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Foreign Direct Investment
Post: #1
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Foreign Direct Investment


Consistent economic growth, de-regulation, liberal investment rules, and operational flexibility are all the factors that help increase the inflow ofForeign direct investment or FDI.FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor.

FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as "direct investments abroad." Different economic factors encourage inward FDIs. These include interest loans, tax breaks
, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. Other categorizations of FDI exist as well.

Vertical Foreign Direct Investment

Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.

Horizontal foreign direct investments

Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called "market-seeking FDIs." "Resource-seeking FDIs" are aimed at factors of production which have more operational efficiency than those available in the home country of the investor. Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as "efficiency-seeking."

Benefits of Foreign Direct Investment

* Growth of capital stock
* Incorporated technologies
* Possibilities to gain managerial and labor skills
* Higher incomes and economic development. (Taxation for public sector)
- Finance education
- Finance health
- Finance infrastructure development, etc.
- Resource -transfer
- Employment
- Balance-of-payment (BOP)
* Import substitution
* Source of export increase

Costs of Foreign Direct Investment

* Adverse effects on the BOP
- Capital inflow followed by capital outflow + profits
- Production input importation
* Threat to national sovereignty and autonomy
- Loss of economic independence


Economic development

Foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships. An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95.

Transfer of technologies

Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country.

Human capital resources

The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country.

Job opportunity

Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country. Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken.

Income generation

Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.


It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.

It becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises.

Foreign direct investment leads to increase in profits within different industries as well as tax cuts and expanded marketability for singularly differing industries.

Often times procurement of properties, buildings, and labor can be obtained at a fraction of the cost in host countries than would be the case within the company's home country. While this may seem unfair, it is a good idea to keep in mind the host countries economy and market. Companies are often forced to abide by local regulations rather than the regulations of their home country.

On the other side of the coin, the host country benefits due to the increase in jobs it produces in the regional labor market to which the investment companies reach out to. Often times dying economies can be revived in the process of becoming a host for certain industries or markets in which that industry or market had not previously been.

This is especially the case with third world countries that are trying to catch up to industrial nations or who need a boost due to changes in regional climates or in the advent of recovery from the aftermath of civil or world war.
Post: #2
Foreign Direct Investment (FDI)

.pptx  Foreign Direct Investment.pptx (Size: 291.65 KB / Downloads: 42)

Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin.
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.

Need for FDI in India

1. Improvement of economical infrastructure
2. Technological up gradation.
3. Exploitation of Natural Resources
4. Scope of Employment
5. Improvement of export competitiveness
6. Benefit to consumers

Present Picture

The World Bank has projected an 8 per cent growth for India in 2010, which will make it the fastest-growing economy for the first time, overtaking China’s expected 7.7 per cent growth.
The India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world economy, according to the World Bank.
Considerable improvement in FDI inflows
FII inflows:
For the period, April 09 – October 09 FII inflow has exceeded USD 17,000 million whereas it was 18,708 for the same period in the last FY.

The Entry Process: Automatic Route

All items/activities for FDI investment up to 100% fall under the Automatic Route except the following:
All proposals that require an Industrial Licence.
All proposals in which the foreign collaborator has a previous venture/ tie up in India.
All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor.
All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted.
Post: #3
Foreign direct investment (FDI

.docx  Foreign direct investment.docx (Size: 17.04 KB / Downloads: 26)

Defined as an investment involving a long-term relationship and reflecting a lasting interest and control of a firm in one country in a firm resident in another country.
India, one of the biggest emerging markets, is currently an important destination for Foreign Direct Investment (”FDI”). The Government of India aims to develop India as a global healthcare hub. India offers a huge patient pool, favourable regulatory environment and a cost advantage to conduct clinical trials. Healthcare expenditure in India is expected to increase by 12 per cent per annum during 2011-15. Rising incomes, greater health awareness, lifestyle diseases, and increasing insurance penetration will contribute to increase this growth.
Healthcare markets five major segments are – Hospitals (generate 71 per cent revenue), Pharmaceutical (generate 13 per cent revenue), Diagnostics (generate 9 per cent revenue), Medical Equipment and Supplies (generate 4 per cent revenue) and Medical Insurance (generate 3 per cent revenue).
Telemedicine is fast-emerging in India, supported by the inforamtion and communication technology (ICT) sector. The private sector accounts for 68 per cent of overall healthcare spending. The size of the healthcare industry is expected to touch US$ 79 billion by 2012 and US$ 280 billion by 2020. By 2012, healthcare spending is estimated to contribute 8 per cent of GDP and would employ around 9 million people.
100 per cent foreign direct investment (FDI) is being permitted for all health related services under the automatic route. Contract research is a fast growing segment in the Indian health care industry. In 2010, the mergers and acquisitions (M&As) deal value in healthcare stood at US$ 6.2 billion, accounting for 12 per cent of total M&A deal value.
The Indian medical tourism industry is poised to grow at 30 per cent annually into a US$ 2 billion business by 2012. There has been a wide array of policy support in the form of reduction in exercise duties and higher budget allocation for the healthcare sector to develop India as a global healthcare club.


