95850091 Foreign Direct Investment Bharth Cohesion to Employment

FDI In Cohesion to Employment

P G Dept. of Management Studies, PESITM, Shivamogg. 1

Introduction :-

Until the 1980s, most developing countries viewed foreign direct investment

(FDI) with great wariness. The presence of multinational corporations (MNCs) was

perceived to impinge on national sovereignty and security. The foreign-based center of

decision making and international mobility raised suspicions about MNCs. commitment

to the host economy. The sheer size and magnitude of FDI by MNCs was viewed as a

threat to host countries, raising concerns about MNCs. capacity to influence economic

and political affairs. These fears were driven by the colonial experience of many

developing countries and by the view that FDI was the modern form of economic

colonialism and exploitation. In addition, MNCs were frequently suspected of engaging

in unfair business practices, such as rigged transfer pricing and price fixing through their

links with their parent companies.

In recent years, however, FDI restrictions have been dramatically reduced as a

result of a host of factors. Accelerating technological change, emergence of globally

integrated production and marketing networks, existence of bilateral investment treaties,

prescriptions from multilateral development banks, and positive evidence from

developing countries that have opened their doors to FDI. In addition, the drying-up of

commercial bank lending due to debt crises brought many developing countries to reform

their investment policies to attract foreign capital, as FDI appeared to be an attractive

alternative to bank loans as a source of capital inflows. In the process, incentives and

subsidies were aggressively offered, particularly to MNCs that supported developing

countries. Industrial policies. This led to a rapid expansion of FDI flows around the world

during the last 20 years. From only $53.7 billion in 1980, FDI outflows reached $1.4

trillion in 2000. The upsurge in FDI has substantially changed the international economic

landscape. A notable characteristic of this change is its phenomenal speed. Since 1980,

the growth of world FDI outflows has overtaken the growth of world exports (Figure 1).

This swift expansion in FDI outflows was more pronounced during 1985-1990, when

many host countries began to relax regulations to attract FDI, and 1995-2000, when

companies undertook scores of mergers and acquisitions in the wake of the Asian

financial crisis and privatization programs in Latin America.

Foreign Direct Investment (FDI) is a driving force of globalization and an

important engine of economic growth. Developing as well as developed countries seek to

attract FDI due to its many advantages for economic development. FDI can not only bring



capital to an economy, but also transfer knowledge, technology and skills, as well as

generate employment and trade.

Due to its economic significance and social impact, FDI statistics has become an

essential parameter for facilitating national policy-makers to set up regulatory policies

and development strategies, and for international institutions to monitor global and

regional economic trends and globalization process. Nevertheless, collecting, processing

and reporting FDI data remains a major challenge for developing and developed countries

alike, as well as to international organizations.

Meaning of FDI :-

Foreign Direct Investment, or FDI, is a measure of foreign ownership of

domestic productive assets such as factories, land and organizations. Foreign

direct investments have become the major economic driver of globalization,

accounting for over head of all cross-border investments.

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.

According to IMF :- FDI by IMF (International Monetary Fund) definition

includes 12 independent and well-defined elements. These include: 1). Equity

Capital. 2). Re-invested earnings of foreign companies. 3). Investment made

by Foreign Venture Capital Investors. 4) Non-Cash acquisition of equity. 5).

Earnings data of indirectly held FDI enterprises. 6) Bonds. 7) Grants. 8).

Trade Credit. 9). Financial leasing. 10). Short-term and long-term loans. 11).

Inter-company debt transactions. 12). Control premium and non-transaction

fees.



According to IMF, FDI is the category of international investment that

reflects the objectives of obtaining a lasting interest by a resident entity in

one economy, in an enterprise resident in another economy.

FDI into India:-

Although china has been the top investment destination for some year, investor

interest in India is a more recent development. Whereas china’s FDI concentrated In

capital-intensive manufacturing and logistics, FDI flow into India are mostly in IT and

Communication centers, which are not accompanied by sizeable FDI flows.

Despite India’s successful positioning as a business processing and IT outsourcing

hub, these activities often translate into Indian services sector exports via third-party

transactions-not FDI. There have recently been position signs of increased FDI into other

sector. Despite the attention to services outsourcing, two of the sectors that received a

large amounts of inward FDI in 2005 were automobile manufacturing and mining.

FDI into India will grow but will remain very low in interest in the country.

Intel, Microsoft, Cisco, Pasco and an AMD-backed chip fabrication consortium

have proposed large multi-year investment.

The recent increasing ceiling on foreign ownership in some telecoms services to

74% (from 49%) and in civil aviation companies to 49% (from 24%) is also helping to

generate greater inflows, although manufacturing is generally open to foreign investment

and there has recently been substantial liberalization of the FDI regime in some sectors,

such as a telecoms, FDI opportunities in other sectors are limited.

