have helped India to attain a financial stability and economic growth with
the help of investments in different sectors. FDI has boosted the economic life
of India and on the other hand there are critics who have blamed the
government for ousting the domestic inflows. After, liberalization of Trade
Policies in India, there has been a positive GDP growth rate in Indian economy.
Foreign direct investments help in developing the economy by generating
employment to unemployed, Generating revenues in the form of tax and
incomes, financial stability to the government, development of infrastructure,
backward and forward linkages to the domestic firms for the requirements of
raw materials, tools, and business infrastructure, and act as support for
financial system. Forward and Backward linkages are developed to support the
foreign firms with the supply of raw materials and other requirements. It helps
in generating of employment and also helps poverty eradication. There are
many businesses and individuals who would earn their lively hood through the
foreign investments. There are legal and financial consultants who also guide
in the early stage of establishment of firm.

Foreign investment means both foreign portfolio investment and foreign direct
investment (FDI). FDI brings better technology and management, marketing
networks and offers competition, the later helping Indian companies improve,
quite apart from being good for consumers. Alongside opening up of the FDI
regime, steps were taken to allow foreign portfolio investments into the Indian
stock market through the mechanism of foreign institutional investors. The
objective was not only to facilitate non-debt creating foreign capital inflows
but also to develop the stock market in India, lower the cost of capital for
Indian enterprises and indirectly improve corporate governance structures. On
their part, large Indian companies have been allowed to raise capital directly
from international capital markets through commercial borrowings and
depository receipts having underlying Indian equity. Thus the country adopted
a two-pronged strategy: one to attract FDI which is associated with multiple
attendants benefits of technology, access to export markets, skills,
management techniques, etc and two to encourage portfolio capital flows
which ease the financing constraints of Indian enterprises.

Off the different types of financial inflows, the FDI and Foreign institutional
investment (FII) has played an important role in the process of development of
many economies. Further many developing countries consider FDI and FII as
 an important element in their development strategy among various forms of
foreign assistants.

Literature Review
Samal, Raju (2016): They focused FDI of manufacturing industries more FDI it
facilitates the economic development as well as increase the growth of the GDP
of the country. Though the result of their research, government should design the
FDI policy such a way where FDI inflow can be utilized as means of enhancing
domestic production savings and exports through the equitable distribution
among states by providing much freedom to states, so that they can attract FDI
inflow at their own level. Not only in manufacturing sector of industrial life and
human life in order to maintain a sustainable and moderate life style.

Alfaro (April, 2003): FDI vary greatly across sectors by examining the effect of FDI
on growth in primary, manufacturing and services sectors. After examining they
found that FDI inflow into the primary sector tend to have a negative effect on
growth whereas, FDI inflow in the manufacturing sector a positive one. Evidence
from the foreign investments in the service sector is ambiguous.

Pradeep : In his thesis FDI and Industrial Development in India found out that a
positive high co-efficient of correlation is found between FDI approvals and actual
inflows. RBI automatic route is found contributing the maximum share of 45.7%
to the total FDI inflows followed with a gap by government FIPB route (25.30%)
and other route (29.00%).

Hooda : In their research paper Determinants of Manufacturing FDI in India a

sectoral analysis They found out that manufacturing FDI in India significantly
negatively affected by tariffs, import- intensity, R&D intensity, where as it
positively impacted by market power. FDI inflows has been higher in those sector
where market imperfections give an opportunity to exploit ownership advantages
of FDI making companies to increase their margins and hence profits. The
negative relationship between tariffs and FDI shows that FDI has been efficiency
seeking.

Either governments increase incentive policies they are concerned with foreign
direct investment. On the other hand transactional corporation decide their FDI
based on the incentive policies applied by developing countries thats why
incentive policies affect FDI more than anything else. It becomes the competition
between various regions that how to attract FDI by incentive policies. Therefore,
this analysis shows the game between incentive policies and FDI by game theory.
This analysis uses a novel approach to understand the possibilities that physical
distances can become a barrier for economic and technology in attraction among
countries.

Aggarwal , Singla: FDI is important for economic development of country. It

provides financial resources, technology and innovative and improved
management techniques. Indian company has two routes of FDI either through
automatic or government. This paper tries to study the requirement of FDI in
India to rank the highest FDI inflows. According to results Mauritius has invested
highly in India after that Singapore, Japan and USA and so on. FDI inflows
increased in India during the year 2000 to 2011.

