FOREIGN DIRECT FOREIGN DIRECT INVESTMENTINVESTMENT

Deepthy Sai Manikandan

FDI: IntroductionFDI: Introduction

FDI occurs when a firm invests FDI occurs when a firm invests directly in facilities to produce or directly in facilities to produce or market a product in a foreign market a product in a foreign country. country.

Once a firm undertakes FDI, it Once a firm undertakes FDI, it becomes a Multi National Company.becomes a Multi National Company.

2 main forms2 main forms

1.1. Establishment of a new operation in Establishment of a new operation in a foreign country – GREEN FIELD a foreign country – GREEN FIELD INVESTMENT.INVESTMENT.

2.2. Acquiring or merging with an Acquiring or merging with an existing firm in foreign country.existing firm in foreign country.

Flow of FDIFlow of FDI

Investment in the equity capital of an Investment in the equity capital of an enterprise in a recipient country by an enterprise in a recipient country by an MNC or an individual.MNC or an individual.

Profits ploughed back by the subsidiary of Profits ploughed back by the subsidiary of an MNC. Such retained profits are assumed an MNC. Such retained profits are assumed to be reinvested in the subsidiary.to be reinvested in the subsidiary.

Short term or long term borrowing and Short term or long term borrowing and lending of funds between the MNC and its lending of funds between the MNC and its subsidiary.subsidiary.

FDIFDI

Allowed in the Allowed in the followingfollowing

forms:forms: Financial Financial

collaborationcollaboration Joint ventureJoint venture Capital marketCapital market Private placementsPrivate placements

Forbidden territoriesForbidden territories Arms & Arms &

ammunitionammunition Atomic energyAtomic energy Railway transportRailway transport Coal & ligniteCoal & lignite MiningMining

Important to IndiaImportant to India

Induce an increase in overall investment Induce an increase in overall investment which leads to faster economic growth.which leads to faster economic growth.

To use unutilized natural resources.To use unutilized natural resources. Improves overall degree of investors Improves overall degree of investors

confidence.confidence. Earns foreign exchange there by creating Earns foreign exchange there by creating

positive impact on exchange rate.positive impact on exchange rate. Additional source of capital – bridge the gap Additional source of capital – bridge the gap

between income and consumption.between income and consumption.

Challenges and strategy to Challenges and strategy to promote FDIpromote FDI

Lack of quality infrastructural Lack of quality infrastructural facilities in India is one of the main facilities in India is one of the main reasons for India’s inability to attract reasons for India’s inability to attract huge infrastructure.huge infrastructure.

Overall political instability at the Overall political instability at the centre is another deterrent for FDI.centre is another deterrent for FDI.

Barriers in Indian marketBarriers in Indian market

Tariffs and tax structureTariffs and tax structure

- complicated tax structure- complicated tax structure BureaucracyBureaucracy

- attitude of bureaucrats- attitude of bureaucrats

- not co-operative- not co-operative CorruptionCorruption InfrastructureInfrastructure

- poor state- poor state

Effect of RecessionEffect of Recession

Most of the FDI in India comes from the Most of the FDI in India comes from the US, so the current financial & liquidity US, so the current financial & liquidity crisis in US affected the flow of FDI.crisis in US affected the flow of FDI.

FDI in BFSI will not be possible due to the FDI in BFSI will not be possible due to the financial crunch but investments in other financial crunch but investments in other venues like retail, print, cinemas, venues like retail, print, cinemas, infrastructure will boom.infrastructure will boom.

Finance Minister is looking to allow 100% Finance Minister is looking to allow 100% FDI for credit inflows in Arab countries FDI for credit inflows in Arab countries which will strengthen our market.which will strengthen our market.