Foreign Direct investment

PRESENTED BY:

Sahil Gundevia

CONTENTS:

• Introduction to FDI• Types and Methods of FDI• Importance & Barriers to FDI• Advantages & Disadvantages of FDI• Case Study : India• Conclusion

It is a direct investment into production/ business by company of country A into country B either by:

Buying a companyExpanding operations in exiting business operations

Simply defines as an investment made by a company in one country, into a company of the another country.Usually involves participation in management, joint-venture, transfer of technology and expertise.

Reasons for FDI Growth

Increasingglobalization

International mergersand acquisitions

Entrepreneurshipand small firms

STRATEGIC ASSETS SEEKING

Inward InvestmentInward (inflow) is when the foreign capital

are invested in local resources.Inward FDI is encouraged by Tax

breaks, subsidies, low interest loans, grants.

Inward FDI is restricted by Ownership restraints or limits, differential

performance requirements

Outward Direction• Outward (outflow) is when the local resources are invested to another

country.

• E.g. The outflow of Indian capital to other countries.

• Outward FDI is encouraged by Government-backed insurance to cover risk .

• Outward FDI is restricted by Tax incentives or disincentives on firms that invest outside of the domestic country.

Greenfield Target

• An investment which involves the flow of FDI by building up New production capacities Expansion of the existing production

• Greenfield Investing is offered as an alternative to another type of investment, for example as mergers and acquisitions, joint ventures, or licensing agreements.

Foreign Horizontal

Direct Investment

• An investment made by a multinational company in different nations.

• It is the investment made for conducting similar business operations.

• For example: Apple Inc. factory in China.

• Horizontal FDI results in expansion of the parent company and brings FDI in the other economy

Vertical Foreign Direct

Investment

• Backward Vertical = It is when an industry abroad provides inputs for a firm's domestic production process

• For example: Indian Oil Petroleum with Royal Dutch Shell.

• Forward Vertical = industry abroad sells the outputs of a firm's domestic production process.

• For example: when Volkswagen entered the United States market it acquired a large number of dealers rather than distribute its cars through independent United States dealers

Resource SeekingThis investment

aimed to get production factor supplies at low

cost. The investment is

seeking access to existing resourcesFor e.g. : Indian low labour cost

The most important among these are:

1. Raw materials, 2. Labour, 3. Public incentives4. The chance to restrain logistic costs

MARKET SEEKINGIts aim is to realize a direct presence in the foreign

market to quickly develop sales revenue and control the marketing mix policy.

It allows firms to pursue strategic goals such as threatening competitors by entering their home

market.

An example is General Motors’ investment in China which is

market seeking because the cars built in China are sold in China.

Strategic asset seeking• It is an investment led to increase self-competitiveness through the

acquisition of strategic assets such as technologies not available in the home market, or rather links with global value-chains.

• This kind of investment typically regards firms located in emerging or developing countries (particularly China), and are often undertaken for various reasons such as to lower costs of production or the will to expand on overseas markets. Similarly to the efficiency seeking firms, the strategic asset seekers aim to capitalise on the advantages of the common ownership of a network of activities and capabilities in diverse environments.

METHODS OF FDI

• by incorporating a completely owned subsidiary or company anywhere

• by acquiring shares in an associated enterprise

• through a merger or an acquisition of an unrelated enterprise

• participating in an fairness joint venture with another investor or enterprise

IMPORTANCE OF FDI

• Resource for economic growth.

• Money inflow from overseas • Business grows in several

countries.• FDI & Economic development• Opportunities.• Competitive requirement• Corporative Activities• Branch plant or subsidiary

company operations• Rise in National Income

BARRIERS TO FDI• Formal restrictions on FDI include limits on

foreign ownership.• Screening and approval procedures.• Informal barriers may also be important.• Barriers to investment access, operations,

areas, products, ownership and land use.• Barriers on labor, policy, institutional and

control variables.• Political controversies.

ADVANTAGES OF FDI• New jobs are created• New technology are implemented• Availability of scarce of factory of productions,

products and raw materials• Improving the balance of payment though import

and export substitution• Revenue to the government through taxation • Improved political relations• To get additional expertise• Increase in the number of competition• Expand local business• Stimulate the local economy and thus increasing in

GDP

DISADVANTAGES OF FDI• Political changes leads to “Expropriation”• Cultural and political indifference.• Investing is more expensive than

exporting.• Threat to local product.• Takes away employment opportunities.• It brings harm to the environment.• Foreign market recession.• Inequality of income distribution.

