FOREIGN DIRECT INVESTMENTS

&

RETAIL INDUSTRIES
Key words:-
_ Abstract
_ Introduction
_ Classification
_ FDI Behavior of Multinational corporations
_ FDI & Indian rules and regulation
_ FDI & India
_ Indian Market & Investment
_ Conclusion
_ Enclosure
FDI report up to July 2007 by RBI
News cutting on FDI
ABSTRACT
Foreign direct investment (FDI) has become a key component of
national development strategies for all
most all the countries over the Globe. FDI is considered to be an essential
tool for jump-starting economic
growth through its bolstering of domestic capital, productivity and
employment.
Reliance on FDI is rising heavily due to its all round contributions to the
economy. The important effect
of FDI is its contributions to the growth of the economy. FDI has an impact
on country's trade balance,
Increasing labor standards and skills, Transfer of new technology and
innovative ideas, Improving
infrastructure, skills and the general business climate.
Foreign direct investment (FDI) is considered to be the lifeblood for
economic development as far as
the developing nations are concerned. FDI to developing countries in the
1990s was the leading source of
external financing. The rise in FDI volume was accompanied by a marked
change in its composition. That
is investment taking the form of acquisition of existing assets (mergers
and acquisitions) grew much more
rapidly than investment in new assets particularly in countries
undertaking extensive privatization of
public enterprises.
The first and second-generation reforms have created a conducive
environment for foreign investments in
India. Market oriented policies are boosting economic activity, all round
development and GDP growth
rate. Government procedures are constantly being simplified and paper
work minimized. As the Indian
economy gears for competition in the international market, overseas
investors clearly see the potential for
attractive returns from investments in India, which is also evident from
the many FDI success stories
already achieved.
INTRODUCTION
Foreign direct investment (FDI) is defined as "investment made to
acquire lasting interest in enterprises
operating outside of the economy of the investor." The FDI relationship
consists of a parent enterprise
and a foreign affiliate which together form a transnational corporation
(TNC). In order to qualify as FDI
the investment must afford the parent enterprise control over its foreign
affiliate. The UN defines control
in this case as owning 10% or more of the ordinary shares or voting power
of an incorporated firm or its
equivalent for an unincorporated firm.
With the advent of globalization, developing countries, particularly those
in Asia, have been witnessing a
massive surge of FDI inflows during the past two decades. Even though
India has been a latecomer to the
FDI scene compared to other East Asian countries, its significant market
potential and a liberalized policy
regime has sustained its attraction as a favorable destination for foreign
investors. This article aims to
examine the impact of inward FDI on the Indian economy, particularly
after a decade of economic
reforms, and analyzes the challenges to position itself favorably in the
global competition for FDI. In this
context, the article further investigates the likely impact on FDI inflows to
India as a result of increasing
competition from another major emerging market economy, i.e., China, in
the wake of its accession to the
WTO.
History
In the years after the Second World War global FDI was dominated by the
United States, as much of the
world recovered from the destruction brought by the conflict. The US
accounted for around three-quarters
of new FDI (including reinvested profits) between 1945 and 1960. Since
that time FDI has spread to
become a truly global phenomenon, no longer the exclusive preserve of
OECD countries. FDI has grown
in importance in the global economy with FDI stocks now constituting over
20 percent of global GDP
Classification of FDI
By Direction
Inward
Inward foreign direct investment is when foreign capital is invested in
local resources.
Inward FDI is encouraged by:
_ Tax breaks, subsidies, low interest loans, grants, lifting of certain
restrictions.
_ The thought is that the long term gain is worth short term loss of income
Inward FDI is restricted by:
_ Ownership restraints or limits.
_ Differential performance requirements.
Outward
Outward foreign direct investment, sometimes called "direct investment
abroad", is when local capital is
invested in foreign resources.
Outward FDI is encouraged by:
_ Government-backed insurance to cover risk.
Outward FDI is restricted by:
_ Tax incentives or disincentives on firms that invest outside of the home
country or on repatriated
profits.
_ Subsidies for local businesses.
