DETERMINANTS OF FOREIGN DIRECT INVESTMENT

A Project Report Presented to the faculty of the School of Management & Entrepreneurship Auro University Surat.

In Partial Fulfilment Of the Requirements for the Degree of Bachelor of Business Administration

Submitted By: SHUBRA CHAWLA Submitted to: Mrs. Mayanka Singh March 2013
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DECLARATION FORM I declare that I have personally prepared this report and that it has not in whole or in part been submitted for any other degree or qualification. Nor has it appeared in whole or in part in any textbook, journal or any other document previously published or produced for any purpose. The work describe here is my own, carried out personally unless otherwise stated. All sources of information, including quotation, are acknowledged by means of reference, both in the final reference section, and at the point where they occur in the text. I understand that plagiarism and collusion are regarded as offence against the Universitys Examination Regulation and may result in formal disciplinary proceedings.

Acknowledgement I would like to take this opportunity to pay my gratitude to God and to people who have supported throughout writing my report. First and Foremost, I express my sincere gratitude to my Supervisor, Ms. Mayanka Singh, for being such an understanding and supporting mentor. Her motivation, support and path direction has greatly enhanced the value that I put in my report which otherwise would not been possible. I would like to thank her for taking the time out for meetings, to answer all my emails as well as providing me with detailed Suggestions and comments about my work. Thank you so very much! I would also like to acknowledge the invaluable help that I received from my professors during the past one year that in turn helped me in my report. I also want to thank the University authorities for providing excellent
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infrastructure such as world-class library with excellent collection of books, providing accesses to valuable journals, and IT facilities. I truly feel privileged to be part of this University. I would like to thank all my friends who supported me in making the project report. Finally, I need to thank my family for believing in me throughout this year and believing my abilities, when I needed it the most! I could not have survived this year at Auro if it werent for your support. Its just truly beyond the Report, I am grateful to them for every bit of contribution.

Regards, Shubra Chawla

Table of Contents CHAPTER 1: ................................................................................................................ 6 1.1 Introduction: ............................................................................................................. 6 CHAPTER 2: ................................................................................................................ 7 LITERATURE REVIEW: .......................................................................................... 7 2.1 Indian Fast Food Industry: ....................................................................................... 7 2.2 About McDonald's India .......................................................................................... 7 2.3 Relationship between McDonald's and Leo Burnett ................................................ 9 2.4 Facts and Figures ..................................................................................................... 9 2.4.1 Company Operated Sales.. 22 2.4.2 Franchised Revenue.. 23 2.4.3 Market Share . 24 2.4.4 Growth Rate . 25 2.4.5 Total Revenue of McDonald's ... . 26 CHAPTER 3: .............................................................................................................. 10 METHODOLOGY: ................................................................................................... 10 3.1 Data Sources: ......................................................................................................... 10 CHAPTER 4: .............................................................................................................. 12 DATA ANALYSIS ..................................................................................................... 12 4.1 BCG Matrix of McDonald's ................................................................................... 12 4.2 McDonald's India: Network and competitors ........................................................ 12 4.3 Products at McDonald's India ................................................................................ 12 4.4 Marketing Mix of McDonald's .............................................................................. 14 4.5 Business Model of McDonald's India .................................................................... 17 4.6 McDonald's marketing efforts over the year 21 CHAPTER 5: .............................................................................................................. 20 REPOSITIONING TECHNIQUES: ........................................................................ 20 5.1 types of repositioning strategies............................................................................. 12 5.2 McDonald's Repositioning Strategy ...................................................................... 12 5.3 McDonald's changing Markets changing Strategies .............................................. 12 5.4 Benefits of Repositioning ...................................................................................... 12 CHAPTER 6: .............................................................................................................. 20 CONCLUSION .......................................................................................................... 20

