Foreign direct investment

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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.[1]

Contents
[hide]

1 History

2 Types

3 Methods

4 Debates about the benefits of FDI for low-income countries

5 Foreign direct investment in the United States

6 Foreign direct investment in China

7 See also

8 References

9 External links

[edit] History
(FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land.
Increasing foreign investment can be used as one measure of growing economic globalization.
Figure below shows net inflows of foreign direct investment. The largest flows of foreign

investment occur between the industrialized countries (North America, Western Europe and
Japan). But flows to non-industrialized countries are increasing sharply.
US International Direct Investment Flows:[2]
Period
1960-69
1970-79
1980-89
1990-99
2000-07
Total

FDI Outflow
$ 42.18 bn
$ 122.72 bn
$ 206.27 bn
$ 950.47 bn
$ 1,629.05 bn
$ 2,950.69 bn

FDI Inflows
$ 5.13 bn
$ 40.79 bn
$ 329.23 bn
$ 907.34 bn
$ 1,421.31 bn
$ 2,703.81 bn

Net
+ $ 37.04 bn
+ $ 81.93 bn
- $ 122.96 bn
+ $ 43.13 bn
+ $ 207.74 bn
+ $ 246.88 bn

[edit] Types
A foreign direct investor may be classified in any sector of the economy and could be any one of
the following:[citation needed]

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.

[edit] 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:[citation needed]

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 projects)

[edit] Debates about the benefits of FDI for low-income

countries
Some countries have put restrictions on FDI in certain sectors. India, with its restriction on FDI
in the retail sector is an example.[3] In a country like India, the walmartization of the country

could have significant negative effects on the overall economy by reducing the number of people
employed in the retail sector (currently the second largest employment sector nationally) and
depressing the income of people involved in the agriculture sector (currently the largest
employment sector nationally).[4]

[edit] Foreign direct investment in the United States

"Invest in America" is an initiative of the US Department of Commerce and aimed to promote
the arrival of foreigners investors to the country.[5]
The Invest in America policy is focused on:

Facilitating investor queries.

Carrying out maneuvers to aid foreign investors.

Provide support both at local and state levels.

Address concerns related to the business environment by helping as an ombudsman in

Washington Dc for the international venture community.

Offering policy guidelines and helping getting access to the legal system.

The United States is the worlds largest recipient of FDI. More than $325.3 billion in FDI flowed
into the United States in 2008, which is a 37 percent increase from 2007. The $2.1 trillion stock
of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of
U.S. gross domestic product (GDP).55
Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs
have been created by foreign companies, resulting in close to $314 billion in investment.[citation
needed]
Unarguably, US affiliates of foreign companies have a history of paying higher wages than
US corporations.[citation needed] Foreign companies have in the past supported an annual US payroll
of $364 billion with an average annual compensation of $68,000 per employee.[citation needed]
Increased US exports through the use of multinational distribution networks. FDI has resulted in
30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all
manufacturing jobs in the US.[6]
Affiliates of foreign corporations spent more than $34 billions on research and development in
2006 and continue to support many national projects. Inward FDI has led to higher productivity
through increased capital, which in turn has led to high living standards.[7]

[edit] Foreign direct investment in China

FDI in China has been one of the major successes of the past 3 decades.[citation needed] Starting from a
baseline of less than $19 billion just 20 years ago, FDI in China has grown to over $300 billion
in the first 10 years. China has continued its massive growth and is the leader among all
developing nations in terms of FDI.[citation needed] Even though there was a slight dip in FDI in 2009
as a result of the global slowdown, 2010 has again seen investments increase.[citation needed] The
Chinese continue to steamroll with expectations that economic growth will be 10% this year.[8]

Indian Economy
Overview

Foreign Direct Investment

Last Updated: July 2010

Trade and External

Sector
FDI
FII

Domestic Investments
Indian Investments
Abroad
Agriculture
Manufacturing
Infrastructure
Ports
Power
Railways
Roads

India has been ranked at the third place in global foreign direct investments in 2009
and will continue to remain among the top five attractive destinations for
international investors during 2010-11, according to United Nations Conference on
Trade and Development (UNCTAD) in a report on world investment prospects titled
'World Investment Prospects Survey 2009-2011' released in July 2009.