By Target
Greenfield investment
Direct investment in new facilities or the expansion of existing facilities is
known as Greenfield
investment. Greenfield investments are the primary target of a host
nation’s promotional efforts because
they create new production capacity and jobs, transfer technology and
know-how, and can lead to
linkages to the global marketplace. The Organization for International
Investment cites the benefits of
Greenfield investment (or in sourcing) for regional and national economies
to include increased
employment (often at higher wages than domestic firms); investments in
research and development; and
additional capital investments.
Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firms’ takes place;
the primary type of FDI is
called Mergers and acquisitions. Cross-border mergers occur when the
assets and operation of firms from
different countries are combined to establish a new legal entity.
Nevertheless, mergers and acquisitions
are a significant form of FDI and until around 1997, accounted for nearly
90% of the FDI flow into the
United States. Mergers are the most common way for multinationals to do
FDI.
Horizontal FDI
Investment in the same industry abroad as a firm operates in at home.
Vertical FDI
_ Backward Vertical FDI
Where an industry abroad provides inputs for a firm's domestic production
process.
_ Forward Vertical FDI
Where an industry abroad sells the outputs of a firm's domestic
production.
By Motive
FDI can also be categorized based on the motive behind the investment
from the perspective of the
investing firm:
Resource-Seeking
Investments which seek to acquire factors of production those are more
efficient than those obtainable in
the home economy of the firm. In some cases, these resources may not
be available in the home economy
at all (e.g. cheap labor and natural resources).
Market-Seeking
Investments which aim at either penetrating new markets or maintaining
existing ones is market seeking.
FDI of this kind may also be employed as defensive strategy; it is argued
that businesses are more likely
to be pushed towards this type of investment out of fear of losing a
market rather than discovering a new
one.
Efficiency-Seeking
Investments which firms hope will increase their efficiency by exploiting
the benefits of economies of
scale and scope, and also those of common ownership. It is suggested
that this type of FDI comes after
either resource or market seeking investments have been realized, with
the expectation that it further
increases the profitability of the firm.
Strategic-Asset-Seeking
A tactical investment to prevent the loss of resource to a competitor.
Easily compared to that of the oil
producers, whom may not need the oil at present, but look to prevent
their competitors from having it.

Foreign Direct Investment Behavior of

Multinational Corporations
There is increasing recognition that understanding the forces of economic
globalization requires looking
first at foreign direct investment (FDI) by multinational corporations
(MNCs): that is, when a firm
based in one country locates or acquires production facilities in other
countries. While real world GDP
grew at a 2.5 percent annual rate and real world exports grew by 5.6
percent annually from 1986
through 1999, United Nations data show that real world FDI inflows grew
by 17.7 percent over this
same period! Additionally, MNCs mediate most world trade flows. For
example, Bernard, Jensen, and
Schott find that 90 percent of U.S. exports and imports flow through a U.S.
MNC, with roughly 50
percent of U.S. trade flows occurring between affiliates of the same MNC,
or what is termed Intra-firm
trade
Exchange Rates and FDI
One good example of this is the effect of exchange rate movements on
FDI. For years, the conventional
theory was to compare FDI to bonds, for which exchange rate movements
do not affect the investment
decision. A depreciation of the currency in the host country reduces the
amount of foreign currency
needed to purchase the asset, but it also reduces the nominal return one
receives in the foreign currency.
Thus, the rate of return for the foreign investor does not change. Empirical
studies of FDI seemed to
confirm this, often finding insignificant effects of exchange rates. In
contradiction to this, the popular
press often points to host-country exchange rate depreciations as a
contributing factor to inward foreign
investment booms, and worries about the selling of key national
technological assets.
Taxes and FDI
Another factor that the literature finds does not affect FDI in a
straightforward manner is tax policy.
MNCs are potentially subject to taxation in both the host and parent
country. However, most parent
countries have policies to reduce or eliminate double taxation of their
MNCs. James R. Hines, Jr. and
co-authors have shown that the way in which parent countries reduce
double taxation on their MNCs
(for example, allowing credits or deductions) can have quite different
implications for FDI activity.
