1. • FOREIGN DIRECT INVESTMENT (FDI)

2. DEFINITION :
• “Foreign direct investment occures when an
investor based in one country acquires assets
in another country with the interest to manage
the asset.”
• Foreign direct investment is investment of
foreign assets into domestic structures,
equipment, and organizations. It does not
include foreign investment into the stock
markets.

3. THEORIES OF FDI
1. THEORY OF IMPERFECT MARKET :
The firms having comparative technological
or organizational advantage invest abroad to
gain firm specific advantages
2. PRODUCT LIFE CYCLE THEORY :
The product life cycle theory tries to explain
that when the product reaches the maturity
stage the firm starts investing abroad
to low cost production areas

4. 3. INTERNATIONALISATION :
Firms invest abroad in order to retain inside
the group the firms competitive advantage
4. ELECTIC THEORY OF FDI :
According to this theory it is not possible for a
single theory to explain all forms of
multinational strategies as there are a
wide range of factors that influence FDI
decision

5. Factors influencing :
A. Ownership advantages :
It arise due to the firm owning a special
knowledge or because of economies of scale or
due to monopolistic advantage
B. Locational advantages :
It is due to location bound endowments enjoyed
by a firm
C. Internationalization advantage :
It refers to the extent to which the firm can
market its advantages within the various units of
the firm

6. WHY DO FIRMS INVEST ABROAD ?
• To reduce cost of production
• To have diversified sourcing facilities
• To increase volume of sale
• To promote knowledge sharing
• To retain domestic customers

7. FDI STRATEGIES :
• BRANCHES :
Parent company open up branches in foreign
country
• JOINT VENTURE :
It is a partnership between the foreign and
domestic company where the partnership
firms share equity and a new firm is formed
Eg : Vodafone’s purchase of 52% stake in Hutch
Essar for about $10 billion

8. EXAMPLES :

9. • WHOLLY OWNED SUBSIDIARY :
If the foreign investment is equal to the
entire equity capital it is called as a wholly
owned subsidiary

10. Examples :

11. • MERGER :
A merger is a combination of two or more
companies being merged into an existing
company or a new company may be formed
Eg : Reliance Petrochemicals Ltd. Merged with Reliance
Industries Ltd. In 2010
• ACQUISITION AND TAKEOVER :
Acquisition is a simple act of acquiring control
over the management of other companies
Eg : HDFC Bank acquisition of Centurion Bank of
Punjab for $2.4 billion

12. BENEFITS OF FDI
• FDI supplements domestic capital
• Availability of scarce factors of production
• Improvement in Balance of Payment
• Influence on foreign trade
• Development of social and economic
infrastructure
• FDI promotes research

13. ARGUMENTS AGAINST FDI
• Capital flow may not be real :
FDI may not bring fresh capital if the foreign
company purchases equity financed by
domestic lenders.
• Obsolete and mismatched technology :
The technology being brought by the MNCs is
one that run its course in the home country
and has been rendered obsolete

14. • FDI may cause in loss of competition :
When FDI is through mergers and acquisition
, it may reduce competition in the host
country
• Exploitation of resources

15. FDI IN INDIA
• Foreign Direct Investment (FDI) is permitted as
under the following forms of investments –
1. Through financial collaborations
2. Through joint ventures and technical
collaborations
3. Through capital markets via Euro issues
4. Through private placements or preferential
allotments

16. • FDI is not permitted in the following industrial
sectors :
1. Arms and ammunition
2. Atomic Energy
3. Railway Transport
4. Coal and lignite
5. Mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamonds, copper, zinc

17. FDI-TOP INVESTERS IN INDIA
MAURITIUS 38 %
SINGAPORE 10 %
U.K 9 %
JAPAN 7 %
U.S.A 6 %
NETHERLANDS 4 %
CYPRUS 4 %
GERMANY 3 %
FRANCE 2 %
U.A.E 1 %

18. FDI - LEADING SECTORS
SERVICES SECTOR 19 %
TELECOMMUNICATIONS 7 %
CONSTRUCTION ACTIVITIES 7 %
COMPUTER SOFTWARE & HARDWARE 7 %
HOUSING & REAL ESTATE 7 %
CHEMICALS 6 %
DRUGS & PHARMACEUTICALS 5 %
POWER 4 %
AUTOMOBILE INDUSTRY 4 %
METALLURGICAL INDUSTRIES 4 %