FDI

1. Foreign Direct Investment
(FDI)
Dr Raju Indukoori

2. Foreign Investment Terms
 Foreign Currency
 Foreign Exchange
 Foreign Exchange Rate
 Foreign Trade(Imports & Exports)
 External Borrowings
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 Foreign Direct Investment (FDI)
 Foreign Portfolio Investment (FPI)
 Foreign Venture Capital Investment (FVCI)
 Non Resident Indian (NRI)
 Person of Indian Origin (PIO)

3. 3
Foreign Investment Schematic Representation
Dr Raju Indukoori

4. FDI
 Investment of foreign companies, institutions
and governments in domestic manufacturing/
Services / other business for a long period of
time.
 Investment of Indian companies, institutions
and governments in foreign manufacturing/
Services / other business for a long period of
time.
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5. FDI Governance
 FDI policy announced by the Government
of India
 Provisions of the Foreign Exchange
Management Act (FEMA) 1999
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6. FDI Routes
1. Automatic Route
2. Government Route
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7. 1.Automatic Route
Foreign investor or the Indian company
does not require any approval from
• RBI
• Government of India
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8. 2. Government Route
Prior approval of the following are required
 Government of India
 Ministry of Finance
 Foreign Investment Promotion Board (FIPB)
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9. Prohibited FDI
1. Chit fund Business
2. Nidhi Company.
3. Agricultural or plantation activities
4. Real estate business / Farmhouse construction.
5. Trading in Transferable Development Rights (TDRs).
6. Print Media: Partnership / Sole Proprietary
7. Retail Trading
8. Atomic Energy
9. Lottery Business
10. Gambling and Betting
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10. Restricted FDI
1. Small Scale Industrial (SSI) Units : 24%
2. Asset Reconstruction Company (ARC) : 49%
3. Stock Acquisition is subject to Industry Cap.
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11. Economy Need for FDI
 Boost business
 Income growth
 Employment opportunities
 Innovation
 Technology
 Foreign Exchange reserves
 To meet unavoidable imports
 Fund FDI from India
 To be part of global village
 Boost foreign trade
 Showcase Brand India
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12. Dr Raju Indukoori 12
FDI Trend since 1990

13. MNCs Need for FDI
1. Boost profits
2. Cost reduction
3. Exploit foreign opportunities
4. International presence
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14. MNCs Need for FDI
1. Boost profits
 Monopolistic opportunities
 Enter profitable markets
 Attract new demand segments
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15. MNCs Need for FDI
2. Cost reduction
Economies of Scale
Low cost of factors of production
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16. MNCs Need for FDI
3. Exploit foreign opportunities
 Natural resources : India exploited by European companies.
 Cheap labor : BPO, KPO, in India and Philippine
 Tax advantages : No tax, Tax holidays and incentives
 Consumer mindset/Behavior : Foreign brands are qualitative
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17. MNCs Need for FDI
4. International presence
 React to trade restrictions with a subsidiary
 Diversification to gain business cycles and
 Create international brand
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18. Forms of FDI
 Horizontal
Same product extended to a foreign country.
 Vertical
Different product extended in value chain
 Platform
Same product for the purpose of export.
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19. FDI Modes
1. Exporting
2. Production Abroad
3. Licensing
4. Management Contracts
5. Foreign Asset Control
6. Joint Ventures
7. Strategic Alliance
8. Wholly owned Subsidiary
9. Acquisition
10. Green Field Investment
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20. MNCs FDI
Channels
Exploit Existing Competitive
Advantage Abroad
Change
Competitive Advantage
Licensing /
Management Contract Foreign Asset Control
Acquisition of a
Foreign Enterprise
Greenfield
Investment
Production at Home:
Exporting
Production Abroad
Joint Venture /
Strategic Alliance
Wholly-Owned
Affiliate
Foreign
Investment
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Foreign
Presence