The 2009 survey of the Japan Bank for International Cooperation released in
November 2009, conducted among Japanese investors continues to rank India as the
second most promising country for overseas business operations, after China.
A report released in February 2010 by Leeds University Business School,
commissioned by UK Trade & Investment (UKTI), ranks India among the top three
countries where British companies can do better business during 2012-14.

According to Ernst and Young's 2010 European Attractiveness Survey, India is

ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010
However, it is ranked the 2nd most attractive destination following China in the next
three years.
Moreover, according to the Asian Investment Intentions survey released by the Asia
Pacific Foundation in Canada, more and more Canadian firms are now focussing on
India as an investment destination. From 8 per cent in 2005, the percentage of
Canadian companies showing interest in India has gone up to 13.4 per cent in 2010.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The
cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at
US$ 134,642 million, according to the data released by the Department of Industrial
Policy and Promotion (DIPP).
The services sector comprising financial and non-financial services attracted 21 per

Services
Consumer Markets
Marketing and
Strategy
Rural Market
Urban Market
Union Budget 2010-11

cent of the total FDI equity inflow into India, with FDI worth US$ 4.4 billion during
April-March 2009-10, while construction activities including roadways and
highways attracted second largest amount of FDI worth US$ 2.9 billion during the
same period. Housing and real estate was the third highest sector attracting FDI
worth US$ 2.8 billion followed by telecommunications, which garnered US$ 2.5
billion during the financial year 2009-10. The automobile industry received FDI
worth US$ 1.2 billion while power attracted FDI worth US$ 1.4 billion. during April
March 2009-10, according to data released by DIPP.

In April 2010, the telecommunication sector attracted the highest amount of FDI
worth US$ 430 million, followed by services sector at US$ 355 million and
computer hardware and software at US$ 172 million, according to data released by
DIPP. During the financial year 2009-10, Mauritius has led investors into India with
US$ 10.4 billion worth of FDI comprising 43 per cent of the total FDI equity inflow
into the country. The FDI equity inflows in Mauritius is followed by Singapore at
US$ 2.4 billion and the US with US$ 2 billion, according to data released by DIPP.

During April 2010, Mauritius invested US$ 568 million in India, followed by
Railway Budget 2010-11 Singapore which invested US$ 434 million and Japan that invested US$ 327 million
according to latest data released by DIPP
Economic Survey 200910

Investment Scenario
In May 2010, the government cleared 24 foreign investment proposals, worth US$
304.7 million. These include:

Asianet's proposal worth US$ 91.7 million to undertake the business of

broadcasting non-news and current affairs television channels.

Global media magnate Rupert Murdoch-controlled Star India holdings'

investment of US$ 70 million to acquire shares of direct-to-home (DTH)
provider Tata Sky.

AIP Power will set up power plants either directly or indirectly by promotion
of joint ventures at an investment of US$ 24.4

Retail major Walmart is batting for allowing 100% foreign direct investment (FDI) in retail with an initial
49% cap, reports CNBC-TV18.

Walmart has proposed that an investment of USD 100 million can have a threshold of five years for
backend, with a minimum threshold only for food retail business. It further says that 50% job quota for
rural youth requires onerous audit so it has suggested tax breaks instead of job quotas.
It has recommended allowing FDI in multi-brand retail in cities with over 2 lakh people. Besides Walmart
has also suggested that more than 50% goods should be sourced locally while small and medium
enterprises (SME) sourcing quota should apply to domestic retailers.
Earlier in July, the government had taken the first step towards opening up the multi-brand retail sector for
FDI by releasing a discussion paper on the issue. The department of industrial policy and promotion
(DIPP) under the commerce ministry had asked for comments on putting FDI cap in multi-brand retail,
which is currently banned.
The paper however was silent on the quantum of FDI cap even after the draft paper had proposed 51%
FDI in multi-brand retail.

