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INTRODUCTION FDI 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 corporations 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 labour 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 worlds 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 resulting Outward foreign direct in investment ,

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. 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. Stocks, bonds, other forms of debt. Differs from FDI, which is the investment in physical assets.

1.1 Definition Foreign 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 10per cent 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 10per cent 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. 1.2 History In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. 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.

1.3 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.

1.4Types of FDI

1.4.1 BY DIRECTION: Outward FDIs

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.'
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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.

1.4.2 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. Liability of foreignness - the costs of doing business abroad resulting in a competitive disadvantage.

1.5 Methods of Foreign Direct Investments The foreign direct investor may acquire 10per cent 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

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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

Foreign direct investment incentives may take the following forms:

Low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

2. ENTRY MODE
The manner in which a firm chooses to enter a foreign market through FDI. - International franchising - Branches - Contractual alliances - Equity joint ventures - Wholly foreign-owned subsidiaries Investment approaches: - Greenfield investment (building a new facility) Cross-border mergers - Cross-border acquisitions - Sharing existing facilities

2.1 Why is FDI important for any consideration of going global? The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: 1 . Avoiding foreign government pressure for local production. 2. Circumventing trade barriers, hidden and otherwise. 3. Making the move from domestic export sales to a locally-based national
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sales office. 4. Capability to increase total production capacity. 5. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SME s, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SME s in particular are now focusing on access to markets, access to expertise and most of all access to technology.

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3.
FOREIGN DIRECT INVESTMENT IN INDIA The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second fastest growing major economy in the world, with a GDP growth rate of 8.9per cent at the end of the first quarter of 2006-2007. However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal. The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering. India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. India faces a burgeoning population and the challenge of
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reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to the green revolution and economic reforms. FDI up to 100per cent is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government: Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a previous/existing venture/tie up in India FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI foreign direct investment and FII foreign institutional investors are a separate case study while preparing a report on FDI and economic growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India and outflow from India. The FDI statistics and data are evident of the emergence of India as both a potential investment market and investing country. FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort - but with $5.3 billion in FDI . India gets less than 10per cent of the FDI of China. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have
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India has continually

been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100per cent of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40per cent of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45per cent of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10per cent of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts? Although the Chinese Approval process is complex; it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.

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4. FOREIGN DIRECT INVESTMENT: INDIAN SCENARIO 4.1 FDI is permitted as under the following forms of investments Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments. 4.2 Sector Specific Foreign Direct Investment in India 4.2.1 Hotel & Tourism: FDI in Hotel & Tourism sector in India 100per cent FDI is permissible in the sector on the automatic route, The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is granted if i. up to 3per cent of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. ii. up to 3per cent of net turnover is payable for franchising and marketing/publicity support fee, and up to 10per cent of gross operating profit is payable for management fee, including incentive fee.

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4.2.2 Private Sector Banking: Non-Banking Financial Companies (NBFC) 49per cent FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit b. Minimum Capitalization Norms for fund based NBFCs:
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i) For FDI up to 51per cent - US$ 0.5 million to be brought upfront ii) For FDI above 51per cent and up to 75per cent - US $ 5 million to be brought upfront iii) For FDI above 75per cent and up to 100per cent - US $ 50 million out of which US $ 7.5 million to be brought up front and the balance in 24 months c. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. d. Foreign investors can set up 100per cent operating subsidiaries without the condition to disinvest a minimum of 25per cent of its equity to Indian entities, e. Joint Venture operating NBFC's that have 75per cent or less than 75per cent foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. appropriate guidelines in this regard. 4.2.3 Insurance Sector: FDI in Insurance sector in India FDI up to 26per cent in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)
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RBI would issue

