Foreign Direct Investment In India

Published Date: 02 Nov 2017

In this project I have analyzed the situation of Indian market as a target market for international companies as hub for refinery business.

Developing economy of India, as it is very unstable and involves lot of risk.

Various government policies that affect international business, since economy is in growing stage.

NEED FOR THE RESEARCH

To know about the salient features of the Indian market as per international players.

To promote more global players to invest in India.

Increase in foreign currency

To know about market of India, its evolution, demand and supply scenario.

INTRODUCTION

India had adopted Investment from different countries as the major strategy to give its economy a big leap. In 1991 liberalization paved the way for globalization. More pragmatic and scientific program and policies were adopted. Much emphasis was now given on foreign investment. Various restrictions such as red tapism, license policy were done away with. After 1991 more stress was given on competition and fair trade practices. One by one every sector was opened for foreign investors. Foreign investors could now invest in India either via financial or technical collaborations, Joint Ventures, capital markets or through preferential allotments by incorporating a completely owned subsidiary or company.

"Foreign direct investment is defined as an investment, which is usually made to serve the business interests of the individual investors in a company, even if the investor is located in a different nation different from the investor's country of origin. The parent company through its foreign direct investment now exercises substantial control over the foreign affiliated company. As defined by the UN, ‘Control’ is owned by a company if it has greater than or equal to 10% of shares or has access to voting rights in an integrated firm. Although most FDI ends up being 100% owned by a Multi-National Corporation (MNC), share of ownership amounts to less than 10% of ordinary shares is termed as portfolio investment and it is not categorized as FDI.

Foreign Direct Investment basically includes investments in the infrastructure development projects which include construction of bridges and flyovers, real estate development, retail sector, energy sector finance sector including banking and insurance services, etc. FDI has increased drastically in the past twenty years to become the most common type of capital flow across borders of both developed and developing economies. Foreign Direct Investment (FDI) flows are mostly preferred over other forms of finance or external investments because they do not create any debt, are less risky, non-volatile and the returns from them depend on the performance of the projects that are financed by the investors. FDI also encourages trade between various countries globally (international trade) and transfer of knowledge and technology. In the present world of increased competition and rapidly changing technology, FDI is considered to be very valuable.

Type of Foreign Direct Investment

Foreign direct investments are of various types. The classification of FDI is based on the restrictions imposed, and the various prerequisites that are required for these investments.

FDIs are classified into two types:

Outward Foreign Direct Investments and

Inward Foreign Direct Investments.

Outward Foreign direct investment is also known as direct investment abroad. Here the local capital is invested in foreign resource. Outward FDI may also be finding useful in the import and export dealings with any foreign country. An outward FDI is backed by that country’s government against all types of associated risks. This Outward FDI is always subject to certain tax incentives as well as disincentives of a variety of forms. Risk coverage that is provided to the local industries and subsidies that are granted to the domestic firms are considered as an obstacle in the way of outward FDI.

Outward FDI faces restrictions due to the following factors as described below:

ï‚· Tax incentives that invest outside their country of origin or on profits are repatriated.

ï‚· Industries that are related to defense are mostly set outside the purview of outward Foreign Direct Investment in order to retain government's control over the defense related industrial setup.

ï‚· Subsidies scheme is targeted at local businesses.

ï‚· Lobby groups with absolute interests possess support from either inward Foreign Direct Investment sector or state investment funding bodies.

ï‚· Government policies lend support to the domestic industry.

Inward Foreign direct investment is a form 'inward investment'. Here, investment of foreign capital generally occurs in local resources.

The factors that encourage the growth of Inward FDI comprises of tax breaks, relaxation of existent regulations, loans offered at low rates of interest, provision of specific grants and also the removal of restrictions and limitations. The inspiration behind inward FDI is that, the long term profits from such sort of funding outweighs the disadvantage of the income loss which is incurred in the short run. Inward FDI flows might also face certain restrictions from factors like restriction on ownership and difference in the performance standard.