21. 1. Export
 There are several advantages to limiting a firm’s
activities to exports as it has none of the unique risks
facing FDI, Joint Ventures, strategic alliances and
licensing with minimal political risks.
 The amount of front-end investment is typically lower
than other modes of foreign involvement.
 Some disadvantages include the risks of losing markets
to imitators and global competitors.
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22. 2. Abroad Production
 Invest in Production unit in a foreign country to
serve the local market
 The management, control and ownership is still
with the company in parent country.
 This happens due to operational and economic
benefits
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23. 3. Licensing
 It is a popular method for domestic firms to profit from
foreign markets without the need to commit sizeable
funds
 It is more advantageous when local consumers prefer
local brands.
Disadvantages
 Some times License fees are more than than FDI profits
 Possible loss of quality control
 Establishment of a potential competitor in third-country
markets
 Risk that technology will be stolen
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24. 4. Management Contracts
 Similar to licensing
 Provide foreign cash flow without significant foreign
investment or exposure.
 Lessen political risk because the repatriation of
managers is easy
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25. 5. Foreign Asset Control
 Buy one division of a company
 It is similar to buying one company but limited to one
asset or department
 Ex : Lafarge India bought Cement division of Tata Steel
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26. 6. Joint Venture
 Shared ownership in a foreign business
 It is more advantageous when local consumers prefer
local brands.
 Advantages
 Better understanding of local markets, risks, customs and
government institutions.
 Capable mid-level management
 Helpful when some countries do not allow 100% foreign
ownership
 Local partners have their own contacts and reputation which
aids in business
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27. Joint Ventures
Disadvantages
Increased political risk if the wrong partner is
chosen.
Divergent views about the need for cash dividends,
or the best source of funds for growth (new
financing versus internally generated funds).
Transfer pricing issues.
Difficulties in the ability to rationalize production
on a worldwide basis.
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28. 7. Strategic Alliance
1. Two firms exchange a share of ownership with
one another.
2. Partners exchange a share of ownership in
addition to creating a separate joint venture
to develop and manufacture a product or
service
3. Joint marketing and servicing agreements in
which each partner represents the other in
certain markets.
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29. 8. Wholly owned Subsidiary
 The MNC enters the foreign shores with
its full presence in terms of investment,
technology, production, operation, brand,
etc.
 Many MNCs like Unilever, IBM, Pepsi, Coca
Cola, Bata, etc. came to India.
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30. 9. Acquisition
 Quick and cost effective way to obtain
technology and/or brand names.
 Variety of channels to acquire.
 Some firms often pay too high a price or
utilize expensive financing to complete a
transaction.
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31. 10. Green Field Investment
 It is establishing a production or service facility
starting from the ground up.
 It is time consuming and needs to look at long
gestation period.
 FDI has full ownership, control, risk and
accountability.
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32. FDI Benefits
 Risk Sharing : Joint Venture and Strategic Alliance
 Market Entry : Acquisition
 Tapping new markets : Exports, licensing and Strategic Alliance
 Brand loyalty : Production and Green Field Projects.
 Foreign Presence : Export, Licensing, Joint Venture and Strategic
Alliance
 Global Brand : Asset Control, Acquisition, Wholly owned subsidiary
 Economies : Foreign Production, Joint Ventures
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33. Key Factors for FDI
 Low correlation : Portfolio performance of FDI portfolio.
 Socio Cultural : Race, Cast, Religion, Language, Customs and Traditions.
 Government Policy : Supportive, comfort zone, tough but profitable
 Political Structure : Unstable government, social unrest, strong opposition
 Economic Indicators : GDP, GDP Growth Rate, Interest Rates, Stock Market indices,
Inflation, Unemployment, Economic Development and Cost of living.
 FDI Barriers: Red tape, Government interventions, Anti MNC/ FDI, Patriotism,
Nationalism.
 FDI Trends
 Target countries and continents
 Paradigm shift in FDI flows
 Weekly or quarterly FDI Data analysis
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34. Questions ?
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35. FDI India
https://www.fdi.finance/media-coverage
RBI Circulars :
https://www.rbi.org.in/scripts/BS_ViewMasterCirculars.aspx?Id=3630&Mode=0
Macro Trends
https://www.macrotrends.net/countries/IND/india/foreign-direct-investment
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