Project Report

On

FDI Investments in India

SUBJECT
International Business

SUBMITTED TO
Professor V. P. Singh

POST GRADUATE DIPLOMA IN MANAGEMENT

(2009-2011)

ATHARVA SCHOOL OF BUSINESS

MALAD-MARVE ROAD, CHARKOP NAKA, MALAD (WEST), MUMBAI –

400095
Group Members

Roll
Name
Number

Sumeet Kotkar (Operation) OP(A) - 43

Krutika Paingankar
FA - 63
(Finance)

Siddhi Mishra (Finance) FA - 56

Sonali Bera (Finance) FA - 06

Nikita Gupte (HR) HA - 26

EXECUTIVE SUMMARY
India has made tremendous progress in building a policy environment to encourage
investment. As a result, the country’s economy is growing more rapidly and FDI inflows have
accelerated impressively. However, investment remains insufficient to meet India’s needs,
particularly in infrastructure. Current efforts to strengthen and liberalise the regulatory
framework for investment need to be intensified and India’s well-developed economic
legislation implemented at an accelerated pace both at national level and right across India’s
states and union territories.

India has made tremendous progress in promoting investment

India has made impressive strides in building a policy environment to encourage both
domestic and foreign investment, in particular to attract foreign direct investment (FDI) and
facilitate outward investment, as evidenced in this study. This progress is an integral part of
the market-oriented reforms which have since 1991 set the scene for a shift to a consistently
higher rate of real annual GDP growth than the country has experienced in its recent history.
The “licence raj” has been largely dismantled. Restrictions on large-scale investment have
been greatly relaxed. Many sectors formerly reserved to the public sector have been opened up
to private enterprise. Import substitution and protectionism have been replaced by an open
trade regime. Sectoral restrictions on FDI have been progressively removed and foreign
ownership ceilings steadily raised. FDI approval procedures have been greatly liberalised.
Foreign exchange restrictions related to investment have been relaxed. Experimental
economic zones such as the Special Economic Zones have been established to test investment
liberalisation measures. At the same time, other elements of the business environment that
have an impact on investment have improved. The legal framework for intellectual property
rights (IPR) protection has been greatly developed in the past two decades and enforcement
has been strengthened. A non-discriminatory Competition Act is being gradually put into
effect. India’s tax system now treats foreign-owned companies on a par with domestic firms.
The corporate governance framework has improved, taking advantage of international norms.
The government is striving to increase investment in human capital. These reforms are
expected to last. India has a history of democracy and the rule of law which provides a firm
basis for the development of a sound legislative and regulatory environment for investment,
incorporating good practices from other jurisdictions, generally on the basis of internationally
recognized standards.

As a result, India’s FDI inflows have accelerated sharply in recent years (until the current
economic crisis). FDI inflows have grown from relatively insignificant levels in the early
1990s to magnitudes now greater than most developing countries. These inflows have begun
to play an important role in providing employment, diversifying consumer choice and adding
competitive stimulus to domestic investment. India’s outward investment, which has grown
apace with its inward investment during the 2000s, is also contributing to India’s role as a
major player in the world economy. Indian companies are active in M&As in OECD countries
as well as greenfield investment in developing countries. This role is also evidenced by India’s
increasingly active investment treaty practice.

INTRODUCTION
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It
can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign
firm which receives the investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills, and as such can
provide a strong impetus to economic development. Foreign direct investment, in its classic
definition, is defined as a company from one country making a physical investment into
building a factory in another country. The direct investment in buildings, machinery and
equipment is in contrast with making a portfolio investment, which is considered an indirect
investment. In recent years, given rapid growth and change in global investment patterns, the
definition has been broadened to include the acquisition of a lasting management interest in a
company or enterprise outside the investing firm’s home country. As such, it may take many
forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment
in a joint venture or strategic alliance with a local firm with attendant input of technology,
licensing of intellectual property, In the past decade, FDI has come to play a major role in the
internationalization of business. Reacting to changes in technology, growing liberalization of
the national regulatory framework governing investment in enterprises, and changes in capital
markets profound changes have occurred in the size, scope and methods of FDI. New
information technology systems, decline in global communication costs have made
management of foreign investments far easier than in the past. The sea change in trade and
investment policies and the regulatory environment globally in the past decade, including
trade policy and tariff liberalization, easing of restrictions on foreign investment and
acquisition in many nations, and the deregulation and privitazation of many industries, has
probably been the most significant catalyst for FDI’s expanded role.

The most profound effect has been seen in developing countries, where yearly foreign direct
investment flows have increased from an average of less than $10 billion in the 1970’s to a
yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion
in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of
global FDI.. Driven by mergers and acquisitions and internationalization of production in a
range of industries, FDI into developed countries last year rose to $636 billion, from $481
billion in 1998 (Source: UNCTAD)

Proponents of foreign investment point out that the exchange of investment flows benefits
both the home country (the country from which the investment originates) and the host
country (the destination of the investment). Opponents of FDI note that multinational
conglomerates are able to wield great power over smaller and weaker economies and can
drive out much local competition. The truth lies somewhere in the middle.