The research project is taken in context of investment liberalization strategy in general with a focus on (health) service investment liberalization. The current literature on FDI mostly focuses on the determinants of FDI .
In the other world , the paper differentiates between the attractors of FDI into two main categories: determinants and incentives. The determinants are factors being more difficult to change (such as size and population of the economy), while incentives are less so. The three major determinants of FDI are: 1) quality of infrastructure; 2) level of skill and human capital; and 3) regulatory environment. There are several types of incentives (infrastructure incentive, regulation incentives and fiscal and financial incentive) which collectively or individually play a role in determining FDI flows. The paper focuses on each one in turn. It addresses those incentives which have apparently assumed greater significance in the context of globalization as firms have shifted away from efficiency-seeking investment to more cost-reducing investments. Moreover, these determinants are directly subject to improvement in the short run in contrast to other determinants such as the market size.
Post: #4
Risks in FDI

.pptx  FDI risks.pptx (Size: 856.61 KB / Downloads: 23)

FDI Introduction

Foreign Direct Investment (FDI)
refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.
It is the sum of equity capital, other long-term capital, and short-term capital as shown in the balance of payments
FDI is “NOT permitted” in the nuclear, railway, arms, coal and lignite or mining industries

Types of FDI

Horizontal FDI

Horizontal FDI refers to producing the same products or offering the same services in a host country as firms do at home. In horizontal FDI model, the main objective to be met is how best to serve the host market (abroad)
E.g. Ford assembles cars in the United States. Through horizontal FDI, it does the same thing in different host countries such as the United Kingdom (UK), France, Taiwan, Saudi Arabia, and Australia.

Vertical FDI

Vertical FDI arises when a multinational firm fragments the production process internationally, thereby locating each stage of production in the country where it can be done at the least cost .In vertical FDI models, the primary objective of a firm is how best to serve the domestic (home) market.

FDI Risks Classification

FDI risks are primarily country specific .
FDI risks arise from variety of factors such as national differences in economic structures, policies, socio-political institutions, geography and currencies
Following Risks are the principal hazards that affect the spatial and sectoral allocation of FDI:
Economic Risk
Political Risks
Transfer Risk
Exchange Rate Risks
Sovereign Risks
Location/Neighborhood Risks

Reduction of FDI Risks

In general, foreign investors reduce their exposure to risks
by limiting the volume and direction of FDI using below strategies:

Hedging strategies
In hedging strategies, firms minimize risk either by diversifying holdings across products and places or by apportioning investments in capacity across places.

Internalization strategies
In internalization strategies, investors absorb would-be foreign
production into existing facilities in the face of exchange rate
and price uncertainty.

FDI in Indian Retail Industry

FDI in the retail sector in India is restricted.
In 2006 govt. eased the policy allowing 51% FDI through the single brand retail route.
Since then there has been an steady increase in FDI.
By middle of 2010 FDI in single brand stood at $ 195 million.
By 2013 total retail sales is expected to touch $ 535 billion (AT Kearney)
Indian retail sector is organized into three categories
Single brand retail
Multiple brand retail
Cash and carry (Wholesale retail)
Post: #5
Foreign Direct Investment

.ppt  1Foreign Direct.ppt (Size: 2.54 MB / Downloads: 260)

Foreign investment that establishes a lasting interest in or effective management control over an enterprise. Foreign direct investment can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates. International Monetary Fund (IMF) guidelines consider an investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm's voting stock of shares. However, many countries set a higher threshold because 10 percent is often not enough to establish effective management control of a company or demonstrate an investor's lasting interest.

Economic Growth

Quantitative change or expansion in a country's economy. Economic growth is conventionally measured as the percentage increase in gross domestic product (GDP) or gross national product (GNP) during one year. Economic growth comes in two forms: an economy can either grow "extensively" by using more resources (such as physical, human, or natural capital) or "intensively" by using the same amount of resources more efficiently (productively). When economic growth is achieved by using more labor, it does not result in per capita income growth (see Chapter 4). But when economic growth is achieved through more productive use of all resources, including labor, it results in higher per capita income and improvement in people's average standard of living. Intensive economic growth requires economic development.

Trends in FDI

Flow and stock increased in the last 20 years
In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Businesses fear protectionist pressures
FDI is seen a a way of circumventing trade barriers
Dramatic political and economic changes in many parts of the world
Globalization of the world economy has raised the vision of firms who now see the entire world as their market

Costs of FDI to Host Countries

Adverse effects on competition
Adverse effects on the balance of payments
After the initial capital inflow there is normally a subsequent outflow of earnings
Foreign subsidiaries could import a substantial number of inputs
National sovereignty and autonomy
Some host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation

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