4.2.4 Telecommunication: FDI in Telecommunication sector i. In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49per cent subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions. ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74per cent with FDI, beyond 49per cent requiring Government approval. These services would be subject to licensing and security requirements. iii. iv. No equity cap is applicable to manufacturing activities. FDI up to 100per cent is allowed for the following activities in the telecom sector : a. ISPs not providing gateways (both for satellite and submarine cables); b. Infrastructure Providers providing dark fiber (IP Category 1); c. Electronic Mail; and d. Voice Mail The above would be subject to the following conditions: e. FDI up to 100per cent is allowed subject to the condition that such companies would divest 26per cent of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. f. The above services would be subject to licensing and security requirements, wherever required.
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Proposals for FDI beyond 49per cent shall be considered by FIPB on case to case basis. 4.2.5 Trading: FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51per cent provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i. 100per cent FDI is permitted in case of trading companies for the following activities:

exports; bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75per cent is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector
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e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing FDI up to 100per cent permitted for e-commerce activities subject to the condition that such companies would divest 26per cent of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) ecommerce and not in retail trading. 4.2.6 Power: FDI In Power Sector in India Up to 100per cent FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment. 4.2.7 Drugs & Pharmaceuticals FDI up to 100per cent is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

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FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval. 4.2.8 Roads, Highways, Ports and Harbors FDI up to 100per cent under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors. 4.3 Special Facilities and Rules for NRI's and OCB's NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc. 2. Up to 100per cent equity with full repatriation facility for capital and dividends in the following sectors i. ii. iii. iv. vi. vii. viii. ix. xi. xii. 34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Sick Industrial Units Industries Requiring Compulsory Licensing

v. Shipping

x. Highways, Bridges and Ports

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3. Up to 40per cent Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40per cent of the new Capital Issues.On non-repatriation basis: Up to 100per cent Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. 4. Portfolio Investment on repatriation basis: Up to 1per cent of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. 5. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24per cent of the Paid Up Value of the Company. 6. Other Facilities: Income Tax is at a Flat Rate of 20per cent on Income arising from Shares or Debentures of an Indian

4.4 India Further Opens up Key Sectors for Foreign Investment India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26per cent to 49per cent. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. FDI in Civil aviation up to 74per cent will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities. 100per cent FDI in aircraft maintenance and repair operations has also been allowed.

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But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has decided to allow 26per cent FDI and 23per cent FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5per cent of the stake. Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100per cent FDI in mining of titanium, a mineral which is abundant in India. Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multibrand retail are out of the policy radar because of political compulsions. Sector-wise FDI Inflows ( From April 2000 to January 2010) AMOUNT OF FDI SECTOR INFLOWS In Rs Million Services Sector 787420.81 In US$ Million 18118.40 8876.43 6215.55 5029.01 3310.23 5118.85 3129.66
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PERCENT OF TOTAL FDI INFLOWS (In terms of Rs)

22.39 11.12 7.83 6.07 4.17 6.20 3.90

Computer Software 391109.74 & hardware Telecommunications 275441.38 Construction Activities Automobile Housing & Real estate Power 213595.12 146799.41 217936.02 137089.37

Chemicals (Other than Fertilizers) Ports Metallurgical industries Electrical Equipments

87008.07

1964.06

2.47

63290.50 109563.20 57379.63

1551.88 2612.85 1324.92 1621.03 2244.17 1480.94 1112.92 1217.50 760.32 748.57 1194.20 4162.55

1.80 3.11 1.63 2.01 2.68 1.77 1.38 1.49 0.98 0.96 1.48 5.19 100.00

Cement & Gypsum 70781.19 Products Petroleum & Natural 94417.17 Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics Information & Broadcasting (Incl. Print media) Misc. industries Total Investment in all Sector Stock Swapped (from 2002 to 2008) Advance Inflows (from 2000 2004) RBI's NRI Schemes Grand Total of to 62416.85 48647.43 52500.05 34362.49 33914.75 52115.90 180561.54 3517310.79 81010.63

145466.35

3391.07

89622.22

1962.82

5330.60

121.33

3757729.96 86395.85 -

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5.
FOREIGN DIRECT INVESTMENT IN CHINA

The evolution of Chinas open door policy in the aspect of FDI needs to be understood in the wider context of China s Political and economic reform, in particular the difficult transition from a planning to a market economy as Deng Xiaoping once said, reform in China is like crossing the river by feeling the stones on the riverbed. This message has been translated into a series of guiding principles for the reforms. The Hard and Soft Investment Environment in China Based on the policy evolution and the economic progress we can now delineate the favorable and not so favorable factors responsible for huge flow of FDI into China. Fengli and Jingli (1990) have classified factors under Hard and Soft Environment as follows: Foreign Investment Environment Hard Environment Soft Environment

