ASSIGNMENT – INTERNATIONAL MARKETING

TOPIC

FOREIGN DIRECT INVESTMENT (FDI) has taken a quantum jump

and is expected to continue to increase over the medium and long

term. What could be your suggestions for attracting a higher

quantum of FDI in India? What are the multifarious advantages

and disadvantages of FDI in India?

SUBMITTED TO : LT. COL.(RETD) NAGESHWANT ROY VAID

Submitted By:

DHIRENDRA KUMAR

ROLL NO- N-18

FMS, NORTH CAMPUS

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 INDEX

S.NO TOPIC PAGE NO

1 WHAT IS FOREIGN DIRECT INVESTMENT 3

2 FDI POSITION OF INDIA 3

3 FOREIGN DIRECT INVESTMENTS IN INDIA- 5

5 SUGGESTIONS FOR ATTRACTING A HIGHER 6

OF FDI IN INDIA

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 WHAT IS FOREIGN DIRECT INVESTMENT (FDI)

FDI may briefly be defined as purchase of physical assets or a significant amount of

ownership (Stock) of a company in another Geographical area, in order to gain a measure of

Management Control. The reasons for the FDI may be (a) Resource Seeking, (b) Market

Seeking or (c) Efficiency Seeking. The various types of FDI may include;

1 Greenfield Investments - These are direct investments in a new facility or

Expansion of Existing Facility. These are primary target of Host Nation’s Promotion

Efforts because they create new production Capacity, Job’s and transfer of

technology and Know How and can lead to linkage to the Golbal Market Place.

2 Mergers and Acquisitions – In this, the transfer of assets from one Local Firm to

Foreign Firms takes place.

3 Horizontal FDI : - It is the investment in the same type of Industry in Foreign

Market.

4 Vertical FDI : It is a type of Backward Vertical FDI, where an Industry abroad

provides Inputs for a Firm’s Domestic Production Process.

FDI POSITION OF INDIA

India is the second largest country in the world, with a population of over 1 billion people. As

a developing country, India’s economy is characterized by wage rates that are significantly

lower than those in most developed countries. For nearly four decades after Independence,

India’s Policy towards FDI remained more or less selective with varying degree of restrictions

on Foreign Collaborations. The entire period may be divided in Four Phases as under;

1 Phase – I ( 1948 -1967) – It was full of Cautions and Selective attitude.

2 Phase – II ( 1968 -1979) – It is marked as period of Massive Restrictions.

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 3 Phase – II ( 1968 -1979) – Initiated a Partial Liberalization

4 Phase – VI (1991 onwards) – Beginning of Full Flagged Liberalization Process

with Introduction of Many reforms as under;

a) Abolition of Industrial Licensing System Except for 18 Industries Under

Strategic and Environmental Concerns.

b) Ceiling of 40% Foreign Equity under FERA done away with.

c) Removal of Registration under MRTP act.

d) Introduction of Dual approval System for FDI proposals i.e. (i) Through

Automatic approval Channel for FDI in 35 Priority Sectors by RBI upto an

equity participation of 51%; (ii) Through Formal Govt of India Channel i.e.

Foreign Investment Promotion Board (FIPB)/ Secretarial for Industrial

Assistance (SIA).

e) Existing Companies were allowed to hike their Foreign equity upto 51% in

priority Sector.

f) Liberalization of the use of Foreign Brands name.

g) Abolition of Phased Manufacturing Programme (PMP) for high Local

Content.

h) Liberalization in Technology Imports.

i) Removal of condition for FDI with Necessary Technological Agreements.

j) Permission for NRI’s and Overseas corporate bodies (OCBs) under

automatic route with repatriation of capital income to invest upto 100%

equity in High Priority Industries.

k) India Become a Signatory to the convention of Multilateral Investment

Guarantee Agency (MIGA) for protection of Foreign Investments.

There have been various amendments to FDI regulations from time to time which has

positively effected Indian FDI share.

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If we see the statistics from 1991 to December 2009, the cumulative FDI Inflow has been

Rs 554270 Crores. There has been remarkable growth over previous year in Financial Year

2006-07 of 146 %. In Global Share of Investing Countries, the FDI equity constitutes 44%

from MAURITIUS, which is the Highest with lowest upto 1% from UAE and France.

If we consider sector wise FDI equity(April 2000 to Dec’2009), the same are;

 SERVICE SECTOR ( Finance and Non Finance) - 22 %

 COMPUTER SOFTWARE/ HARDWARE - 9%

 TELECOME - 8%

 HOUSING AND REAL ESTATE - 8%

 CONSTRUCTION ACTIVITY - 7%

 POWER - 4%

 AUTOMOBILE INDUSTRY - 4%

 METALLURGY INDUSTRY - 3%

 PETROLEUM & NATURAL GAS - 2%

 CHEMICALS - 2%

FOREIGN DIRECT INVESTMENTS IN INDIA - APPROVED TWO ROUTES

1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks (subject

to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%;

74% and 100% is allowed depending on the category of industries and the sectoral caps

applicable. The lists are comprehensive and cover most industries of interest to foreign

companies. Investments in high-priority industries or for trading companies primarily engaged

in exporting are given almost automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases

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FIPB stands for Foreign Investment Promotion Board which approves all other cases where

the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks.

Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is

not necessary for foreign investors to have a local partner, even when the foreign investor

wishes to hold less than the entire equity of the company. The portion of the equity not

proposed to be held by the foreign investor can be offered to the public.

SECTORS PROHIBITED FOR FDI

i. Retail Trading (except single brand product retailing)

ii. Atomic Energy

iii. Lottery Business

iv. Gambling and Betting

v. Business of chit fund

vi. Nidhi Company

vii. Trading in Transferable Development Rights (TDRs).

viii. Activity/sector not opened to private sector investment

SUGGESTIONS FOR ATTRACTING A HIGHER QUANTUM OF FDI IN INDIA

It is well known that FDI can complement local development efforts in a number of ways,

including boosting export competitiveness; generating employment and strengthening the

skills base; enhancing technological capabilities (transfer, diffusion and generation of

technology); and increasing financial resources for development. It can also help plug a

country in the international trading system as well as promote a more competitive business

environment. Few suggestions for improving the FDI in India are as under;

IMAGE IMPROVEMENT : As per the latest report on “Doing Business 2008” India is

ranked a 120 out of 178 economies in the world. The report is based on a series of annual

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reports investigating the regulations that enhance business activity and those that constrain

it. Doing Business presents quantitative indicators on business regulations and the protection

of property rights that can be compared across 178 economies-from Afghanistan to

Zimbabwe-and over time. The report considers 10 indicators and they are fairly self-

explanatory. These indicators are;

a) starting a business,

b) dealing with licenses,

c) employing workers,

d) registering property,

e) getting credit,

f) protecting investors,

g) paying taxes,

h) trading across borders,

i) enforcing contracts

j) closing a business.

In view of the above, it is highly required focus area where GOI should must work to improve

overall Image of India in the world. India fairs "decently" in only two areas, viz. setting credit

and protecting investors categories. Perhaps the truly embarrassing rank is for the enforcing

contracts category in which India is ranked a dismal 177 out of 178 countries. According to

the report, it takes 1420 days to enforce a contract and the cost to enforce that contract

is almost two-fifths of the claim. This is a key concern for businesses.

While India must do image-building exercises to promote it as a favourable investment

location; it desperately needs to get rid of the tag that it can only do services and not

manufacturing. Between India and China, ask any businessman about where they will invest

their money: if it is service sector related, the answer, more often than not, is India and when

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it is manufacturing sector related, the answer is mostly always China. India does have a

vibrant manufacturing sector but that rarely comes out internationally because it gets

drowned out by the more glamorous software and other service related sectors. While one

may think that companies will look at the fundamentals of a country when it comes to

investing their money, which is not entirely wrong, they also invest based on perceptions.

This perception is a fundamental one and goes well beyond reasons such as red-tape,

corruption, poor infrastructure though they are inter-related to an extent. To get rid of this tag

is easier said than done but the government can do more promotion activities to this end.

COMPETITIVENESS : World Economic Forum The World Economic Forum (WEF) has an

annual index which tries to measure competitiveness. The WEF define competitiveness as:

The set of institutions, policies, and factors that determine the level of productivity of a

country. The level of productivity, in turn, sets the sustainable level of prosperity that can be

earned by an economy. The productivity level also determines the rates of return obtained by

investments in an economy. Because the rates of return are the fundamental determinants of

the growth rates of the economy, a more competitive economy is one that is likely to grow

faster over the medium to long run. India’s ranks on competitiveness is 48 out of 131

countries as under;

Ranking of India in World Competitiveness Index

Global Competitiveness Index 2007-2008 (131 countries) = 48

Global Competitiveness Index 2006-2007 (122 countries) = 42

The position over the year has lowered which is very serious and India needs to improve

competiveness factor to make India is better FDI destination.

FDI IN EDUCATION FIELD : Currently there is no FDI in education allowed. Since it is well

known that the education sector in India has reached a plateau in terms of ideas or

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development, it is only fair that new ideas and methodologies from other countries be tried

out. Hence, India must take a view for allowing FDI in the education sector.

Special Economic Zones (SEZ) Issues : Indian Govt has not favoured Large Scale

Investments particularly in Manufacturing sector . The SEZ’s has been very successful in

China, but in India, due to given the relatively small size of the proposed SEZs (most are

about 1 square kilometer compared to the mega-sized SEZs of 100 square kilometers in

China).

Keeping in large Population density in India makes such large and seamless SEZs less

viable. Apart from the scalerelated issues, there are also valid concerns regarding the fiscal

implications of the SEZs given the large tax breaks offered to businesses in the Indian SEZs.

In other words, SEZs may merely lead to uneven regional development (via a diversion of

investments from the other areas of the country to the SEZs) and worsen the country’s fiscal

position. Further, there has been many political issues related to allocation of SEZ’s which

adversely affect the establishment of SEZ’s attracting FDIs. In effect, a SEZ should be like a

huge industrial park rather than having one single company in it.