For small and medium sized companies, FDI represents an opportunity to become more
actively involved in international business activities. In the past 15 years, the classic
definition of FDI as noted above has changed considerably. This notion of a change in the
classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct
foreign investment is still made in the form of fixtures, machinery, equipment and buildings.
Moreover, larger multinational corporations and conglomerates still make the overwhelming
percentage of FDI. But, with the advent of the Internet, the increasing role of technology,
loosening of direct investment restrictions in many markets and decreasing communication
costs means that newer, non-traditional forms of investment will play an important role in the
future. Many governments, especially in industrialized and developed nations, pay very close
attention to foreign direct investment because the investment flows into and out of their
economies can and does have a significant impact. In the United States, the Bureau of
Economic Analysis, a section of the U.S. Department of Commerce, is responsible for
collecting economic data about the economy including information about foreign direct
investment flows. Monitoring this data is very helpful in trying to determine the impact of
such investments on the overall economy, but is especially helpful in evaluating industry
segments. State and local governments watch closely because they want to track their foreign
investment attraction programs for successful outcomes.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to
accomplish several tasks:

Avoiding foreign government pressure for local production.

Circumventing trade barriers, hidden and otherwise.
Making the move from domestic export sales to a locally-based national sales office.
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in very
general terms. While it is nice that many business writers like the expression, “think globally,
act locally”, this often used cliché does not really mean very much to the average business
executive in a small and medium sized company. The phrase does have significant
connotations for multinational corporations. But for executives in SME’s, it is still just
another buzzword. The simple explanation for this is the difference in perspective between
executives of multinational corporations and small and medium sized companies.
Multinational corporations are almost always concerned with worldwide manufacturing
capacity and proximity to major markets. Small and medium sized companies tend to be more
concerned with selling their products in overseas markets. The advent of the Internet has
ushered in a new and very different mindset that tends to focus more on access issues. SME’s
in particular are now focusing on access to markets, access to expertise and most of all access
to technology.
What would be some of the basic requirements for companies considering a foreign
investment?

Depending on the industry sector and type of business, a foreign direct investment may be an
attractive and viable option. With rapid globalization of many industries and vertical
integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast
of global trends in their industry. From a competitive standpoint, it is important to be aware of
whether a company’s competitors are expanding into a foreign market and how they are doing
that. At the same time, it also becomes important to monitor how globalization is affecting
domestic clients. Often, it becomes imperative to follow the expansion of key clients overseas
if an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some stage,
export of product or service reaches a critical mass of amount and cost where foreign
production or location begins to be more cost effective. Any decision on investing is thus a
combination of a number of key factors including:

assessment of internal resources,

competitiveness,
market analysis
market expectations.

TYPES OF FDI
BY DIRECTION

• Inward

Inward foreign direct investment is when foreign capital is invested in local resources.

• Outward

Outward foreign direct investment, sometimes called "direct investment abroad", is

when local capital is invested in foreign resources.

• Horizontal FDI

Investment in the same industry abroad as a firm operates in at home.

• Vertical FDI

Backward Vertical FDI: Where an industry abroad provides inputs for a firm's
domestic production process.

Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's
domestic production.

BY TARGET

• Greenfield investment

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 jobs, transfer technology and know-how, and can
lead to linkages to the global marketplace. 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 whose profits are seen to flow back entirely into the domestic economy.
 • Mergers and Acquisitions

Transfers 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 control of assets and operations is transferred from a local
to a foreign company, with the local company becoming an affiliate of the foreign
company. Nevertheless, mergers and acquisitions are a significant form of FDI and
until around 1997, accounted for nearly 90% of the FDI flow into the United States.
Mergers are the most common way for multinationals to do FDI.

BY MOTIVE

FDI can also be categorized based on the motive behind the investment from the
perspective of the investing firm:

• Resource-Seeking

Investments which seek to acquire factors of production those are more efficient than
those obtainable in the home economy of the firm. In some cases, these resources may
not be available in the home economy at all (e.g. cheap labor and natural resources).
This typifies FDI into developing countries, for example seeking natural resources in
the Middle East and Africa, 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 pushed 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 Accounting,
Advertising and Law firms.

• Efficiency-Seeking

Investments which firms hope will increase their efficiency by exploiting the 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.
 Typically, this type of FDI is mostly widely practiced between developed economies;
especially those within closely integrated markets (e.g. the EU).

• Strategic-Asset-Seeking

A tactical investment to prevent the loss 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.

ROUTES OF FDI
FDI Approvals in India are carried out by agencies like the Reserve Bank of India and the
Foreign Investment Promotion Board. FDI Approval in India is done quickly by the concerned
agencies in order to bring in huge amounts of foreign direct investment into the country.

Various Routes of FDI Approval in India

The proposals for foreign direct investment in India get their approval through two routes that
are the Reserve Bank of India and the Foreign Investment Promotion Board. Automatic
approval is given by the Reserve Bank of India to the proposals for foreign direct investment
in India. The Reserve Bank of India gives approval within the time period of two weeks. It
gives approval to the proposals for foreign direct investment in India that involve FDI up to
74% in the nine categories that are included in List four, FDI up to 50% in the three categories
that are included in List two, and FDI up to 51% in the forty eight industries.

FDI Approval in India is also done by the Foreign Investment Promotion Board (FIPB), which
processes cases of non- automatic approval. The time taken by Foreign Investment Promotion
Board for approving the proposals for foreign direct investment in India is between four to six
weeks. The approach of FIPB is liberal as a result of which it accepts most of the proposals
and rejects very few.