India’s ability to attract FDI is also hampered by its poor infrastructure recent

survey by KPMG, that showed India’s poor infrastructure (the road network, the ports,

the distribution networks and in particular, the power supply) is a cause for concern and a

major barriers to investment.

Most of the companies surveyed doubted that rapid changes could be made to

solve the infrastructure issues. The scope for making improvements is limited by the state

of public finances. The combined deficit of the federal and state governments is running

at around 10% of GDP.



Employment Scenario:-(EMPLOYMENT AND UNEMPLOYMENT SCENARIO

IN INDIA)

APPROACH TO EMPLOYMENT IN ECONOMIC

PLANNING:-

Planning in India focused at realizing a high rate of growth of output in the long term. A

basic assumption was that shortage of capital goods in relation to employable persons

constituted a fundamental constraint on growth in the economy. Therefore the planning

process made no attempt to define an independent employment strategy; the focus on

economic growth was viewed as essential for improving the employment situation.

Initially, labour force expansion was not seen as a problem to be contented with. Thus,

in the Five Year Plans, the generation of employment was viewed as part of the process

of development and not as a goal in conflict with, or to be pursued independently of

economic development.

EMPLOYMENT PLANNING IN INDIA:-

The approaches to tackling the task of unemployment have varied from time to time. In

the initial years of planning reliance was placed primarily on the expectations of a rapid

industrial development and control of population. These expectations did not materialize

and it was observed that the rate of growth of employment was generally much lower

than the GDP rate of growth of the economy. Seasons of severe drought and failure of

monsoons exposed large sections of population to extensive deprivations. Successive

plans, strategies, policies and programmes were, therefore, re-designed to bring about a

special focus on employment generation as a specific objective. The seventies and

eighties saw the emergence of special schemes like NREP, RLEGP to provide wage

employment through public works programmes and schemes to promote self-employment

and entrepreneurship through provision of assets, skills and other support to the

unemployed and the poor. While employment levels expanded steadily during the

seventies and eighties, the rate of growth of employment continued to lag behind that of

the labour force. Unemployment among the educated showed a rising trend. Another

feature of the employment situation is the sizeable proportion of the employed working at

low levels of the productivity and income. The eighties exposed the weakness in the then

ongoing strategies of expanding public sector irrespective of competition.



POVERTY ALLEVIATION AND EMPLOYMENT

GENERATION PROGRAMMES:-

Anti-poverty strategy comprises of a wide range of poverty alleviation and employment

generation programmes, many of which have been in operation for several years and have

been strengthened to generate more employment, create productive assets, impart

technical and entrepreneurial skills and raise the income level of the poor. Under these

schemes, both wage employment and self-employment are provided to the people below

the poverty line. In 1998-99, various poverty alleviation and employment generation

programmes are grouped under two broad categories of Self-Employment Schemes and

Wage Employment Schemes. Funding and organizational patterns are also rationalized to

achieve better impact. These programmes are primarily meant for poverty alleviation and

have generally not been helpful in sustainable employment generation.

GLOBAL EMPLOYMENT SCENARIO:-

The global employment and unemployment situation according to the World Employment

Report 1998-99, was as follows:

Out of an estimated 6 billion population in the year 1997 around 3 billion

was in the labour force.

160 million persons have been estimated to be fully unemployed.

25 to 30 percent of the employed labour force is under employed.

A large number of young people in the age group of 15 and 24 (around 60

million in 1997) are continuously in search of work i.e. unemployed

A few important conclusions which emerges from the above report are:-

Limited demand for unskilled and less skilled labour.

Increase in demand for skilled labour on account of technological

development and up gradation and changes in the organization of work

Problems in maintaining the continued employability of labour force

Demand for multi skilling.



Some of the important strategies recommended in the World Employment Report

are:

Timely Investment in skill development and training at enhanced level.

Enhancement of education and skill level of workers.

Responsive training system.

Need for effective partnership of all stake holders.

EMPLOYMENT & UNEMPLOYMENT SCENARIO IN INDIA:-

In India, due to the agrarian sector with seasonal operations time disposition and

availability for work have been the criteria for measuring employment. The accepted

method of measuring employment is the usual status. Reliable estimates of

employment/unemployment are generated through National Sample Surveys conducted

once in five years by National Sample Survey Organisation (NSSO). The concept

recognizes time utilisation only. Quality of work or income does not get reflected in

the approach.

As per the results of the National Sample Survey conducted in 1999-2000, total

work force as on 1.1.2000, as per Usual Status approach (considering both principal and

subsidiary activities) was of the order of 406 million. About 7 % of the total work force is

employed in the formal or organized sector (all public sector establishments and all non-

agricultural establishments in private sector with 10 or more workers) while remaining

93% work in the informal or unorganized sector. The size of the Organized Sector

employment is estimated through the Employment Market Information Programmed of

DGE&T, Ministry of Labour. The capacity of the organized sector to absorb additional

accretion to the labour force, taking into account the current accent on modernization and

automation, is limited. In other words, an overwhelming proportion of the increase in the

labour force will have to be adjusted in the unorganized sector. About 369 million

workers are placed today in unorganized/informal sector in India; agriculture workers

account for the majority of this work force.



