INTERNATIONAL INVESTMENT

Types of foreign investment

Two types

(1)Foreign direct investment (FDI) Wholly owned subsidiary Joint venture acuqisition (2)Portfolio investment Investments by FIIs Invesment in GDRs, FDRs, FCCBs etc.

(1) FDI : refers to investment in foreign country where Investor retains control over the investment. it typically takes the form of starting a subsidiary, acquiring a stake in existing firm or starting a joint venture in foreign country (2) Portfolio investment : if investor has only a sort of property interest in investing capital in buying equities,bonds or other

Contd..
Sequrities abroad it is refered to as portfolio investment. That is ,in the case of portfolio investment investor uses his capital to get return over it, but has no much control over the use of capital. FDI are governed by long term considerations because these investment cannot be easily liquidated. Hence factors like long term political stability, govt. policy, industrial & economic prospects etc. influence the FDI decision.

Contd..
portfolio investment , which can be liquidated fairly

easily, are infuenced by short term gains only. There are mainly 2 routes of portfolio investment in india, viz. by Foreign Institutional Investment (FIIs) like mutual funds & through Global Depository Receipts (GDRs), American Depository Receipts(ADRs),Foreign Currency Convertible Bonds (FCCBs)

SIGNIFICANCE OF FOREIGN INVESTMENT

Foreign capital & technology can play a important role in socio-economic development of a nation, & particularly for the development of developing countries. a classic ex is china. foreign investment may also help increase a countrys exports & reduce import requirement if such investment take place in export oriented & import competing indystries.

Contd..
(1) Domestic labour: they may get higher real wages

because of the increase in productivity. There might also be an expansaion of employment opporunities. (2)consumers: if foreign investment is cost reducing in a particular industry, consumers of the product may gain through lower product prices. If the invest. Is product-improving or productinnovating, consumers benefit from better quality products or new products.

Contd..
(3) Government : the increase in foreign trade & production resulting from foreign capital might increase the fiscal revenue of govt. (4) External economoies : foreign capital may bring in a number of indirect gains through realisation of external economies. For an instance, if foreign investment is used for development of infrastructure, this could stimulate domestic investment In industrial & other sectors.

LIMITATIONS & DANGERS OF FOREIGN CAPITAL

Foreign capital , both private & official (governmental

& institutional), have certain limitations. One of the important limitation to utilise foreign capital is absorptive capacity of the recepient country, i.e., the capacity of a country to utilise foreign capital effectively. Lack of infrastuctural facilities, technical know how, personnel, inputs, markets, feasible projects, inefficiency or inadequecy of machinery etc. are factors that affect the absorptive capacity.

Following criticism are levelled against foreign capital :

(1)Private foreign capital tends to flow to the high profit areas rather to priority sectors. (2)Technologies brought in by foreign investors may not be adopted to the consumption needs, size of domestic market, resources availability, stage of development of economy, etc. (3) Foreign capital sometimes interferes in the national politics. (4) Foreign investors sometime engages in unfair& unethical trade practices.

FACTORS AFFECTING INTERNATIONAL INVESTMENT

(1)RATE OF INTEREST: the most important stimuli to international capital movements is the difference of the rate of the rate of interest prevailing at different places. Capital has tendency to move from a low rate of interest to high rate of interest. (2)PROFITABILITY: private foreign capital movement is influenced by the profit motive. So, private foreign capital will be attracted to countries where return on investment is comparatively higher.

Contd..
(3)ECONOMIC CONDITIONS: particularly the market potential & infrastuctural facilities, influence private foreign capital will be attracted to countries have an important bearing on the market opportunities. (4)GOVERNMENT POLICIES : particularly towards foreign investment , foreign collabarations, profits ,taxation, foreign exchange control, tarrifs, & monetary,fiscal & other incentives are important factors that may influence foreign invest. In india.

Contd..
(4)POLITICAL FACTORS: like political stability, nature of important political parties & relations with other countries also influence capital movements.

CROSS BORDERS M&As

Cross border M&As has been the key driver of global

FDI since the late 1980s. A very significant aspect of recent FDI surge is that it is triggered to a large extent by cross-border M&As. For instance, total value of cross-border M&As with value of over $1 billion each alone accounted for 3/4th value of global FDI inflows in 2000. Cross-border M&As involve FDI in host country by merging with or acquiring an existing local firm. In the later case, acquisition involves an equity stake of 10 % or more.

Contd..
As an UN reports points out, one recent feature is that M &

As among large or dominant TNCs, resulting in even larger TNCs. The pharma. , automobile, telecomm. & financial industries are typical ex. Of industries in which such concentrations are observed. This trend significantly changes the industry stucture. For ex. Total no. of automobile makers may well decline to 5-10 by 2010, from the 1998 figure of 15. In pharma. Industry many markets are now controlled by a small no. of firms. In both these industries there have been a string of M&As. Major M&As in pharma. Includes Glaxo-smithcline Beecham,Pfizer Warner Lambert and Hoechst rhone.

