Foreign Direct

Investment.

WHAT IS FDI ?
Foreign direct investment (FDI) in its classic
form is defined as a company from one country
making a physical investment into building a
factory in another country.

Include investments made to acquire lasting

interest in enterprises operating outside of the
economy of the investor.

Generally speaking FDI refers to capital inflows

from abroad that invest in the production capacity
of the economy and are
Usually preferred over other forms of external
finance because they are
Non-debt creating, non-volatile and their returns
depend on the performance of the projects
financed by the investors.
FDI also facilitates international trade and transfer
of knowledge, skills and technology.

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 IMF 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.

Foreign Direct Investment (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.

ENTRY STRATEGIES FOR

FOREIGN INVESTOR

1. Wholly owned subsidiary.

2. Licensing.
3. Joint Venture.
4. Mergers & Acuisition.

WHY FDI ?
1. Gain a foothold in a new geographic market.
2. Increase a firms global competitiveness and
positioning.
3. Fill gaps in a companys product lines in a
global industry.
4. Reduce costs in areas such as R&D,
production, and distribution.

Factor Influencing FDI

Supply Factor:
Production Cost
Logistics
Access to Technology
Resource Availibility

Demand Factors:

Follow Rivals
Customer Access
Exploitation of Competitive Advantage
Follow Clients

Government Factors
Trade Barriers
Economic Priorities
Economic Development Incentives

Motives of FDI.
Imperfect Market:
Availability of Technology and competent Human Resources
Nearness to Raw Materials
Horizontal Expansion:
Expanding the production capacity beyond the demand of home country.
Limited Home Market.
Potential Untapped Markets.
Overcome Trade barriers.
Product Life Cycles.
Vertical Expansion:
Cost Advantage from economies of scale.
Risk Diversification:
Reduced Effects of Business Cycles

ADVANTAGES OF FDI
To Host Country

To Home Country

A) Resources Transfer.

A) Lower Prices For

Consumer.

B) Employment Effect.
C) Balance of Payments
Effects.

B) Create Demand for

Export.
C) Employment Generation.

D) Improve Socio
-Economic Welfare of
the Country.

D) Revenue from Tax.

DISADVANTAGES OF FDI
Industrial Sector Dominance in the Domestic
Market.
Technological Dependence on Foreign
Technology Sources.
Disturbance of Domestic Economic Plans in
Favor of FDI-Directed Activities.
Cultural Change Created by Ethnocentric
Staffing The Infusion of Foreign Culture , and
Foreign Business Practices

Barriers to International Trade and

Foreign Direct Investment.
Tariff Barriers-:
Socialistic Objective.
Form of Revenue.
Protection to Domestic Producers.

Non Tariff Barriers.

Non tariff barriers are in the form of regulations that
impose restrictions of foreign investment.
Below are different types of Non Tariff Barriers

Specific Limitations on Trade

Standards
Government Participation in Trade
Charges on imports

Theory Of Absolute
Advantage. (Adam Smith)
Believes that every country has an absolute
advantage in supplying certain products.
Hence, the country must specialise in export of
those products only.

It should import goods from countries, which have

an absolute advantage in exporting the products,
and hence get them at a cheaper rate.

 Eg. Japan has an advantage in production of high

quality steel while India has huge reserves of iron
and coal mines. This advantage can be used to
complement each other.
In practicality, it is not possible for only one
country to have absolute advantage in terms of
cost or otherwise for a particular product .

COMPARATIVE ADVANTAGE.
(David Ricardo).
Comparative advantage refers to the ability of a
party to produce a particular good or service at a
lower marginal and opportunity cost over another.
The conclusion drawn is that each party can gain by
specializing in the good where it has comparative
advantage, and trading that good for the other.
Even if one party is more efficient in the production
of all goods (absolute advantage in all goods)
than the other, both countries will still gain by
trading with each other, as long as they have
different relative efficiencies.

EXAMPLE 2 parties producing 2

commodities with the same resources, time,
all factors been equal. Output as shown
below:
Party A- 1000tons of cassava, 2500tons of
cotton.
Party B - 1000tons of cassava, 1000tons of
cotton.

Theory of Comparative Advantage

The Theory of comparative advantage is an econom

theory about the work gains from trade for individua
firms, or nations that arise from differences in their
factor endowments or technological progress.

2) Exchange Rate and Terms of Trade.

1) Sharing benefits of international
Trade.

Areas Where FDI is not Permitted

in India
Gambling & Betting
Atomic Energy
Lottery Business
Business of Chit fund
Nidhi Company
Agriculture or plantation activities (excluding
floriculture, horticulture, development of seeds,
animal husbandry, tea plantation etc)

THANK YOU