Five Different Types of Foreign Direct Investment (FDI)

According to Chryssochoidis, Millar & Clegg, 1997 there are five different types of foreign direct investment (FDI). The first type of FDI is taken to gain access to specific factors of production, e.g. resources, technical knowledge, material know-how, patent or brand names, owned by a company in the host country. If such factors of production are not available in the home economy of the foreign company, and are not easy to transfer, then the foreign firm must invest locally in order to secure access. The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis. According to this model the company shall invest in order to gain access to cheaper factors of production, e.g. low-cost labour. The government of the host country may encourage this type of FDI if it is pursuing an export-oriented development strategy. Since it may provide some form of investment incentive to the foreign company, in form of subsidies, grants and tax concessions. If the government is using an import-substitution policy instead, foreign companies may only be allowed to participate in the host economy if they possess technical or managerial know-how that is not available to domestic industry. Such know-how may be transferred through licensing. It can also result in a joint venture with a local partner. The third type of FDI involves international competitors undertaking mutual investment in one another, e.g. through cross-shareholdings or through establishment of joint venture, in order to gain access to each other's product ranges. As a result of increased competition among similar products and R&D-induced specialisation this type of FDI emerged. Both companies often find it difficult to compete in each other's home market or in third-country markets for each other's products. If none of the products gain the dominant advantage, the two companies can invest in each other's area of knowledge and promote sub-product specialisation in production. The fourth type of FDI concerns the access to customers in the host country market. In this type of FDI there are not observed any underlying shift in comparative advantage either to or from the host country. Export from the companies' home base may be impossible, e.g. certain services, or the capability to request immediate design modifications. The limited tradability of many services has been an important factor explaining the growth of FDI in these sectors. The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type occurs when there are location advantages for foreign companies in their home country but the existence of tariffs or other barriers of trade prevent the companies from exporting to the host country. The foreign companies therefore jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence need only be sufficient to circumvent the trade barriers, since the foreign company wants to maintain as much of the value-added in its home economy.

ENTRY ROUTES FOR FDI 1 Investments can be made by non-residents in the equity shares/fully, compulsorily and Mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes; 1. The Automatic Route: under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment. 2. The Government Route: under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.

Advantages

Increase economic growth by dealing with different international products 1 million (1 Crore) employment will create in three years - UPA Government Billion dollars will be invested in Indian market Spread import and export business in different countries Agriculture related people will get good price of their goods

Disadvantages

Will affect 50 million merchants in India Profit distribution, investment ratios are not fixed An economically backward class person suffers from price raise Retailer faces loss in business Market places are situated too far which increases traveling expenses Workers safety and policies are not mentioned clearly Inflation may be increased Again India become slaves because of FDI in retail sector

Why India is a good destination to Invest your money

Innovation and India go together with the latter known worldwide for the former. Post the British and licence raj era, when Indias innovative ability was hampered, India has bounced back strongly. Software, aerospace, telecommunications, medicine, pharmacy etc. are just some of the many fields that have benefited from Indias innovation and creativity. Zero was born in India! And today it is perhaps the most sought after number after all the number of zeroes behind a digit makes a huge difference! Creativity in India can be seen in its Ajanta and Ellora caves, various art forms (including literature, music and dance), and diverse religions. India is home to five major classical dance forms; two forms of classical music, and four major religions were born in this country. India is also home to 25 languages Kannada and Telugu being the most advanced of all and innumerable dialects. Unfortunately, the spirit of innovation and creativity slacked during the British reign in India. Our traditional (and ancient) educational system of Gurukul was completely destroyed. But now this spirit is reviving. Indians are known for their creativity and innovativeness. And innovation stands on the pillars of capital, in terms of both human and money. And fortunately, India is the second most densely inhabited country, and the flow of money has increased dramatically in the past 10-15 years. Since independence, India has strived to achieve unexplored heights in scientific and engineering education. And today millions of students not only from India but also abroad graduate from these institutions every year.