Contd..
The liberlisation & deregulation of several vital

industries in many countries across the world have given an impetus to cross border M & As in both developed & developing countries. Increasing M & As in the service sector in general & financial industries in particular reflect the impact of liberlisation. Privatisation has been a very important stimulant to M & As. Banking, finance, insurance & telecomm. Industries have been witnessing a spate of M & As

FOREIGN INVESTMENT IN INDIA

The flow of direct foreign investment to India has been

comparatively limited because of type of industrial policy & the very cautious foreign investment policy followed by nation.

Direct foreign investment (private) in

India was adversly affected by the following factors.

Public sector was assigned a monopoly or dominant

position in the most important industries & therefore scope of private invest. Both domestic and foreign was limited.

Contd.
Govt. policy towards foreign capital was very selective.

Foreign inves. Was normally permitted only in high technology industries in priority areas & in export oriented industries. Corporate taxation was high & tax laws & procedures were complex.

FIIS INVESTMENTS
The Indian stock market was opened upto FII invest. In

1992-93 & since then there has been a significant increase in portfolio invest. By FIIs. Portfolio invest. Refers to cross-border transactions & positions involving debt or equity securities other than those included in direct invest. Or reserve assets. In India FIIs cover ovearseas pension funds, mutual funds, investment trusts, charitable trusts & societies, trustees or power of attorney holders incorporated or established outside India proposing to make proprietary investment. India is one of the largest recepients of portfolio inflows among emerging market economoies.(EMEs)

Contd..
According to the regulations, FIIs may invest only in:

securities in primary & secondary markets including shares, debantures & warrants of companies listed on a recognised stock exchange in India Units of schemes floated by domestic mutual funds including Unit trust of India, weather listed on a recognised stock exchange or not.

IMPORTANT SECTORS/INDUSTRIES OF INVESTMENT

One important criticism of the liberalisation of foreign

investment would take place mostly in non-priority sectors. However, lions share of foreign invest. In india since the liberlisation has gone to priority sectors. Now, several of priority industries , including infrastuctural sector, which were exclusively reserved for public sector is opened to foreign investment. From Jan. 1991 to sept. 2006 , following sectors / industries accounted for about 60% of FDI: electrical equipment,( including computer software & electronics) telecomm. ,energy, transportation, service sectors,chemicals other than fertilizers, drugs & pharmaceuticals, food processing mettalurgical industries. The service sector attracted the max. FDI inflows in 200607.

REGIONAL DISPERSION
The inward FDI is highly concentrated in a few areas.
2 regions- Delhi (consisting of Delhi, part of UP &

Haryana) & Mumbai (consisting of Maharashtra, Dadra,Nagar Haveli, Daman & Div) attract a largeshare of FDI in flow to India. Karnataka, tamilnadu,pondichery & andhrapradesh also receives large FDI.

SOURCES OF FDI TO INDIA

Mauritius & UK are the major FDI investors in India.
Other are US,

Netherland,Singapore,Japan,France,Switzerland & south Korea.

FOREIGN INVESTMENT BY INDIAN COMPANIES

Until 1991,Indian companies made very little invest.

Abroad.although govt. of Indias policy had been one of encouraging foreign invest. By Indian companies subject to certain conditions, several factors like domestic economic policy & domestic economic situation were deterrents to foreign invest. By Indian companies. Indian companies have established subsidiaries & joint ventures in a no. of countries in different manufacturing industries & service sectors.

SPURT IN FDI OUTFLOW:

Foreign investment , both in greenfield enterprises and M

&As is clearly a part of globalisation strategy of many Indian companies. Recently there has been a spurt in FDI by many Indian companies. Starategic M &AS have been finding favour with corporate India too. M&As by Indian companies involving foreign firms fall into 3 categories, viz., acquisition of foreign firms, acquisition of MNCs affiliates in India & acquisition of foreign brands. Overseas direct invest. From India jumped from $1.5 billion in 2003-04 to $ 4.5 billionduring 2005-06 & further to $ 19 billion in 2008

FDI DESTINATIONS:
Most Indian outward FDI is in manufacturing (55 %)&

in non financial services also (25 %) share is there. FDI in particularly in IT services has begun to grow rapidly. The growing technological capabilities of Indian firms & their rising exports, particularly in IT services & pharma. Are driving the FDI growth. Securing natural resources is also becoming an important driver for FDI in the oil & gas industries & mining. The most important destination for Indian industries has been the US.

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