Malhotra (2014): With the increase of globalization, developing countries

especially in Asia have been witnessing at tremendous growth of FDI inflows
during the past two decades. As compare to East Asian countrys India has been a
late comer in the FDI scene. But it sustained its attraction as a favorable
destination for foreign investors due to its liberalized policy. This paper shows the
effect of FDI on Indian economy. Particularly after economic reforms and global
competition for FDI.

Nunnenkamp, Peter: They assess the 6020 foreign investors at the level of
Indian district. Employing conditional logit models they search that clustering of
FDI is herding among investors strongly from India and other countries of origin.
Research Methodology
This research is a descriptive study in nature. The secondary data was collected
from various websites particularly from the dipp.nic.in and many more. This study
is based on the time period from April, 2000 to December, 2016.

Many changes have been made to the Foreign Direct Investment (FDI) Policy in
the last few years. Further, FDI Is allowed through two different routes namely,
Government and Automatic route. Various other conditions as defined in the
consolidated FDI Policy are applicable to various sectors. In specific sectors, FDI is
prohibited.

FDI in INDIA SECTOR WISE

SECTOR FDI Limit Entry route

and Remarks
Agriculture and Animal Husbandry 100% Automatic
Floriculture, Horticulture , Apiculture and Cultivation
of Vegetables and Mushrooms under controlled
conditions
Development and Production of seeds and planting
material
Animal Husbandry(including breeding of dogs),
Pisciculture, Aquaculture
Services related to agro and allied sectors
Plantation Sector 100% Automatic
Tea sector including tea plantations
Coffee Plantation
Rubber Plantation
Cardamom Plantation
Palm oil tree plantation
Olive oil tree plantation
Mining 100% Automatic
Mining and Exploration of metal and non-metal ores
including diamonds, gold, silver and precious ores but
excluding titanium bearing minerals and its ores.
Mining ( Coal and Lignite) 100% Automatic
Mining 100% Government
Mining and minerals separation of titanium bearing
minerals and ores, its value addition and integrated
activities
Petroleum and Natural Gas 100% Automatic
Exploration activities of oil and natural gas fields,
infrastructure related to marketing of petroleum products
and natural gas, marketing of natural gas and petroleum
products etc
Petroleum and Natural Gas 49% Automatic
Petroleum refining by the Public Sector Undertaking (PSU),
without any disinvestment or dilution of domestic equity
in the existing PSUs.
Defence Manufacturing 100% Automatic up
to 49% Above
49% under
Government
route in cases
resulting in
access to
modern
technology in
the country
Broadcasting 100% Automatic
Teleports ( setting up of up-linking HUBs/Teleports)
Direct to Home (DTH)
Cable Networks (Multi System Operators (MSOs)
operating at National or State or District Level and
undertaking up gradation of networks towards
digitalization and addressability
Mobile TV
Head end-in-the Sky Broadcasting Services (HITS)
Broadcasting 100% Automatic
Cable Networks ( Other MSOs not undertaking up
gradation of networks towards digitalization and
addressability and Local Cable Operators (LCOs)
Broadcasting Content Services 49% Government
Terrestrial Broadcasting FM (FM Radio)
Up-linking of News and Current Affairs TV Channel
Up-linking of Non-News and Current Affairs TV 100% Automatic
Channels/Down- linking of TV Channel
Print Media 26% Government
Publishing of newspaper and periodicals dealing
with news and current affairs
Publication of Indian editions of foreign magazines
dealing with news and current affairs
Publishing/printing of scientific and technical 100% Government
magazines/specialty journals/periodicals, subject to
compliance with the legal framework as applicable and
guidelines issued in this regard from time to time by
Ministry of Information and Broadcasting
Publication of facsimile edition of foreign newspaper 100% Government
Civil Aviation Airports 100% Automatic
Green Field Projects and Existing Projects
Civil Aviation Air Transport Services 100% Automatic up
Scheduled Air Transport Service/ Domestic to 49% Above
Scheduled Passenger Airline 49% under
Regional Air Transport Service government
(Foreign Airlines are barred from investing in Air route
India ) 100%
Automatic for
NRIs
Civil Aviation 100% Automatic
Non- Scheduled Air Transport Service
Helicopter services/seaplane services requiring
DGCA approval
Ground Handling Services subject to sectoral
regulations and security clearance
Maintenance and repair organizations; flying
training institutes; and technical training institutions
Construction Development: Townships, Housing, Built-up 100% Automatic
Infrastructure
Industrial Parks (new and existing) 100% Automatic
Satellite- establishment and operation, subject to the 100% Government
sectoral guidelines of Department of Space/ISRO
Private Security Agencies 74% Automatic up
to 49%
Above 49%
and up to 74%
under
government
route
Telecom Services 100% Automatic up
to 49%
Above 49%
under
government
route
Cash and Carry Wholesale Trading 100% Automatic
E-Commerce activities (e-commerce entities would engage 100% Automatic
only in Business to Business (B2B) e-commerce and not in
Business to Consumer (B2C) e-commerce).
Single Brand Retail trading 100% Automatic up
Local sourcing norms will be relaxed up to three years and to 49%
a relaxed sourcing regime for another five years for Above 49%
entities undertaking Single Brand Retail Trading of under
Products having state-of-art and cutting edge Government
technology. route
Multi Brand Retail Trading 51% Government
Duty Free Shops 100% Automatic
Railway Infrastructure 100% Automatic
Construction, operation and maintenance of the following
Suburban corridor projects through PPP
High speed Train projects
Dedicated Freight lines
Rolling stock including train sets, and locomotives/
coaches manufacturing and maintenance facilities
Railway Electrification
Signaling System
 Freight terminals
Passenger terminals
Infrastructure in industrial park pertaining to
railway line/sidings including electrified railway lines
and connectivities to main railway lines
Mass Rapid Transport Systems.
Asset Reconstruction Companies 100% Automatic
Banking-Private Sector 74% Automatic up
to 49%
Above 49%
and up to 74%
under
Government
route
Banking- Private Sector 20% Government
Credit Information Companies (CIC) 100% Automatic
Infrastructure Company in the Securities Market 49% Automatic
Insurance 49% Automatic
Insurance company
Insurance Brokers
Third Party Administers
Surveyors and Loss Assessors
Other Insurance Intermediaries
Pension Sector 49 % Automatic
Power Exchanges 49% Automatic
White Label ATM Operations 100% Automatic
Financial services activities regulated by RBI, SEBI, IRDA 100% Automatic
or any other regulator
Pharmaceuticals (Green Field ) 100% Automatic
Pharmaceuticals (Brown Field) 100% Automatic up
to 74%
Above 74%
under
Government
route
Food products manufactured or produced in India 100% Government
Trading, including through e-commerce, in respect of food
products manufactured or produced in India.

