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Foreign Direct Investment

its Impact on the
Economy

By: Md. Sulaiman Akbari

Roll No: 111
 Channels of Capital Flow

L
Loans
o
a
n
s
D
Direct Investments
i
r
e
c
G
t Grants and Aids
rI
an
nv
te
s
What is FDI?

According to International Monetary Fund, FDI

is defined as “Investment that is made to
acquire a lasting interest in an enterprise
operating in an economy other than of the
investor”.
Classification of FDI

From the perspective of the investor

1. Horizontal FDI- is undertaken for the

purpose of horizontal expansion to
produce the same kind of goods abroad

1. Vertical FDI- is undertake for the purpose

of exploiting raw materials (backward
vertical FDI) or to be nearer to consumers
through the acquisition of distribution
outlets(forward vertical FDI).
 Contd….

From the perspective of the host country

Import substituting FDI- involves the production of
goods previously imported by the host country.

Export increasing FDI- desire to seek new sources

new sources of input, such as raw materials and
intermediate goods..

Government Initiated FDI- when a government offers

incentives to foreign investors in an attempt to
eliminate a balance of payments deficit.
What forms a FDI may take?

Greenfield Investment-
(Occurs when the investing firm
establishes new production, distribution
or other facilities in the host country).

Cross-border mergers and acquisitions

Joint Ventures
Various ‘types’ of FDI

1. To gain access to factors of production i.e.

resources, technical knowledge, managerial
know-how, patents or brand names owned
by a firm and not available in the home
economy of foreign firms.

1. To gain access to cheaper factors of

production, i.e. low-cost labor, material etc.

1. To secure access to customers in host-

country market.
 COND…

4. Access to products in which international

competitors undertaking mutual investment in
one another ( either through cross-
shareholdings, or through the establishment of
Joint ventures.)

5. ‘Tariff-jumping’, where locational advantages

for foreign firms in their home country, but the
firms are prevented from exporting to the host
economy by existence of tariffs or other
barriers.
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M o tivatio n fo r F
Need for Foreign Investment

Raising the level of investment

Up-gradation of technology
Exploitation of natural resources
Development of basic economic infrastructure
Improvement in exports competitiveness
Improvement in the balance of payments
position
Benefit to consumers
Revenue to government
Adverse Implications of Foreign
Investment

Exploitative character
Attitude of discrimination
Obstruct the growth of indigenous industrial
entrepreneurship.
Competition with home investments, profit
falls, causes fall in domestic savings.
Contribution in public revenue is less due to
liberal tax concessions, subsidies and tariff
protection.
May influence political decisions in developing
countries.
Political Ideology and FDI

Radical Pragmatic Free

View Nationalism Market
The Radical View

Marxist view:
MNE’s exploit less-developed host
countries
Extract profits
Give nothing of value in exchange
Instrument of domination, not
development
Keep less-developed countries
The Radical View

By the end of the 1980s radical view was in retreat

Collapse of communism
Bad economic performance of countries that
embraced the radical view
Strong economic performance of countries who
embraced capitalism rather than the radical view
The Free Market View

Nations specialize in goods and services that

they can produce most efficiently
Resource transfers benefit and strengthen
the host country
Positive changes in laws and growth of
bilateral agreements attest to strength of
free market view
All countries impose some restrictions on FDI
Pragmatic Nationalism

FDI has benefits and costs

Allow FDI if benefits outweigh costs

Block FDI that harms indigenous industry

Golden rules for Foreign Direct Investment

§ Remove unnecessary restrictions on equity

participation by companies
§ Standardize guidelines for environmental issues
§ Strengthen intellectual property rules.
§ Reduce the variance of FDI laws based on sector.
§ Increase areas of automatic approval
§ increase political commitment, regulatory
transparency, and dispute resolution mechanisms to
foreign participation infrastructure.
§ focus immediately on the infrastructure of airports,
telecommunications, ports, and roads in selected
areas to make the country more attractive to foreign
investors.
§ Expand export processing zones to provide modern
infrastructure export-oriented projects.
 What areas to analyze
before Investing in a Foreign
Market??
 Host Country Determinants

Policy framework for FDI

Economic, political and social stability.

Rules regarding entry and operations.
Standards of treatment of foreign affiliates
Policies on functioning structure of
markets(especially competition and M&A policies)
Privatization policy
Trade policies.
Tax policy
 CONTD…

Business Facilitation

Investment promotion (including image-building,

investment generating activities and investment
facilitation services)
Investment incentives
Hassle costs(related to corruption, administrative,
efficiency, etc.)
Social amenities (bilingual schools, quality of life,
etc.)
 Contd…

Economic determinants
Market seeking
Resource/asset-seeking
Efficiency seeking.
Trends in FDI

Flow and stock increased in the last 20 years

In spite of decline of trade barriers, FDI has

grown more rapidly than world trade
because

Businesses fear protectionist pressures

FDI is seen as a way of circumventing trade
barriers
Dramatic political and economic changes in
The Direction of FDI

Historically, most FDI has been directed at the developed

nations of the world as firms based in advanced countries
invested in other markets
The US has been the favorite target for FDI inflows

While developed nations still account for the largest share of

FDI inflows, FDI into developing nations has increased

Most recent inflows into developing nations have been targeted at

the emerging economies of South, East, and Southeast Asia
FDI Flow by Region
Foreign Direct
Investment in INDIA
FDI in india

Pre-liberalization policies
The attitude towards foreign capital was
one of fear and suspicion and only selective
foreign investments were approved.
Liberalization Policies

Liberalization is a process whereby liberal

values, concepts and percepts take operational
form.

Abolition of industrial licensing system except

for some industries.
Ownership levels of 50%, 74%, and 100%
foreign equity.
Opening new sectors to foreign-owned
companies.
Foreign ownership up to 100% is permitted in
most manufacturing sectors.
Post Liberalization Period

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Attractiveness of India for FDIs

The 2009 survey of the Japan Bank for

International Cooperation released in
November 2009, conducted among Japanese
investors continues to rank India as the
second most promising country for
overseas business operations, after China.

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.
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Recent trends of FDI in India

India attracted FDI equity inflows of US$ 2,214

million in April 2010. The cumulative amount of
FDI equity inflows from August 1991 to April
2010 stood at US$ 134,642 million, 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$ 4.4 billion during April-March 2009-
10, while construction activities including
roadways and highways attracted second
 COND…

In April 2010, the telecommunication sector

attracted the highest amount of FDI worth US$
430 million, followed by services sector at US$
355 million and computer hardware and
software at US$ 172 million, according to data
released by DIPP. During the financial year
2009-10, Mauritius has led investors into India
with US$ 10.4 billion worth of FDI comprising
43 per cent of the total FDI equity inflows into
the country. The FDI equity inflows in Mauritius
is followed by Singapore at US$ 2.4 billion and
the US with US$ 2 billion, according to data
released by DIPP.
Critical Appraisal of FDI in India and
its impact on the economy.

Does liberalization mean simply inviting a good

number of foreign companies on whatever terms
with whatever objectives in mind and in whatever
sector indiscriminately?

To what extent is technology, that has gained

entry, consistent with India’s employment
objectives?

Has local technological development received a

set-back on account of foreign technology?
References

Ø Business Environment Shaikh Saleem

Ø Financial Services, Nalini Prava
Ø International Financial Management, V.K.
Bhalla
Ø International Business Environment, V.K.
Bhalla
&
Various publications of:

q UNCTAD