Foreign Investment through GDRs

Global Depository Receipt (GDRs) enables the elevation of equity capital of Indian
companies in the global market. GDRs are usually calculated in foreign dollars and not
subjected to any other currency or ceilings in terms of investments. The Indian companies
who are seeking government's approval for enrolling in this sector are required to have a good
track record in terms of financial performance or other matters for a minimum period of three
years. For infrastructure projects such telecommunication, power generation, petroleum
exploration and refining, airports, roads, and ports, this requirement of three years is not
mandatory.
Foreign Investment through GDRs - Clearance from FIPB-

FIPB is responsible for the clearance of Euro-issue to be floated by a company or a group of

companies in the financial year. For example, a manufacturing company, which is entitled to
the regulations and norms of Annex-III of the New Industrial Policy, is likely to witness a 51
percent increase in the foreign direct investment amount after the proposed Euro issue. The
manufacturing company therefore is required to seek the FIPB approval before obtaining the
final approval from Ministry of Finance in case of a project, which does not abide by Annex-
III of the New Industrial Policy.

Use of GDRs in Foreign Direct Investment-

The proceeds of GDRs are used for providing financial assistance to import capital goods,
capital expenditure of domestic purchase or installation of plants, instrument and constructing
and investment in software development procedures, defrayal or scheduled repayment of
earlier external loans, and equity investment in JV/WOSs in India.

Restrictions in Foreign Investment through GDRs-

Foreign Direct Investments in stock markets and real estate market through GDRs are not
allowed. The proceeds of investments can be stopped either in the foreign country from where
the FDI is coming or in India depending on the use of funds that are being approved for end
users. FDI investments under every circumstance require prior approval of the Indian
government.
BENEFITS OF FOREIGN DIRECT INVESTMENT
One of the advantages of foreign direct investment is that it helps in the economic
development of the particular country where the investment is being made.
This is especially applicable for the economically developing countries. During the decade of
the 90s foreign direct investment was one of the major external sources of financing for most
of the countries that were growing from an economic perspective. It has also been observed
that foreign direct investment has helped several countries when they have faced economic
hardships.

An example of this could be seen in some countries of the East Asian region. It was observed
during the financial problems of 1997-98 that the amount of foreign direct investment made in
these countries was pretty steady. The other forms of cash inflows in a country like debt flows
and portfolio equity had suffered major setbacks. Similar observations have been made in
Latin America in the 1980s and in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done basically in
the way of provision of capital inputs. The importance of this factor lies in the fact that this
transfer of technologies cannot be accomplished by way of trading of goods and services as
well as investment of financial resources. It also assists in the promotion of the competition
within the local input market of a country. The countries that get foreign direct investment
from another country can also develop the human capital resources by getting their employees
to receive training on the operations of a particular business. The profits that are generated by
the foreign direct investments that are made in that country can be used for the purpose of
making contributions to the revenues of corporate taxes of the recipient country.

Foreign direct investment helps in the creation of new jobs in a particular country. It also
helps in increasing the salaries of the workers. This enables them to get access to a better
lifestyle and more facilities in life. It has normally been observed that foreign direct
investment allows for the development of the manufacturing sector of the recipient country.
Foreign direct investment can also bring in advanced technology and skill set in a country.
There is also some scope for new research activities being undertaken.
Foreign direct investment assists in increasing the income that is generated through revenues
realized through taxation. It also plays a crucial role in the context of rise in the productivity
of the host countries. In case of countries that make foreign direct investment in other
countries this process has positive impact as well. In case of these countries, their companies
get an opportunity to explore newer markets and thereby generate more income and profits. It
also opens up the export window that allows these countries the opportunity to cash in on their
superior technological resources. It has also been observed that as a result of receiving foreign
direct investment from other countries, it has been possible for the recipient countries to keep
their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The
biggest beneficiaries of these facilities are the small and medium-sized business enterprises.

Disadvantages of Foreign Direct

Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to
operation, distribution of the profits made on the investment and the personnel. One of the
most indirect disadvantages of foreign direct investment is that the economically backward
section of the host country is always inconvenienced when the stream of foreign direct
investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such an
opinion. It is normally the responsibility of the host country to limit the extent of impact that
may be made by the foreign direct investment. They should be making sure that the entities
that are making the foreign direct investment in their country adhere to the environmental,
governance and social regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where the host country
has some sort of national secret – something that is not meant to be disclosed to the rest of the
world. It has been observed that the defense of a country has faced risks as a result of the
foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated
by the workers of the recipient country. Foreign direct investment, at times, is also
disadvantageous for the ones who are making the investment themselves. Foreign direct
investment may entail high travel and communications expenses. The differences of language
and culture that exist between the country of the investor and the host country could also pose
problems in case of foreign direct investment.
Yet another major disadvantage of foreign direct investment is that there is a chance that a
company may lose out on its ownership to an overseas company. This has often caused many
companies to approach foreign direct investment with a certain amount of caution.
At times it has been observed that there is considerable instability in a particular geographical
region. This causes a lot of inconvenience to the investor.
The size of the market, as well as, the condition of the host country could be important factors
in the case of the foreign direct investment. In case the host country is not well connected with
their more advanced neighbors, it poses a lot of challenge for the investors.

At times it has been observed that the governments of the host country are facing problems
with foreign direct investment. It has less control over the functioning of the company that is
functioning as the wholly owned subsidiary of an overseas company.This leads to serious
issues. The investor does not have to be completely obedient to the economic policies of the
country where they have invested the money. At times there have been adverse effects of
foreign direct investment on the balance of payments of a country. Even in view of the various
disadvantages of foreign direct investment it may be said that foreign direct investment has
played an important role in shaping the economic fortunes of a number of countries around the
world.

FDI IN INDIA

Why FDI in India?

 Second largest Economy (Purchasing Power Parity)-A safe place to do business

 Largest reservoir of skilled manpower

 Largest democracy –political stability and consensus on reforms

 Long –term sustainable competitive advantage – high growth rate economy

 Liberal and transparent investment plans

 Second largest emerging market

FDI Policy Liberalisation:

FDI INFLOWS

India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative
amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion,
according to the data released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of the
total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December
2010, while telecommunications including radio paging, cellular mobile and basic telephone
services attracted second largest amount of FDI worth US$ 1,327 million during the same
period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066
million followed by power sector which garnered US$ 1,028 million during the financial year
April-December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024
million.