Many countries also have negotiated bilateral investment treaties (BITs)
to mutually reduce withholding
taxes on MNCs based in the other country. The Organization for Economic
Co-operation and
Development (OECD) has been a big advocate of BITs as a way to
enhance FDI across member
countries. Others contend that BITs are mainly intended to share tax
information across countries in
order to deter tax evasion and to reduce administrative costs and, thus,
should have little, or even
negative, effects on FDI flows.
Trade Protection and FDI
The notion that trade protection encourages FDI is folk wisdom for
economists, so much so that it is
rarely examined empirically. But my research into this relationship has
also yielded surprises. In a study
examining all U.S. antidumping trade protection actions from 1980
through 1995, I find that FDI
responses to these trade actions (tariff-jumping FDI) occur only for firms
with previous experience as
MNCs.
Information and FDI
An almost unexplored issue in the literature has been the role of
information on FDI decisions. FDI
requires substantial fixed costs of identifying an efficient location,
acquiring knowledge of the local
regulatory environment, and coordination of suppliers. Thus, access to
better information about some
host countries may make FDI to that location more likely.
Estimating Long-Run General-Equilibrium Determinants
of FDI
Much of the literature described to this point motivates analysis with
partial equilibrium models of
individual firm-level FDI decisions. But we also want to have empirical
specifications of FDI that are
grounded in theory and that do a good job of explaining FDI patterns
across the world. Researchers
looking at world FDI patterns have generally used variations of a gravity
framework to model FDI,
specifying parent- and host-country GDPs along with distance as core
determinants of FDI.

FDI & INDIA’S RULES AND REGULATIONS

Foreign direct investment (“FDI”) is prohibited in the
following cases:
_ Gambling and Betting
_ Lottery Business
_ Retail Trading (except single brand retail trading-not provided in Master
Circular)
_ Atomic Energy
_ Housing and Real Estates
_ Agriculture (with certain exceptions) and Plantations (Other than Tea
plantations).
Sector Specific Foreign Direct Investment in India: FDI
in India
Hotel & Tourism: FDI in Hotel & Tourism sector in India
100% FDI is permissible in the sector on the automatic route.
The term hotels include restaurants, beach resorts, and other tourist
complexes providing accommodation
and/or catering and food facilities to tourists. Tourism related industry
include travel agencies, tour
operating agencies and tourist transport operating agencies, units
providing facilities for cultural,
adventure and wild life experience to tourists, surface, air and water
transport facilities to tourists, leisure,
entertainment, amusement, sports, and health units for tourists and
Convention/Seminar units and
organizations.
Private Sector Banking: Non-Banking Financial Companies (NBFC)
49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from
time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities
shall be as per levels
indicated below:
i. Merchant banking
ii. Underwriting
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Venture Capital
ix. Custodial Services
x. Factoring
xi. Credit Reference Agencies
xii. Credit rating Agencies
xiii. Leasing & Finance
xiv. Housing Finance
xv. Foreign Exchange Brokering
xvi. Credit card business
xvii. Money changing Business
xviii. Micro Credit
xix. Rural Credit
b. Minimum Capitalization Norms for fund based NBFCs:
i) For FDI up to 51% - US$ 0.5 million to be brought upfront
ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $
7.5 million
to be brought up front and the balance in 24 months
c. Minimum capitalization norms for non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in respect of
all permitted nonfund
based NBFCs with foreign investment.
d. Foreign investors can set up 100% operating subsidiaries without the
condition to disinvest
a minimum of 25% of its equity to Indian entities, subject to bringing in
US$ 50 million as at b)
(iii) above (without any restriction on number of operating subsidiaries
without bringing in
additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign
investment will
also be allowed to set up subsidiaries for undertaking other NBFC
activities, subject to the
subsidiaries also complying with the applicable minimum capital inflow i.e.
(b)(i) and (b)(ii)
above.
f. FDI in the NBFC sector is put on automatic route subject to compliance
with guidelines of
the Reserve Bank of India. RBI would issue appropriate guidelines in this
regard.
Insurance Sector: FDI in Insurance sector in India
FDI up to 26% in the Insurance sector is allowed on the automatic route
subject to obtaining
license from Insurance Regulatory & Development Authority (IRDA).