The Indian FDI Case Study

Key statics :-

• India witnessed a year-on-year (y-o-y) upsurge of 24.2 per cent in FDI to

touch US$ 3.95 billion in April-May 2013 as against US$ 3.18 billion

during the same period in 2012, according to statistics released by the

Department of Industrial Policy and Promotion (DIPP).

• During 2012-13, India attracted FDI worth US$ 22.42 billion. Hotels and

tourism, pharmaceuticals, services, chemicals and construction received

the highest amount of FDI.

• The major contributors to the Indian FDI were Singapore, Mauritius, the Netherlands and the US.

• Mauritius has been the largest direct investor.

• New Delhi And Mumbai are two major cities where

FDI inflows is heavily concentrated.

• Retailing is the single largest component of the

services sector in terms of contribution of GDP.

SECTORS OF F.D.I IN INDIA

• 100% F.D.I is permissible in hotel and tourism industry• Hotel industry includes restaurants, beach resorts, accommodation

and other food facilities to tourists• Tourism industry includes travel agencies, tourist transport agencies,

units providing facilities for culture ,adventure and wild life to tourists• Medical tourism, in India, has emerged as a huge money generator• India has been promoting its medical tourism to provide healthcare

facilities to tourists that has estimated to reach US$4 billion by 2014.• Up to 100% F.D.I is allowed in projects related to electricity generation,

transmission , and distribution other than atomic reactor power plants.• F.D.I up to 100% is permitted in the manufacturing of drugs and

pharmaceutical provided it does not involves recombinant D.N.A technology.

Continued….

• F.D.I up to 100% is permitted in projects of construction and maintenance of roads highways, vehicular bridges, toll roads, tunnels, ports and harbors.

• F.D.I up to 49% is permitted in insurance sector provided adherence to guidelines of INSURANCE REGULATORY & DEVELOPMENT AUTHORITY.

• For trading companies 100% F.D.I is allowed for exports ,bulk imports and carry wholesale trading

• FDI upto 100% in telecom sector.• F.D.I. in Retail(51%) & Aviation Sectors (49%) will also change the

economic outlook of the country.

FDI in Aviation

• The latest visionary decision of the Government of India to allow FDI up to 49% in India's domestic aviation, is expected to heal the cash-strapped aviation industry of India, and attract massive foreign direct investment in the aviation sector of India, in short and long future.

• The aviation sector of India has been serving about 100 million aviation travellers every year, both international and domestic markets, in the recent years.

• According to RNCOS Report, India is one among the top ten largest markets of the world, in respect of aviation, and is growing tremendously.

• The domestic aviation market of India will emerge out as the third biggest domestic aviation market in the entire world by 2020 with over 450 million domestic passengers.

• Tata sons- Singapore Airlines, Jet Airways-Etihad deals are spicing up the Aviation industry in India.

WHY INDIA ?

• India is world’s largest liberal democracy with sufficient natural resources .

• India has got skilled labor force.• In India the rate of return on investment is high.• Second largest group of software developer.• Asia’s fourth largest economy and second largest

pharmaceutical industry.• India has been growing with around 5.5% GDP• India has got an international stand to become the next

permanent member to United Nation’s Security council • India is an important member of SAARC , WTO, SAFTA and

G-20

India Transformed !!

Slow rate of growth Bureaucratic Protected and slow Small consumer markets Weak infrastructure

…Yesterday

…Today

Strong macro economic fundamentals Encouraging foreign investment Outsourcing destination Growing consumerism Impetus on infrastructure development

Conclusion

"If there is one place on the face of this

Earth where all the dreams of living

men have found a home when man

began the dream of existence, it is

India”.

• Considering foreign direct investment as an important measure of a country’s economic growth and development through introduction of foreign advance technology which is beneficial for both consumer and seller ,it must be promoted .

• As it is generating employment

opportunities it is dealing with one of the most important issue of our country and in education sector providing international standard of education within the country , it is certainly a WIN-WIN situation for us .

References

Websites:www.globaljurix.com/foreign-direct-investment.php

Scrib.com

wikipedia.org/wiki/Foreign_direct_investment

investorpadia.com

http://www.allbankingsolutions.com/Banking-Tutor/FDI-in- India.htm

News Papers:

Economic Time

Business Line

QUESTIONS ???