During April-December 2010, Mauritius has led investors into India with US$ 5,746 million
worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI
equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with
US$ 1,055 million, according to data released by DIPP.

COUNTRY – WISE FDI INFLOWS

FDI OUTFLOWS
The country's outward FDI showed a bigger decline of 52.7 per cent for the January-March
quarter of FY10 at $1.9 billion, as against $4.1 billion over the same period of 2008-09.

"During 2009-10, the actual outward FDI in joint ventures and wholly-owned subsidiaries
stood at USD 10.3 billion, which was 36.5 per cent lower than the investment made during the
previous year," RBI said in its July bulletin.

While manufacturing accounted for 43.1 per cent of the total investments by domestic
companies, finance, insurance real estate and business services attracted 28.1 per cent outward
investment from the country.

The apex bank said during the past fiscal the share of equity in the total outward FDI
financing decreased whereas the share of loans increased compared to 2008-09.

While equity (minus that of individuals and banks) accounted for over 64 per cent (over $6.6
billion) of the total outward FDI, loans accounted for about 35.6 per cent (over $3.6 billion).
In 2008-09, the share of equity financing was 81 per cent and loans stood at 19 per cent.

In terms of destinations, Singapore, Mauritius, the Netherlands, the US and the British Virgin
Islands accounted for 67 per cent of total outward FDI, with Singapore and Mauritius
remaining top destinations, accounting for over 48 per cent of the investments during the
period.
 In fact, Singapore increased its share of investments from India to 35.5 per cent during the
period, over 2008-09 when it accounted for 23.1 per cent share. The Netherlands, on the other
hand, witnessed a dip of 10 points to 7.2 per cent in the last fiscal as against 17.2 per cent in
2008-09 as the preferred destination.

The share of Mauritius remained constant at 12.8 per cent, while the US improved its share
marginally from 5.7 per cent to 6.5 per cent.

SECTOR WISE FDI IN INDIA FOR FOREIGN

INVESTORS
Sector/Activity FDI Cap/Equity Entry Route

Airports 100% Automatic

Construction Development 100% Automatic
Petroleum & Natural Gas

26% (For PSUs)FIPB

(b) Refining
100% ( Private companies) Automatic
Other than Refining 100% Automatic
Telecommunication

Basic and cellular;STD/ISD 74% Automatic up to 49%

Manufacture of telecom equipment 100% Automatic
Power ( Except Atomic energy);
regulations transmission,
distribution and Power Trading
Ports 100% Automatic
Roads & Highways 100% Automatic
Shipping 100% Automatic

FDI RESTRICTIONS IN INDIAN SECTORS

FDI Restrictions in Indian Sectors have been imposed in a number of sectors such as, atomic
energy, chit fund business and lottery business. FDI Restrictions in Indian Sectors have been
imposed by the government of India in order to protect the interests of the nation.

Foreign direct investment in India:

The several policy initiatives taken by the government of India in the 1990s helped to
transform the country from a restrictive regime with regard to foreign direct investment to a
liberal one.

As in 2007, foreign direct investment in India is encouraged in almost all the sectors of the
country's economy under the automatic route. At the same time there are a few Indian sectors
in which foreign direct investment has been restricted by the government. Forms through
which foreign direct investment in India are allowed include, Euro issues, preferential
allotments, technical collaborations, and financial collaborations. The amount of foreign direct
investment in India came to around US$ 4.7 billion in 2006 - 2007, and the next year this
figure increased more than three times to about US$ 15.7 billion.

Various Indian sectors having FDI restrictions:

FDI Restrictions in Indian Sectors have been imposed on a few sectors by the Indian
government. FDI Restrictions in Indian Sectors have been imposed in order to protect the
interests of the country, as these sectors either relate to national security or sensitive enough to
keep apart the foreign companies. Foreign direct investment restrictions in Indian sectors have
also been imposed in order to allow the domestic companies to make more profits with less
competition, than that of in the presence of rivalry international firms. The various Indian
Sectors having restrictions of foreign direct investment are:

• Atomic energy
• Betting and gambling
• Chit fund business
• Plantation or agricultural activities
• Real estate business
• Business in Transferable Development Rights
• Lottery business
• Retail trading
• Railway transport
• Mining of chrome, zinc, gold, diamonds, copper, iron, gypsum, manganese, and
sulphur
• Ammunition and arms

CHALLENGES FACING LARGER FDI

The challenges facing larger FDI in India are in spite of the fact that more than 100 of Fortune
500 companies are already investing in India. These FDIs are already generating employment
opportunities, income, technology transfer and economic stability.

India is focusing on maximizing political and social stability along with a regulatory
environment. In spite of the obvious advantages of FDIs, there are quite a few challenges
facing larger FDIs in India, such as:

1. Resource challenge: India is known to have huge amounts of resources. There is

manpower and significant availability of fixed and working capital. At the same time,
there are some underexploited or unexploited resources. The resources are well
available in the rural as well as the urban areas. The focus is to increase infrastructure
10 years down the line, for which the requirement will be an amount of about US$ 150
billion. This is the first step to overcome challenges facing larger FDI.
2. Equity challenge: India is definitely developing in a much faster pace now than before
but in spite of that it can be identified that developments have taken place unevenly.
This means that while the more urban areas have been tapped, the poorer sections are
inadequately exploited. To get the complete picture of growth, it is essential to make
sure that the rural section has more or less the same amount of development as the
urbanized ones. Thus, fostering social equality and at the same time, a balanced
economic growth.