5.1 KEY FACTORS o Transportation o Tele Communications o Energy Supply o Public Utilities o Other Infrastructure o Raw Material & components supplies
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o Historical Elements o Political Background o Cultural and social structure o Economic Regime o Social Securities & welfare o Law & Legal System o Human resources o Labour Relations o Government Services o Business Services

Whereas the hard environment refers to the conditions and characteristics of the tangible infrastructure, many of which are readily measurable in quantitative terms, the soft environment factors are mostly intangible and are very difficult to measure, but they are most often critical to the operation and development of foreign invested enterprises.

5.2 Foreign Direct Investment in Chinas Economic Development Chinese economic development since 1978 can be broadly conceptualized as sequential process with the following phases: 1978-84: Agricultural transformation, massive increases in rural income and saving and release of labour to industry. 1984-92: Growth of Township-Village Enterprises (TVEs) through

exploration of rural savings and demand and simultaneous explosion of FDIoverwhelmingly from the overseas Chinese, in the Special Economic Zones

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and related coastal areas, primarily for export of labour-intensive light manufactures. 1992-2000: Proliferation of Multinational Investments in heavier, more capital and technology intensive industries, and infrastructure, mainly for the domestic market or the non-tradable sector.

Further the following basic facts of Chinese economic growth amplify the impact of FDI on its economy: The Chinese economy has been growing of nearly 10 percent a year since last two decades, the fastest rate of growth in the world. The savings rate in China has been exceptionally high at almost 35 percent in 1994. The magnitude of poverty has reduced to 6 percent from 22 percent. The World Bank (2002) estimates also have substantiated it. Nearly 190 million people have been pulled out of the poverty. The enormous amount of investments that have been made in infrastructure, especially in power and real estates, transportation in SEZs, boosted the overall growth rates.

5.3 Poverty Reduction in China In terms of number of people escaping absolute income poverty, china has undoubtedly made the single largest contribution to global poverty reduction of any country in the past 20 years. Using official income poverty lines as a bench mark,(official income poverty line for china has been set at about $0.70 per day which has base year of 1993 PPP or international prices) the number of poor in
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rural China fell from 250 million in 1978, the first year of the economic reforms, to around 34 million in 1999. These gains are impressive not in themselves but also in comparison with the trends in much of the rest of the world. However, it is perhaps legitimate to model the Chinese development process as one in which the initial growth of huge domestic market through an Agricultural Revolution, followed by rural industrialization and export explosion with its domestic multiplier effects, acted as an irresistible lure for the inward rush of large MNCs. The process gained momentum with the unfolding of international division of labour. This model implies a two-tier FDI process: 1. Mainly export-oriented investment in light manufacturing by the overseas Chinese; 2. An accelerating in flow of multinational investment eager to establish a presence in what was apparently going to be, in a few years, the largest domestic market. 5.4 FDI Policy and Environment China has a fairly restrictive policy frame work with all Foreign Direct Investment Proposals being approved on a case-by case basis , FDI is encouraged in most of the manufacturing industries and agricultural activities, though all industries in the service sector are closed to foreign -investment 100% foreign ownership is permitted in export- oriented hi-tech industries. China permits repatriation of profits only out of net foreign exchange earnings.

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The important highlights of the FDI proposals are listed here under: All FDI Proposals are approved automatically, except in manufacturing and agricultural activities where it is done by case-by-case basis. Repatriation of profits allowed only on net foreign exchange earnings. Most enterprises exempted from duties on import of capital goods. Corporate income taxed at a flat rate of 33 per cent tax holiday available for all enterprises.