Foreign Direct Investment (FDI) Definition

Definition of Foreign Direct Investment

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 an incorporated firm. For an unincorporated firm one needs to consider an equivalent
criterion.

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

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.
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.

Foreign Direct Investment (FDI) Definition

Definition of Foreign Direct Investment

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 an incorporated firm. For an unincorporated firm one needs to consider an equivalent
criterion.
Ownership share amounting to less than that stated above is termed as portfolio investment and
is not categorized as FDI.
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.

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.
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.
FDI-Foreign Direct Investment
FDI means Foreign Direct Investment. India Foreign Direct Investment includes
investments in the infrastructure development projects including construction of
bridges and flyovers, finance sector including banking and insurance services , real
estate development , retail sector etc. The foreign direct investment definition says
the direct investments in any productive assets in a country by any foreign
company is called foreign direct investment or FDI.
Foreign Direct Investment in India

FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign
direct investment and FII foreign institutional investors are a separate case study
while preparing a report on FDI and economic growth in India. FDI and FII in India
have registered growth in terms of both FDI flows in India and outflow from India.
The FDI statistics and data are evident of the emergence of India as both a
potential investment market and investing country.
FDI Policy in India

The Foreign direct investment scheme and strategy depends on the respective FDI
norms and policies in India. The FDI policy of India has imposed certain foreign
direct investment regulations as per the FDI theory of the Government of India
(GoI). These include FDI limits in India for example:
o

Foreign direct investment in India in infrastructure development projects

excluding arms and ammunitions, atomic energy sector, railways system ,
extraction of coal and lignite and mining industry is allowed upto 100%
equity participation with the capping amount as Rs. 1500 crores.

FDI figures in equity contribution in the finance sector cannot exceed more
than 40% in banking services including credit card operations and in
insurance sector only in joint ventures with local insurance companies.

o FDI limit of maximum 49% in telecom industry especially in the GSM services

FDI Advantages and Disadvantages

The FDI norms in real estate sector as well as in the retail sector are also
predetermined by the GoI after a careful study of the foreign direct investment pros
& cons. The foreign direct investment advantages lay in the fact that equity
participation form foreign investors brings larger infrastructure base for the project
but the FDI disadvantages of losing the ownership rights to a foreign company
makes it a cautious decision.
The FDI theories listing the FDI disadvantages include the increased liquidity and
consequent inflation due to excessive FDI inflow in India. In order to absorb the FDI
entering the Indian economy, the rupee is being pressurized. However the FDI
benefits include better efficiency in funds management in India and thus
improvisations in the quality standards.
The FDI policy 2007 ascertains regulations on the FDI stocks and this may reduce
the foreign direct investment confidence as closing the doors of industrial relations
with foreign investors with only hamper the FDI and economic growth in India
coordination. FDI and GDP in India working together and brining the reforms to the
economics in India.
Foreign Portfolio Investment in India

Another form of foreign investment besides FDI is FPI or foreign portfolio investment
that is a more easily traded form of foreign investment and less permanent. In FPI
investment is made through stocks and bonds in a foreign enterprise without longterm financial relationship plans.
FDI Trends in India

Steps have been taken by the government to impart technical FDI education so as
to improvise the FDI database of the country. FDI and trade go hand in hand as both
works in a symbiotic situation. FDI has also created more employment opportunities
as FDI trends have increased the basic infrastructure of any organization thus
demanding growth in terms of organizational structure as well. The foreign direct
investment news in India shows the FDI notations being adopted by India, the
foreign direct investment strategies, and the FDI guidelines regulating the inflow of
foreign funds in India.
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