EMPLOYMENT GENERATION IN INDIA:-

7% of the total employed are in the organized sector i.e., unorganized

sector dominates in the employment scenario.

Additional employment generation in the organized sector is not

significant i.e., scope for additional wage employment in the organized

sector continued to be less.

Significant employment generation took place in the tertiary sector

particularly in services industries.

Substantial employment growth was observed in the small and

unorganised sector, i.e., in small and tiny enterprises.

Self-employment and casual labour continued to play a pivotal role in

rehabilitation of the unemployed.

Skill level of Labour Force in India:-

The overwhelming majority of the work force, not only in rural areas but also in

urban areas, does not possess any identifiable marketable skill. In urban, only

about 19.6% of male and 11.2% of female workers possessed marketable skills.

Whereas, in rural areas only about 10% of male and 6.3% of female workers

possessed marketable skills.

Most of the job seekers (about 80%) in employment exchange are without any

professional skill.



The Estimates of potential job opportunities in different sectors

Sectors/Programmes Total Additional job

opportunities created over the

10th Plan

(in lakhs)

Total

(in

lakhs)

Growth based Programmed

based

Agriculture Including National Watershed

Development Project for Rain fed Areas (NSDRPA),

Farm Management programmed, Agro Clinics,

Greening India Programmed, Watershed and

Wasteland Development, Medicinal Plant, Bamboo

Development and Energy Plantation like Ethanol etc.

4.1 90.6 94.7

Mining & Minerals -2.0 -2.1

Manufacturing (Excl. Prime Minister’s Rozgar-

Yojana (PMRY) & Rural Employment Generation

Programmed (REGP)

14.2

(large

manufacturer)

60.0

(SSI)

14.2

60.0

Electricity, Gas & Water -2.1 -2.1

Construction 63.0 63.0

Trade, Hotels & Restaurants 112.3 112.3

Transpor,Storage &Communications 55.1 55.1

Financial Sector 19.3 19.3

Community Sector 4.9 32.0 4.9

Special Programmes

Prime Minister’s Rozgar Yojana (PMRY) (SSI) &

REGP (KVIC)

Sampoorna Gramin Rozgar Yojana (SGRY)

Pradhan Mantri Gram Sadak Yojana (PMGSY)

& Swarna Jayanti Gram Swarozgar Yojana (SGSY)

22.0

20.0

12.9

7.7

8.0

22.0

20.0

12.9

7.7

8.0

Total 296.8 193.2 490.0



FDI Impact on Employment [Global Level & India]:-

Globalization has played an important role in the generation of employment in

India. Since the economic liberalization policies in the 1990s, the employment scenario in

the country has significantly improved. An analysis of the impact of globalization on

employment in India will bring out a number of factors in this regard.

Market liberalization policies and employment

The wake of globalization was felt in India in the early 1990s when the then

Finance Minister Manmohan Singh initiated the open market policies. This led to a

significant improvement in the gross domestic product of the country and the exports

increased considerably. There was significant rise in the customer base and it slowly gave

rise to the consumer market where the market changes were dependant on the demand

supply chains. In fact, the growth in demand brought a favorable change and the supply

too started increasing. As, supply is directly involved with employment, more supply led

to more production which led to more employment over the years.

Growth of new segments in the market

Due to globalization and the growth of the consumer market, a number of

segments in various sectors of the industry have grown over the years. This has led to the

significant rise in the rate of demand and supply. In the recent years, a number of industry

segments such as information technology, agro products, personal and beauty care, health

care and other sectors have come into the market.

Experts say that the introduction of a wide range of sectors have led to the

favorable growth of the economy in the country. With more and more industry segments

coming up, there has been a high demand for quality workforce. As such, lots of young

people are taking jobs in all these segments in order to start a good career.

In the unorganized sector as well, there has been an increase in various sectors

which has improved the rate of employment in the country. As per the recent surveys,

there has been a significant increase in the number of people working in the unorganized

and allied sectors. The pay package in all these unorganized sectors have also increased to

a great extent.



Improvement in the standard of living

As globalization has put a favorable impact in the economy of the country, there

has been an improvement in the standard of living of the people. The favorable economic

growth has led to the development of infrastructure, health care facilities and services, per

capita income and other factors which have really led to the high growth rate. It has been

expected that the economy in India will grow by around 6-7% yearly. This growth rate is

expected to improve the overall employment situation more and the per capita income

will also increase significantly.