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6.
EFFECT OF FDI ON INDIA AND CHINESE ECONOMY

6.1 Introduction India and China are the two emerging economic giants of the developing world, both situated in Asia with 37% of world population and with more than 8%

growth in their respective GDP of their economies. Both the economies have immense natural resources, skilled and unskilled, cheap but quality labour force, huge domestic market and above all the relatively stable political environment. Both the economies hence have vast potential to attract Foreign Direct Investment (FDI) to serve the local market and to become a more important part of the global integration. China got independence in 1949, after 2 years of India s political Independence (1947), but today, China has surged far ahead of India in socio-economic development indicators. After Chinas entry into World Trade Organisation (WTO) China has emerged into the most attractive FDI destination in the developing world. The UNCTAD and Asian Development Outlook highlight the fact that Indias FDI is far below that of China and there is a wide gap between approvals and actual realization. The FDI in India is just 3.4% of FDI flows as a percentage of Gross Fixed Capital Formation in India by 2004 and 5.9% of FDI stocks as a percentage of GDP by 2004, whereas in China it was 8.2% of FDI flows as a percentage of Gross Fixed Capital Formation and 34.9% of FDI stocks as a percentage of GDP during the same year, In absolute terms China attracted US$ 53,510 million in 2003 whereas India attracted only US$3420 million and during 2004 China attracted US$ 60,600 million, whereas India attracted only 4374 million US$ during the same period.
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6.2 The impact of FDI on various variables:

6.2.1 Macro Economic The impact of FDI separately on various macro economic variables. As we all by now known, FDI involves the transfer managerial resources to the host country. There have been disagreements about the costs borne and the benefits enjoy by host and recipient country between pro-liberalization and antiliberalization/anti-market views. One country losses need not necessarily be another country gains. Kindelberger (1969) argues that the relationship arising from the FDI process is not a zero sum game. Ex-ante, both countries must believe that the expected benefits to them must be greater than the costs to be borne by them, because an agreement would not otherwise be reached and the under lying project would not be initiated. However, believing in something exante is not guarantee that it materializes ex-post. The impact of FDI on host country can be classified into economic, political, and social effects. The main intention at heart of every MNC is profitability and hence they invest where the returns are high, buy raw materials including cheap labour where it is relatively cheap. MNCs succeed because of market imperfections and cast doubts on it as claim on welfare of host country. The conventional wisdom that FDI is always improving is no longer a conventional wisdom (Leahy and Montangna, 2000). The economic effect of FDI can be classified into micro and macro effects.

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6.2.2 Micro Effects: The micro effects of FDI reflect on structural changes in the economic and industrial organization. An important issue is whether FDI is conducive to the creations of competitive environment in the host country. Markusen and Venables (1997) put forward two simple analysis channels to find the micro effect of FDI. They are: Product Market Competition (PMC) Through PMC the MNCs will be substituting the products of domestic firms in host country. Linkage Effect MNCs may work as complimentary firms to domestic firms in host country where it is possible for FDI to act as a catalyst leading to the development of local industry. FDI may have benefits, but it will not come without costs. The decade of liberalization and the impact of the FDI on macro economic factors in India have to be found in this study. To assess the impact of FDI on various relevant macro-economic variables namely exports, private final consumption expenditure, Forex, Gross Domestic Investment, gross domestic savings, trade balance, balance of payments.

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7. FDI IN INDIA AND CHINA; A COMPARATIVE ANALYSIS China has been receiving substantial FDI compared to India. Although prior to 1980s India received higher FDI than China but because of the liberalization policy adopted by China in 1978, turned the tables in favor of China. Since late eighties and throughout nineties China has been in forefront of the developing world in terms of FDI inflows and hence economic development. The growth of FDI inflows in China has raised from 2.8 per cent in 1990 to 12.5 per cent by 2002 whereas in India also the FDI has grown by 10 per cent annually. In FDI stock as a percentage of GDP, China by 2002 had 36.2 per cent whereas India at the same time had 8.3 per cent of FDI stock as a percentage to GDP. Per capita FDI flows were 40.7 per cent in China during 2002 and at the same time it was 5.3 per cent in India. But of late, India s FDI is getting major boost and it had 153% of growth in 2006 over 2005. Hence India in order to keep pace with China has to speed the second generation reforms. The policies of china and India regarding FDI have become significantly more liberal during the past several years. The comparison of the two countries polices in attracting foreign investment gives us fair idea to indicate the reasons for the differences in inflows of FDI and will enable us to suggest how India can improve its investment climate.

