Understanding

Foreign Direct Investment

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 Policy Studies Series

This series is designed to fill a visible gap in existing Social Sciences literature: the
need to address, empirically investigate and rigorously analyse public policy in
the field of governance.
It is important to study the policy world in its entirety because:
• Policies establish the context within which we live out our individual and
collective lives, and deeply impact the way we and future generations will
live and work.
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The literature generated through the series, we hope, will serve to identify the
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The Series Editors

• Neera Chandhoke is former Professor of Political Science, University of
Delhi.
• Praveen Jha is Professor, Centre for Economic Studies and Planning, and
Adjunct Professor, Centre for Informal Sector and Labour Studies, School
of Social Sciences, Jawaharlal Nehru University, New Delhi.
• C. Rammanohar Reddy is Editor-in-chief, The India Forum, a digital
journal-magazine on contemporary issues.

The Series Advisory Board

• Akeel Bilgrami is Sidney Morgenbesser Professor of Philosophy, and
Professor, Committee on Global Thought, Columbia University, New York.
• Niraja Gopal Jayal is Professor, Centre for the Study of Law and
Governance, Jawaharlal Nehru University, New Delhi.
• Prabhat Patnaik is Editor, Social Scientist, and Professor Emeritus, Centre
for Economic Studies and Planning, School of Social Sciences, Jawaharlal
Nehru University, New Delhi.

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 Understanding
Foreign Direct Investment

Biswajit Dhar
K. S. Chalapati Rao

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 UNDERSTANDING FOREIGN DIRECT INVESTMENT

ORIENT BLACKSWAN PRIVATE LIMITED

Registered Office
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First published by Orient Blackswan Private Limited 2020

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The opinions expressed in this book are those of the authors and
cannot be attributed to Jawaharlal Nehru University and Institute for
Studies in Industrial Development.

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 Contents

Abbreviations vii
Figures, Tables and Boxes ix
Acknowledgements xv

1. Foreign Direct Investment in 1

the Post-decolonisation Era
2. Conceptualising FDI 26
3. Trends in Global FDI Flows 52
4. India’s Policies towards FDI 77
5. India’s FDI Inflows since 1991 103
6. Performance of FDI Companies: A Brief Assessment 145
7. Summary and Conclusions 162

Annexure 172

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Understanding Foreign Direct [Link] 6 25/02/2020 11:38:57
 Abbreviations

ADR American depositary receipts

BIS Bank for International Settlements
BIT Bilateral investment treaty
BPM Balance of Payments Manual
CAD Current account deficit
CFP Consolidated FDI Policy
CDIS Coordinated Direct Investment Survey
CIFLA Census of India’s Foreign Liabilities and Assets
CMIE Centre for Monitoring Indian Economy
DIPP Department of Industrial Policy and Promotion
DPIIT Department for Promotion of Industry and
Internal Trade
DPN Draft Press Note
ECB External commercial borrowing
ESO Employee stock option
EU European Union
FCCB Foreign currency convertible bonds
FCRC Foreign-controlled rupee company
FDI Foreign direct investment
FERA Foreign Exchange Regulation Act
FII Foreign institutional investment
FIPB Foreign Investment Promotion Board
FPI Foreign portfolio investment
FVCI Foreign Venture Capital Investment

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 viii  Abbreviations

G-20 Group of Twenty

GAAR General Anti-avoidance Rules
GDP Gross domestic product
GDR Global depositary receipt
IET Interest equalisation tax
IMF International Monetary Fund
IPO Initial public offering
IPS Industrial Policy Statement
IT Information technology
LIBOR London Interbank Offered Rate
NDA National Democratic Alliance
NRI Non-resident Indian
M&A Merger and acquisition
MBRT Multi-brand retail trading
MSME Micro, small and medium enterprise
OCB Overseas corporate body
OECD Organisation for Economic Cooperation and
Development
OPEC Organisation of Petroleum Exporting Countries
PE Private equity
R&D Research and development
RBI Reserve Bank of India
SAR Special Administrative Region
SDR Special drawing rights
SEBI Securities and Exchange Board of India
SEZ Special Economic Zone
SIA Secretariat for Industrial Assistance
SNA System of National Accounts
TMG Technical Monitoring Group
TNC Transnational corporation
UNCTAD United Nations Conference on Trade and
Development
UPA United Progressive Alliance

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 Figures, Tables and Boxes

Figures

3.1 Foreign Investment Flows, 1970–2016 55

3.2 Foreign Investment Inflows as a Share of
GDP, 1970–2016 (%) 58
3.3 Trends in FDI and FPI, and Other Investment
Inflows, 1970–2016 61
3.4 Trends in FDI Inflows, 1970–2016 64
3.5 Trends in FDI Outflows, 1970–2016 65
3.6 Inflows of FDI, 1970–2017 ($ Billion) 67
3.7 FDI Inflows to the Developed and
Developing Countries, 1970–2017 ($ Billion) 68
3.8 Outflows of FDI, 1970–2017 73
5.1 Average FDI Equity Inflows Reported during
Different Periods, 1991–2010 118
5.2 Relative Contribution of Reinvested Earnings
and Acquisition of Shares to FDI, 2001–10 120
5.3 Distribution of Foreign Equity Inflows, 2007–10 125
5.4 Trends in FDI Inflows, 2010–18 130
6.1 Charges for the Use of Intellectual Property,
2007–18 157

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 x  Figures, Tables and Boxes

Tables

1.1 US FDI Abroad, 1949–60 9

1.2 US FDI: Share of Major Recipients, 1949–60 (%) 10
1.3 US FDI Abroad, 1961–70 13
1.4 Sources of Finance of Oil-importing Developing
Countries, 1970–80 ($ Billion, in 1978 Prices) 16
1.5 Direct Foreign Investment in Selected Country
Groups, 1965–83 16
1.6 Indicators of External Debt for Developing
Economies, 1970–89 (%) 18
2.1 Conceptually Segregating FDI and FPI 47
3.1 Inflows of Foreign Investment by Major
Categories, 1970–2016 ($ Billion) 56
3.2 Outflows of Foreign Investment by Major
Categories, 1970–2016 ($ Billion) 57
3.3 Foreign Investment Inflows and Global GDP,
1980s to 2010s 58
3.4 Foreign Investment Outflows and Global GDP,
1980s to 2010s 58
3.5 Components of Global FDI Inflows:
Relative Shares, 1970–2016 (%) 65
3.6 Components of Global FDI Outflows:
Relative Shares, 1970–2016 (%) 66
3.7 Top Recipients of FDI, 1970–2017 ($ Billion) 69
3.8 Share of Developing Country Groups in
Global FDI Inflows, 1970–2016 70
3.9 Regional Distribution of FDI Inflows,
1970–2016 (% Share of Total Inflows) 71

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 xi
Figures, Tables and Boxes 

3.10 Share of FDI Inflows in Gross Capital Formation,

1970–2016 72
3.11 Top Sources of FDI, 1970–2016 74
4.1 Number of Sectors Subjected to FDI Policy
Changes, 1997–2016 90
4.2 Activities Requiring Central Government
Approval or Having Caps 91
5.1 FDI Inflows into India, 1991–2000 ($ Million) 110
5.2 FDI Approvals by Major Sectors, 1991–2000
($ Million) 112
5.3 Approved FDI by Top-10 Sources, 1991–2000
($ Million) 115
5.4 Potential and Actual FDI, 1991–2000 ($ Million) 116
5.5 Reported FDI Inflows into India, 2000–10
($ Million) 117
5.6 Entry Route-wise Distribution of FDI Equity
Inflows, 2000–10 ($ Billion) 119
5.7 FDI Approvals in the Early Years of the 2000s
($ Million) 122
5.8 Distribution of Approved Foreign Investment
between Broad Sectors, 2000–04 (%) 123
5.9 FDI Inflows in the Top-10 Sectors, 2004–10
($ Million) 123
5.10 FDI Inflows in Major Sectors/Industries,
2007–10 ($ Billion) 126
5.11 Changing Sectoral Shares in FDI Equity Inflows,
2004–10 (%) 127
5.12 India’s FDI Equity Inflows: Top-10 Home
Countries Share, 2002–10 (%) 128

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 xii  Figures, Tables and Boxes

5.13 Sources of FDI in India with Doubtful Records

as Providers of Finance 129
5.14 Entry Route-wise Distribution of FDI Equity
Inflows, 2010–18 ($ Billion) 130
5.15 Distribution of FDI Equity Inflows across Sectors,
2010–18 ($ Million) 132
5.16 Share of the Broad Sectors in FDI Inflows,
2010–18 134
5.17 ‘Make in India’ Sectors 135
5.18 Foreign Equity Inflows into the ‘Make in India’
Sectors, 2014–18 ($ Billion) 136
5.19 Top Sources of FDI Inflows, 2010–18 137
5.20 Trends in Repatriation of Capital, 2004–18
($ Billion, Unless Qualified) 140
6.1 Sales of Foreign Subsidiaries, 2012–18 (Rs Billion) 146
6.2 Exports of Foreign Subsidiaries, 2012–18 ($ Billion) 148
6.3 Imports of Foreign Subsidiaries, 2012–18 ($ Billion) 149
6.4 Share of Exports to Sales, 2012–18 150
6.5 Share of Imports to Purchases, 2012–18 151
6.6 Export Intensity of Sample FDI Companies in
Select Sectors, 2013–14 to 2014–15 153
6.7 Import Intensity of Sample FDI Companies in
Select Sectors, 2013–14 to 2014–15 154
6.8 Net Earnings in Foreign Exchange, 2013–14 to
2014–15 ($ Million) 155
6.9 R&D Intensities of Sample FDI Companies,
2013–14 to 2014–15 155
6.10 Detailed Break-up of R&D Intensity, 2013–14
to 2014–15 156

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 xiii
Figures, Tables and Boxes 

6.11 Estimated Royalty Payments by Select FDI

Companies, 2012–18 ($ Million) 158

Boxes

2.1 Elements of a Direct Investment Relationship

(May Be Used Also in Combination) 36
3.1 Financial Account of the Balance of Payments 53
4.1 Discussion Paper of the DIPP FDI in
the Defence Sector: Some Observations 87
5.1 Classification of Broad Sectors and
their Components in Official Data on FDI 121

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Understanding Foreign Direct [Link] 14 25/02/2020 11:38:58
 Acknowledgements

O ur academic collaboration began more than three decades

back at the Corporate Studies Group of the Indian Institute
of Public Administration. In the subsequent decades, we continued
to put our heads together at the Institute for Studies in Industrial
Development (ISID) and Research and Information System for
Developing Countries (RIS), the two institutes that gave us the
opportunities and infrastructure to take our research interests
forward.
We are extremely grateful to the management of ISID, in
particular to Professor S. K. Goyal (vice-chairman) and Professor
M. R. Murthy (director) for supporting us in every way to
pursue our work. Sadly, the late chairman of the institute,
Shri T. N. Chaturvedi, who was a constant source of encouragement,
is not with us to see our endeavour come to fruition.
We would also thank our many well-wishers, especially
Professor Muchkund Dubey, for inspiring us. And, finally, we
would thank our wives, Apurba Moitra and K. Lakshmeeswari,
for quietly motivating us.
 Biswajit Dhar
 K. S. Chalapati Rao

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Understanding Foreign Direct [Link] 16 25/02/2020 11:38:58
 one

Foreign Direct Investment in

the Post-decolonisation Era

F oreign direct investment (FDI) has been extensively discussed

in the received literature through ‘two related but [yet] different
sets of topics or activities’ (Lipsey 2001: 1), anchored in two very
distinct traditions. The first of these deals with FDI as a component
of finance, which influences the economies of both the home and
the host countries of foreign investors. A section of the literature
places FDI at par with development finance, for it is seen to
plug the resource gap of host countries. The second tradition
analyses many different facets of the principal organisational
manifestation of FDI, namely the transnational corporations
(TNCs). The behaviour of these firms, especially their motivations
and the incentives to invest in foreign jurisdictions as well as their
relationships with their home and host countries, is captured in
a large body of literature. Broadly viewed, the former tradition is
developed within the macroeconomic framework, while the latter
is more centred in the microeconomic tradition and also borrows
significantly from the institutional economics framework.
FDI as an important source of long-term finance has been
analysed from the point of view of its implications on the macro-
economy, especially its impact on the savings–investment situation
and on balance of payments (Meier 1966: 471). Although this
aspect of FDI inflows can impact both the recipients and providers

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 2  Understanding Foreign Direct Investment

of investment, the focus of much of the academic research has

been on the former set of countries.
Available literature has argued that FDI inflows are essential
for bridging the gaps between the investment needs and domestic
resource mobilisation, typical of developing countries. In fact, this
was the avowed objective with which the largest creditor country
at the end of World War II, namely the United States, had defined
its foreign policy from the late-1940s. The policy framework was
put in place in 1949 by President Harry Truman through his
‘Point Four’ programme, the ‘fourth point’ in his foreign policy,
which was to respond to the development needs of the under­
developed countries.1
This chapter deals with two sets of issues. We begin by
recalling the narrative on FDI that dominated the immediate post-
World War II phase. The role of FDI in the context of development
of the then underdeveloped regions was extensively discussed in
this phase; we provide a flavour of the views that were expressed
by some of the major contributors to the debate.
The second part of the chapter traces the evolution of FDI
since the middle of the twentieth century. There are roughly four
broad phases over which FDI has evolved. In the first phase,
the first two decades following World War II, FDI flows were
expectedly influenced by the policies adopted by the US, the
only significant creditor country. Beginning with the 1950s, the
US administration provided incentives to private investors from
its territory to expand their global operations, including to the
underdeveloped regions. From the early-1960s, the world’s largest
economy faced balance of payments difficulties stemming from
the deficits on both the current account and the capital account.
The US administration responded to its balance of payments
difficulties by taking control of outflows of capital, which meant
uncertain times for foreign investors. For private investors, these

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 3
Foreign Direct Investment in the Post-decolonisation Era  

uncertainties of the 1960s not only remained, but were exacerbated

in the following decade with the breakdown of the fixed exchange
rate mechanism provided by the Bretton Woods system, and with
it, the Gold Dollar Standard.2
In the second phase, which roughly corresponds to the
breakdown of the Bretton Woods system in 1971, FDI became a
relatively smaller player in global financial flows. This phase was
dominated by bank finance that came into prominence through
the recycling of petrodollars.
The third phase begins with the revival of FDI flows in the
1980s, after the onset of the external debt crisis of the developing
countries. Large swathes of the developing world were saddled
with a serious debt-overhang, caused by their over-exposure to
the US banking system from the 1970s. With the debt-ridden
countries facing serious constraints in financing their debt-service
commitments, a case was made for injecting ‘new money’ into these
economies. At least two supporting arguments were made for the
infusion of FDI: the first was that FDI inflows were relatively more
stable and predictable as compared to the debt-financed forms,
and two, FDI inflows were non-debt creating and would hence
not add to the payment liabilities of the recipients.
The fourth phase, from the early 1990s, coincides with the
popularity gained by market-oriented reforms from the early-
1990s. Liberalisation of FDI polices became an integral part of
the reforms agenda. Over the three decades since then, therefore,
governments have transformed themselves from ‘quasi-regulators’
of foreign investment3 to outright facilitators.

Narratives on FDI in the Mid-twentieth Century

The years following World War II also coincided with the

decolonisation of most of the present-day developing countries.

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 4  Understanding Foreign Direct Investment

In discussions on the economic revival of these countries, FDI

was considered as an important source of finance. One of the early
proponents of this formulation was a group of experts appointed
by the Secretary General of the United Nations (henceforth, the
UN Expert Group) that was tasked with the responsibility of
identifying the measures necessary for the economic development
of the underdeveloped regions. The UN Expert Group estimated
that the annual shortfall of savings over investment needs of
underdeveloped countries would be about $14 billion if the
national income of these countries were to grow by 2 per cent.
According to the experts, this savings–investment gap had to be
met through annual inflows of foreign capital of more than $10
billion (United Nations 1951: 79).
Ragnar Nurkse held a contrary view, arguing that foreign
investment would not help in bridging this gap (Kattel, Kriegal
and Reinhart 2011: 146). He argued that the demand for foreign
investment was aplenty in underdeveloped countries, and that
there were several supply-side bottlenecks. The key factor was
that foreign investors lacked sufficient inducement to invest in
these regions (ibid.: 120) Private investment, argued Nurkse, was
influenced by market demand, which was too small in most of the
developing countries to act as an incentive for foreign investors
to invest in these countries. He argued that foreign investors
were mainly interested in operations that can best be described
as extension of the colonial pattern, namely investing in the
production of primary commodities and in extractive industries
in order to fuel the demand for these commodities in their home
countries. They did not bring sizeable investments into any
country unless they had necessary inducements.4
From the point of view of the recipient countries, FDI was
particularly attractive. The attraction towards FDI lay in its three
attributes discussed in the literature. The first is what Nurkse

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 5
Foreign Direct Investment in the Post-decolonisation Era  

called ‘real addition’ to the productive capacities by FDI in the

host countries (ibid.: 162). The second is that FDI is perceived
as a more stable form of investment as compared to other forms,
especially portfolio investment (Dutt 1998: 165). And the third is
that FDI is not mere financial flow; it comes along with a ‘package
of intangibles’, including technology and managerial skills. We
will dwell on the last of these attributes in a later section.
While the necessity of foreign capital for addressing the
problems of underdevelopment received uncritical acceptance,
views were divided about the contribution that FDI could make
in capital-deficient countries. The UN Expert Group alluded
to two obstacles to the further expansion of FDI. First, several
underdeveloped countries did not view this kind of investment
very favourably, for they had fears about foreign control of
important sectors of their economies. Second, the cost of foreign
private capital was too high. For instance, the average rate of
return on US foreign investments in 1948 was about 17 per cent,
as compared to about 14 per cent on its domestic investments
(United Nations 1951: 81).
Penrose (1956: 233) substantiated this view. She argued that
intrinsic difficulties of controlling direct private investment once
it was established, the problem of paying for it, together with the
political fear of foreign ‘exploitation’ and domination, led many
underdeveloped countries to explore ways of hiring foreign man­
agement and technical personnel, and purchasing access to foreign
technology. In other words, these countries were not certain that
FDI, as a ‘package of intangibles’, would be beneficial to them.
Hunter (1953) was somewhat more explicit in this context:
foreign investors have not always acted in the best interests of
the countries in which they have invested (or in their own best
interests either), that the character of development and particularly
its direction has not always been the most desirable, that rates of

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 6  Understanding Foreign Direct Investment

return have been too high in some cases, that labour has been
exploited monopsonistically, that undue political influence has
been assumed by investing firms, and that private investment has
led to concentration of ownership of the factors of production to
the exclusion of potential native operation. (Ibid.: 24)

He, therefore, pointed out that the task before underdeveloped

countries was to decide ‘how much correction of the evils of
foreign investment can be accomplished without reducing its flow
below the level necessary to produce given results’ (ibid.).
Cardoso and Dornbusch (1989: 1413–14) provided a com­
prehensive list of problems they saw were associated with the
activities of foreign companies, because of which commercial
loans were preferred to FDI.
First, rather than help bridge the domestic savings and invest­
ment gaps in their host countries, foreign companies could lower
savings and investment by not reinvesting their profits, and by
backing groups whose propensity to save was low and propensity to
import was high. Higher import-intensity of these companies meant
that domestic companies did not get opportunities to expand.
Second, instead of closing the gap between investment and
foreign exchange requirements in developing countries, foreign
companies could reduce foreign exchange earnings in the long run.
The current account could deteriorate due to increased import
propensity of the foreign companies and repatriation on account
of profits, interest, royalties and management fees.
Third, foreign companies could cause reduction of govern­
ment revenues because host governments provided liberal tax
concessions, investment allowances, disguised public subsidies
and tariff protection.
Fourth, foreign companies could worsen income inequalities
in their host countries by promoting the interests of a ‘small number
of well-paid, modern-sector workers’ (ibid.), while ignoring most

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 7
Foreign Direct Investment in the Post-decolonisation Era  

workers in the traditional sectors. The companies could divert

resources away from the much-needed food production into the
manufacture of sophisticated products consumed by the local elite.
Fifth, foreign companies could introduce in their host
countries products that stimulate inappropriate consumption
patterns through advertising, and use inappropriate technologies
of production. This could lead to diversion of local resources into
socially undesirable projects.
Sixth, the management, skills and overseas contacts provided
by foreign companies could have little or no impact on local
enterprises.
Seventh, the tendency of foreign companies to use transfer
prices in intra-firm transactions could ‘diverge from equivalent
arm’s length market prices that would be set in trade between
unrelated parties’ (ibid.). Under- or over-invoicing of exports or
imports in order to shift profits, and evading taxes and foreign
exchange controls, could be greater for intra-firm trade as
compared to the trade between independent companies that are
usually not given to these practices.
Finally, it is difficult to put an exact price on technology
transfer, especially if technologies are transferred as one of the
elements of a package of resources provided by FDI.

Evolution of Policies on FDI since the Mid-1940s

Policies on FDI in the immediate post-World War II decades were

dictated by the largest and the only creditor country for most
of the post-War years, namely the US. As the only economy of
substance in the capitalist world, the US effectively dictated global
capital flows.

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 8  Understanding Foreign Direct Investment

Policies in the 1950s and 1960s

In the 1950s and 1960s, the US administration adopted two
contrasting sets of policies. In the 1950s, the most significant of
the policies adopted was President Truman’s ‘Point Four’ initiative,
a legislation5 that was to assist the peoples of economically under­
developed areas to raise their standards of living and encourage
outflow of private investment beneficial to their economic develop­
ment (Truman 1949a: 184).
One of the key features of Point Four was President Truman’s
emphasis that private investors must be encouraged to provide a
major part of the capital required for American investment to the
underdeveloped countries. The US administration also recognised
the need to provide protection to American enterprises investing
in underdeveloped countries, and suggested that entering into
investment protection agreements with the recipient countries
could be an option.6 The administration pointed out that a major
limitation of such agreements was that they were incapable of
addressing problems relating to the inability of the underdeveloped
countries to garner the foreign exchange necessary to service the
investments. Under such circumstances, the possibilities of default
by the recipient could be higher.
Table 1.1 captures the response of private investors to the
policy measures taken by the Truman administration during the
first decade of the implementation of the measures. The figures
show the annual changes to the stock of US FDI abroad, which
comprised the gross outflows of FDI and the reinvested earnings
of the American companies in their host territories. These are the
closest approximations of the inflows of FDI. Table 1.1 shows that
as a result of the measures taken by the administration to promote
long-term investment, annual increments to FDI steadily increased

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 9
Foreign Direct Investment in the Post-decolonisation Era  

in the first half of the 1950s, before registering a quantum jump in

the second half of the decade.

Table 1.1: US FDI Abroad, 1949–60

Year FDI Abroad ($ Billion)

1949 1.1
1950 1.1
1951 1.3
1952 1.7
1953 1.4
1954 1.1
1955 2.0
1956 2.9
1957 3.1
1958 2.1
1959 2.4
1960 2.9
Source: Survey of Current Business, US Department of Commerce, various issues.

The destinations of FDI from the US remained mostly confined

to the traditional partner-countries in the Americas (Table 1.2).
Well above two-thirds of the investments went to Canada and
Latin America until the mid-1950s. The underdeveloped regions,
mostly in Africa and Asia, received a negligible share of the FDI.
Thus, despite the emphasis of the Truman administration’s ‘Point
Four’ and the UN Expert Group’s expectation that the resource
gaps faced by the underdeveloped countries would be plugged by
private foreign capital, companies were not very enthusiastic. Even
after the US administration had offered to protect their invest­
ments in many of these newly independent countries through
bilateral investment treaties (BITs), the companies chose to be
dictated by their perceptions of commercial risks while dealing
with the underdeveloped countries.

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 10  Understanding Foreign Direct Investment

Table 1.2: US FDI: Share of Major Recipients, 1949–60 (%)

Year Europe Canada Latin America Middle-east Far-east Africa Others

Asia Asia
1949 18.2 63.6 45.5 n/a n/a n/a –27.3
1950 18.2 45.5 9.1 n/a n/a n/a 27.3
1951 23.1 30.8 38.5 n/a n/a n/a 7.7
1952 5.9 29.4 35.3 n/a n/a n/a 29.4
1953 21.4 50.0 14.3 n/a n/a n/a 14.3
1954 18.2 54.5 18.2 n/a n/a n/a 9.1
1955 20.0 35.0 20.0 n/a n/a n/a 25.0
1956 17.2 34.5 17.2 n/a n/a n/a 31.0
1957 22.6 41.9 9.7 2.5 5.8 –0.1 17.6
1958 14.3 33.3 19.0 1.5 –24.1 4.5 51.4
1959 33.3 33.3 12.5 3.6 3.0 3.4 10.8
1960 82.8 27.6 10.3 –0.4 2.4 3.0 –25.7
Source: Survey of Current Business, US Department of Commerce, various issues.

The Tide Turns: US Controls on

Foreign Investment Abroad
By the late-1950s, the US began feeling strains on its balance of
payments, a problem that aggravated considerably soon after.
The deterioration of the balance of payments occurred primarily
due to three factors. First, US monetary reserves had suffered an
unprecedented decline since the late-1940s. Second, the current-
account balance had deteriorated, and third, net outflows of private
foreign investment had increased, essentially due to increase in
FDI outflows, which was the largest component of private capital
outflows (Triffin 1966: 7).
FDI had increased from $7.8 billion in 1949 to $36 billion in
1964; the increase coming on the back of a four-fold increase in
inflows in gross terms during this period. By the beginning of the
1960s, almost half of the global outward FDI flows were contributed
by investors based in the US. No other country was anywhere close

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to making the contributions that investors from the US had made;

the United Kingdom had the next largest share, at 18 per cent, and
the Netherlands had 10 per cent (Lipsey 1999: 12).
The response of the US administration to the burgeoning
capital-account deficit was to regulate outflows of foreign invest­
ment from the US. The first of these regulations was the interest
equalisation tax (IET), which appeared on the statute books in
1964, but was made effective retroactively from the date the regu­
lation was announced in July 1963. Using this instrument, the
administration tried to make acquisition of fixed interest-bearing
assets as well as foreign equities unattractive for American investors.
IET had a major impact on the outflow of private portfolio capital
into foreign securities (Strauber 1970: 10). Notwithstanding its
impact, IET was unable to address the primary problem of leakage
of funds through the capital account, owing to the relatively small
share that portfolio investment had in the total private capital
outflows from the US.
It was, therefore, hardly surprising that the US administration
should have introduced a separate set of measures focusing on
restricting FDI outflows. In 1965, the Voluntary Foreign Credit
Restraint Programme introduced non-mandatory controls on
direct investment abroad by American corporations and lending
to foreigners by American commercial banks, which lasted until
the end of 1967. The US Department of Commerce encouraged
nearly 600 corporations responsible for the major share of FDI
outflows to borrow abroad, to finance their investments in other
countries. Further, they were asked to improve their contributions
to the country’s balance of payments by repatriating their short-
term assets held abroad, increasing their exports and enhancing
the remission of foreign earnings (Adler 1971: 3).
The non-mandatory controls failed to achieve the desired
results in curbing outflows and improving the balance of payments

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 12  Understanding Foreign Direct Investment

position. This prompted the US administration to introduce man­

datory controls on external operations of the corporations. The
Foreign Direct Investment Regulations of 1968 were aimed
at reducing FDI outflows by $1 billion from the level in 1967
(Willey 1970: 98).
The Regulations were applied to the ‘direct investor’, defined
to include any entity which directly or indirectly owned or
acquired (a) 10 per cent or more of the total voting power of any
foreign entity; or (b) the right or power to receive, control or enjoy
10 per cent or more of the earnings, receipts, income or profits of
any foreign entity; or (c) the right or power to receive, control
or direct the disposition of 10 per cent or more of the assets of
any foreign entity upon liquidation [Executive Order No. 11387
(1968) § 1000.304]. Identifying a ‘direct investor’ in this manner
was an important step towards developing the norms for defining
FDI, an issue we will dwell on in Chapter 2.
An official assessment of the outcome of the FDI Regulations
was that there were no significant changes ‘in the rate of accumu­
lation of assets abroad’ that could be attributed to FDI (Joint
Economic Committee 1971: 43). In other words, the Regulations
were unable to realise the immediate objective, namely curbing
FDI outflows from the US by $1 billion between 1967 and 1968.
Table 1.3 shows that the yearly changes in FDI maintained its
upward trend in the medium term. The explanation for the later
trend was that direct investors were ‘able to carry out their plans
while meeting the restrictions of the program because they ... made
substantial amounts of foreign borrowings, usually in place of
domestic borrowings’ (ibid.).
The inevitability of failure stared at the Regulations as the US
administration and corporations had sharply conflicting interests:
while the former was concerned about the country’s economic
health, the latter were only interested in protecting their lucrative

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Table 1.3: US FDI Abroad, 1961–70

Years FDI Abroad ($ Billion)

1961 2.9
1962 2.5
1963 3.5
1964 3.7
1965 5.1
1966 2.3
1967 4.8
1968 5.3
1969 6.2
1970 7.4
Source: Survey of Current Business, US Department of Commerce, various issues.

international markets. Thus, the 1960s ended with the principal

creditor country adopting a contrasting policy regime on FDI
outflows, as compared to the one at the beginning of the decade:
policies encouraging American corporations to invest abroad were
replaced with a set of repressive policies. These policies also
signalled the beginning of a period when the share of FDI in inter­
national capital flows declined.

Declining Role of FDI in the 1970s

Foreign capital inflows financed between 10–20 per cent of the
total investment requirements of developing countries in the
1960s and 1970s. A bulk of these inflows originated from official
or semi-official sources, and were either grants or concessional and
non-concessional loans. Private finances were largely of suppliers’
credits and FDI.
The global financial market turned on its head during 1973–
75, when the first oil price shock sent the trade deficits of middle-
income developing countries spiralling upwards, forcing these

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 14  Understanding Foreign Direct Investment

countries to borrow heavily. During these years, deficits of the

oil-importing developing countries as a whole rose by more than
three-fold in real terms, rising to 5 per cent of their gross domestic
product (GDP) by 1975. The trade deficit of low-income countries
increased somewhat slowly, by more than double in real terms
during 1973–75. These countries were less affected since they
were less dependent on oil.
FDI was about 20 per cent of the net capital inflows to the
developing countries in 1970. This component grew relatively
less as compared to the other forms of external capital during
the 1970s, but in the early years of the decade, the situation was
considerably different. A combination of commodity boom and
favourable policies toward FDI adopted by the middle-income
countries in Latin America from the late-1960s fuelled capital
inflows. However, after 1975, money-centre banks’ expansion and
the consequent spike in commercial bank lending led to a change
in the form of foreign investments in developing countries: intra-
company loans supplanted equity participation. TNCs looked
increasingly towards sources other than the parent company to
meet their financing needs, which included borrowing from the
private capital markets.
Among the components of foreign sources of finance, lending
by commercial banks registered the highest growth, from nearly
$4.0 billion in 1970 to over $36 billion in 1980. The banks
had clearly emerged as the financial intermediaries by replacing
governments and multilateral agencies as principal lenders to the
developing countries. It must also be noted that bank lending
to these countries was not without the ‘encouragement and
implicit support’ of governments of the developed economies
(Dooley 1994: 4).
While such inflows were critical for meeting the financing
needs of developing countries, especially in view of the rapid

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deterioration in their trade deficits, the consequences of this

magnitude of borrowing was felt acutely by the borrowers. By 1980,
the outstanding debt of developing countries to private lenders
had shot up to $284 billion, from $32 billion in 1970 (World Bank
1981: 52). Most of this increase was on account of the syndicated
bank loans that had been taken on floating interest rates. When
they had initially borrowed, the benchmark interest rate, namely
the London Interbank Offered Rate (LIBOR), was lower than the
rate of inflation, and this gave developing countries the advantage
of accessing the funds, often at negative interest rates. But once
the global economy entered the zone of uncertainty, and inflation
raised its head, developed countries, especially the US, adopted
tight monetary policies, the immediate impact of which was felt
by the LIBOR. From 1977–78, oil-importing developing countries
dipped into the international capital markets when the phase of
negative real interest rates was well behind them. From then on,
these countries were left to bear the heavy load of servicing the
loans, and on increasingly adverse terms.
Table 1.4 provides the details of the current-account deficits
experienced by developing countries in the 1970s and the sources
financing their deficits. It also shows the drastically changing
patterns of financing of deficits, especially for the middle-income
countries. In relation to bank finance, FDI played a vastly dimin­
ished role in providing hard currency to these countries. This
situation would change yet again in the 1980s, when the heavily
indebted countries weathered the headwinds of rising indebtedness,
and FDI was offered as a source of mitigating the problems.

Third-world Debt Crisis in the 1980s and FDI

FDI was back in favour as the preferred form of international
finance, from the beginning of the 1980s (Table 1.5).

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 16  Understanding Foreign Direct Investment

Table 1.4: Sources of Finance of Oil-importing Developing Countries,

1970–80 ($ Billion, in 1978 Prices)

Item Low-income Countries Middle-income Countries

1970 1973 1975 1978 1980 1970 1973 1975 1978 1980
Current-account 3.6 4.9 7.0 5.1 9.1 14.9 6.7 42.8 20.4 48.9
deficit
Financed by net capital flows
Official 3.4 4.1 6.6 5.1 5.7 3.3 5.3 5.3 6.5 7.9
assistance
FDI 0.3 0.2 0.4 0.2 0.2 3.4 5.1 3.8 4.6 4.5
Commercial 0.5 0.6 0.8 0.9 0.7 8.9 13.7 21.0 29.4 27.1
loans
Financed by –0.5 –1.1 –0.7 –1.1 2.4 –0.8 –11.7 12.7 –20.1 9.5
changes in
reserves and
short-term
borrowing*
Note: *Minus signs (–) indicate increase in reserves.
Source: World Bank (1981: Table 5.1).

