Introduction Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other

than that in which the foreign direct investor is based. Foreign direct investment (FDI) is aiso defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment. Foreign Direct Investment (FDI) flows have increased dramatically in last few decades. As developing countries, particularly in Asia, remove restrictions and implement policies to attract FDI inflows, trade and investment have become increasingly intertwined. As such, there have been growing calls for a multilateral framework of foreign investment rules to be negotiated under the auspices of the World Trade Organization (WTO). This paper reviews developments in FDI flows and their impacts in developing Asia, and the importance of the policy context in which those flows occur. It discusses advantages and disadvantages of including FDI in WTO negotiations, and related policy options for developing Asian economies.

Different Types of FDI

By Direction Inward:
Inward foreign direct investment is a particular form of inward investment when foreign capital is invested in local resources. Inward FDI is encouraged by:

Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions The thought is that the long term gain is worth more than the short term loss of income

Inward FDI is restricted by:

Ownership restraints or limits Differential performance requirements

Outward: Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign commodity country.

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 home country or on repatriated profits Subsidies for local businesses Leftist government policies that support the nationalization of industries (or at least a modicum of government control) Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labour markets and agriculture. Security industries are often kept safe from outwards FDI to ensure localised state control of the military industrial complex

By Target Greenfield investment

Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. Mergers and Acquisitions Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI. Horizontal FDI Horizontal FDI occurs when the multinational undertakes the same production to activities in multiple countries.

Vertical FDI Backward Vertical FDI Where an industry abroad provides inputs for a firm's domestic productions. Forward Vertical FDI Where an industry abroad sells the outputs of a firm's domestic production.

By Motive
FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm: Resource-Seeking Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980s by Accounting, Advertising and Law firms. Efficiency-Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Strategic-Asset-Seeking A tactical investment to prevent the gain of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it. Benefits of Foreign Direct Investment One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.

This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95. Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country. The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country. Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country. Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken. Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.

It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level. It becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises. Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country. The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves. Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment. Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution. At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor. The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors. At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company. This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world. FOREIGN DIRECT INVESTMENT IN INDIA

Investment in Indian market India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No company, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies. India has in the recent years emerged as a favored destination for investment in various sectors like Power generation, Heavy Machinery, Infrastructure project, Telecom, Communication, Software etc. Various hurdles that existed in the economy earlier have been removed as a result of the winds of liberalization sweeping the country. India has now opened its doors to foreign investment in a major way. Non-Resident Indians and Multinational Companies have to follow certain rules and regulations prior to investment. Policy FDI upto 100% 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 in the same or allied field, All proposals relating to acquisition of shares in an existing Indian company by a foreign/NRI investor. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion. Automatic Route FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. Government approval route

All activities which are not covered under the automatic route, prior Government approval for FDI/NRI shall be necessary. Areas/sectors/activities hitherto not open to FDI/NRI investment shall continue to be so unless otherwise decided and notified by Government. An investor can make an application for prior Government approval even when the proposed activity is under the automatic route. Procedure for obtaining Government approval -FIPB All proposals for foreign investment requiring Government approval are considered for approval by the Foreign Investment Promotion Board (FIPB). The FIPB also grants composite approvals involving foreign investment/foreign technical collaboration. For seeking the approval for FDI other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted to the Department of Economic Affairs (DEA), Ministry of Finance. FDI from NRI & for 100% EOU FDI applications with NRI Investments and 100% EOU should be submitted to the Public Relation & Complaint (PR&C) Seetion of Secretariat of Industrial Assistance (SIA), Department of Industrial Policy & Promotion. FDI Prohibited FDI is not permissible in the following cases i. Gambling and Betting, or ii. Lottery Business, or iii. Business of chit fund iv. Nidhi Company v. Housing and Real Estate business. vi. Trading in Transferable Development Rights (TDRs) vii. Retail Trading viii. Atomic Energy ix. Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations(other than Tea plantations) FDI in EOUs/SEZs/Industrial Park/EHTP/STP Special Economic Zones (SEZs)

100% FDI is permitted under automatic route for setting up of special Economic Zone. Units in SEZ qualify for approval through automatic route subject to sectoral norms. Details about the type of activities permitted are available in the Foreign Trade Policy issued by Department of Commerce. Proposals not covered under the automatic route require approval by FIPB.. 100% Export Oriented Units (EOUs) 100% FDI is permitted under automatic route for setting up 100% EOU, subject to sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB. Industrial Park 100% FDI is permitted under automatic route for setting up of Industrial Park Electronic Hardware Technology Park (EHTP) Units All proposals for FDI/NRI investment in EHTP Units are eligible for approval under automatic route. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB. Software Technology park Units All proposals for FDI/NRI investment in STP Units are eligible for approval under automatic route. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB WHY FDI PREFERED OVER FII? 1. FDI is more stable than FII 2. FDI aims to increase the productivity/capacity 3. Along with cash it brings better management, technology etc. 4. FDI is a long term investment while FII is generally not for such long time. Foreign Direct Investment (FDI) is permited 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.

