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7/31/2019 FDI Manish Mahajan
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MANISH MAHAJAN
SRS2011PGDM19F004
DIV-A-PGDM
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2/20
INTRODUCTION
International Trade and Foreign Direct Investment are thetwo most important international economic activitiesintegrating the world economy.
Due to increase in the mobility of factors of production
across countries, FDI has become an integral part of afirms strategy to expand international business.
FDI is the largest source of external finance fordeveloping countries.
FDI not only serves as a source of capital inflow but alsohelps to enhance the competitiveness of domesticeconomy through transfering technology, raisingproductivity and generating new employmentopportunities.
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WHY FDI IS SUPERIOR TO OTHER TYPES
OF CAPITAL INFLOWS ?The following are the reasons why FDI is superior. They
are:
FDI flows are less volatile and easier to sustain at the timeof economic crisis.
FDI is more likely to be used to improve productivity.
As FDI provides more than just capital by offering access
to internationally available technologies, managementknow-how and marketing skills.
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CONCEPT OF FDI
FDI means acquiring ownership in an overseas business
entity.
It is a movement of capital across national frontier which
gives control to investor over the assets acquired.
FDI occurs when an investor in one country acquires an
asset in another country with the intent to manage.
A firms become an MNC by way of FDI as its operations
extend to multiple countries.
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DEFINITION:FDI can be defined as It is an investment involving a long
term relationship and reflecting a lasting interest and
control by a resident enterprise in one economy in an
enterprise resident in an economy other than that of the
foreign direct investor.
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BENEFITS OF FDI:Access to superior technology:-
Here foreign firms bring superiortechnology to the host countries while investing. Theextend of benefits depends upon the technology spillover
to other firms based in the host country.
Increased competition:-
The investing foreign firm increases
industry output resulting in overall reduction in domesticprices, improved products or services quality and greateravailability. This intensifies competition in hosteconomies resulting in net improvement in consumer
welfare.
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Increase in domestic investment:-
It is found that capital inflows in theform of FDI increase domestic investment so as to surviveand effectively respond to the increased competition.
Bridging host countries foreign exchange gap:-
In most developing countries thelevels of domestic savings are often insufficient to supportcapital accumulation to achieve growth targets. Besides
the level of foreign exchange may be insufficient topurchase imported inputs. Thus FDI helps in makingavailable foreign exchange for imports.
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NEGATIVE IMPACT OF FDI:
Market monopoly:-MNCs are far more advanced than domestic
companies owing to their large size and financial power. This
enterprise have ability to operate at a large scale and invest
heavily in marketing, advertising and R&D activities as a resulttheir product would be different than domestic company
product as a result more people will buy new advances
product.
Corruption:-
Large foreign investors often bribe government
officials and distort market forces.
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Technology dependence:-
MNCs often function in a way that
doesnt result in technology sharing or technology transfer
thereby making local firms technologically dependent or
technologically less self reliant.
Profit outflow:-
Foreign investors import their inputs and
use the host country as a processing base with little valueadded earning in the host country. A large proportion of
their profits may be repatriated.
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TYPES OF FDI:
FDI may be classified under various heads depending upon
the criteria used. Major types of FDI are discussed here in
a detailed manner.
On the basis of direction of investment:-
INWARD FDI:- Foreign firms taking control over domestic
asset is termed as inward FDI. From an Indian perspective
direct investment made by foreign firms such as Suzuki ,
Honda, LG etc in India are examples of inward FDI.
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OUTWARD FDI:- Domestic firms investing in foreign
countries taking control over the foreign assets is knownas outward FDI. This is also known as Direct Investment
Abroad(DIA). Tata Motors , Infosys , Videocon etc are
examples for outward FDI.
On the basis of types of activity:-
HORIZONTAL FDI:- When a firm invest in a foreign
country in similar production activity as carried out in
home country is a horizontal FDI. This occurs when the
multinational undertakes the same production activities in
multiple countries. A number ofMNCs such as coke, LG
etc expanded internationally by way of horizontal FDI.
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VERTICAL FDI:- Direct investment in industries abroad
so as either provide inputs for the firms domesticoperations or sell its domestic outputs overseas is termd as
vertical FDI.
BACKWARD VERTICAL FDI:- Direct investmentoverseas aimed at providing inputs for the firms
production processes in the home country is termed as
backward vertical FDI. This type of FDI is common in
extractive industries like mining and petroleum extraction.Companies like Shell and British Petroleum expanded
their international business by backward vertical FDI.
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FORWARD VERTICAL FDI:- Direct investment in a
foreign country aimed to sell the output of the firms
domestic production processes is referred to as forward
vertical FDI. Setting up a marketing network , assembly or
mixing operations overseas are illustrations of forward
vertical FDI.
CONGLOMERATE FDI:- Direct investment overseas
aimed at manufacturing products not manufactured by the
firm in the home country is termed as conglomerate FDI.
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On the basis of entry modes:
GREENFIELD INVESTMENT:- Investing in creation ofnew facilities or expansion of existing facilities is termed
as Greenfield investment. The selection FDI mode is
influenced by-
1. Institutional Factors
2. Cultural Factors
3. Transactional factors
MERGERS AND ACQUISITIONS:- For establishingoverseas production facilities mergers and acquisition
are crucial tool for a firms internationalization strategy.
It is estimated that 70%-80% of FDI are in the form of
MERGERS AND ACQUISITIONS.
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On the basis of sector:-
INDUSTRIAL FDI:- Investment by foreign firms in themanufacturing sector is termed as industrial FDI. Major
objectives of FDI in the manufacturing sector include are-
1. To achieve cost efficiency by way of talking advantage
of availability of raw material inputs and manpower atcheaper costs.
2. To bypass trade barriers such as high import tariffs and
other import restrictions.
3. To be closer to the markets and serve them moreefficiently.
4. To have physical presence due to strategic reasons.
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NON INDUSTRIAL FDI:- Investment by a foreign firm in
services sector is termed as non industrial FDI. The majorreasons for this are-
1. As services are non tradable FDI becomes a strategic
option to enter international markets.
2. To overcome regulatory obstacle.
3. To create regular contact with the customer.
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PROMOTION OF FDI IN INDIA:-
INSTITUTIONAL FRAMEWORK:-
1. The Department of Industrial policy and Promotion is
responsible for promoting FDI inflows in India.
2. This department advices to potential investors aboutinvestment policies, procedures and opportunities.
3. It also helps in resolving the problems faced by foreign
investors in the implementation of their projects through
Foreign Investment Implementation Authority which
interacts directly with investor.
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POLICY FRAME WORK:-
1. The policy framework of FDI in India evolved in aphased manner from the strategy of import substitution
soon after independence to progressive liberalization
that begin in early 1990s.
2. FDI inflows in the development of infrastructure ,setting up of Special Economic Zones and technological
upgradation of Indian industry through Greenfield
operation investments in manufacturing and in projects
with high employment potentials are encouraged.
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FDI PROHIBITED:-
Retail Trading.
Atomic Energy.
Lottery Business.
Gambling and Betting sector. Business of Chit Funds.
Plantation except Tea.
Activity/sector not opened to private sector investment.
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