Foreign Investment and its

Necessity : Introductory
Saroj K Ghimire
Asst. Prof. of Law, TU
2016-11-10
 FOREIGN INVESTMENT
• "Foreign Investment" means the following
investment made by a foreign investor in any
industry"
• (1) Investment in Share (Equity) (FDI)
• (2) Reinvestment of the earnings derived from
the investment.
• (3) Investment made in the form of loan or
loan facilities.
FOREIGN DIRECT INVESTMENT
• FDI is an important type of private capital
financing for developing countries.
• FDI is a direct investment into production in a
country by a company located in another
country, either by buying a company in the
target country or by expanding operation of an
existing business in that country.
• Thus, putting the money of your country in a
company which in functioning in some other
country is Foreign Direct Investment, if we invest
this way then we are a foreign direct investor.
• OECD Defines, “ FDI is a category of 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”
• Cross border investment
• Resident of one economy to other
• Direct investment and Excludes indirect profits and
investments
 Must have lasting interest

• Lasting interest implies the existence of long-

term relationship between the direct
investment and direct investment enterprises,
• a significant degree of influence and control
on the management and operation of that
enterprises, and
• Intention of long term benefit.
 thus
• FDI can be defined as an investment made by
a resident of one economy in another
economy, and
• It is long term nature or of “lasting interest”.
• IMF 1993, “ for operational purposes 10% of
the voting shares or voting power is the level
of ownership necessary for a direct
investment interest to exist.
• Foreign Direct Investment plays an
extraordinary and growing role in global
business.
• It can provide a firm with new markets and
marketing channels, cheaper production
facilities, access to new technology, products,
skills and financing for a host country, which
receives the investment. It can provide a
source of new technologies, capital, processes,
products, organizational technologies and
management skills, and as such can provide a
strong impetus to economic development.
 In the case of FDI
• The foreign direct investor is represented on the board of
directors of the direct investment enterprises and participates
in its policy making process.
• Means of representation:
• FDI would normally involve ownership in the equity or voting
power,
• Have direct control in the management,
• Considered to be more of an owner/manager then an
investor lender
• Takes responsibility of managing or arranging corporate
financing, loans and undertakes business risks
 Direct investment relationship
• Arises when an investor resident in one
economy makes an investment that gives
control or a significant degree of influence on
the management of an enterprises that is
resident in another economy.
 Direct Investor
• An entity or group of related entities that is
able to exercise control or a significant degree
of influence over another entity that is
resident of a different economy.
 Classification of direct investor
• An individual
• A group of related individual
• Incorporated enterprises
• Public or private enterprises
• Government body
• And other
CONTEXT
• Like trade, foreign direct investment (FDI) has
occurred throughout history and investors
routinely have entered new markets in foreign
dominions.
• From its early days of economic development to
the First World War, the USA was the world’s
largest importer of foreign capital, and now
several countries are in race of inviting FDI.
• However, due to the economic crisis slashed in
the year 2008 and onwards, FDI flows, affected
all economies, sectors, and forms of investment.
• The benefits of FDI for economic development
have been well established
• A global network of 80,000 multinational
corporations and 800,000 foreign affiliates has
helped create millions of jobs, transferred
technology, upgraded skills, fostered
competition, and contributed to the fiscal
standing of many economies.
 Coverage of FDI
• FDI to grow the company worldwide
• FDI to avoid trade barriers
• FDI as a tool to follow investment
opportunities
• FDI to acquire local management expertise
• FDI to attract foreign currency
• FDI as a means of Technology benefit.
• FDI as means of generating employment
 FDI revolves around some theories, like:

• FDI is wholly beneficial to the host state.

Beneficial Theory
• Unless a state veers (deviates) away from
dependency on FDI, it cannot achieve
development (Dependency theory)
• Unless states veers away from dominancy, it
cannot achieve its independent recognition.
(Dominance theory)
Need for Foreign Direct Investment
• Inadequate Domestic Capital:
• Since, the domestic capital is inadequate for the
purposes of economic growth, it becomes necessary
to invite foreign capital for investment.
• Developing countries are not in a position to mobilize
adequate savings for their development.
• Thus, foreign capital becomes indispensable to fill the
gap between actual capital formation out of domestic
sources and the amount of capital necessary for
accelerating the process of development.
To Decrease Deficit in Balance of Payment

• A developing country has to import of plant,

machinery, equipments, raw material,
technology, etc. in large amount, to balance it,
it cannot do export in equivalent amounts.
• So there is arising a deficit in the balance of
payment.
• Foreign capitals help to decrease such deficit.
 Development of Basic infrastructure

• Increment in infrastructure facility is necessary

for economic development.
• But there is a lack of capital for infrastructure
development in developing country.
• By receiving foreign capital investment such
country can build-up such facility and can
push up economic development
 Inflow of Technical know-how
• The underdeveloped or developing countries
have a low level of technology, which create a
need of import of technology from the
developed countries.
• Such technology comes with a foreign capital
investment.
Exploitation of Natural Resources
• In a developing country, it cannot make
optimum use of natural resources due to lack
of knowledge and capital.
• With the assistance of foreign capital
investment, the maximum use and speedy
economic development can be possible.
 Speeding up Economic Activity
• In a developing country like Nepal, there may
be potential saved but this may come forward
only with a higher level of economic activity,
where foreign capital can prove to be quite
helpful.
 Risk Factor in New Business
• The larger risk is lying in new business.
• When the industrialization process starts, then
no entrepreneurs come forward to face risk and
uncertainty lying in new business.
• But with the help of foreign aid, many new
businesses have established and developed,
which have given their valuable contribution in
economic development, by facing risk factor
successfully
 Vicious Circle of Poverty
• Developing countries suffer from the vicious
circle of poverty due to low level of income
savings and investment foreign help to
increase the production of wealth and income.
• This results in increase of savings and
investment.
• The cumulative process follows towards
development.
 Total Economic Development
• For totally economic development and to
maintain balance in the development of
various sectors of country, foreign direct
investment is necessary.
• Due to foreign investment, it has been
possible development in industry and service
sector which will facilitate for overall
economic development.
Development and reforms in laws
 Principles of the law of foreign investment

• Principle of simple and transparent procedure

• - Protection against expropriation
• - Fair and equitable treatment
• - Full protection and security
• - National Treatment
• - The MFN treatment
• - Non-discrimination and fairness