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PROJECT REPORTON

FOREIGN DIRECTINVESTMENT IN INDIA

Subject: MANAGERIAL ECONOMICS

SUMITTED TO: SUMITTED BY:Dr. TAPAN KUMAR NAYAK JASMIT KAUR 010065

MD.AZAM IMAM 010081

MD.ANWAR KHAN 010083 NEHA SHARMA 010088 PAPIYA SINGH 010098 RAHUL PRAJAPATI 010115

INSTITUTE OF MANAGEMENT STUDIES GHAZABIAD

DECLARATION

We hereby declare that the Project Report entitled “Foreign Direct Investment In India “is an original and independent work prepared by us under the esteemed guidance of Dr.Tapan Kumar Nayak Associate Professor of Economics and Associate Chairperson-PGDM IMS Ghaziabad.

We further declare that we have not submitted this Project Report to any other institution for award of any degree and indebtedness to any other publication has been duly acknowledged at relevant places.

Date: Signature:

Place:

(i)

CERTIFICATE

It is certified that JASMEET KAUR, MD. AZAM IMAM, NEHA SHARMA, PAPIYA SINGH, RAHUL PRAJAPATI has been allotted the topic “ FDI(FOREIGN DIRECT INVESTMENT) IN INDIA” in MANAGERIAL ECONOMICS towards the partial fulfilment of PGDM 1st trimester course.

SIGNATURE OF TEACHER:

DATE: - 30th September, 2010 Dr.Tapan kumar Nayak AssociateProf.E

conomics

(ii)

We would like to acknowledge and extend our heartfelt gratitude to the following persons who have made the completion of this project possible:

Our subject teacher Dr. Tapan Kumar Nayak and Mr. Sanjay Kumar Mangla for their vital encouragement, support and for the help and inspiration they extended.We are thankful especially to our friends for their understanding and assistance.

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ABSTRACT

FDI is the investment done by foreign companies by purchasing land, equipments, building and other essential fixed assets along with securities in another countries.In India, FDI started after liberalization of Indian economy in 1991.

The importance of FDI in India is to develop the entire economic structure which leads to technological advancement, generation of employment, increment in the investment and enhancing the export thereby increasing the capital inflow into the country.This will lead to entire economic development in terms of financial structure of the country.

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LIST OF CONTENT

1. Declaration (i)2. Certificate (ii)3. Acknowledgment (iii)4. Abstract (iv)5. List of Content (v)6. List of Abbreviation (vi)7. Introduction 1-138. Literature Review 14-16 9. Objective 1710. Research Methodology 1811. Data Analysis 1912. Bibliography 20

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LIST OF ABBREVIATIONS

FDI : Foreign Direct Investment MNC : Multinational Company UN : United Nations R&D : Research and Development EPZ : Export Processing Zone IMF : International Monetary Fund FEMA : Foreign Exchange Management Act FERA : Foreign Exchange Regulation Act GOI : Government of India INR : Indian Rupee3

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INTRODUCTION

Foreign direct investment

Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are three types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.

Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin.

A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in incorporated firm.

Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI.

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Classification of Foreign Direct

Investment

Foreign direct investment may be classified as Inward or Outward.

Foreign direct investment, which is inward, is a typical form of what is

termed as 'inward investment'. Here, investment of foreign capital

occurs in local resources.

The factors propelling the growth of Inward FDI comprises tax breaks,

relaxation of existent regulations, loans on low rates of interest and

specific grants. The idea behind this is that, the long run gains from

such a funding far outweighs the disadvantage of the income loss

incurred in the short run. Flow of Inward FDI may face restrictions

from factors like restraint on ownership and disparity in the

performance standard.

Foreign direct investment, which is outward, is also referred to as

“direct investment abroad”. In this case it is the local capital, which is

being invested in some foreign resource. Outward FDI may also find

use in the import and export dealings with a foreign country. Outward

FDI flourishes under government backed insurance at risk coverage.