Prohibited Sectors

FDI is prohibited in the following sectors

Lottery Business including Government/private lottery, online lotteries, etc.

Gambling and Betting including casinos etc.
Chit funds
Nidhi company
Trading in Transferable Development Rights(TDRs)
Real Estate Business or Construction of farm Houses (Real Estate business
does not include development of townships, construction of
residential/commercial premises, road or bridges )
Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes
Activities/sectors not open to private sector investment e.g. Atomic Energy
and Railway operations (other than permitted activities).

Analysis of FDI Inflows and Interpretation

1. Cumulative FDI Flows Into India(2000-
2016)
A. Total FDI Inflows (from April, 2000 to
December, 2016):
1. Cumulative Amount of FDI Inflows US$
(Equity inflows +Re-invested earnings+ - 472,199
Other capital Million
 2. Cumulative Amount of FDI Equity Inflows Rs. US$
(excluding, amount remitted through 1,735,711 324,357
RBIs NRI Schemes) Crore Million

B. FDI Inflows During Third Quarter of

Financial Year 2016-2017 (October,
2016 to December,2016):
1. Total FDI Inflows Into India (Equity inflows US$
+Re-invested earnings+ Other capital) - 18,196
(as per RBIs Monthly bulletins) Million
2. FDI Equity Inflows Rs. US$
95,712 14,220
Crore Million