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7.1 Reforms With open door policy adopted since 1979, China has tried to attract FDI to modernize its economy in its own way, capitalistic characters, within the socialistic system. FDI regime in China is delineated, in major investment laws and their implementing regulations, featuring control over foreign investment and requirements. In additions to these measures china offered number of incentives to attract FDIs since 1980s. India also gradually opened its economy since 1991 removing itself from license-control raj. But as RBI rightly points out .Despite all the talk, we are no where even close to being globalized in terms of any commonly used indicator of globalization. In fact, we are still one of the least globalised among major countries-however we look at it Due to lack of political consensus the labour reforms, fiscal reforms and freeing the economy from the iron grip of bureaucratic controls still has to take place in India 7.2 Policy Changes and Initiatives Indian government has regulated the inflow of FDI through a highly selective policy. Indias first generation reforms in 1991, was restrictive, limiting the maximum foreign equity participation generally to 51 percent though FIPB. It also gave the discretionary powers to FIPB to permit 100 percent equity ownership in some cases. It also gave liberal tax concessions to foreign enterprises. Approvals for opening liaison offices by foreign companies were liberalized and procedures for the out ward remittance of royalties and technical fees were streamlined. Bhagawati (1993) rightly points out that the policy changes were neither credible nor momentum-giving reforms as they were not comprehensive in their scope and did not go for enough to make a significant impact.
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Whereas China, too, grants preferential tax treatment to enterprises set up in Special Economic Zones and specified coastal cities. Enterprises that qualify as Export-oriented or technologically advanced also avail of a 50 percent reduction in the income tax rate. A crucial characteristic missing in the Indian policy is the absence of tax exemption on imported materials and equipment, some tax reduction is possible in the case of power projects, coal mining, and petroleum refining projects. 7.3 Employment and Infrastructure The Indian FDI Policy, nevertheless, scores over the policies of other competing countries in the matter of employment of foreign personal while restrictions on their employment do not exist in India, they are prevalent in most countries in the ASEAN countries as well as in China. Further, though India has a large number of free trade Zones and 100 per cent export oriented units providing similar benefits, their functioning is hampered by location-specific or infrastructural problems. These schemes require greater attention of the policy makers in India. In terms of the policy areas, simplification of the entry routes, raising of equity ceiling, introduction of a negative list, simplification of the operating systems and procedures, IPR legislation and a comprehensive dispute settlement system are critical. Unless India and its policies are marketed vigorously, the anticipated fallouts from policy liberalization will remain sub optimal. One way to create a better image of India as a business location will be to introduce stability in the system incremental policy changes as is being done in the case of the power and telecom sectors can cause total confusion regarding the sincerity and stability of any policy regime.

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7.4 Growth rate and Growing market With 37 percent of the worlds population, India and china are potentially the worlds largest markets and the biggest host countries for FDI from the European Union. Investment from abroad has been a major driving force in the attainment of high growth rates in these countries. It became clear to both the Chinese and Indian governments that their economic takeoff could only be achieved by attracting technology embodied foreign investment. Given their size and their level of development, china and India are apparently direct competitors for FDI. In fact, size of domestic market has been the most important factor responsible for the China fever with about 1.2 billion population and the economy growing at an average rate of 10 percent for the past one decade, China has emerged as one of the fastest expanding markets in the world. Hence, large members of Multinational Corporations from the USA, Europe, Japan, and South Korea have been moving into china to have a slice of investment opportunities. India is not far behind in terms of the size of market it offers to investors, the size of Indian market, which has over 350 million people in the middle-income group, is considered to be the most important factor attracting overseas investors. India, also is second largest pool of scientific, and technical manpower in the world, the net result is India is exporting a very high quality human resources to the world. The wages in India are also one of the lowest in the world. 7.5 Sunrise Sector Investment Although India is a First-Phase FDI recipient China as a more mature FDI recipient attracts more investment in the sunrise sectors. Totally in opposition to the Indian situation, the EU, a relatively small investor in China, tends to invest more in the high-tech sectors than its Japanese or American counterparts.
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China example should be mentioned, so long as foreign capital is flowing in and particularly in those areas where China is lacking, the Chinese authority is not bothered about the type of technology the Foreign Investor is bringing. The system is regimented and it has ruled about a debate in political circles, which are very common in a democratic set up in India. This type of system has been found to be very suitable for the foreign investors. South Korea also has been able to import modern technology in crucial industries so that it can maintain competitive edge in the export front.

