FOREIGN DIRECT INVESTMENT

(FDI)
Course: BBA
Subject: Business Environment
Unit-IV
Faculty: Dr. Priya Sharma
 Foreign investment
• Foreign investment involves capital flows from one country to another, granting extensive
ownership stakes in domestic companies and assets. Foreign investment denotes that
foreigners have an active role in management as a part of their investment. A modern trend
leans toward globalization, where multinational firms have investments in a variety of
countries.

Foreign
Investment

FDI(Investment FPI(Investment
in physical in financial
assets) assets)
 Introduction of FDI

“A foreign direct investment (FDI) is an investment in the form of a controlling

ownership in a business in one country by an entity based in another country”

• Apart from being a critical driver of economic growth, foreign direct investment
(FDI) is a major source of non-debt financial resource for the economic
development of India. Foreign companies invest in India to take advantage of
relatively lower wages, special investment privileges such as tax exemptions,
etc. For a country where foreign investments are being made, it also means
achieving technical know-how and generating employment.
• The Indian government’s favourable policy regime and robust business
environment have ensured that foreign capital keeps flowing into the country.
The government has taken many initiatives in recent years such as relaxing FDI
norms across sectors such as defence, PSU oil refineries, telecom, power
exchanges, and stock exchanges, among others.
 Structure of FDI

Entry mode
Flows Types Entry route

Mergers &
Inflow Horizontal Automatic
acquisitions

Green field
Outflow Government
investment Vertical
(FIPB)

Licensing Complex

Exporting

Partnering and
Strategic Alliance
 FDI Flows
• FDI net inflows are the value of inward direct investment made by non-
resident investors in the reporting economy. In other words it means the
investments which a country receives from other countries, which in turn,
help the host country (receiving FDI) to have access to new technologies,
capital, processes, organisational technologies and management skills.

• FDI net outflows are the value of outward direct investment made by the
residents of the reporting economy to external economies. ... Outward
direct investment is also called direct investment abroad. In other words it
means the investments which a country makes in other countries.
 Entry mode of FDI
Type of Entry Advantages Disadvantages
Low control, low local
knowledge, potential negative
Exporting Fast entry, low risk
environmental impact of
transportation

Less control, licensee may

become a competitor, legal and
Licensing and Franchising Fast entry, low cost, low risk
regulatory environment (IP and
contract law) must be sound

Higher cost than exporting,

Shared costs reduce investment
Partnering and Strategic licensing, or franchising;
needed, reduced risk, seen as
Alliance integration problems between
local entity
two corporate cultures

Fast entry; known, established High cost, integration issues

Acquisition
operations with home office
Gain local market knowledge;
High cost, high risk due to
Greenfield Venture (Launch of a can be seen as insider who
unknowns, slow entry due to
new, wholly owned subsidiary) employs locals; maximum
setup time
control
Types and Examples of Foreign Direct Investment