Foreign Direct Investment in India

India being the third most attractive FDI destination in the world, after China and the United States which are ranked 1st and 2nd respectively. The country has a favourable foreign investment environment that provides freedom of entry, investment, location, choice of technology, import and export. Its policy structure provides clear guidelines for the entry, freedom of location, technological preference, production, Capital repatriation, etc. and a well-balanced package of fiscal incentives, which is specifically aimed of enhancing the flow of FDI.

India received around US$25 billion of FDI in the year 2007-08; this number rose to US$27 billion in the year 2008-09, highlighting India’s ability to remain durable and attract investment despite the global slowdown. Multinational firms have taken advantage of the country's increasingly prosperous consumer market. In the first nine months of 2009, FDI dipped by 26 per cent to $21.4 billion from $29 billion a year ago. The total FDI inflow into India in the fiscal year 2009-10 since 2001 has crossed the $100 billion mark. The total number of foreign technical collaborations has also been increasing in line with the rise of Foreign Direct Investment. In the year 2006-2007, exact FTC approval was 81 although in the beginning of the 2007-2008 this number rose to 40. Between 1991(August) to 2007(June) the number of FTC approval has reached up to 7,886.

OBJECTIVES OF THE STUDY

To study the Indian market.

To study the benefits associated with FDI.

Also study the world and mainly about Indian FDI market.

To study about challenges in FDI.

To study about future outlook.

To study FDI regulation.

Limitations

Minimum availability of first hand data.

Limited area under consideration.

Limited samples taken for interview.

Limited time.

RESEARCH METHODOLOGY

Research methodology is the simple framework or plan for the study that is used as the guide in collecting & analyzing the data it may be understood as a science of studying how research is done scientifically. It is necessary for the researcher to know only the research methods and techniques but also a methodology.

The purpose of research methodology is to describe the research problem and to establish truth that gains wide acceptance for the research. This research will also involve the opportunities and advantages of laying down the cross-country pipelines.

The methodology that will be undertaken to study the present synopsis and to fulfil the above stated aims and objective would be:-

My research is based on Empirical Research.

SOURCES OF DATA COLLECTION

Secondary Data

The secondary data are those which have already collected by someone else and which have already been passed through the statistical process.

I have also collected secondary data for my synopsis. The secondary data for conducting the study has been taken from:-

Research papers

From internet sites

Journals

LITERATURE REVIEW

Rao and Dhar (2011) attempted to present the FDI flows to India for past 10years. Following the commercial bank debt crisis and the aid fatigue, in the 1980s, once again, countries became more interested in non‐debt creating sources of external private finance.

An extensive amount of literature on FDI has emerged regarding its role in not just augmenting domestic savings for investment but more as provider of technologies and managerial skills essential for a developing country to achieve rapid economic development. FDI was given greater freedom and a role of its own to contribute to India’s development process along with gradual liberalization of India’s economic policies which started in the 1980s.The New Industrial Policy, 1991, which accelerated the liberalization process, stated:

The Government will continue to follow the policy of self‐reliance; greater importance will be given on building up our nation’s ability to pay for all imports through our own foreign exchange earnings.

Foreign investments and technology collaborations will be welcomed in order to obtain higher technologies, to increase exports and to expand our production base. Foreign investment would bring greater advantages of technology transfer, expertise in marketing, introduction of more modern managerial techniques and latest possibilities for promotion of exports. The government will thus invite foreign investment which will be in the interest of the country’s industrial development.

India has gradually expanded the scope for FDI by progressively increasing the number of eligible sectors as also the limits for FDI in an enterprise.

The steps taken included removing the general ceiling of 40% on foreign equity under the Foreign Exchange Regulation Act, 1973 (FERA), lifting of restrictions on the use of foreign brand names in the domestic market, removing restrictions on entry and expansion of foreign direct investment into consumer goods, abandoning the phased manufacturing programme (PMP), diluting the dividend balancing condition and export obligations, liberalizing the terms for import of technology and royalty payments and permitting foreign investment up to 24% of equity of small scale units and reducing the corporate tax rates.

FDI accounted for 36% of the total inflows of $81 bn. covered by the 2,748 cases and that going into manufacturing sector formed a mere 10% of the total.

Only a small proportion of the total inflows are subjected to specific government approvals. Interestingly, compared to the other investors, specific approval from the government (FIPB/SIA) was sought to the maximum extent by what we termed as realistic FDI investors. Nearly all of NRIs’ investment is through the Automatic Route.