CHAPTER 1:
1.1 Introduction: Foreign Direct Investment in India Foreign Direct Investment was introduced in 1991 in India as Foreign Exchange Management Act (FEMA). Finance Minister Manmohan Singh drove it. If we start from the baseline it was less than $1 billion, a recent UNCTAD survey projected India as the second important FDI destination after China for transnational corporation in 2010-2012. According to the data the sectors, which were attracted higher inflows, were construction activities telecommunication, services, computer software and hardware. India is one of the worlds fastest economies at present but development in all sectors is not equal. Share of Primary sector in GDP is coming down and on the other hand, secondary and tertiary sector is increasing at high rate. Though every country that starts growing, at its initial stages, primary sector contributes maximum and in later stages, manufacturing i.e. secondary sector and service sector grows. Primary sector sets up the base for economy. Manufacturing units need huge investment, which generally country cant afford at initial stages of growing so sectorial shifts, are generally seen in later stages. Country prefer agriculture sector as a start of development or base because of the simple reason that investment needed in this sector is quite low compared to other sector and reason for shift is, productivity gained from agriculture is quite low and increase in productivity is at very less rate which makes scope in future to grow very less and people seeks other areas of investment. Income in agriculture sector generally remains fix until and unless there is huge inflation in market for goods.

CHAPTER 2: LITERATURE REVIEW:

2.1 Definition: An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. (investopedia) 2.2 Types of FDI There are five types of foreign direct investment that can be stated as under: According to Chryssochoidis, Millar & Clegg, 1997 five different ways of foreign direct investment (FDI) are as follow: 1st: Basically, in this type of investment it is taken to gain access to specific factors of production like technical knowledge, resources, material know-how, brand name or patent, owned by a company in the host country. If such type of factors of production are not available in the home economy of foreign company and are not easy to transfer, then the foreign firm must invest locally in order to secure access. (Chryssochoidis, 1997) 2nd:It involves international competitors undertaking mutual investment in one another like through establishment of joint venture or through cross-shareholding, in other to gain access to each other product ranges. As there is an increase in the competition among the similar products and R&D- induced specialization in this type of FDI emerged. Both the companies find it difficult to compete with each others home market or in the third countrys market for each other products. If none of the products gains the dominant advantage then the companies can invest in each others country area of knowledge and promote sub-product specialization in the production of the products. (Chryssochoidis, 1997) 3rd:Basically in this it relates to the trade diversionary aspect of regional integration. This occurs when there is a location advantage for foreign companies in their home country, but the existence of tariffs and other barriers of trade that prevent the companies from exporting to their host country. Therefore the foreign company jumps the barriers by establishing a local presence within their 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.

(Chryssochoidis, 1997) 4th: The Raymond Vernon in his product cycle hypothesis develops this investment. In this model the company shall invest to gain access at the cheaper factors of production like labours at cheap rate and the government of the host country also encourage this type of FDI if its pursuing an export-oriented development strategy. It may also provide some form of investment incentive to the foreign countries in the form of grants, tax concessions and subsides. If government is using import-substitution instead, then foreign companies 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 can be transferred through licensing and can also result in a joint venture with a local partner. (Chryssochoidis, 1997)

5th:basically it concerns the access to customer in the host country market. In this type of investment there are not observed any underlying shift comparative advantage either from or to the host country. Export from the companys home base may be possible like for example the capability to request immediate design modification or the certain services. (Chryssochoidis, 1997)

As explained above five different types of Foreign Direct Investment that companies can take for different use. The first type of invest in FDI is to gain access to the specific factors of production like technical knowledge, know-how, brand names or patents. In the second type of investment it involves international competitors undertaking mutual investment in one another to gain access to each other product ranges, like joint venture. According to the third type of investment companies jump barriers by establishing a local presence in order to gain access to local market. In the forth type the companies shall invest to gain access to cheaper factors of production like cheap labour.in the fifth type companies undertake FDI in order to gain access to customers in the host country market.

In 1960, Hymer stated that markets were not perfect and there was no free flow of information. He also argued that foreign competitors did not have better information about the economic environment in host country then the local player of that country. According to kindleberger the four different type of imperfection that explain the existence of FDI are that the diversification theory explains why companies take risk to invest in foreign country. Due to this theory the MNCs may gain advantage through risk reduction through international diversification. (Hymer, 1960)