7.6 FDI by Non-resident Chinese and Indians (NRCs and NRIs) Chinas development as a haven for FDI and a source of labour intensive exports is a logical as well as chronological sequel to the pacific miracle. India s development has no such organic link with the East Asian experience. Expatriate Indian entrepreneurs played, but a minor role in East Asia s growth and expatriate investment had a negligible share in India s total FDI. Of course, the Open Door is a far more recent phenomenon in India, dating back only to 1991, as opposed to the early 1980s in China. However, enough time has passed since 1991 to assert that India has not experienced anything like the early surge of expatriate investment in China has been accelerating after a slow start and its growth curve is not too similar to that of early MNC investment in china. Nor is the character of MNC investment very different in the two countries. Largely, in both countries, such investment has been oriented towards the domestic market rather than to exports. It has been attracted by economics of scale and large market sizes, not primarily by low-wage costs. Non-resident Indian (NRI) Investment, on the other hand, has been far more export-oriented. It has also tended to favor small-scale and labour-intensive technologies.

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During 1983, early stages of Chinese reforms NRCs contributed greatly for surge in FDI inflows into China by contributing more than 66 per cent on average in between 1983 to 1990. They initially were contributing around 59 per cent that rose to 75 per cent in 1989. India was not fortunate to get such a monumental start from NRIs in boosting FDI in India. Though India opened her doors to MNCs with a bang, NRIs did not do their role as their counter part, NRCs did for China .NRCs contributed 71.28 in 1991, which rose to 82.91 per cent in 1992, though marginally declined to 64.96 per cent by 1997. The NRIs were no match, as their peak contribution of 45.59 per cent came when India opened her doors for MNCs. Later on, they demanded and got more provisions rather than increasing their share in total FDI. Their contribution instead of increasing after getting more incentives is shrinking and it reached rock bottom at 2.69 per cent during 1998. Because of which China could attract about 25 per cent of total FDI inflow into the developing countries. The next country in the line, that is, Brazil could attract only 10 per cent. The predominant position of China in attracting FDI for 1995 onwards cannot be explained by normal economic parameter. China on all accounts fair better in the factors of investment climate. FDI as percentage of gross capital formation is 10.1 per cent in 2001 and India during the same period is 3.2 per cent. In the entry regulation, India is restrictive and China permits authorised investors only to enter but whereas once enter the repatriation of income and capital is free in both the countries. The composite international country risk guide rating of both the countries are good, but China's rating is excellent. The institutional investor credit rating ranks the countries on the chances of countries default, where China's rating is good at 59 per cent whereas India it is at 47.3 per cent. The Euro-money country credit worthiness rating which studies the risk of investing in an economy, rates both the countries as equally good. The Moody's sovereign Foreign or domestic
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currency long term and debt rating ranges from AAA which is extremely strong capacity to C which is default ranks China's foreign currency ahead of India, but for the domestic currency it has not calculator but for India both is at Ba2 which refers to fair rating. 7.7 Similarities between India and China In both cases, the approach is a multi-stage approach; Reforms proceed by a series of steps that are constantly under review. The use of a five-year plan in both countries as a synthetic framework of economic policy helps in designing the reforms. There are many common instruments of the economic reforms in the two countries: outward-looking policies; attraction of FDI through fiscal incentive; Creation of free trade zones (Special Economic Zones (SEZs) in China, and Export Processing Zones (EPZs) in India); Emphasis on technology-embodied FDI; willingness to tackle the regional problem. 7.8 Major Differences between India and China The first dividing factor is the different positioning of the two countries on the learning curve. Since China initiated its new policy 12 years before India, it is well able to fine-tune its incentive package, whereas India, as a "first phase FDI recipient is primarily concerned with the revival of its growth rates. The approach has been gradual in both cases indeed, but in Chinese case, there is a continuous, logical, and chronological flow of policies and events, whereas in the Indian case, there is a series of spurts followed by contractions.

