CURRENT TRENDS IN FDI

INTRODUCTION:

FDI is categorized as cross border investment made by a resident in one economy (the direct
investor) with the objective of establishing a ‘lasting interest’ in an enterprise (the direct
investment enterprise) that is resident in an economy other than that of the direct investor.
The motivation of the direct investor is a strategic long term relationship with the direct
investment enterprise to ensure the significant degree of influence by the direct investor in
the management of the direct investment enterprise. Direct investment allows the direct
investor to gain access to the direct investment enterprise which it might otherwise be
unable to do. The objectives of direct investment are different from those of portfolio
investment whereby investors do not generally expect to influence the management of the
enterprise.

During last twenty to twenty-five years, there has been a tremendous growth in global
Foreign Direct Investment (FDI). There was substantial growth in international trade. The
growth in international flows of goods and capital implies that geographically distant parts of
the global economy are becoming increasingly interconnected as economic activity is
extended across boundaries. FDI is an important factor in the globalisation process as it
intensifies the interaction between states, regions and firms. Growing international flows of
portfolio and direct investment, international trade, information and migration are all parts
of this process. The large increase in the volume of FDI during the past two decades provides
a strong incentive for research on this phenomenon.

The definition of FDI flows has changed over time as the definition of FDI enterprises has
changed. Direct investment capital flows are made up of “…equity capital, reinvested
earnings, and other capital associated with various inter-company debt transactions.”
The last category is the most difficult, covering “…the borrowing and lending of funds
including debt securities and supplier’s credits between direct investors and subsidiaries,
branches and associates.” This includes “…inter-company transactions between affiliated
banks (depository institutions) and affiliated financial intermediaries….” However, the
later are now to be included in direct investment only if they are “…associated with
permanent debt (loan capital representing a permanent interest) and equity (share
capital) investment or, in the case of branches, fixed assets”. Deposits and other claims
and liabilities related to usual banking transactions of depositary institutions and claims
and liabilities of other financial intermediaries are classified under portfolio investment or
other investment.

FDI IN EARLIER INDIA

In the Indian context till the end of March 1991, FDI was defined to include investment in:

1) Indian companies which were subsidiaries of foreign companies

2) Indian companies in which 40 percent or more of the equity capital was held
outside India in one country

3) Indian companies in which 25 percent or more of the equity capital was held by a
single investor abroad.

As a part of its efforts to bring about uniformity in the reporting of international

transactions by various member countries, the Indian Monitory Fund has provided
certain guidelines which enable inter-country comparisons. Reflecting this with effect
from March 31, 1992 the objective criterion for identifying direct investment has been
modified and is

Fixed at 10 percent ownership of ordinary share capital or voting rights. Direct

Investment also includes preference shares, debentures and deposits, if any, of those
individual investors who hold 10 percent or more of equity capital. In addition to this,
direct investment also includes net foreign liabilities of the branches of the foreign
companies operating in India. A committee was constituted by the Department of
Industrial Policy and Promotion (DIPP) in May 2002 to bring the reporting system of FDI
data in India into alignment with international best practices. Accordingly, the RBI has
recently revised data on FDI flows from the year 2001 onwards by adopting a new
definition of FDI. The revised definition includes three categories of capital flows under
FDI; equity capital, reinvested earnings and other direct capital. Previously the data on
FDI reported in the Balance of payment statistics used only equity capital. It is the intent
and objective of the Government to promote foreign direct investment through a policy
framework which is transparent, predictable, simple and clear and reduces regulatory
burden. The system of periodic consolidation and updation is introduced as an investor
friendly measure. It is the policy of the Government of India to attract and promote
productive FDI in activities which significantly contribute to industrialization and socio-
economic development. FDI supplements domestic capital and technology. It has been
decided that from now onwards a consolidated circular would be issued every six
months to update the FDI policy. This consolidated circular will, therefore, be
superseded by a circular to be issued on April 30, 2011.

TYPES OF FDI

1) Inward Foreign Direct Investment: This refers to long term capital inflows into a
country other than aid, portfolio investment or a repayable debt. It is done by an
entity outside the host country in the home country.

2) Outward Foreign Direct Investment: This refers to a long term capital outflow
from a country other than aid, portfolio investment or a repayable debt. It is done
by an entity outside the host country in the home country.

