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 OBJECTIVE
To Understand meaning of FDI
Why country allow FDI
Why Companies go for FDI
Effects of FDI on Host & Home Country
Government view on FDI
Recent trend of FDI in India

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 Foreign Direct Investment
Foreign direct investment (FDI): a firm
invests directly in foreign facilities
A firm that engages in FDI becomes a
multinational enterprise (MNE)
Multinational = more than one country
Factors which influence FDI are related to
factors that stimulate trade

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 Foreign Direct Investment
Involves ownership of entity abroad for
production
Marketing/service
R&D
Access of raw materials or other resource
Parent has direct managerial control
Depending on its extent of ownership and
On other contractual terms of the FDI
No managerial involvement = portfolio investment

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 WHY COMPANIES GO FOR FDI
(Export is not feasible)
CHEAPER TO PRODUCE IN HOST COUNTRY
TRANSPORTATION COST IS HIGH
(Coke) Turkey to Kyrgyzstan
WHEN PRODUCT NEED ALTERATION
Right Hand driving & Left Hand riving
HIGH TRADE BARRIER IN HOST COUNTRY
COUNTRY OF ORIGIN IS IN ISSUE
NOT ENOUGH DOMESTIC CAPACITY
PRODUCTION (Volkswagen-Beetle)
CONSUMPTION

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 Host Country Effects of FDI
Benefits
Resource -transfer
More Employment
improved knowledge and expertise of foreign multinational.
higher wages and improved working conditions.
Balance-of-payment (BOP)
Import substitution
Source of export increase
Costs
Adverse effects on the BOP
Capital inflow followed by capital outflow + profits
Production input importation
Threat to national sovereignty and autonomy
Loss of economic independence
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 Theories behind Globalization
Internalization Theory
Companies seek to have internal control.
Key Position, Technology
Appropriability Theory
Less chance to have competitor.
Automobile industry, Pharma Industry
Freedom to pursue a global Strategy

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 Forms of FDI
Purchase of assets:
why? Quick entry, local market know-how, local
financing may be possible, eliminate competitor,
why not? buying problems
New investment (Green Field Investment)
why? No local entity is available for sale, local
financial incentives, no inherited problems,
why not? long lead time to generation of sales
International joint-venture
Shared ownership with local and/or other non-local
partner
Shared risk 10
 Alternative Modes of Market Entry
(Collaborative Arrangements)
FDI
FDI < 100% ownership, International Joint
Venture
Franchising
Licensing
Management Contracts
Turnkey Operations

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 Government Policy and FDI
The radical view: inbound FDI harmful.
MNEs
Are imperialist dominators
Exploit host to the advantage of home
country
Extract profits from host country; give
nothing back
Keep LDCs backward and dependent for
investment, technology and jobs

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 Government Policy and FDI
The free market view: FDI should be
encouraged
Adam Smith, Ricardo, et al: international
production should be distributed per
national comparative advantage
An MNE increases the world economy
efficiency
Brings to bear unique ownership advantages
Adds to local economys comparative
advantages

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 Government Policy and FDI
Home country
Outward FDI encouragement
Risk reduction policies (financing, insurance, tax incentives)
Outward FDI restrictions
National security, BOP
Host country
Inward FDI encouragement
Investment incentives
Job creation incentives
Inward FDI restrictions
Ownership extent restrictions (national security; local nationals
can safeguard host countrys interests

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 Decision Framework for FDI
Are transportation costs Import
No No Export
high? Barriers?
Ye
Ye s
s
Is know-how easy to No FDI
license?
Ye
s
Tight control over foreign Yes FDI
ops required?
No

Yes FDI
Is know-how valuable and
is protection possible?
No License

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 STEPS INVOLVED IN INVESTING
1. Identification of structure
2. Central Government approval if required
3. Setting up or incorporating the structure
4. Inflow of funds via eligible instruments and following pricing guidelines
5. Meeting reporting requirements of RBI and respective Act
6. Registrations/obtaining key documents like PAN etc.
7. Project approval at state level
8. Finding ideal space for business activity based on various parameters like
incentives, cost, availability of man power etc.
9. Manufacturing projects are required to file Industrial Entrepreneurs Memorandum (IEM),
some of the industries may also require industrial license.
10. Construction/renovation of unit.
11. Hiring of manpower.
12. Obtaining licenses if any.
13. Other state & central level registrations.
14. Meeting annual requirements of a structure, paying taxes etc.

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 INDIA & FDI
FY 15-16 = $40 BILLION (29% GROWTH) FROM
LAST YEAR.
SECTOR
SERVICE (6.9 BILLION),
COMPUTER HARDWARE & SOFTWARE (5.9 BILLION)
MAXIMUM BY
SINGAPORE (13.69 BILLION)
MAURITIUS (8.35 BILLION)
USA (4.19 BILLION)
NETHERLAND (2.64 BILLION)
JAPAN (2.61 BILLION)

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 INDIA & FDI
Way to do FDI in India
Automatic Route
The investors are only required to intimate the
Regional office concerned of the Reserve Bank within
30 days of receipt of inward remittance.
Government Route
Under this route applications are considered by the
Foreign Investment Promotion Board (FIPB).

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 INDIA & FDI
FDI NOT ALLOWED IN:
Atomic Energy
Lottery Business
Gambling and Betting
Business of Chit Fund
Nidhi Company
Agricultural
Housing and Real Estate business
(except development of townships, construction of
residential/commercial premises, roads or bridges to
the extent specified BY GOVT.)
Manufacture of cigars, cheroots, cigarillos and
cigarettes, of tobacco or of tobacco substitutes.
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 HIGHLIGHT OF INDIAS FDI POLICY
SECTOR FDI CAP ROUTE
Construction Development: Townships, 100% Automatic
Housing, Built-up Infrastructure
Industrial Parks -new and existing 100% Automatic
Satellites- establishment and operation, 100% Government
Private Security Agencies 49% Government

Telecom Services 100% Above 49% Government

Cash & Carry Wholesale 100% Automatic

Trading/Wholesale Trading (including
sourcing from MSEs)
E-commerce activities 100% Automatic
Single Brand product retail trading 100% 49% Automatic
Above that Government
Multi Brand Retail Trading 51% Government
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 HIGHLIGHT OF INDIAS FDI POLICY
SECTOR FDI CAP ROUTE
Railway Infrastructure 100% Automatic

Banking- Private Sector 74% Above 49% Govt.

Banking- Public Sector 20% Government
Credit Information Companies 100% Automatic

Insurance 49% Government

Non-Banking Finance Companies 100% Automatic

(NBFC)
Pharmaceuticals 100% Automatic
Green Field Government
Brownfield

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 Amazon , second largest delivery centre
outside USA in Hyderabad.
Apple Inc first development centre outside the US in
Hyderabad, which will employ over 4,000 people.
PANASONIC FOR NEW REFRIGERATOR PLANT.
PEPSI ANOTHER PLANT IN MAHARASTRA (500 CR.)
Banana Republic, an American fashion brand owned
by GAP, plans to open its first store in India by early
next year by entering into a partnership with Arvind
Retail.

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