C. FDI Equity Inflows (Month-Wise) During

The Financial Year 2016-17:
Financial Year Amount Of FDI Equity Inflows
2016-17
(In RS. Crore) (In US$ mn)
1. April,2016 22,345 3,362
2. May,2016 13,271 1,983
3. June,2016 15,111 2,245
4. July,2016 27,430 4,081
5. August,2016 32,150 4,803
6. September,2016 34,366 5,149
7. October,2016 41,353 6,195
8. November,2016 31,631 4,677
9. December,2016 22,727 3,347
2016-2017(April,2016 to
December,2016)# 240,385 35,844
2015-16 (April, 2015 to
December,2015)# 191,063 29,442
%age growth over last year
(+)26% (+)22%
Source: As per DIPPs FDI Data base

Interpretation: Above Table shows the amount of FDI inflows from April, 2016 to
December, 2016. It shows the amount in Rs Crore and in US $ mn. The highest FDI
inflows in the country is in the month of October, 2016 i.e. 41,353 in Rs crore and
6,195 in US $mn. Other months shows the fluctuating trend.
 Chat 1. Amount of FDI inflows

6000

5000

4000
Amount of FDI
3000 In Us $ Mn

2000

1000

0
April May June July August Sept Oct Nov Dec

Month Wise

Interpretation: Chat 1 shows the total FDI inflows during the time
period April, 2016 to December, 2016. The FDI inflow shows a
fluctuating trend in different months.

D. Sectors Attracting Highest FDI Equity

Inflows in India:
Amount in Rs. Crores (US$ In Million)

Ranks Sector 2014-15( 2015-16 2016-17 Cumulative %age to total

April- (April- (April,16- Inflows ( inflows ( In
March) March) December,16) April, 16- terms of
December,16) US$)
1. Service Sector 27,369 45, 415 50,620 308,975 18%
( 4,443) (6,889) (7,553) (58,345)
2. Construction 4,653 727 659 114,596 8%
Development: (769) (113) (99) (24,287)
Townships, Housing,
Built- up
Infrastructure
3. Telecommunications 17,372 8,637 37,270 129,998 7%
(Radio paging, (2,895) (1,324) (5,539) (23,921)
cellular mobile, basic
telephone services)
4. Computer Software 14,162 38,351 12,149 124,333 7%
and Hardware (2,296) (5,904) (1,814) (22,832)
5. Automobile Industry 16,760 16,437 9,776 91,170 5%
(2,726) (2,527) (1,453) (16,518)
6. Drugs and 9,052 4,975 4,584 74,681 4%
Pharmaceuticals (1,498) (754) (687) (14,537)
7. Trading 16,755 25,244 13,442 82,279 4%
(2,728) (3,845) (2,000) (13,873)
8. Chemicals ( other 4,658 9,664 5,250 64,805 4%
than Fertilizers) (763) (1,470) (783) (12,683)

9. Power 4,296 5,662 6,459 59,073 4%

(707) (869) (961) (11,437)
10. Metallurgical 2,196 2,982 8,419 51,846 3%
Industries (359) (456) (1,259) (10,149)
Source: As per DIPPs Data base

Interpretation: Above table shows the favorite and leading sectors for FDI in
India. According to FDI report Service sector is the favorite sector with highest FDI
inflows 18%. After Service sector Construction Development and
Telecommunication is the next favorite sector with 8% and 7%. There is a good
future prospect for investors in other sectors also like Automobile industry and
Power sectors.
 E. Statement of Country- Wise FDI Inflows
from April, 2000 to December, 2016
S.No Name of the country Amount of Foreign Direct Investment %age with inflows
Inflows
(In RS. Crore ) (In US$ Million )

1. Mauritius 566.396.06 108,729.21 33.52

2. Singapore 304,325.37 52,994.49 16.34
3. Japan 139,193.27 25,215.45 7.77
4. U.S.A 107,585.30 19,883.67 6.13
5. China 9,933.87 1,611.66 0.50
6. New Zealand 326.35 61.08 0.02
7. Brazil 124.37 24.77 0.01
8. Ukraine 32.57 5.43 0.00
9. Nepal 12.48 2.45 0.00
10. Sudan 0.24 0.05 0.00
Source: As per DIPPs Data Base

Interpretation: Above table Depict the having Highest FDI in India. The reports
show Mauritius country has the highest foreign investor in India with 33.52%.
After Mauritius, Singapore and Japan invest the highest FDI in India with 16.34%
and 7.77% respectively. U.S.A also got 4th position in FDI in India.

