Module III: Foreign Direct and Portfolio Investments

1. Introduction to Foreign Investments

• Foreign investment means investment made by individuals,
companies, or institutions of one country in another
country.
• It brings capital, technology, and managerial skills.
• Two major types:
o Foreign Direct Investment (FDI)

o Foreign Portfolio Investment (FPI)

• Plays an important role in economic development,

employment generation, and global integration.

2. Foreign Direct Investment (FDI) – Meaning & Objectives

Meaning
• FDI is investment made by a foreign company or individual
in business activities of another country with the intention
of gaining control or long-term interest.
Objectives
• Enter new markets and expand business.
• Access natural and human resources.
• Transfer technology and managerial skills.
• Increase production and profitability.
• Strengthen global business presence.
3. Foreign Portfolio Investment (FPI) – Meaning
• FPI refers to investment in financial assets such as shares,
bonds, debentures, and securities in another country.
• Investors do not participate in management.
• It is usually short-term and return-oriented.
• Investments can be easily bought and sold in stock markets.

4. Difference between FDI and FPI

• FDI involves investment in physical assets; FPI involves
financial securities.
• FDI provides management control; FPI does not provide
control.
• FDI is long-term and stable; FPI is short-term and volatile.
• FDI contributes directly to production; FPI mainly affects
capital markets.

5. Multinational Corporations (MNCs)

Meaning
• MNCs are companies that operate in more than one country
through branches, subsidiaries, or joint ventures.
Features
• Large financial resources.
• Use advanced technology.
• Operate globally.
 • Centralised management with local operations.
Significance in developing economies
• Promote industrial development.
• Generate employment.
• Transfer knowledge and technology.
• Improve infrastructure and productivity.

6. FDI Routes in India

Automatic Route
• Foreign investment allowed without prior government
approval.
• Investors must follow regulations and inform authorities.
Government Approval Route
• Prior approval required from the government for sensitive
sectors.
• Used for sectors related to national security and strategic
importance.

7. Liberalisation of FDI Policy in India

• Began with economic reforms of 1991.
• Restrictions on foreign investment were reduced.
• Many sectors opened for foreign participation.
• Sectoral limits increased.
 • Approval procedures simplified to attract investors.

8. Role of Regulatory Institutions

• Reserve Bank of India regulates foreign exchange
transactions, capital inflows, and reporting requirements.
• DPIIT formulates FDI policy, sectoral guidelines, and
monitors implementation.
• Government ministries grant approvals under the approval
route.

9. Advantages and Disadvantages of FDI

Advantages
• Promotes economic growth and industrialisation.
• Provides employment opportunities.
• Transfers modern technology and skills.
• Improves infrastructure and productivity.
Disadvantages
• Profits may be taken back to the home country.
• Domestic firms may face strong competition.
• Possibility of economic dependence on foreign firms.
• Regional inequalities may increase.

10. FDI Inflows and Outflows

FDI Inflows
• Investments coming into a country from foreign investors.
• Indicates investor confidence and economic attractiveness.
FDI Outflows
• Investments made by domestic companies in foreign
countries.
• Shows global expansion of domestic businesses.
Reasons for FDI Outflows
• Expansion into international markets.
• Access to raw materials and resources.
• Strategic alliances and partnerships.
• Cost reduction and efficiency.

11. Major Sectors and Sources of FDI in India

Major sectors
• Services sector.
• Manufacturing sector.
• Information technology.
• Telecommunications.
Sources of FDI
• Countries like USA, Singapore, Japan, and European
nations.
 • Foreign institutional investors and multinational
companies.

12. Greenfield and Brownfield Investments

Greenfield Investment
• Establishing new business operations or facilities from the
beginning.
• Requires large capital and time.
Brownfield Investment
• Investment in existing companies or infrastructure.
• Faster and less costly.
Differences
• Greenfield creates new infrastructure; Brownfield uses
existing infrastructure.
• Greenfield involves higher cost; Brownfield involves lower
cost.
• Greenfield takes more time; Brownfield allows quick
expansion.
13. Capital Account Liberalisation
• Removal or relaxation of government restrictions on
movement of foreign capital.
• Encourages international investment and financial
integration.
• Supports economic growth and global participation.

14. Determinants of FDI Inflows

• Size and growth of market.
• Political and economic stability.
• Availability of infrastructure.
• Government policies and incentives.
• Availability of skilled labour and resources.

15. Role of SEZs and Government Initiatives

Special Economic Zones (SEZs)
• Areas with tax benefits, infrastructure, and easy
regulations.
• Promote exports and attract foreign investment.
Make in India Initiative
• Make in India encourages manufacturing in India.
• Promotes foreign investment and industrial development.
16. FPI Reforms in India
• Simplified registration and compliance procedures.
• Increased investment limits for foreign investors.
• Improved transparency and regulatory framework.
• Strengthened capital market participation.

17. Recent Trends in FDI in India

• Increased investment in technology and digital sectors.
• Growth in manufacturing and infrastructure investment.
• Rising participation of global investors.
• Focus on renewable energy and start-ups.

18. Disinvestment of Foreign Capital & Outward FDI

Disinvestment of foreign capital
• Withdrawal or sale of foreign investments from a country.
Outward FDI
• Investment by Indian companies in foreign countries to
expand business and gain global presence.

19. Evolution of FDI Policy in India since 1991

• 1991 reforms opened the Indian economy to foreign
investors.
• Progressive liberalisation of policies and sectoral caps.
• Simplification of approval procedures.
• Emphasis on ease of doing business and global integration.