3) Horizontal Foreign Direct Investment: This refers to a multi-plant firm producing

the same line of goods from plants located in different countries

4) Vertical Foreign Direct Investment: If the production process is divided into

upstream (parts and components) and downstream (assembly) stages, and only
the latter stage is transferred abroad, then the newly established assembly plant’s
demand for parts and components can be met by exports from home-country
suppliers. This is what Lipsey and Weiss (1981, 1984) and other researchers
describe as “Vertical FDI”, whose aim is to exploit scale economies at different
stages of production arising from vertically integrated production relationships.

5) Greenfield Foreign Direct Investment: Greenfield FDI is a form of investment

where the MNC constructs new facilities in the host country.

6) Brownfield Foreign Direct Investment: Brownfield FDI implies that the MNC or
an affiliate of the MNC merges with or acquires an already existing firm in the
host country resulting in a new MNC affiliate.

LIKELY BENEFITS OF FDI

1) FDI is less volatile than other private flows and provides a stable source of
financing to meet capital needs.

2) FDI is an important and probably dominant channel of international transfer of

technology. MNCs, the main drivers of FDI are powerful and effective vehicles
for disseminating technology from developed to developing countries and are
often the only source of new and innovative technology which is not available
in the arm’s length market.

3) The technology disseminated through FDI generally comes as a package

including the capital, skills and managerial knowhow needed to appropriate
technology properly.

The resilience of foreign direct investment during financial crises may lead
many developing countries to regard it as the private capital inflow of choice.
Although there is substantial evidence that such investment benefits host
countries, they should assess its potential impact carefully and realistically

Foreign direct investment (FDI) has proved to be resilient during financial

crises. For instance, in USA, such investment was remarkably stable during the global
recession of 2008-10. In sharp contrast, other forms of private capital flows—
portfolio equity and debt flows, and particularly short-term flows—were subject to
large reversals during the same period The resilience of FDI during financial crises
was also evident during the Mexican crisis of 1994-95 and the Latin American debt
crisis of the 1980s.This resilience could lead many developing countries to favour FDI
over other
forms of capital flows, furthering a trend that has been in evidence for many years.
Also, when compared to other inflows FDI have proved strong in almost every
countries. When compared to the chart below we can clearly see the portfolio
investment and loans comparison with the FDI. Bifurcation between developing and
emerging market countries is shown below:

FDI versus other flows

LIKELY COSTS OF FDI

Recent years have seen increased public concern that the benefits of FDI have yet to
be demonstrated and that, where benefits exist, they may not be shared equitably in
the society. The adjustment costs associated with FDI include:

i. Higher short term unemployment due to corporate restructuring

ii. Increased market concentration

iii. Incomplete utilisation of FDI benefits due to incoherent institutional policies and
regulatory conditions, unavailability of skilled labour and infrastructure.

FACTORS WHICH ATTRACT FDI IN A COUNTRY

 Host countries with a sizeable domestic market, measured by GDP per capita
and sustained growth of these markets measured by growth rates of GDP,
attract relatively large volumes of FDI.
 Resource endowments of a host country including natural and human
resources are a factor of importance in the investment decision process of the
foreign firms.
 Infrastructure facilities including transportation and communication are
important determinants of FDI. An unexplored issue has been the role of
information decisions. FDI requires substantial fixed costs of identifying an
efficient location, acquiring knowledge of the local regulatory environment and
coordination for supplies. Thus access to better information may make FDI to
that location more likely.
 Macroeconomic stability signified by stable exchange rates and low rates of
inflation is a significant factor in attracting foreign investors.
 Political stability in the host countries is an important factor in the investment
decision process of foreign firms.
 A stable and transparent policy framework towards FDI is an attractive factor to
potential investors.
 Foreign firms place a premium on a distortion free economic and business
environment. An allied proposition here is that a distortion free foreign trade
regime which is neutral in terms of the incentives it provides for Import
Substitution (IS) and Export Promoting (EP) industries attracts relatively large
volumes of FDI than either an IS or EP regime.
 Fiscal and monetary incentives in the form of tax concessions do play a role in
attracting FDI. MNCs are potentially subject to taxation in both the host and
home countries. It is found that the way in which parent country reduces
double taxation on their MNCs can have implications for FDI.
 Trade protection is also found to encourage FDI. It is found that FDI response
to these trade actions (tariff jumping FDI) occurs only for firms with previous
experience as MNCs.
 Wages are an important factor determining inward FDI. It is possible that lower
wages are associated with higher levels of inward FDI. However, where there
is a control for productivity, there could be a positive association found
between FDI and the types of labour standards that may raise wages but that
ultimately contributes to worker’s productivity. It is found that FDI is positively
correlated to the right to establish unions, to strike, to collective bargaining and
to the protection of the union members
 FDI TRENDS