F.DIPPs Financial Year Wise FDI Equity

Inflows:
S.No Financial Amount Of FDI inflows %age growth over
Year (April- previous year (in terms
March) of US$)
Financial Years 2000-01 (in Rs. Crore ) (In US$
to 2016-17 million )
1. 2000-01 10,733 2,463 -
2. 2001-02 18,654 4,065 (+)65%
3. 2002-03 12,871 2,705 (-)33%
4. 2003-04 10,064 2,188 (-)19%
5. 2004-05 14,653 3,219 (+)47%
6. 2005-06 24,584 5,540 (+)72%
7. 2006-07 56,390 12,492 (+)125%
8. 2007-08 98,642 24,492 (+)97%
9. 2008-09 142,829 31,396 (+)28%
10. 2009-10 123,120 25,575 (-)18%
11. 2010-11 97,320 21,383 (-)17%
12. 2011-12 165,146 35,121 (+)64%
13. 2012-13 121,907 22,423 (-)36%
14. 2013-14 147,518 24,299 (+)8%
15. 2014-15 189,107 30,931 (+)27%
16. 2015-16 262,322 40,001 (+)29%
17. 2016-17 ( 240,385 35,844
from April,
2016 to
December,
2016)
Cumulative Total (from 1,736,144 324,478
April, 2000- to December,
2016)
Source: As per DIPPs Data base

Interpretation: Above table shows the total amount of FDI inflows in India
during last 10 years i.e. 2000-2016. The FDI inflows from 2000- 2016 i.e. 10,733
crore Rs. In 2001-2002it was 18,654 crore Rs. It shows the good result in the FDI
inflows in India. Little bit ups and downs in FDI inflows up to 2005-06, but after
that hike in the year 2007-08 i.e. 98,642 crore Rs. As compare to earlier years .in
2008-09 there was a huge investment in FDI in 142,829 crore Rs. And so on. So we
can say that foreign investment has been on rise in India.

Findings:
 FDI is an important stimulus for the economic growth of India.
FDI shows a tremendous growth in second decade that is there is three times
then the first decade of FDI in service sector.
Service sector is first and banking and insurance sector is second segment of
which pick the growth in second decades of reforms.
FDI create high perks jobs for skilled employee in Indian service sector.
Mauritius and Singapore is the 2 top countries which has maximum FDI in
India.
FDI plays an important role in the development of infrastructure because
many countries invest in the infrastructure sector and service and baking
finance sectors.
Atomic energy and Railway Transport are some important and life line of any
country. Therefore India also liberalized FDI in these sectors.
After above analysis, we can say that FDI has good future growth in Retailing
and Real estate sector in India.

Conclusion
It can be observed from the above analysis that at the sectoral level of the Indian
economy, FDI has helped to raise the output, productivity and employment in
some sectors especially in service sector. Indian service sector is generating the
proper employment options for skilled worker with high perks. On the other side
banking and insurance sector help in providing the strength to the Indian
economic condition and develop the foreign exchange system in country. So, we
can conclude that FDI is always help to create employment in the country and
also support the small scale industries also and helps country to put an impression
on the world wide level through liberalization and globalization.

References
 Lee Chen-Kuo, The influence on developing countries foreign direct
investment (FDI) policies imposed by incentives, African Journal of Business
Management vol. 5(34), December, 2011.
Nunnenkamp Peter, Mukim Megha, The Clustering Of FDI in India: The
Importance of Peer Effects, Applied Economic Letters Vol: 19, Nov 8, 2012.
Bhavya Malhotra, Foreign Direct Investment: Impact on Indian Economy,
Global Journal of Business Management And Information Technology Vol:
4, Number 1(2014), pp. 17-23.
Shalini Aggarwal, Ankush Singla, Ritu Aggarwal, : Foreign Direct Investment
:IJCEM International Journal of Computational Engineering and
Management, Vol. 15 Issue 5, September 2012.
Sanghamitra Samal, and D. Venkatrama Raju : A Study of Foreign Direct
Investment (FDI) on Manufacturing Industry in India: An Emerging
Economic Opportunity of GDP Growth and Challenges.
Laura Alfaro: Foreign Direct Investment and Growth: Does the Sector
Matter? : Harvard Business School, April, 2003.
Websites : Www.Dipp.nic.in