TOPIC

FOREIGN DIRECT
INVESTMENT
 Introduction
Ø Foreign direct investment (FDI) plays an
extraordinary and growing role in global
business.
Ø It can provide a firm with new markets and
marketing channels, cheaper production
facilities, access to new technology,
products, skills and financing.
Ø 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
 A CONCEPT RELATED TO
GLOBALIZATION

1. Firms are becoming Global by investing

Globally.
2. When a country receives investment from
other
countries, it is termed as foreign investment.
3. Foreign investment refers to long term
participation by country A into country B.
4. It usually involves participation in
management,joint- venture, transfer of
technology and expertise.
 IT CAN BE IN FORM OF:

1. Setting up a production unit , or

2. Just an investment in shares of a company.
 DEFINITION
Classic definition:
Ø A company from one country making a
physical investment into building a factory in
another country.
Ø
Broadened definition:
Ø It include the acquisition of a lasting
management interest in a company or
enterprise outside the investing firm’s home
country.
Ø
 TYPES

Fo re ig n in ve s t m e n t

Fo re ig n d ire c t in ve s t m e n t Po rt fo lio in ve s t m e n t

lly owned subsidiary Investment in ADRs GD

Acquisition Joint venture Investment by FIIs
 FOREIGN DIRECT
INVESTMENT (FDI)
Ø When a foreign investor bring his money to invest

Ø As well as control this investment by managing day-to-day

activities

It can be in different forms like:

Ø
§ Wholly Owned Subsidiary
§ Acquisitions
§ Joint Ventures
 WHOLLY OWNED SUBSIDIARY
Ø Green Field Investment (GFI)
Ø Foreign Company setup a NEW production
cut by his own investment
Ø Also Manage it ± Carried out Operations
full profit belongs to parent company
Ø Example: Honda of Japan having subsidiary
in India as Honda scooters and Motorcycle
India Pvt..Ltd.
 ACQUISITION
Instead of setting up a new production facility
foreign firm acquire and old Domestic production
unit by paying consideration to old owner now
investment as well as management is of foreign
company
For Example: Vodafone acquires Hutch
Joint Ventures
Ø When a foreign firm join hand with a domestic
firm for starting a business
A. Both of them contribute Capital.
B. Both of them Manage the Operations.
C. Both shares the profit.
Ø For example: Prudential ± Wallmart-
Bharti,icici,Tata-AIG
 PORTFOLIO INVESTMENT
Ø A Sort of Property Interest only
Ø Invest Capital (Money) in existing or new
businesses
Ø Just to earn a return (interest, profit,
dividend etc)
Can be in two forms:
I. Foreign Institutional Investment (FII)
II. Investment in GDRs,ADRs & FCCB
 INVESTMENT IN GDRS , ADRS
& FCCBS

q Domestic companies approaches to foreign

investors with their proposals
GDR - Global Depository Receipts
ADR - American Depository Receipts
FCCB - Foreign Currency Convertible Bonds

q Foreign Public subscribe to these

instruments of a domestics company.
 WHY FOREIGN INVESTMENT

Benefits to firms:

Ø New Sources of Demand

Ø Existence of Market Imperfection
Ø Economies of Scale
FACTORS TO BE CONSIDERED
WHILE INVESTING
Ø Assessment of internal resources,
Ø Competitiveness,
Ø Market analysis ,
Ø Market expectations.
 WHY NOT TO INVEST
Ø Foreign Exchange Risk

Ø Political Risk

Ø Social & Cultural Risk

Ø
Ø Outflow of Capital from Home Country
Ø
Ø Impact on Balance of Payment
 BENEFITS TO HOST COUNTRY
Ø Availability of Scarce Factors of production,
Ø Improvement in Balance of Payment ,
Ø Backward Economic Linkage ,
Ø More tax revenues to Government ,
Ø Technological Development ,
Ø Employment Generation ,
Ø Overall Economic Development .
 PROMLEMS FDI CAN INFLICT
Ø Competition to Local Business ,
Ø More focus on machinery and intellectual
property
than on salary ,
Ø Exploitation of Natural Resources recklessly ,
Ø Inappropriate Technology ,
( example is Union Carbide )
Ø Chances of losing ownership to a overseas

company ,
Ø Less control over wholly owned subsidiary of
foreign company,
TOP 5 DRIVERS OF FDI
FORBIDDEN AREAS FOR FDI


Ø Arms and ammunitions

Ø Railways Transport
Ø Atomic Energy
Ø Lottery Business
Ø Agriculture
Ø Mining of iron , manganese , chrome ,
gypsum , sulphur , diamonds , copper ,
zinc .
 FDI – APPROVAL ( 3
ROUTES)


Ø Automatic approval by RBI

Ø The FIPB Route
 (Foreign investment Promotion Board
)
Ø CCFI Route
 ( Cabinet Committee of Foreign
 Investment )
 FDI : Inward and outward
35

30
F FDI Inbound FDI Outbound
D
I
25
(

U
S
20
$

b 15
i
l
l
i 10
o
n
)

02 August 2008 General: AV 20

TOP 5 INVESTING COUNTRIES
IN INDIA

RANK COUNTRY FDI (INFLOW) INFLOW( %)

MILLION USD

1 Mauritius 50,164 42.00

2 Singapore 11,275 9.00
3 USA 8,914 7.00
4 UK 6158 5.00
5 Netherlands 4,968 4.00
 INDIA Vs CHINA


 It is basically a difference of quality Vs

quantity


 Form of administration is a big

contrasting
 factor
Thank you