Global inflows of foreign direct investment (FDI) fell by 39% from US$1.7 trillion in
2008 to a little over US$1.0 trillion in 2009, based on UNCTAD estimates. The decline
in FDI was widespread across all major groups of economies. After experiencing a
severe fall in 2008, FDI flows to developed countries continued their dramatic decline
in 2009 (by a further 41%). FDI flows to developing and transition economies, which
had risen in 2008, declined in 2009 (by 35% and 39%, respectively), as the impact of
the global financial and economic crisis continued to unfold. All components of FDI –
equity capital, reinvested earnings and other capital flows (mainly intra-company
loans) – were affected by the downturn. However, the decrease was especially
marked for equity capital flows, which are most directly related to transnational
corporations’ (TNCs) longer-term investments strategies. Regarding the mode of
entry, cross-border mergers and acquisitions (M&As) were the most affected, with a
66% decrease in 2009 as compared to 2008. The number of international greenfield
projects also declined markedly, though to a much lesser degree (-23%). After a
sharp fall in the first quarter of the 2009, followed by a slight rebound in the second
quarter, FDI flows in the third quarter remained relatively stable. UNCTAD’s Global
FDI Quarterly Index declined only slightly, from 113 to 111 (see table below).
However, when compared to the corresponding quarter of 2008, global FDI flows in
2009 remained much lower. The Global FDI Quarterly Index in the third quarter in
2009 was 36 points lower than the level in the previous year. Initial indicators for the
fourth quarter of 2009 show no signs of a pickup in FDI flows. Global cross-border
M&As, which are highly correlated with FDI equity capital flows, plunged in the fourth
quarter of 2009 after several quarters of marginal improvement. Nevertheless, it is
still likely that a modest rebound in flows will take place in 2010, as investment
conditions are improving in many countries. However, there is a huge upward slide in
the FDI scenario after post recession period. Global FDI flows in 2010 will exceed $1.2
trillion. The factors in current trends in FDI are:

 FDI flows to the developing world are expanding again

 Regional FDI patterns are shifting in the developing world

 South-South FDI is significant and growing

 China continues to be the developing world’s FDI magnet

 Strong commodity prices are boosting FDI for extractive industries

  Private investment in public infrastructure is surging

 Efficiency-seeking FDI is an increasing share of all FDI in developing

countries

 The end of global textile/apparel quotas has had mixed impacts on FDI

 OECD’s Policy Framework for Investment is an important new

analytical tool

FDI flows to the developing world are expanding again

Worldwide FDI flows peaked in 2000, and then – in an environment of global economic
recession and uncertainty – declined through 2003 for both developed and developing
countries and we saw again a decline at the time of global recession period of 2008.
Since that low point, however, FDI inflows have again begun to grow. In the developing
world the increase has been dramatic: in 2009/2010 FDI inflows rose by 30 percent from
the 2008/2009 trough. Reports suggest that in developing countries the flow of FDI is
more rapid than in high income countries. For 2009, early reports indicate that
developing countries experienced a third consecutive year of FDI expansion, albeit a
modest one. And for the rest of the decade, forecasts suggest that FDI flows to
developing countries will rise sharply . It is widely known that capital flows into
developing economies like India have risen sharply in nineties and has, therefore,
become a self propelling and dynamic actor in the accelerated growth of the economies.
This study focuses on FDI as a vector of Indian globalisation. Recently not only did India
become a more frequent destination for FDI, but also many Indian firms have started
investing abroad in a big way. Thus we find a surge in both inward and outward FDI flows.
The impassioned advocacy of increased FDI flows (inward and outward) is based on the
well worn arguments that
FDI is a rich source of technology and knowhow; it can invigorate the labour oriented
export industries of India, promote technological change in the industries and put India
on a higher growth path. This exuberance of FDI needs to be based on analytical review
of India’s needs and requirements and her potential to participate in huge investment
flows. Thus there is a definite need to incorporate the various dimensions of FDI into a
theory of open economy development so as to explain in one integrated theoretical
paradigm, the undercurrents of both inward and outward FDI flows. Comparison
between FDI flow in developed and developing country is given below:
Regional FDI patterns are shifting in the developing world