2.3 Foreign Direct Investment and the developing world According to meta-analysis of the effects of FDI on local firms in transition and developing countries suggests that foreign investment robustly increases local productivity growth. (meta-analysis, 2011) 2.4 Difficulties Limiting Foreign Direct Investment Foreign Direct Investment may be difficult or politically controversial because it may partly reverses previous policies intended to protect growth of the infant industries or the local investment. When these kinds of barriers are against outside investment seem to have not worked sufficiently so it can be politically expedient for a host country to open a small tunnel as focus for FDI. The nature of foreign direct investment tunnel depends upon the countries need and policies and it is not restricted in developing countries.to get good benefits for less cost, this tunnel need to be focused on a particular industry and on a closely negotiated, specific terms. The specific terms define the trade offs of certain levels and different types of investment made by the firm and specified concessions by the host country. (foreign direct investment, 2012)

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CHAPTER 3: METHODOLOGY: 3.1 Data Sources: For my research work on this topic, I decided to choose secondary data. Secondary data not only consists of raw or compiled data but it also includes published summaries. Most of the organisations keep their records and data safe so that in future if any research work is to be done, it can be easier for anyone to analyse trends and draw to some relevant conclusion. Benefit of keeping records is, on doing research for same topic in future, time does not get wasted to collect same data again and again. One base data is available then it helps to make strategies. Data is available from many sources like magazine, newspaper, government records, industry statistics and reports, journals and old research that has been done time-to-time. This data includes all basic information about what company expects from countrys government and what is minimum level of technology that is needed for setting up industry etc. for research work, various surveys that are released by government can also be used.

Indian economy is developing at high rate and is in the list of one of the fastest developing nation of the world when whole world and particularly major developed economy is in recession. Inflow of FDI is obvious thing that will happen in India after seeing its growth rate. Indian government is also taking many measures to increase FDI inflow in India. Due to this reason, many journals, research papers, articles, magazines are published for this topic. My knowledge was enhanced after reading all these printed media and it gave me lot of information about India and also it helped

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me to clear all concepts that I just heard before in various discussions or read somewhere.

For my research work, main types of secondary data that i used are:

1. Secondary Data From Multiple Sources: Sources of multiple data are used from survey data or documentary. In my dissertation, I have used all these types of data, which is combination of two or more data. 2. Secondary Data from Documentaries: This is kind of data that includes various things documents that includes notices, government and public records and correspondence. For my dissertation, I have read many journals, newspapers, articles, published research on internet and books so that I can get good information for my research which has high credibility and also it helped me in giving good conclusion and recommendation of my dissertation. I gone through Aston Elibrary portal and also various links that has information regarding FDI and agriculture sector of India.

This topic that I have chosen to research on has always been in limelight and have been studied time-to-time. Thus, my approach for dissertation is inductive approach.

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CHAPTER 4: DATA ANALYSIS 4.1 DETERMINANTS OF FOREIGN DIRECT INVESTMENT 4.1.1 INFRASTRUCTURE The term infrastructure has been since 1927 to refer collectively to the rail lines, roads, bridges and similar public work that are required for industrial economy, or a part of it, to function. It also includes human, organizational and social elements. (Language, 2009) 4.1.1.1 How INFRASTRUCTURE attracts FDI FDI occurs more in countries with better infrastructure such as ports, highways, bridges etc. It is also seen that there are diminishing returns in infrastructure, but only of specified types. First bridge is more important than the second than the third and so on. Therefore, countries with poor infrastructure may be unattractive countries for FDI for variety of reasons, and even substantial investment in infrastructure will not bring FDI in one go. But all else equal, a country with better infrastructure is expected to get more FDI. (world economy infrastructure and FDI, 2012) 4.1.2 CORRUPTION Corruption is defined as, dishonest or fraudulent conduct by person who is in power, typically it involves bribery or it can be defined as action of making someone or something morally depraved or the state of being so. (dictionary.com) Corruption definition is not only limited to above written criterias. (Pusca, The political Economy of Corruption in Romania, 2004)

Market centered definition of corruption is corruption involves shift from a mandatory pricing model to a free-market model. When this happens bureaucracy ceases to be patterned after the mandatory market and takes on the characteristics of a free -market Above definition of corruption in context of market is problematic in many ways. Firstly, it is very generalised as they are less concerned with what of corruption but

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instead they are with how, when, why, and to what degree of corruption. (Farrales, what is corruption, 2005) 4.1.2.1 POSITIVE EFFECTS OF CORRUPTION ON FDI