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 The Chinese five year plan is well thought of and is aimed at designing and implementing coherent strategic choices, whereas in India the decision to accept new foreign investor are taken on a case by case basis, a practice that leads to arbitrariness, and that militates against a coherent view. There are no clear policy guidelines for investment in different sectors, there are no clear strategic choices, and the threat to reverse some freshly born policies is all too vivid. Another major difference between the two countries is the role played by technology in the growth and development process. Technology imports and Technology Transfer (TT) are strongly encouraged in China. TT has become a sine qua non condition for a successful investment strategy in China. In an effort to foster industrial upgrading and restructuring, China has been spending heavily on imports of Technology, advanced machinery, and equipment worth US $ 18.4 billion during the period 1979 - 1994 (People s Daily 1996). Another major difference is that the objective of National Interest is much stronger in China than in India. In China, Sino-Foreign JVs and cooperative enterprises are required to abide strictly by the principle of sharing the common interest; both Chinese and foreign partners have to bear equal risk. In attracting FDI, China wants to maximize its own national interest by accepting beneficial inputs, while restricting and eliminating those which may have an unfavorable impact (Beijing Review, 1994). Those activities with an unfavorable impact are those that have resulted in the monopolization of the market in obstructions to the development of national industry, and that have created environmental pollution. In restricting foreign ownership to 51 per cent in some industries, India is also dedicated to the principle of national interest

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but the country allows foreign firms to gain quick returns on their investment regardless of the economic externalities. Just as striking, China is basically a homogenous society, dominated by the Hans race despite the presence of a few ethnic, religious and linguistic minorities in regions such as Tibet, Xingjian and Manchuria. India, in contrast, is a veritable museum with every conceivable variety of heterogeneous castes and religions, languages, cult and culture. The Chinese polity is a monolithic dictatorship of one party with a single individual wielding vast power, or at least influence. The Indian political system is a complex federal democracy with power so widely diffused that Galbraiths famous description of it as a functioning anarchy remains to this day its apt characterization. In its quest to increase FDI flows, the Indian government has not (yet) been able to discriminate between the beneficial and unfavorable activities. Some first steps in this direction are perceptible the environment ministry had made it mandatory for all thermal power stations to switch over to washed coal since 2000. The notoriously high ash content in Indian coal and the resulting carbon dioxide emissions from them, make them one of the most polluting industries. On the other hand, Indias poor performance in terms of competitiveness, quality of infrastructure and skills, productivity of labour, were responsible for less attractive ground for Foreign Direct Investment.

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7.9 Hindrances of India-China Anti competitive practicing & financing. Tax administration-High taxes. Regulations. Corruption Exchange rate Inflation Political Instability or uncertainty Infrastructure to taxes & regulations Functioning of the organized crime Environmental regulations Customs regulations Business regulations.

However, what is significant to note is that an internal IFC survey (foreign investor survey) has found that while the main business environment in India is better than China, but the legal and regulatory infrastructure for financial institutions, bankruptcy law and commercial law enforcement, and above all the corruption, Redtapesim, lack of transparency, bureaucratic hurdles makes India less attractive.

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8. CONCLUSION

A large number of changes that were introduced in the country s regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. The rich countries club, OECD rightly observed, The effective and thorough implementation of Chinas WTO Commitments would be critical to its success in achieving its potential in luring FDI. Besides, chinas success would also rely on its ability to carryout complementary reforms, to open up domestic markets, to improve the performance of state-owned enterprise, to better protect intellectual property rights and to speed up competition and judicial enforcement that are essential to the effective functioning of Chinas markets. Whereas India is still far behind China in becoming the attractive FDI destination, for the obvious reason such as power shortage, poor infrastructure, security consideration, absence of an exit policy etc. If India has to reach its target of attractive more FDI for its development, The Indian Policy makers should understand that the good intentions and mere plan layouts alone are not sufficient condition, but a bold aggressive third generation reforms is the need of the hour. Only then one can expect India to attract FDI to its potential and can become a popular investment destination as China.

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BIBLIOGRAPHY www.rbi.org www.fin.in.nic www.sebi.org

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