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Foreign direct investment (FDI) refers to capital inflows from abroad that invest in the production capacity of the

economy i.e. a company from home country making a physical investment into building a factory in the host country. Foreign Direct Investment (FDI) is usually permitted in the following forms:
Financial collaborations Joint ventures Technical collaborations Capital markets via Euro issues Private placements or preferential allotments

Firms around the world invest in foreign firms directly for:

Gaining a foothold in a new geographic market Increasing firms global competitiveness and positioning Filling gaps in companys product lines in global industry Reducing costs in areas such as R&D, production, and distribution

FDI is usually preferred over other forms of external finance because:

They are Non-debt creating They are Non-volatile i.e. their returns depend on the performance of the projects financed by the investors FDI facilitates transfer of knowledge, skills and technology FDI facilitates international trade

The FDI relationship consists of:

A parent enterprise from home country A foreign enterprise from the host country

For any investment to qualify as FDI, the investment must give the firm from home country control over the firm in host country The International Monetary Fund (IMF) defines control in this case as owning 10% or more of the ordinary shares/voting power of an incorporated firm

Any Foreign Company has the following options to set up business operations in India : A. By incorporating a company under the Companies Act, 1956
I. II. A wholly owned subsidiary Joint venture company - existing company or new company with domestic partner

B. As an unincorporated entity
i. ii. iii. Liaison Office Project Office Branch Office

Liaison office is not permitted to undertake any commercial/trading/industrial activity The role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers Acting as a communication channel between the parent company and Indian Companies It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in India Approval for establishing a liaison office in India is granted by RBI

General permission is usually given to foreign entities to establish Project / Site Offices (temporary in nature)

Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project
They have to seek general permission for remitting surplus funds after completion of project on production of certain documents

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposes Branch Offices are established with the approval of RBI Permitted to remit outside India profit of the branch

Macroeconomic Stability Political Environment

Regulations/Regulatory Environment
GDP Growth rate Openness

Profit Repatriation
Access to Natural Resources Quality of Business Infrastructure Quality of Labor i.e. Low cost BUT Qualified, Educated/Skilled Labor Pool Market size i.e. Long-term Market Potential (i.e. Yields greater than what can be achieved domestically)

Arms and ammunition Atomic Energy

Railway Transport
Coal and lignite Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc Lottery Business Agricultural or plantation activities Housing and Real Estate Business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005)

Foreign direct investments in India are approved through three routes:

Automatic approval by RBI (The investors are only required to notify the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances and submit necessary documents within 30 days) The FIPB Route (FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of FIPB ) CCFI Route (Investment proposals falling outside the automatic route and having a project cost of Rs. 6,000 million or more would require prior approval of Cabinet Committee of Foreign Investment (CCFI))

Department of Industrial Policy and Promotion (DIPP)

Foreign Investment Promotion Board (FIPB)

Foreign Investment Promotion Council (FIPC) Foreign Investment Implementation Authority (FIIA)

Investment Commission
Secretariat for Industrial Assistance (SIA)

Negative impact on Balance of Payment Impact on competitive environment Transfer Pricing Distorted Consumption patterns (divide) Social Costs (unemployment) Environmental cost Natural Resources cost Impact on culture (Tourism/Media/News/Entertainment) Loss of control over Strategic sectors

Increase in Domestic Employment

Investment in Needed Infrastructure

Positive Influence on the Balance of Payments New Technology and Know How Transfer

Increased Capital Investment

Targeted Regional and Sectoral Development

Industrial Sector Dominance in the Domestic Market

Technological Dependence on Foreign Technology Sources

Disturbance of Domestic Economic Plans in Favor of FDIDirected Activities

Cultural Change Created by the Infusion of Foreign Culture and Foreign Business Practices

Stable democratic environment over 64 years of independence Large and growing market World class scientific, technical and managerial manpower Cost-effective and highly skilled labor Abundance of natural resources

Well-established legal system with independent judiciary Developed banking system and vibrant capital market India among the top three investment hot spots and one of the fastest growing economies in the world Large English speaking population