1. Foreign Direct Investment 27th Jan,2011 Presentation By- DhananjayKale AFMI, Mysore

2. Outline - Definition Forms of FDI Reasons for FDI in India FDI Approval Permitted & Prohibited sectors for FDI Government attitude towards FDI Effects on host country Effect of FDI on domestic productivity Advantages of FDI conclusion

3. Definition - FDI- Foreign Direct Investment is the purchase by the investors or corporations of one country of non-financial assets in another country. This involves a flow of capital from one country to another to build a factory, purchase a business or buy real estate. OR company from one country making a physical investment into building a factory in another country.

4. Forms of FDI - Green-Field Investment establishing a new operation in a foreign country Acquiring or Merging (or joint venture) with an existing firm in the foreign country can be a minority, majority or outright stake of firm

5. Reason for FDI in India - Stable democratic environment over the 60 year of independence. Large and growing market World class scientific, technical and managerial manpower. Cost effective highly skilled labor. Abundance of natural resources.

6. Cont….. Well established legal system with independent judiciary. Developed banking system with vibrant capital market. One of the fast growing economy and top three investment hot spot in world.

7. FDI Approval in India - FDI approved in India through three route – Automatic approval by RBI The FIPB route CCFI route

8. FDI Approval Procedure Government Route for few sectors Automatic Route in most Sector RBI FIPB No permission required, only to notify RBI within 30 days of issue of shares to foreign investors Approval is granted generally in 30 days 8

9. Permitted through - Financial collaboration Joint venture and technical collaboration Capital market Branch office with approval of RBI

11. Prohibited sector for FDI - Gambling and betting Lottery business Atomic energy Retail trading Agriculture or Plantation Activities in Agriculture Railway Arms and animation Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

13. During 70s MNCs were commonly seen by many economists and policy makers as detrimental to the host economies, because: They were thought to create Monopoly situations.

15. Most host economies have reduced barriers to FDI, and many industrializing countries have created infrastructure and special concessions to attract it

18. 17 Wages Some studies find that MNC pay higher prices for people with higher education (higher quality), while for blue collar differences are minimal Why would a firm pay more wages than its competitors in the host country? Host country regulations or home country pressures To maintain “good public relations” with local government and host environment It pays a premium for reducing turn-over To attract better workers

19. 18 Productivity Productivity indicates how efficient is the production process – i.e. how much output a firm produces given its inputs Economists generally assume that MNC have higher productivity than domestic firms, especially in developing countries Several studies document this in a number of developing countries (E.g. Brazil,Indonesia, Mexico, India etc.)

20. 19 Productivity Spillovers Positive: When the increase of FDI in an industry leads to an increase in productivity of domestic firms in the same industry (horizontal spillovers) or in industries that are vertically connected (vertical spillovers) Negative: When the increase of FDI in an industry leads to an decrease in productivity of domestic firms in the same industry (horizontal spillovers) or in industries that are vertically connected (vertical spillovers)

21. 20 Positive Productivity Spillovers Locally- owned firms might increase their efficiency by: Copying the operations of the foreign- owned firms; Being forced by competition from foreign- owned firms to raise their efficiency to survive Qualify and improve the skills of local human resources The transfer of knowledge through backward linkages with domestic suppliers

23. Higher productivity

24. Lower prices for a better quality products

26. 23 Why in some cases there are effects and in others not?

27. 24 The capabilities of domestic firms Even to adopt and imitate countries and firms need a minimum of absorptive capacity Human resources (training, education) Investment in experimentation, R&D

28. 25 2. Behaviour of MNC subsidiaries Economists almost always conceive MNC subsidiaries as having ‘advanced’ skills/ technologies with respect to domestic firms Economists also assume that R&D is centralised in the Headquarters and that subsidiaries are just a ‘passive’ local branch of the MNC

29. 26 3. National Policies Is there a need for governments to promote actively the creation and deepening of linkages? …Markets may fail to create efficient linkages, raising the cost to both parties of entering into long-term supply relationships and reducing the ability of domestic firms to become competitive suppliers Rules of origin/Local content requirements: preferential treatments based on the level of value added or local content Example: the entry of Suzuki in Hungary was done to enjoy duty-free access for car exports to the EU, and it was subject to the creation of local linkages

30. 27 Exports and new industries MNC can have two further effects: Export Spillovers: Because they on average export more than local firms, they generate export spillovers on domestic firms Generation of new industries: The case of Ireland and Costa Rica and the generation of new high tech industries

31. INDIA:YEARWISE FDI INFLOWS

32. INDIA:YEAR WISE FDI INFLOWS

33. Advantages - Increase in domestic employment Increase investment in needed infrastructure Increase capital investment Target regional & sartorial development Improve forex position of the country Increase in export Increases tax revenue

34. Conclusion - FDI is a key driver of economic growth and development Foreign firms do generate technological development in the host country. Crowding out is not a major problem Benefits increases in terms of competition, innovation and efficiency.

35. Literature cited- RBI Monthly Bulletin December-2010 Page no.- S1324. Wikipedia. www.fdi.com www.rbi.org.in