Development of other sectors

Globalization has positively affected the growth of various sectors in India. These

have opened up new employment opportunities for the people. The service industry has a

share of around 54% of the yearly Gross Domestic Product (GDP). From this figure itself,

it is understood that the service industries are doing very well in the market and as such,

plenty of employment opportunities are taking place.

In the other sectors such as industry and agriculture, the rate of employment has

gone up. The industrial sector contributes around 29 % while the agricultural sector

contributes around 17 % to the gross domestic product. Some of the well known exports

of the country consist of tea, cotton, jute, wheat, sugarcane and so on. Due to the growth

of customer base in all these sectors, more and more employment opportunities are

opening up. In fact even young people and freshers are getting jobs in all these sectors. In

the manufacturing sector, there has been a growth of around 12% while the

communication and storage sector has also grown up by around 16.64%.

Government Initiatives

To keep pace with the favorable effects of globalization, the government has taken

a number of initiatives. A number of employment opportunities such as Prime Minister

Rojgar Yojna and the CM Rojgar Yojna have been initiated to improve the employment

situation in the rural areas. The Minimum Wages scheme has also been successfully

implemented. In order to improve the quality of the workforce, effort is also being given

to impact education to various sectors of the rural areas. Under these schemes, new

schools are being opened up and attention is also being given to the welfare of the

students. Likewise in the urban sector too, more and more employment opportunities are

being opened up for the youth in a number of government sectors, banks and so on.



In order to foster communication and migration of workforce to various parts of

the country to cater to the needs, the government has also developed infrastructure to a

great extent. New roads and highways are being constructed to increase connectivity.

Current Scenario of FDI:-

Foreign Direct Investment (FDI) is now regarded as an important driver of

growth. Emerging Market Economies (EMEs) look upon FDI as one the easiest means to

fulfill their financial, technical, employment generation and competitive efficiency

requirements. Gradually they also realized that substantial economic growth is inevitable

without global integration of business process. This created opportunities for location

advantages and thus facilitated strategic alliances, joint ventures and collaborations over

R & D.

The world economy has observed a phenomenal change in volume and pattern of

FDI flow from developed nations to EMEs in 1980s and 1990s compared to earlier

decades. The hostile attitude of developing nations regarding multinationals investment

has become generous during this transition period. FDI was fostered by liberalization and

market-based reforms in EMEs. The financial sector deregulation and reforms in the

industrial policy further paved the way for global investments.

There is clearly an intense global competition for FDI. India has emerged as the

second most attractive destination for FDI after China and ahead of the US, Russia and

Brazil. In view of these facts, the present paper takes stock of current status of FDI in

India, aims to find reasons for comparatively lesser flow of FDI and suggest measures to

boost flow of FDI to India.

The FDI scenario in India is currently witnessing a gradual shift with liberalized

reforms over last few years and an attractive investment climate making a positive impact

on the inflow. With a steady increase in volume of FDI, India has attracted more than 90

countries till 2010 (29 countries in 1991) across the globe to invest in India making it

upstages US in the list of top investment destinations in the world in the UNCTAD WIP

Report.

There are certain factors which have played a pivotal role in taking India to the

world. Demographics, suitable business climate, low man power costs along with



availability of talented pool of resources are some of them. India also has certain

advantages at the policy level. Collaboration with a local partner is not mandatory for

making investment in India, repatriation of capital is easy and low cost, and licenses

granted can be used to operate from any part of the country. There is also better

protection of IP rights simplification of laws and introduction of a uniform Goods and

Service Tax and a soon to be introduce Direct Tax Code.

Investment into India could mostly follow the automatic route with no licenses or

permissions required Investment in sectors that have caps such as single brand retail,

private banking, insurance, stock exchange needs to be approved by Foreign Investment

Promotion Board.

As per the latest FDI policy steps have been taken to evaluate certain sectors

having limited or no access to foreign investment. Discussion papers on FDI in multi

brand retail trading was released which proposed to increase FDI in Single brand retail to

100% from current 51% and to allow FDI in Multi Brand retail, which will improve the

growth rate in organized retail currently one of the lowest in the world at 4%.

Consolidated FDI policy in now issued every 6 months, online filing for FIPB

application, methodology for calculation of indirect foreign investments in Indian

companies now clearly defined. Project Offices are now permitted to open one or more

non – interest bearing foreign currency accounts for projects to be executed in India,

which will give greater flexibility for Project offices to operate.

India is placed quite well to attract investments and key reforms have been

initiated at the macro level. The need of the hour is to implement policy reforms both at

the macro and micro level, prioritize sectors, focus on product-specific SEZs or multi-

product SEZs and synchronize FDI policy with export policy. In order to sustain its

competitive advantage in being the top investment destination in the world India will also

need to address other key issues like lack of infrastructure, restrictive labor laws, absence

of Centre-state co-ordination.

