PROJECT ON: FOREIGN DIRECT INVESTMENT

BY: C.ROHIT (11SJCCB127) JOEL ABHISHEK (11SJCCB147)

What is FDI
These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporations home country. The investing corporation must control 10 percent or more of the voting power of the new venture. According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago. The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area

where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment. FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy.

Benefits
Foreign Direct Investment plays a pivotal role in the development of India's economy. It is an integral part of the global economic system. Advantages of FDI can be enjoyed to full extent through various national policies and international investment architecture. Both the factors contribute enormously to the maximum FDI inflows in India, which stimulates the economic development of the country. Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments. FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same. Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher.

Some of the biggest advantages of FDI enjoyed by India have been listed as under: Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India. Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India. Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns.

DRAWBACKS
As the largest democracy with the second largest population in the world and with rule of law and a highly educated, English speaking work force, India must have been considered as a safe haven for foreign investors. Yet, India seems to be suffering from a host of self-imposed restrictions and problems regarding opening its markets completely to global investors by implementing full scale economic reforms. Foreign investment is seen as a slow and inefficient way of doing business, especially in a paperwork system that is shrouded in red tape Some of the major impediments for Indias poor performance in the area of FDI are: 1. Political instability: problems relating to the political instability at the central government arising out of the multiplicity of regional political parties and the need to form shaky coalition governments. Consequently, there were four general elections and six prime ministers during the last decade. In such an environment, the much needed economic reforms have been slow and inadequate. divergent agendas. There is a general consensus across party lines to push for sustained economic reforms and growth but, in reality, governments are repeatedly obliged to dilute the reforms in order to keep their coalition partners on board

2. Infrastructure: infrastructure is the weakest link in the economy. Lack of adequate infrastructure is cited as a major hurdle for FDI inflows into India. There is a regional differences in infrastructure which have become critical determinants for outside investors. The Indian government has vowed to bring its infrastructure up to date, but power cuts remain daily events, and transporting goods from place to place takes weeks .This bottleneck in the form of poor infrastructure may discourage foreign investors from putting their money in India. Biggest infrastructure problem is the supply of electricity. Power cuts are so common that most businesses stopped depending on state electricity supply and started having their own power generators. Even the little power supplied by stateowned electricity boards, the power is so uncertain and uneven that it leads to burnt out motors and lost output. It is no surprise that India is the worlds biggest market for items such as voltage regulators and power stabilizers. 3. Commercial Law and Government regulations: Indian company law has undergone a number of significant changes in supposedly paving for smoother inflow of FDI. The Companies (Amendment) Act of 1999 allowed Indian companies for the first time to buy back their shares and substantially relaxed the restrictions on inter-corporate loans and investments. However, an indirect amendment of the law by the new guidelines of the Ministry of Industry has effectively rendered investments by international investor subject to veto by their local partners ventures between foreign and Indian companies have unraveled, forcing the investors to waste a lot of time negotiating with their Indian partners over the premium demanded for a buy-out.

Under the new law, written approvals have to be obtained from both past and present joint venture partners and technology and trade mark licenses in order for a foreign company to do anything in India. Restricting foreign investment is a recurring theme throughout the 1999 amendments to the Companies Act. Additionally, the new Guidelines of the Ministry of Industry effectively put the Indian companies in a position to dictate terms to their joint venture partners and licensors of technology and trademarks). 4. Corruption:. It is common knowledge in India that corruption is the norm, not an exception. India is afflicted with what some refer to as a crisis in governance, with corruption in nearly every public service, from defense to distribution of subsidized food to the poor people, to the generation and transmission of electric power. Politicians in their honest moments admit that the system is thoroughly corrupt. The complex approval procedures confronting the foreign investors are also very often intimidating. As, foreign investors find it difficult to cut a path through the paper work of overlapping government agencies. The humongous bureaucratic structure has created a ground for corruption. And observes that a combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption at the top have turned foreign investors away from India. Most foreign investors have become leery of the country's history of discrimination against foreign companies and its reputation as a slow, difficult, bureaucracy environment to do business.