Prasad (2012) highlighted the key impact of FDI on India’s trade and the policy issues related to it. The world economy has been receiving shocks at regular intervals. Accordingly, GDP growth of global economy is revised downwards to 3.3 percent in 2012 and 3.6 percent in 2013 which is down by 0.2 and 0.3 percentage points respectively as per October 2012 projections compared to the July 2012 projections. IMF has also reduced its earlier projections for world trade in goods and services to 3.2 percent for 2012 and to 4.5 percent for 2013, drastically down by 0.6 and 0.7 percentage points respectively. There is a drastic fall in import and export projections for emerging and developing economies by 0.8 and 1.7 percentage points respectively for 2012, compared to the marginal fall for advanced economies by 0.2 and 0.1 percentage points respectively. India’s export performance has been much better than many other countries on the export front as it could not only surpass pre-crisis levels but also reach pre-crisis trends and maintain it for a fairly long time in the post-crisis period. But in the last few months India’s export growth has also started to decelerate.

Thomsen, Otsuka and Lee (2011) attempted to present the role of Southeast Asia in the global FDI flows. As hosts to international direct investment, ASEAN countries have emerged from the recent global crisis in relatively good shape. Inflows are at record levels in some countries, and the prospect for future flows is good. Although many regions have followed the path breaking development strategy of ASEAN in welcoming inward investment, ASEAN member states are holding their own against this com-petition – including from China.

Southeast Asian countries, with few exceptions, also have a well-established track record of openness to FDI. Neither in the 1997 Asian financial crisis, nor in the most recent global one, did governments in the region resort to protectionism. On the contrary, governments in some crisis-affected economies in 1997-1998 actually opened further to foreign investors in key sectors such as banking.

Information on the activities of foreign investors in ASEAN suggests that they are increasingly focusing on the regional market. Local markets still account for the largest share of sales of affiliates, but regional sales are growing faster than exports to the home country of the investor. This suggests that competition for global FDI will in the future depend as much on the appeal of the ASEAN market itself as it will on the costs of production and related factors.

Thomsen (1999) explained the role of direct investment in the development of Southeast Asia. The four countries reviewed in this paper - Indonesia, Malaysia, Philippines and Thailand have all to certain degrees welcomed inward investment for its contribution to outward flow (exports). FDI has been an essential instrument in driving export-led growth in Southeast Asia. Foreign firms have played an important role in those sectors which have the fastest export growth such as electronics etc.

Malaysia and Thailand were open to foreign investment. They were quick to recognize the most essential role that foreign investors could play in increasing export-led growth. Partly as a result of FDI inflows, Malaysia and Thailand were among the world’s fastest growing economies just before the crisis.

Trends of FDI in the ASEAN4 (Indonesia, Malaysia, the Philippines and Thailand)

With the exception of the Philippines, which until the 1990s had not generally welcomed foreign investors, the ASEAN4 have all been major recipients of foreign direct investment (FDI). The period of most intense foreign investment activity occurred in the late 1980s when firms from Japan and the Newly Industrializing Economies (NIEs) were looking for production bases abroad to escape appreciating home currencies and the loss of preferential access to many OECD markets.

Hill and Chandra(2000) updated the literature survey on FDI in Southeast Asia. It focuses on the impact of Asian economic crisis of FDI inflows relative to other forms of capital inflows, the link between FDI and trade, and technology transfer and adaptation. Major trends which were evident included: FDI flows were increasing much more quickly than world GDP. Secondly OECD-north continued to be the source of FDI.

Developing Asian countries received 6.1% of Global FDI over the period 1975-80.This share tribled to18.1% for 1990-95. Six East Asian economies (China, Singapore, Malaysia, Thailand, Indonesia, and Hong-Kong) were among the eight largest developing countries that were recipients of FDI in 1990-95.

Total FDI flows in Malaysia were $3billion by 1996. Real estate, resource development and financial services have been the dominant areas of investment. As in Singapore overseas manufacturing investment by Malaysian firms is limited. Majority of Malaysian investment is in Singapore, Hong Kong, USA, Australia and Britain."