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Outward FDI faces restrictions under a host of factors as described

below:

Tax incentives or the lack of it for firms, which invest outside their

country of origin or on profits, which are repatriated

Industries related to defense are often set outside the purview of

outward FDI to retain government's control over the defense related

industrial complex

Subsidy scheme targeted at local businesses

Lobby groups with vested interests possessing support from either

inward FDI sector or state investment funding bodies

Government policies, which lend support to the phenomenon of

industry nationalization

Foreign direct investment may be further classified by their set target.

The areas here are Greenfield investment and Acquisitions and

Mergers.

Greenfield investments involve the flow of FDI for either building up of

new production capacities in the host nation or for expansion of the

existent production facilities of the host country. The plus points of

this come in form of increased employment opportunities, relatively

high wages, R&D activities and capacity enhancement.

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The flip side comes in the form of declining market share for the

domestic firm and repatriation of profits made to a foreign country,

which if retained within the country of origin could have led to

considerable capital accumulation for the nation.

Multinationals mostly rely on mergers to bring in FDI. Until 1997

mergers and acquisitions accounted for around 90% of FDI flow to

the US economy. FDI flow through acquisitions does not render any

long run advantage to the economy of the host nation as under

Greenfield investments.

Some other types of foreign direct investment in vogue are termed as

Horizontal FDI, Forward Vertical FDI, Vertical FDI and Backward

Vertical FDI.

Types

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organisation; or any combination of the above.

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Methods

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or

enterprise

Foreign direct investment incentives may take the following forms:

low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ - Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large )

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Advantages of FDI

Foreign Direct Investment plays a pivotal role in the development of India's economy. It is an integral part of the global economic system. Advantages of FDI can be enjoyed to full extent through various national policies and international investment architecture. Both the factors contribute enormously to the maximum FDI inflows in India, which stimulates the economic development of the country. Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments.

FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same.

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Benefits of Foreign Direct Investment-

Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under:

Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

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Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It

helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

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Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret – something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves.

Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.

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Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to

approach foreign direct investment with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.

At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.

This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.

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FDI in India

The year 1991 marks a new growth phase of FDI in India with an all time high flow of FDI. Following the Industrial Policy (1991)17, a large number of foreign 17 The Industrial Policy (1991) made several provision to liberalize the flow of FDI into the country. With this many sectors were opened up for FDI in India. A phase wise reduction of import duties was outlined in this policy. This policy marked the beginning of many economic and fiscal reforms in India.

19 companies from different parts of the world rushed into India. In this period, in addition to thousands of foreign collaborations in India, as many as 145 foreign companies registered in India within a span of 10 years from 1991-2000. Companies like General Motors, Ford Motors, and IBM that divested from India in the 1950s and 1970s re entered India during this period. A large number of Asian companies like Daewoo Motors, Hyundai Motors and LG Electronics from S. Korea, Matsushita Television and Honda Motors from Japan invested in India during this period.

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The Government of India faced severe foreign exchange crisis by 1990 and itsForeign exchange reserve had reached an unsustainable level. International Monetary Fund (IMF) and World Bank agreed to provide loans to India on the conditions that India will make major changes to liberalize trade and investments in India. The domestic pressure to meet the imports of essential commodities and the external pressure to liberalize Indian market

forced the Government of India to accelerate the liberalization process in India. With the legislation of the Industrial Licensing Policy, 1991, industrial licensing was abolished except for 18 industries. FDI up to 51% equity was allowed in 34 formerly high priority industries and the concept of phased manufacturing requirement on foreign companies was removed. Further, the tariffs on imports have been steadily reduced in every budget since 1991.

Subsequently, GOI replaced FERA, 1973 that regulated all foreign exchangetransactions with Foreign Exchange Management Act (FEMA), 1991. The objectives of FEMA have been to facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market. But for sectors like banking, civil aviation, petroleum, real estate, venture capital funds, infrastructure, service sector, atomic energy, defense, agriculture and plantation, print media, broadcasting and postal services, automatic approval of FDI were allowed in all other sectors during this period. 18 FEMA was created to facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market. The objective of FEMA has been to facilitate and not regulate foreign trade and investment as it was in FERA (1973), (Roy, 2000). Many of the FDI approval processes have been simplified to smoothen the approval process with the enactment of this Act.