3. Political Challenge: The support of the political structure has to be there towards the
investing countries abroad. This can be worked out when foreign investors put forward
 their persuasion for increasing FDI capital in various sectors like banking, and
insurance. So, there has to be a common ground between the Parliament and the
Foreign countries investing in India. This would increase the reforms in the FDI area
of the country.

4. Federal Challenge: Very important among the major challenges facing larger FDI, is
the need to speed up the implementation of policies, rules, and regulations. The vital
part is to keep the implementation of policies in all the states of India at par. Thus,
asking for equal speed in policy implementation among the states in India is important.

5. India must also focus on areas of poverty reduction, trade liberalization, and banking
and insurance liberalization. Challenges facing larger FDI are not just restricted to the
ones mentioned above, because trade relations with foreign investors will always bring
in new challenges in investments.

FDI - opportunities and challenges for India

MERGERS and acquisitions are a major source of FDI inflows. This could mean that the net
addition to total physical production capabilities annually is less than that implied by the value
of annual FDI flows as most of the additions may well be created b y simply changing
ownership. Also, the 10 largest home countries accounted for nearly 80 per cent of global FDI
outflows with divergent trends between the developed and the developing. Developing
countries receive more FDI inflows per dollar of gross domestic product than do developed
countries. There could be a justification for this as FDI may be attracted into developing
countries by factors such as natural resources and not purely by the size of their economies.
Most investments into Eastern Europe have been through the privatisation of government-
owned enterprises although, of late, some direct FDI flows have also been noticed.

Russia has not yet successfully tackled the internal economic restructuring with the result that
the privatisation route has not picked up as expected. In Latin America and the Caribbean,
privatisation of service- or natural resource-based state enterpri ses continues to be the driving
force of FDI inflows. China remains the largest FDI host country in Asia; By comparison,
India was unable to get more than $4 billions, though the target is $10 billions this year.
Africa is still awaiting the realisation of its potential; the most promising countries for FDI
inflows in the continent are South Africa, Nigeria, Botswana, Cote d' Ivoire and Tunisia,
although Ghana, Mozambique, Namibia, Tunisia and Uganda have also been identified as
having good potential fo r FDI flows.

A contributing factor for the increased flow of foreign investment in the 1990s has been the
extensive reform by host governments, removal of restrictive policies governing FDI flows
and permitting free flows of capital. Approval procedures were simplifi ed and rationalised
either by removing licensing requirements or keeping it to the bare minimum. A survey, by
the European Round Table of Industrialists, of the improvements of conditions for investment
in 25 developing countries, in the wake of liberali sation, noted that more companies were
willing to invest in the developing world for strategic considerations and to realise the long-
term economic potential of these markets. Towards that goal, regulatory efficiency, as
opposed to simple deregulation, s hould be the policy focus. Improved conditions for
investment are not automatically, or always, identical with deregulation, much less efficient
regulatory framework. The demand for a competition policy and an open investment regime
as demanded at the WT O, has its genesis in this premise.

What are the opportunities and challenges before developing countries such as India? The
wave of M and As as a driving force for FDI will continue, particularly in crucial sectors such
as IT, telecom, financial and pharmaceuticals. These might be aided b y trade liberalisation,
investment in capital markets, deregulation and the fiercer competitive pressures resulting
from globalisation and technological changes. The Unctad study notes: ``Expanding firm size
and managing a portfolio of locational assets becomes more important for firms, enabling
them to take advantage of resources and markets worldwide. The search for size is also driven
by the search for financi al, managerial and operational synergies, as well as economies of
scale. Finally, size puts firms in a better position to keep pace with an uncertain and rapidly-
evolving technological environment, a crucial requirement in an increasingly knowledge-inten
sive world economy, and to face soaring research costs. ``Other motivations include efforts to
attain a dominant market position as well as short-term financial gains in terms of stock value.

In many instances the dynamics of the process feeds upon itself, as firms fear that if they do
not find suitable partn ers, they may not survive, in the long run.'' From the host-country point
of view, some important issues can be identified. To what extent can foreign investment serve
the overall socio-economic goals in an open regime? Income disparities, employment
generation, technology flows, environmental costs of industrial development, commitment to
exports are some of the key issues.

There could be a crowding-out effect in the face of competition for scarce resources and
markets. The pattern of investment and the routes FDI flows might take may undergo a
significant change. For instance, M and As may become more common. There could b e
takeovers of local firms in a few cases with implications for domestic brands. Takeovers per
se are not to be frowned upon. But the ground rules for transparency and prevention of
insider-trading practices must be enforced vigorously under SEBI guideli nes. Today, this is a
weak area in Indian corporate mergers. Improving the host country's negotiating power with
TNCs needs attention. Information of cost and the status of technology offered and the global
strategies of firms are vital to strengthen the bargaining capability. There is likely to be an
increasing role of the TNC home countries in controlling the flow of critical or dual
technology on so called `security grounds' which issue musty be discussed to evolve suitable
international standards. With particular reference to portfolio investments and profit
repatriation, host countries must evolve suitable financial policies and instruments to prevent
capital market volatility.

