Foreign Direct Investment

FDI means building productive capacity

directly in a foreign country
FDI is along term investment and is associated
with investment in capital assets and creating
employment
FDI is undertaken with an intention of
exercising control over the enterprise
FII is a relatively short term investment linked
to the financial markets

Investment Mode
Green field investment ( GI) and Merger and
Acquisition (M & A) are the two main mode
Mode depends upon not only on the wishes of
the MNC, but also on eco /political
environment in host country
Wrong selection of mode makes the
investment unviable

Green Field Investment

Financial resources provided
make addition to capital stock

M&A
Financial resources provided do not
add to capital stock

Addition to the assets with

foreign funds

It is simply transfer of ownership of

local assets to foreign hands

Investment is spread over time Lump sum and immediate

and in kinds
investment inflow
Exchange rate impact is not
large and immediate

Due to lump sum and immediate

investment inflow, currency of host
country appreciates

Generates new employment

Transfer of responsibility of existing

employees

Drivers of FDI

Ample market
Lower labour cost
Higher productivity
Cost and availability of raw material
Lower transport cost due to proximity to
markets
Low tax / subsidy advantage
Availability of R & D opportunities

Benefits and limitations of FDI

Benefits to host country
Inflow of capital
Inflow of technology
Inflow of knowledge capital
Improvement in Balance of Payments
Employment generation
Contribution to GDP growth

Benefits and limitations of FDI

Limitations to host country
Competition to domestic firms
Competition in financial markets
Inappropriate technology
Cultural / political interference

Benefits and limitations of FDI

Benefits to home country (Outward FDI)
Drivers of FDI already discussed

Limitations to home country (Outward FDI)

Market Risk
Political Risk

Factors affecting FDI

The growth potential of host country

Exchange rate stability
Investment related policies
Political stability
Relation between home and host country
Ethnic and religious factors

Causes of low FDI in India

Infrastructure shortage
Bureaucratic hurdles
Complex tax laws
Labour laws
Political instability
Corruption

Conflicts of MNCs with home country

MNCs shift their profits to tax haven countries
Loss of income to state exchequer
Undertaking R & D in host country affects
employment of scientific and technical
personnel adversely

Govt. measures
Home Govt. measures to minimize effects
Monetary / fiscal disincentive for outflow of
investments
Appropriate legal restrictions

Conflicts of MNCs with host country

Threat to domestic industry
Opposition by Trade Union, as it restrict their
bargaining power
Abnormally high price for technology
Misuse of transfer pricing

Govt. measures
Host Govt. measures to minimize effects
Govt. representative on management Board
Compulsory domestic participation in equity
Restrictive import rules for inputs to be used
Insisting local purchase of materials