Table 1.5: Direct Foreign Investment in Selected Country Groups,

1965–83

Country Groups Average Annual Value of Flows ($ Billion)

1965–69 1970–74 1975–79 1980–83
Industrial countries 5.2 11.0 18.4 31.3
Developing countries 1.2 2.8 6.6 13.4
Latin America and Caribbean 0.8 1.4 3.4 6.7
Africa 0.2 0.6 1.0 1.4
Asia, including Middle-east Asia 0.2 0.8 2.2 5.2
Other countries and estimated 0.2 –1.0 0.6 4.8
unreported flows
Total 6.6 12.8 25.6 49.4
Source: World Bank (1985: Table 9.1).

FDI flows registered sharp increases in all regions except

Africa as compared to the previous decades. In overall terms,
there was a doubling of inflows between 1975–79 and 1980–83,

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Foreign Direct Investment in the Post-decolonisation Era  

a pattern that was seen particularly for all developing countries

put together.
The trigger for a virtual metamorphosis of the global capital
market was the oil price hike of 1973 that left a sizeable surplus
of oil revenue with the oil-producing countries, cartelised as the
Organisation of Petroleum Exporting Countries (OPEC). This
surplus oil revenue, the so-called petrodollars, was first deposited
in the banks in Western countries, and later reinvested in securities
or other assets. Deposits placed in these banks between 1978 and
1982 accounted for 28 per cent of investable funds accumulated
over the same period (McGuire and Tarashev 2006: 19). The
net liabilities of the BIS-reporting banks to OPEC member
states increased two-fold over this period, resulting in the OPEC
countries becoming some of the largest net suppliers of funds to
the international banking system.
The banks became lenders to the developing countries, and
they did so with the approval and encouragement of the advanced-
country governments (Dooley 1994: 3–4). The increase in bank
lending took place also because commercial banks saw recycling as
a profitable business. Increasing the legitimacy of the banks were
the governments, especially the US government, which were not
willing to extend to the developing countries either official credit
or support-expansion of credit from the multilateral financial
institutions, that is, the World Bank and International Monetary
Fund (IMF) (ibid.: 4). Finding willing borrowers was not difficult
throughout the Latin American region, since an excessively loose
monetary policy followed by the Federal Reserve Bank of the
US from the middle to the end of the 1970s fuelled the rate of
inflation, resulting in the decrease in short-term real interest rates
to close to or below zero (Feldstein 1991: 3).
Borrowers preferred to secure bank credit from the more
traditional sources, as the banks were able to offer cheap credit for

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 18  Understanding Foreign Direct Investment

the reasons just stated. The behaviour of the banks was perfectly
rational, for they felt assured that their losses could be shifted to
the governments.
But by the beginning of the 1980s, the situation became
adverse for both the borrowers and the lenders. The second oil
price shock sent the inflation rate soaring and the US Federal
Reserve Bank responded by raising the interest rates. The jump
in the real interest rates caused an appreciation of the US dollar.
Struck by the twin costs of higher interest rates and a higher
value of the dollar, the sovereign borrowers declared insolvency,
triggering the debt crisis (Table 1.6).
With bank finance, the largest component of private capital
flows, imposing heavy liabilities on the developing country
debtors and resulting in the most extensive sovereign debt default
in history, search began for sources of foreign capital that could
deliver on two counts: (a) allow the debt-stricken countries to grow
out of their indebtedness and (b) prevent reoccurrence of a debt-
induced crisis. Cardoso and Dornbusch (1989: 1434) argued that
commercial banks were ‘unlikely to provide much development

Table 1.6: Indicators of External Debt for Developing Economies,

1970–89 (%)

Economy/Groupings Total External Debt to GDP Interest Payments to Exports

1970–75 1976–82 1983–89 1970–75 1976–82 1983–89
Low-income 10.2 14.8 28.5 2.9 4.3 9.8
Low-income, 20.5 28.5 60.7 2.9 5.3 11.8
excluding China
and India
Middle-income 18.6 3.4.6 54.9 5.1 11 15.4
Argentina 20.1 46.1 80.3 14.1 17.9 41.6
Brazil 16.3 28.2 42 12.1 28.5 30.3
Morocco 18.6 55.1 109.5 2.8 13 17.1
Philippines 20.7 45.8 79.2 4.2 14.1 20.5
Source: World Bank (1991: Table 6.2).

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Foreign Direct Investment in the Post-decolonisation Era  

finance in the years to come’. Further, bond markets would not

be accessible for the heavily indebted countries. Therefore, private
capital flows to the debtor countries had to focus on other forms,
and FDI was the ‘immediately obvious candidate’ (ibid.).
Two financial arrangements for helping the indebted
countries grow out of their indebtedness found more mention
than the others: increased flows of FDI and debt-conversion
(and especially debt-equity swap) mechanisms,7 the latter being
the indirect infusion of FDI into debt-stricken economies (ibid.:
1431). These two forms found favour especially because these
were ‘non-debt creating’, an important consideration for the debt-
burdened countries. Simultaneously, it was also argued that FDI
was a ‘safer form of finance’ (Fernández-Arias and Hausmann
2001: 93) and that it was less volatile as compared to all other
forms as also the ‘most dependable source of foreign investment’
(Lipsey 1999: 326).
While developing countries were keen to increase the inflows
of FDI, the critical issue was the policy environment in the recipient
countries that would induce favourable responses from the
investors. The 1990s marked a watershed in this respect as almost
all developing countries adopted foreign investor-friendly regimes.

FDI in the 1990s and After

The resurrection of FDI since the 1990s has been captured in a
large body of literature produced since the early 1990s whose
principal objective was to provide guidance to the developing
countries for attracting larger inflows of FDI. The typical
prescription for the recipient countries has been succinctly stated
in Edwards (1990: 10): (a) reforming the foreign sector by opening
up international trade; (b) reducing the size of government;
(c) at least maintaining, but preferably increasing, their degree

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 20  Understanding Foreign Direct Investment

of international competitiveness; and (d) increasing the rate of

domestic investment, which would then tend to see an increase in
their level of direct foreign investment. Elements of this prescrip­
tion were accepted as the norm by most developing countries.
The ideological underpinning of economic liberalisation
was the Washington Consensus, a set of 10 prescriptions that
were ‘widely held in Washington’ as necessary ‘in most or all
Latin American countries as of 1989’ (Williamson 2004: 1475).8
Included in this list of prescriptions were policies regarding the
treatment of FDI. John Williamson, the principal architect of
Washington Consensus, provided the rationale for opening the
doors to FDI:
a restrictive attitude limiting the entry of foreign direct investment
(FDI) is regarded as foolish. Such investment can bring needed
capital, skills, and know-how, either producing goods needed
for the domestic market or contributing new exports. The main
motivation for restricting FDI is economic nationalism, which
Washington disapproves of, at least when practiced by countries
other than the United States. (Williamson 1990)

Dani Rodrik provided a pointed criticism of the framework of the

Washington Consensus. Rodrik’s basic contention was that the
framework of economic liberalisation included several elements
that had to be rejected outright. As regards liberalisation of FDI,
Rodrik (2002) argued that ‘encouraging foreign investment or
liberalizing everything and then waiting for things to happen will
not work’. Rodrik was clearly proposing a more proactive policy
regime that could secure tangible benefits from FDI.
In contrast to what Rodrik suggested, policy regimes for dealing
with FDI evolved very differently in developing countries. Initially,
the recipient countries ‘liberalised their enabling frameworks for
FDI’ (Sauvant 2001: 40). This phenomenon was common right
across the world. Data provided by United Nations Conference on

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Foreign Direct Investment in the Post-decolonisation Era  

Trade and Development (UNCTAD) showed that in the year 2000,

out of about 150 FDI regulatory changes made by 69 countries,
98 per cent were aimed at ‘creating a more favourable environment
for FDI’ (ibid.). When such ‘passive liberalisation’ did not result
in sufficient investment flows, governments turned to the second-
generation policies to attract investment. These policies were
adopted to ‘actively market’ their countries as locations for FDI.
The relationship between the FDI and their host countries
went through several phases from the early post-World War II
decades. In the 1950s and 1960s, the relationship between the host
country and FDI was largely dependent on the policies adopted by
the US. While in the earlier decade, the principal creditor nation
promoted FDI, as its balance of payments situation deteriorated in
the 1960s, the US resorted to coercive methods to regulate foreign
investors. After being dominated by bank finance in the 1970s
and 1980s, FDI has become one of the centrepieces of the policies
of economic liberalisation since the 1990s. In Chapter 2, we shall
provide the conceptual framework for understanding FDI.

Notes

1. In President Truman words, spoken at his inaugural address: ‘Our

aim should be to help the free peoples of the world, through their own
efforts, to produce more food, more clothing, more materials for housing,
and more mechanical power to lighten their burdens’ (Truman 1949b).
2. The Gold Dollar Standard was the fixed exchange rate mechanism
underlying the Bretton Woods system. This mechanism gave the US
dollar the de facto position of an international reserve currency by making
all currencies pegged to the US dollar. The value of the dollar was, in
turn, determined by its parity to gold—one ounce of gold was equivalent
to $35. Importantly, the US Federal Reserve had agreed to convert dollars
at this gold parity rate.

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 22  Understanding Foreign Direct Investment

3. The justification of our characterisation of governments as ‘quasi

regulators’ will be provided in Chapter 4, where we discuss India’s
policies towards FDI.
4. According to Nurkse, foreign investments from private sources
behaved differently from those from government or official sources, the
difference being that private investors needed inducements before making
their investments, while official investors did not require any such invest­
ments and were ‘autonomous’ (Kattel, Kriegal and Reinhart 2011: 82).
5. International Development Act of 1950.
6. The US signed the first Treaty of Friendship, Commerce and
Navigation with Italy in early 1948, and later in the same year, a similar
agreement was signed with Uruguay (Brown, Jr 1950: 486). These were
the first evidences of international investment agreements, although
the first formal agreement was formalised between West Germany and
Pakistan in 1958.
7. Chandra (1988: 632) has argued that there was ‘some evidence
that in the recent past the debt-equity swaps have partly replaced the
traditional mode of foreign investment’.
8. The term ‘Washington Consensus’ was coined by John Williamson
in 1989 to describe a 10-point agenda for ushering in pro-market
economic reforms (Williamson 2003: 1475; see also Williamson 2004).

References

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for Foreign Investments’. American Economic Review 40 (2), papers
and proceedings of the sixty-second annual meeting of the American
Economic Association, May: 486–94.
Cardoso, E., and R. Dornbusch. 1989. ‘Foreign Private Capital Flows’. In
Handbook of Development Economics, Volume 2, eds Hollis Chenery and
T. N. Srinivasan, 1387–1441. Amsterdam: North Holland.

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Chandra, Nirmal Kumar. 1988. ‘Debt-Equity Swaps: New Way out of

International Debt Crisis?’. Economic and Political Weekly 23 (13), 26
March: 631–32.
Dooley, Michael P. 1994. ‘A Retrospective on the Debt Crisis’. Working
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The Risk of Economic Crisis, 1–18. Chicago and London: University of
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Fernández-Arias, Eduardo and Ricardo Hausmann. 2001. ‘Capital Inflows
and Crisis: Does the Mix Matter?’. OECD Foreign Direct Investment
Versus Other Flows to Latin America: Development Centre Seminars,
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Organisation for Economic Co-operation and Development, Paris.
Hunter, John M. 1953. ‘Long-term Foreign Investment and Underdeveloped
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Payments%20Mess%20(518).pdf (accessed 10 March 2018).

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Kattel, Rainer, Jan A. Kregel and Erik S. Reinert. 2011. Ragnar Nurkse: Trade
and Development. London: Anthem Press.
Lipsey, Robert E. 1999. ‘The Role of Foreign Direct Investment in International
Capital Flows’. In International Capital Flows, ed. Martin Feldstein,
307–31. Chicago: University of Chicago Press.
. 2001. ‘Foreign Direct Investment and the Operations of Multinational
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Truman, Harry S. 1949a. ‘The President’s Message to the Congress on “Point

Four Legislation”’. Annals of the American Academy of Political and Social
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 two

Conceptualising FDI

A ny discussion on foreign investment brings into focus the

forms in which intra- and inter-corporate capital flows take
place. Our objective in this chapter is, therefore, to discuss the key
characteristics of FDI, one of the principal forms of capital flows
between commercial enterprises. More specifically, we will explore
the essential features of FDI and how this form of capital can be
distinguished from some of the other forms of intra- and inter-
enterprise capital flows, especially foreign portfolio investment (FPI).
Understanding the distinction between FDI and other forms
of capital inflows, including FPI, is critical for two reasons. First,
FDI provides not only investible funds to developing countries, but
also technology and managerial expertise, which was described in
Chapter 1 as the ‘package of intangibles’. Over the past decades,
research on FDI, which includes studies that have analysed the
functioning of direct investment companies in their host countries,
has seen a huge increase.1 However, our assessment of a large cross-
section of these studies is that most scholars have not considered
the essential characteristics of FDI while studying this form of
capital. In our view, this is a major lacuna, for, as we shall discuss
in this chapter, it is important to understand how official agencies
have conceptualised FDI before they capture and collate data. The
impact of FDI on host economies critically hinges on the definition
of FDI.

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 27
Conceptualising FDI 

The second reason why understanding the distinction between

FDI and other forms of capital inflows must be made is because
governments of developing countries usually attach a premium to
the former. While identifying financial resources for development,
these governments have increasingly given a prominent place to
FDI inflows. Moreover, it is common for governments to make
efforts to attract such inflows by providing direct and indirect
incentives to foreign companies.
The incentives that developing-country governments extend
to FDI can take a number of forms; here, we will allude to three.
First, these countries provide tax incentives to foreign companies
that are common in construction, information technology (IT) and
electronics, machinery and equipment, and other manufactur­
ing sectors (Andersen, Kett and von Uexkull 2018: 75). Second,
governments have continually expanded the scope of operation
of foreign companies through deregulation and privatisation. The
expansion of FDI inflows has often occurred at the expense of
the domestic enterprises in recipient countries, largely the micro,
small and medium enterprises (MSMEs). With governments
increasingly tying the fortunes of their economic development
programmes to FDI inflows, the cumulative impact of such inflows
on the domestic enterprises has been far-reaching. One evidence
of the adverse impact of FDI is the crowding-out of domestic
investment (Dhar and Sinha Roy 1996).
A third set of incentives is provided through the BITs. Most
developing countries have signed BITs for protecting and promot­
ing foreign investments in their countries. Some studies have
concluded that BITs have stimulated FDI flows into developing
countries (Banga 2003: 34).2
Before we explore the reality behind the FDI numbers, let us
focus on two related aspects of this form of capital. The first is the
composition of FDI, and the second, and more important, is

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 28  Understanding Foreign Direct Investment

how FDI has been defined for the purposes of policymaking and
presentation of data.

Composition of FDI

FDI usually has three components. The first is the inflow of equity
capital from abroad, which adds to the country’s capital stock,
including plant and machinery, and is also called ‘greenfield’
investment. The second component is reinvested earnings of FDI
enterprises, the undistributed profits of existing foreign enterprises
in a country that are ploughed back. The third component is the
acquisition of going enterprises by foreign investors, either through
mergers or takeovers—the so-called ‘brownfield’ investments.
As is obvious, the last form of FDI does not add to productive
capacities in the host countries.

Fresh Infusion of Capital

For the host countries, ‘greenfield’ investments are the most
preferred form of FDI, for they make net additions to the productive
capacities. They also come with the maximum possibility of the
host countries benefiting from the positive externalities in the
form of intangibles like technology (know-how) and managerial
skills provided by direct investors.

Retained Earnings
In its Benchmark Definition of Foreign Direct Investment (hence­
forth, ‘Benchmark Definition’), the Organisation for Economic
Cooperation and Development (OECD) defines retained earnings
as the net current earnings of an FDI enterprise ‘that are not
distributed as dividends to the shareholders ... are deemed

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Conceptualising FDI 

distributed, as investment income, to the direct investor ...

proportionate to its holdings of shares’3 in the enterprise (OECD
2008: 180). The UN System of National Accounts (SNA) explains
that retained earnings of an FDI enterprise are to be treated as
if they have been ‘distributed and remitted to foreign direct
investors in proportion to their ownership of the equity of the
enterprise and then reinvested by them by means of additions to
equity’ (Commission of the European Communities et al. 1993:
paragraph 7.120). The rationale behind this treatment of retained
earnings is that since direct investment enterprises are under
direct control, or influence, of foreign investors, the decision to
retain some of the earnings of such enterprises ‘must represent
a deliberate investment decision’ on the part of foreign direct
investors. Retained earnings remain as reserves until they are
converted into equity through issue of bonus shares.4

Mergers and Acquisitions

Mergers take place when two or more companies agree to combine
into a single entity. Acquisitions, on the other hand, occur when
the equity capital of one company or group of companies is bought
by another company or group of companies. Although the two
phenomena are different in their motivations, they are considered
together, as they entail the taking over of existing entities, locally
or foreign owned, by a foreign investor. Entities resulting from
mergers or acquisitions (M&A) involving a foreign investor are
identified as FDI enterprises.5
However, the Balance of Payments Manual (BPM) of the IMF
does not consider M&A as separate items within direct invest­
ment. The BPM considers M&As differently from other forms of
direct invest­ments, as ‘they may not provide any new financing

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 30  Understanding Foreign Direct Investment

for the firms involved but rather represent a change in investors’

(IMF 2009: 135).
Data on M&As is provided by UNCTAD (2017a: 86) in its
annual World Investment Reports. The cases included are of
those merged or acquired enterprises that meet the criteria of
FDI enterprises.

Identification of FDI: The Policy Discourse

What constitutes FDI has been extensively discussed by academ­

ics and policymakers for nearly a century. The beginnings of
this tradition can be traced back to the first official survey of
outward direct investment conducted by the US Department
of Commerce for 1929. The survey was mandated to measure
‘... the amount of capital involved in the extension of American
enterprise into foreign countries ...’ (Lipsey 2001: 3). It made
an analytically significant contribution to our understanding of
FDI, for it made the all-important distinction between FDI and
FPI.6 FDI, according to the survey, included ‘commercial and
industrial properties situated abroad and belonging to residents
of the US and its Territories, from which a return is normally
expected’. It was defined as ‘pure “interest” capital’ invested in
‘American-controlled corporations operating abroad’ (ibid.: 4).
FPI, on the other hand, was ‘acquired through the purchase of
foreign securities publicly offered and through the international
securities movement’, and was included as ‘a part of the holding
of American commercial and industrial corporations’ (ibid.). In
other words, in an FPI enterprise, a foreign investor did not hold
the controlling stock.
Further clarity on ‘control’ as the distinguishing feature of
FDI came in the next survey conducted in 1936. FDI enterprises

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Conceptualising FDI 

were identified as those that were ‘controlled by a person or small

group of persons (corporate or natural) domiciled in the US, or in
which such person or group has an important voice’. The factor
of control was ‘purposely emphasized in the definition, since it
[was] considered to be the most significant basis for classifying
investments’ (ibid.). However, the survey did not provide a
quantitative basis for assessing ‘control’.
The quantitative basis of ‘foreign control’ for the purposes
of identifying FDI, was provided for the first time in 1941 when
US Treasury conducted a Census of Foreign Owned Assets in
the country, including that of ‘foreign controlled United States
enterprises’. This census determined ‘foreign control’ based on
ownership of 25 per cent or more of the voting stock by foreigners
(Wilkins 1999: 72).
The US Department of Commerce conducted the outward
investment survey for 1950 which provided a somewhat detailed
categorisation of investments abroad, including those that were
substantially controlled by US investors. Four categories of FDI
were identified in the survey. These were:
1. foreign corporations, whose voting securities amounting
to 25 per cent or more were owned by persons or groups
of affiliated persons, ordinarily US residents;
2. foreign corporations, whose voting stock in the aggregate
amounting to 50 per cent or more was publicly held within
the US, but distributed among stockholders, so that no
investor, or group of affiliated investors, owned less than
25 per cent;
3. sole proprietorships, partnerships or real property (other
than property held for the personal use of the owner) held
abroad by residents of the US; and
4. foreign branches of US corporations (Lipsey 2001: 5).

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In the subsequent decades, the threshold of foreign ownership

for determining ‘control’ by foreigners was lowered. The US
Department of Commerce lowered the threshold to 10 per cent
in the 1960s. This was done first for US businesses abroad and,
subsequently, for foreign businesses in the US (Wilkins 1999: 72).
The Foreign Direct Investment Regulations introduced by
President Lyndon B. Johnson in 1968 provided one of the early
evidences that the US administration had diluted the ownership
criteria. We discussed in Chapter 1 that the Regulations were aimed
at preventing American companies from investing abroad, given
the country’s deteriorating balance of payments situation.
The Regulations defined ‘direct investor’ in the context of
outward flows of FDI from the US as
... any person within the US who directly or indirectly owned or
acquired:
(a) 10% or more of the total combined voting power of any
foreign national; or
(b) The right or power to receive, control, or otherwise enjoy
10% or more of the earnings, receipts, income or profits of
any foreign national;
(c) The right or power to receive, control or otherwise direct
the disposition of 10% or more of the assets of any foreign
national upon the liquidation. (International Legal Materials
1968: 56)

The International Investment Survey Act of 1976 provided the

conclusive evidence that the US had adopted the criterion of 10 per
cent of voting share for identifying direct investment (henceforth,
the ‘10 per cent rule’).7

The International Practice

The IMF tried to follow the developments in the largest creditor
nation for benchmarking FDI, which it needed to provide guidance

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Conceptualising FDI 

to its member states regarding their balance of payments. The first

of such guidance appeared in the third edition of its Balance of
Payments Manual in 1961 (BPM3). IMF defined ‘direct investment’
as an investment ‘made to create some kind of permanent interest
in an enterprise’ (IMF 1961: paragraph 367). Since it was
intended to create or expand a permanent interest in business,
direct investment, according to IMF, was not likely to be reversed
and was unlikely to vary in the short run, as was the case with
most other forms of investment (ibid.: paragraph 369).
The threshold of foreign ownership that IMF proposed for
identifying control was similar to that adopted by the US legal
system, namely 25 per cent of the voting stock by a closely
organised group of non-residents (ibid.: paragraph 373).
The IMF revised its Balance of Payments Manual in 1977
(BPM4), and its characterisation of ‘direct investment’ underwent
changes. The two features of FDI identified in BPM3—the intrinsic
link between ownership and control in a direct investment
enterprise, and the long-term nature of the investment—were kept
unchanged. Changes were, however, introduced in the threshold
of voting share required to be held by the foreign direct investor
for the investment to be counted as FDI. While so doing, BPM4
adopted an imprecise definition of FDI, stating that when foreign
ownership was ‘concentrated in the hands of one investor or a
group of associates, the percentage chosen as providing evidence
of direct investment ... frequently ranged from 25 per cent down
to 10 per cent’ (IMF 1977: paragraph 412).
By the early 1990s, a broad consensus had emerged between
at least three policy-coordination agencies on the definition of
FDI—the IMF, OECD and UN SNA. IMF pushed for a standardised
definition of FDI so that a consistent framework for reporting
the balance of payments position of its member countries could
be developed. The UN, too, had a similar reporting function, in

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 34  Understanding Foreign Direct Investment

the national accounts of the member states. OECD’s interest in a

standardised definition was two-fold: one, develop a consistent
reporting framework for its member states, and two, develop
policy guidelines on monitoring foreign investment.
The efforts made by the IMF, OECD and UN to arrive at a
consensus on the definition of FDI were reflected, respectively,
in the approaches suggested in the IMF’s Balance of Payments
Manual (BPM5) adopted in 1993 (IMF 1993), the third edition of
the OECD’s Benchmark Definition of 1996 (OECD 1996) and the
SNA of 1993 prepared by the Inter-secretariat Working Group on
National Accounts under the aegis of the UN (Commission of the
European Communities et al. 1993). In fact, the Inter-secretariat
Working Group had the participation of the first two organisations,
besides the European Commission and the World Bank. We will
now discuss the manner in which FDI was conceptualised by the
IMF and the OECD; the SNA incorporated the definitions given in
BPM5 and the Benchmark Definition.
BPM5 defined direct investment as
the category of international investment that reflects the objective
of a resident entity in one economy obtaining a lasting interest in
an enterprise resident in another economy ... The lasting interest
implies the existence of a long-term relationship between the direct
investor and the enterprise and a significant degree of influence
by the investor on the management of the enterprise. Direct
investment comprises not only the initial transaction establishing
the relationship between the investor and the enterprise but also
all subsequent transactions between them and among affiliated
enterprises, both incorporated and unincorporated. (IMF 1993:
paragraph 359)

A second element was included to identify a direct investment

enterprise, which was based on the extent of ownership by a
foreign investor. This was a departure from the definition of

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Conceptualising FDI 

FDI provided in BPM4, which, as mentioned earlier, was rather

imprecise. BPM5 provided a more precise definition of a direct
investment enterprise:8 ‘an incorporated or unincorporated
enterprise in which a direct investor, who is resident in another
economy, owns 10% or more of the ordinary shares or voting
power (for an incorporated enterprise) or the equivalent (for an
unincorporated enterprise)’ (ibid.: paragraph 362).
Although BPM5 proposed the ‘10 per cent rule’ for identifying
direct investment, IMF members could also use twin parameters
of ownership and control to identify FDI under the following
circumstances: (a) in case the direct investor owned less than
10 per cent (or even none) of the ordinary shares of an enterprise
but it had effective voice in management, this enterprise could
be included as a direct investment enterprise; and (b) when the
investor owned 10 per cent or more but did not have effective
voice in management, the enterprise could be excluded.
According to OECD’s Benchmark Definition, direct investment
served the
objective of obtaining a lasting interest by a resident entity in one
economy (“direct investor”) in an entity resident in an economy
other than that of the investor (“direct investment enterprise”).
The term “lasting interest” implied the existence of a long-term
relationship between the direct investor and the enterprise and a
significant degree of influence on the management. (OECD 1996:
paragraph 5)

Endorsing the 10 per cent rule for determining the existence of a

direct investment relationship, OECD clarified that an ‘effective
voice in the management, as evidenced by an ownership of at least
10 per cent, implies that the direct investor is able to influence or
participate in the management of an enterprise; it does not require
absolute control by the foreign investor’ (ibid.: paragraph 8).

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 36  Understanding Foreign Direct Investment

OECD also recognised that countries may not apply the 10 per
cent rule for identifying FDI, since an investor may not be able
to exercise any significant influence on an enterprise even while
owning 10 per cent of the voting shares, while another may have
an effective voice in management even with less than 10 per cent
ownership. Under such circumstances, countries not following
the 10 per cent rule were advised by the OECD to ‘identify,
where possible, the aggregate value of transactions not falling
under the 10 per cent cut-off rule, so as to facilitate international
comparability’ (ibid.: paragraph 9).
The OECD also recognised that countries may consider the
existence of elements of a direct investment relationship through
a combination of factors listed in Box 2.1. The purpose behind
OECD’s enumeration of the possible factors for determining the
existence or otherwise of a direct-investment relationship seems
to be an attempt by the organisation to ensure transparency in
the reporting of FDI, and that countries produce comparable sets
of data.

Box 2.1: Elements of a Direct Investment Relationship

(May Be Used Also in Combination)

1. Representation on the board of directors;

2. Participation in policymaking processes;
3. Material inter-company transactions;
4. Interchange of managerial personnel;
5. Provision of technical information;
6. Provision of long-term loans at lower than existing market rates.
Source: OECD (1996: 8).

The two main organisations involved in setting global

benchmarks for identifying FDI revised their conceptual frame­
works yet again in 2008. The IMF, in its sixth edition of the
Balance of Payments Manual (BPM6), defined direct investment as
a ‘category of cross-border investment associated with a resident

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Conceptualising FDI 

in one economy having control or a significant degree of influence

on the management of an enterprise that is resident in another
economy’ (IMF 2009: paragraph 6.8). BPM6 added that since
there is control or a significant degree of influence by the investor,
‘direct investment tends to have different motivations and to
behave in different ways from other forms of investment’ (ibid.:
paragraph 6.10).
One of the major changes introduced by BPM6 was the
adoption of two separate yardsticks for ‘control’ and ‘significant
degree influence’ of an FDI enterprise by the foreign investor.
It may be recalled that these two yardsticks were earlier used
interchangeably in the definition of ‘direct investment’. In the
revised framework, ‘control’ was determined to exist if the direct
investor owned more than 50 per cent of the voting rights in
an enterprise, while ‘significant degree of influence’ existed if
the direct investor owned between 10 and 50 per cent of the
voting rights.
The OECD, too, modified its definition of FDI in its fourth
edition of the Benchmark Definition. FDI, according to this
definition, was the form of investment used by the direct investor
to establish ‘a lasting interest’ in an enterprise. ‘Long-term
relationship between the direct investor and the direct investment
enterprise and a significant degree of influence on the management
of the enterprise’ (OECD 2008: paragraph 117), together with the
10 per cent rule, were indicators of ‘lasting interest’. Thus, the
OECD, too, adopted the criteria ‘significant degree of influence’
to describe the relationship of the foreign investor with an FDI
enterprise, dispensing with ‘control’ as the criteria. Further, the
past practice wherein OECD allowed the use of other elements
mentioned in Box 2.1 for identifying FDI was discontinued; the
new approach did ‘not recommend the use of other considerations’,
which actually manifest control/influence (ibid.).

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But while the IMF and OECD had diluted the criteria of
ownership and control, the specialised body of the UN that is
mandated to monitor foreign investment, UNCTAD (2017b: 3),
followed the past practice of identifying FDI using the three-fold
criteria, namely the ‘10 per cent rule’, ‘control’ and ‘substantial degree
of influence’ of the direct investor over the invested enterprise.
Over the past decades, the definition of FDI has undergone
several significant changes. While in the earlier decades, ownership
by the foreign investor above a threshold was used as the major
criteria for identifying FDI, in the more recent decades, this criterion
has been progressively diluted. Ownership by a foreign investor
above the threshold meant that the investor exercised both ‘control’
and ‘substantial degree of influence’, and it was, therefore, a well-
accepted proposition that the foreign investor would guide the
fortunes of the invested enterprise. Further, the criteria mentioned
earlier, put together, also implied that the foreign investor would
have a lasting interest in the host country, and would, therefore,
participate in the latter’s development endeavours.
In Chapter 1, we discussed the dilution of the role of FDI
as a source of long-term finance, and in this chapter, we saw a
confirmation of this fact. The foreign ownership criteria necessary
for identifying a company as FDI was diluted to 10 per cent from
the earlier 25 per cent. Given that many of these companies were
public limited and most were also widely held, a lower foreign
shareholding was deemed sufficient for the foreign investor to
exercise both control and substantial degree of influence over
an enterprise. As long as the foreign investor had significant
influence or control, the long-term stakes of the investor could
also be guaranteed.
With the change in the definition of FDI towards the later
part of the 2000s, the relationship between ownership on the one
hand, and control and substantial degree of influence on the other,

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Conceptualising FDI 

has become quite tenuous. The implications of adopting this

framework for the host countries, in terms of the quality of FDI
they have received in the recent past, are analysed in the following
section by looking at the numbers from India.
Several generations of commentators have commented on
the changing character of FDI, and their views for a complete
understanding of the phenomenon are critical, in our view. A brief
account of the perspective of the commentators is also presented
in the following section.