• Horizontal: a business expands its domestic operations to a foreign country. In this case, the
business conducts the same activities but in a foreign country. For example, McDonald’s
opening restaurants in Japan would be considered horizontal FDI.
• Vertical: a business expands into a foreign country by moving to a different level of
the supply chain. In other words, a firm conducts different activities abroad but these activities
are still related to the main business. Using the same example, McDonald’s could purchase a
large-scale farm in Canada to produce meat for their restaurants.
However, two other complex forms of FDI have also been observed: conglomerate and platform
FDI.
• Conglomerate: a business acquires an unrelated business in a foreign country. This is
uncommon, as it requires overcoming two barriers to entry: entering a foreign country and
entering a new industry or market. An example of this would be if Virgin Group, which is
based in the United Kingdom, acquired a clothing line in France.
• Platform: a business expands into a foreign country but the output from the foreign
operations is exported to a third country. This is also referred to as export-platform FDI.
Platform FDI commonly happens in low-cost locations inside free-trade areas. For example, if
Ford purchased manufacturing plants in Ireland with the primary purpose of exporting cars to
other countries in the EU.
 Entry Route of FDI
• Basically, there are two routes for FDI in India. There is the Automatic
Route, where no approval or authority is required by the private foreign
investor. He can invest in any company it wishes with no need for
government approval.
• And then there is the Government Route. In this route, there is no
investment without the prior approval of the Government of India.
 Entry Route of FDI(Contd...)
• Foreign Direct Investment in India does not have a uniform rate. Some industries allow 100%
FDI, i.e. the entire funds of the business can be from foreign direct investment.
The percentages vary from 26% to 49% to 51%. There are a few industries where FDI is strictly
prohibited under any route. These industries are
• Atomic Energy Generation
• Any Gambling or Betting businesses
• Lotteries (online, private, government, etc)
• Investment in Chit Funds
• Agricultural or Plantation Activities (although there are many exceptions like horticulture,
fisheries, tea plantations, Pisciculture, animal husbandry, etc)
• Housing and Real Estate (except townships, commercial projects, etc)
• Trading in TDR’s
• Cigars, Cigarettes, or any related tobacco industry
There has always been opposing views about FDI in some sensitive industries like defence,
insurance, media, etc. Because of the integrity of our democracy and the safety of our nation
are at stake. So, for many such industries, the FDI limits are there. For example, defence
industry allows only 49% FDI.
 Foreign Direct Investment Flows to India:
Country-wise and Industry-wise data
• https://m.rbi.org.in/Scripts/AnnualReportPubli
cations.aspx?Id=1278
 Importance of FDI
• FDI provides capital
• FDI removes balance of payments constraint
• FDI brings technology, management and marketing skills
• FDI promotes exports of host developing country
• FDI provides increased employment
• FDI results in higher wages
• FDI generates competitive environment in host country
(FOR DETAIED EXPLAINATION REFER TO THE BOOK
NOTES)
 Disadvantages of FDI
• Disappearance of cottage and small scale industries
• Contribution to the pollution
• Exchange crisis
• Cultural erosion
• Political corruption
• Inflation in the economy
• Trade deficit
• World bank and LMF AID
• Convertibility of currency
(FOR DETAIED EXPLAINATION REFER TO THE BOOK NOTES)
 FDI in India: Market size
• According to the Department for Promotion of Industry and Internal Trade
(DPIIT), FDI equity inflows in India stood at US$ 456.79 billion during
April 2000 to December 2019, indicating that government's effort to
improve ease of doing business and relaxation in FDI norms is yielding
results.
• FDI equity inflows in India stood at US$ 36.79 billion during April-
December 2019. Data for 2019-20 indicates that the service sector attracted
the highest FDI equity inflow of US$ 6.52 billion, followed by computer
software and hardware – US$ 6.34 billion, telecommunications sector -
US$ 4.29 billion and trading – US$ 3.52 billion.
• During 2019-20, India received the maximum FDI equity inflows from
Singapore (US$ 11.65 billion), followed by Mauritius (US$ 7.45 billion),
Netherlands (US$ 3.53 billion), Japan (US$ 2.80 billion) and USA (US$
2.79 billion).
 FDI in India: Investments/ developments
• Some of the recent significant FDI announcements are as follows:
• In January 2020, Amazon India announced investment of US$ 1 billion for digitising small
and medium businesses and creating one million jobs by 2025.
• In January 2020, Mastercard announced its plans to invest up to US$ 1 billion in India over
next five years to double-up its research and development efforts for the Indian market.
• In October 2019, French oil and gas giant Total S.A. have acquired a 37.4 per cent stake in
Adani Gas Ltd for Rs 5,662 crore (US$ 810 million) making it the largest Foreign Direct
Investment (FDI) in India’s city gas distribution (CGD) sector.
• In August 2019, Reliance Industries (RIL) announced one of India's biggest FDI deals, as
Saudi Aramco will buy a 20 per cent stake in Reliance's oil-to-chemicals (OTC) business at an
enterprise value of US$ 75 billion.
• In October 2018, VMware, a leading software innovating enterprise of US has announced
investment of US$ 2 billion in India between by 2023.
• In August 2018, Bharti Airtel received approval of the Government of India for sale of 20 per
cent stake in its DTH arm to an America based private equity firm, Warburg Pincus, for
around $350 million.
• In June 2018, Idea’s appeal for 100 per cent FDI was approved by Department of
Telecommunication (DoT) followed by its Indian merger with Vodafone making Vodafone
Idea the largest telecom operator in India
• In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a consideration of US$ 16
billion.
 FDI in India: Government Initiatives
• In March 2020, government permitted non-resident Indians (NRIs) to acquire up to 100 per
cent stake in Air India.
• In December 2019, government permitted 26 per cent FDI in digital sectors.
• In August 2019, government permitted 100 per cent FDI under the automatic route in coal
mining for open sale (as well as in developing allied infrastructure like washeries).
• In Union Budget 2019-20, the government of India proposed opening of FDI in aviation, media
(animation, AVGC) and insurance sectors in consultation with all stakeholders.
• 100 per cent FDI is permitted for insurance intermediaries.
• As of February 2019, the Government of India is working on a road map to achieve its goal of
US$ 100 billion worth of FDI inflows.
• In February 2019, the Government of India released the Draft National E-Commerce Policy
which encourages FDI in the marketplace model of e-commerce. Further, it states that the FDI
policy for e-commerce sector has been developed to ensure a level playing field for all
participants.
• Government of India is planning to consider 100 per cent FDI in Insurance intermediaries in
India to give a boost to the sector and attracting more funds.
• No government approval will be required for FDI up to an extent of 100 per cent in Real Estate
Broking Services.
• The Government of India is in talks with stakeholders to further ease foreign direct investment
(FDI) in defence under the automatic route to 51 per cent from the current 49 per cent, in
order to give a boost to the Make in India initiative and to generate employment.
 Conclusion
• India has become the most attractive emerging market for global partners
(GP) investment for the coming 12 months, as per a recent market
attractiveness survey conducted by Emerging Market Private Equity
Association (EMPEA).
• Annual FDI inflows in the country are expected to rise to US$ 75 billion
over the next five years, as per a report by UBS.
• The Government of India is aiming to achieve US$ 100 billion worth of FDI
inflows in the next two years.

(Note: Conversion rate used as on January 2020, Re 1 = US$ 0.014022531)