It is necessary to note that an Indian company must be both owned and controlled

by Indian citizens. If either condition is violated, then its investment would be treated as

indirect foreign investment.



For determining the foreign ownership of an Indian company it should have more

than 50% foreign ownership. What happens in a situation where the Indian and the

foreign partner have an equal (50 : 50) stake ? In several Indian JVs, the foreign partner

desires one golden share (over 50%) to enable consolidation with his foreign company. If

such a JV makes a downstream investment in any company, then the entire investment

would now be treated as indirect foreign investment.

For determining the foreign control, it only needs to be seen whether the foreign

entity has power to appoint majority of directors. It does not address the other ways in

which control can be exercised, e.g., veto rights, affirmative votes, shareholders’

agreement. In sectors where the FDI is subject to Government approval, the Indian

company will need to disclose to the FIPB the details of inter-se shareholder agreements

which have an effect on the appointment of the Board of Directors, differential voting

rights and such other matters. But a similar treatment has not been extended to the

indirect foreign investment. A majority of the private equity deals have a host of special

investor rights, but may not necessarily have a majority of the Board seats

What would happen if an Indian investing company with 49% FDI and which is

owned and controlled by Indian citizens, invests 26% in an NBFC which already has 51%

FDI ? Under the new norms, 26% investment would be treated as domestic investment

and hence, the NBFC would not have to comply with the minimum capitalisation norms

applicable to an NBFC which has more than 75% FDI.

What if the Indian investing company, which has 49% FDI and which is owned

and controlled by Indian citizens, invests in a sector for which FDI is prohibited, e.g.,

lottery business? Sectors such as retail trading, real estate, information, defence,

avaiation, etc., are expected to benefit from this Press Note. We may soon have a case

where several foreign retail players may try to invest in multi-brand retailing via the

indirect foreign ownership method. As per Press reports, the RBI has objected to this

Press Note.

FII investment has been treated as foreign investment. However, to consider the

same, one has to ascertain the limits as on 31st March. If one looks at the FII activity after

31st March, 2008 there are only withdrawals. Hence, even though the current position is

drastically different from what it was on 31st March, 2008, yet one is required to consider

the FII investment level as on 31st March, 2008. This provision would create a lot of

problems. Further, clubbing ADR/GDR holding with foreign shareholding is also a vexed

issue. The voting on ADR/GDR is by the custodian of the shares. How the custodian



would vote is generally not specified. There are a few cases where it is specified in the

prospectus. But generally, it is left open. Interestingly, Cl. 40A of the Listing Agreement,

while computing the public shareholding in a listed company, excludes the shares which

are held by custodians and against which depository receipts are issued overseas. The

logic being that the custodian would vote in unison with the promoter. If that be the case

under the Listing Agreement, then the stand taken by the FIPB is diagonally opposite, i.e.,

the custodian would vote in unison with the foreign receipt owners.

Special investor rights are the norm in the case of private equity deals and hence, if

PE deals are to be done in sectors requiring FIPB approval, then the Shareholders’

Agreement would have to be filed with the FIPB. Thus, if any courier company (where

FIPB approval is required) wants to get PE funding, it would also have to get the

Shareholders’ Agreement approved by the FIPB. Thus, the regulator would now exercise

quasi-judicial functions.

Ranked 2nd

most favored destination for foreign investments after China

India ranks among the top 12 producers of manufacturing value added

(MVA)

In textiles, the country is ranked 4th

after China, USA and Italy.

In electrical machinery and apparatus, it is ranked 5th

.

6th

position in the basic metals category.

7th

in chemicals and chemical products.

10th

in leather, leather products, refined petroleum products and nuclear fuel.

12th

in machinery and equipment and motor vehicles.

Growth Opportunities:-

India has been ranked at the second place in global foreign direct investments in

2010 and will continue to remain among the top five attractive destinations for

international investors during 2010-12 period, according to United Nations Conference on

Trade and Development (UNCTAD) in a report on world investment prospects titled,

'World Investment Prospects Survey 2009-2012'.

The 2010 survey of the Japan Bank for International Cooperation released in

December 2010, conducted among Japanese investors, continues to rank India as the

second most promising country for overseas business operations.



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.

According to Ernst and Young's 2010 European Attractiveness Survey, India is

ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010.

However, it is ranked the 2nd most attractive destination following China in the next

three years.

The wave of M and A’s as a driving force for FDI will continue, particularly in

crucial sectors such as IT, telecom, financial and pharmaceuticals. These might be aided

by trade liberalization, investment in capital markets, deregulation and the fiercer

competitive pressures resulting from globalization and technological changes.