Telecommunication: FDI in Telecommunication sector
i. In basic, cellular, value added services and global mobile personal
communications by
satellite, FDI is limited to 49% subject to licensing and security
requirements and
adherence by the companies (who are investing and the companies in
which investment is
being made) to the license conditions for foreign equity cap and lock- in
period for
transfer and addition of equity and other license provisions.
ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is
permitted up to 74%
with FDI, beyond 49% requiring Government approval. These services
would be subject
to licensing and security requirements.
iii. No equity cap is applicable to manufacturing activities.
iv. FDI up to 100% is allowed for the following activities in the telecom
sector :
ISPs not providing gateways (both for satellite and submarine cables);
Infrastructure Providers providing dark fiber (IP Category 1);
Electronic Mail;
Voice Mail
FDI up to 100% is allowed subject to the condition that such companies
would divest
26% of their equity in favor of Indian public in 5 years, if these companies
are listed in
other parts of the world.
The above services would be subject to licensing and security
requirements, wherever
required.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case
basis.
Trading: FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51% provided it
is primarily export
activities, and the undertaking is an export house/trading house/super
trading house/star trading
house. However, under the FIPB route:-
 100% FDI is permitted in case of trading companies for the following
activities:
exports;
bulk imports with ex-port/ex-bonded warehouse sales;
cash and carry wholesale trading;
Other import of goods or services provided at least 75% is for
procurement and sale of
goods and services among the companies of the same group and not for
third party use or
onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions
of EXIM Policy:
Companies for providing after sales services.
Domestic trading of products of JVs is permitted at the wholesale level
for such trading
companies who wish to market manufactured products on behalf of their
joint ventures in
which they have equity participation in India.
Trading of hi-tech items/items requiring specialized after sales service
Trading of items for social sector
Trading of hi-tech, medical and diagnostic items.
Trading of items sourced from the small scale sector under which,
based on technology
provided and laid down quality specifications, a company can market that
item under its
brand name.
Domestic sourcing of products for exports.
Test marketing of such items for which a company has approval for
manufacture
provided such test marketing facility will be for a period of two years, and
investment in
setting up manufacturing facilities commences simultaneously with test
marketing.
FDI up to 100% permitted for e-commerce activities subject to the
condition that such companies
would divest 26% of their equity in favor of the Indian public in five years,
if these companies
are listed in other parts of the world. Such companies would engage only
in business to business
(B2B) e-commerce and not in retail trading.
Power: FDI in Power Sector in India
Up to 100% FDI allowed in respect of projects relating to electricity
generation, transmission
and distribution, other than atomic reactor power plants. There is no limit
on the project cost and
quantum of foreign direct investment.
Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of
drugs and
pharmaceutical, provided the activity does not attract compulsory
licensing or involve use of
recombinant DNA technology, and specific cell / tissue targeted
formulations.
FDI proposals for the manufacture of licensable drugs and
pharmaceuticals and bulk drugs
produced by recombinant DNA technology, and specific cell / tissue
targeted formulations will
require prior Government approval.
Roads, Highways, Ports and Harbors
FDI up to 100% under automatic route is permitted in projects for
construction and maintenance
of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports
and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and
consultancy for
integration of pollution control systems is permitted on the automatic
route.

FDI & INDIA

India continues to be the best place to start a business, says a global
services location index by
AT Kearney. In another AT Kearney study, India has displaced the US to
become the secondmost
favored destination for foreign direct investment after China. It has now
been named as the
top reformer in South Asia in the annual Doing Business Report issued by
the International
Finance Corporation (IFC).
It is evident. India is in the reckoning. And the figures appear to be
improving by the day. While
FDI equity flows were US$ 5.5 billion in 2005-06, it increased almost three
times to US$ 15.7
billion in 2006-07, representing a growth rate of 184 per cent. In fact,
calculating the total FDI
inflows into India by international best practices places the total inflow at
US$ 19,531 million.
This huge inflow of FDI has in turn reversed the past trend, with FDI
inflows overtaking the
portfolio investment inflows by almost US$ 5.6 billion in 2006-07,
according to the RBI’s report
on International Investment Position.