As in Budget 2000-01, raising the level of investment by the FIIs which essentially operate in
the capital market might have both advantages and disadvantages. The advantage is that this
step might integrate India's financial market with the rest of the world. But there is a price:
Market volatility could have a destabilising effect and bearish and bullish trends can be
managed at will by large investors. This might also be true when more Indian companies have
their stocks listed in world capital markets where the volumes traded are high as is the
velocity. The solution is not to argue against these measures if we want globalisation but to
encourage indus trialisation and improve corporate performance to international standards.
Also, the number of good scrips must increase as should the volumes traded. The regulatory
framework of the capital market must also improve with the professionalisation of brokerage
firms, and the enforcement of strict dealing and settlement standards. Increasingly, trading
velocity will be much higher, and scripless trading, w ith networked stock markets to rope in
more investors, will be necessary.

Importantly, economic management should not give cause for alarm as FIIs are highly
temperamental investors whose business is to maximise profits and minimise risks for their
members and not necessarily to work for the development of the host country. Th is must be
done keeping the markets liberalised and open so that investor confidence is not shaken.

The Malaysian example of placing an embargo on capital repatriation at a time of crisis is not
to be emulated. However, to the extent to maintain a globally competitive regime movement
of capital cannot have a totally disruptive effect. Otherwise, the ex perience of east Asian
countries and Japan may be repeated. With increased investment by TNCs, there should be
effective tools in our tax system and the administrative machinery needs to be adequately
adjusted to address the question of transfer pricing. Lastly, evolving good corporate
governance and proper internal checks and balances through independent audit committees is
a must. So far, this area has been only a talking point among corporates with some leading
chambers of commerce even treating this issue as a voluntary measure

FDI - India vs. China

With the rapidly changing world economy, every country around the globe is trying to
integrate its economy with rest of the world. This process is known as globalization.
Globalization, as a process of integration of economies around the globe, usually goes through
various ways and one such visible way is the inflow of Foreign Direct Investment (FDI). In
recent times, FDI has emerged as a buzzword in international business and has received
substantial consideration in the policy analysis circles. It represents long-term movement of
capital in and out of a country with the purpose of buying physical assets to start a business. It
specifies the transfer of a package of resources across the countries, which not only includes
capital, but also technology, management, and marketing expertise. Although the process of
FDI is a universal phenomenon, the developing countries, however, have strived hard to
attract more of it to fill the resource gaps for their economic development.

The global FDI inflows have been on an increasing trend and have increased from a low of
US$ 209 bn in 1995 to US$ 612 bn in 2005. Though the major share of FDI inflows was
always into developed countries, but an important feature was that all developing regions
including Africa lately saw an increase in inflows. Among the individual countries, China has
been particularly active and successful in attracting large FDI inflows since the beginning of
its economic reforms in 1979. On the contrary, India has been successful in attracting large
inflows of FDI, though at a slower rate in comparison to China, since the reforms that began
in 1990. One of the most visible reasons for China having an upper hand in attracting FDI is
that the country started its reform process much earlier than India. During the beginning of
1990s, India had only US$0.097 bn FDI inflows while China had US$3.5 bn and the ratio of
FDI inflows between the two countries was about 36:1. Both the Asian neighbors were
progressing at a faster rate during the 1990s for attracting more and more FDI inflows into the
economy. In the turn of the century, China attracted an amount of US$40.7 bn FDI, while
India attracted US$2.3 bn only but substantially high in comparison to its earlier period. The
increase in the FDI inflows led to the decline of FDI ratio between the countries to about 17:4.
At present, China's FDI inflows have increased to US$62 bn, while India's FDI inflows are in
the region of US$6 bn and have, in the process, contributed to the decline of the ratio between
the two countries to 10:3. It is predicted that if this declining ratio continues, India can level
its FDI inflows with China within a couple of years. But the question is why is China very
successful in attracting FDI inflows and how can India level its position with China?

There are large numbers of factors that affect the substantial inflows of FDI into Chinese
economy and can be roughly grouped under three broad heads: Economic structure, open
economic policies and cultural and legal environment. Under economic structure, China is
very successful for its market potentiality. As we know, market size is considerably an
important factor in attracting more FDI from Europe and USA. In fact, many MNCs of USA
and Europe have been India can attract more FDI and can compete with China, if it can create
a favorable environment similar to that of China. – Rudra Prakash Pradhan Faculty,
Economics and Finance Group, Birla Institute of Technology and Science (BITS), Pilani,
Rajasthan. Chartered Financial Analyst December 2005 13 The FDI Inflows: China vs. India
setting up their factories in China with the aim of producing goods for domestic market.
Another factor that is favorable for China's FDI inflows is its cheap, skilled labor force. The
low wage costs appear to have played a significant role in attracting export-oriented FDI to
China and in the distribution of FDI flows across its provinces. This has contributed to China's
rapid emergence as an important global competitor in laborintensive manufacturing. Empirical
studies have already confirmed that a region with more developed infrastructure tends to
receive more FDI. China is no exception to it and is successfully attracting more FDI inflows
because of its excellent infrastructure. If we look into the Chinese economy, the FDI inflows
are substantially high in eastern coastal-China because of this region's superior infrastructure
and transport links to external markets. Taking the advantage of positive impact of
infrastructure on FDI inflows, China classified its economy into certain special economic
zones as per the availability of infrastructure and made the local governments to put an effort
to upgrade the infrastructure in order to attract more FDI. China is substantially advanced in
transport, electricity, gas, water, posts and telecommunication, which all have a positive
impact on FDI inflows.

China has strong scale effects. It suggests that once a province has attracted a critical mass of
FDI, it finds easier to attract more. This is because foreign investors perceive the presence of
other foreign investors as a positive signal. Additionally, economies of scale make it more
efficient for MNCs to locate in the same area, allowing them to share information and
facilities (like education and health) for expatriate workers. The coastal provinces of China
particularly the southern provinces of Guangdong and Fujian, which are close to Hong Kong
SAR and Taiwan, have been the largest recipient of FDI and have acquired an important
advantage over the inland provinces in attracting FDI over the past two decades.

