“FOREIGN DIRECT INVESTMENT”
FINAL DRAFT SUBMITTED IN THE PARTIAL FULFILLMENT OF THE COURSE
LEGAL RESEARCH AND METHODOLOGY
SUBMITTED TO – SUBMITTED BY –
MR. VIJYANT SINHA NAME : SANKET SHIVANSH
TEACHER ASSOCIATE COURSE: BBA.LLB(HONS.)
ROLL NO. 2036
CHANAKAYA NATIONAL LAW UNIVERSITY
NYAYA NAGAR, MITHAPUR, PATNA-800001
I, hereby, declare that the work reported in the BBA.LL.B (Hons.) Project Report entitled “FOREIGN DIRECT INVESTMENT”submitted at Chanakya National Law University is an authentic record of my work carried out under supervision of Mr. VIJAYANT SINHA. I have not submitted this work elsewhere for any other degree or diploma. I am fully responsible for the contents of my project report.
SIGNATURE OF CANDIDATE
NAME OF CANDIDATE: SANKET SHIVANSH
CHANAKYA NATIONAL LAW UNIVERSITY
I would like to thank my faculty Mr. VIJAYANT SINHA whose guidance helped me a lot with structuring my project.
I owe the present accomplishment of my project to my friends, who helped me immensely with materials throughout the project and without whom I couldn’t have completed it in the present way.
I would like to extend my gratitude to my parents and all those unseen hands that helped me out at every stage of my project.
NAME: SANKET SHIVANSH
ROLL NO: 2036
TOC o “1-3” h z u 1. INTRODUCTION PAGEREF _Toc525580386 h 52. GENERAL CONCEPT PAGEREF _Toc525580387 h 93. TYPES OF FDI PAGEREF _Toc525580388 h 114. METHODS OF FDI PAGEREF _Toc525580389 h 165. ADVANTAGES AND DISADVANTAGES PAGEREF _Toc525580390 h 196. FDI IN DIFFERENT SECTORS PAGEREF _Toc525580391 h 227. IMPACT OF FDI ON INDIAN ECONOMY PAGEREF _Toc525580393 h 248. CONCLUSION AND SUGGESTION PAGEREF _Toc525580394 h 279. BIBLIOGRAPHY PAGEREF _Toc525580395 h 28
1. INTRODUCTIONWhat is Foreign Direct Investment?
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 corporation’s 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 world’s 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.
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan).But flows to non-industrialized countries are increasing sharply. Foreign direct investment (FDI) refers to long term participation by country A into country B.
It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) .Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (”direct investor”) in an entity resident in an economy other than that of the investor (”direct investment enterprise”).The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.
Foreign Direct Investment – when a firm invests directly in production or other facilities, over which it has effective control, in a foreign country.
Manufacturing FDI requires the establishment of production facilities.
Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities.
Foreign subsidiaries – overseas units or entities.
Host country – the country in which a foreign subsidiary operates.
Flow of FDI – the amount of FDI undertaken over a given time.
Stock of FDI – total accumulated value of foreign-owned assets.
Outflows/Inflows of FDI – the flow of FDI out of or into a country.
Foreign Portfolio Investment – the investment by individuals, firms, or public bodies in foreign financial instruments.
Stocks, bonds, other forms of debt.
Differs from FDI, which is the investment in physical assets.
AIMS AND OBJECTIVE
The researcher aims to fulfill below objectives through this project:
The main aim of this project is to study the basic concept of FDI.
To study what all influences FDI can have on India.
The impact of Foreign Capital Flow in the form of FDI on Indian economy can be positive or negative. It is very tough to find out what really will be the effect of FDI on Indian economy without carrying out a research.
The researcher will be relying on Doctrinal method of research to complete the project.
What is FDI?
What are the different types of FDI?
What are different methods of FDI?
Why is FDI important for any organization
What is the effect of FDI on India?
2. GENERAL CONCEPTForeign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor’s country of origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC.
