Presented By –Gaurav LakraGurleen KaurHarsh Kumar

University Business School

Foreign Direct Investment

FDI occurs when an entity or investor from one country (home

country e.g. USA) obtains or acquires the controlling interest

in an entity in another country (host country e.g. India) and

then operates and manages the entity and its assets as part of

the multinational business of the investing entity

Definition

• Formal definition

• Government Strategies

• Why FDI

• Types of FDI

• Factors influencing FDI inflow

• Problem of regional inequality

• SWOT analysis

• FDI in retail sector

• Case studies : POSCO

• India Vs China

Contents

Anti FDI inflows 1969-1975

Selective FDI inflows 1975-1991

Pro-FDI inflows after 1991

Government Strategies in India

FDI raises the investment in the host economy which by multiplier effect leads to increase in employment->income->savings

It provides latest machinery, state of art technology, skill, managerial know how

Improving country’s trade balance

Wide and varied choices to consumers

Quality goods

Breaking of domestic monopolies

Contributes to corporate tax revenue

Makes industry internationally competitive

Why FDI

• Direct Investment in new facilities /expansion of existing facilities

• To create new production capacity and jobs, transfer of technology

• Profit do not feed back to local economy but to multinational’s home economy

Greenfield Investment

• Transfer of existing assets from local firms to foreign firms

• Cross – border mergers : assets and operation of firms from different countries are combined to establish a new legal entity

• Cross – Border Acquisitions : control of assets and operations is transferred to foreign company by its local affiliate company

• No long term benefit to local economy

Mergers & Acquisitions

• Investment in the same industry abroad as a firm operates in at home

Horizontal Foreign Direct

Investment

• Backward Vertical : Industry abroad provides inputs for a firm’s domestic production process

• Forward Vertical : Industry Abroad sells the outputs of a firm’s domestic production process

Vertical Foreign Direct

Investment

Typ

es O

f FD

I

• No prior approval of government of RBI in all activities / sectors as specified in the consolidates FDI policy

Automatic

• Activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, and Ministry of Finance

Government

Routes to enter in FDI

• Economic, political social stability

Policy framework

• Standard of treatment of foreign affiliates

Rules regarding entry & operations

• Tax policy

Trade policy(Barriers: tariff and non-tariff)

Host country determinants

Resource seeking

Raw materials

Low-cost unskilled labour

Skilled labour

Infrastructure (ports , roads ,

power & telecom)

Economic Determinants

• Regional inequality in the FDI inflows in india.

Equity challenge

• Implementation of policies, rules and regulations

Federal challenge

• Get out of vote – centric approach

Political challenge

• underexploited and unexploited resources exist

Resource challenge

In ground reality it’s only PARTIALLY true

Reasons for Regional

Inequality

Literacy

Skilled Labour

Infrastruc-ture

Installed Electricity

The states need to improve basic infrastructure rather than enhancing the concessions to foreign investors

Clearance required from the government and the role of

export councils

Clear inequalities within the country

What china has achieved and India has not succeeded is

making backward states as key economic destinations.

What needs to be done ?

Strength• Effective control of wastage of farm produce

• Flow of foreign exchange into the country

• Generates revenue through tax

• Variety to consumers

Weakness•State Governments to decide on implementation of FDI

•Relaxation of mandatory local sourcing criteria in case of FDI in single brand retail

• Investment in back-end infrastructure not including costs of land etc.

Opportunities•Small manufacturers can expand their business

operations

•Elimination of middle men , greater transparency and direct procurement from farmers is likely to benefit farmers to a great extent

•New technology, improvement in supply chains, packaging, storing is expected to greatly reduce wastages.

•Brings in best management practices and training to youth.

Threats• Manufacturing sector at its low, unprepared to

absorb population likely to be displaced.

• Ambiguity on the definition of small scale industries.

• Poses a great threat to unorganized retailers, which constitutes 92% of the retail sector.

• Predatory pricing, monopolistic practices and cartelization.

SWOT ANALYSIS

This sector accounts for 14-15% of GDP therefore, an attractive investment outlet

India’s retail sector

Organized

Unorganized

Shorten the supply chain

Rid farmers of middlemen

Providing them large shares of the selling price.

FDI in retail

Unlikely to outcompete the “kirana” stores because of :

low level income of majority of population

lack transport facilities to reach such supermarkets as they are in outskirts

Lower level income people can neither afford nor store goods at home

both the sectors organized and unorganized have different clientele altogether

Studies conducted In USA (Sobel and Dean 2008)denies any relation of mart’s entry on small

retailers

They’ll contribute to social objectives through their pursuit of profits.

Farming technology and efficiency can be improved

Impact of FDI in retail

Case Study

POSCO

POSCO

The End : POSCO India

Various REGULATORY DELAYS and CONTROVERSIESprevented the company from starting construction.

The memorandum expired in June 2011, and, it has not been renewed.

Apart from Odisha, POSCO India has project sites in the Karnataka state and exited from it too in june 2013

FDI - India Vs China

Corruption

Bureaucratic inefficiencies

Land acquiring

Environmental clearances

Administrative loopholes

Policy paralysis

So, what's wrong?

Infrastructure investment

Abundance of labor and its low cost

More flexible and better labor laws

Political system ad stability

Rapid economic growth

consumer purchasing power , labor climate , rate of return, tax regime and entry and exit procedure

China is better in

• Foreign Direct Investment: Impact on Indian Economy Bhavya Malhotra Sri

Aurobindo College, University Of Delhi

• YOJANA a development monthly. Edition December 2014

• http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%

20Statistics%20on%20Indian%20Economy

• FDI in India’s Retail : CMA JayashreeRamanan, Dr. K.P.V.Ramanakumar , IOSR

Journal of Business and Management

References

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