The Unclad study notes: “Expanding firm size and managing a portfolio of

location assets becomes more important for firms, enabling them to take advantage of

resources and markets worldwide. The search for size is also driven by the search for

financial, managerial and operational synergies, as well as economies of scale. Finally,

size puts firms in a better position to keep pace with an uncertain and rapidly-evolving

technological environment, a crucial requirement in an increasingly knowledge-intensive

world economy, and to face soaring research costs.

A contributing factor for the increased flow of foreign investment in the 1990s has

been the extensive reform by host governments, removal of restrictive policies governing

FDI flows and permitting free flows of capital. Approval procedures were simplified and

rationalized either by removing licensing requirements or keeping it to the bare minimum.

A survey, by the European Round Table of Industrialists, of the improvements of

conditions for investment in 25 developing countries including India, in the wake of

liberalization, noted that more companies were willing to invest in the developing world

for strategic considerations and to realize the long-term economic potential of these

markets. Towards that goal, regulatory efficiency, as opposed to simple deregulation,

should be the policy focus. Improved conditions for investment are not automatically, or

always, identical with deregulation, much less efficient regulatory framework. The

demand for a competition policy and an open investment regime as demanded at the

WTO has its genesis in this premise.



Challenges of Employment in India:-

The challenges facing larger FDI in India are in spite of the fact that more than

100 of Fortune 500 companies are already investing in India. These FDIs are already

generating employment opportunities, income, technology transfer and economic stability

India is focusing on maximizing political and social stability along with a regulatory

environment. In spite of the obvious advantages of FDIs, there are quite a few challenges

facing larger FDIs in India, such as:-

Resource challenge: India is known to have huge amounts of resources. There is

manpower and significant availability of fixed and working capital. At the same

time, there are some underexploited or unexploited resources. The resources are

well available in the rural as well as the urban areas. The focus is to increase

infrastructure 10 years down the line, for which the requirement will be an amount

of about US$ 150 billion. This is the first step to overcome challenges facing

larger FDI.

Equity challenge: India is definitely developing in a much faster pace now than

before but in spite of that it can be identified that developments have taken place

unevenly. This means that while the more urban areas have been tapped, the

poorer sections are inadequately exploited. To get the complete picture of growth,

it is essential to make sure that the rural section has more or less the same amount

of development as the urbanized ones. Thus, fostering social equality and at the

same time, a balanced economic growth.

Political Challenge: The support of the political structure has to be there towards

the investing countries abroad. This can be worked out when foreign investors put

forward their persuasion for increasing FDI capital in various sectors like banking,

and insurance. So, there has to be a common ground between the Parliament and

the foreign countries investing in India. This would increase the reforms in the

FDI area of the country.

Federal Challenge: Very important among the major challenges facing larger

FDI, is the need to speed up the implementation of policies, rules, and regulations.

The vital part is to keep the implementation of policies in all the states of India at

par. Thus, asking for equal speed in policy implementation among the states in

India is important.



India must also focus on areas of poverty reduction, trade liberalization, and

banking and insurance liberalization. Challenges facing larger FDI are not just

restricted to the ones mentioned above, because trade relations with foreign

investors will always bring in new challenges in investments.

However, some important issues can be identified. To what extent can foreign

investment serve the overall socio-economic goals in an open regime? Income

disparities, employment generation, technology flows, environmental costs of

industrial development, commitment to exports are some of the key issues.

There could be a crowding-out effect in the face of competition for scarce

resources and markets. The pattern of investment and the routes FDI flows might

take may undergo a significant change. For instance, M and A’s may become

more common. There could b e takeovers of local firms in a few cases with

implications for domestic brands. Takeovers per se are not to be frowned upon.

But the ground rules for transparency and prevention of insider-trading practices

must be enforced vigorously under SEBI guidelines. Today, this is a weak area in

Indian corporate mergers.

Improving the country's negotiating power with MNCs needs attention.

Information of cost and the status of technology offered and the global strategies

of firms are vital to strengthen the bargaining capability.

There is likely to be an increasing role of the MNC home countries in controlling

the flow of critical or dual technology on so called `security grounds' which issue

must be discussed to evolve suitable international standards.

With particular reference to portfolio investments and profit repatriation,

Government must evolve suitable financial policies and instruments to prevent

capital market volatility.

The challenges facing host country authorities:-

Sound host-country policies toward attracting FDI and benefiting from foreign

corporate presence are largely equivalent to policies for mobilising domestic resources for

productive investment. As stated in the Monterrey Declaration, domestic resources in

most cases provide the foundation for self-sustaining development. An enabling domestic

business environment is vital not only to mobilise domestic resources but to attract and

effectively use international investment. As the experience of OECD members and other



countries has shown, the measures available to host-country authorities fall into three

categories: improvements of the general macroeconomic and institutional frameworks;

creation of a regulatory environment that is conducive to inward FDI; and upgrading of

infrastructure, technology and human competences to the level where the full potential

benefits of foreign corporate presence can be realized.