The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. ‘Control’ as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI.
FDI stands for Foreign Direct Investment, a component of a country’s national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially “hot money” which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.
FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.
While we are talking about the Foreign Direct Investment we should also be aware of the term Foreign Direct Investor.
A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the foreign direct
investor or investors.
3. TYPES OF FDI
Types of Foreign Direct Investment: An Overview
FDIs can be broadly classified into two types:
1 Outward FDIs
2 Inward FDIs
This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments.
Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as ‘direct investments abroad.’
Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.
Other categorizations of FDI
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations.
Horizontal FDI – the MNE enters a foreign country to produce the same products product at home.
Conglomerate FDI – the MNE produces products not manufactured at home.
Vertical FDI – the MNE produces intermediate goods either forward or backward in the supply stream.
Platform FDI – FDI from a source country into a destination country for the purpose of exporting to a third country. This type is also known by the name of Export platform foreign direct investment.
In this project we will basically discuss about
HORIZONTAL FDI – Horizontal FDI is FDI in the same industry abroad as that in which a firm operates at home, but why should a firm choose FDI rather than the options of exporting and licensing?FDI is both expensive and risky compared with either exporting or licensing. It is expensive because the firm is literally starting from scratch to build a new enterprise in a foreign country, unless of course it has bought a going concern. It is risky because of the problems likely to arise in a different culture and because of distance and communication problems. The reasons FDI is often chosen in preference to the other two options are complex and are
Concerned with five factors:• transportation costs• market imperfections• competition• the product life-cycle• location-specific advantages.
Some other advantages of Horizontal FDI are
The corporation does not have to start to change its processing procedures and this makes it much easier to set up shop and start production
In case of any production problems, the multinational will have an easier way of dealing with the challenges because of previous experiences
This type of investment is more predictable hence a multinational company can make accurate budgets and also forecast profits.
The well renowned brands of multinational corporations can easily be accepted into the market by consumers who have bought them or heard of them before.
As for host countries, horizontal foreign direct investment can be beneficial because:
It creates more employment
Enables consumers to access foreign products more easily
This type of investment assures consumers of quality production because the processes used are similar to that of the original country.
Everything has two aspects, Horizontal FDI has certain advantages but it also comes with some limitations.
Horizontal foreign direct investment can be challenging especially if the consumers of the host country appreciate a different type of culture and have diverse tastes. In this case using the original methods of production without addressing these unique tastes and preferences can be detrimental for the multinational corporation.
As for the host country, horizontal foreign direct investment can push out local producers from the market especially if they are manufacturing products that are similar or substitutable with those of the foreign companies.
Horizontal foreign direct investment can be improved to make it gainful for both the multinational corporations and the host countries involved. Multinational corporations can retain the original production methods whilst tailoring the product to suit the tastes of local consumers.
Host countries can protect their local producers by putting in place favorable policies that protect the local producers without necessarily hurting the foreign investors. One such policy is the implementation of joint ventures between domestic and foreign investors.
VERTICAL FDI – Vertical foreign direct investment occurs when a multinational decides to acquire or build an operation that either fulfills the role of a supplier (backward vertical FDI) or the role of a distributor (forward vertical FDI). Companies that seek to enter into a backward vertical FDI typically seek to improve to the cost of raw materials or the supply of certain key components.For example, one of the major materials used for car manufacturing is steel. An American car manufacturer would prefer that steel be as cheap as possible, but the price of steel can fluctuate dramatically depending on overall supply and demand. Furthermore, the foreign steel supplier would prefer to sell steel for as high as possible in order to please its owners or shareholders. If the car manufacturer acquires the foreign steel supplier, the car manufacturer would no longer need to deal with the steel supplier and its market-driven prices.
On the other hand, the need for a forward vertical FDI stems from the problem of finding distributors for a specific market. For example, assume that the earlier mentioned American car manufacturer wants to sell its cars in the Japanese auto market. Since many Japanese auto dealers do not wish to carry foreign brand vehicles, the American car manufacturer may have a very difficult time finding a distributor. In this case, the manufacturer would build its own distribution network in Japan to fulfill this niche.