The Indian Practice

India never provided a formal definition of a foreign-controlled
company. In the decade of the 1960s and 1970s, regulations
were adopted to limit foreign shareholding in companies, most
significantly, through the Foreign Exchange Regulation Act
(FERA) of 1973. But FERA, as we shall discuss in Chapter 4, was
not intended to restrict foreign control over enterprises; as its title
suggested, the Act provided mechanisms for limiting outgo of
foreign exchange from the country.
The Reserve Bank of India (RBI) took up the task of identifying
foreign-controlled companies for reporting on the country’s foreign
liabilities and assets. This exercise was taken up immediately after
Independence in pursuance of the request of the IMF. In its Census
of India’s Foreign Liabilities and Assets (CIFLA), the RBI (1950)
examined various concepts and definitions for CIFLA. The RBI
concluded that a company could be treated as a foreign-controlled
company if (a) 40 per cent or more of its shares were owned in
any one country outside India, (b) it was a subsidiary of a parent
company registered in any country abroad, (c) 25 per cent or
more of its shares were owned by a foreign-controlled Indian joint
stock company, which was not a managing agent, and (d) it was

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 40  Understanding Foreign Direct Investment

a company managed by a foreign-controlled managing agency

company (ibid.: 36). The exercise was repeated by the RBI in the
same format up to 1961, after which it has been publishing an
annual survey of ‘India’s International Investment Position’ of the
(a) branches, (b) subsidiaries of foreign companies and (c) a select
number of other undertakings having foreign equity capital. For
purposes of the annual surveys, the RBI takes 25 per cent or more
foreign equity in a company as a basis for classifying the company
as under ‘foreign control’.9
With India integrating increasingly with the global processes
since the 1990s, efforts have been made to align the country’s FDI
reporting system with the international reporting system. This
process was taken further following the recommendations of the
Committee on Compilation of Foreign Direct Investment in India
in 2002 (Government of India 2002). The Committee, even while
recognising the fact that the benefits derived by direct investors
go far beyond the investment income and that the investees often
happen to be units of multinational operations, recommended
that the way FDI was defined should ‘facilitate external account
recording’. It underlined that ‘... the concepts, definitions and
classifications used [should be] internally consistent and support
comparability of these statistics with other compilers. Secondly,
the compilation of FDI statistics has to be based on internationally
accepted BPM5’ (ibid.: 10). The Committee’s recommendations
thus endorsed the criterion of 10 per cent voting power included
in BPM5, and its further focus was essentially on the items to be
included and procedures for collecting the information.
The upshot of this exercise was that the 10 per cent criterion
was taken as the inviolable yardstick for determination of foreign
influence over an enterprise, and all other aspects of FDI were
ignored. In particular, the representative character of company-
finance studies based on the new criteria compared to those based

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Conceptualising FDI 

on foreign-controlled rupee companies (FCRCs) to reliably reflect

the operations of FDI in India were also not discussed.
It needs to be spelt out that while India started reporting FDI
inflows as per international best practices beginning 2000–01,
following the recommendations of the Committee, the adoption
of best practices has been confined to reporting reinvested
earnings, equity capital of unincorporated foreign bodies and
other associated capital (mainly loans). Besides meeting the
international requirements, the unstated objective was also to
make India’s inflows look relatively healthy in comparison to
those of China. Instead of applying the 10 per cent rule, however,
all investments by persons/entities residing outside India in the
capital of Indian companies other than those through the portfolio
investment scheme were treated as FDI. RBI (2010) explains that
while as per the international definition, for an investment to
qualify as FDI the foreign investor needs to have a 10 per cent or
higher stake in a given company, in India this has not been strictly
adhered to. Irrespective of the extent of holding in a particular
company, it is considered as an FDI if the non-resident acquires
shares in a company other than by way of acquisition from the
stock market, i.e., through initial public offerings (IPO) or through
private arrangements ... (Ibid.: 82)

Thus, credit (inflows) under FDI ‘to India’ includes all types of
investments in equities (investments made by non-residents in the
shares/mandatorily-convertible debentures/preference shares of
an Indian company), reinvested earnings of both incorporated and
unincorporated bodies (mainly foreign bank branches operating
in India) and other capital of FDI companies. ‘Other’ under FDI
includes inter-corporate loans given by parent companies (group)
to their affiliates.
The fact of non-adherence to the 10 per cent criterion, ignoring
the context surrounding FDI, was found to be problematic in

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many quarters. Significantly, the Economic Advisory Council to

the Prime Minister in its Review of the Economy 2007–08 said:
Inflows of Private Equity (PE) investments have also been quite
large. Since in most cases PE flows constitute less than 10% of
the capital of the company being invested they should ideally be
reported under Portfolio Capital, and not under FDI. It is not clear
what the current accounting practice is (emphasis added). (Economic
Advisory Council to the Prime Minister 2008: 25)

What gets clearly reflected in this statement is the fact that an

important official advisory body was unaware of certain aspects of
computing FDI in India.
The thin line between FDI and FPI, as far as classification of
foreign private equity and venture capital in India are concerned,
is further evident from the following observation of the Working
Group on Foreign Investment set up by the Ministry of Finance.
Inflows into unlisted equity: At a conceptual level, a private equity
or venture capital fund outside India can invest in India in three
ways. First, private investment in unlisted equity can take place
if the foreign entity creates an investment vehicle which obtains
an FII [foreign institutional investment] registration. Second, even
without registering as an FII a private equity or venture capital
fund outside India can invest in an Indian unlisted company up
to the level of caps for FIIs. These investments would be treated
as FDI ... These two mechanisms, put together, characterize the
main avenues for private equity/venture capital inflows into India.
The third way for private equity or venture capital funds outside
India to invest in the country is to register as an FVCI [foreign
venture capital investor] with SEBI [Securities and Exchange Board
of India] and be regulated as such. (RBI 2010: 71)

The Consolidated FDI Policy (CFP) issued on 31 March 2010

by then Department of Industrial Policy and Promotion (DIPP),
renamed the Department for Promotion of Industry and Internal

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Conceptualising FDI 

Trade (DPIIT), and its predecessor, Draft Press Note (DPN) on

the FDI Regulatory Framework, throw light on the way FDI is
being measured in India. While reiterating the motivation of the
direct investor as ‘... a strategic long term relationship with the
direct investment enterprise to ensure the significant degree of
influence by the direct investor in the management of the direct
investment enterprise’ (Government of India 2010: 5), the CFP
further explained: ‘Investment in Indian companies can be made
both by non-resident as well as resident Indian entities. Any non-
resident investment in an Indian company is direct foreign investment’
(emphasis added) (ibid.: 24).
Interestingly, the DPN issued earlier for discussion by the
government stated that: ‘In India the “lasting interest” is not
evinced by any minimum holding of percentage of equity capital/
shares/voting rights in the investment enterprise’ (ibid.: 1).
This suggests that all foreign investments (other than those
purchased by FIIs on the stock market) in equity capital and
equity-related instruments are being treated as FDI, irrespective of
the extent of foreign share. It is obvious that there will not be lasting
interest and the ability or intention to significantly influence the
management of the investee company in all the cases. While this
contrasts sharply with the ‘international best practice’, one cannot
expect such FDI to be accompanied by the attendant attributes
and deliver the perceived benefits from FDI.

Conceptualisation of FDI in Available Literature

Commentators in the early post-World War II period identified

FDI using the yardstick of the foreign investors’ ‘control’ over the
functioning of the invested enterprise, even though the degree
of control exercised was a more difficult distinction to apply

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(Hunter 1953: 16). The earlier studies differentiated between FDI

and FPI based on whether the foreign investor had substantial
control over an enterprise to be able to direct its activities and,
therefore, anticipate returns from the investment (ibid.). Another
characterisation of FDI was that this component of foreign capital
flows brought with it ‘significant element of ownership, control,
and management’ over an enterprise; in other words, they were
‘entrepreneurial investments’ (Maffry 1954: 614). According to
Penrose (1956),
in the realm of manufacturing this kind of investment is probably
more effective in expanding productivity and promoting industrial
efficiency than any other kind of foreign investment. Its advantages
derive largely from the fact that behind the new foreign firm are
the resources and experience of the parent concern, including not
only managerial and technical personnel but also that indefinable
advantage in its internal operations which an efficient going
concern usually has over a new one. (Ibid.: 225)

Penrose also pointed out that FDI multiplied itself by ploughing

back the earnings of the enterprises that received such inflows.10
Thus, commentators not only endorsed the definition adopted
by policymakers, but added an important factor, namely the
long-term association with the host country, as yet another key
characteristic of FDI.
More recent literature has dwelled on the nature of FDI in
somewhat greater detail. Wilkins (1999) points out that a foreign
direct investor invests abroad as part of a business strategy with
a view to exercising ownership and control, potential for control,
or at least influence. Such an investor ‘intends to be “active” ...
whereby it plans to obtain a return based not only on its financial
contribution, but also on its transfer of intangible assets, its way of
doing business and its technology (broadly construed)’ (ibid.: 56).
This feature of FDI takes us back once again to Chapter 1, where

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Conceptualising FDI 

we argued that this form of investment is understood not only as a

form of capital flow, but also as a package, combining capital and
the critical intangibles for an enterprise, namely technology and
managerial expertise.
While studies on FDI have proliferated over time, only a
small proportion of them have made serious efforts to not only
lay bare the features of this form of capital flow, but perhaps, more
importantly, attempt to make a distinction between FDI and the
various other forms of capital flow, including FPI. Commentators
who have dwelled on these have made the distinction between
the forms of foreign capital flows by tracing them back to their
historical patterns.
Most studies argue that the period before 1914 was dominated
by FPI. Dunning (1970) estimates that in 1914, 90 per cent of
all international capital flows were FPI. Included in such capital
flows were acquisition of securities issued by foreign institutions,
without any control over, or participation in the management of,
the entities concerned. Dunning also pointed out that although
several American and European companies had owned sizeable
foreign manufacturing ventures, these involvements ‘were the
exceptions rather than the rule’; they ‘rarely accounted for a major
part of the enterprises’ total activities’ (ibid.: 2). This was hardly
surprising given that the corporations, which, in the later decades,
were the main drivers of FDI flows, began consolidating their
position in the global economy only after the World War I.
Lipsey (1999: 10) suggests that FDI and FPI can be ‘thought of
as ways of dividing up risks among different types of investors and
borrowers’. In the early history of the US, for instance, early foreign
investment went mainly into government securities, considered
relatively safe. Later foreign investors focused on investments into
railroads. Lipsey explains that ‘foreign portfolio investment went to
large, lumpy, social overhead capital projects, railroads, canals, and

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 46  Understanding Foreign Direct Investment

later, public utilities, relatively safer investments and less dependent

on local knowledge than the typically much smaller, and on that
account, riskier enterprises in agriculture or manufacturing, which
were left mainly to local financing’ (ibid.: 313).
Based on the patterns of participation of FDI and FPI in foreign
enterprises, Wilkins (1999) provides an important analytical
construct. The author makes four distinctions between FDI and
FPI, drawing on Dunning and Dilyard (1999): (a) FDI includes
the transfer of non-financial, as well as financial assets; (b) FDI
involves continuing control, while FPI does not; (c) FDI is usually
more lumpy and indivisible than FPI; and (d) FPI tends to be
prompted by financial returns that are higher abroad than those
at home, while motivations for individual FDI projects are far
broader (Wilkins 1999: 57–58). The last-mentioned distinction
holds the key, for it enumerates the essential character of FDI as a
critical input in the development model adopted, especially by the
developing countries in recent decades.
Several studies have commented on the dilution in the criteria
for identifying FDI and the consequent implications for identifying
FDI enterprises. According to Lipsey (1999):
[O]ver time, the definition of direct investment has shifted from an
emphasis on control across national boundaries to a vaguer notion
of “lasting interest” and a “significant” influence on management,
and in the balance of payments data the enterprise is divided
up statistically among owners of shares of 10 per cent or more.
(Ibid.: 23)
This situation is well summarised by Soci (2007: 227): the idea
of ‘control’, which was present in earlier definitions, has been
abandoned in favour of a broader though no less vague concept.
What ‘lasting interest’ means is
a stake of 10% or more of the ordinary shares or voting power of
an incorporated enterprise or the equivalent of an unincorporated

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 47
Conceptualising FDI 

enterprise ... This is the threshold in the US, whereas the

legislation in the European Union is not yet completely uniform.
The immediate consequence of an FDI is that a national firm acting
as above becomes, by definition, a multinational enterprise. (Ibid.)

Table 2.1 summarises some of these conceptual distinctions

between FDI and FPI.

Table 2.1: Conceptually Segregating FDI and FPI

FDI FPI
Greenfield Greenfield
M&A M&A
Control Some possibility of control
Long term Not long term
Technology Little scope
Management Some possibility
Brand names No
Trade with related parties No
Source: Compiled by the authors.

Notes

1. The earlier studies were captured in two exceptional surveys by

Cardoso and Dornbusch (1989) and Helleiner (1989).
2. An UNCTAD (2014) survey of the studies on BITs also showed that
these treaties have had a positive impact on FDI. However, a more recent
survey conducted by the Bonnitcha (2017: 4) concludes that ‘investment
treaties are more effective in attracting the types of FDI that are less
beneficial from a host country perspective’.
3. OECD (2008) explains that it is the direct investor’s ‘percentage
holding of shares on issue (or equivalent) that determines the ratio
under which reinvested earnings are deemed distributed, not the level
of voting power’.

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 48  Understanding Foreign Direct Investment

4. Helleiner (1989) provides a neat analytical explanation of the

inclusion of retained earnings as FDI:
... when retained earnings are employed for the financing of investment
they should be thought of analytically as constituting an external payment
(foreign earnings) followed by an external inflow of investment. If such
investments are freely made they are obviously just as important as any
“fresh” capital inflow; earnings on previous foreign investment are as surely
foreign as are those from any other payment for an import. If external
payments are controlled, as they frequently are, foreign firms may have few
options but reinvestment in their own activities (which are usually more
attractive than, say, government bonds or bank deposits). (Ibid.: 1455)
5. See the discussion on identification of FDI later in this chapter.
6. However, Wilkins (2004: 70), through her extensive research on
foreign investment in the US, has shown that there can be ‘conceptual
difficulties in distinguishing FDI and FPI’.
7. The Act used the following language to define direct investment:
‘ownership or control, directly or indirectly, by one person of 10 per
centum or more of voting securities or an incorporated business enterprise
or an equivalent interest in an unincorporated enterprise’ [International
Investment Survey Act 1976, Public Law 94–472, Section 3(10)].
8. BPM5 provides a more elaborate definition of direct investment
enterprises: ‘those entities that are subsidiaries (a non-resident investor
owns more than 50 percent), associates (an investor owns 50 percent or
less) and branches (wholly or jointly owned unincorporated enterprises)
either directly or indirectly owned by the direct investor’ (IMF 1993:
paragraph 362).
9. The RBI adopted this definition after 1970–71. By way of a footnote
to the survey, the RBI introduced the new definition which has been
followed ever since. See RBI (1973).
10. ‘Direct foreign investment – and by this I mean the ownership
and operation of business organisations in a foreign country’
(Penrose 1956: 220).

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 49
Conceptualising FDI 

References

‘International Investment Survey Act of 1976’. 1976. Public Law 94–472,

11 October.
Executive Order No. 11387, 33 Federal Register 47. 1968. Reproduced
in ‘United States: Mandatory Controls on Investment Abroad’,
International Legal Materials 7 (1), January: 53–86.
Andersen, Maria R., Benjamin R. Kett and Erik von Uexkull. 2018. ‘Corporate
Tax Incentives and FDI in Developing Countries’. In Global Investment
Competitiveness Report 2017/2018: Foreign Investor Perspectives and
Policy Implications, 73–99. Washington, D. C.: World Bank.
Banga, Rashmi. 2003. ‘Impact of Government Policies and Investment
Agreements on FDI Inflows’. Working paper no. 116, Indian Council
for Research on International Economic Relations, New Delhi.
Available at [Link] (accessed 15 July 2018).
Bonnitcha, Jonathan. 2017. ‘Assessing the Impacts of Investment Treaties:
Overview of the Evidence’. International Institute for Sustainable
Development, Manitoba, Canada. Available at [Link]
sites/default/files/publications/assessing-impacts-investment-treaties.
pdf (accessed 10 July 2018).
Cardoso, E., and R. Dornbusch. 1989. ‘Foreign Private Capital Flows’. In
Handbook of Development Economics, Volume 2, eds Hollis Chenery and
T. N. Srinivasan, 1387–1441. Amsterdam: North Holland.
Commission of the European Communities, IMF, OECD, United Nations
and World Bank. 1993. System of National Accounts. Prepared under
the auspices of the Inter-Secretariat Working Group on National
Accounts, United Nations, Brussels/Luxembourg, New York, Paris and
Washington, D. C.
Dhar, Biswajit and Saikat Sinha Roy. 1996. ‘Foreign Direct Investment and
Domestic Savings-Investment Behaviour: Developing Countries’
Experience’. Economic and Political Weekly 31 (35–37), special number,
September: 2547–51.
Dunning, John. 1970. Studies in International Investment. London: George
Allen and Unwin.

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 50  Understanding Foreign Direct Investment

Dunning, John and John Dilyard. 1999. ‘Towards a General Paradigm

of Foreign Direct and Foreign Portfolio Investment’. Transnational
Corporations 8 (1), April: 1–52.
Economic Advisory Council to the Prime Minister. 2008. ‘Review of the
Economy 2007/08’. New Delhi. Available at [Link]
rev_eco0708.pdf (accessed 25 July 2018).
Government of India. 2002. ‘Committee on Compilation of Foreign Direct
Investment in India’. Department of Industrial Policy and Promotion,
October. Available at [Link]
(accessed 25 July 2018).
. 2010. ‘Draft Press Note No. (2010): FDI Regulatory Framework’.
Department of Industrial Policy and Promotion, Ministry of
Commerce and Industry. Available at [Link]
files/pn9_2009_1.pdf (accessed 25 July 2018).
Helleiner, G. K. 1989. ‘Transnational Corporations and Direct Foreign
Investment’. In Handbook of Development Economics, Volume 2, eds
H. Chenery and T. N. Srinivasan, 1441–80. Amsterdam: North
Holland.
Hunter, John M. 1953. ‘Long-term Foreign Investment and Underdeveloped
Countries’. Journal of Political Economy 61 (1): 15.
IMF. 1961. ‘Balance of Payments Manual’, third edition. Washington, D. C.
. 1977. ‘Balance of Payments Manual’, fourth edition. Washington,
D. C.
. 1993. ‘Balance of Payments Manual’, fifth edition. Washington, D. C.
. 2009. ‘Balance of Payments and International Investment Position
Manual’, sixth edition. Washington, D. C.
Lipsey, Robert E. 1999. ‘The Role of Foreign Direct Investment in International
Capital Flows’. In International Capital Flows, ed. Martin Feldstein,
307–31. Chicago: University of Chicago Press.
. 2001. ‘Foreign Direct Investment and the Operations of Multinational
Firms: Concepts, History, and Data’. Working paper no. 8665, National
Bureau of Economic Research. Available at htp://[Link]/papers/
w8665 (accessed 5 June 2018).
Maffry, August. 1954. ‘Direct Versus Portfolio Investment in the Balance of
Payments’. American Economic Review 44 (2), papers and proceedings

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Conceptualising FDI 

of the 66th annual meeting of the American Economic Association,

May: 614–623.
OECD. 1996. ‘OECD Benchmark Definition of Foreign Direct Investment’,
third edition. Paris.
. 2008. ‘OECD Benchmark Definition of Foreign Direct Investment’,
fourth edition. Paris.
Penrose, Edith Tilton. 1956. ‘Foreign Investment and the Growth of the
Firm’. Economic Journal 66 (262), June: 220–35.
RBI. 1950. ‘Report on the Census of India’s Foreign Liabilities and Assets as
on 30th June 1948’. Examiner Press, Bombay.
. 1973. ‘Finances of Branches of Foreign Companies and Foreign
Controlled Rupee Companies’. Reserve Bank of India Bulletin, October.
. 2010. ‘Report of the Working Group on Balance of Payments Manual for
India’. September. Available at [Link]
[Link]?UrlPage=&ID=596 (accessed 10 July 2018).
Soci, Ann. 2007. ‘FDI: A Difficult Connection between Theory and Empirics’.
In New Directions in Economic Geography, ed. Bernard Fingleton, 277–
314. Cheltenham, UK: Edward Elgar.
UNCTAD. 2014. ‘The Impact of International Investment Agreements
on Foreign Direct Investment: An Overview of Empirical Studies
1998–2014, IIA Issues Note’. September. Available at http://
[Link]/Upload/Documents/unctad-web-
diae-pcb-2014-Sep%[Link] (accessed 15 June 2018).
. 2017a. ‘World Investment Report 2017: Investment and the Digital
Economy’. Geneva.
. 2017b. ‘Methodological Note, World Investment Report 2017:
Investment and the Digital Economy’. Geneva.
Wilkins, Mira. 1999. ‘Two Literatures, Two Story-lines: Is a General Paradigm
of Foreign Portfolio and Foreign Direct Investment Feasible?’.
Transnational Corporations 8 (1), April: 53–116.
. 2004. The History of Foreign Investment in the United States, 1914–
1945. Cambridge, Massachusetts and London, England: Harvard
University Press.

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 three

Trends in Global FDI Flows

I n this chapter, we will discuss the trends in global FDI flows

since 1970. The choice of the initial year is dictated by the
availability of data, which we shall collate from two sources. The
first source is the IMF and the second is UNCTAD. It may be
recalled that in Chapter 2, we had relied on these two sources for
functional definitions of FDI. In the following sections, we will
put the numbers to the categories that we borrowed from the two
organisations for our earlier discussion.
The two sources of data on FDI provide two distinct sets of
numbers. While the IMF provides data on FDI from the balance of
payments statistics, UNCTAD provides data not only on FDI, but
also on M&As by foreign companies, as well as their greenfield
investments.1
This chapter will cover both the flows and stocks of FDI.
While the former represents the investments that are made in a
particular year, the latter allows us to assess the accumulation of
FDI at the end of any year. Further, both inflows and outflows of
FDI will be included in the discussion.

IMF Data on FDI and Related Forms of Investment

FDI statistics provided by the IMF follow the classifications

given in BPM6. FDI is included as a component of the ‘Financial

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Trends in Global FDI Flows 

Account’, the details of which are shown in Box 3.1. As can be

seen, FDI belongs to a category of capital flows that includes
portfolio and other investments, besides ‘financial derivatives’
and ‘employee stock options’ (ESO). Each of these categories of
investments is used to settle external payments, as is the fourth
component, namely ‘reserve assets’.

Box 3.1: Financial Account of the Balance of Payments

3.1 Direct investment

3.1.1 Equity and investment fund shares
[Link] Equity other than reinvestment of earnings
[Link] Reinvestment of earnings
3.1.2 Debt instruments
3.2 Portfolio investment
3.2.1 Equity and investment fund shares
3.2.2 Debt securities
3.3 Financial derivatives (other than reserves) and employee stock options
3.4 Other investment
3.4.1 Other equity
3.4.2 Currency and deposits
3.4.3 Loans
3.4.4 Insurance, pension and standardised guarantee schemes
3.4.5 Trade credit and advances
3.4.6 Other accounts receivable/payable—other
3.4.7 Special drawing rights
3.5 Reserve assets
3.5.1 Monetary gold
3.5.2 Special drawing rights
3.5.3 Reserve position in the IMF
3.5.4 Other reserve assets
Source: IMF (2009: Appendix 9).

We discussed earlier how direct investment and portfolio

investment are both defined in BPM6. Here, we will briefly
allude to the treatment of financial derivatives and ESOs and
‘other investments’. BPM6 defines a financial derivative as a
financial instrument, which is ‘linked to another specific financial
instrument or indicator or commodity and through which specific
financial risks (such as interest rate risk, foreign exchange risk,
equity and commodity price risks, credit risk, and so on) can be

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 54  Understanding Foreign Direct Investment

traded in their own right in financial markets’ (IMF 2009: 93).

ESOs are options to buy the shares of a company that are offered
to employees of the company as remuneration or as an incentive
package. ESOs can also be considered financial derivatives if
the employees’ stock options can be traded on financial markets
without any restriction (ibid.: 96).
‘Other investment’, according to BPM6, is a residual category
that includes investment flows not included in any of the other
categories in the Financial Account, namely direct investment,
portfolio investment, financial derivatives and ESOs, and reserve
assets. It includes, ‘other equity’, which can ‘include equity in
quasi-corporations, such as branches, trusts, limited liability and
other partnerships, unincorporated funds, and notional units for
ownership of real estate and other natural resources’ (ibid.: 85).
These characterisations of the components of the Financial Account
of the Balance of Payments indicate a close relationship between
FDI, FPI and other investments (henceforth, ‘FPI and others’).
BPM6 defines ‘reserve assets’ as
those external assets that are readily available to and controlled
by monetary authorities for meeting balance of payments
financing needs, for intervention in exchange markets to affect
the currency exchange rate, and for other related purposes (such
as maintaining confidence in the currency and the economy, and
serving as a basis for foreign borrowing). (Ibid.: 111)

Estimates of Foreign Investment Flows

Our first objective is to provide estimates of the different forms

of investment flows over the past four decades, which will
also provide us a perspective of the relative importance of FDI
in relation to the other forms of investment flows that the IMF
includes in the Financial Account of the Balance of Payments.

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Trends in Global FDI Flows 

Foreign investment inflows in overall terms increased from

just over $22 billion in 1970 to over $4.6 trillion in 2016, while
the corresponding figures for outflows were $26 billion and
$5.6 trillion, respectively (Figure 3.1).
Figure 3.1 shows that the increases in foreign investment
flows were not gradual; there were periods of rapid increase all
through the period. After remaining well below the $100-billion
mark, investment flows quickly crossed the $300-billion threshold
in a significant upturn in the latter half of the 1970s, the increase
being triggered by portfolio and other investment flows, which we
can see in Table 3.1.

Figure 3.1: Foreign Investment Flows, 1970–2016

16,000
14,000
12,000
$ Million

10,000
8,000
6,000
4,000
2,000
0
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015

Total Foreign Investment Inflows

Total Foreign Investment Outflows
Source: International Investment Position by Indicator, IMF, various years.

After breaching the $400-billion level in the early 1980s,

investment flows dipped as the global economy was subjected to
the considerable stress caused by the first of the major financial
crises in the post-Bretton Woods period, namely the developing-
country debt crisis.
By the time the debt crisis went off the boil, global economic
management was firmly in the control of the Bretton Woods twins,

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 56  Understanding Foreign Direct Investment

Table 3.1: Inflows of Foreign Investment by Major Categories,

1970–2016 ($ Billion)

Categories Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
Direct investment inflows 16.6 83.7 412.4 1,788.2 2,802.7
Portfolio investment inflows 19.8 120.8 645.0 2,605.7 2,182.2
Other investment inflows 88.0 283.9 505.9 1,517.3 866.4
Total investment inflows 124.4 488.4 1,563.3 5,911.2 5,851.3
Source: International Investment Position by Indicator, IMF, various years.

the IMF and World Bank, whose prescription for opening the
capital account was accepted either de jure or de facto by almost
all countries. No wonder, therefore, that investment flows surged
in the early 1990s, and by 1994, they had reached close to the
$1 trillion-mark.
Prior to the next big financial crisis that gripped East Asia in
1997, inflows peaked yet again, topping $2.5 trillion. A quick
turnaround by the countries from the financial crisis helped check
not only a global contagion, but also helped foreign investment
flows scale the $4-trillion mark in the new millennium. A minor dip
in flows coinciding with the uncertainties in Europe was followed
by the strongest phase of expansion of foreign investment flows,
resulting in inflows (as well as outflows) reaching astronomical
levels. Between 2002 and 2007, both inward and outward invest­
ment flows increased by similar magnitudes: from about $3 trillion
to nearly $14 trillion, a nearly five-fold increase within five years.
Data for the decade of the 2010s shows that foreign investment
flows have been struggling to reach the levels that they had in the
previous decade.
Table 3.2 summarises the position of FDI vis-à-vis the other
forms of investment flows during the period 1970–2016.
Table 3.2 shows the two features of the overall foreign invest­
ment flows. The first is the steep increase in foreign investment

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Trends in Global FDI Flows 

Table 3.2: Outflows of Foreign Investment by Major Categories,

1970–2016 ($ Billion)

Categories Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
Direct investment inflows 23.8 74.4 429.2 1,861.3 2,592.4
Portfolio investment inflows 10.6 62.1 498.7 1,860.3 1,645.4
Other investment inflows 74.0 227.1 388.1 1,396.9 1,191.9
Total investment inflows 108.4 363.6 1319.1 5,502.6 5,546.5
Source: International Investment Position by Indicator, IMF, various years.

flows, with a distinctly upward trend prominent since the

1980s. Until the 2000s, average investment flows, both inflows
and outflows, increased nearly three-fold as compared to the
immediately preceding decade. Thus, between the 1980s and the
first decade of the new millennium, the average of the total inward
investment flows had increased from less than $500 billion to
nearly $6 trillion, or by a factor of 12. Outward investment flows
increased somewhat higher, from nearly $360 billion to $5.5
trillion over the same period, or by a factor of 15. This phase
of rapid increase was punctuated by the economic recession of
2008, following which there was a significant cooling of foreign
investment flows.
A second aspect arises from putting the absolute numbers of
foreign investment flows in perspective by comparing them with
the global GDP. In the three decades since the 1980s, foreign
investment inflows increased from a mere 3 per cent of global
GDP to nearly 13 per cent (Table 3.3), while the corresponding
numbers for outflows were less than 3 per cent and 12 per cent
(Table 3.4). More significantly, when investment flows peaked
in 2007, they were more than 24 per cent of the global GDP
(Figure 3.2). These three insights inform us about the extent to
which financialisation of the global economy has been taking
place in recent decades.

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 58  Understanding Foreign Direct Investment

Table 3.3: Foreign Investment Inflows and Global GDP, 1980s to 2010s

Decades Average for the Decades ($ Billion) Foreign Investment Inflows

as Share of GDP (%)
Global GDP Foreign Investment Inflows
1980s 14,172.5 488.4 3.4
1990s 28,326.7 1,563.3 5.5
2000s 46,453.1 5,911.2 12.7
2010s 70,235.1 5,851.3 8.3
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years; World Development Indicators, World Bank, various years.

Table 3.4: Foreign Investment Outflows and Global GDP, 1980s to 2010s

Decades Average for the Decades ($ Billion) Foreign Investment Outflows

as Share of GDP (%)
Global GDP Foreign Investment Outflows
1980s 14,172.5 363.6 2.6
1990s 28,326.7 1,319.1 4.7
2000s 46,453.1 5,502.6 11.8
2010s 70,235.1 5,546.5 7.9
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years; World Development Indicators, World Bank, various years.

Figure 3.2: Foreign Investment Inflows as a Share of GDP,

1970–2016 (%)
30
Foreign Investment Inflows as a

25
Share of GDP (%)

20

15

10

0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years; World Development Indicators, World Bank, various years.

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Trends in Global FDI Flows 

We shall now refer to Tables 3.1 and 3.2 to discuss the observed
trends in the two larger forms of foreign investment flows, namely
FDI and FPI, in recent years. Analytically, FDI is distinctly different
from FPI, for the former, as we discussed earlier, is usually longer-
term investment, while the latter is short-term, besides being the
footloose and speculative form of investment. The behaviour of
FDI and FPI over time necessitates, in our view, three sets of obser­
vations, which we shall briefly dwell on in the following paragraphs.
First, in most of the years referred to in Tables 3.1 and 3.2, FPI
was the larger of the two forms of investments until the onset of
the recession of 2008. Long-term investment, which complements
the efforts of the recipient states to set up productive capacities,
was really lagging FPI. In other words, the composition of foreign
investments was driving a growing wedge between the financial
and the real world. It was, therefore, hardly surprising that the
financial system driven by booms and busts of FPI was able to
expose the weak foundations of the real economy, resulting in
recurring episodes of economic crises.2
Second, the data suggests that even within the overall domi­
nation by portfolio investment, there were signs of the growing
importance of FDI. The rising trend was more pronounced in
case of inflows, where the share of FDI increased from less than
a sixth of the total inflows in the decade of the 1970s to a fourth
in the 1990s and increased further to nearly half of the total
flows in the 2010s. While in case of inflows, the share of FDI
had maintained a continuous upward trend, reaching its highest
share in the 2010s, the trend in the outflows saw an uneven
pattern in the share of FDI, increasing to over 58 per cent in the
previous decade, to settling at a level slightly below that of the
share in inflows. This fact should be seen in light of an observation
in Dunning and Dilyard (1999: 8) that ‘some FDI is increasingly
taking on the characteristics of FPI’.

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 60  Understanding Foreign Direct Investment

It is interesting to note that the pattern displayed by FDI

inflows in terms of its relative share corresponds with the changing
narrative on the importance of FDI emphasised in the policy
debates. It may be recalled, we had mentioned in Chapter 1, that
from the 1960s, the US administration tried to curb FDI outflows
from the country; this form of investment was somewhat more
muted than the others. The inflows did not pick up significantly in
the 1980s as major economies, including the US, were intervening
in the first major financial crisis of the post-World War II era
which took the form of the developing-country debt crisis. By the
turn of the decade, the tide had turned decisively in favour of
FDI for two reasons. First, foreign firms were encouraged to buy-
out the debt of the developing countries through, what is better
known as, debt-for-equity swaps. Second, with the advent of the
Washington Consensus, liberalisation of FDI policies became one
of the centrepieces of economic reforms that developing countries
were advised to follow.3
Our third observation is related to an earlier point we made
that FDI has a close relationship with FPI in that the sources of
the two flows are related. Dunning and Dilyard (1999: 5–6) have
argued that FDI and FPI have been closely linked from as early as
the beginning of the nineteenth century and that there is ‘growing
interconnectedness between FDI and FPI’. This relationship
between the two forms of capital has become significantly more
complex since the end of the twentieth century.
If FDI and FPI are juxtaposed over the period for which we
have the data, an interesting pattern emerges, which is captured
in Figure 3.3. It lends itself to two observations. The first is that
the cycles of FPI upswing are more pronounced than those of FDI.
And the second is that the existence of an interesting relationship,
especially between the cycles of FPI upswing and the global
economic cycles, can be seen over the entire period.

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Figure 3.3: Trends in FDI and FPI, and Other Investment Inflows,
1970–2016
90
80
70
Share of FDI/FPI (%)

60
50
40
30
20
10
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
FDI Inflows FPI Inflows
Source: International Investment Position by Indicator, IMF, various years.

The FPI upswings shown in Figure 3.3 are clearly followed

by episodes of economic uncertainty. This lends weight to the
argument that has been regularly made over the past decade
that financialisation of the global economy has increased the
downside. The data presented here shows that larger flows of
FPI have had destabilising effects on the global economy. This is
briefly enumerated here.
In the first half of the 1970s, FPI upswing came in the
immediate aftermath of the breakdown of the Bretton Woods
system, the post-World War II exchange rate management system
that recognised the centrality of the US dollar.
The next episode of FPI upswing corresponded with the
recycling of petrodollars. Following the oil price hike in 1973,
the oil-rich countries registered huge current account surpluses,
a large proportion of which was deposited in money-centre banks
in the US. The banks, in turn, lent heavily to several developing
countries, mostly in the Latin American region. By the early 1980s,
the borrowers realised that they were unable to service the debt,

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and in 1984, sovereign debt default had almost become a reality.

