international investment (fdi and portfolio investment)

8/9/2019 International Investment (FDI and Portfolio Investment)

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International Investment (FDI

and Portfolio Investment)


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Foreign InvestmentBroadly there are two types of foreigninvestment namely, foreign direct investment

andportfolio investment.

FDIrefers to investment in a foreign countrywhere the investor retains control over the

investment. It typically takes the form of

starting a subsidiary, acquiring a stake in an

existing firm or starting a joint venture in theforeign country. Direct investment and

management of the firm concerned normally

go together.


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But if the investor has only a sort of propertyinterest in investing the capital in buyingequities, bonds, or other securities abroad. Itis referred to asportfolio investment. That isin the case ofportfolio investments theinvestors uses his capital in order to get areturn on it, but has no much control over theuse of the capital.

FDIs are governed by long term considerationbecause these investments cannot be easilyliquidated. However, portfolio investments,

which can be liquidated fairly easy are


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Foreign InvestmentForeign Investment

Foreign Direct Investment Portfolio Investment

Wholly owned

SubsidiaryAcquisitionJoint Venture

Investment

By FIIs

Investment inGDRs,FDRs

FCCBs etc


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Significance of Foreign

Investmenty It play very important role in socio-economicdevelopment of a nation.

y It helps in accelerating the pace of economic growthby facilitating essential imports required for carrying

out development programs, like capital goods, know-how, raw materials and other inputs and evenconsumer goods.

y When export earnings are insufficient to finance suchvital imports, foreign capital could help reduce the

foreign exchange gap.y It may also helps in increasing a countrys export and

reduce the import requirements if such investmentstake place in export-oriented and import-competingindustries.


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L

imitations and Dangers of FDIy Private foreign capital tends to flow to high profit areathan to the priority sectors.

y Foreign investment, sometimes have unfavorableeffect on the Balance of payment of a country,

because the drain of foreign exchange by way ofroyalty, dividends etc is more than the investmentmade by the foreign concern

y Foreign investors sometimes engage in unfair andunethical trade practices.

y Sometimes foreign investment can result in thedangerous situation of minimizing / eliminatingcompetition and the creation of monopolies oroligopolistic structure


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y Profitability- Private foreign movement may beinfluenced by the profit motive. Hence, otherthings being equal, private capital will beattracted to countries where the return on

investment is comparatively higher.y Costs ofProduction- Private capital

movement are encouraged by lower costs ofproduction in foreign countries. We maydistinguish b/w two types of cost reducing

investments.yThe first arises from the need to obtain raw

materials from abroad.yThe second type arises from the need of

obtaining commodities other than material


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y Economic conditions- Economic conditions

particularly the market potential and the

infrastructural facilities, influence private

foreign investment. The size of the populationand the income level of the country have an

important bearing on the market opportunities.

y GovernmentPolicies-Govt policies,

particularly towards foreign investment,foreign collaboration, remittances, profits,

taxation, foreign exchange control, tariffs and

monetary and fiscal policy are important

factors that may influence FDIs in a country.


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EXIM Policy


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FOREIGN Trade PolicyIn macro economics net exports or the difference

b/w exports (X) and imports (M) is a component of nation income (Y)

Y= C+I+G+(X-M)

As national income increases, it causes increase inthe demand for foreign goods just as in the caseof domestic goods. Similarly the demand for imported raw materials, capital goods, technologyand related products also increases resulting inhigher imports to the extent that these arepermitted under foreign trade policy. Imports aregenerally considered as leakages from thedomestic income stream having negative effect

on the level of national income.


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EXIM policy Introduction

The Indian EXIM policy restricts and regulates the

parties involved in commercial trade through the

export and import of items. This becomes

particularly important in a country like India,

where the import and export of items does play a

crucial role not just in balancing budgetary

targets, but also from an economy developmental

viewpoint.

Exports in India are finally witnessing an upwardtrend at an estimated growth rate of 20 per cent

in the last few months. This is an encouraging

and heartening sign of things to come and the

government's efforts should now be focused to


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Export thrust areas

y Cereals particularly wheat

y Iron ore

y Leather and particularly its manufacturers

y Handicrafts and jewelleryy Basic chemical

y Electronic goods and computer software

y Readymade garments


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Components ofEXIM policyExport promotion through thrust products- For this purpose,

220 products and 25 foreign markets have been identifiedto push the exports. Sector wise export promotionstrategies have also been formulated for identified exportpotential items.

Push to AgriculturalExports- The government has identified32 agri-export zones all over the country which seek topromote agricultural and agro-based exports particularly infloriculture and horticulture. The countrys performance inagricultural exports greatly depends on the followingcritical factors

a. Domestic availablity of quality products

b. Ability to execute timely and safe deliveries

c. Cost of cultivation

d. Nutritional content of the produce


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Obstacles to Export Growth

y Protective tariffs in the US and a number of

European countries against Indias thrust

products like textiles.

y

Weakening of the global demand for Indianproducts in recent years.

y High transaction costs increasing export prices.

y High burden of taxation making export products

less price-competitive.y Technological and quality constraints on the

quality export products.


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y Broadbasing the marketaccess initiative

scheme- The policy seeks to provide greater

thrust to the country-product approach (i.e.

identifying specific product groups with high

exports potential to specific countries). The major

components of the scheme includes

y Extensive survey of the prospective markets

through professional export consultants

y Display of selected products in selected centers infocus countries by setting up showrooms

y Promotion of branded products


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SpecialEconomic Zones (SEZs)-An SEZ is basically aduty-free enclave of business firms which arepredominantly engaged in export production. Units inthe zones are provided special incentives and

facilities to enable the exporters to attaincompetitiveness at the global level. Benefits to thezones are as follows.

a. For all trade operations, an SEZ is treated as a dutyfree zone for import of various inputs

b. There is no routine examination of imports andexport cargo by custom authorities

c. The units can sell a part of their output in thedomestic sector.

d. Foreign direct investment on 100% basis is allowed

through RBSs automatic rout in the manufacturing


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StrategicPackage ofSSIs- The policy provides fro a

special package to SSIs which make an estimated

contribution of about tRs.70,000 crore to the country

export basket. The policy lays heavy emphasis on

improving productivity and export competitiveness ofthe small scale cottage and handicraft industries. The

major components of the Strategic package include

the following

a. Exemption from maintaining the average export

obligation under the Export Promotion Capital

Goods Scheme.

b. Duty free access to Market Access Initiative

Scheme

c. Lowering of the threshold level of exports achieving

international investment (fdi and portfolio investment)

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