EXPORT PLATFORM FDI – Export-platform FDI is FDI motivated by a desire to export rather than to serve the local market. Vertical FDI is export-platform FDI where the exports are sent back to the home market. However, there is an increasing trend toward export-platform FDI where the exports are sent to third markets. The rise of trade blocks with low internal trade barriers but higher external barriers may contribute to this trend. Multinationals are establishing production subsidiaries within a trade block and using that plant to serve the entire block. To the degree that the host country is small relative to the overall size of the trade block, the vast bulk of production will be exported to other countries in the trade block.Motta and Norman (1996) find that improved market access within a trade block leads to export-platform FDI in this manner. As an additional benefit, since FDI into the block becomes more attractive to outside firms, due to firms being better able to reach the majority of markets within the block through exports from one plant, the subsidies required to entice firms to locate in the block will be reduced. Instead of considering only the market size of a potential host country, firms now consider the broader, regional market that can be easily reached from the country. As trade blocks are often formed on a regional basis, avoiding artificial trade barriers (such as tariffs) and natural trade barriers (transport costs) tend to go hand in hand.Kumar (1998) emphasized the need to distinguish between export-platform FDI oriented toward the home market versus that oriented toward third countries. FDI for export back to the home market occurs to take advantage of cheaper factors of production elsewhere, and only trade costs between the home and host country matter. FDI for export to third countries is critically dependent on the ease of access to the third countries, and the trade costs back to the home market matter little.
4. METHODS OF FDIThe foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:
by incorporating a wholly owned subsidiary or company
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise
Definition of Wholly Owned Subsidiary Company: A Wholly Owned Subsidiary Company is an entity of which 100% shares are held by another company. For example, if ABC Pvt. Ltd. owns 100% shares of the XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes a wholly owned subsidiary of company of the ABC Pvt. Ltd.
When foreign company makes 100% FDI (Foreign Direct Investment) in India through an automatic route, the Indian company becomes the Wholly Owned Subsidiary of that Foreign Company. Let’s say, ABC Inc. USA owns 100% shares in XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes the Subsidiary company.
This is only possible where 100% FDI (Foreign Direct Investment) is permitted and no prior approval is required from the Reserve Bank of India
A Wholly Owned Subsidiary Company can be defined as an entity whose entire share is capital is held by the foreign corporate bodies. A Wholly Owned Subsidiary Company can be formed as a private, limited by share, limited by guarantee or an unlimited liability company. Considering the various exemptions available to a private company limited by shares (a “private company”) under the India’s Companies Act, 2013 (the “Act”), it is recommended that a Wholly Owned Subsidiary Company be established as a private company.
By Acquiring Shares In An Associated Enterprise – An enterprise would be regarded as ‘associated enterprise’ of another enterprise if
it participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise, or
The persons participating, directly or indirectly, or through one or more intermediaries, in its management or control or capital also participate in the management or control or capital of other enterprise.
FDI can also be made by buying/acquiring the shares of that enterprise which comes under the purview of associated enterprise as defined above.
Through A Merger Or An Acquisition Of An Unrelated Enterprise – Mergers and acquisitions (M;A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M;A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.
An acquisition/takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through myriad avenues including market research, trade expos, sent up from internal business units, or supply chain analysis. Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.
“Acquisition” usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.
A Merger is an agreement that unites two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, scale of operations, etc. For this reason, the term “merger of equals” is sometimes used.
Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues and increase profits, all of which should benefit the firms’ shareholders. After a merger, shares of the new company are distributed to existing shareholders of both original businesses.
Participating In An Equity Joint Venture With Another Investor Or Enterprise – A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons:
to access a new market, particularly emerging marketsto gain scale efficiencies by combining assets and operations
to share risk for major investments or projects
or to access skills and capabilities.