The US and the IMF brokered a series of rescheduling of debts, by
creating what was euphemistically called ‘new money’. This caused
yet another upswing in the FPI during the mid- to late-1980s.
After a brief interlude, FPI went through a relatively long
period of upswing, from 1992 to almost 1999, a period that saw
two financial crises: the Mexican peso crisis in 1994 followed
by the east Asian financial crisis in 1997. The latter was the first
financial crisis that not only caused a global contagion, facilitated
by a highly interconnected global economy, but also led to a
significant cooling of the global economy.
Another short period of relative decline in the share of FPI
vis‑à‑vis FDI that occurred during the economic uncertainties
faced by both the US and Europe was followed by yet another
prolonged spell of upswing of FPI during which the housing
bubble in the US coupled with the subprime crisis sent the global
economy spiralling into recession.
In the present decade, as the global economy has struggled
to recover from the recession, the FDI–FPI patterns expectedly
show no clear winners. These observations lend themselves to
only one conclusion: excessive supplies of FPI result in serious
uncertainties to the global economy. Therefore, regulation of this
form of capital, identified aptly as ‘unproductive capital’, should
be on top of the agenda of the global institutions.

Analysing the Components of FDI

We will now analyse the behaviour of the different components of
FDI since 1970. Recall the definition of direct investment given
by BPM6, according to which an FDI enterprise is one in which
the foreign investor has 10 per cent or more of equity stake. The
foreign investor is seen to have ‘control’ over the enterprise if its

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Trends in Global FDI Flows 

share in the equity stake is over 50 per cent, and when the equity
stake is between 10 per cent and 50 per cent, the foreign investor
has ‘significant degree of influence’.
From the aforementioned definition, it is clear that equity-
holding is a key component of FDI. There are two other compo­
nents identified by BPM6, namely retained or reinvested earnings
and debt instruments. Retained earnings of direct investment
enterprises have become a prominent component of FDI. The
undistributed part of net operating surplus, net property income
and net current transfers is recorded as retained earnings or net
saving of corporations. Retained earnings of direct investors are
treated as if they were distributed to the owners, who then reinvest
these earnings back into the enterprise. In terms of the settlement of
this item on the account books, BPM6 clarifies that the ‘imputation
of income to the owners of investment funds and direct investors
is shown in the primary income account as “reinvested earnings”
and the corresponding flow is recorded in the financial account
as “reinvestment of earnings”’ (IMF 2009: 189). Reinvestment
of earnings is an imputed financial transaction; it is not shown
separately but is included implicitly in the total value of equity.
From this it should be understood that reinvestment of earnings
does not entail fresh infusion of capital from the foreign direct
investors; these are their claims arising from profits of existing
direct investment enterprises that they use to build their assets in
their host countries. Thus, an increase in FDI on account of higher
reinvestment of earnings does not arise from the inflows on the
capital account; it results from the decisions by foreign investors
in FDI enterprises not to repatriate their investment incomes.
Debt instrument transactions and positions are intercompany
lending between enterprises that have ‘direct investment’ relation­
ships. BPM6 clarifies that although debt and other similar ‘claims
that do not involve voting power are not relevant to defining a

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direct investment relationship, they are included in direct invest­

ment transactions and positions if a direct investment relationship
exists between the parties’ (ibid.: paragraph 6.27). Thus, all debt
instruments, except for monetary gold, special drawing rights
(SDRs), currency, interbank positions and pension and related
entitlements can potentially be considered direct investment.
However, transactions between affiliates in financial assets issued
by unrelated third parties are not included as direct investment
transactions. All debt positions between selected types of affiliated
financial corporations that are not considered direct investment
are included under portfolio or other investment.
From the data available for the reporting countries, FDI
inflows increased from under $11 billion in 1970 to nearly
$2.2 trillion in 2016. Figures 3.4 and 3.5 show the trends in the
different categories of FDI inflows from 1970 to 2016.
Investments in the equity of enterprises have been the largest
component of both FDI inflows and outflows since the 1980s, and
were well above 50 per cent of the total flows during this period. In

Figure 3.4: Trends in FDI Inflows, 1970–2016

1,600 2,500

1,400
2,000
1,200

1,000 1,500
$ Billion

$ Billion

800

600 1,000

400
500
200

0 0
1970–79 1980–89 1990–99 2000–09 2010–16
Equity other than Reinvestment of Earnings Reinvestment of Earnings
Debt Instruments Total FDI Inflows
Source: International Investment Position by Indicator, IMF, various years.

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Trends in Global FDI Flows 

Figure 3.5: Trends in FDI Outflows, 1970–2016

1,200 2,500

1,000 2,000
800
$ Billion

$ Billion
1,500
600
1,000
400

200 500

0 0
1970–79 1980–89 1990–99 2000–09 2010–16
Equity other than Reinvestment of Earnings Reinvestment of Earnings
Debt Instruments Total FDI Inflows
Source: International Investment Position by Indicator, IMF, various years.

the later decades, reinvestment of earnings was the less-preferred

option exercised by direct investors to increase their presence in
host economies. Taken without any additional qualification, this
observation implies that the foreign investors have been infusing
fresh capital in their host countries instead of expanding their
presence by merely reinvesting their earnings. However, FDI data
from IMF does not allow us to distinguish between investments
in equity being made in a ‘greenfield’ or a ‘brownfield’ project.
Therefore, the extent to which FDI has contributed to the fresh
addition of productive capacities in the recipient economies
cannot be readily assessed. (Tables 3.5 and 3.6).

Table 3.5: Components of Global FDI Inflows: Relative Shares,

1970–2016 (%)

Components Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
Equity other than 36.0 58.6 63.2 58.5 58.6
Reinvestment of Earnings
Reinvestment of Earnings 39.9 13.1 7.0 14.6 21.1
Debt Instruments 24.1 28.3 29.8 26.9 20.3
Total 100.0 100.0 100.0 100.0 100.0
Source: International Investment Position by Indicator, IMF, various years.

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Table 3.6: Components of Global FDI Outflows: Relative Shares,

1970–2016 (%)

Components Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16

Equity other than 21.8 45.4 53.8 53.6 51.5

Reinvestment of Earnings
Reinvestment of Earnings 49.8 36.9 21.9 22.2 30.8

Debt Instruments 28.4 17.7 24.3 24.2 17.7

Total 100.0 100.0 100.0 100.0 100.0

Source: International Investment Position by Indicator, IMF, various years.

Disaggregating FDI Flows

The most extensively used source for disaggregated data is the

UNCTAD database, which provides data on FDI flows since 1970.
This database includes data for associates and subsidiaries of
foreign firms, including ‘net sales of shares and loans (including
non-cash acquisitions made against equipment, manufacturing
rights, etc.) to the parent company plus the parent firm’s share
of the affiliate’s reinvested earnings plus total net intra-company
loans (short- and long-term) provided by the parent company’.
For branches of foreign companies, data on FDI flows captures
the ‘increase in reinvested earnings plus the net increase in funds
received from the foreign direct investor’ (UNCTAD, n.d.).
In addition, UNCTAD provides data on two analytically
important components of FDI, namely M&A and ‘greenfield’
investments. However, the data on these categories is available for
fewer years as compared to the overall figures on FDI.
UNCTAD informs us that the inflows of FDI increased from
$13 billion in 1970 to $1.7 trillion in 2016. Inflows had increased
to over $1.9 trillion in 2015, the highest ever, but declined in the
two subsequent years.

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Trends in Global FDI Flows 

According to the UNCTAD, FDI inflows increased continu­

ously until the year 2000, buoyed by steep rise in inflows to the
developed countries in the closing years of the 1990s. After the
global economy overcame the uncertainties in the early 2000s,
FDI inflows found the highest level for that period as the 2008
recession was setting in (Figure 3.6). The revival of inflows follow­
ing the recession took place as developing countries emerged as
the more preferred destinations for direct investors (Figure 3.7).
Between 2009 and 2014, the share of developing countries in
the total inflows increased from 40 to 53 per cent; but there was
some shift in the pattern thereafter. In this context, it should also
be pointed out that China has been a key factor influencing the
rise in the developing-country share. In recent years, China’s
contribution has usually been close to a fifth of the FDI inflows to
the developing countries.

Figure 3.6: Inflows of FDI, 1970–2017 ($ Billion)

2,500

2,000

1,500

1,000

500

0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Developing Economies Developed Economies Total Inflows

Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

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Figure 3.7 also shows the cyclical nature of FDI inflows: strong
surge towards one group of countries was followed by a reversal of
almost equal magnitude. There are two prominent cycles of FDI
surge towards developing countries: the first in the early 1980s,
just prior to debt crisis, and again in the 1990s, preceding the east
Asian financial crisis. However, the sharp reversals faced by the
developing countries after these surges and the adverse impact
on their growth momentum raise serious questions whether
FDI inflows have positively impacted their economies. Some
more evidence in support of this proposition is presented in a
subsequent discussion.
Despite the emergence of developing countries like China
and India as major recipients of FDI, developed countries have
remained the preferred destinations of direct investors by a small
margin in recent years, as Figure 3.7 shows.

Figure 3.7: FDI Inflows to the Developed and Developing Countries,

1970–2017 ($ Billion)
100
90
80
70
60
50
40
30
20
10
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Developing Countries Developed Countries

Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

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Trends in Global FDI Flows 

FDI inflows have remained concentrated in a few economies

(Table 3.7). The top-10 recipients have accounted for more than
half of the average inflows during the 2010s. Over the decades,
the composition of the major destinations has changed quite
drastically, several developing countries, including China, Brazil
and India, having emerged among the top destinations.
The increasing share of developing countries raises an
interesting question regarding the distribution of the gains from
FDI inflows. We have already pointed to the disproportionately
large share of China in the inflows to developing countries, but
when the inflows to the poorer countries are observed, the reality
of FDI inflows becomes quite evident. There is still no evidence
that FDI has been able to pull these countries by their bootstraps.

Table 3.7: Top Recipients of FDI, 1970–2017 ($ Billion)

Host Countries Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–17
United States 3.2 33.7 89.1 174.5 278.5
China — 1.6 29.0 68.6 127.2
Hong Kong SAR 0.3 2.1 9.0 38.2 102.6
Brazil 1.3 1.7 9.9 24.0 71.0
Singapore 0.3 1.9 9.0 20.4 61.3
Netherlands 1.0 2.7 15.4 38.5 43.9
France 1.4 4.1 23.0 26.1 28.6
Australia 1.0 3.9 5.9 20.1 46.0
Switzerland, Liechtenstein — 1.2 4.4 17.9 33.4
India 0.0 0.1 1.5 16.1 34.9
Total 8.5 53.1 196.3 444.4 827.4
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

Table 3.8 provides the inflow data of developing countries

classified by their levels of incomes. The lower-middle income

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 70  Understanding Foreign Direct Investment

countries are not included separately in the table as several

countries in this grouping were low-income countries not even a
decade previously.

Table 3.8: Share of Developing Country Groups in Global FDI Inflows,

1970–2016

Country Categories Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
Upper-middle income 16.2 21.1 26.2 27.1 36.2
developing economies
Middle-income developing 7.5 3.8 4.2 4.5 6.9
economies
Low-income developing 1.1 0.3 0.3 0.5 1.3
economies
All developing countries 24.5 25.2 30.6 32.1 44.4
Note: The categories are according to the World Bank classification.
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

Upper-middle income developing countries absorbed more

than 80 per cent of the total FDI inflows to the developing world,
a share that has remained so from the 1980s. In contrast, the
middle- and low-income developing countries lost their shares
during most decades since the 1970s. From these figures, an
important observation can be made regarding the significance of
the open-door policies followed by all countries to attract FDI. If
the policy framework is the single most important determinant
of FDI inflows, as it is made out to be, every country-grouping
should have seen FDI inflows increase by similar magnitudes.
That there are major variations suggests that there are some other
factors making one group of countries more attractive than the
others.
These observations are further reinforced by the regional
distribution of FDI inflows captured in Table 3.9.

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Trends in Global FDI Flows 

Table 3.9: Regional Distribution of FDI Inflows,

1970–2016 (% Share of Total Inflows)

Country Categories Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
Africa 5.3 2.6 1.9 3.5 4.4
Developing Americas 11.1 8.2 9.1 7.8 11.2
Developing Asia 7.8 14.3 19.6 20.7 28.6
North America* 25.7 39.5 23.0 18.9 18.7
Europe 43.2 30.4 41.7 42.1 28.7
Note: * US and Canada.
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

FDI inflows have been considerably skewed across regions.

Until the previous decade, nearly two-thirds of the inflows were
concentrated in Europe and North America, and when Asia was
added, the share went up to nearly four-fifths. Even within Asia, the
same spectre of concentration can be seen, with the two relatively
developed regions, namely East and Southeast Asia, attracting
more than 80 per cent of the inflows. The contrast is provided
by Africa: the region was attracting more direct investment in the
1970s than it had been able to after the region embraced open-door
policies to FDI in keeping with the prescription of the Washington
Consensus. The message conveyed by these numbers spread over
four decades is quite unambiguous: relatively advanced regions
would attract more FDI, notwithstanding the attractiveness of the
FDI policies adopted by the governments.
This conclusion is supported by yet another indicator that the
UNCTAD database provides, the share of FDI in the gross capital
formation of the recipient countries.
The figures in Table 3.10 provide a complete picture of the
importance of FDI in the capital formation of the country-groupings.
For most groups, FDI inflows were well below 10 per cent of their

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Table 3.10: Share of FDI Inflows in Gross Capital Formation, 1970–2016

Country Categories Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
High-income developing 2.4 3.3 8.2 11.9 8.4
economies*
Middle-income developing 2.7 1.9 5.4 8.0 7.4
economies*
Low-income developing 3.1 1.6 4.8 10.8 15.8
economies*
All developing economies 2.5 2.9 7.7 11.2 7.1
Developed economies** 1.6 2.5 5.1 9.4 7.3
World 0.0 2.6 5.7 10.0 7.3
Note: * World Bank definition; ** UN definition.
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

gross capital formation. This implies that although FDI inflows have
risen considerably since the 2000s, there is no visible impact of
these inflows on the capital formation of most country-groupings.
In case of the sole exception, the low-income countries, the shares
are much larger, since the somewhat large inflows they received,
especially since 2010, were accompanied by significantly lower
rates of capital formation as compared to most other groups.
This raises questions about the quality of FDI inflows: in
Chapter 5, we shall provide evidence of this using Indian data.

Outflows of FDI
Outflows of FDI have been wholly dependent on developed
countries, barring in the 2010s, when emerging economies began
making their contributions, thus closing the gap (Figure 3.8).
Developing countries became a consistent source of this form of
capital during this decade. Their share reached a high of nearly
38 per cent in 2014 due to a sudden surge from the Hong Kong
Special Administrative Region (SAR), but was soon reversed.

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Trends in Global FDI Flows 

Figure 3.8: Outflows of FDI, 1970–2017

2,500

2,000

1,500
$ Billion

1,000

500

0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Developing Economies Developed Economies Total Inflows
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

China’s emergence as a provider of direct investment has been

the most notable development since the later years of the 2000s.
From a share of less than 2 per cent in 2005, China’s share in the
global FDI outflows increased to nearly 13 per cent by 2016, which
was nearly 50 per cent of the outflows from the developing world.
China’s emergence as a top investor country is the most
remarkable piece of evidence in Table 3.11. Outward FDI from
China had reached over $4 billion in the early years of the 1990s,
but after the east Asian financial crisis in 1997, its outflows shrank
to below $1 billion. However, from 2005, outward FDI consistently
increased, reaching almost $200 billion in 2016.
Another interesting trend is the emergence of Hong Kong SAR,
in the list of the top-10 providers of FDI. It may be pointed out
that Hong Kong has had a close relationship with the mainland,
especially after the British withdrawal from its former colony in
1997 and Beijing’s recognition of it as an SAR. Thus, the two

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regions of China have emerged as the largest providers of FDI

after the US (Table 3.11).

Table 3.11: Top Sources of FDI, 1970–2016

Investor Countries Average for the Decades

1970–79 1980–89 1990–99 2000–09 2010–16
United States 12.4 17.5 86.9 205.6 309.5
Japan 1.6 14.4 25.1 53.4 124.1
China n/a 0.5 2.3 18.8 116.1
United Kingdom 4.6 16.6 57.4 124.4 5.9
Hong Kong SAR n/a 1.2 16.7 38.4 85.7
Germany n/a n/a 43.1 64.2 81.2
Canada 1.4 4.4 12.9 43.1 59.8
British Virgin Islands n/a 1.7 2.9 28.8 69.9
France 1.1 6.4 39.9 73.9 47.5
Luxembourg n/a n/a n/a 15.9 36.7
Source: Foreign Direct Investment: Inward and Outward Flows and Stock, UNCTAD,
various years.

Main Observations
We pointed out in an earlier discussion that the importance of
FDI grew after developing countries began adopting the policies
of economic liberalisation from the 1980s. The openness of these
economies began to get reflected in their increasing shares; in
the 2010s, foreign direct investors showed no clear preferences
between developed and developing countries. Emerging
economies like China, Brazil and India tipped the scales in favour
of the developing countries.
Developed countries remained the predominant providers of
FDI, although in the decade of the 2010s, China has emerged as
a major source.

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Trends in Global FDI Flows 

Notes

1. Inter-governmental agencies normally provide data from official

sources. One of the rare exceptions is UNCTAD’s reporting of M&As and
greenfield investments, for which the agency relies on non-official sources.
2. Patnaik (2016) calls this ‘illusionism of finance’, a situation in which
‘all that matters is the soundness of the financial calculation, not the state
of the real economy or the possible future travails of the real economy’.
3. Williamson (2004: 8) put this in a rather straightforward manner:
‘Barriers impeding the entry of foreign [direct investment] should
be abolished.’

References

Dunning, John and John Dilyard. 1999. ‘Towards a General Paradigm

of Foreign Direct and Foreign Portfolio Investment’. Transnational
Corporations 8 (1), April: 1–52.
IMF. 2009. ‘Balance of Payments and International Investment Position
Manual’, sixth edition. Washington, D. C.
. (various years). International Investment Position by Indicator:
Liabilities, Direct Investment. Available at [Link]
aspx?key=62805745 (accessed 15 July 2019).
Patnaik, Prabhat. 2016. ‘The Illusionism of Finance’. Available at [Link]
[Link]/wp-content/uploads/2016/10/Illusionism_Finance.
pdf (accessed 10 June 2018).
UNCTAD (n.d.). ‘Sources and Definitions’. Available at [Link]
Pages/DIAE/FDI%20Statistics/[Link] (accessed
15 June 2018).
. (various years). ‘Foreign Direct Investment: Inward and Outward
Flows and Stock, Annual’. UNCTADStat. Available at [Link]
[Link]/wds/TableViewer/[Link]?ReportId=96740
(accessed 15 June 2018).

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 76  Understanding Foreign Direct Investment

Williamson, John. 2004. ‘The Washington Consensus as Policy Prescription

for Development’. Lecture in the series ‘Practitioners of Development’,
delivered at the World Bank, 13 January. Available at [Link]
publications/papers/[Link] (accessed 20 June 2018).
World Bank (various years). ‘World Development Indicators’. Available at
[Link]
development-indicators (accessed 20 July 2018).

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 four

India’s Policies towards FDI

I ndia’s foreign investment policies have evolved from

restricting participation of foreign companies in the early post-
Independence days to the adoption of open-door policies over the
past few decades. Such has been the extent of liberalisation that
Government of India has claimed that ‘India is now the world’s
most open economy for foreign investment’ (Government of India
2018a).1 Foreign investment policies were liberalised from the
mid-1980s, even before the adoption of economic reforms in 1991.
This chapter will discuss the evolution of India’s FDI policies
over the past seven decades in two broad sections, the first dealing
with the pre-reforms phase and the second, the decades since 1991.

FDI Policies in the Pre-1991 Decades

It has often been argued that the Indian government went from
a phase of hostility towards foreign investment in the early
post-Independence decades, which changed since the 1980s
(Martinussen 1988). However, we shall argue that this characteri­
sation of India’s foreign investment policies was not entirely
substantiated by the policy pronouncements that were made in
this phase.
The first substantive policy pronouncement in which the
government dwelled on the role of foreign capital in the economy

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was the Industrial Policy Statement (IPS), presented in April

1948. IPS argued that foreign capital was valuable in bringing
resources for development and that it also provided technology
and knowledge for rapid industrialisation of India. However, the
IPS of 1948 did not provide clear assurances or guarantees to
foreign capital operating in India, for it said that the ‘conditions
under which they may participate should be carefully regulated in
national interest’. It was further stated that foreign capital would be
regulated under a new legislation that would provide for ‘scrutiny
and approval by the Central Government of every individual case
of participation of foreign capital and management in industry’.
It seems that the government did a quick rethink of its stance
towards foreign capital, and this was reflected in Prime Minister
Jawaharlal Nehru’s statement to Parliament on foreign investment
in 1949.2 While the IPS had stated that ‘as a rule major interest in
ownership and effective control should always be in Indian hands’,
the prime minister opined that there can be no hard and fast rule
in this matter. His statement clarified that the ‘... Government
would not object to foreign capital having control of a concern
for a limited period ...’. There was a similar turnaround on the
question of control in Indian hands. The prime minister remarked
that the government would not object to the employment of non-
Indians in posts requiring technical skills and experience when
Indians of requisite qualifications were not available, as long as the
foreign enterprises attached vital importance to the training and
employment of Indians for such positions in the quickest manner.
He further explained that India, with a low level of domestic savings
rate, needed foreign capital to undertake larger investments for
rapid industrialisation. The statement that foreign private capital
was also important because ‘in many cases scientific, technical and
industrial knowledge and capital equipment can best be secured
along with foreign capital’ was surprisingly similar to the thinking

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of the governments in the post-reforms phase. The prime minister

also assured foreign capital that the government:
1. did not intend to place any restriction or impose conditions
which were not applicable to similar Indian enterprises;
2. would also frame their policy to enable further foreign
capital to be invested in India on terms and conditions
that were mutually advantageous;
3. did not foresee any difficulty in remittance of profits;
4. had no intention of placing any restriction on withdrawal
of foreign capital investments; and
5. would pay compensation on a fair and equitable basis in
case of compulsory acquisition of any foreign concern.
In other words, he assured that foreign investments would be
protected in India and that they could freely repatriate their profits
and divest from India. Such assurances have formed the core of the
investment promotion and protection treaties that the government
has signed since the 1990s (Dhar, Joseph and James 2012).
Government’s policies on the role and responsibilities of
foreign capital during the 1950s and early 1960s were summed
up in its press note of May 1961:
Basically, the policy regarding foreign investments would be
to attract private foreign capital in those fields, in which the
country needs to develop in pursuance of the Plan targets. While
Government have been encouraging the investment of private
foreign capital in the country, it is to be recognized that this has
necessarily to be on a selective basis.
If any project is approved for development in the private sector
and, if imported plant and machinery are required, foreign capital
investment would ordinarily be welcome as a form of financing
the project. While Indian majority holding would be generally
welcome, the ratio of foreign capital in joint venture enterprises,

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the extent of foreign shareholding that is to be permitted in any

case etc., have necessarily to be judged on merits. This judgment is
made after evaluating the technical skills offered and after weighing
the requirements of foreign exchange for the purchase of equipment
from abroad and the desire of Indian collaborators to play an
effective part in the company’s management. (Kust 1964: 142)

Thus, the government invited foreign capital to participate in

India, but its participation was to be dictated by the country’s
development priorities.
The foreign exchange crisis of the mid-1960s brought
renewed thinking in the government on the role of foreign capital.
The Mudaliar Committee on Foreign Collaboration (Government
of India 1967), in its report in 1967, made several major
recommendations, which included:
1. positive approach to the import of know-how, particularly
of process know-how, or product design;
2. favourable attitude towards joint ventures involving foreign
equity participation in industries, as they are beneficial
as far as the government’s policy allowing foreign capital
participation and substantial import of capital goods are
concerned; and
3. liberal approach towards foreign collaborations in
substantially export-oriented industries.
Accepting the Mudaliar Committee’s recommendations and
for minimising the procedural delays in dealing with applications
relating to foreign investment and collaboration, the government
established the Foreign Investment Board3 in 1968. In January
1969, the government issued three illustrative lists of industries
where, in keeping with the foreign investment policy, (a) financial
collaboration was permitted, (b) only technical collaboration was
permitted and (c) no collaboration was considered necessary. This

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step helped in lending considerable transparency to the policy

framework.
The next big move of the government was to introduce FERA
in 1973. FERA required companies with foreign shareholding
to reduce the share of the foreign investors to 40 per cent in an
enterprise for it to be treated at par with an Indian company.
There were some exceptions to this general rule: for companies
using high technologies and/or exporting 40 per cent of their own
production, foreign investors’ shareholding could be as high as
74 per cent (Dhar 1988: 26). This implied that after the dilution of
foreign equity, a company even with (substantial) foreign owner­
ship could expand its operations like any other Indian company.
There is a view that FERA regulations were against the interests
of foreign investors, since their shareholding in the companies
they had invested in had to be reduced to a less-than majority
level and that ‘FERA’ companies were subjected to strict controls
(Joshi and Little 1996: 195). But, was FERA really an instrument
of controlling operations of foreign companies in India? In the
following discussion, we will provide evidence to show that FERA
did not dilute the effective control of the foreign investors in the
companies they had invested in. Moreover, it needs to be under­
stood that FERA was, in effect, a regulation for limiting foreign
exchange outflows from the country, and not one for regulating
foreign investment in the country.4
The first point that needs to be understood is that India’s foreign
investment policies assumed a fair degree of transparency after the
enactment of FERA. This was because it was FERA that made a
clear distinction between an ‘Indian’ and a ‘foreign’ company by
laying down the 40 per cent threshold in foreign shareholding
for distinguishing the two, which had not existed earlier. Thus,
companies with 40 per cent foreign shareholdings were treated
as Indian companies and could expand their operations in India,

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while foreign shareholders continued to ‘control’ the enterprise

as before. In the Chapter 2, we discussed that the global bench­
mark for identifying a foreign-controlled company was already
veering towards the 10 per cent foreign shareholding when FERA
was enacted.
Another interesting evidence is that at least a decade before
the enactment of FERA, a guidebook of the US Department of
Commerce for American investors informed prospective investors
that ‘some foreign firms consider corporate control as an essential
condition for their entry into the Indian market’ and ‘in such cases
they frequently take 40 per cent of shares’ in the joint venture (US
Department of Commerce 1963: 12). This implies that the foreign
companies were willing to operate with less risk capital at stake
in a joint venture, since they could exercise effective control over
such an enterprise with less-than majority in equity capital.
The enactment of FERA did not result in the reduction of
the dollar value of foreign investment in India; foreign investors
were merely required to reduce their relative shares in their
invested enterprises. This intention of the government was stated
in a 1972 policy that introduced the so-called ‘dilution formula’
(Ganesan 1982: 5–7). The policy of inducting domestic equity in
foreign-majority companies was strengthened in 1972. Till then,
the extent of dilution by foreign-majority companies was done by
examining each case individually, and to overcome the long delays
caused by this procedure, it was decided to introduce the ‘dilution
formula’. According to this formula, whenever a foreign-majority
company undertook an expansion programme, it was required to
issue a certain share of fresh equity to Indians. A company having
75 per cent or more of foreign equity was required to issue 40 per
cent of the additional equity to Indians. Companies having foreign
equity between 60 and 75 per cent were required to issue a third
of their new equity to Indians, and all the other foreign-majority

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companies were required to issue a fourth of their issue to Indians.

FERA was an extension of the ‘dilution policy’. Companies having
more than 40 per cent foreign shareholding diluted their shares to
comply with FERA and, in a large number of cases, several wholly
owned subsidiaries and branches of foreign companies expanded
their equity capital after keeping them unchanged for a long time
(ibid.). Thus, these companies expanded their operations, raising
them significantly above their pre-FERA levels (Chaudhuri 1979).
The 1980s saw the stage being set for sweeping liberalisation
of foreign investment policies. The IPS of 1980 allowed 100 per
cent export-oriented units, and these units were freed from the
requirements of FERA.5 Export-oriented units were established for
encouraging foreign investment; these units were not subjected to
import controls.
Foreign investment was allowed in some of the sunrise sectors.
The communications industry, earlier reserved for the public
sector, was opened for foreign investors, who could own up to
49 per cent of the total equity in an enterprise. The electronics
industry was also opened, and the reason given by the govern­
ment for free technology imports was that the Indian industry had
to be competitive internationally. Import duties on components
were reduced to help the Indian industry develop its competitive
edge (BM 1984).
Thus, in the initial decades after the attainment of political
independence, the government viewed foreign investment as a
provider not only of the much-needed capital to a capital-short
country, but also as a provider of critical inputs like technology
and managerial skills. Within the broad sweep of policies that the
government adopted, some policies like FERA did appear to be
overly regulating foreign investors, but as pointed to earlier, this
regulation eventually provided clarity to the foreign investors to
expand their operations in the country.

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Thus, in the 1980s, foreign investment policies were adopted

to explicitly support the expansion of India’s manufacturing base
in several key sectors, notably automobiles, telecommunications
and computer hardware. This set the tone for an open-door policy
towards foreign investment, which came in the early 1990s as
a part of the overall policy package that introduced economic
liberalisation.

Foreign Investment Policies: Post-1991

A radical shift in India’s foreign investment policy was seen

immediately after the pro-reforms government of P. V. Narasimha
Rao took office. The broad thrust of India’s policy towards
foreign investment was underlined by the then finance minister,
Manmohan Singh, in his first budget speech:
After four decades of planning for industrialisation, we have now
reached a stage of development where we should welcome, rather
than fear, foreign investment ... Direct foreign investment would
provide access to capital, technology and markets. It would expose
our industrial sector to competition from abroad in a phased
manner. Cost, efficiency, and quality would begin to receive the
attention they deserve. (Government of India 1991a: paragraph 12)

Singh also spelt out the pathway towards opening the door to
foreign investors:
First, direct foreign investment in specified high priority
industries, with a raised limit for foreign equity at 51 per cent,
would be given prompt approval, if equity inflows are sufficient to
finance the import of capital goods at the stage of investment and
if dividends are balanced by export earnings over a period of time.
Second, foreign equity up to 51 per cent would be allowed for
trading companies primarily engaged in export activities. Third, a

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special board would be constituted to negotiate with several large

international firms and to approve direct foreign investment in
selected areas; this would be a special regime to attract substantial
investment that would provide access to high technology and to
world markets. (Ibid.)

This statement introduced an important concept in India’s

policymaking framework, namely the concept of direct foreign
investment or FDI.6 Hitherto, the policies made a reference to the
more general concept of ‘foreign investment’, but the new regime
made a more pointed reference to FDI with clear emphasis on
obtaining ‘high technology’ and access to world markets.
Government of India’s changed policies towards foreign invest­
ment were reflected in the Statement of Industrial Policy 1991:
Foreign investment would bring attendant advantages of technology
transfer, marketing expertise, introduction of modern managerial
techniques and new possibilities for promotion of exports. This is
particularly necessary in the changing global scenario of industrial
and economic cooperation marked by mobility of capital. The
government will therefore welcome foreign investment which is in
the interest of the country’s industrial development. (Government
of India 1991b: paragraph 24)

However, one of the important elements of the previous policy

regime, namely ‘dividend balancing’ by foreign companies,
remained: ‘... the payment of dividends would be monitored
through the Reserve Bank of India so as to ensure that outflows
on account of dividend payments are balanced by export earnings
over a period of time’ [ibid.: paragraph b(ii)]. In his budget speech
in 1992–93, Singh had made it amply clear that the stance of the
government towards foreign investment had decisively changed:
Concern is sometimes expressed that the policy of welcoming
foreign investment will hurt Indian industry and may jeopardise
our sovereignty. These fears are misplaced. We must not remain

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permanent captives of a fear of the East India Company, as if

nothing has changed in the past 300 years! India as a nation is
capable of dealing with foreign investors on its own terms. Indian
industry has also come of age and is now ready to enter a phase
where it can both compete with foreign investment and cooperate
with it. This is the trend all over the world and we cannot afford
to be left out ... [W]e have enough policy instruments at our
disposal to ensure that enterprises with foreign equity function
in accordance with our national priorities. (Government of India
1992a: paragraph 22)

As a first step, it was proposed to raise the limit for foreign equity in
specified high-priority industries to 51 per cent and to give ‘prompt
approval’ to such investment proposals in 35 sectors (Government of
India 1991b: Annexure III). This was the beginning of the eventual
lifting of government scrutiny of foreign investment proposals.
Alongside, the government used the Statement of Industrial
Policy to announce that it could establish a ‘Special Empowered
Board constituted to negotiate with a number of large international
firms and approve direct foreign investment in select areas’. The
Foreign Investment Promotion Board (FIPB) was established
subsequently ‘to attract substantial investment that would provide
access to high technology and world markets’. The government
also announced that ‘investment programmes of such firms would
be considered in totality, free from pre-determined parameters
or procedures’ (ibid.: 10). Yet another measure adopted by the
government to dilute regulatory controls came in the form of
withdrawal of the ‘dividend balancing’ requirements ‘in all foreign
investment approvals except for industries in the consumer goods
sector’ (Government of India 1992b).
In a further relaxation of FDI policies, foreign investors were
invited in the power sector and hydrocarbon sectors, where,
in the government’s view, ‘capacities are inadequate and needs

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for invest­ ments are large’. Proposals were invited for foreign
investment, ‘in production, refining and marketing of oil and gas,
with a view to maximising the growth potential of this crucial area’
(Government of India 1993). In 1997, automatic approval was
granted to for­eign investment proposals in 111 sectors ‘involving
foreign equity capital of upto 51% in the Indian Company’
(Government of India 1996). This was the first major expansion
of the list of sectors that were put on the automatic approval route.
In the year 2000, all sectors, except for a negative list, were
placed under the automatic approval route for foreign investment.
In the earlier regime, the dividend-balancing requirement was
also completely removed (Government of India 2000a). But what
was more important was that caps on equity holding by foreign
investors were gradually raised in several sectors/activities. The key
sectors which were opened for FDI were insurance and defence (see
Box 4.1 for the government’s justification for FDI in defence). In
both these sectors, FDI was allowed, subject to a cap of 26 per cent
(Government of India 2000b, 2001, 2002). In other sectors that
were already open for foreign investment, the caps were increased.
For instance, the cap for telecom services was increased from 49 to
74 per cent (Press Note No. 5 of 2005) by the United Progressive
Alliance (UPA) government that followed. FDI was allowed up to
51 per cent in single-brand retail (Government of India 2006a).