The total number of foreign collaborations increased from 976 in the year 1991 to 2144 in the year 2000. Similarly, the amount of FDI increased from 5156 million INR to 373722 million INR during this period. It is also observed that there has been a significant shift in the share of FDI from different countries that have been investing in India. The share of FDI from the United Kingdom reduced to almost 10% and the share of FDI from UK & USA also decreased during this period. Interestingly the share of other countries including S. Korea, Malaysia, Australia, and countries from Asia and European Union increased to over 65% of the total FDI during this period.

12In a period of about 40 years since the British left India, USA has gained more control of the Indian economy through direct investments of American companies in India. Owing to the poor balance of payment position in 1990, India had to seek loan from the International Monetary Fund (IMF) that is largely controlled by USA. IMF used this opportunity to force India to

liberalize its economy so that foreign companies could have more & easy access to the Indian economy and market. In the recent decade, however, companies from many other countries have increased their share of direct investments in India.

In summary, the poor balance of payment position of India and pressure of IMF and World Bank to liberalize the Indian economy forced the Government of India to accelerate the pace of liberalization process in India since 1991. While the shares of FDI from traditionally dominant countries like the U.K. and the USA have fallen, the shares of FDI from other countries including the countries from Asia and the European Union have increased from 53% in 1991 to 86% in 2000. The power equation of U.K., USA, Japan and other European countries with India.

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LITERATURE REVIEW

A brief review of literature on FDI and related aspects is provided below :Anand and Delios (1996) documented that the relatively slow growth of FDIfrom Japanese MNCs in India as compared to China is attributed to the desire to gain only market access in India.

Garg, et al. (1996) documented that along with the regulation of product prices, since 1986 the Indian government has limited the profits pharmaceutical companies can earn to approximately 6 percent of sales turnover. From 1970 through the early 1990s, industry pre-tax profitability as a percent of sales declined consistently, one reason for which was the rate of return constraint. Indeed, in 1977- 1978 industry profitability 11.7 percent. In 1982-1983 this dropped to 7.5 percent, further declining to 3.5 percent in 1987-1988. Since 1992, industry profitability has been rising, and by 1996 it had reached approximately 10 percent of sales (Garg, et al., 1996).

Lee and Mansfield (1996) found that the developing country technology polices have often favored the objective of national self-determination at the expense of Direct Investment Inflows in India- Opportunities and Benefits 247 foreign technology transfer. In particular, host country policies of weak intellectual property protection and forced licensing of technology, although intended to facilitate technology spillovers, are more likely to discourage FDI and the transfer of leading edge technologies by MNCs (Lee and Mansfield, 1996).

Dijkstra (2000), Tybout (2000) and Vachani (1997) found that investment policy liberalisations have major impacts on firms in less developed countries (LDCs) where the pre-liberalisation level of protection was high. Not all firms are affected equally; some will be losers while others will be winners, depending on their characteristics.

Feinberg & Majumdar (2001) found that Liberalisation of FDI policies offers opportunities for firms as well as threats. If FDI (and trade) liberalisation results in faster growing national economies, then firms face larger, faster-growing markets domestically. 14

The studies of FDI in the US, Japan and Europe have been prevalent, similarresearch on FDI in India is however limited. Restricted policy environment towards FDI and weak property protection rights have been described to cause significant R&D spillovers in Indian pharmaceutical sector [Feinberg and Majumdar 2001]

Aditya K.R. Bajaj and Swastik Nigam (2007) in this work made an attempt to analyze and study the impact of globalization in the pharmaceutical

industry and FDI spillovers in various forms to the domestic pharmaceutical industry in terms of domestic productivity and competitiveness etc. The analysis of the study reveals that the spillover effects have had a manifold impact on the Indian pharmaceutical industry, with the new WTO patent regime introduced in 2005, the foreign players have found greater security in operating in India and due to the spillover effects of a competitive environment, the domestic players have substantially increased theirproductivity, probability and hence compete on stranger footing with the incoming pharma firms.

Jaya Gupta(2007) in his paper made an attempt to review the change in sectoral trends in India due to FDI Inflows since liberalization. This paper also examines the changed policy implications on sectoral growth and economic development of India as a whole.

Jayashree Bose(2007) in his book studied the sectoral experiences faced by India and China in connection with FDI inflows. This book provides information on FDI in India and China, emerging issues, globalization, foreign factors, trends and issues in FDI inflows, FDI inflows in selected sectors. A comparative study has also been conducted on FDI outflows from India and China. This book also revealed the potential and opportunities in various sectors in India that would surpass FDI inflows in India as compared to China.

15Sudershan K (2007) in his thesis made an attempt to examine the impact of FDI inflows on financial performance and export performance of select pharmaceutical companies and the financing pattern of FDI and Non-FDI based select pharmaceutical companies. The study is conducted for a period of 15 years i.e. from 1991 to 2005 and the data analysis is done using both traditional methodologies, such as common size statements, trend analysis and ratio analysis and econometric modeling such as pooled cross section time series analysis or panel data analysis. Based on the results, the study reveals that higher proportion of FDI will result into better performance of

companies. As far as export performance is concerned, the performance of FDI based pharmaceutical companies in India.

Tanay Kumar Nandi and Ritankar Saher (2007) in their work made an attempt to study the Foreign Direct Investment In India with a special focus on Retail Trade.

This paper stresses the need of FDI in India in retail sector and uses the augment that FDI is allowed in multiple sectors and the effects have been quite good without harming the domestic economy. The study also suggests that FDI in retail sector must be allowed.

The review of literature reveals that on a particular sector FDI has a direct impact and on a particular sector it has an indirect impact. A study on the impact of FDI on manufacturing sector reveals that FDI inflows in chemicals, electrical and electronics shows direct impact and FDI inflow in drugs and pharmaceutical sectors shows indirect impact (spillover effects). (Rajit Kumar Sahoo, 2005)

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Objective of Study

The objective of this project report is to find out the percentage growth of FDI in India. It also aims at finding out the year-wise pattern of the inflow of FDI in India. By

this we have found the total nature and impact of the FDI inflow on Indian economy. We have also tried to establish a correlation of development with reference to FDI.

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Research Methodology

This study of history of FDI in India primarily relies on an empirical study of the developments of FDI in India during 1990 to 2009.. The secondary data were supplemented and updated with unpublished data from a few foreign companies in India.

In order to determine the percentage growth of FDI in India for the year 1990 to 2009 , we have adopted certain quantitative techniques and through statistical approach we come to know the value of FDI for the years specified above. The current FDI in India is approximately 29% for the year 2010.

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DATA ANALYSIS

STATISTICAL DATA ANALYSIS OF FDI DATA FROM YEAR 1990-2009

YEAR FDI(Rs Cr) Y T T*T TY

1990-1991 174

1991-1992 316 81.6092 1 1 81.6092

1992-1993 965 205.3797 2 4 410.7595

1993-1994 1838 90.46632 3 9 271.399

1994-1995 4126 124.4831 4 16 497.9325

1995-1996 7172 73.82453 5 25 369.1226

1996-1997 10015 39.64027 6 36 237.8416

1997-1998 13220 32.002 7 49 224.014

1998-1999 10358 -21.649 8 64 -173.192

1999-2000 9338 -9.84746 9 81 -88.6271

2000-2001 18406 97.10859 10 100 971.0859

2001-2002 29235 58.83408 11 121 647.1748

2002-2003 24367 -16.6513 12 144 -199.815

2003-2004 19860 -18.4963 13 169 -240.452

2004-2005 27188 36.89829 14 196 516.576

2005-2006 39674 45.92467 15 225 688.8701

2006-2007 103367 160.5409 16 256 2568.655

2007-2008 138276 33.7719 17 289 574.1223

2008-2009 161481 16.78165 18 324 302.0698

TOTAL= 1030.621 171 2109 9859.145

DATA ANALYSIS-

1. Our employment has increased.2. Infrastructure has enhanced a lot. 3. As the investment has increased a lot so, product quality has also increased.4. We have acquired foreign currency which can be utilized in future.

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BIBLIOGRAPHY

dipp.nic.in/fdi_statistics/india_fdi_index.htm www.economywatch.com › FDI www.oifc.in/fdi-in-india www.tradechakra.com/direct-foreign-india-

investment.html business.mapsofindia.com/fdi-indi

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