5. ADVANTAGES AND DISADVANTAGESIn recent times the companies have opted for FDI more fluently than ever before. Some of the advantages which motivate the companies to go for FDI are as follows;
1. Economic Development Stimulation. Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.
2. Easy International Trade.Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.
3. Employment and Economic Boost. Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.
4. Development of Human Capital Resources. One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.
5. Tax Incentives. Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.
6. Resource Transfer. Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
7. Reduced Disparity Between Revenues and Costs. Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.
8. Increased Productivity. The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.
9. Increment in Income. Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred. Take note that larger corporations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income.
Everything comes with certain advantages and disadvantages the same applies to FDI also there are certain advantages as discussed above but there are also certain limitations/disadvantages.
The disadvantages are as follows
1. Hindrance to Domestic Investment. As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.
2. Risk from Political Changes. Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.
3. Negative Influence on Exchange Rates. Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.
4. Higher Costs. If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.
5. Economic Non-Viability. Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.
6. Expropriation. Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.
7. Negative Impact on the Country’s Investment. The rules that govern foreign exchange rates and direct investments might negatively have an impact on the investing country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.
8. Modern-Day Economic Colonialism.Many third-world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of modern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies’ exploitations.
6. FDI IN DIFFERENT SECTORSThe government of India has taken some positive steps towards allowing FDI in the country. FDI has been allowed in some very important sectors like Infrastructure Automotive Pharmaceuticals Service Railways Chemicals Insurance etc.In this project we will basically discuss about FDI in RAILWAY and INSURANCE sector.
FDI IN RAILWAY SECTOR – Currently FDI in Railway is fully opened up. A foreign player can invest up to 100% in most segments of rail infrastructure such as suburban rail, metro rail, locomotive and rolling stock and dedicated freight lines, railways electrification, signaling systems, freight terminals, passenger terminals etc. In high-speed rail projects — informally called bullet trains a foreign player is now allowed to run a parallel and fully privatized Railway Company, completely detached from the existing Indian Railway network.
FDI in rail infrastructure up to 100% will be cleared through automatic route, which means no approval from the Foreign Investment Promotion Board would be required. It is expected that opening up of the sector can attract up to Rs 90,000 crore FDI into Indian Railways.
It is necessary that Indian Railways needs investments both financial and technological so that domestic capacity could also be enhanced. Therefore Indian Railways has now no option but to take the FDI route to become more competitive.
FDI IN INSURANCE SCTOR – The insurance industry of India consists of 52 insurance companies of which 24 are in life insurance business and 28 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Indian insurance sector was liberalized in 2001. Liberalization has led to the entry of the largest insurance companies in the world, who have taken a strategic view on India being one of the top priority emerging markets. The Insurance industry in India has undergone transformational changes over the last 14 years. With raising the cap on FDI into Indian insurance companies to 49% from the 26% would allow global reinsurance companies to set up branches in India.
The most major role that is played by the insurance sectors is to mobilize national savings and to channelize them into investments in different sectors of the economy.
FDI in insurances increase the penetration of insurance in the countries like India. FDI can meet India’s long term/short term capital requirements to fund the building of infrastructures. Currently, up to 49 per cent FDI is permitted through the automatic approval route.
Insurance sector has the capability of raising long-term capital from the masses, as it is the only avenue where people put in money for as long as 30 years even more. An increase in FDI in insurance would indirectly be a boon for the great Indian economy.
Over the years, FDI inflow in the country has increasing fast. However, India has tremendous potential for absorbing greater flow of FDI in the coming years.
7. IMPACT OF FDI ON INDIAN ECONOMYForeign Direct Investment (FDI) plays an important role in the growth and development of an economy. It is more important where domestic savings is not sufficient to generate funds for capital investment. Not only it supplements the investment requirements of an economy but also it brings new technology, managerial expertise and adds to foreign exchange reserves. FDI inflow is more beneficial particularly to developing and emerging countries than the developed ones. IMF has defined FDI as “a category of international investment that reflects the objective of a resident entity in one economy (direct investor or parent enterprise) obtaining a lasting interest and control in an enterprise resident in another economy (direct investment enterprise)”.