FDI inflows increased in all regions of the developing world, reaching new highs in all
regions. FDI inflows to developing countries are expected to rise 17% in 2010 ,
supported by low funding costs. In contrast, FDI flows to high-income countries are
expected to fall 4%, reflecting weaker short and medium-term growth prospects. Major
focus of FDI inflow and outflow is in Asia, wherein China is playing the major role in this
area.  The amount of foreign direct investment (FDI) that flowed into China in July 2010
rose 29.2 percent year on year to 6.924 billion U.S. dollars, a Ministry of Commerce
(MOC) spokesman said Tuesday. The figure brought FDI inflow to China in the first seven
months of the year to 58.35 billion U.S. dollars, an increase of 20.65 percent from a year
earlier, ministry spokesman Yao Jian said. Yao said on a month-on-month basis, FDI
inflow had increased by more than 20 percent for two straight months, reflecting the
solid recovery in FDI flows into China. The manufacturing sector received 47.94 percent
of the July FDI inflow and the services industry got 45.09 percent. A total of 14,459
foreign-invested companies were approved for establishment in China during the first
seven months of the year, up 17.9 percent year on year. On the other hand, during the
first seven months of the year, Chinese entities invested 26.75 billion U.S. dollars in
overseas markets, excluding financial investment, bringing total outbound investment by
the end of July to 226.5 billion U.S. dollars, the MOC data showed without giving year-
on-year comparisons. China's Hong Kong, the Cayman Islands, Sweden, Canada,
Australia, the United States and Brazil were the main overseas destinations of Chinese
FDI.

The aggregate cost of 32 domestic mergers and acquisition (M&A) agreements in India
in January 2010 stood at US$ 2,167 million against 8 deals amounting to US $ 1,324
million and 28 deals amounting to US$ 223 million in 2009 and 2008, respectively.  In
the fiscal year 2009, developing economies gained a massive share of 51.6% FDI, more
than what the developed nations gained, as per the survey by Ernst & Young on
globalization. This was chiefly because of major decline in FDI into industrial markets,
that was 50% less than FDI in 2008. From 4% of 2004 to 8% of 2005, the nation's
endowments in infrastructure industry doubled, as per the report by Planning
Commission of India. With the fiscal structure gaining momentum, endowment
proposals in India Inc witnessed an upsurge of around 16% in 2009 to US$ 345.3, as per
the report conducted by a premiere sectoral body. In 2009, nine tenders contributing
total FDI of US$ 112.25 million was sanctioned by the central administration. Among
the sanctioned tenders, Mitsui and Company of Japan is expected to contribute US$
69.83 million to set-up a fully governed subsidiary in the warehousing industry. In
2010, the Indian government gave its consent to 14 FDI tenders which are likely to
bring foreign investment amounting to US $ 157.89 million. These encompass:
 US$ 58.82 million worth FDI tender by Asset Reconstruction Company
 FDI valuing US$ 44.39 million by Standard Chartered Bank that is likely to
elevate to 100% from 74.9% in its portfolio management arm
 Tenders by SaharaOne, KS Oils and NDTV Imagine
 NDTV Lifestyle tender worth US$ 54.28 million
 Tender by India Infrastructure Development Fund based in Mauritius that is
likely to bring US$ 517.29 million
 Asianet's proposal worth US$ 91.7 million to undertake the business of
broadcasting non-news and current affairs television channels.
 Global media magnate Rupert Murdoch-controlled Star India holdings'
investment of US$ 70 million to acquire shares of direct-to-home (DTH) provider
Tata Sky.
 AIP Power will set up power plants either directly or indirectly by promotion
of joint ventures at an investment of US$ 24.4 million.

Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake in
the 1,320 mega watt (MW) coal-fired plant of Thermal Powertech Corporation India
Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 235.1
million.

Cinepolis, a Mexico-based multiplex operator, is looking at expanding its footprint in

India. The company which started operations in India last year plans to invest US$ 350
million in the next five years to operate 500 screens in 40 cities.