India was the fourth-largest recipient of FDI during 2005-06 and was
instrumental in FDI
inflows to South Asia surging by 126 per cent, amounting to US$ 22 billion
in 2006, reveals
UNCTAD’s World Investment Report.
During April-July 2007-08, FDI inflows amounted to US$ 5,614 million as
against US$ 2,848
million during the corresponding period last year, recording a growth rate
of 97 per cent.
Cumulative FDI inflows during the period August 1991 to July 2007
amounted to US$ 60,242
million. Between 2001-02 and 2006-07, inflows increased by about two
and a half times.
The principal sources of FDI during August 1991 to June 2007 have been
Mauritius (US$ 20,808
million), US (US$ 6,215 million), UK (US$ 3,979 million), Netherlands (US$
2,789 million),
Japan (US$ 2,585 million), Singapore (US$ 2,033 million) and Germany
(US$ 1,917 million),
accounting for 41.89 per cent, 12.03 per cent, 7.98 per cent, 5.59 per
cent, 5.07 per cent, 4.05 per
cent and 3.69 per cent, respectively.
The principal sectors attracting FDI during August 1991 to June 2007 have
been services (US$
9,443 million), electrical equipment (US$ 8,964 million),
telecommunication (US$ 4,880
million), transportation (US$ 3,856 million), fuels (US$ 2,892 million),
chemicals (US$ 2,465
million) and construction (US$ 1,912 million).
Clearly, investors’ interest in India is on a high, with a host of companies
lining up major FDI
proposals in the next few years.
 Steel tycoon Lakshmi Niwas Mittal has pledged an investment of about
US$ 20 billion
for building two 12-million-tonne steel plants in the states of Jharkhand
and Orissa.
Vodafone, the world's second-biggest mobile firm, plans to spend US$ 2
billion a year on
capital expenditure in India.
Eyeing the projected 15 per cent growth in the luxury car market
segment,
DailmerChrysler India Pvt Ltd, makers of Mercedes-Benz cars, has decided
to set up a
new plant in Pune.
Israeli mall developer Plaza Center NV will invest US$ 1.22 billion over
the next fiveseven
years to set up 50 malls in India.
Nokia plans to invest US$ 100 million in India in the next three years to
ramp up its
capacity in Chennai.
US-based aircraft engine manufacturer, Pratt and Whitney, plans to
invest about US$ 30
million in the InfoTech and spare parts manufacturing sector.
Government Initiatives
In a bid to stimulate this sector, the Government has taken on a series of
ambitious economic
reforms. In fact, as pointed out by Minister of State for Industries, Dr
Ashwani Kumar, nearly 98
per cent of the Indian economy is open to FDI through the automatic
route.
The Centre has divested some of its own powers of approving foreign
investments that it
exercised through the Foreign Investment Promotion Board (FIPB) and has
handed them
over to the general permission route under the RBI.
The FDI cap for telecommunications has been increased to 74 per cent,
up from the
earlier ceiling of 49 per cent.
It has set up an Investment Commission that will garner investments in
the infrastructure
sector among others, and plans to increase the limit for investment in the
infrastructure
sector.
The Government has approved sweeping reforms in FDI with a first step
towards
partially opening retail markets to foreign investors. It now allows 51 per
cent FDI in
single brand retail outlets.
100 per cent is allowed in new sectors such as power trading,
processing and
warehousing of coffee and rubber.
FDI limit has been raised to 100 per cent under automatic route in
mining of diamonds
and precious stones, development of new airports, cash and carry
wholesale trading and
export trading, laying of natural gas pipelines, petroleum infrastructure,
captive mining of
coal and lignite.
Foreign funds would be allowed to own up to 26 per cent stake in
entities that would be
set up by state-owned banks, mutual funds and financial institutions to
manage pension
funds.
The Government plans to float a joint-venture company with the private
sector to set up countryspecific
investment promotion centers in India and abroad. Under the new
scheme, 10 countryspecific
windows focusing on investment promotion from the US, Japan, Taiwan,
UK, Germany,
Singapore, France, South Korea, Switzerland and Italy would be set up in
the country.
Looking Ahead
According to a report by Economist Intelligence Unit, compiled in
cooperation with Columbia
Programme on International Investment (CPII), India is likely to receive FDI
of US$ 20.4 billion
every year during 2007-11.
In fact, buoyed by the increasing foreign investor’s interest in India, the
Government has fixed
an ambitious target to attract US$ 30 billion during 2007-08. Also,
according to UNCTAD’s
world investment report, India has emerged as the second most-attractive
location after China,
ahead of the US and Russia, for global FDI in 2007.
INDIAN MARKET & INVESTMENT
Investment in Indian market
India, among the European investors, is believed to be a good investment
despite political
uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India
presents a vast potential for overseas investment and is actively
encouraging the entrance of
foreign players into the market. No company, of any size, aspiring to be a
global player can, for
long ignore this country which is expected to become one of the top three
emerging economies.
Success in India
Success in India will depend on the correct estimation of the country's
potential, underestimation
of its complexity or overestimation of its possibilities can lead to failure.
While calculating, due
consideration should be given to the factor of the inherent difficulties and
uncertainties of
functioning in the Indian system. Entering India's marketplace requires a
well-designed plan
backed by serious thought and careful research. For those who take the
time and look to India as
an opportunity for long-term growth, not short-term profit- the trip will be
well worth the effort.
Market potential
India is the fifth largest economy in the world (ranking above France, Italy,
the United Kingdom
and Russia) and has the third largest GDP in the entire continent of Asia. It
is also the second
largest among emerging nations. (These indicators are based on
purchasing power parity.) India
is also one of the few markets in the world which offers high prospects for
growth and earning
potential in practically all areas of business. Yet, despite the practically
unlimited possibilities in
India for overseas businesses, the world's most populous democracy has,
until fairly recently,
failed to get the kind of enthusiastic attention generated by other
emerging economies.
Lack of enthusiasm among investors
The reason being, after independence from Britain 50 years ago, India
developed a highly
protected, semi-socialist autarkic economy. Structural and bureaucratic
impediments were
vigorously fostered, along with a distrust of foreign business. Even as
today the climate in India
has seen a sea change, smashing barriers and actively seeking foreign
investment, many
companies still see it as a difficult market. India is rightfully quoted to be
an incomparable
country and is both frustrating and challenging at the same time. Foreign
investors should be
prepared to take India as it is with all of its difficulties, contradictions and
challenges.
Developing a basic understanding or potential of the Indian
market, envisaging and
developing a Market Entry Strategy and implementing these
strategies when actually
entering the market are three basic steps to make a successful entry
into India.
Developing a basic understanding or potential of the Indian
market
The Indian middle class is large and growing; wages are low; many
workers are well educated
and speak English; investors are optimistic and local stocks are up;
despite political turmoil, the
country presses on with economic reforms. But there is still cause for
worries.
Infrastructural hassles.
The rapid economic growth of the last few years has put heavy stress on
India's infrastructural
facilities. The projections of further expansion in key areas could snap the
already strained lines
of transportation unless massive programs of expansion and
modernization are put in place.
Problems include power demand shortfall, port traffic capacity mismatch,
poor road conditions
(only half of the country's roads are surfaced), low telephone penetration
(1.4% of population).
Indian Bureaucracy.
Although the Indian government is well aware of the need for reform and
is pushing ahead in
this area, business still has to deal with an inefficient and sometimes still
slow-moving
bureaucracy.
Diverse Market.
The Indian market is widely diverse. The country has 17 official languages,
6 major religions,
and ethnic diversity as wide as all of Europe. Thus, tastes and preferences
differ greatly among
sections of consumers.
Therefore, it is advisable to develop a good understanding of the Indian
market and overall
economy before taking the plunge. Research firms in India can provide
the information to
determine how, when and where to enter the market. There are also
companies which can guide
the foreign firm through the entry process from beginning to end
--performing the requisite
research, assisting with configuration of the project, helping develop
Indian partners and
financing, finding the land or ready premises, and pushing through the
paperwork required.
Developing up-front takes:
Market Study
Is there a need for the products/services/technology? What is the probable
market for the
product/service? Where is the market located? Which mix of products and
services will find the
most acceptability and be the most likely to generate sales? What
distribution and sales channels
are available? What costs will be involved? Who is the compete
Check on Economic Policies
The general economic direction in India is toward liberalization and
globalization. But the
process is slow. Before jumping into the market, it is necessary to
discover whether government
policies exist relating to the particular area of business and if there are
political concerns which
should be taken into account.
Policies to Attract Foreign Direct Investment
There is keen competition among developed and developing countries to
attract foreign direct
investment (FDI).This drive to lure investment often extends to the sub
national level, with
different regional authorities pursuing their own strategies and
assembling their own baskets of
incentives to attract new investments. Various reforms and strategies
have been implemented,
with mixed results. Some are critical of the high costs of many of these
initiatives, arguing that it
would be more rewarding to improve a country’s general business
environment.
The resources gathered under this topic look at the many different
methods used by policymakers
to attract FDI and their effectiveness. These approaches include:
providing targeted fiscal incentives, such as tax concessions, cash
grants, and specific
subsidies;
improving domestic infrastructure;
promoting local skills development to meet investor needs and
expectations;
establishing broad-reaching FDI promotion agencies;
improving the regulatory environment and decreasing red tape; and
Engaging in international governing arrangements.
Conclusion
Several measures to boost FDI have been announced in 1998-99. Projects
for electricity
generation, transmission and distribution as also roads and highways,
ports and harbors, and
vehicular tunnels and bridges have been permitted foreign equity
participation up to 100 per cent
under the automatic route, provided foreign equity does not exceed Rs.
1500 crore. FDI
permissible under Non-Banking Financial Services now includes "Credit
Card Business" and
"Money Changing Business". Regarding equity participation in private
sector banks, multilateral
financial institutions have been allowed to contribute equity to the extent
of the shortfall in NRI
holdings within the overall permissible limit of 40 per cent. The
Government has also decided to
permit FDI up to 49 per cent of the total equity, subject to license, in
companies providing
Global Mobile Personal Communication by Satellite (GMPCS) services.
Also, minimum
capitalization norms earlier required for pure financial consultancy
services have been relaxed.
GDR/ADR guidelines have been further liberalized in 1998-99. Unlisted
companies are now
permitted to float Euro issues under certain conditions. All end-use
restrictions on GDR/ADR
issue proceeds have been removed, except the prevailing restrictions on
investment in stock
markets and real estate. The 90-day validity period for final approvals of
GDR/ADR issues has
been withdrawn and final approval will continue to be valid, thereby
imparting greater flexibility
to issuing companies regarding the timing of issues. Indian companies are
now permitted to issue
GDRs/ADRs in the case of Bonus or Rights issue of shares, or on genuine
business
reorganizations duly approved by the High Court. The companies,
however, in all such cases,
will be required to get approval from the Department of Economic Affairs
for the issue of
GDRs/ADRs.
Enclosures: -
17 Oct, 2007, 0531 hrs IST, TNN
NEW DELHI: India has emerged as the second most-attractive location
after China, ahead of the
US and Russia, for global foreign direct investment (FDI) in 2007.
According to Unctad’s world
investment report, released here on Tuesday, India’s ranking in inward
FDI performance index
has also improved to 113 in 2006 from 121 in 2005. China is the most
preferred investment
location, followed by India, the US, the Russian Federation and Brazil, the
report said.
The share of India and China in total global FDI outflows has also risen.
While both accounted
for 10% of total FDI outflows in 2005 in the Asian region, it increased to
25% in 2007. While
China’s outflows increased 32% to $16 billion in 2006, Indian outflows
witnessed a four-time
rise since 2004.
On the increased flow of FDI into India, the report pointed out that while
foreign retailers such as
Wal-Mart had started to enter the Indian market, a number of US
companies such as General
Motors and IBM are rapidly expanding their presence in the country. So
are several large
Japanese MNCs such as Toyota and Nissan. Global FDI inflows soared in
2006 to reach $1,306
billion, showing a growth of 38%.