Prior to 1980s, economic theories were not delving extensively on the aspects of foreign direct investment and Multi-lateral enterprises (MNEs). During last three decades globalization has been the key to almost all countries’ economic policies. An important aspect of globalization is FDI inflows from home countries to host countries. Though there is no general rule of developed and developing countries as home and host countries respectively, however, mostly it is seen that FDI flows from developed countries to developing and emerging countries. There has been growing competition among developing and emerging countries to attract FDI. India is not left behind in this regard.
FDI is believed to play many important roles in the host countries. It has different effects on different countries based on the host country policies, investment climate and other domestic macroeconomic conditions. The first and foremost is, it acts as a capital supplement to the domestic capital for investment demand. Apart from capital it brings new, innovative technology to the host countries. In many countries it also promotes competition among the domestic firms to improve their level of technology adoption. Effectively, they invest more in research and development (R ; D) to upgrade their technology. With increased investment as supplement to domestic capital, it also generates more employment opportunities. With keen interest in the investee firms through FDI, the foreign firms improve their managerial competence, which also improves managerial skills in the country through competition and dissemination of the new ideas and skills.
The firms with improved technology and competition produce quality products, which are exportable, thus it improves the level of export and degree of openness of the host countries. With foreign partners, there are better tie ups with the importing firms abroad for potential exportable domestic products. With improvement in exports the foreign exchange earnings of the host countries gets boosted. Capital flow through FDI and improved export earnings can also increase the level of foreign exchange reserve in the host countries.
With higher foreign exchange reserve, the demand for domestic currency will go up. Hence the domestic currency of the host country is expected to appreciate as against the basket of foreign currencies mostly of trade partners. FDI is also believed to improve the Gross domestic product (GDP) of the host country through improved production and competition among the domestic firms. With improved production and more employment, it also can improve gross domestic capital formation (GDCF) which caters to the increasing requirement of domestic investment in the country. Further, with competition, improvement in technology, the performance of the investee firms as well as other domestic firms can improve. Thus it can have a positive impact on return on capital and thereby on the stock prices.
The study made above establishes the relationship between FDI and other macroeconomic variables in Indian context, hence the impact of FDI on Indian Economy can be understood by it.
Some of the positive and negative effects can be understood by the following
– Causes a flow of money into the economy which stimulates economic activity
– Employment will increase
– Long run aggregate supply will shift outwards
– Aggregate demand will also shift outwards as investment is a component of aggregate demand
– It may give domestic producers an incentive to become more efficient
– The government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it.
– Inflation may increase slightly.
– Domestic firms may suffer if they are relatively uncompetitive.
– if there is a lot of FDI into one industry e.g. the automotive industry then a country can become too dependent on it and it may turn into a risk that is why countries like the Czech Republic are “seeking to attract high value-added services such as research and development.
8. CONCLUSION AND SUGGESTIONFDI in India will bring various benefits like advancement of knowledge, skill, technology, exports, employment and management. But MNCs may create forex drain from India. Indian companies will face stiff competition from foreign companies. Thus, while allowing different sectors like multi-brand retailing, GOI should have to take a cautious steps.FDI in retail would expose the retail traders in domestic markets to unfair competition and thereby eventually leading to job losses. A balanced and objective view needs to be taken in this regard; foreign investment in portfolio may be withdrawn at any time. Therefore GOI should stress to attract more equity investments. Further the regulatory policies should be made favorable and policymakers should avoid uncertainties for boosting FDI in India and ultimately to increase GDP, Trade and Foreign reserves. Retailers in India can fight against foreign retailers and survive in the competition due to their own merits like- local market, low price, close customer relations, credit facility, intimacy with customer and personalized services.
9. BIBLIOGRAPHYThe researcher has consulted following sources to complete the final proposal: