Foreign Investment in India - PowerPoint Presentation

1. Foreign Investment in IndiaForeign capital is needed for a developing country to increase the rate of investment and for capital accumulation for further economic growth.For developed country it is needed to support sustainable development.

2. Forms of foreign capitalForeign Direct InvestmentForeign Portfolio Investment Depository ReceiptsDebt Capital

3. Foreign Direct InvestmentIt is the investment made by foreign individual or a firm in one country into business located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company.

4. Foreign Portfolio InvestmentIt is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets.

5. Depository ReceiptsThese are a negotiable certificate issued by a bank representing share in a foreign company traded on a local stock exchange.These are in the form of American and GlobalADR is a negotiable certificate issued by a US bank representing shares in a foreign stock is traded on US exchange.ADRs are denominated in US$ with the underlying security held by a US financial institution overseas.

6. Global Depository Receipt are negotiable instrument issued by Depository Bank against the domestic shares of the issuing company.GDRs are listed and traded on one or more international exchanges, except USA.

7. Debt Foreign capitalThese are loans from friendly governments, or multilateral institutions like IMFExternal commercial borrowing RemittancesForeign Currency deposits of non-resident citizens of the country.

8. Foreign Direct InvestmentFDI can be made in a variety of ways, including the opening of a subsidiary or associate company in a foreign country, acquiring a controlling interest in an existing foreign company or by means of a merger or joint venture with a foreign company.Thus FDI is calculated to include all kinds of capital contributions such as the purchase of stocks as well as the reinvestment of earnings by a wholly owned company incorporated abroad and the lending of firms to a foreign subsidiary or branch.

9. Types of FDIGreenfield Investments and Mergers and AcquisitionsHorizontal and vertical investmentInward or outward investmentAccording to WTO

10. Greenfield InvestmentA Greenfield investment refers to a type of FDI where a company establishes a wholly new operation in a foreign country. It can be a new production or an expansion of the existing production facilities of the host country.Due to this there are increased employment opportunities, relatively high wages, R & D and capacity enhancement.

11. Acquiring or MergingIt is acquiring control of existing entities though cross-border mergers and acquisitions. It occurs when a transfer of existing assets from local firms takes placeThey represents about 77% of all flows in developed countries and about 33% of all flows in developing countries

12. Horizontal and Vertical InvestmentHorizontal investment refers to FDI in the same industry abroad as the foreign investor company.Vertical Direct Investment can be of two kindsBackward – investments into industry that provides inputs into a firm’s domestic production eg. MiningForward – investment in an industry that utilises the outputs from a firm’s domestic production.

13. Inward or outward investmentAn inward investment involves an external or foreign entity either investing in or purchasing the goods of a local economy.An Outward direct investment is a business strategy in which a domestic firm expands its operations to a foreign country.

14. Categories according to WTOEquity capitalReinvested earningsOther capital

15. Equity capitalIt is the value of MNC’s investment in shares of an enterprise in a foreign country. It includes mergers and acquisitions and Greenfield investment.

16. Reinvested earningsThese are the retained profit of the firm in which MNC has invested Other capitalShort and long term lending and borrowing between the MNC and affiliate.

17. Benefits of FDIIncreased investmentFdi provides additional capital.It does not increase the external debt.2. Transfer of new technology3. Contribution to balance of paymentsBy contributing towards debt servicing repayments- by boosting export markets and produce foreign exchange revenues

18. 4. Social development-by raising wages and income5. InfrastructureGreenfield investment can stimulate new infrastructure development and technologies in host economies.6. Stimulate domestic enterprises7. Import substitution

19. 8. Stimulate exports and generate inward flow of earnings which help in trade balance.9. Competition…..in the domestic market10. Human capital formation11. Revenues12. Sectoral development13. Better allocation14. Growth15. Better management techniques and practicesS

20. Drawbacks of FDI to host countriesCompetition…..drives out local competitorsBalance of PaymentsThe earnings of MNCs and imports affect the capital account of the balance of payment of the host country.3. Trade balance….negative trade balance if MNCs import a high percent of components.

21. 4. Dependency5. Diversion6. Sovereignty and Autonomy7. Social impact- FDI benefits only a small percentage of people who are educated and wealthy. Widens the gap.8. Cultural Impact – Investment may occur for non-traditional goods or on sophisticated goods

22. 9. Local, Small and rural business10. Inappropriate techniques