Box 4.1: Discussion Paper of the DIPP FDI in the Defence Sector:
Some Observations

• The indigenous R&D has not kept pace with the requirements and manufacture
through transfer of technology (ToT) to Public Sector Units (PSUs)/Ordnance
Factories (OFs) has proved to be ineffective and slow. ToT was often not complete,
as the suppliers were more keen to push their own products, rather than indigenising
the production in India.
• Since it may take some time for domestic companies to acquire a technical edge in
the defence industry which is highly capital and technology intensive, it is necessary
to access the technology through FDI.

(Contd)

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Box 4.1 (Contd)

• The general perception is that the present minority FDI cap of 26% discourages
original equipment manufacturers (OEMs) from bringing in proprietary technology,
as OEMs are reluctant to license their proprietary technology.
• A higher FDI limit would ... provide a significant incentive for transfer of know-how/
technology to the country, leading to higher levels of technological expertise.
• Increase of cap from 26% to 49% will not give any additional say to the foreign
investor in the affairs of the company as per the provisions of the Company Law.
• By merely increasing the limit from 26% to 49% we may be accused by posterity of
doing too little and too late. Therefore, in case we really want to have the state of
the art technology, we have to permit anything above 50% if not 100%. It may be,
therefore, desirable to allow either 100% or 74% as in the case of telecom sector.
• FDI provides the necessary supplemental funds and higher levels of foreign
investment would reduce the corresponding fund requirements of the Indian
partners.
• Defence manufacture is much more dispersed among larger number of countries
today than in the past. Also, the ownership structure of many of the important
defence production companies is in a state of continuous flux. Therefore, there is no
risk of exclusive dependence on a particular country for investment and technology.
• Further, any such threat can be addressed with Government having a right to
expropriate a manufacturing facility if the situation warrants.
• A large share of Indian foreign exchange goes towards defence purchases. Allowing
more FDI in defence would result in significant savings in foreign exchange, as
more foreign companies will establish defence industries in India.
• Liberalisation of the FDI regime would strengthen India’s export potential by way of
exports of defence products to other countries.
• Production of military equipment within the country will provide impetus to the
manufacturing sector through large scale ancillarisation as in the case of major
industrialised nations like USA, France and Germany.
• A large number of manufacturers of defence and dual-use products are finding it
difficult to manage their production in western countries due to increasing costs of
labour and other inputs. This is the right time for India to project itself as a new hub
for manufacturing.
• A number of global defence majors are waiting to set up an alternative/additional
manufacturing base in India. It is, therefore, not at all necessary for us to underwrite
production. The FDI policy will not interfere with the prerogative of the Armed
Forces to choose an equipment of their choice.
• There need not be any commitment on procurement and foreign investors will
have to participate in the RFP (Requests for Proposals for sourcing of defence
equipment) to technically qualify and also compete in the financial bid.
• For future RFP’s by MoD, a condition may be imposed that the successful bidder
would have to set up the system integration facility in India with a certain minimum
percentage of value addition in India. The successful bidder should be allowed to
bring equity up to the proposed sectoral cap.
Source: Government of India (2010).

During this phase of relaxation of FDI policies, an important

element was the decision to allow wholly foreign-owned companies

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through the automatic route in townships, housing, built-up

infrastructure and construction-development projects.7 The year
2005 also witnessed the enactment of the Special Economic Zones
(SEZ) Act, which opened further vistas for the involvement of foreign
firms in the Indian economy, especially after the modification of
the FDI policy in 2006, to permit FDI up to 100 per cent foreign
equity (Government of India 2006b). Alongside liberalising the
FDI regime, the government declared its intention in 1992 to allow
FPI into the Indian stock market through the mechanism of foreign
institutional investors.8 The objective was not only to facilitate non-
debt creating foreign capital inflows, but also to develop the stock
market in India, lower the cost of capital for Indian enterprises and
indirectly improve corporate governance structures. On their part,
large Indian companies have been allowed to raise capital directly
from international capital markets through commercial borrowings
and depository receipts. Thus, the country adopted a two-pronged
strategy: one, to attract FDI and, two, to encourage portfolio capital
flows to ease the financing constraints of Indian enterprises.
As a result of the aforementioned policy changes, by the
early 2000s, India followed an FDI-friendly regime that is quite
comparable to that adopted by most countries.9 One can see the
bunching of FDI policy changes applicable to different sectors in
at least four years since the year 2000 (Table 4.1). These years are
within two years of a government getting a fresh mandate from the
people. It may not be a coincidence that in respect of two of these
years, the current account deficit (CAD) had increased substantially
in the previous financial year. The budget speech of 2013–14 made
the objective of meeting the CAD even more explicit.
Much of the foreign investment could take advantage of the
automatic approval route without seeking prior permission of
the central government. Caps on FDI shareholding began to
be applied to only a few sectors, mainly in the services sector.10

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Table 4.1: Number of Sectors Subjected to FDI Policy Changes,

1997–2016

Year No. of Sectors Affected

1997 2
1998 2
1999 1
2000 29
2001 8
2002 3
2004 4
2005 5
2006 21
2008 9
2009 2
2011 2
2012 16
2013 4
2014 3
2015 7
2016 18
Grand Total 136
Source: Based on a tabulation of FDI policy changes announced through Press Notes
and Consolidate FDI Policy documents. Changes in CAD are calculated from the data
provided by the RBI on its website.

Concomitant steps were taken to remove the hurdles in the path of

foreign investors, both at the stage of entry and later in the process
of establishing the venture. The policy changes were thus aimed
at improving India’s record in attracting FDI inflows, which was
seen to be below its potential. As a result of the relaxations effected
by successive governments, there remain very few activities where
government approval is required and even fewer ones where
sectoral caps are applicable (Table 4.2). As a logical next step, the
government abolished the FIPB during 2017–18, thus ending the
era of scrutinising FDI before it could be invested in India.

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Table 4.2: Activities Requiring Central Government Approval or

Having Caps

Activity Upper Limit for FDI

A. Government approval with or without caps
Mining and mineral separation of titanium-bearing Up to 100%
minerals and ores
Defence Beyond 49% and up to 100%
Publishing/printing of scientific and technical Up to 100%
magazines/specialty journals/periodicals
Publication of facsimile edition of foreign Up to 100%
newspapers
Print media: publishing of newspaper and Up to 26%
periodicals dealing with news and current affairs
Print media: publication of Indian editions of foreign Up to 26%
magazines dealing with news and current affairs
Air transport service: scheduled and regional air Beyond 49% and up to 100%
transport service
Satellites: establishment and operation Up to 100%
Telecom services Beyond 49% and up to 100%
Pharma: brownfield Beyond 74% and up to 100%
Banking: private sector Beyond 49% and up to 74%
Banking: public sector Up to 20%
Private security agencies Beyond 49% and up to 74%
Broadcasting content service
1. FM radio Up to 49%
2. Uplinking of ‘news and current affairs’ TV Up to 49%
channels
Trading: MBRT Up to 51%
B. Other activities having a cap on FDI
Insurance 49%
Pension sector 49%
Infrastructure companies in securities markets 49%
Petroleum refining by the public sector 49%
undertakings
Power exchanges 49%
Source: Government of India (2017).

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The policy debate on FDI has raised two sets of issues:

(a) the distinction between direct and portfolio investment; and
(b) imposition of foreign investment caps in order to limit the
extent of control of the foreign investors over the enterprises they
invested in. These issues will be dealt with in this chapter.

Attempt to Differentiate between Direct

and Portfolio Investments

We mentioned earlier that the issue of differentiating FDI from

portfolio investments arose in the 1990s following the adoption
of economic reforms. This was to serve two purposes. One,
although the policy of imposing caps on foreign shareholding
in the equity of companies was progressively diluted, this policy
was was not dispensed with because caps were used on grounds
of national security, national sensitivities, sectoral interests and
public health, among others. A related issue was whether invest­
ments by FIIs should be included while implementing the caps on
foreign shareholding.
A second purpose for distinguishing between FDI and FPI is
the oft-stated objective of giving preference to long-term FDI over
the volatile FPI in view of the large CAD. The then Union finance
minister had set the ball rolling in his budget speech of 2013–14
when he said:
In order to remove the ambiguity that prevails on what is Foreign
Direct Investment (FDI) and what is Foreign Institutional
Investment (FII), I propose to follow the international practice and
lay down a broad principle that, where an investor has a stake of
10 percent or less in a company, it will be treated as FII and, where
an investor has a stake of more than 10 percent, it will be treated
as FDI. (Government of India 2013: paragraph 95)

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Further, the budget speech of 2013–14 stated: ‘... India, at the

present juncture [facing a huge CAD], does not have the choice
between welcoming and spurning foreign investment. If I may be
frank, foreign investment is an imperative. What we can do is to
encourage foreign investment that is consistent with our economic
objectives’ (ibid.: paragraph 11).
The announcement in the Union budget of 2013–14 was
followed by the appointment of the Committee for Rationalising
the Definition of FDI and FII, which was headed by the then secre­
tary of the department of economic affairs in March 2013. The
committee came to be known as the Mayaram Committee, named
after its chairman. The Securities and Exchange Board of India
(SEBI) had appointed another committee earlier, in December
2012, headed by a former revenue secretary to study the conver­
gence of the various portfolio investment regimes. One of the
recommendations of this committee was in line with the finance
minister’s statement, as it suggested a cut-off point of 10 per cent for
distinguishing the two types of foreign investments. The Mayaram
Committee took a long time in finalising its recommendations
(Government of India 2014). In its brief report, it re-endorsed the
10 per cent criterion, and its recommendations were concerned
with administrative issues only. However, exceptions to the 10 per
cent rule suggested by it make identifying an investment as FDI
or portfolio investment, without having access to additional
information, difficult. Significantly, it differentiated between
invest­ments in listed and unlisted companies and supported
the prevailing approach of treating all foreign investments in
unlisted companies as FDI. The Committee made no attempt to
question the basic definition and, hence, provided no guidance
for distinguishing FDI and FPI in general.
DIPP, whose role and functions include ‘Formulation of
Foreign Direct Investment (FDI) Policy and promotion, approval

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and facilitation of FDI’ (Government of India 2018b), raised

several questions on the adoption of the 10 per cent rule for
measuring FDI:
• a percentage definition does not take note of the qualitative
aspect of the more stable nature of FDI;
• change in definition would create complications as the
current policy is bound in several bilateral and multilateral
agreements; and
• the OECD Benchmark Definition is not followed even by all
the OECD member countries (Economic Times 2013).
What one can, however, surmise is that the distinction
between FDI and FPI and other investors made at the policy
level does not extend to the reporting of FDI inflows. As noted in
Table 4.2, caps are now applicable to only a few sectors, including
banking, insurance, pension, broadcasting (carriage and content)
services, print media, power exchanges and multi-brand retail
trading (MBRT).11 In case of private sector banks, the 74 per
cent limit includes all forms of foreign investment, namely FIIs/
FPIs, remittances from non-resident Indians (NRIs), erstwhile
overseas corporate bodies (OCBs), private placements, global
depositary receipts (GDR)/American depositary receipts (ADR)
and acquisition of shares from existing shareholders. Had foreign
financial investors been treated as a separate category, the story
of Flipkart, which was taken over by Walmart in 2018, would
probably have been different. On the other hand, the defective
categorisation of indirect FDI helped Amazon participate in the
inventory model of e-commerce.
The various categories of foreign investors have been defined
under respective schedules of the Foreign Exchange Management
Act (Transfer or Issue of Securities by Persons Resident Outside
India) Regulations 2000. Incidentally, these regulations do not

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specify any minimum percentage for investments through the FDI

route. Since it is not specified that the investee company should
have been listed, it follows that the portfolio investors registered
with SEBI under relevant categories can directly invest in Indian
companies through the automatic route. Thus, such portfolio
investments will be reported under the automatic route of FDI for
statistical purposes.
As far as the operation of caps on foreign equity is concerned,
an important change was introduced relating to indirect equity.
Following Press Note No. 2 (Government of India 2009), for mea­
suring indirect foreign equity, further investments by companies
with 49 per cent foreign equity and controlled by Indians
are treated as domestic investments. Compared to the earlier
proportionate method, this is a better way of looking at FDI from
the point of caps, as caps are meant to restrict foreign influence/
control rather than the economic benefit that is derived by the
foreign investor. However, it is debatable if any foreign investor
contributing up to 49 per cent risk capital would be content to
remain a sleeping partner. In fact, the discussion paper of DIPP
on FDI caps ‘implicitly recognises that foreign equity, up to 49%,
is purely a source of funding, as long as “control” is not yielded
to non-resident investors/entities’ (Government of India 2011:
paragraph 21).
Given the fact that there is effectively no explicit restriction on
the extent of foreign control at the point of entry, the subsequent
efforts at limiting control through monitoring indirect foreign
equity would be of little consequence. Since retaining some control
in Indian hands appears to be the main objective of applying caps,
the following points may be in order. It would be unrealistic to
expect that foreign investors would not be interested in securing
their technology and reputation, besides maximising their overall
gains. This is especially due to the fact that the joint venture came

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into being mainly because of the restrictive FDI regime, in the

absence of which they would most probably have opted for a wholly
owned venture. On the other hand, the Indian partner would go
for an FDI relationship, mainly to derive substantial advantages
in terms of technology, goodwill, etc., apart from obtaining a
stable risk capital. This is likely to place them at a disadvantage in
negotiating with the foreign partner, thus making them more likely
to concede control of the operations and strategy to the foreign
investor. The subordinate relationship would be covered up only
to meet the requirements of the official policy on FDI, which places
limits on foreign participation, on paper. The disproportionate
control of the boards conceded to the foreign partners in the joint
ventures of the insurance and defence industries clearly points to
this phenomenon. Further, without any criteria on the nature of
the domestic partner, the objective of the cap could be defeated.12
These reflect the policymakers’ dilemma to maintain caps on
foreign shareholding while also trying to attract inflows.
In sum, Indian policymakers never really took into
consideration corporate control mechanisms for adopting FDI
policies. Evidently, in the post-1991 period, the caps were deployed
mechanically. Besides, there was inconsistency in treating financial
investors in the FDI policy. Using FDI to finance CAD on the one
hand, and infrastructure like housing on the other, undermined
the main justification for seeking this form of capital emphasised
by the Statement of Industrial Policy of 1991, namely that it
would bring with it technology, management skills and other
intangibles. While the international thumb rule of 10 per cent
for identifying an FDI relationship fails to distinguish between
investment that brings with it the intangibles like technology and
advanced management techniques, India’s approach, which did
not consider even this thumb rule, has further obliterated the
distinction between direct and portfolio investments.

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Notes

1. Several sectors, like IT, were opened up to foreign investment after

the mid-1980s. For details, see Dhar and Joseph (2019: 98, 104).
2. See Nehru’s statement in Parliament on 6 April 1949. Before that, in
the IPS of 6 April 1948, the policy regarding the participation of foreign
capital was mentioned in very broad terms (India 1948: 2385–86).
3. An institution with similar functions, namely the FIPB, was
established in 1991 to expedite approval of foreign investment proposals.
4. It was an Act to consolidate and amend the law regulating certain
payments, dealing in foreign exchange and securities, transactions
indirectly affecting foreign exchange, and the import and export of
currency, for the conservation of the foreign exchange resources of the
country and the proper utilisation thereof in the interest of the economic
development of the country.
5. The return of Indira Gandhi to power in 1980 marked the beginning
of the process of relaxation of the regulations.
6. The distinction had to be made probably because the government
decided to allow FPI in the stock market.
7. This includes, but is not restricted to, housing, commercial
premises, hotels, resorts, hospitals, educational institutions, recreational
facilities, and city- and regional-level infrastructure, subject to certain
guidelines.
8. ‘We will also consider ways of allowing reputable foreign investors,
such as pension funds, to invest in our capital markets, with suitable
mechanisms to ensure that this does not threaten loss of management
control’ (Government of India 1992a).
9. See Planning Commission (2002) and IMF (2005).
10. These included air-transport services, rail infrastructure,
insurance and pension sectors, defence sector, broadcasting sector,
banking (private sector), power exchanges, brownfield pharmaceuticals
and private security agencies. Besides, FDI is not permitted in a few
areas like agriculture (except floriculture, horticulture, development
of seeds, animal husbandry, pisciculture, aquaculture and cultivation of

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vegetables and mushrooms), retail trading (except single-brand product

retailing), lottery, gambling and betting, chit fund, mutual-benefit
financial companies, trading in transferable development rights, real
estate, manufacturing of cigars, cigarettes, tobacco or tobacco substitutes,
atomic energy, and railway transport (other than mass rapid transport
systems). See Government of India (2017, 2018).
11. In some activities, though there was a sub-limit for automatic
entry, FDI could go up to 100 per cent with government approval.
12. For instance, Amazon exploited this loophole by partnering with
a domestic private equity firm that has no (long- or short-term direct)
interest in retail trade (Rai 2014).

References

‘Reforms Get Stuck in FDI versus FII Fight as DIPP Opposes Change in
Definition of FDI’. 2013. Economic Times, 8 May. Available at https://
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stuck-in-fdi-versus-fii-fight-as-dipp-opposes-change-in-definition-of-
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BM. 1984. ‘Luring Multinationals into High Technology Areas’. Economic and
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Chaudhuri, Sudip. 1979. ‘FERA: Appearance and Reality’. Economic and
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Dhar, Biswajit. 1988. ‘State Regulation of Foreign Capital in India’. Working
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Dhar, Biswajit and Reji K. Joseph. 2019. ‘India’s Information Technology
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Uday S. Racherla, 93–117. Singapore: Springer Open. Available at https://
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Dhar, Biswajit, Reji Joseph and T. C. James. 2012. ‘India’s Bilateral Investment
Agreements: Time to Review’. Economic and Political Weekly 47 (52), 29
December: 113–22.
Ganesan, A. V. 1982. ‘Domestic Participation in Ownership of Existing
Transnational Corporation Subsidiaries in Developing Countries: The
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Industrial Development and Company Affairs, New Delhi.
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of Finance’. Available at [Link]
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Industry and Internal Trade, 24 July. Available at [Link]
sites/default/files/chap001_0_0.pdf (accessed 25 July 2018).
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(accessed 25 July 2018).
. 2000a. ‘Press Note No. 7 (2000 Series): Review of Existing Sectoral
Policy and Sectoral Equity Cap for Foreign Direct Investment (FDI) /
Non-resident Indian (NRI) / Overseas Corporate Bodies (OCB)
Investment’. Available at [Link]
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Government of India. 2000b. ‘Press Note No. 10 (2000 Series): Review of

Existing Sectoral Policy and Sectoral Equity Cap for Foreign Direct
Investment (FDI) and Investment by Non-resident Indians (NRI) /
Overseas Corporate Bodies (OCB)’. Available at [Link]
sites/default/files/[Link] (accessed 25 July 2018).
. 2001. ‘Press Note No. 4 (2001 Series): Revision of Existing Sectoral
Guidelines and Equity Cap on Foreign Direct Investment (FDI),
Including Investment by Non-resident Indians (NRIs) and Overseas
Corporate Bodies (OCBs)’.Available at [Link]
files/[Link] (accessed 25 July 2018).
. 2002. ‘Press Note No. 2 (2002 Series): Guidelines for Licensing
Production of Arms and Ammunitions’. Available at [Link]
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. 2006a. ‘Press Note No. 3 (2006 Series): Guidelines for FDI in Retail
Trade of “Single Brand” Products’. Available at [Link]
default/files/pn3_2006_0.pdf (accessed 25 July 2018).
. 2006b. Press Note No. 4 (2006 Series): Rationalisation of the FDI
Policy’. Available at [Link]
pdf (accessed 25 July 2018).
. 2009. ‘Press Note No. 2 (2009 Series): Guidelines for Calculation of
Total Foreign Investment, i.e. Direct and Indirect Foreign Investment
in Indian Companies’. Available at [Link]
files/pn2_2009_1.pdf (accessed 25 July 2018).
. 2010. ‘Foreign Direct Investment (FDI) in Defence Sector’. Department
of Industrial Policy and Promotion. Available at [Link]
in/sites/default/files/DiscussionPapers_17May2010%20%[Link]
(accessed 25 July 2018).
. 2011. ‘Discussion Paper: FDI Policy-Rationale and Relevance of Caps’.
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relevance_23June2011%20%[Link] (accessed 25 July 2018).
. 2013. ‘Budget 2013–2014: Speech of P. Chidambaram, Minister of
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Government of India. 2014. ‘Report of the Dr Arvind Mayaram Committee on

Rationalizing the FDI/FII Definition’. Ministry of Finance, Department
of Economic Affairs, June. Available at [Link]
sites/default/files/Report%20of%20Dr%20Arvind%20Mayaram%20
committe%20on%20FDI_FII.pdf (accessed 20 July 2018).
. 2017. ‘Consolidated FDI Policy (Effective from August 28, 2017)’.
Department of Industrial Policy and Promotion, Ministry of Commerce
and Industry. Available at [Link]
policies/foreign-direct-investment-policy (accessed 25 July 2018).
. 2018a. ‘India: The World’s Most Open Economy for FDI, Multiple New
Sectors Opened up for FDI’. Make in India. Available at [Link]
[Link]/article/-/v/india-is-now-the-most-open-economy-
in-the-world-for-fdi (accessed 30 July 2018).
. 2018b. ‘Role and Functions of the Department for Promotion of
Industry and Internal Trade’. Department for Promotion of Industry
and Internal Trade. Available at [Link]
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(accessed 31 July 2018).
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India: Selected Issues, 7 January. Available at [Link]
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India. 1948. ‘Constituent Assembly of India (Legislative) Debates, Vol. III,
No. 1’, 2385–86.
Joshi, Vijay and I. M. D. Little. 1996. India’s Economic Reforms, 1991–2001.
Oxford: Clarendon Press.
Kidron, Michael.1965. Foreign Investments in India. London: Oxford
University Press.
Kust, Matthew J. 1964. Foreign Enterprise in India: Laws and Policies. Chapel
Hill, North Carolina: University of North Carolina Press.
Martinussen, John. 1988. Transnational Corporations in a Developing Country:
The Indian Experience. New Delhi: Sage Publications.
Planning Commission. 2002. ‘Report of the Steering Group on Foreign Direct
Investment’. August, 22.

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Rai, Saritha. 2014. ‘Amazon Ties Up with IT Billionaire Murthy of Infosys to

Launch e-Commerce Joint Venture in India’. Forbes, 27 June. Available
at [Link]
up-with-it-billionaire-murthy-of-infosys-to-launch-e-commerce-
joint-venture-in-india/#74b7ef04f7a6 (accessed 5 July 2018).
US Department of Commerce. 1963. ‘Investment in India: Conditions and
Outlook for United States Investors’. Washington, D. C.

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 five

India’s FDI Inflows since 1991

T his chapter analyses the trends in and the underlying features

of FDI inflows into India since 1991, the period in which
Government of India progressively removed almost all restrictions
on foreign investors. We will use the available official data on
the participation of FDI in India since 1991 to help understand
the changing nature of FDI since the adoption of the economic
reforms programme. Before we get into the numbers describing
the nature of FDI participation, we will provide a brief snapshot of
the database on FDI statistics. This is vital for understanding the
quality of official data, and of course, the nature of conclusions
that can be made about FDI in India.

Understanding the Database on FDI in India

The RBI and DPIIT, Ministry of Commerce and Industry, provide

data on FDI. The latter is the ‘nodal Department for formulation of
the policy of the Government on Foreign Direct Investment
(FDI)’ (DPIIT 2019) and, as part of the erstwhile FIPB, has also
been responsible for screening FDI proposals.1 The DPIIT ‘is also
responsible for maintenance and management of data on inward
FDI into India, based upon the remittances reported by the Reserve
Bank of India’ (ibid.). However, despite this apparent synergy

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between the RBI and DPIIT, the data presented by each agency
is on occasion not comparable, which we shall enumerate briefly.
First, let us consider the availability of data on FDI inflows.
The RBI has provided data on inflows for each financial year
beginning 1990–91. From 1991–92, RBI data has informed on the
magnitude of investments ‘routed’ through the FIPB, after receiving
government approvals, or entering through the ‘automatic route’.
Another important aspect of the FDI data is that until 1994–95,
data on ‘acquisition of shares’ by foreign companies, or cases of
M&A, were not reported.2
Yet another limitation of RBI data, one which runs right
through the post-1991 period, is that this institution does not
provide a comprehensive set of disaggregated data in terms of
either the source countries of FDI or the sectors in which such
investments are made. Although a partially disaggregated set of
data is provided in the RBI’s annual report of 2010–11, covering
the period from 2006–07, the available data does not give the full
flavour of the nature of FDI inflows.
The DPIIT has addressed this limitation to a considerable
extent by providing data for sources of FDI inflows and their
sectoral distribution from 1996. The Secretariat for Industrial
Approvals, now renamed Secretariat for Industrial Assistance
(SIA), provided disaggregated data from 1991 until the early
years of the following decade. However, this database provided
information, not on the actual FDI inflows, but on approvals
granted by the government to the proposals of foreign investors.
This data had three limitations. First, since figures for proposed
foreign investments and not actual FDI inflows were reported, it
was not possible to decipher from this database the proportion
of the approvals which eventually fructified. A second lacuna
was that the database did not allow us to identify the number
of foreign investment projects in which the foreign investors had

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effective control. This lacuna was felt because the agencies engaged
in regulating the entry of foreign capital did not distinguish
between the analytically distinct categories of direct and portfolio
investments. These agencies were only providing information on
the proposed financial collaborations, or on projects in which the
foreign investors were intending to make investments in foreign
currency. A third, and a relatively minor issue, was that the DPIIT
provided the disaggregated data for calendar years, as opposed to
financial years, the period used for reporting the later data.
The lack of a clear distinction between FDI and FPI is, in our
view, the most serious limitation of the official data on FDI inflows.
In addition to the conceptual point made in Chapter 4, there are at
least two contributory factors, both arising from the lack of clarity
in defining the components of FDI in official statistics. The first
is that from 1994, data on approvals of FDI into India included
GDRs/ADRs, and foreign currency convertible bonds (FCCBs)
and external commercial borrowings (ECBs). These forms of
inflows are, in effect, portfolio investments/borrowings, essentially
because they lack the key characteristics of direct investment,
namely control of the foreign investor over the invested company.
Counting these inflows as FDI is, therefore, erroneous.
Overstatement of FDI inflows stemming from the inclusion
of GDRs/ADRs becomes obvious if the official data is closely
examined. GDRs were first included in FDI approvals in 1994,
adding Rs 52 billion ($1.6 billion) to the total approvals and
increasing them by 60 per cent as compared to the figure for 1993
(Government of India 1995: 4). Had the GDRs not been included,
approved FDI for 1994 would have been marginally higher than
the approved FDI for 1993.
The next issue is regarding the comparability of FDI data
provided by the RBI and subsequently reported by the DPIIT.
We discussed in Chapter 4 that until the end of the 1990s, the

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composition of FDI was quite different from that of the present.

For instance, retained earnings were excluded from FDI statistics
(RBI 2010: 2). In this period, FDI inflows to and from India
comprised mainly of equity capital. India adopted the international
best practices given by IMF’s BPM5, on recommendation of the
Technical Monitoring Group (TMG) on FDI statistics (ibid.:
83). The coverage of FDI was, thus, expanded from 2000–01 to
include equity capital, reinvested earnings (or retained earnings
of FDI companies) and ‘other direct capital’ (inter-corporate debt
transactions between related entities) (RBI 2007: 223). Clarifying
what ‘other capital’ comprises, RBI stated that this ‘part of FDI
inflow has been carved out from the figure reported under external
commercial borrowings’ (ibid.). But, as discussed earlier, the RBI
had previously noted that ECBs were no more than portfolio
investments. However, in its revised format for presenting the data
on foreign investment, GDRs and ADRs were excluded from FDI,
while other ECBs were included. There are, therefore, considerable
problems with India’s data on FDI, especially their comparability
with those from countries that strictly adhere to the OECD/IMF
Benchmark Definitions.
It can be concluded from the foregoing discussion that the
official agencies in India have not followed the definition given
by OECD/IMF that helps in distinguishing between FDI inflows
and those that are not, using the criteria of 10 per cent of voting
shares. Interestingly, the RBI admits to this lacuna when it states
that the ‘present definition being used to classify FDI in India is
at variance with this definition (to the extent that the threshold
limit of 10% is not strictly adhered to)’ (RBI 2010: 10). This is
a significant statement as it lays bare the problems with India’s
FDI data, namely that the distinction between direct and portfolio
investments is, at best, fuzzy. In the ensuing paragraphs, we shall
try to explain this hiatus between the OECD/IMF definition of

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FDI and that adopted by the Indian agencies. Our view is that
the nature of the administrative mechanisms that have been in
place for regulating the entry of foreign investors into India are
responsible for creating this hiatus
From the early post-Independence years, Government of India
encouraged foreign companies to enter through joint ventures,
commonly called foreign collaborations. This was the message of
the policy note issued in 1961 on the role of foreign capital in
India’s industrialisation (Kust 1964: 142). Foreign collaboration
approvals were essentially of two types. One, foreign companies
contributed only technology (‘technical collaborations’) and other
know-how to unaffiliated enterprises, and two, foreign investors
made capital infusion into enterprises, both affiliated and unaffili­
ated (‘financial collaborations’). The latter could be done either in
association with Indian partners or through sole ventures.
We discussed in Chapter 4 that the Statement of Industrial
Policy of July 1991 set in motion the process of progressively ex­
empting foreign investors from mandatory government approvals.
Initially, ‘automatic approvals’ were made applicable to foreign
investors investing up to 51 per cent foreign equity in an enterprise
belonging to a set of identified high-priority industries. The upper
limit of foreign shareholding in cases of ‘automatic approval’ was
raised in 1997 from 51 per cent to 74 per cent (100 per cent in
case of investments by NRIs) in notified industries. Over the next
two decades, FDI policy underwent two important modifications.
First, the ambit of government approval was drastically reduced
and, second, caps on foreign shareholding were progressively
raised and eventually eliminated in most sectors. As discussed in
Chapter 4, this meant that automatic approval was expanded to
cover almost the entire manufacturing sector, and several activities
in the agricultural and the services sectors as well. Government
approvals currently cover only a small set of sectors.

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Finally, a comment on DIPP’s reporting of sectoral and

source-wise inflows of FDI, which, in our view, has yet another
conceptual ambiguity. The agency has all along reported intra-
and inter-corporate inflows of capital, which implies that the
inflows should include both equity capital and ‘other capital’,
following the OECD/IMF definition. Until the Indian agencies
took steps towards adopting international norms for reporting
FDI data, there was no compulsion to report ‘other capital’ in the
statistics. However, even after 2000–01, there was a need to clarify
whether FDI inflows included only equity capital or ‘other capital’
as well. Not only was this clarification not provided, DPIIT used
the term ‘FDI Equity Inflows’ for reporting data from 2012–13.
Given that DPIIT has not clarified the nature of inflows prior to
2012–13 and also that much of the approvals data made available
for the 1990s did not include ‘other capital’, we would use the
term ‘FDI equity’ when we use the DPIIT database for analysing
the sectoral behaviour of inflows and the countries contributing
to these inflows.
Considering the foregoing discussion, three comments about
the quality of FDI data provided by the government agencies are
in order. First, data on FDI from 1991–92 to 1999–2000 cannot
be compared with the data either from the earlier or the sub­
sequent decades. Second, agencies providing the FDI data have
not ensured that the data is consistent over time. This problem is
acutely felt when the data is disaggregated in terms of the sectors or
the providing countries. Third, India’s FDI data is not comparable
with that of other countries, since the RBI does not ‘strictly’ adhere
to criteria for identifying FDI provided by the OECD/IMF while
computing the data.
In the following sections, we will discuss the features and
trends in FDI inflows since 1991. It covers three periods: the
decade of the 1990s; the first decade of the new millennium; and

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2010–11 to 2017–18. While this periodisation can be justified

on the grounds of the availability of comparable datasets, it is
also dictated by both the quality of data and quantity of foreign
investment flows. It may be recalled that the data for the first
period is available only for the approved cases of FDI. In the
second period, Indian agencies took steps towards adopting the
global best practice in reporting statistics on FDI, developed
by the OECD and IMF, and therefore, the datasets are more
comparable. The third period marks the quantum jump in FDI
inflows following the unshackling of foreign investors investing
in India.