According to a study released by global consultancy Bain & Company, private equity
(PE) and venture capital (VC) investments are projected to reach US$ 17 billion in 2010.
The report includes a survey conducted across leading PE investors globally. The
survey revealed number of respondents planning to invest in the range of US$ 200-500
million in 2011 has risen nearly four-fold to 27 per cent. Further, as per figures
released by Grant Thornton, the food processing and agri-based companies have
attracted US$ 300 million PE investments during January-June 2010. In 2009, PE
investments in these sectors were about US$ 398 million.

IL&FS Investment Managers (IIML) plans to invest US$ 300 million, in real estate and
urban infrastructure projects by the end of 2010.

“We are in the advance stages of finalising 3-4 deals in residential real estate and
urban infrastructure space like roads and hospitality,” said Shahabad Dalal, Vice-
Chairman and MD, IIML.

Investments by French companies in India is expected to touch US$ 12.72 billion by

2012, and would focus on automobile, energy and environment sectors among others,
according to Jean Leviol, Minister Counsellor for Economic, Trade and Financial Affairs,
French Embassy in India.
Japanese pharmaceutical major, Eisai plans to invest US$ 21.25 million in India to
expand its manufacturing capacity and research capabilities. The investment will be
used for increasing the manufacturing capacity of Active Pharmaceutical Ingredients
(APIs) and product research at the Eisai Knowledge Centre in Visakhapatnam.

Japan's Kobelco Cranes, a subsidiary of Kobe Steel, is planning to invest US$ 12.7
million to set up a plant near Chennai to produce crawler cranes. The plant will begin
production in 2011.

Franco-American telecom equipment maker, Alcatel-Lucent plans to shift its global

services headquarters to India. The headquarters would need about US$ 500 million in
investments over three years, according to Ben Verwaayen, Chief Executive Officer,
Alcatel-Lucent.
 E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS
(Financial years):

Amount Rupees in crores (US$ in million)

Ranks Country 2008-09 2009-10 2010-11 Cumulative %age to
(April- (April- ( April- Inflows total
March) March) September) (April ’00 - Inflows
September (in terms of
‘10) US $)
1. MAURITIUS 50,899 49,633 17,720 228,626 42 %
(11,229) (10,376) (3,849) (51,089)
2. SINGAPORE 15,727 11,295 5,182 50,329 9%
(3,454) (2,379) (1,139) (11,329)
3. U.S.A. 8,002 9,230 3,349 40,538 7%
(1,802) (1,943) (724) (9,002)
4. U.K. 3,840 3,094 1,508 27,507 5%
(864) (657) (327) (6,212)
5. NETHERLAN 3,922 4,283 2,289 22,415 4%
DS (883) (899) (498) (4,985)
6. CYPRUS 5,983 7,728 1,921 19,698 4%
(1,287) (1,627) (415) (4,314)
7. JAPAN 1,889 5,670 2,552 19,447 4%
(405) (1,183) (563) (4,278)
8. GERMANY 2,750 2,980 364 12,832 2%
(629) (626) (79) (2,878)
9 FRANCE 2,098 1,437 1,395 8,313 2%
(467) (303) (301) (1,831)
10. U.A.E. 1,133 3,017 1,129 8,152 1%
(257) (629) (243) (1,792)
TOTAL FDI INFLOWS * 123,025 123,120 50,570 552,268 -
(27,331) (25,834) (11,005) (123,378)
SOUTH-SOUTH FDI IS SIGNIFICANT AND GROWING

Multinational enterprises based in developing countries have become increasingly

important sources of FDI capital for other developing countries. This South-South FDI
may have been about 37 percent of total FDI inflows to the developing world in 2003, up
from 16 percent in 1995. Russia, China, Brazil, Mexico, Indonesia, and India are key FDI
providers. Most South-South FDI is intra-regional – China is a major investor in Asia, for
example, and South Africa is a major investor in Sub-Saharan Africa – but there are also
rising inter-regional trends as well, notably Chinese and Indian investment in Sub-
Saharan Africa. Much South-South FDI is directed to entering host-country or regional
markets, but some is also natural resource-seeking. South-South FDI will likely to
continue to grow in importance over the rest of the decade, multiplying the developing
world’s potential FDI sources.