Commenting on the rising outflow of FDI from the two countries, the
report said both China and
India are throwing up competition for countries like Hong Kong (China),
the Republic of Korea,
Singapore and Taiwan as the main sources of FDI in developing Asia.
Interestingly, while India’s outflows have been dominated by privately-
owned corporates such as
Tata group (Tata-Corus deal), in China FDI outflows are mainly driven by
the international
expansion of state-owned enterprises due to progressive government
policies. Tata Steel acquired
Corus Group in early 2007, creating Tata-Corus — the worlds fifth-largest
steel maker.
In terms of locational choice for foreign investors, China polled 52% of the
respondents in the
Unctad survey, followed by India with 41%. The US received support of
36% and Russia 22%,
followed by Brazil with 12%. China’s outward FDI stock reached $73 billion
in 2006, the sixthlargest
in the developing world, according to the report. China’s major chunk of
overseas
expansion involves considerable investment in other developing and
transition economies, the
report says.
The emergence of China and India as important sources of FDI, coupled
with active M&A
activities by investors based in the Asian newly-industrializing economies
(NIE), has led to
increased FDI flows from Asia to developed countries as well.
India was the fourth-largest recipient of FDI during 2005-06, with China
and Hong Kong
(China) remaining on top. Singapore was ahead of India at the third
position. “India registered a
substantial increase in FDI amounting to $17 billion,” the report said. Due
to increased
investments in India, FDI inflows to south Asia surged 126%, amounting to
$22 billion, in 2006.
India's FDI outflow to exceed inflow in 2007-08: study
New Delhi, Delhi, India, 2007-03-16 19:31:14 (IndiaPRwire.com)
As a confident India Inc has started bidding for more and bigger deals
abroad, in 2007-08
overseas investment from India will be around $15 billion - surpassing
foreign direct investment
(FDI) inflows in the country, says a study. The bulk of outward FDI flow will
be driven mainly
by India's booming manufacturing sector, said the 'Study on FDI Outflow
and amp; Role of
Manufacturing in the Mergers and amp; Acquisitions Front, 2007', by the
Associated Chambers
of Commerce and Industry (Assocham). Indian companies' preferred
investment destinations are
the European countries and the US, as also Africa taking advantage of its
cost competitiveness.
Sectors such as pharmacy and automobiles will give a major thrust to the
FDI outflow, though IT
will continue to dominate the scene, said the report released Friday.
'Riding on strong balance
sheets, good credit ratings and confidence shown by global business
community, Indian
manufacturing is leading India Inc.'s global quest,' said Venugopal Dhoot,
president, Assocham.
The main factors fuelling the growing hunger for mergers and acquisitions
(M and amp; A)
among Indian companies are huge fund supply, globally competitive
business practices and
favorable regulatory environment, besides higher margins, revenue,
volumes and growth
prospects. 'The number of outbound M and amp; A deals has increased
sharply over the past six
years from about 37 in 2001 to more than 170 in 2006. The transactions
gathered tremendous
momentum in 2005,' the report said. 'The total number of deals actually
doubled in 2005 from
2004 to reach a figure of close to 150 from 70 in previous year.'
According to Assocham, the Indian conglomerates that are upbeat on
inorganic growth are the
Tata group, Bharat Forge, Ranbaxy, ONGC, Infosys and Wipro. 'The
sectors attracting
investments by Corporate India include a whole gamut of sectors - metal,
pharmaceuticals,
industrial goods, automotive components, beverages, cosmetics and
energy in manufacturing;
and mobile communications, software and financial services in services,'
the report said.
Talking about specific examples, the study noted: 'The Apollo Group of
Hospitals may strike
cross border deals to expand its global footprint through strategic
partners with some of the local
hospital chains overseas while pursuing mergers and acquisitions in the
US and Europe.
'Nicholas Piramal India Ltd plans to invest $50 million over a three-year
period in its plants in
the UK and India,' it added. In the energy sector, India's Suzlon Energy
Limited, the world's fifth
largest wind turbine manufacturer, has offered $1.3 billion for Germany's
REpower.
- Indo Asian News Service