The open door policies of China towards attracting FDI are very encouraging. Since the
beginning of reform process, Chinese government fixed the goal of attracting FDI inflows into
its economy, expecting that it would introduce new technologies and capital that would be
helpful to develop its export sector. China's open door policy for attracting FDI follows
relaxation in governmental controls and provides practical assistance along with political and
legal assurances. It also follows with tax concessions and special privileges for foreign
investors and the establishment of Open Economic Zones (OEZs). The tax incentives for
Foreign- Found Enterprises (FFEs) are mostly in the form of reduced enterprise income tax
rates and tax holidays. These are available to all FFEs as well as domestic firms in the OEZs
and to export-oriented and advanced-technology FFEs outside the OEZs. The firms in the
OEZs enjoy great autonomy in managing their operations. They face minimal controls on the
movements of goods and are allowed to export and import almost freely. These firms also
benefit from more flexible labor relations and more land use rights. For export- oriented and
advanced-technology FFEs, there is tax exemption on profit remittances and additional tax
benefits for reinvested profits and larger reductions in land use fees. OEZs have played a
central role in the gradual opening of economy to foreign investors. The local authorities in
the OEZs are solely responsible for infrastructural development and other investment as long
as they could raise the funds from taxation, from profits of the enterprise they wholly or partly
own, or from banks in the zones. The foreign enterprises are allowed to access foreign
exchange and domestics market.

The inflow of FDI is also significantly affected by culture, corruption, and legal environment.
It is often argued that the unique phenomenon of a large Chinese Diaspora has been the key to
China's success in attracting FDI. The fact that Hong Kong SAR, Singapore and Taiwan
Province of China together account for more than half of FDI inflows into China is usually
used to support this argument. Simultaneously, it is also indicated that the large share of non-
resident Chinese in FDI flows into China is a reflection of distortions rather than a unique
advantage. Cultural barriers such as language that deter foreign investors from entering China
could be a sign that the investment climate is difficult for outsiders, which implies a cost, not
an advantage. Also, Chinese law is ambiguous and legal disputes are often settled through
personal contracts rather than formal contracts enforceable in the courts. The ambiguity in the
law has, in turn, contributed to corruption. China scores relatively poor on corruption and
governance indicators in international comparisons, which is measured through Transparency
International Corruption Perceptions Index.

In brief, the Chinese success in attracting FDI inflows has been primarily due to its large
special economic zones as well as the availability of adequate infrastructure, highly
streamlined administration, cheap yet skilled labor force, flexible labor laws, low corruption,
strong legal environment, better bureaucratic delivery system, and favorable regulatory and
tax treatment to foreign firms. In this range, the position of India is comparatively low and
that leads to low FDI inflows into the Indian economy. India can attract more FDI and can
compete with China, if it can create a favorable environment similar to that of China.
Institutional reforms in a more accountable and transparent way, are imperative for the
country. It calls for the creation of special economic zones, improvement in infrastructure,
policy stability, introduction of labor reforms, establishment of a strong legal environment,
streamlining of the bureaucracy, and the elimination of corruption. It should not be a daunting
task, if there is adequate political will with respect to the economy.
 FUTURE FOR THE ASIAN COUNTRIES IN FDI
A recent survey of transnational corporations found that companies see China and India as the
world’s first and second most important destinations for foreign direct investment over the
2010 to 2012 period, respectively.

The World Prospectus Survey 2010-2012 was released yesterday by the United Nations
Conference on Trade and Development (UNCTAD), showing that China has once again
retained title of the world’s most important FDI destination. India, meanwhile, overtook the
United States to claim the survey’s second spot as the U.S. economy continues to struggle.

The figure below shows the top priority host economies for FDI for the 2010 to 2012 period
(the number of times that the country is mentioned as a top priority for FDI by transnational
corporations). The number in parenthesis is the country’s rank in last year’s UNCTAD survey.
The figure below shows prospects for respondent companies’ FDI expenditures in 2010 to
2012 as compared to 2009 by home region (average of responses from the transnational
corporations surveyed) with 0 indicating no change, 1 indicating an increase of less than 10
percent, 2 indicating an increase between 10 percent and 30 percent, 3 indicating an increase
between 30 percent and 50 percent, and 4 indicating an increase of more than 50 percent.

FUTURE OF FOREIGN DIRECT INVESTMENT

India has been ranked at the second place in global foreign direct investments in 2010 and will
continue to remain among the top five attractive destinations for international investors during
2010-12 period, according to United Nations Conference on Trade and Development
(UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects
Survey 2009-2012'.The 2010 survey of the Japan Bank for International Cooperation released
in December 2010, conducted among Japanese investors, continues to rank India as the second
most promising country for overseas business operations.A report released in February 2010
by Leeds University Business School, commissioned by UK Trade & Investment (UKTI),
ranks India among the top three countries where British companies can do better business
during 2012-14.
According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the
4th most attractive foreign direct investment (FDI) destination in 2010. However, it is ranked
the 2nd most attractive destination following China in the next three years.

Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific
Foundation in Canada, more and more Canadian firms are now focusing on India as an
investment destination. From 8 per cent in 2005, the percentage of Canadian companies
showing interest in India has gone up to 13.4 per cent in 2010. India attracted FDI equity
inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity
inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the data
released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of the
total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December
2010, while telecommunications including radio paging, cellular mobile and basic telephone
services attracted second largest amount of FDI worth US$ 1,327 million during the same
period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066
million followed by power sector which garnered US$ 1,028 million during the financial year
April-December 2010. The Housing and Real Estate sector received FDI worth US$ 1,024
million.