The first of these points establishes the fact that every aspect of host countries’

economic and governance practices affects the investment climate. The overall goal for

policy makers must, therefore, be to strive for the greatest possible macroeconomic

stability and institutional predictability. More concretely (and while macroeconomic and

financial enabling environments have not been the focus of the main report), the

following recommendations are widely supported.

Pursue sound macroeconomic policies geared to sustained high economic growth

and employment, price stability and sustainable external accounts.

Promote medium-term fiscal discipline, efficient and socially just tax systems, and

prudent public-sector debt management.

Strengthen domestic financial systems, in order to make domestic financial

resources available to supplement and complement foreign investment. A priority

area is the development of capital markets and financial instruments to promote

savings and provide long-term credit efficiently.

This will help alleviate funding constraints in general and allow local enterprise

development to benefit those business opportunities arising from foreign corporate

activities. This process will entail a progressive implementation of multilaterally

agreed financial standards.

The broader enabling environment for FDI is generally identical with best

practices for creating a dynamic and competitive domestic business environment.

The principles of transparency (both as regards host country regulatory action and

business sector practices) and nondiscrimination are instrumental in attracting

foreign enterprises and in benefiting from their presence in the domestic economy.

FDI is unlikely unless investors have a reasonable understanding of the

environment in which they will be operating. Moreover, a lack of transparency

may lead to illicit and other unethical practices, which generally weaken the host



country’s business environment In this context, host-country authorities should

undertake the following measures.

Strengthen their efforts to consolidate the rule of law and good governance,

including by stepping up efforts against corruption and enhancing policy and

regulatory frameworks (e.g. as regards competition financial reporting and

intellectual property protection) to foster a dynamic and well-functioning business

sector. Such policies will benefit the climate for FDI through their effect on

transparency.

Work toward increased openness to foreign trade, so the domestic enterprise

sector can participate fully in the global economy. This approach should be

undertaken jointly with efforts to increase business sector competition. A

combined approach would allow a greater domestic and international openness to

business to go hand-in-hand with safeguards against the negative effects of a rise

in concentration.. Moreover, the successful elimination of global and regional

trade barriers makes participating countries more attractive for FDI, owing to the

concomitant expansion of the “relevant” market.

Enshrine the principle of non-discrimination in national legislation and implement

procedures to enforce it through all levels of government and public

administration. Given the importance of competition for resource allocation and

sustained economic growth, it is essential that foreign entrants should be able

compete without government prejudice, and that incumbent enterprises are not

unduly disadvantaged vis-à-vis foreign-owned ones. To reap the maximum

benefits from corporate presence in a national economy, domestic competences,

technologies and infrastructure need to be sufficiently well developed to allow

nationals to take full advantage of the spillovers that foreign-owned enterprises

generate. Hostcountry authorities should therefore – with due regard to the

balance between costs and expected benefits, and the state of development of the

domestic economy – undertake measures to the following effect.

Put in place, and raise the quality of, relevant physical and technological

infrastructure. The presence of such infrastructure is instrumental in attracting

MNEs, in allowing national enterprises to integrate the technological spinoffs

from foreign-owned enterprises in their production processes, and in facilitating

their diffusion through the host economy. Allowing foreign investment in



infrastructure sectors and leveraging such investment by means of ODA may

assist in these efforts.

Given the importance of basic, widespread education for development, raise the

basic level of education of national workforces. The provision of specialised

skills beyond basic education should build on existing competences in the host

economy, rather than target the short-term or specific needs of individual foreign-

owned enterprises. A healthy workforce population is also needed, which requires

basic public health infrastructure (e.g. clean water).

Implement internationally agreed. Efforts to reduce child labour, eliminate

workplace discrimination and remove impediments to collective bargaining are

important in their own right. They also serve as tools to upgrade the skills and

raise the motivation of the labour force and facilitate linkages with MNEs

operating on higher standards. Additionally, a comparatively sound environmental

and social framework becomes increasingly important for countries seeking to

attract international investments operating on high standards.

Consider carefully the effects of imposing performance requirements on foreign

investors. Rather than justifying performance requirements as a necessary

counterweight to generous FDI incentives, countries may wish to reassess the

incentive schemes themselves. Moreover, it should be recognised that such

requirements may work against efforts to attract higher quality FDI.

The challenges facing home-country authorities:-

While host-country authorities should bear the brunt of the policy adjustments

needed to reap the benefits of FDI for development, the home countries of MNEs – and

the developed world more generally – should review the ways in which their national

policies affect developing countries. Thus, the benefits of FDI that flow from increased

international trade integration and diffusion of technology, as mentioned in this report, are

influenced significantly by the policies of developed countries Further trade liberalization

would contribute substantially to worldwide economic development, benefiting both

developed and developing countries. In the FDI context, the trade policies of developed

(home) countries gain a further dimension, insofar as an important share of FDI is

contingent upon subsequent trade between related enterprises. Trade barriers and

subsidies aimed at limiting imports into developed countries currently impose costs



on developing countries. The authorities in developed countries could enhance

developing countries’ ability to attract foreign investment by working to reduce and

eventually eliminate these barriers and subsidies.