Focus on Type of FDI : Focus should not just be on the absolute amount of gross FDI

inflows but also the type. More specifically, while India has experienced an infusion of FDI

inflows in recent times, a large portion of the new inflows have been in the form of M&As.

Given that the latter does not necessarily imply new capital infusion into a country, the

macroeconomic consequences of the two types of FDI can be quite different. The focus

should not just be on the amount of Greenfield FDI inflows but also the positive externalities

to be derived from them, including in terms of technological development. The best type of

policy intervention would involve general steps to enhance overall human capital and

technical capabilities of the domestic economy on a non-discriminatory basis rather than

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attempt selective intervention to maximize linkages between local firms and local subsidiaries

of TNCs or technology transfer.

IMPROVING TELENT POOL : Telent pool is the desperate need to create a deep talent

pool. Again an activity that is easier said than done because it takes time to create a deep

talent pool. If one looks at investment bank reports on India, one point that gets constantly

highlighted is the lack of talent at all levels. This is inherently dangerous for a country like

India which has a tag of a services country; a sector that needs a deep talent pool to feed off.

This lack of talent is reflected in the growth in wages which is one of the highest in the world.

The one thing that makes India attractive is the cost arbitrage and if wages increase the way

they are increasing, it is very likely that this arbitrage will disappear and along with it,

valuable FDI dollars. The way to increase the talent pool has nothing to do with increasing

the number of students coming out of colleges; there are already plenty of them. It has been

estimated that only 30 percent of college graduates are ‘employable’ and what needs to be

done is to make the other 70 percent employable. To this end, it is necessary to continuously

monitor the quality of students as well as the quality of teachers in educational institutions.

MULTIFARIOUS ADVANTAGES AND DISADVANTAGES OF FDI IN INDIA

The Multifarious advantages of FDI in India are as under;

Rapid Growth & Economic Development of the Host : The FDI is important in terms of

enhancing rapid growth and self reliance in various field. With the liberalisation policies in

1991 onwards, there has been tremendous Growth . It can be seen from figures that from

1991 till Dec’2009, there has been FDI inflow of value Rs 5,54,270 Crores, which has

changed the growth pattern of India in last two decades.

Transfer of Technology(TOTs) : FDI is union of mutual benefits of two or more stake

holders. For increasing productivity, better utilisation of resources the Technology transfers

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are carried out, which would have been taken a long way to develop that technology by a

Host country. The technology development and TOTs has given a faster development.

Development of Human Capital Resources : FDIs involves better skills and new horizons

for Human Development and enhancing capital resources. The Know how , trainings , and

exposures to new development enhance the Human resources capabilities.

CREATION OF MORE JOB OPPERTUNITIES : FDI’s main objective is to rapid and

DISADVANTAGES OF FDI :

FEAR OF LOOSING OWNERSHIP AND CONTROL : With the allowing increasing FDI

percentage , there are fears that country may loose control and Indian owners may loose

control. This may lead to a state of Monopoly state and may lead to a state of dictating terms.

We may consider example of FDI flows have simply enabled trans-national giants like Coke

and Pepsi to set up monopolies in highly profitable sectors where Indian business concerns

were already meeting the requirements of the market. Coke and Pepsi, with their

monopolistic stranglehold on the bottling and distribution chain have wiped out niche

producers; consumers have less choice than they did before, and must pay more. Neither

has these companies brought in any valuable new technology.

INCERASE OF INFLATION AND CROWING OUT : It is seen in many cases that the

Inward FDI raised inflation and many a time crowing out. The main reasons for crowing out

may be ;

1 When local firms disappears because of higher efficiency and better product

quality of Foreign collaborations.

2 When the Local firm just wipe out because foreign affiliates have better access

to financial resources and start anticompetitive practices.

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Hence Host country must adopt policies so that such things do not occur.

DISCLOSER OF COUNTRY’s SECRETS : The host country must keep a strict vigil so as to

ensure that Country’s secrets are not disclosed to foreign nations and there is no threat the

safety. Due to this reason, the FDI caps in various sectors are totally prohibited.

POSSIBILITY OF SCANDALS :

FDI’ s may sometime promote scandals.. In a  September 1999, exposed the emerging

scandal in the telecom sector. When the Indian government opened up cellular telephony to

private industry - several foreign investors lined up to enter India's telecom sector. A process

of competitive bidding led to licensing agreements that required telecom operators to pay

license fees in exchange for connectivity to the fixed-line network that had already been set-

up by the Department of Telecom (DOT) and MTNL - the telephone provider in Delhi and

Bombay. But just weeks before the last government lost it's vote of confidence, it waived a

substantial amount of these license fees - losing crores in revenues for the Indian tax-payer.

Both foreign and Indian companies received a multi-crore windfall in the waiver of license

fees. The scandal is a reason for lust of higher gains.

DIFFRENCE IN LANGUAGE AND CULTURE : The FDI integrate host country and Foreign

nations at a common platform. There has been a great difficulty in adoption of culture of two

nations due to many barriers including language. It takes a long time to meet the wavelength

of both the partners, with higher training inputs, and cross border movements.

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