Foreign Investment Inflows in the First Decade of

Economic Reforms

In this section, we will try to quantify the impact of the Indian

government’s favourable regime by providing estimates of foreign
investment inflows. Table 5.1 provides the broad trends in FDI
inflows in the 1990s.
Foreign investors responded positively to the easing of
controls over their operations, ushered in by the economic reforms
programme. Immediately preceding economic reforms, inflows of
FDI were less than $100 million, and as Table 5.1 shows, there
was a steady increase in inflows thereafter. Between 1991–92 and
1994–95, FDI inflows increased more than 10-fold. This evidence
of positive response of FDI to the policy changes effected in 1991
strengthens if the FDI data for the late 1980s is also considered.
This data requires some adjustments since data for actual inflows
of FDI is not available; data on FDI approvals is provided by the
official agencies. In 1989, the year that witnessed the peaking of
FDI inflows for the entire decade, the total FDI inflows did not

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Table 5.1: FDI Inflows into India, 1991–2000 ($ Million)

Years Direct Equity Government RBI NRI Acquisition

Investment (SIA/FIPB) of Shares
to India
1990–91 97 — — — — —
1991–92 129 129 66 — 63 —
1992–93 315 315 222 42 51 —
1993–94 586 586 280 89 217 —
1994–95 1,314 1,314 701 171 442 —
1995–96 2,144 2,144 1,249 169 715 11
1996–97 2,821 2,821 1,922 135 639 125
1997–98 3,557 3,557 2,754 202 241 360
1998–99 2,462 2,462 1,821 179 62 400
1999–2000 2,155 2,155 1,410 171 84 490
Source: Database of the Indian Economy, 2018, RBI, available at [Link]
DBIE/[Link]?site=statistics (accessed 5 August 2018).

cross the threshold of 50 million,3 which was almost half of the

inflows in 1990–91. It should be noted that the increase in inflows
during 1990–91 took place despite the critical balance of payments
situation (Institute for Studies in Industrial Development 1995).4
Significant increases in FDI inflows occurred from 1995, when
inflows touched the $2 billion mark. The increase in inflows seems
more impressive considering that the rupee had depreciated by
more than 40 per cent during this period. In other words, FDI had
the potential of contributing more to the capital formation of the
country in terms of the domestic currency.
The inflow figures after the mid-1990s were reported sepa­
rately for the acquisition of shares by foreign companies or M&As.
M&A activities, first reported in 1995–96, were quite modest, but
by the end of the decade, they had increased to more than 22 per
cent of the total inflows.

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Industry-wise Pattern of Approvals

We discussed in Chapter 4 that the primary objective of the reform
of the FDI policy framework undertaken by the government was
to provide incentives to foreign investors to participate in high-
technology and export-intensive sectors.
This was emphasised in the Statement of Industrial Policy,
which said: ‘foreign investment and technology collaboration will
be welcomed to obtain higher technology, to increase exports
and to expand the production base’ (Government of India 1991:
paragraph 13).
The focus of the FDI policies was on attracting investments
for stimulating India’s industrial sector, and the data on FDI
approvals in terms of the value of foreign investments shows
that the industrial sector had an overwhelmingly large share of
the cases involving approvals of FDI.5 Except in 1996, when the
share of the services sector in the approved investments was more
than 18 per cent, the industrial sector had a share well above
85 per cent of the approved FDI cases during 1991–2000. It may,
however, be pointed out that this trend was along expected lines,
since most of the services sectors (and agriculture) were not open
for foreign investors to the extent that the industrial sector was.
Table 5.2 gives the details of FDI approvals in terms of value
for the top-10 sectors during 1991–2000. These sectors explain a
large share of the approvals: 80 per cent for the entire period, and
95 per cent in the year 2000.
Before we dwell on the sectoral composition of approvals,
we should remember that the data presented in Tables 5.1 and
5.2 includes not only the approvals for FDI, but also for portfolio
investment in the form of ADRs, GDRs and other forms of non-
FDI inflows.

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Table 5.2: FDI Approvals by Major Sectors, 1991–2000 ($ Million)

Sectors 1991–95 1996 1997 1998 1999 2000 1991–

2000
Fuels (power and 4,093.1 1,623.5 7,279.0 3,366.9 1,317.7 1,282.9 18,963.3
oil refinery) (19.7) (15.9) (48.2) (45.1) (20.0) (15.6) (27.7)
Telecommunica- 6,302.3 1,252.0 1,978.8 751.4 906.2 2,056.4 13,247.1
tions (30.3) (12.3) (13.1) (10.1) (13.8) (25.0) (19.4)
Electrical 969.9 881.1 603.9 346.0 592.2 2,784.4 6,177.6
equipment (4.7) (8.6) (4.0) (4.6) (9.0) (33.8) (9.0)
(including
computer
software)
Transportation 1,040.4 812.5 1,043.7 378.8 1,444.8 226.8 4,947.1
industry (5.0) (8.0) (6.9) (5.1) (21.9) (2.8) (7.2)
Services sector 1,107.3 1,487.2 395.7 411.3 531.4 307.4 4,240.3
(5.3) (14.6) (2.6) (5.5) (8.1) (3.7) (6.2)
Metallurgical 1,432.9 653.7 693.1 538.0 325.2 407.2 4,050.1
industry (6.9) (6.4) (4.6) (7.2) (4.9) (4.9) (5.9)
Chemical (other 1,244.9 855.1 778.6 440 188.2 58.1 3,564.5
than fertilisers) (6.0) (8.4) (5.2) (5.9) (2.9) (0.7) (5.0)
Food-processing 838.2 955.3 530.6 153.3 32.8 61.3 2,571.5
industries (4.0) (9.4) (3.5) (2.1) (0.5) (0.7) (3.5)
Hotel and tourism 641.1 126.7 200.5 116.5 182.2 83.4 1,350.4
(3.1) (1.2) (1.3) (1.6) (2.8) (1.0) (2.0)
Miscellaneous 392.6 231.9 88.5 53.7 199.2 174.5 1,140.4
industries (1.9) (2.3) (0.6) (0.7) (3.0) (2.1) (1.7)
Total for the 16,168.0 7,182.7 12,366.5 6,150.7 5,572.8 7,837.4 55,278.1
top-10 sectors (77.6) (70.4) (81.8) (82.4) (84.6) (95.1) (77.0)
Total FDI 20,824.8 10,201.4 15,116.1 7,468.2 6,588.4 8,241.7 71,752.3
approvals
Note: Figures in parentheses are percentage shares of the total approvals for the year/
period.
Source: Handbook of Industrial Policy and Statistics, 2001, Ministry of Commerce and
Industry, Government of India.

The top-three sectors in terms of the combined FDI approvals

for 1991–2000, namely electrical equipment, telecommunications
and fuels, accounted for 56 per cent of all proposed investments.
The dilution of the post-Independence industrial policy during
the 1990s, leading to the dereservation of areas earlier reserved

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for public sector enterprises,6 was a possible trigger for the

dramatic rise in FDI approvals in these sectors. The iron and steel,
and transportation industries were the two sectors in which this
shift in policy allowed foreign companies to look for investment
opportunities, the evidence of which is in Table 5.2. The automobile
industry was among the industries in which consolidation of
foreign companies during the 1990s changed the character of
industry. The pharmaceutical industry is another interesting case.
Though not on the top-10 list in Table 5.2, this sector, which also
had critical presence of the public sector before 1991, due to the
changed priorities of the government, saw an increase in interest
by foreign companies towards the close of the 1990s.
One of the leading sectors in the list of top-10 sectors was the
‘services sector’, including banking and other financial services like
insurance and non-financial services, like hospital and diagnostic
services. During the 1990s, FDI approvals granted to the ‘services
sector’ were mostly for the financial services (nearly 70 per cent
of approvals).

Sources of FDI Approvals

Sources from which India received investment proposals were
considerably diverse, both in terms of the numbers and the
regions. One less-known feature of FDI inflows into India is that
many countries are reported to have shown interest in investing in
the country. DPIIT reports that during the 1990s, FDI approvals
were granted to entities from 94 countries, although the approvals
granted were mostly from the top-10 countries (Table 5.3). These
countries accounted for more than 75 per cent of the approved
investment during 1999–2000.
Countries from which foreign direct investors showed interest
in investing in India in the country’s early post-reforms phase were

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mostly industrialised countries. More than three-fourths of the

total approvals for FDI came from these countries. The US had a
strong presence, with a share of more than 25 per cent in terms of
the investments approved during 1991–2000, though its position
had become relatively weak in the second half of the 1990s with
the emergence of Mauritius as a source country. Mauritius was the
second largest potential source of FDI, a position that it would
consolidate in the following decades.
Four of the countries listed in Table 5.3 have a common
feature: they are recognised as tax havens. Two of these are
better known, namely Mauritius and the Netherlands, while two
others, South Korea and Malaysia, have also been identified as
jurisdictions whose tax regimes have been questioned for lack of
necessary transparency (Akhtar and Grondona 2019). Just outside
the top-10 list was Singapore, another tax haven which played a
significant role as a source of FDI in the subsequent decades.
The final aspect of our discussion in this section concerns an
estimation of FDI approvals fructifying into actual investments.
In India and elsewhere, governments and foreign companies
routinely make announcements about investment projects, but
whether these announcements result in actual investments is not
widely discussed. While detailed examination of investment data
at individual company-level can give some indication about the
gaps between the interest shown by a company to invest and the
fructification of this investment, there is a data gap at the macro
level that prevents examination of this phenomenon. The data on
FDI provided by DPIIT for the 1990s allows us to estimate the
gaps between approved and actual investments (Table 5.4).
According to Table 5.4, overall, just about a fourth of the
total FDI approvals fructified as investments, which may reflect
the difficult approval processes existing in India requiring the
involvement of a multitude of agencies. The share of actual inflows

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Table 5.3: Approved FDI by Top-10 Sources, 1991–2000 ($ Million)

Countries 1991–95 1996 1997 1998 1999 2000 1991–

2000
US 5,393.9 2,838.0 3,736.9 863.3 830.4 933.4 14,647.0
(30.6) (35.0) (27.9) (13.3) (14.5) (26.9) (25.9)
Mauritius 863.0 658.7 2,871.6 767.3 883.3 1,609.6 8,557.0
(4.9) (8.1) (21.5) (11.8) (15.4) (46.3) (15.1)
UK 1,328.2 430.3 1,236.7 775.8 688.2 91.5 4,764.5
(7.5) (5.3) (9.2) (11.9) (12.0) (2.6) (8.4)
Japan 991.8 420.0 525.0 310.9 370.4 184.1 2,888.5
(5.6) (5.2) (3.9) (4.8) (6.5) (5.3) (5.1)
South Korea 173.5 909.0 538.6 89.3 847.5 9.1 2,829.2
(1.0) (11.2) (4.0) (1.4) (14.8) (0.3) (5.0)
Germany 774.0 434.0 593.7 206.9 265.5 132.1 2,470.4
(4.4) (5.4) (4.4) (3.2) (4.6) (3.8) (4.4)
Australia 700.4 235.5 118.9 639.3 150.7 13.7 1,923.8
(4.0) (2.9) (0.9) (9.8) (2.6) (0.4) (3.4)
Malaysia 522.7 11.9 579.6 437.0 27.0 3.5 1,621.3
(3.0) (0.1) (4.3) (6.7) (0.5) (0.1) (2.9)
France 240.7 471.8 196.5 124.5 336.5 45.0 1,522.7
(1.4) (5.8) (1.5) (1.9) (5.9) (1.3) (2.7)
Netherlands 576.3 296.0 239.7 120.3 146.8 1.0 1,366.4
(3.3) (3.7) (1.8) (1.8) (2.6) (0.03) 2.4
Total for top- 11,564.4 6,705.2 10,637.1 4,334.6 4,546.2 3,023.2 42,590.7
10 countries (65.6) (82.8) (79.5) (66.6) (79.3) (87.0) (75.2)
I. Total of all 17,634.0 8,097.6 13,375.8 6,505.0 5,733.4 3,475.3 56,642.1
countries
II. NRI 945.3 618.3 500.4 181.9 105.6 360.2 2,772.0
III. Euro-issue 2,245.4 1,485.6 1,239.8 781.4 749.3 4,406.3 12,338.3
GDR/FCCB
Total FDI 20,824.8 10,201.4 15,116.1 7,468.2 6,588.4 8,241.7 71,752.3
(I + II + III)
Note: Figures in parentheses are percentage shares of the annual approvals.
Source: Handbook of Industrial Policy and Statistics, 2001, Ministry of Commerce and
Industry, Government of India.

was particularly low in certain sectors—fuels, telecommunications

and metallurgical industries. This was either due to the nature of
the foreign investors, or the sectoral policy was slow to evolve in
areas earlier reserved for the public sector.7

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Table 5.4: Potential and Actual FDI, 1991–2000 ($ Million)

Years Approved FDI Actual Inflows Share of Actual to

Approved (%)
1991–95 20,824.8 3,915.9 18.8
1996 10,201.4 2,467.8 24.2
1997 15,116.1 3,577.0 23.7
1998 7,468.2 3,216.0 43.1
1999 6,588.4 2,150.7 32.6
2000 8,241.7 2,323.3 28.2
1991–2000 68,440.5 17,650.7 25.8
Source: SIA Newsletter, DPIIT, various issues.

Analysis of Inflows in the First Decade

of the Millennium

The first decade of the millennium was the period in which India’s
FDI policy was rapidly liberalised. We discussed in Chapter 4 that
between 2000 and 2009, FDI policies were amended more than 80
times, covering all the major sectors—agriculture, manufacturing
and the services sectors. Another important development was that
reporting of FDI data was made compatible with IMF’s BPM5.8 The
change in the reporting practice introduced new items, especially
reinvested earnings of the already-established enterprises.
Table 5.5 presents the inflows data for the decade 2000–
01 to 2009–10. As compared to the earlier methodology, the
new approach resulted in a sizeable increase in reported FDI
inflows: from $4 billion in 2000–01, FDI inflows increased to
nearly $10 billion in 2005–06. Inflows gathered momentum in
the second half of the decade, peaking to nearly $42 billion in
2008–09. Thus, FDI inflows grew at an average rate of 15 per
cent during 2000–01 to 2004–05 and by nearly 52 per cent in
the second half of the decade. The dramatic rise in FDI inflows

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after 2005–06 resulted from exceptionally high increases in equity

inflows (Table 5.5).

Table 5.5: Reported FDI Inflows into India, 2000–10 ($ Million)

Years Direct Investment to India

2000–01 4.0
2001–02 6.1
2002–03 5.0
2003–04 4.3
2004–05 6.1
2005–06 9.7
2006–07 22.8
2007–08 34.8
2008–09 41.9
2009–10 37.7
Source: Based on ‘Fact Sheet on Foreign Direct Investment (FDI)’, DPIIT, December
2009 and November 2010.

FDI equity inflows during 2005–06 to 2009–10 were almost

seven times higher than those in the immediately preceding
quinquennium. This trend points to a discernible relationship
between the increase in inflows and the extensive relaxation of
controls on foreign investors. Caps on the shareholding by foreign
investors in enterprises were either raised or removed for several
critical sectors, including telecommunications, petroleum (both
in exploration and refining) and pharmaceuticals. While in many
sectors, foreign investors could hold majority stake, and thereby
establish subsidiaries in India, there were several other sectors
in which they could fully own enterprises. Alongside, foreign
investors were increasingly freed from the approval processes of
the government; in other words, funds could be brought into the
country directly, through the so-called ‘automatic route’.

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There is a sub-text to the narrative on India’s open-door policy

towards FDI, which is that foreign investors did not respond
immediately to the policy reforms introduced in the 1990s or
even in the early years of the new millennium. The response from
foreign investors came with a lag; only after 2005–06 did the
inflows increase substantially.
Figure 5.1 captures the steep increase in FDI inflows between
1991 and the end of the 2000s. FDI inflows grew from an annual
average of less than $2 billion in the first decade of the economic
reforms to over $17.2 billion in the 2000s. Particularly remarkable
was the expansion in the inflows in the second half of the decade,
which was over $29 billion. Average inflows in the latter half of
the decade were, therefore, nearly six times higher than those in
the first half.

Figure 5.1: Average FDI Equity Inflows Reported during

Different Periods, 1991–2010
$29.2

$17.2

$5.1
$1.7

1991/92–1999/2000 2000/01–2004/05 2005/06–2009/10 2000/01–2009/10

Source: Database of the Indian Economy, 2018, RBI, available at [Link]
DBIE/[Link]?site=statistics (accessed 5 August 2018). Based on ‘Fact Sheet on Foreign
Direct Investment (FDI)’, DPIIT, December 2009 and November 2010.

Route-wise distribution of FDI inflows provides a perspective

on the nature of FDI inflows through which foreign investors
expanded their presence in the country (Table 5.6). The three
major routes through which foreign investors brought in equity
investment—namely the approvals route, through FIPB, automatic
route and acquisitions route—and the trends in each of three

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Table 5.6: Entry Route-wise Distribution of FDI Equity Inflows,#

2000–10 ($ Billion)

Year Direct Equity* Reinvested Other

Invest- Earnings Capital
Total Government RBI Acquisi- Equity
ment
Equity (SIA/FIPB) tion of Capital of
to
Shares Unincor-
India
porated
Bodies
2000–01 4.0 2.4 1.5 0.5 0.4 0.1 1.4 0.3
2001–02 6.1 4.1 2.2 0.8 0.9 0.2 1.6 0.4
2002–03 5.0 2.8 0.9 0.7 0.9 0.2 1.8 0.4
2003–04 4.3 2.2 0.9 0.5 0.7 0.0 1.5 0.6
2004–05 6.1 3.8 1.1 1.3 0.9 0.5 1.9 0.4
2005–06 9.7 6.7 1.9 2.2 2.2 0.4 2.8 0.2
2006–07 22.8 16.5 2.2 7.2 6.3 0.9 5.8 0.5
2007–08 34.8 26.9 2.3 17.1 5.1 2.3 7.7 0.3
2008–09 41.9 32.1 5.4 21.3 4.6 0.7 9.0 0.8
2009–10 37.7 27.1 3.5 19.0 3.1 1.5 8.7 1.9
Notes: Excluding investments in unincorporated bodies, reinvested earnings and other
#

capital.
* Includes small quantities on account of NRI investment for the years 2000–01 and 2001–02.
Source: Based on RBI Monthly Bulletin, January 2011, Table 44.

routes are given in Table 5.6. The table shows that foreign investors’
acquisition of domestic enterprises made important contributions
to FDI equity inflows9 from the beginning of the decade. This
component peaked in 2005–06 and 2006–07, reaching almost
two-fifths of the total FDI equity flows, but fell thereafter.
Acquisition of shares, which do not represent actual inflows
and hence cannot create fresh capacities, together with reinvested
earnings, accounted for a substantial proportion of the reported
total inflows (Figure 5.2). Another notable feature of the inflows is
that the proportion of the inflows subject to specific government
approvals declined from 62.3 per cent in 2000–01 to 13.6 per cent
in 2009–10, reflecting the progressively greater freedom enjoyed

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Figure 5.2: Relative Contribution of Reinvested Earnings and

Acquisition of Shares to FDI, 2001–10
60
Shares in Total Inflows (%)

50

40

30

20

10

0
2001–02

2002–03

2003–04

2004–05

2005–06

2006–07

2007–08

2008–09

2009–10
Acquisition of Shares Reinvested Earnings + Acquisition of Shares
Source: Based on RBI Monthly Bulletin, January 2011, Table 44.

by foreign investors to invest in India without being subjected to

government scrutiny. The corresponding increase in the share of
investments which need mere reporting to the RBI at 74 per cent
in 2009–10, substantiates the earlier point.

Sectoral Distribution
In assessing the sectoral distribution of FDI inflows in the 2000s,
two sets of problems are encountered. The first is the inconsistency
in the presentation of the official statistics. For example, in the
earlier years of the decade, data on approved cases of FDI rather
than actual inflows was available from DPIIT. Even when actual
inflows were reported, the data was provided for calendar years
as against financial years, which is usually the norm for reporting
official statistics. The second problem is that the classification of
approvals/inflows data was hampered by excessive aggregation
and changes in the classification system over the years. Several
years later, Economic Survey 2014–15 commented on the anomaly

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thus: ‘[T]he ambiguity in classifying FDI in different activities

under the services sector continues’ (Government of India 2015:
paragraph 7.15). Such ambiguity was amply visible in the official
reporting for the period 2000–09, some samples of which are
provided in Box 5.1.
Box 5.1 informs us about the problem areas arising from
the classification of sectors in the official statistics. There are at
least three problems that we would like to point out: the first is
the overlap of sectors across the broad groupings. For instance,
‘construction’ is included both in groups I and II. Second, the
residual category in several groups, namely ‘others’, was often
reported to have the largest share in group, in case of the
‘miscellaneous manufacturing industries’. ‘Others’ accounted for
more than 50 per cent of the approvals/inflows during several
years. And finally, the telecommunications sector includes an
entry which suggests that some elements of broadcasting were
also taken into consideration.

Box 5.1: Classification of Broad Sectors and their Components

in Official Data on FDI

I. Miscellaneous manufacturing industries include:

(i) horticulture; (ii) agriculture (hybrid seeds and plantation); (iii) floriculture;
(iv) diamond; (v) ornament and gold; (vi) construction activities and real estate;
(vii) tea/coffee; (viii) cigarettes; (ix) printing of books, etc.; (x) coir; and (xi) others
(miscellaneous industries).
II. Telecommunications include:
(i) telecommunications, (ii) radio paging; (iii) cellular mobile/basic telephone
service; (iv) telecommunication (information and broadcasting); and (v) others
(telecommunications).
III. Consultancy services include:
(i) design and engineering services, (ii) management services; (iii) marketing;
(iv) construction; and (v) others (consultancy service).
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
archives (accessed 5 August 2018).

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Table 5.7 provides the data on sector-wise FDI approvals for

the years 2000–01 to 2003–04 for the top-10 sectors.

Table 5.7: FDI Approvals in the Early Years of the 2000s ($ Million)

Industries 2000–01 2001–02 2002–03 2003–04

Engineering goods 2,236.2 680.8 267.9 291.7
Telecommunications 2,602.7 444.4 166.1 149.5
Trading 56.5 35.0 44.3 128.4
Services sectors 125.3 301.6 182.1 110.8
Chemicals 345.5 103.3 100.4 82.3
Fuels 1,130.2 1,110.7 65.9 48.8
Hotel and tourism 69.4 23.2 18.6 36.3
Processed food 40.9 106.4 149.3 22.9
Consultancy services 51.0 41.6 21.5 18.3
Metallurgical industries 316.5 156.5 13.1 7.1
Others 253.6 369.8 207.2 144.1
Total 7,227.8 3,373.3 1,236.4 1,040.3
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

Table 5.7 indicates that the approvals for foreign investment

were highly concentrated in the top-10 sectors, accounting for 83–
96 per cent of the total approvals. Telecommunications, engineer­
ng goods and fuels dominated the approvals in all the four years.
Table 5.8 provides the distribution of FDI approvals across
sectors. An interesting shift away from manufacturing and towards
services can be seen from the figures. This indicates that foreign
investors reinforced the movement towards the modern services
sector that was seen in India from the early years of the millennium.
We would like to emphasise at this point that the figures
provided here are mere indications of the trends in the likely
involvement of foreign investors in India. We have already clarified
that these figures represent approvals granted by the government

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Table 5.8: Distribution of Approved Foreign Investment between

Broad Sectors, 2000–04 (%)

Industries 2000–01 2001–02 2002–03 2003–04

Agriculture 0.3 0.4 0.2 0.5
Manufacturing 58.1 70.7 54.3 45.3
Services 40.2 25.1 35.0 42.6
Unclassified 1.4 3.8 10.4 11.5
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

that have been used in the absence of data on sector-wise actual

inflows for the years mentioned in Table 5.8. A second point we
would make is that the approvals data became a weak proxy for
the participation of foreign companies because of the slackening
of government regulations over foreign investors.

Sectoral Distribution of FDI Inflows

We will now consider the sectoral distribution of actual flows of
FDI. DPIIT provides data for the major sectors receiving equity
inflows from the year 2004–05. Table 5.9 provides the data for the
top-10 sectors until the end of the 2000s.

Table 5.9: FDI Inflows in the Top-10 Sectors, 2004–10 ($ Million)

Sectors 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Services sector (financial 444 543 4,664 6,615 6,116 4,392
and non-financial)
Computer software and 539 1,375 2,614 1,410 1,677 919
hardware
Housing and real estate 0 38 467 2,179 2,801 2,844
Construction activities 152 151 985 1,743 2,028 2,868
(including roads and
highways)

(Contd)

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Table 5.9 (Contd)

Sectors 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Telecommunications 125 624 478 1,261 2,558 2,554
(radio paging, cellular
mobile, basic telephone
services)
Power 53 87 157 967 985 1,437
Automobile industry 122 143 276 675 1,152 1,177
Metallurgical industries 182 147 173 1,177 961 407
Petroleum and natural 113 14 89 1,427 412 272
gas
Chemicals (other than 198 390 205 229 749 362
fertilisers)
Total for the 1,928 3,512 10,108 17,683 19,439 17,232
top-10 sectors (% share (59.3) (63.4) (64.9) (72.0) (71.1) (67.3)
in equity inflows)
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

Increased FDI inflows after the mid-2000s were accompanied

by a significant development: the confirmation that the services
sectors were major recipients of FDI. During 2004–05 to 2009–10,
four of the top-five sectors that attracted the largest equity inflows
for the period taken as a whole belonged to the services sector.10
Within services, financial services had the largest share in the group
of the top-10 (almost a third), while construction and real estate
gained the most after 2007–08 (Table 5.9 and Figure 5.3). A further
scrutiny of the data suggests that only a few of the Indian investee
companies like Punj Lloyd, Soma Enterprises and Shriram EPC
can be categorised as engineering and construction companies,
and the rest are developers—a few of these were engaged in setting
up IT parks and SEZs. A similar examination of the inflows in the
financial sector suggested that close to 40 per cent of the inflows
were into companies that served the securities market, suggesting
that they did not directly contribute to the long-term financing

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Figure 5.3: Distribution of Foreign Equity Inflows, 2007–10#

Computer
Software*
Others 5% Financial
7% Services
22%
Energy
8%

Telecommunications
8%

Manufacturing
Other Services 20%
11%

Real Estate and

Construction
19%
Notes: # Excluding those into unincorporated bodies, reinvested earnings and other capital.
* Following the previous year’s distribution, the share of computer software within the
broad classification of ‘Computer software and hardware’ has been taken approximately
as 96%.
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

needs of Indian business. These could be termed as adjuncts to the

foreign portfolio investors.
Table 5.10 provides a more detailed account of FDI inflows by
sectors and industries, taking advantage of the significantly better
reporting by the DPIIT in the second half of the 2000s. Two trends
can be seen from the table: the dominance of the services sector
and the diminished role of the manufacturing sector. Within the
services sector, financial services and real estate and construction
received nearly three-fourths of the total inflows in the services
sector, and more than 40 per cent of the overall inflows during
2007–10. The priorities of the foreign investors are quite evident
from these numbers.
The most noticeable aspect of the trends in inflows was the
steady shift away from manufacturing from the middle of the
2000s, a trend that was strengthened by the end of the decade.

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Table 5.10: FDI Inflows in Major Sectors/Industries, 2007–10 ($ Billion)

Sectors/Industries 2007–08 2008–09 2009–10 2007–10

Services sector 15.4 17.9 17.4 50.7
Financial services 6.6 6.1 4.4 17.1
Real estate and construction 2.2 2.8 2.8 7.8
Telecommunications 1.7 2.0 2.9 6.6
Computer software 1.3 2.6 2.6 6.4
Trading 1.4 1.7 0.9 4.0
Hotel and tourism 0.6 0.6 0.6 1.8
Information and broadcasting 0.4 0.4 0.7 1.6
(including print media)
Manufacturing 4.6 5.8 4.8 15.2
Automobile industry 0.7 1.2 1.2 3.0
Metallurgical industries 1.2 1.0 0.4 2.5
Electrical equipment 0.6 0.4 0.7 1.7
Chemicals (other than fertilisers) 0.2 0.7 0.4 1.3
Cement and gypsum products 0.02 0.7 0.03 0.8
Drugs and pharmaceuticals 0.3 0.2 0.2 0.7
Industrial machinery 0.1 0.1 0.4 0.6
Energy 2.5 1.5 2.2 6.1
Power 1.0 1.0 1.4 3.4
Petroleum and natural gas 1.4 0.4 0.3 2.1
Non-conventional energy 0.04 0.1 0.5 0.6
Others 2.1 2.2 1.4 5.7
Miscellaneous industries 0.6 1.5 1.0 3.2
Ports 0.9 0.5 0.1 1.5
Mining 0.4 0.03 0.2 0.7
Total 24.6 27.3 25.8 77.7
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

This trend is particularly significant since around this phase,

Government of India had started taking note of the low share of
manufacturing in the country’s GDP: it was about 17–18 per cent

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of the GDP. In 2006, the National Manufacturing Competitiveness

Council (Government of India 2006: 59) commented in its report
that the share of manufacturing in GDP should increase to at least
23 per cent by 2015 from the then-existing level. Although succes-
sive governments progressively removed entry barriers for foreign
investors in the manufacturing sector, expecting that these inves-
tors would help revive its sagging fortunes, foreign investors did
not respond to the priorities of the government (Table 5.11). The
share of FDI inflows in the manufacturing sector registered a steep
fall from 61 per cent in 2004–05 to less than a fifth in 2009–10.

Table 5.11: Changing Sectoral Shares in FDI Equity Inflows, 2004–10 (%)

Sectors 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Manufacturing 61.0 52.3 25.1 18.7 21.2 18.6
Services 29.8 36.2 62.1 62.8 65.4 67.5
Energy 0.0 1.7 1.5 10.0 5.4 8.5
Miscellaneous 9.2 9.7 11.3 8.5 8.0 5.4
industries
Total 100.0 100.0 100.0 100.0 100.0 100.0
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

Sources of FDI Inflows in the 2000s

As for the source countries of FDI in India, the 2000s showed
a clear shift towards established tax havens like Mauritius and
Singapore (Table 5.12). We mentioned earlier that Mauritius
had emerged as one of the top sources of equity inflows towards
the end of the 1990s, and its position was further strengthened
in the following decade. During the period 2002–03 to 2009–
10, Mauritius accounted for more than 40 per cent of the total
reported inflows. What also needs to be highlighted here is
that most of India’s source countries figured prominently in the

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Table 5.12: India’s FDI Equity Inflows: Top-10 Home Countries Share,
2002–10 (%)

Countries 2002–03 to 2005–06 to 2008–09 to 2002–03 to

2004–05 2007–08 2009–10 2009–10
Mauritius* 26.1 44.7 40.6 41.0
Singapore* 2.7 8.8 11.0 9.3
US 14.2 5.5 7.0 7.0
UK 6.4 7.4 2.9 5.1
Netherlands 9.8 3.2 3.3 3.8
Cyprus 0.0 2.0 5.5 3.5
Japan 6.5 2.5 3.0 3.1
Germany 3.9 2.1 2.4 2.4
UAE* 0.0 1.2 1.7 1.3
France 0.0 0.6 1.4 1.0
Total for top-10 58.6 72.6 71.6 70.9
Note: * Excluding NRI investments and those for which country details have not been
reported. The ranking is based on their position from 2002–03 to 2009–10.
Source: Based on the data provided in the SIA Newsletter, various monthly and annual
issues. Classification of home countries into tax havens is based on Tax Justice Network
(2007) and United States Government Accountability Office (2008).

2011 Financial Secrecy Index of the Tax Justice Network, which

identified jurisdictions having less than desirable transparency in
their financial market regulations, and could therefore be called
‘tax havens’ (Tax Justice Network 2011).
It is not just the top-10 countries that bring questionable
sources of FDI into India; the problem is, in fact, considerably
bigger. This issue is especially relevant because policymakers in
India have been emphasising on the developmental role of FDI.
However, if the list of more than 90 countries from which India
received FDI between 2002–03 and 2009–10 were perused, one
would find that a significant number of these countries were not
those that could have provided the bundle of intangibles like
technology and other inputs that are necessary for strengthening
India’s manufacturing sectors (Table 5.13). A second area of

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India’s FDI Inflows since 1991 

concern is that many of these countries are either failed states or

tax havens. A more detailed analysis of this aspect of the sources
of FDI will be provided in the following section.

Table 5.13: Sources of FDI in India with Doubtful Records as

Providers of Finance

Bahamas Libya
Bermuda Maldives
British Isles Mauritius
British Virginia Myanmar
Cayman Island Nevis
Colombia Nicosia
Cyprus Nigeria
Djibouti Panama
East Africa Seychelles
Fiji Islands St. Vincent
Gibraltar Sudan
Iran UAE
Jordon Vanuatu
Kazakhstan Virgin Islands
Kenya West Africa
North Korea West Indies
Kyrgyzstan Yemen
Lebanon Zambia
Liberia
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

FDI Trends in the 2010s

FDI inflows into India expanded significantly after 2012–13. In

the early years of the decade, FDI inflows were subdued as the

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persisting effects of the economic recession of 2008 were being

felt by the global economy (Table 5.14 and Figure 5.4).