And are in percentage of : n Banking - 74%

n Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) 100% n Insurance - 26% n Telecommunications - 74% n Private petrol refining - 100% n Construction development - 100% n Coal & lignite - 74% n Trading - 51% n Electricity - 100% n Pharmaceuticals - 100% n Transportation infrastructure - 100 % n Tourism - 100% n Mining - 74% n Advertising - 100% n Airports - 74% n Films - 100% n Domestic airlines - 49% n Mass transit - 100% n Pollution control - 100% n Print media - 26% for newspapers and current events, 100 % for scientific and technical periodicals FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite.

 Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Gambling and Betting Lottery Business Atomic Energy Agriculture (with certain exceptions) and Plantations (Other than Tea plantations Factors affecting FDI Inflows in India Domestic market potentials Low wage rates Low transactions costs High rates of return Labour mobility Matured capital market Modern financial system Efficient infrastructure Established legal and institutional set-up Transparent rules and regulations Administrative speed and efficiency Special economic zones, EPZs etc. Fourth largest economy in terms of PPP adjusted GDP after USA, China and Japan One of ten fastest economies of the world Largest pool of technical manpower Demographic dividend- youngest workforce Rich in mineral and natural resources Major country in agrl and industrial products Fiscal incentives and investment environment

 Low wage rates and low production costs High Return and Huge domestic market Well developed banking and capital market. Dynamic private sector Sectors attracting FDI 1. Service Although the share of the services sector has been declining when compared with FY2007, it still has the largest share at 29.4% as of FY2009 (12-months ended March 2009). FDI in the services sector remained largely stable at US$10.3 billion in FY2009 compared with US$10.2 billion FY2008, but increased from US$7.9 billion in FY2007. Within services, the financial services segment accounts for bulk of the inflows, followed by the IT/BPO segment. 2. Real estate & Construction Liberalization of laws related to FDI investments over the last few years has helped to increase foreign investments into the real estate and construction sector. In FY2009, the real estate and construction investments are estimated to be at US$4.8 billion compared with US$3.9 billion in FY2008 and US$1.5 billion in FY2007. 3. Manufacturing Investment in the manufacturing sector has improved significantly over the last two years as the investment climate has improved. Of course the rising size of the domestic market appears to be one reason explaining this trend; we believe the gradual improvement in infrastructure investments and deregulation are also helping improve the business environment. For instance, infrastructure investments have increased to 5.8% of GDP (US$68 billion) in FY2009 from 3.4% of GDP (US$15.4 billion) in FY2000. The key sub-segments that are attracting manufacturing investments include metallurgical industries, the automobile industry, electrical equipment and chemicals. FDI outflow also increasing: Increasing Forex reserves and rising capital inflows have over the years encouraged the central bank to liberalize the limits for foreign investment abroad. Over the last three years, the RBI has increased the limit for foreign investments by local companies from 100% of net worth to 400% of net worth, under automatic route. Moreover, Indian companies have also emerged in size and managerial capability to be able to make acquisitions outside the country. In FY2009, total FDI outflows rose to US$17.5 billion from US$5.9 billion in FY2006. Going Forward: India is likely to further improve its position in global FDI ranking, for several reasons such as India is continuing to expand as a major destination for services sector outsourcing.

Second, there should be a steady increase in FDI focused on growing domestic market opportunities, especially in consumer goods, real estate and infrastructure. Third, the positive trend of globalization of the capital markets will mean increased acquisition of shares by foreign companies ensuring higher FDI inflows. We believe that FDI in manufacturing will also improve further over the next 2-3 years as there is progress on critical issues such as infrastructure. Indeed, with India gradually catching up to China on GDP growth, it would not be surprising to see India reach very close to China on FDI inflows over the next 4-5 years. Conclusion Foreign direct investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI may be undertaken by individuals as well as business entities. Foreign direct investment (FDI) continues to gain in importance as a form of international economic transactions and as an instrument of international economic integration. The rate of growth of worldwide FDI inflows in the past two decades has substantially exceeded that of worldwide gross domestic product (GDP), exports and domestic investment. Transnational corporations (TNCs) account for an increasing share and, in some cases, a substantial part of the assets, employment, domestic capital formation, research and development, sales and trade of many countries and have become one of the driving forces of integration in the world economy.