During April-December 2010, Mauritius has led investors into India with US$ 5,746 million
worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI
equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with
US$ 1,055 million, according to data released by DIPP.

INVESTMENT SCENARIO
In the year 2010, India has assumed a notable position on the world canvas as a key
international trading partner, majorly because of the implementation of its consolidated FDI
policy. The consolidation, first undertaken in March 2010, pulls together in one document all
previous acts, regulations, press notes, press releases and clarifications issued either by the
DIPP or the Reserve Bank of India (RBI) where they relate to FDI into India. According to the
modified policy, foreign investors can inject their funds though the automatic route in the
Indian economy. Such investments do not mandate any prior government permission.
However, the Indian company receiving such investment would be required to intimate the
RBI of any such investment.

The FDI rules applicable to such sectors are, therefore, fairly clear and unambiguous.
In May 2010, the government cleared 24 foreign investment proposals, worth US$ 304.7
million. These include:

• Asianet's proposal worth US$ 91.7 million to undertake the business of broadcasting
non-news and current affairs television channels.
• Global media magnate Rupert Murdoch-controlled Star India holdings' investment of
US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky.
• AIP Power will set up power plants either directly or indirectly by promotion of joint
ventures at an investment of US$ 24.4 million.

According to the 6th Annual Edition 2010 data released by Grant Thornton India, an
accounting and consulting firm, total of 971 deals valued at US$ 62.2 billion were registered.
The increasing confidence in the Indian economy, buoyancy in the capital markets, significant
improvements in global perception of India and improved performance of the earlier cross-
border transactions, resulted in India Inc’s total merger and acquisitions (M&A) and private
equity (PE) activity to reach US$ 6.24 billion, registering a growth of 159 per cent over 2009.
The total M&A deals in 2010 were valued at US$ 49.8 billion (622 deals) and PE were valued
at US$ 6.2 billion (253 deals), while the qualified institutional placement (QIP) deals in 2010
were valued at US$ 6.2 billion (56 Deals). Moreover, cross border activity also surged in 2010
and significant outbound investments totalled US$ 22.50 billion, while the inbound activity
also increased significantly to touch US$ 9 billion (91 deals).

• Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake in
the 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation India
Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 235.1
million.
• Renewable energy project developer, Juwi Group, launched its first facility in India in
Bengaluru resulting in Juwi India Renewable Energies Pvt Ltd, being headquartered in
Bangalore.
• In the biggest foreign direct investment (FDI) into India, BP, the world’s fourth-largest
energy company, will pay $7.2 billion for a 30 per cent stake in 23 oil and gas blocks
of Reliance Industries Ltd (RIL).
• Investments by French companies in India are expected to touch US$ 12.72 billion by
2012, and would focus on automobile, energy and environment sectors among others,
according to Jean Leviol, Minister Counsellor for Economic, Trade and Financial
Affairs, French Embassy in India.
• Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million in India to
expand its manufacturing capacity and research capabilities. The investment will be
used for increasing the manufacturing capacity of Active Pharmaceutical Ingredients
(APIs) and product research at the Eisai Knowledge Centre in Visakhapatnam.
• India's largest automobile company Maruti Suzuki will supply its latest compact car A-
Star to Volkswagen AG . The car, which will undergo some modifications and design
changes, will be sold in India and Asian markets under a new brand, according to
senior officials in the automobile industry.
• Franco-American telecom equipment maker, Alcatel-Lucent plans to shift its global
services headquarters to India. The headquarters would need about US$ 500 million in
investments over three years, according to Ben Verwaayen, Chief Executive Officer,
Alcatel-Lucent.
• Robert Bosch Engineering and Business Solutions Ltd (RBEI), a 100 per cent owned
IT subsidiary of Robert Bosch GmbH of Germany, a supplier of technology and
 services to automobile OEMs, has announced an additional investment of US$ 66.36
million over next two years to expand its global powertrain electronics centre in India.
RBEI develops software for in-house applications of Bosch group for its global
operations.

The HSBC Markit Business Activity Index, which measures business activity among Indian
services companies, based on a survey of 400 firms, rose to 58.1 in January 2011 from 57.7 in
December 2010.

Conclusion
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 force. The government while
serious in its efforts to induce growth in the economy and country started with foreign
investment in a haphazard manner. While it is accepted that the 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 the 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, CPI (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 dispensable 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 (telecommunications and
Power) and is not evenly distributed.

The three major industrial houses (CII, ASSOCHAM, FICCI), World Bank and the Planning
Commission have similar recommendations for FDI and yet despite their concurrence, a
comprehensive policy in this respect is still to be formulated after 15 years of India’s
economic reforms. The Swadeshi alternative has receded in public policy debate.

Centre for Civil Society

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 the policy environment for Foreign Direct Investment
presents 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.

BIBLOGRAPHY

WEB SITES:
http://www.hindu.com/businessline

http://business.mapsofindia.com
http://www.going-global.com

www.2point6billion.com

BOOKS REFERRED:
1. Does Foreign Direct Investment Promote Development?
Edited by Theodore H. Moran , Edward M. Graham and Magnus Blomström.

2. Foreign Direct Investment. By: A.K. Thakur.

3. Foreign Direct Investment in India: Problems and Prospects

Anil Kumar Thakur (ed.) Tapan Kumar Shandilya (Ed.)