Table 5.14: Entry Route-wise Distribution of FDI Equity Inflows,

2010–18 ($ Billion)

Year Gross Equity Capital Reinvested Other

Inflows Earnings Capital
Total Govern- RBI Acquisition Equity
Equity ment of Shares Capital of
(SIA/ Unincor-
FIPB) porated
Bodies
2010–11 34.8 22.3 1.9 13.0 6.4 0.9 11.9 0.7
2011–12 46.6 35.9 3.0 20.4 11.4 1.0 8.2 2.5
2012–13 34.3 22.9 2.3 16.0 3.5 1.1 9.9 1.5
2013–14 36.0 25.3 1.2 14.9 8.2 1.0 9.0 1.8
2014–15 45.1 31.9 2.2 22.5 6.2 1.0 10.0 3.2
2015–16 55.6 41.1 3.6 32.5 3.9 1.1 10.4 4.0
2016–17 60.2 44.7 5.9 30.4 7.2 1.2 12.3 3.2
2017–18 61.0 45.5 7.8 29.6 7.5 0.7 12.5 2.9
Source: RBI Bulletin, various issues.

Figure 5.4: Trends in FDI Inflows, 2010–18

70 70
Share of Total Inflows (%)

60 60
50 50
$ Billion

40 40
30 30
20 20
10 10
0 0
2012–13

2013–14

2014–15

2015–16

2016–17

2017–18
2010–11

2011–12

Government (SIA/FIPB) RBI

Acquisition of Shares Equity Capital of Unincorporated Bodies
Reinvested Earnings Other Capital
Total Inflows
Source: RBI Bulletin, various issues.

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FDI inflows rose sharply by 25 per cent in 2014–15, but in

the subsequent years, there was a marked slowing of the growth of
inflows. The numbers for 2017–18 were mired in confusion, with
the DPIIT and RBI giving different sets of numbers.11
Equity inflows increased significantly since the beginning of
2010s, doubling between 2010–11 and 2016–17. Inflows through
the ‘automatic route’ (RBI) also doubled during the same period,
indicating, as in the earlier decades, the extent of relaxation of
FDI policies and greater freedom enjoyed by foreign investors
in making their investment decisions. Acquisition of shares and
reinvested earnings taken together accounted for just less than
a third in 2017–18, after reaching a peak of over 42 per cent in
2011–12

Sectoral Distribution of FDI Equity Inflows

Inflows of equity capital continued to be highly concentrated in
the services sector during the 2010s, confirming a trend that was
established in the previous decade (Table 5.15). Financial services
were the overwhelming favourites of foreign investors; the sweeping
relaxation of government controls over most areas in the financial
sector paved way for the strong penetration of foreign capital. The
relatively low level of exposure of India’s financial sector to the
global capital markets was one of the main reasons why the earlier
episodes of financial crises did not adversely affect the country’s
economy. This situation changed completely a decade since the last
major global economic downturn in 2008. The pattern of inflows
can be seen in Table 5.15.
Alongside the consolidation of the services sector as the
favoured sector for foreign investors, the share of the manufacturing
sector in the total FDI inflows declined continuously after 2013–
14. In 2017–18, the share of the manufacturing sector declined

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 Table 5.15: Distribution of FDI Equity Inflows across Sectors, 2010–18 ($ Million)

Sectors 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2010–11 to
2017–18
Services 10.4 14.9 12.5 10.0 15.6 27.6 27.2 32.2 150.4
Financial services* 3.4 5.2 4.8 2.2 3.3 6.9 8.7 6.7 41.2
Telecommunications 1.7 2.0 0.3 1.3 2.9 1.3 5.6 6.2 21.3
Computer software and hardware 0.8 0.8 0.5 1.1 2.2 5.9 3.7 6.2 21.1

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Trading 0.5 0.8 0.7 1.3 2.8 3.8 2.3 4.3 16.6
Construction activities 1.1 0.4 0.3 0.5 0.9 4.5 1.9 2.7 12.2
Hotel and tourism 0.3 1.0 3.3 0.5 0.8 1.3 0.9 1.1 9.2
Construction development 0.0 3.1 1.3 1.2 0.8 0.1 0.1 0.5 7.2
Information and broadcasting 0.4 0.7 0.4 0.4 0.3 1.0 1.5 0.6 5.3
Hospital and diagnostic centres 0.3 0.3 0.3 0.7 0.7 0.7 0.7 0.7 4.4
Manufacturing 5.5 15.1 7.8 12.2 11.3 9.5 13.9 9.3 84.5
Automobile industry 1.3 0.9 1.5 1.5 2.6 2.5 1.6 2.1 14.1
Chemicals (other than fertilisers) 0.4 4.0 0.3 0.8 0.7 1.5 1.4 1.3 10.4
Drugs and pharmaceuticals 0.2 3.2 1.1 1.3 1.5 0.8 0.9 1.0 10.0
Metallurgical industries 1.1 1.8 1.5 0.6 0.5 0.5 1.4 0.4 7.7
Food processing industries 0.2 0.2 0.4 4.0 0.5 0.5 0.7 0.9 7.4

(Contd)

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 Table 5.15 (Contd)

Sectors 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2010–11 to
2017–18
Electrical equipment 0.2 0.6 0.2 0.1 0.6 0.4 2.2 0.5 4.8
Industrial machinery 0.6 0.6 0.5 0.5 0.9 0.6 0.3 0.5 4.4
Energy 2.0 4.1 1.9 1.6 2.3 1.7 2.1 2.8 18.6
Power 1.3 1.7 0.5 1.1 0.7 0.9 1.1 1.6 8.8
Non-conventional energy 0.2 0.5 1.1 0.4 0.6 0.8 0.8 1.2 5.5

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Petroleum and natural gas 0.6 2.0 0.2 0.1 1.1 0.1 0.2 0.0 4.3
Others 1.5 1.0 0.3 0.5 1.6 1.2 0.4 0.4 7.0
Total 19.4 35.1 22.4 24.3 30.9 40.0 43.5 44.9 260.5
Note: * Also includes outsourcing, research and development (R&D), courier, technical testing and analysis, etc.
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter), various issues, DPIIT, available at [Link]
publications/si-news-letters/archives (accessed 5 August 2018).

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Table 5.16: Share of the Broad Sectors in FDI Inflows, 2010–18

Sectors 2010– 2011– 2012– 2013– 2014– 2015– 2016– 2017– 2010–11
11 12 13 14 15 16 17 18 to
2017–18
Services 53.6 42.4 55.6 41.3 50.6 68.9 62.5 71.8 57.7
Manufacturing 28.1 43.0 34.7 50.1 36.6 23.6 31.9 20.8 32.5
Energy 10.4 11.8 8.3 6.6 7.6 4.4 4.8 6.4 7.1
Others 7.9 2.8 1.4 2.0 5.2 3.1 0.8 1.0 2.7
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

to 20.8 per cent, its lowest for the decade (Table 5.16). Since the
middle of the previous decade, successive governments have spoken
about the importance of increasing the share of the manufac­
turing sector, from mid- to high-teens to at least a fourth of the
GDP.12 Figures in the Table 5.16 show that foreign investors were
reluctant participants in the government’s initiatives for the revival
of the manufacturing sector.

‘Make in India’ and FDI Inflows

The National Democratic Alliance (NDA) government unveiled
‘Make in India’ as its first major programme for transforming
the Indian economy. The primary goal of this initiative was to
transform India into a global manufacturing hub, which was to be
achieved by increasing the share of manufacturing in the country’s
GDP to 25 per cent in 2025 (Government of India 2016a), or
by about 10 percentage points. In order to lend a better focus
to this initiative, the government identified 25 sectors, of which
13 were in the manufacturing sector, while the rest belonged to
the services and infrastructure sectors (Table 5.17).

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Table 5.17: ‘Make in India’ Sectors

Automobile Food processing Renewable energy

Automobile components IT and business process Roads and highways
management
Aviation Leather Space
Biotechnology Media and entertainment Textiles and garments
Chemicals Mining Thermal power
Construction Oil and gas Tourism and hospitality
Defence manufacturing Pharmaceuticals Wellness
Electrical machinery Ports and shipping
Electronic systems Railways
Source: Compiled from the Make in India website, available at [Link]
com/sectors (accessed 31 May 2018).

Although the statement of intent of ‘Make in India’ spoke of

encouraging both ‘multinational as well as domestic companies to
manufacture their products within the country’ (Government of
India 2016a), liberalisation of FDI policies that the NDA govern­
ment began in August 2014 suggested a new level of confidence
that it developed in the ability of the foreign companies to con­
tribute to the ‘making of India’. This was more than evident from the
following unequivocal statement of the government: ‘FDI reforms
reflect a decisive change in philosophy, from viewing FDI as a
tolerable necessity to something to welcome’. Operationally, FDI
policy reforms were intended to ‘put more and more FDI proposals
on automatic route instead of Government route where time and
energy of the investors is wasted’ (Government of India 2016b: 2).
The response of foreign investors to the ‘Make in India’
initiative is captured in Table 5.18. Except for the space sector,
equity inflows into all the other sectors included in the initiative
are shown in the table.

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Table 5.18: Foreign Equity Inflows into the ‘Make in India’ Sectors,
2014–18 ($ Billion)

Make in India Sectors 2014–15 2015–16 2016–17 2017–18 2014–15

to
2017–18
Thermal power 0.7 0.9 1.1 1.4 4.3
Renewable energy 0.6 0.8 0.8 1.2 3.4
Oil and gas 1.1 0.1 0.2 0.0 1.4
Automobile 2.6 2.5 1.6 2.1 8.8
Chemicals 0.7 1.5 1.4 1.3 4.8
Biotechnology/pharmaceuticals 1.5 0.8 0.9 1.0 4.1
Electrical machinery 0.6 0.4 2.2 0.5 3.7
Food processing 0.5 0.5 0.7 0.9 2.7
Textiles and garments 0.2 0.2 0.6 0.4 1.5
Electronic systems 0.1 0.2 0.1 0.2 0.6
Railways 0.1 0.1 0.1 0.1 0.4
Leather 0.04 0.02 0.00 0.02 0.08
Defence manufacturing 0.0 0.0 0.0 0.0 neg.*
Mining 0.7 0.5 0.1 0.0 1.3
IT and business process 2.2 5.9 3.7 6.2 17.9
management
Tourism and hospitality 0.8 1.3 0.9 1.1 4.2
Media and entertainment 0.3 1.0 1.5 0.6 3.4
Wellness 0.7 0.7 0.7 0.7 2.9
Ports and shipping 0.3 0.4 0.7 1.0 2.5
Construction/roads and 1.6 4.6 2.0 3.3 11.1
highways
Aviation 0.1 0.4 0.1 0.6 1.1
Total for Make in India sectors 15.2 22.9 19.4 22.6 80.0
Total equity inflows 30.9 40.0 43.5 44.9 159.3
Note: * Less than $200,000
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

Given their preference for the services sector in general,

foreign investors backed the services sectors figuring in the ‘Make

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India’s FDI Inflows since 1991 

in India’ initiative as well. Nearly 54 per cent of the FDI inflows

between 2014–15 and 2017–18 went into the services sectors.
However, more than 40 per cent of the inflows into this sector
were accounted for by the IT and business process management
sectors, and a further 25 per cent went into construction
and roads/highways. In other words, two of the sectors saw
disproportionately large interest from foreign investors.
As with the earlier initiatives for reviving the fortunes of
the manufacturing sector through greater infusion of foreign
investment, the ‘Make in India’ initiative, too, received a hesitant
response. During the period of implementation of the initiative,
the manufacturing sector received a third of the total FDI inflows.
Perhaps more disconcertingly, the share of this sector in the total
inflows declined in 2017–18.

Sources of Inflows
Equity inflows into India came largely from a similar set of countries,
as in the previous decade. Table 5.19 provides the details.

Table 5.19: Top Sources of FDI Inflows, 2010–18

Countries FDI Inflows ($ Billion) Share in Total FDI Inflows (%)

Mauritius 80.3 30.1
Singapore 56.6 21.2
Japan 23.6 8.8
Netherlands 19.0 7.1
UK 19.6 7.3
US 14.1 5.3
Germany 8.0 3.0
Cyprus 5.7 2.1
France 4.7 1.8
UAE 4.2 1.6

(Contd)

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 138  Understanding Foreign Direct Investment

Table 5.19 (Contd)

Countries FDI Inflows ($ Billion) Share in Total FDI Inflows (%)

Switzerland 3.4 1.3
Hong Kong SAR 2.6 1.0
Luxembourg 2.4 0.9
Spain 2.1 0.8
South Korea 2.1 0.8
Cayman Islands 2.1 0.8
Italy 1.8 0.7
China 1.9 0.7
Belgium 1.0 0.4
Total for these countries 255.1 95.7
Total equity inflows 266.6 100.0
Source: Compiled by the authors from the SIA Newsletter (renamed FDI Newsletter),
various issues, DPIIT, available at [Link]
(accessed 5 August 2018).

Table 5.19 includes 19 countries that contributed a billion dol-

lars or more in the total FDI inflows. The share of these countries
was more than 95 per cent of the total FDI inflows. In fact, the top-
five countries, namely Mauritius, Singapore, Japan, the Nether-
lands and the UK, accounted for three-fourths of the total inflows.
Mauritius remained the top source of FDI inflows, but in recent
years, its gap with the second largest source, namely Singapore,
has decreased considerably. This happened after the government
took serious note of the contention that inflows of capital
from Mauritius were violating the Double Taxation Avoidance
Agreement between the two countries, as well as the General
Anti-avoidance Rules (GAAR) introduced in 2012 to prevent tax
avoidance. When the issue of GAAR was in sharp focus following
its introduction, inflows from Mauritius declined to $5 billion
in 2013–14, putting this source country behind Singapore. But

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India’s FDI Inflows since 1991 

in the year 2017–18, when GAAR was finally implemented, FDI

inflows from Mauritius increased to nearly $16.0 billion, almost
twice the level of the immediately preceding fiscal year, and its
share went up from 29 per cent in 2014–15 to more than 35 per
cent in 2017–18.
As compared to the earlier phases of the post-1991 period, the
sources from which India received equity investment during the
current decade have seen both quantitative and qualitative changes.
First, the quantitative aspect: 148 countries have invested in India
in the decade of the 2010s, well above 91 countries that did so in
the preceding decade. The number of countries providing FDI has
increased significantly, in step with the investment liberalisation,
suggesting yet again a clear relationship between easing of controls
on foreign investors and an expansion in the sources of funding.
Now to the qualitative aspect of the change in the sources
of funding: we mentioned earlier that several countries providing
such funds were not exactly those from which Indian industry
could expect to receive advanced technology and other assets for
increasing its competitiveness. In addition to countries with a
doubtful record as suppliers of capital, as listed in Table 5.13,
suppliers of FDI to India in recent years have included Afghanistan,
Algeria, the Democratic Republic of Congo, Senegal, Iraq, the Isle
of Man, the Togolese Republic and Syria.

Trends in Repatriation of Capital

One phenomenon which emerged in the 2000s, and which has
gained considerable significance in recent years, is the repatriation
of capital by foreign investors. Until the end of the 2000s, repatria­
tion of capital was less than $5 billion dollars, having been less
than a billion dollars in the earlier years.

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Table 5.20: Trends in Repatriation of Capital, 2004–18

($ Billion, Unless Qualified)

Years FDI Inflows Equity Inflows Repatriation/Disinvestment

Total Equity
2004–05 6.1 3.8 0.1 (1.1)* 0.1 (1.7)**
2005–06 9.7 6.7 0.1 (0.6)* 0.1 (0.9)**
2006–07 22.8 16.5 0.1 (0.4)* 0.1 (0.5)**
2007–08 34.8 26.9 0.1 (0.3)* 0.1 (0.4)**
2008–09 41.9 32.1 0.2 (0.4)* 0.2 (0.5)**
2009–10 37.7 27.1 4.6 (12.3)* 4.2 (15.6)**
2010–11 34.8 22.3 7.0 (20.1)* 6.5 (29.3)**
2011–12 46.6 35.9 13.6 (29.2)* 13.0 (36.3)**
2012–13 34.3 22.9 7.3 (21.4)* 6.9 (29.9)**
2013–14 36.0 25.3 5.3 (14.7)* 4.8 (18.9)**
2014–15 45.1 31.9 9.9 (21.8)* 9.6 (30.1)**
2015–16 55.6 41.1 10.7 (19.2)* 10.5 (25.6)**
2016–17 60.2 44.7 18.0 (29.9)* 17.3 (38.7)**
2017–18 56.8 42.2 19.1 (33.6)* 18.9 (44.7)**
Notes: * Figures in parentheses are percentage of FDI inflows.
** Figures in parentheses are percentage of equity inflows.
Source: Database on Indian Economy, RBI, available at [Link]
rbi?site=statistics (accessed 5 August 2018).

Table 5.20 shows the alarming pace at which repatriation

of capital has taken place, especially since 2013–14. As a share
of FDI inflows, total repatriation in 2013–14 was just less than
22 per cent, but by 2017–18, this figure had increased to nearly
34 per cent. Repatriation of equity capital was even more serious.
This largest component of FDI inflows saw repatriation of nearly
30 per cent of equity inflows in 2014–15, which increased to close
to 45 per cent in 2017–18. This implies that foreign investors had
withdrawn equity capital measuring almost half of inflows for the
year. Consequently, net inflows of FDI registered a relatively small
increase since 2014–15.

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Notes

1. As mentioned in Chapter 4, Government of India established the

FIPB following the Statement of Industrial Policy in 1991 which was an
inter-ministerial agency responsible for vetting FDI proposals. FIPB was
phased out in 2018–19.
2. The acquisition of shares of Indian companies by non-residents
through private arrangements was included as part of FDI since January
1996 (RBI 2010: 83).
3. FDI approvals were nearly $200 million in 1989. Our estimates
show that the actual inflows during the early 1990s were approximately
25 per cent of the amount for which the government had granted
approvals. This gives us the estimated amount of inflows for this year.
4. Much of the initial inflows were on account of the hike in equity
to majority by the existing foreign companies. At the end of January
1995, equity-hike cases accounted for 53.8 per cent of the inflows. The
realisation in their case was 73.3 per cent. In all other cases, it was only
19 per cent.
5. We mentioned earlier that for the 1990s and the early years of the
2000s, DIPP did not provide the actual inflows data while reporting the
sectoral composition of FDI—the available data pertained to the approvals
granted by the government. The data is, therefore, proposed investments
and not actual investments.
6. The framework was provided by the Industrial Policy Resolution
of 1956. Most of the key sectors were reserved for the public sector,
which was expected to control the ‘commanding heights of the economy’
(Government of India 1991: paragraph 15).
7. There is, however, another dimension to it. In the early years, several
expatriate Indians (for example, Swraj Paul and the Hindujas) promised
huge investments, but these did not get translated into actual investments
because their demands for favourable terms were not acceded to by the
authorities/public sector partners, Indian Oil Corporation and Kuwait
Petroleum (Institute for Studies in Industrial Development 1995).

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 142  Understanding Foreign Direct Investment

8. India adopted the international practice of reporting FDI inflows

data following the recommendations of the Committee on Compilation
of Foreign Direct Investment in India, October 2002 (Government of
India 2002).
9. Inflows through the FIPB/SIA, automatic and acquisition routes.
10. The group ‘computer software and hardware’ mostly included
computer software.
11. While the DPIIT has reported that FDI inflows in 2017–18 were
nearly $62 billion, RBI has produced three sets of numbers, one of which
says that inflows were $56.8 billion, lower than the previous year’s figure
by nearly 6 per cent. See Rao and Dhar (2018).
12. We mentioned earlier that the National Manufacturing Competi­
tiveness Council had, in its report, argued that the share of the manu­
facturing sector in GDP should increase to 23 per cent, resulting from
its annual growth of 12 per cent. In 2011, the government announced
a National Manufacturing Policy with the objective of raising the share
of manufacturing in GDP to 25 per cent. The following government
announced the biggest and the most detailed policy for the revival of the
manufacturing sector, namely the ‘Make in India’ initiative, within months
of its coming into power in 2014. Make in India identified 25 sectors,
aimed at transforming ‘India into a global design and manufacturing hub’
(Government of India 2016a).

References

Akhtar, Jahanzeb and Verónica Grondona. 2019. ‘Tax Haven Listing in

Multiple Hues: Blind, Winking or Conniving?’. Research paper no. 94,
South Centre, Geneva. Available at [Link]
wp-content/uploads/2019/04/RP94_Tax-Haven-Listing-in-Multiple-
Hues-Blind-Winking-or-Conniving_EN.pdf (accessed 1 May 2019).
DPIIT. 2019. ‘Foreign Direct Investment Policy’. Available at [Link]
in/policies-rules-and-acts/policies/foreign-direct-investment-policy
(accessed 1 May 2019).

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 143
India’s FDI Inflows since 1991 

Government of India. 1991. ‘Statement on Industrial Policy’. Department

for Promotion of Industry and Internal Trade, 24 July. Available at
[Link] (accessed 25
July 2018).
. 1995. ‘SIA Newsletter: Volume 3, No. 9’. January. Ministry of Industry,
Department of Industrial Development.
. 2002. ‘Committee on Compilation of Foreign Direct Investment in
India’. Department of Industrial Policy and Promotion, October.
Available at [Link] (accessed 25
July 2018).
. 2006. ‘The National Strategy for Manufacturing’. National
Manufacturing Competitiveness Council, New Delhi.
. 2015. Economic Survey 2014–15, Volume 2. Ministry of Finance,
Department of Economic Affairs. Available at [Link]
[Link]/budget2015-2016/es2014-15/[Link] (accessed 20
July 2018).
. 2016a. ‘Make in India: The Vision, New Processes, Sectors,
Infrastructure and Mindset’. Make in India. Available at [Link]
[Link]/article/-/v/make-in-india-reason-vision-for-the-
initiative (accessed 30 July 2018).
. 2016b. Economic Survey 2015–16, Volume 1. Ministry of Finance.
Institute for Studies in Industrial Development. 1995. ‘Foreign Investment
Approvals and Implementation Status: A Review (August 1991 to
December 1994)’. Project report for the Department of Economic
Affairs, Ministry of Finance, March. Available at [Link]
[Link] (accessed 30 June 2018).
Kust, Matthew J. 1964. Foreign Enterprise in India: Laws and Policies. Chapel
Hill, North Carolina: University of North Carolina Press.
Rao, K. S Chalapati and Biswajit Dhar. 2018. ‘India’s Recent Inward Foreign
Direct Investment: An Assessment’. Institute for Studies in Industrial
Development, New Delhi.
RBI. 2007. ‘Manual on Financial and Banking Statistics’. Mumbai.
Available at [Link]
aspx?head=Manual%20on%20Financial%20and%20Banking%20
Statistics%20-%20March%202007 (accessed 10 July 2018).

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 144  Understanding Foreign Direct Investment

RBI. 2010. ‘Report of the Working Group on Balance of Payments Manual

for India’. September. Available at [Link]
[Link]?UrlPage=&ID=596 (accessed 10 July
2018).
Tax Justice Network. 2007. ‘Closing the Floodgates: Collecting Tax to Pay for
Development’. Commissioned by the Norwegian Ministry of Foreign
Affairs.
. 2011. ‘The Significance of the 2011 Financial Secrecy Index’. Available
at [Link]
[Link] (accessed 1 May 2019).
United States Government Accountability Office. 2008. ‘Large U.S.
Corporations and Federal Contractors with Subsidiaries in
Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions’.
Report to Congressional Requesters, December.

Understanding Foreign Direct [Link] 144 25/02/2020 11:39:06

 six

Performance of FDI Companies

A Brief Assessment

T his chapter attempts to assess the performance of FDI

companies in India during 2012–13 to 2017–18. This
is a period for which we have a consistent set of data for FDI
companies. This exercise is constrained by data limitations arising
from two sets of issues. The first is that many FDI companies have
not listed their shares in the stock market, and these companies
are not required to make data regarding their functioning publicly
available.1 The second issue is that the standards of reporting have
been changing which has contributed to considerable data gaps.
Given these limitations, we relied on two data sources to
assess the performance of FDI companies. The first set of data is
from the RBI’s Annual Census on Foreign Liabilities and Assets of
Indian Companies, and the second is from the Prowess database2
that includes data from the annual reports of companies.
The Coordinated Direct Investment Survey (CDIS) began in
2009 ‘to improve the quality of direct investment position statistics
in the international investment position (IIP) and the availability
of these statistics by immediate counterpart economies’ (IMF
2015: 1). Thus, comparable data on FDI is now available for
about 100 countries. Although the CDIS provides data only on
FDI stock, RBI’s census provides additional data covering some
aspects of the functioning of a subset of FDI companies operating

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 146  Understanding Foreign Direct Investment

in India, namely the subsidiaries of foreign companies. This data

is analysed in the following section.

Annual Census on Foreign Liabilities and

Assets of Indian Companies

The census provides data regarding the size of operations of

subsidiaries of foreign companies across major sectors of the
economy (Table 6.1). In 2012–13, just less than two-thirds of the
sales of these companies belonged to the manufacturing sector.
However, the subsequent years witnessed a steep fall in the share
of this sector; in 2017–18, manufacturing companies accounted

Table 6.1: Sales of Foreign Subsidiaries, 2012–18 (Rs Billion)

Activities 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18

A. Agriculture-related, 43.7 51.2 64.5 52.9 76.4 72.2
plantations and allied
activities
B. Mining 148.3 116.9 113.0 107.3 104.6 126.7
C. Manufacturing 7,307.7 9,757.6 10,207.5 9,041.9 11,058.7 11,879.7
D. Electricity, gas, steam 72 38.1 42.1 144.6 107.9 141.4
and air-conditioning
supply
E. Water supply, 9.9 9.4 6.7 11.1 162.3 185.1
sewerage, waste
management and
remediation activities
F. Construction 223.1 273.4 247.9 193.1 215.3 223.1
G. Services 3,659.2 5,014.0 5,908.7 6,731.0 8,542.5 10,041.0
Total 11,463.9 15,260.6 16,590.4 16,281.9 20,267.7 22,669.2
Number of foreign 6,144 7,485 8,032 8,326 8,557 10,215
subsidiaries included
Source: Annual Census on Foreign Liabilities and Assets of Indian Companies, various
years, RBI, available at [Link]
%20Census%20on%20Foreign%20Liabilities%20and%20Assets%20of%20Indian%20
Companies# (accessed 19 August 2018).

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Performance of FDI Companies 

for just a little more than half of the total sales of subsidiaries
of foreign companies. The growth of foreign subsidiaries in the
services sector is more impressive in absolute terms. In the period
for which the data is provided in Table 6.1, sales of the services
sector companies grew nearly three-fold, as against a 60 per cent
expansion in sales of the manufacturing sector companies. Another
important indicator of the ascendancy of services sector companies
was that in 2017–18, the number of firms belonging to this sector
was more than twice of those engaged in manufacturing. These
figures are consistent with our earlier findings about the sectoral
inflows of FDI, namely the growing presence of foreign investors
in the services sector.
In the manufacturing sector, motor vehicles, trailers and
semi-trailers accounted for nearly a fourth of the total sales of the
sector in 2017–18, while information and communication service
companies contributed to nearly half of the services sector sales.
Companies engaged in wholesale and retail trade gained in impor­
tance, accounting for over 30 per cent of the services sector sales.
Data on foreign trade of the foreign subsidiaries is presented
in Tables 6.2 and 6.3.
Foreign subsidiaries, taken together, ran trade surplus,
which was due to the large and growing exports of services. The
sectoral patterns mirrored the overall pattern of trade, with the
manufacturing and services sector companies recording trade
deficit and surplus, respectively.
Exports by foreign subsidiaries increased by over 70 per
cent from 2012–13, which was expected given that the share of
services sector companies was more than 67 per cent of the total
exports. Services exports were driven by the information and
communication sectors, accounting for nearly three-fourths of the
total exports of this sector, and nearly half of the total exports
by all foreign subsidiaries. While foreign subsidiaries engaged in

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 148  Understanding Foreign Direct Investment

Table 6.2: Exports of Foreign Subsidiaries, 2012–18 ($ Billion)

Sectors 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18

Manufacturing
Food products 1.5 6.1 2.9 2.7 1.0 1.0
Coke and refined 5.7 6.8 4.5 4.2 0.6 0.7
petroleum products
Chemicals and 1.6 1.9 1.5 1.4 1.7 1.8
chemical products
Pharmaceuticals, 1.7 1.8 1.8 1.6 3.1 3.4
medicinal and
chemical products
Computer, electronic 3.5 2.7 3.0 2.8 2.4 2.8
and optical products
Electrical equipment 1.7 1.6 1.7 1.6 1.7 1.5
Machinery and 2.1 2.6 3.6 3.3 2.9 3.3
equipment n.e.c.
Motor vehicles, trailers 6.4 7.1 6.6 8.4 9.5
and semi-trailers
Total manufacturing 28.3 37.4 40.3 28.1 30.8 34.4
Services
Wholesale and retail 2.1 2.5 4.3 4.0 5.0 6.7
trade, etc.
Transportation and 0.9 1.0 1.0 0.9 0.4 0.4
storage
Information and 27.8 32.8 42.2 39.4 48.3 55.1
communication
Financial and 1.1 1.1 1.6 1.5 1.8 2.2
insurance activities
Total Services 35.6 42.2 48.3 49.6 64.2 74.6
Total for all sectors 64.5 80.1 89.0 78.1 96.0 110.1
Source: Annual Census on Foreign Liabilities and Assets of Indian Companies, various
years, RBI, available at [Link]
%20Census%20on%20Foreign%20Liabilities%20and%20Assets%20of%20Indian%20
Companies# (accessed 19 August 2018).

services increased their exports by more than 70 per cent since

2012–13, those in the manufacturing sector registered a decline
in exports after peaking in 2014–15. While there is no discernible
trend in the total imports of the manufacturing companies, if the

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Performance of FDI Companies 

Table 6.3: Imports of Foreign Subsidiaries, 2012–18 ($ Billion)

Sectors 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18

Manufacturing
Food products 1.2 10.9 9.6 2.1 2.2 2.2
Coke and refined 13.0 12.1 10.1 5.1 0.3 0.6
petroleum products
Chemicals and 2.1 2.8 3.2 2.5 3.8 4.4
chemical products
Pharmaceuticals, 1.5 1.3 1.5 1.5 1.9 2.1
medicinal and
chemical products
Computer, electronic 3.4 8.8 7.0 8.1 8.0 11.0
and optical products
Electrical equipment 9.0 2.5 2.6 2.0 3.5 3.8
Machinery and 2.7 1.9 2.3 2.8 3.1 3.6
equipment n.e.c.
Motor vehicles, trailers 1.8 6.3 5.2 4.6 6.0 6.7
and semi-trailers
Total manufacturing 48.6 57.2 56.0 42.4 44.5 56.4
Services
Wholesale and retail 7.3 9.0 11.8 10.4 14.0 18.5
trade, etc.
Transportation and 0.4 0.4 0.5 0.4 0.2 0.2
storage
Information and 2.9 3.3 5.0 3.9 5.2 6.3
communication
Financial and 0.1 0.1 0.1 0.2 0.2 0.1
insurance activities
Total Services 11.5 13.8 18.5 16.5 20.8 26.9
Total for all sectors 60.9 71.9 75.3 59.8 66.3 84.8
Source: Annual Census on Foreign Liabilities and Assets of Indian Companies, various
years, RBI, available at [Link]
%20Census%20on%20Foreign%20Liabilities%20and%20Assets%20of%20Indian%20
Companies# (accessed 19 August 2018).

imports of coke and refined petroleum products are excluded,

there does appear to be a tendency to import more. Many
branches of manufacturing increased their imports. The increase
was, however, more substantial in case of electronics. Imports by

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 150  Understanding Foreign Direct Investment

services sector companies also increased substantially, with most

of the increase coming from trading companies.
The relative importance of the engagement of foreign subsidiar-
ies in trade can be seen by comparing their exports and imports with
their sales and purchases. Tables 6.4 and 6.5 provide the details.

Table 6.4: Share of Exports to Sales, 2012–18

Sectors/Industries 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18

Manufacturing 21.1 23.4 21.8 21.8 19.2 18.6
Food products 20.0 30.9 28.9 28.9 8.3 8.6
Coke and refined 33.5 40.0 42.4 42.4 41.5 26.1
petroleum products
Chemicals and 21.6 13.6 16.9 16.9 18.2 14.3
chemical products
Pharmaceuticals, 33.4 32.1 32.5 32.5 36.6 44.6
medicinal and
chemical products
Computer, electronic 12.4 17.2 19.0 19.0 19.5 15.9
and optical products
Electrical equipment 23.8 17.1 16.2 16.2 12.9 12.7
Machinery and 18.7 28.6 33.4 33.4 29.5 25.0
equipment n.e.c.
Motor vehicles, trailers 24.8 20.2 20.5 20.5 14.6 20.1
and semi-trailers
Services 52.9 51.5 48.9 48.9 48.0 47.9
Wholesale and retail 12.3 12.0 15.2 15.2 17.6 14.4
trade, etc.
Transportation and 33.8 33.9 26.3 26.3 23.7 22.9
storage
Information and 78.6 77.2 70.6 70.6 70.0 72.5
communication
Financial and 47.0 34.5 32.6 32.6 36.7 37.1
insurance activities
Note: Original figures in Indian rupees converted to US dollars using relevant market
exchange rates.
Source: Annual Census on Foreign Liabilities and Assets of Indian Companies, various
years, RBI, available at [Link]
%20Census%20on%20Foreign%20Liabilities%20and%20Assets%20of%20Indian%20
Companies# (accessed 19 August 2018).

