Foreign Direct Investment

1. FOREIGN DIRECT INVESTMENT
Dr.J Srinivasan
Assistant Professor of Commerce
SRM IST, Ramapuram, Chennai.

2. Foreign Direct Investment
• The International Monetary Fund defines
foreign direct investment as ‘’an investment
made to acquire lasting or long-term interest
in enterprises operating outside of the
economy of the investor”.
• Investment made by foreign enterprises in
domestic industrial / services sector.

3. Sector Specific Limits of FDI
• 100% FDI
• Floriculture, Horticulture, Development of
seeds, Animal Husbandry, Pisciculture,
Acquaculture, Cultivation of vegetables and
mushrooms and services related to agro and
allied sectors
• Tea sector (including plantations)
• Mining activities

4. FDI
100% FDI
Manufacturing (alcohol-distillation & Brewing,
coffee and rubber processing and warehousing,
industrial explosives, drugs and pharmaceuticals)
Power (except atomic energy)
Publication of scientific journals
Non-Banking Finance Companies
Single Brand Retailing

5. FDI
• 74% FDI
• Telecommunications,(including FDI,FII, NRI,
FCCBs, ADR/GDR)
• Banking (private) sector (including FDI, FII)
• 51% FDI
• Multi-brand Retailing

6. FDI
• 49% FDI
• Insurance, Petroleum and Natural Gas,
Commodity Exchanges, Cable Network, Asset
Reconstruction Companies, Civil Aviation
• 26% FDI
• Print Media, Defence Production

7. FDI
• It is a source of external finance made
available to developing economies for
meeting their investment commitments
related to industrial and services sector.
• It is a source of non-debt capital flow.

8. FDI – Why?
• Investment required for one unit of growth of
economy is measured by ICOR. Suppose ICOR
of a country is 4 means for every one per cent
of growth of economy, 4% of investment is
needed. Estimated growth of economy in a
year 8% means, 32% of investment is needed.
If the available domestic investment is less
than 32%, foreign investment is needed to
bridge the gap. This situation prevails in all
developing economies. So FDI is needed.

9. FDI
• India is considered to be the third most
favoured destination for investment after
China and the US for major global companies.
The World Investment Report anticipates that
foreign investments in India would increase by
over 20% in 2012-13. The Global
Competitiveness Report 2011-12 states that
India ranks at 56 among 142 countries.

10. FDI
• The India ranks higher than many countries in key
parameters such as market size (third) and
innovation (thirty eight). It also possesses a
sound financial market, which ranks 21st in the
world. The ever-growing middle class
population, cost competitiveness, big domestic
market, larger manpower base, diversified
natural resources and strong macroeconomic
fundamentals have made India one of the most
attractive destinations for business and
investment opportunities for MNCs across the
world.

11. FDI (US $ Billion)
• 2009 2010 2011
• FDI Inflow (World) 1198 1309 1524
• FDI Outflow 1175 1451 1694
• FDI Inflow(developed) 606 618 684
• FDI Outflow 858 990 1238
• FDI Inflow(developing) 519 617 684
• FDI Outflow 269 400 384

12. FDI in selected countries in 2011
(US $ Billion)
• USA 227
• Belgium 89
• Hongkong 83
• Brazil 67
• Singapore 64
• UK 54
• Australia 41
• Germany 40
• India 32

13. FDI
• The global FDI inflow was at $1.5 trillion in
2011 and it is 16% higher than the year 2010.
In it, Asian accounts 27%.
• FDI in India
• 2000-01 US$ 4.029
• 2005-06 8.961
• 2008-09 41.873
• 2011-12 46.553

14. FDI
• The share of Mauritius stood first in total FDI
equity inflow in India in 2010-11, 2011-12 and
2012-13 followed by Singapore, UK, japan,
USA and Netherlands. Mauritius has invested
$65.60 billion in India during the period April
2000 to June 2012 followed by Singapore
$17.50 billion, UK $16.30 billion, Japan $12.60
billion and USA $10.70 billion.

15. FDI
• In India, services sector attracted the highest FDI
equity inflows followed by construction
development, telecommunications, computer
software and hardware, drugs and
pharmaceuticals, chemicals power and
automobiles. FDI inflow in services sector remain
at $33.40 billion, construction $21 billion,
Telecom $12.50 billion, computer software and
hardware $11.20 billion and pharmaceuticals
$9.60 billion during the period April 2000 to June
2012.

16. FDI – Impact Factors
• Economic Value Added
• 1. Total Value Added (Gross output of the
new/additional economic activity resulting from
the investment.
• 2. Value of Capital Formation (contribution to
gross fixed capital formation)
• 3.Total and net export generation
• 4. Number of formal business entities
• 5. Total fiscal revenues

17. FDI
• Job Creation
• 1. Employment (total number of jobs
generated by the investment – direct and
indirect)
• 2. Wages (total household income generated –
direct and indirect)
• 3. Typologies of employee skill levels

18. FDI
• Sustainable Development
• 1. Labour Impact Indicators (employment of women
and disadvantaged groups
• 2. Social Impact Indicators (number of families lifted
out of poverty, wages above subsistence level)
• 3. Environmental Impact Indicators (Greenhouse gas
emissions, carbon off-set/credits, carbon credit
revenues, energy and water consumption/efficiency
hazardous materials, enterprise development in eco-
sectors.
• 4.Development Impact Indicators ( development of
local resources, technology dissemination)

19. FDI
• In October 2012, L & T Finance Holdings acquired
french company Credit Ltd for $21.82 million.
• The Mahindra Group has bought companies to gain
access to technology and design capabilities. The
Tatas have gained substantially from the brand value
of Tetley while Corus’s technologies have been
implemented at the Jamshedpur steel plant of Tata
Steel

20. FDI
• In a 2010 report, PriceWaterhouseCoopers
(PWC) predicted that by 2018 India would
produce more multinationals than China every
year. It added that by 2024 India would have
20% more MNCs than China.

21. FDI
• Indian companies are seeking out their share
of the global pie, even as India attracts a
limited amount of foreign direct investment
every year. In 2010 Indian companies invested
$22 billion abroad to buy foreign companies
(or stake in them). By contrast companies
from other countries spent $8.96 billion to
acquire companies or stake in India

22. FDI
• January to November 2012, Indian companies
invested $1.2 billion in foreign countries
whereas foreign companies invested $8.09
billon in India.(Business Today, January 6, 2013
page 168) Indian companies acquire to be able
to export from India especially in certain
sectors like Pharma, where they get access to
distribution channels by acquiring abroad.