An Investment is..
An Investment becomes foreign
investment when
What is foreign direct investment?
An indirect investment is one where the investor
does not gain control of the entity he or she invests in
I can buy stock in Toyota, but Toyota’s
management won’t pay much attention to my
opinions.
A direct investment is one where the investing
company creates a new business or gains control
When BP bought the whole of Amoco (a U.S. oil
company), it took control of the firm
Taking control of the business your firm will work
with may:
decrease operating costs
• because it results in better coordination
increase rate of technology transfer
• because businesses are willing to transfer
tech to units they control
Foreign direct investment (FDI) refers to long term
participation by a country into another country. It usually
involves participation in management, joint-venture, transfer of
technology, managing supply chain, distributing and expertise
etc.
FDIs around here – Hitachi, Fujitsu, Sony from
Japan, BP from Britain, Volkswagen owns its own
dealers.
You can enter foreign markets without control by…
Exporting – selling your goods overseas without
setting up a unit abroad that you control
Licensing – selling others the permission to use your
knowhow
Franchising – where you provide a complete package
to allow others to set up a business like yours – is a
kind of licensing
How companies make foreign direct investments
Acquisition: buying an existing company
Easy to execute
Gain brand identification and goodwill
Best if your company is attempting to acquire
knowledge
Building a new unit from scratch (‘Greenfield’ investment):
hire or buy local resources
construct or buy
buildings build own labor force
Foreign personnel may be difficult
to hire
You control the results
When Sony set up a network to sell its TVs in the US, it set up a
company and hired people here.
The Investor’s Advantage
Foreign direct investment is correlated with profitability.
o Companies that do more foreign direct investment are, on
average, more profitable
Why?
Create supremacy over other companies in countries of
interest (monopoly)
o Sell more efficiently
o Get to know markets, resource sources better
o Foreign currency may have a high buying power
o May be able to borrow capital at a lower interest rate
than companies from other countries
Factors Required to Attract FDI
Low cost BUT Qualified, Educated/Skilled Labor Pool.
Long-term Market Potential OR Yields greater than can be
achieved Domestically.
Access to Natural Resources.
Geography
Stability of the economic and Political Environment.
Mining of iron, manganese, chrome, gypsum, sulphur, gold,
diamonds, copper, zinc.
Lottery Business
Agricultural or plantation activities
Housing and Real Estate Business (except development of
townships, construction of residen-tial/commercial premises,
roads or bridges to the extent specified in NotificationNo.
FEMA 136/2005-RB dated July 19, 2005)
Advantages of FDI
Employment and Economic Boost-
Increased Productivity-
Increment in Income-
Quality of products and flow of technology-
Increase in government revenue-
Increased Capital Investment
New Technology and “Know How” Transfer.
Disadvantages of FDI
Bad deal for the small entrepreneurs
Inflation
Limited employment generation
Cultural erosion
Corruption
Technological Dependence on Foreign Technology
Sources
Flow of FDI in India
Currently FDI is permitted in India
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential
allotments.
Major Sector for FDI in India are
Infrastructure
Automotive
Pharmaceuticals
Defense
Retails
Railways Infrastructure
Chemicals
Textiles
Airlines
Sector for which FDI is NOT permitted in India are
Arms and ammunition
Atomic Energy
Railway Transport
Coal and lignite
Agriculture
Housing and Real Estate business
Major MNC’s under FDI in India are
Apple
Vodafone
Ford Motors
LG
Samsung
Hyundai
Accenture
Reebok
Skoda Motors
Impact of FDI on Indian Economy
Investment provides the base and pre-requisite for
economic growth and development.
Apart from a nation's foreign exchange reserves,
exports, government's revenue, financial position,
available supply of domestic savings, magnitude and
quality of foreign investment are necessary for the well
being of a country.
FDI is the safest type of international capital flows out of all
the available sources of external finance available.
FDI provides a win — win situation to the host and the home
countries. Both countries are directly interested in inviting
FDI because they benefit a lot from such type of investment.
FDI can help to raise the output, production and export at the
sectoral level of the Indian economy
It is advisable to open up the export oriented sectors and
higher growth of economy could be achieved through
the growth of these sectors. FDI affects the GDP of a
country directly and hence they are positively correlated.
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