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Performance of FDI Companies 

Table 6.5: Share of Imports to Purchases, 2012–18

Sectors/Industries 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18

Manufacturing 48.0 50.7 50.6 50.6 43.7 43.9
Food products 23.5 68.2 93.3 93.3 23.3 31.1
Coke and refined 79.1 81.5 68.8 68.8 79.2 49.6
petroleum products
Chemicals and 51.3 46.3 56.2 56.2 51.5 54.5
chemical products
Pharmaceuticals, 52.5 45.7 50.5 50.5 49.7 54.8
medicinal and
chemical products
Computer, electronic 52.7 78.6 85.3 85.3 80.6 88.0
and optical products
Electrical equipment 79.4 36.4 38.5 38.5 37.6 44.4
Machinery and 38.8 35.6 34.7 34.7 36.7 38.7
equipment n.e.c.
Motor vehicles, trailers 33.2 26.3 23.3 23.3 18.5 19.6
and semi-trailers
Services 36.3 35.1 30.9 30.9 29.2 31.1
Wholesale and retail 47.0 51.3 48.7 48.7 46.7 47.2
trade, etc.
Transportation and 25.9 25.1 19.4 19.4 16.9 14.7
storage
Information and 30.6 25.4 20.6 20.6 16.9 20.0
communication
Financial and 11.5 6.9 17.8 17.8 7.1 6.1
insurance activities
Source: Annual Census on Foreign Liabilities and Assets of Indian Companies, various
years, RBI, available at [Link]
%20Census%20on%20Foreign%20Liabilities%20and%20Assets%20of%20Indian%20
Companies# (accessed 19 August 2018).

Except for the companies in the pharmaceutical industry,

foreign subsidiaries operating in India’s manufacturing sector
had relatively low penetration in international markets. Overall,
companies in the manufacturing sector showed declining trends in
exports to sales, from close to a quarter of sales in 2012–13 to a fifth
in 2017–18. Nearly 45 per cent of the sales of foreign subsidiaries
in the pharmaceutical industry were in the international market,

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 152  Understanding Foreign Direct Investment

which is in keeping with the growing presence of companies based

in India in the global markets. In sharp contrast, the electronic
and electrical equipment manufacturers had increasingly turned
towards the domestic market.
The services sector was relatively more export-oriented;
nearly half of their sales were in international markets. Besides
companies in the information and communication sectors,
finance and insurance companies also had significant exposure to
the international markets in 2012–13; however, in the subsequent
years, the exports to sales ratio declined.
Imports had a significant share in the purchases of foreign
subsidiaries in manufacturing. The import to purchases ratio
across the sub-sectors speaks of the extent of their respective
import-dependence. For instance, for the electronics industry,
imports accounted for 88 per cent of their purchases. Chemicals
and pharmaceuticals industries also had large import-dependence,
the latter turning to China for their requirements of active
pharmaceutical ingredients for producing formulations.
The trends in exports and imports of the foreign subsidiaries
in the manufacturing sector companies show that these companies
could have played only a marginal role in the regional value chains.
In several industries, the companies were sourcing their purchases
from international markets, but their sales were clearly domestic
market-oriented. There is, therefore, some evidence to suggest
that foreign subsidiaries were, by and large, not supporting one of
the core objectives of Government of India to make India a hub
for manufacturing exports.

Analysis based on Annual Reports of FDI Companies

We analysed the performance of 265 FDI companies using the

data available from their annual reports for two years for which

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Performance of FDI Companies 

consistent data is available. The selected companies belong to

five industries, namely auto-ancillaries, automobiles, domestic
appliances, pharmaceuticals and electronics. The process of
identifying these companies is explained in Appendix 6.1.
Our analysis includes four facets of the FDI companies,
which are: trade transactions, payments in foreign exchange on
account of dividends as well as royalty, and spending on research
and development.
Export intensities of the selected companies, clustered
according to their main activities, are provided in Table 6.6.

Table 6.6: Export Intensity of Sample FDI Companies in

Select Sectors, 2013–14 to 2014–15

Industries No. of Exports of Goods Total Sales Share of

Companies and Services ($ Billion) Exports in Total
($ Billion) Sales (%)
Auto ancillaries 174 1,703.6 17,654.4 9.6
Automobile 13 3,842.0 23,293.6 16.5
Domestic 13 359.2 4,587.8 7.8
appliances
Pharmaceuticals 28 2,015.0 4,226.4 47.7
Electronics 37 1,476.0 11,693.8 12.6
All industries 265 9,395.8 61,456.1 15.3
Source: Based on data collected from Prowess and/or company annual reports
downloaded from the website of the Ministry of Corporate Affairs, Government of India.

Except for the companies in the pharmaceutical industry, FDI

companies had relatively low exposure to the international market.
As in the case of the foreign subsidiaries, the set of 265 companies
also showed the large participation of the pharmaceutical industry
in global markets.
As compared to their export intensities, import intensities of
the sample companies was significantly higher (Table 6.7).
FDI companies in the electronics industry had the highest
import intensities, which is expected, given the regional/global

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 154  Understanding Foreign Direct Investment

Table 6.7: Import Intensity of Sample FDI Companies in

Select Sectors, 2013–14 to 2014–15

Industries No. of Imports Total Sales Share of

Companies ($ Million) ($ Million) Imports in Total
Sales (%)
Auto ancillaries 174 3,251.5 17,654.4 18.4
Automobile 13 3,993.0 23,293.6 17.1
Domestic appliances 13 940.9 4,587.8 20.5
Pharmaceuticals 28 1,111.7 4,226.4 26.3
Electronics 37 5,491.5 11,693.8 47.0
All industries 265 14,788.6 61,456.1 24.1
Source: Based on data collected from Prowess and/or company annual reports
downloaded from the website of the Ministry of Corporate Affairs, Government of India.

sourcing of the parts and components by this industry. The degree

of import-dependence shown by this smaller sample of companies
is much lower than that shown by the subsidiaries of the foreign
companies, as reported by the RBI. In case of subsidiaries, however,
the import intensities were with respect to purchases.
Net foreign exchange earnings of the sample companies
are given in the Table 6.8. Expectedly, all industries, barring
pharmaceuticals, show net outflows of foreign exchange. The
37 FDI companies belonging to the electronics industry were
the highest net spenders of foreign exchange, including on the
invisibles account, which include dividends outgo.
Earlier, contribution of FDI companies in the area of technology
could be assessed in terms of their research and development
(R&D) intensities and through transfer of technologies. While the
former indicator can be assessed to the extent that the companies
report their R&D activities, the latter can partly be gauged by
analysing the royalty and lumpsum payments, which arise from the
use of proprietary technologies and/or other forms of intellectual
property rights, like trademarks, copyrights and designs.

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Performance of FDI Companies 

Table 6.8: Net Earnings in Foreign Exchange,

2013–14 to 2014–15 ($ Million)

Industries No. of Exports Imports Trade Other Net

Companies Balance Balances Earnings
Auto ancillaries 174 1,703.6 3,251.5 –1,547.9 –633.7 –2,181.6
Automobile 13 3,842.0 3,993.0 –151.0 –1,090.9 –1,241.9
manufacturers
Domestic 13 359.2 940.9 –581.8 –600.8 –1,182.6
appliances
Pharmaceuticals 28 2,015.0 1,111.7 903.4 –281.7 621.7
Electronics 37 1,476.0 5,491.5 –4,015.5 –268.1 –4,283.6
All industries 265 9,395.8 14,788.6 –5,392.8 –2,875.2 –8,268.0
Source: Based on data collected from Prowess and/or company annual reports
downloaded from the website of the Ministry of Corporate Affairs, Government of India.

Table 6.9 gives some indications about the R&D intensities of

the sample FDI companies.

Table 6.9: R&D Intensities of Sample FDI Companies,

2013–14 to 2014–15

Industries No. of Sales R&D R&D

Companies Turnover Spending Intensities
($ Million) ($ Million) (%)
Auto ancillaries 174 17,654.4 119.5 0.7
Automobile manufacturers 13 23,293.6 223.6 1.0
Domestic appliances 13 4,587.8 24.3 0.5
Pharmaceuticals 28 4,226.4 122.8 2.9
Electronics 37 11,693.8 8.1 0.1
All industries 265 61,456.1 498.2 0.8
Source: Based on data collected from Prowess and/or company annual reports
downloaded from the website of the Ministry of Corporate Affairs, Government of India.

The FDI companies in the sample had low spending on

R&D, except for those in the pharmaceutical industry. The most
surprising figures are for the 37 companies from the electronics
industry included in the sample, which, despite being in one of the
technology-intensive areas, spent a negligible amount on R&D.

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 156  Understanding Foreign Direct Investment

Table 6.10 helps in making a better assessment of the R&D

intensity of the sample companies.

Table 6.10: Detailed Break-up of R&D Intensity, 2013–14 to 2014–15

Range Auto Automobile Domestic Pharma- Electronics All

(%) Ancillaries Manufacturers Appliances ceuticals Industries
Nil 106 4 3 13 30 156
Less than 10 1 4 1 16
0.1
0.1 to 0.5 18 3 6 2 2 31
0.5 to 1.0 20 2 2 1 25
1.0 to 2.0 13 4 1 3 3 24
2.0 and 7 2 — 4 — 13
above
Grand 174 13 13 28 37 265
total
Source: Based on data collected from Prowess and/or company annual reports
downloaded from the website of the Ministry of Corporate Affairs, Government of India.

Table 6.10 shows that of the 265 companies, 156 (or nearly
60 per cent of the total) did not conduct any R&D. A further 72
companies had R&D intensity of 1 per cent or less, levels that are
sub-optimal. Only 13 companies had R&D intensity of 2 per cent
or more; these are the only companies that have some potential to
conduct meaningful research. FDI companies can, therefore, make
at most a very minor contribution towards the strengthening of
the technological base of India’s manufacturing sector.
Royalty payments by FDI companies are indicators of
their use of intellectual property like patents, trademarks and
copyrighted proprietary technologies owned by their parents,
affiliates or other companies. These payments can be interpreted
in two very different ways: one, they may be seen as indicators of
infusion of foreign technologies, and two, they can be interpreted
as technological dependence, if royalty payments are continuously

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 157
Performance of FDI Companies 

made. Royalty payments are an important source of extraction of

economic rent by the owners of intellectual property, and such
payments can become a source of economic drain, if they persist
over long periods.
India has seen growing concern regarding royalty payments
because of a steep increase in such payments in recent years. RBI
has reported that during the past decade, payments to owners of
intellectual property have increased nearly seven-fold, from about
$1 billion to $7 billion (Figure 6.1). The rate of increase remained
unabated in 2018–19; in the first six months of that year, the
payments crossed $4 billion. It may be mentioned here that the
government had removed the limits on royalty payments in 2009.3

Figure 6.1: Charges for the Use of Intellectual Property, 2007–18

8,000
7,000
6,000
$ Million

5,000
4,000
3,000
2,000
1,000
0
2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14

2014–15

2015–16

2016–17

2017–18

Source: Handbook of Statistics on Indian Economy, various years, RBI, available at

[Link]
Statistics%20on%20Indian%20Economy (accessed 21 August 2018).

In this context, it would be useful to consider the royalty

payments made by large FDI companies in recent years. In many
of these companies, especially in Microsoft, Samsung, Hyundai
and Hindustan Unilever, royalty payments increased significantly.
Aggregate payments by these companies increased by 76 per cent

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 158  Understanding Foreign Direct Investment

during 2013–14 to 2017–18. The payments in 2017–18 were, in

fact, double of those in 2012–13 (Table 6.11).

Table 6.11: Estimated Royalty Payments by Select FDI Companies,

2012–18 ($ Million)

FDI Companies 2012– 2013– 2014– 2015– 2016– 2017– Total

13 14 15 16 17 18
Maruti Suzuki India Ltd 484.0 436.7 479.4 530.2 583.7 620.6 3,134.6
Microsoft Corporation 0.4 166.4 270.8 392.3 523.8 551.8 1,905.5
(India) Pvt. Ltd
Oracle India Pvt. Ltd 270.2 261.4 318.5 295.8 368.5 404.2 1,918.6
Samsung India 54.4 89.1 237.9 293.6 374.6 398.6 1,448.2
Electronics Pvt. Ltd
Sap India Pvt. Ltd 185.0 176.6 184.1 198.9 237.5 261.8 1,243.9
Hyundai Motor India 79.3 77.7 118.0 138.4 143.0 158.0 714.4
Ltd
Hindustan Unilever Ltd 68.3 84.3 116.4 130.6 101.6 100.4 601.6
Honda Cars India Ltd 50.6 75.1 114.2 93.5 83.5 90.3 507.2
Toyota Kirloskar Motor 58.5 59.0 63.2 57.0 99.3 103.1 440.1
Pvt. Ltd
Renault Nissan 30.8 41.9 79.9 68.5 82.0 65.9 369.0
Automotive India Pvt.
Ltd
Nokia Solutions & 16.2 54.0 72.0 114.9 11.6 49.5 318.2
Networks India Pvt.
Ltd
Nestle India Ltd 52.8 49.9 56.0 45.6 53.3 65.0 322.6
ABB India Ltd 43.9 41.5 42.4 56.4 54.5 59.5 298.2
Procter & Gamble 35.9 35.6 39.8 35.8 33.3 36.8 217.2
Home Products Pvt.
Ltd
Ford India Pvt. Ltd 17.0 15.2 21.5 48.0 74.5 75.9 252.1
JCB India Ltd 37.2 30.4 26.2 31.2 42.0 76.8 243.8
Reckitt Benckiser 28.1 28.2 29.1 31.6 36.1 37.6 190.7
(India) Pvt. Ltd
LG Electronics India 28.9 27.3 30.0 29.2 32.6 36.4 184.4
Pvt. Ltd

(Contd)

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Performance of FDI Companies 

Table 6.11 (Contd)

FDI Companies 2012– 2013– 2014– 2015– 2016– 2017– Total

13 14 15 16 17 18
Colgate-Palmolive 26.4 27.2 30.1 29.4 27.4 28.8 169.3
(India) Ltd
Dassault Systems N.R. 29.5 30.6 33.6 40.2 40.7 174.6
India Pvt. Ltd
John Deere India 21.3 27.0 26.1 29.4 29.6 25.4 158.8
Pvt. Ltd
Bosch Ltd 27.0 22.0 29.8 23.9 24.9 32.5 160.1
IBM India Pvt. Ltd 28.5 24.6 23.1 23.4 25.5 25.0 150.1
GlaxoSmithKline 20.1 26.6 23.0 23.1 22.2 22.1 137.1
Consumer Healthcare
Ltd
Total 1,664.6 1,907.3 2,461.8 2,754.3 3,095.0 3,366.7 14,486.9
Source: Prowess database and Annual Reports of Companies. Converted from the
corresponding rupee values using the rates applied by Prowess.

Appendix 6.1: Selection of Companies

Researchers face many, and most often, insurmountable obstacles

in studying the Indian corporate sector. Given that an overwhelm­
ing part of the FDI is invested in companies registered under the
Companies Act, studies of their role and place in the economy
also suffer from the limitations of the system. Studies about
the impact of FDI are generally based on identifying small sets
of companies selected from popular corporate databases like
Prowess from the Centre for Monitoring Indian Economy (CMIE),
and Capitaline. Given the major differences in the characteristics
of foreign investors described in the foregoing discussion, the
sectors invested in and the modes of entry (for example, M&A
versus greenfield), it is obvious that observed relationships based
on the aggregates can never be robust.

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 160  Understanding Foreign Direct Investment

These popular databases are primarily focused on the

companies listed on the stock exchange. While they do include
other companies, their inclusion does not follow any systematic
procedure. Even though corporate filings have been made in
electronic form for some years now, the system is, so far, not
geared to respond to analysis of many of the critical attributes of
the sector. Changes in the reporting format have compounded the
problem further, and made locating relevant data in the filings,
and making comparisons over time, increasingly difficult.
For a long time, transactions in foreign exchange were
reported in a set format under clearly identifiable categories. The
main items of expenditure in foreign exchange were exports and
imports, receipts and payments on account of dividends, royalty,
know-how, professional and consultancy fees, and interest. This
vital information, however, finds no place in the new format.
While companies are required to report earnings and expenditure
in foreign exchange in the report of the board of directors, they do
not follow any standard pattern.
This was the background in which we had to carry out the
exercise of tracing performance indicators of FDI companies
included in the earlier discussion. Of the 1,480 companies
classified under the selected industries and each having at least
$1 million total income during 2013–14, the Prowess database
identified 126 companies as having foreign equity holdings.
In view of the inconsistencies in the reporting of data, espe-
cially of transactions in foreign exchange described earlier, it was
also decided to reconfirm in case of missing entries. Company
classification was also rechecked by referring to publicly available
shareholding patterns of listed companies, and annual reports
downloaded from the website of the Ministry of Corporate Affairs.
Following this exercise, several companies were included as
FDI companies, while some others had to be dropped because the

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 161
Performance of FDI Companies 

relevant details were missing. Gaps regarding royalty payments

were filled using the information available in the company
annual reports, directly or as part of the disclosures under related
party transactions.
This exercise helped us identify 265 FDI companies with rea-
sonably reliable data on indicators used in the foregoing discussion.

Notes

1. Companies registered with the Ministry of Corporate Affairs are

required to submit their annual reports.
2. Prowess is a database of the financial performance of companies.
Annual reports of companies, stock exchanges and regulators are the
principal sources of the data. The database is produced by the Centre for
Monitoring Indian Economy (CMIE).
3. Before 2009, payment of royalties under foreign technology
collaboration did not require government approval as long as the
payment was up to $2 million and the royalty payments were 5 per cent
of domestic sales and 8 per cent of export values. The Liberalisation of
Foreign Technology Agreement policy, notified by Press Note No. 8 of
2009, removed this cap.

Reference

IMF. 2015. ‘Coordinated Direct Investment Survey Guide’. Washington, D. C.

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 seven

Summary and Conclusions

T his book has been written with two objectives. One, to situate
FDI in the development discourse in the post-colonisation
period by explaining the evolution of FDI from the early 1950s,
and to thereby understand the characteristics of an important
component of North–South financial flows. Alongside this
narrative, we have also given a perspective on the functioning of
the organisational manifestation of FDI, namely the TNCs. The
second objective was to discuss and discover India’s tryst with FDI
during the phase when successive governments invited FDI to be
a partner in the country’s progress.
In the early years of the post-colonisation phase, covering
the 1950s, developing countries had a somewhat divided opinion
about this source of finance. While these countries themselves
recognised that FDI may be useful for financing their developmental
needs, several scholars writing in this period commented on the
exploitative character of the foreign companies, which could
stymie the progress of these countries. On the other hand, the
main source of FDI in these years, the US, was actively engaged in
encouraging its private investors from investing abroad, including
in the then underdeveloped regions of the world.
The trend was thus set for FDI to be closely linked to the
directions provided by the largest creditor country, the US. In the
1950s, the US government was keen to maximise the returns to

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 163
Summary and Conclusions 

capital when it was running a surplus on its current account, but

in the following decade, it turned against American companies
investing abroad when its economy began leaking capital. Desper-
ate to prevent the loss of confidence in the dollar and, therefore,
its hegemonic role in the Bretton Woods system, the US imposed
controls on FDI. Thus, began a phase of relative decline of FDI
in the global capital markets, a trend that was exacerbated in the
1970s, when private capital, particularly bank finance, became
the dominant form of international capital flows.
FDI gained ground following the developing-country debt
crisis in the 1980s, when it was involved in buying out debts of
the heavily indebted developing countries in a number of swap
deals. This led to its emergence as a key element in the framework
of economic reforms of developing countries, more commonly
known as the Washington Consensus, promoted by the World
Bank and IMF. As part of this framework, developing countries,
which had earlier followed a regulated regime for FDI, began
pursuing open-door policies.
One of the important elements of this book has been the
discussion on the evolution of the concept of FDI. We pointed out
that the definition of FDI, or how direct investment companies
are identified, has changed several times over the past many
decades. The common understanding of FDI is that this form
of capital exerts control or a significant degree of influence over
the enterprise it invests in the host country. This is the distinct
feature of FDI, one that sets it apart from portfolio investment.
‘Control’ was seen to be exercised through the ownership of
equity capital or voting shares of the direct investment enterprise.
The link between ownership and control was established in the
US, where 25 per cent or more of the equity capital owned by a
foreign enterprise was identified as direct investment. The IMF,
too, recognised that ‘ownership of 25 per cent of the voting stock

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 164  Understanding Foreign Direct Investment

by a closely organised group of non-residents, may be taken as

evidence of direct control’ (IMF 1961: paragraph 373).
In subsequent decades, two significant changes were intro­
duced for the purposes of identifying a direct investment enter­
prise. This revised template for identifying FDI was given by the
OECD in 1983 (IMF 1992: 24) and later endorsed by the IMF
in BPM5 (IMF 1993: 86). First, the extent of foreign ownership
deemed necessary for exercising control over an enterprise was
reduced from the earlier 25 per cent to 10 per cent of equity
capital of an enterprise. Second, other than foreign investments
in equity capital for setting up enterprises, FDI now included two
other funding mechanisms used by the foreign investors in their
host countries. These were reinvested earnings of existing direct
investment enterprises and inter-corporate loans.
FDI flows entered a new trajectory of expansion from the
1990s, after developing countries embraced the policies of
economic liberalisation. The real expansion of FDI took place
from the beginning of the new millennium, when average annual
inflows for the decade of the 2000s crossed the $1.5-trillion mark.
The financial crisis in the closing years of the decade impacted
the inflows, but once the capital markets overcame crisis mode,
inflows got their momentum back. In the first seven years of this
millennium, average annual inflows got closer to the $3-trillion
mark. However, there are indications that FDI inflows have
declined in 2017, largely on account of a dip in inflows into the
developed country regions.
An interesting tendency seen in the total foreign investment
inflows, which includes FDI, portfolio investments and other
investment inflows, including derivatives, is that until the current
decade, FPI had the largest share in the inflows. This tendency
has been reversed in the decade of the 2010s, with FDI topping

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 165
Summary and Conclusions 

portfolio investments. What could explain this phenomenon?

One likely explanation is that since the previous decade, a larger
number of developing countries have adopted the OECD–
IMF definition of FDI; for instance, India formally adopted the
methodology in the early years of the 2000s. But it is also a fact
that authorities in many jurisdictions do not strictly adhere to
the OECD–IMF methodology and, therefore, count most foreign
investments (including portfolio investments) as FDI. This feature
of FDI statistics is a major lacuna in understanding the real
importance of FDI in today’s economic dynamics.

India’s Tryst with FDI

India’s tryst with FDI began immediately after the country attained
political independence. Starting with the statement of Prime
Minister Nehru on foreign investments in 1949, to the adoption of
the Industrial Policy Resolution in 1956, Government of India gave
foreign investors the opportunities to participate in the country’s
industrialisation. In subsequent decades, several key policies
on FDI, including the controversial FERA of 1973, performed
the important task of defining the scope of foreign investment,
thereby lending a sense of predictability to the foreign investors.
Not surprisingly, many companies with significantly high levels of
foreign participation in equity capital expanded after FERA was
included in the statute book.
Over the two decades spanning the 2000s and 2010s, India
has emerged as one of the most attractive destinations for FDI.
This is the outcome of a complete turnaround in the policies
governing FDI, which changed from mildly encouraging foreign
investors in earlier decades to warm embrace from the mid-1990s.

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 166  Understanding Foreign Direct Investment

By the government’s own admission, India has one of the most

foreign investor-friendly policies in the world (Government of
India 2017b).
The first signs of this metamorphosis of India’s FDI policy
came with the unveiling of the IPS almost immediately after
the economic liberalisation policies were introduced in 1991.
This statement spoke of FDI as the key agent of change; the
government expected that foreign investors would help overcome
the lack of dynamism in India’s manufacturing sector. The tone of
the government policies vis-à-vis FDI which was set in the 1990s
reverberates even more in many of the key policy pronouncements
of the successive governments.
In an attempt to revive the manufacturing sector in the
previous decade, the then government took far-reaching steps to
invite FDI into India. Foreign investors were increasingly allowed
to enter without even minimal review, reversing the earlier policy
of subjecting these investors to a limited review, with a few
exceptions, before they could bring in their funds. The limited
review, which was essentially in the nature of oversight functions,
was performed by the FIPB, established after the announcement
of the IPS of 1991. Having progressively diluted the FIPB,
Government of India finally decided to dismantle the organisation
in 2017 (Government of India 2017a: paragraph 96).
The sectors in which FDI was positioned as a critical element
for their upgradation and development, by successive governments
in the 2010s, included defence and retail. Thus, restrictions on the
entry of FDI into the defence sector were progressively relaxed,
eventually rendering this sector of strategic importance as one of
those most open to FDI. A similar roadmap was laid out for the
retail sector, but in the crucial sub-sector of multi-brand retail,
stakeholder opposition stymied the entry of foreign firms.

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 167
Summary and Conclusions 

Understanding and Interpreting India’s Inflows

The success of the ‘Make in India’ initiative, the most ambitious
programme, adopted in 2014, to modernise the manufacturing,
services and infrastructure sectors, was also predicated on sub­
stantial inflows of FDI. Similar was the thrust of another proposed
policy initiative, the ‘Industrial Policy’; FDI was given a key role in
the implementation of this policy as well, so much so that despite
expressing dissatisfaction over FDI’s contribution, it proposed to
attract $100 billion annually.
Since the 1990s, therefore, Government of India has consis­
tently signalled that it is almost completely dependent on FDI for
making the country’s manufacturing and services sectors globally
competitive. Do we have evidence that foreign investors have
responded to the government’s priorities?
Assessing the response of foreign investors to the policy
changes brought by the government is a daunting task, largely
because the database provided by the two official agencies, namely
the RBI and DPIIT, have a number of limitations. In the 1990s, FDI
data initially comprised only equity investments made by foreign
investors. And from 2000–01, the coverage of FDI was expanded
to include, in addition to equity capital, retained earnings of FDI
companies (reinvested earnings) and ‘other direct capital’ (inter-
corporate debt transactions between related parties, in other
words, between direct investors, and subsidiary branches and
associates). Data on equity capital includes equity of incorporated
as well as unincorporated entities. These changes were introduced
in keeping with the OECD–IMF definition of FDI. With the
official agencies frequently changing the criteria for identifying
FDI and the reporting format, inter-temporal comparisons are a
difficult task.

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 168  Understanding Foreign Direct Investment

But the more problematic aspect of the available FDI data is

that although the RBI spoke of presenting the data in accordance
with ‘international best practice’, the organisation has also
informed subsequently that the present definition being used to
classify FDI in India is at variance with the OECD–IMF definition,
which recommends 10 per cent as the share in equity holding
for defining FDI. The threshold limit of 10 per cent is not strictly
adhered to, clarifies the RBI. This clarification is very significant,
for it lays bare one of the fundamental problems with India’s FDI
data, namely that the distinction between direct and portfolio
investment can be, at best, fuzzy.
The regulatory mechanism for foreign companies, existing prior
to 1991, could lie at the root of this problem. Under this mechanism,
the participation of foreign companies could be in two forms:
foreign financial collaboration and foreign technical collaboration.
Foreign investments routed through financial collaborations were
recorded, and the extent of foreign participations in total equity of
existing or proposed companies registered in India was not usually
clarified. This manner of capturing the financial contribution
of foreign companies in existing or proposed Indian companies
has continued even after the change in the definition of FDI was
officially incorporated from 2000–01. Our analysis of FDI inflows,
too, was based on this less-than-perfect database.
FDI inflows into India expanded rapidly after the mid-
1990s, reaching $3.5 billion in 1997–98, just as the east Asian
financial crisis was taking the global capital markets downhill.
This data informs us that fuels and telecommunications were
the two sectors that the foreign investors favoured; these sectors
accounted for more than 60 per cent of the total investment that
the government had approved. The sources from which India was
receiving inflows were diverse in the early years of the 1990s, but
in the later years, the share of tax havens like Mauritius increased.

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 169
Summary and Conclusions 

These two characteristics of FDI inflows in the 1990s, namely the

larger share of the non-manufacturing sectors and the dominance
of tax havens, could be seen in the subsequent phases as well.
The adoption of the international best practice and inclusion
of the additional categories of funds invested by foreign investors
did result in an increase in the reported FDI inflows, but it was
only in 2004–05, that they were distinctly higher than the levels
reached in the earlier decade. In the following years, FDI inflows
went up to $22 billion in 2006–07 and then further to $42 billion
in 2008–09, even when the global capital markets were facing one
of the worst crises.
Sectoral inflows in this period were skewed towards the
services sector, a trend that would remain in the following decade
as well. Although the government of the day began emphasising
on the need to revive the manufacturing sector, direct investors
did not respond adequately. This trend repeated itself even when
the government, in 2014, introduced the most ambitious policy
focused on the manufacturing sector in nearly six decades since
the announcement of the Industrial Policy Resolution in 1956.
Identified tax havens were the main sources of FDI. These
countries continued to channelise funds to major economies like
India, even when the OECD and the Group of Twenty (G-20)
countries were engaged in developing mechanisms to limit their
stranglehold over global capital markets. This practice not only
indicates the possible loss of tax revenues, it also prevents assessing
the host-country responses to India’s efforts at attracting FDI.

Quality of the Inflows

In the 2010s, FDI inflows into India reached record levels, going
beyond $60 billion. The country had leap-frogged to a position
among the group of countries which, from the point of view of

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 170  Understanding Foreign Direct Investment

the foreign investors, were attractive destinations. However,

serious questions about the utility and reliability of these inflows
are beginning to surface. Our detailed research into the essential
character of the FDI inflows into India has shown that only about
half of the inflows could qualify as real-FDI, that is, they could
potentially be the providers of the ‘package of development
inputs’, the critical intangibles like technology and managerial
skills, besides capital. This finding is consistent with the fact that
the RBI, following the international best practice, does not identify
if the intra- and inter-corporate investments coming from abroad
are indeed FDI.
A second worrisome territory that FDI has entered in recent
years is divestment or repatriation of capital. In 2017–18, divest­
ment was almost a third of the total inflows, and nearly half of
the equity inflows for the year. This implies that there has been a
sharp erosion in the net inflows of FDI.
Even if Indian policymakers were aware of the meaning and
purpose of caps on foreign shareholding, it did not get reflected in
the way the caps were implemented. Further, progressive dilution
of the caps leaves one wondering what objectives the caps were
expected to serve. This was more so when the possibilities of
further diluting the FDI policy with respect to the manufacturing
sector were practically exhausted after 2000. Categorisation of
foreign investments for policy purposes (as distinct from statistical
purposes), and the way indirect FDI was defined, further suggest
that they were driven by short-term exigencies rather than being
the result of a well-designed strategy.
Analyses of participation of FDI in the Indian economy
showed that there were at least two counts on which the country
was not able to secure long-term benefits. First, official data on
approvals of FDI proposals up to 2001, and those on actual FDI
inflows for the subsequent period, showed that foreign investors

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Summary and Conclusions 

preferred investing especially in the services sectors. However, the

focus of the government’s policy was on attracting FDI for reviving
the manufacturing sector, which is an important development
objective. Second, India started looking for FDI to meet the CAD
instead of its other specific attributes, especially technology for
upgrading the productive sectors to make them competitive.
Growing disinvestments could be directly related to the major
involvement of financial investors and the role of M&As. The non-
specific and liberal definition of FDI and its active promotion by
the international agencies are at the root of this problem.
India’s experience of FDI inflows since the 1990s can perhaps
be summed-up as follows: the State treated these inflows as their
partners to provide competitive strengths to the productive sectors
and, therefore, offered them concessions, but the foreign investors
were more interested in extracting the concessions from the
State without being the true partners of the kind that the Indian
State needed.

References

Government of India. 2017a. ‘Budget 2017–2018: Speech of Arun Jaitley,

Minister of Finance’. 1 February.
. 2017b. ‘Foreign Direct Investment Inflows: A Success Story’. Ministry
of Commerce and Industry, 19 May. Available at [Link]
[Link]?PRID=1490278 (accessed 12 May 2018).
IMF. 1961. ‘Balance of Payments Manual’, third edition. Washington, D. C.
. 1992. ‘Report on the Measurement of International Capital Flows’.
Washington, D. C.
. 1993. ‘Balance of Payments Manual’, fifth edition. Washington, D. C.

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 Annexure: Tax Havens Identified by
the European Union (EU) and Oxfam

Oxfam EU’s Blacklist EU’s Greylist

Albania American Samoa Albania Malaysia
Anguilla Bahrain Andorra Maldives
Antigua and Barbados Armenia Mauritius
Barbuda
Bahamas Grenada Aruba Montenegro
British Virgin Guam Belize Morocco
Islands*
Cook Islands Korea (Republic of) Bermuda Nauru
Gibraltar Macao SAR Bosnia New Caledonia
Jersey Marshall Islands Botswana Niue
Singapore Mongolia Cabo Verde Oman
US Virgin Islands Namibia Cayman Islands Peru
Palau Cook Islands Qatar
Panama Curaçao Saint Vincent
Saint Lucia Faroe Islands San Marino
Samoa Fiji Serbia
Trinidad and Tobago Former Yugoslav Seychelles
Republic of Macedonia
Tunisia Greenland Swaziland
United Arab Emirates Guernsey Switzerland
Herzegovina Taiwan
Hong Kong SAR Thailand
Isle of Man The Grenadines
Jamaica Turkey
Jersey Uruguay
Jordan Vanuatu
Labuan Island Vietnam
Liechtenstein
Note: * Indicates that the jurisdiction has been identified as a conduit tax haven.
Sources: Oxfam, ‘Blacklist or Whitewash?: What a Real EU Blacklist of Tax Havens Should
Look Like’, 27 November 2017, available at [Link]
or-whitewash-what-real-eu-blacklist-tax-havens-should-look (accessed 5 September 2018);
Council of the European Union, ‘The EU List of Non-cooperative Jurisdictions for Tax
Purposes’, ECOFIN 1088, 5 December 2017.

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