Home-country governments need to assess the effects that their technology

policies may have on the transfer of technologies to the host economy. Authorities can

contribute to a positive outcome by encouraging MNEs to consider the technological

needs of host countries. The OECD Guidelines for Multinational Enterprises, which

adhering countries are committed to promote, stipulate that enterprises should adopt

practices that “permit the transfer and rapid diffusion of technologies and know-how,

with due regard to the protection of intellectual property rights”.* The need for home-

country governments to play a role with respect to least developed countries is

highlighted by Article 66(2) of the TRIPS Agreement, which states that.

“Developed country members shall provide incentives to enterprises and

institutions in the territories for the purpose of promoting and encouraging technology

transfer to least-developed country members in order to enable them to create a sound and

viable technological base”.

While recognising that developed and developing countries generally do not

compete for the same investment projects, developed countries should remain attentive to

the potential impacts of their measures of subsidising inward direct investment on

developing countries’ ability to attract FDI.

Another area of action relates to improving the synergies between FDI flows and

ODA. While ODA has been, in certain least-developed countries, the only substitute for

inadequate FDI, there is evidence that carefully targeted development assistance may

assist in leveraging FDI flows and creating a virtuous circle of increasing savings and

investment. ODA can be used to buttress or develop institutions and policies in

developing countries. This helps create a favourable environment for domestic savings,

and for domestic and foreign investment and growth. Some donor and recipient countries

are already working along these lines. ODA funds can be used to support those areas

considered important to investors in determining investment decisions, notably by helping

host countries achieve some of the measures outlined in the previous section. Efforts to

improve physical infrastructure, human capital and health in developing countries are all

cases in point. Moreover, through its effect on social cohesion, ODA may help make

developing countries more attractive locations for FDI.



Conclusion:-

Instrumental in growth and development of economy.

As every economic techniques it has its cost and benefits.

Many sectors and regions are yet to be benefited.

Hit over worldwide because of its non volatile nature.

The analysis present high FDI influence on the performance of the Polish

economy measuredby GDP, export, import as well as job creation. When

analyzing employment, the overall conclusion is that FDI were highly influential

in increasing employment and job preservation. Foreign capital can be beneficial

for the technological, labor and industrial development of one country, and it was

such case when investigating the Polish economy. One explicit evaluation is that

reducing unemployment and favoring employment couldn’t be accomplished

without consistence FDI influence and presence. In all years observed there was

visible cohesion between those two variables leading to proportional growth or

fall through years. However when comparing with other CE countries, Poland still

remains as country with high unemployment rate with estimated unemployment

rate of 10,3% in 2007. This outcome leaves doubts about how much Poland

succeed to utilize the FDI presence in contriving better economic growth. While

analyzing the high unemployment rate through years, one conclusion is that FDI

influence was deficiently used in terms of employment.

When we made an overview of the Polish labor market, we came up with

conclusion that the percentage of high skilled labor force is incomparable low and

the percentage of low skilled labor force is above the average of other countries in

Central Europe. When we observed the investment tendency of foreign

companies, we assume that they look towards educated and skilled labor force that

can fulfill their expectation on work. They are willing to pay more than domestic

companies, but they seek for well skilled workers as well. Alongside with their

request Polish labor market will not be terrified as most desirable. Yet another

conclusion is that foreign investment enterprise couldn’t accomplish their

investment projects, because the Polish labor market is inefficient to satisfy their



needs for human capital. There is more to be done to improve the Polish labor

market in order to satisfy the needs of foreign companies for skilled and well

educated labor force. One propound is that Polish Government should lend oneself

on upgrading the labor market condition by investment in education, training

programs, courses for under skilled workers and this could be of some value for

the Polish labor market since this research as well as many others signals for its

poor competence.

The overall perception is that FDI are only one factor that contribute in job

creation but cannot be considered as ultimate solution in decreasing

unemployment. In order to decrease the unemployment among workable

population more measures should be undertaken.

However, the overall conclusion is that this research represent basis for further

analyses to be conducted in the same research area. This area is widely unexplored

and I hope that this thesis work will initiate many researchers to partake with their

efforts in proving something new in the same area of interest.



Bibliography:-

Indian Journal of Finance

[P.Srinivasan & Anchal Singh]

Indian Journal of Finance

[Dr.Ravi Aluvala]

Indian Business Environment

[Suresh Bedi-Excel Books]

From Web Pages

[Wikipedia]

[Google]

[Google Books]

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95850091 Foreign Direct Investment Bharth Cohesion to Employment

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