It is not right to say that corruption is bad for economy. It has some positive effects too which are explained in various papers. Many economists and noneconomists suggests that, in developing economies where rules and regulations are pervasive and cumbersome, corruption can actually improve efficiency and can contribute to some extent for the growth of the country. According to Nathaniel H. Leff (Leff, 1964) if the government has erred in its decision, the course that is made possible by corruption may well be the better one Some economists say that corruption is much-needed grease for the squeaking wheels of an uncompromising government. Leys (1965) says that by giving bribe to bureaucrats, firms get permission to set up new industry at faster time then expected which is beneficial for economy as it brings inflow of money. (Johnston). 4.1.2.2 NEGATIVE EFFECTS OF CORRUPTION ON FDI

Corruption has negative impact in a way that it leads to increase in general price level of basic commodities. On economy it has worst effect as cost of basic infrastructure development like cost of constructing roads, bridges, proper water facilities increases which ultimately leads to increase in burden of general public. Corruption does not allow talented and ethical people to work which ultimately reduce efficiency and talent is hindered from country. (Transparency Ethiopia-An Organisation devoted to fight all forms of corruption, 2012)

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4.1.3 ECONOMIC GROWTH

Economic growth is generally measured in terms of production amount that takes place in a country or region over a certain period of time. It is increase in capacity of an country for producing goods and services in comparison of one period of time to another. (Economic Growth) Economic growth can be measured in two ways. Firstly, Nominal terms, it includes inflation of a country. Secondly, Real terms, it is bit of adjustment of inflation. Important factors that are taken into consideration while calculating economic growth of a country are GDP and GNP of a country i.e. because it takes into account population difference of a country. (Economic Growth) HOW ECONOMIC GROWTH ATTRACTS FDI

In recent studies it has been analysed that FDI acted as a major catalyst for technology transfer and for economic growth in a country. Every country wants to attract FDI and this can be only done if country has all above-mentioned factors positive and environment is in favour of MNCs. FDI brings huge amount of capital in an economy, which is must for setting up of heavy manufacturing units. (ADBI Publications, 2009)

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TABLE-1.1 FDI INFLOWS IN INDIA (from 1948-2010)

Amount MID 1948 of FDI

MARCH 1964

MARCH 1974

MARCH 1980

MARCH 1990

MARCH 2000 MARCH 2010

In crores

256

565.5

916

933.2

2705

18486

123378

Source: Kumar39 1995, various issues of SIA Publication There is a considerable decrease in the tariff rates on various importable goods. The above table shows the FDI in India from 1948-2010. FDI inflows during 1991-92 to March 2010 in India increased manifold as compared to during mid 1948 to march 1990. The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. There were only few (U.K., USA, Japan, Germany, etc.) major countries investing in India during the period mid 1948 to March 1990 and this number has increased to fifteen in 1991. India emerged as a strong economic player on the global front after its first generation of economic reforms. As a result of this, the list of investing countries to India reached to maximum number of 120 in 2008. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries. Mauritius, USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the entire FDI inflows to India. FDI inflows are welcomed in 63 sectors in 2008 as compared to 16 sectors in 1991. YEARS AMOUNT IN CRS

1948 MARCH 1964 MARCH 1974 MARCH 1980 MARCH 2000 MARCH 2010 MARCH

0 0 0 0 2 14.1 15

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CHART 1.1

Amount in crs.
16 14 12 10 8 6 4 2 0 1948 MARCH 1964 MARCH 1974 MARCH 1980 MARCH 2000 MARCH 2010 MARCH Amount in crs.

Source: Kumar 1995, various issues of SIA Publication.

The FDI inflows in India during mid 1948 were Rs. 256 crores. It is almost double in March 1964 and further to Rs. 916 crores. India received a cumulative FDI inflow of Rs. 5,384.7 crores during mid 1948 to March 1990 as compared to Rs. 1,41,864 crores during August 1991 to March 2010. It is observed from the above chart that there has been a steady flow of FDI in India after the Independence. But there is a sharp rise in FDI inflows from 1998 onwards. U.K. the prominent investor during the pre and post independent era stands nowhere today as it holds a share of 6.1 % of the total FDI inflows in India. (indian economy)

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4.2 SWOT ANALYSIS OF FDI

4.2.1 STRENGHTS: Customers will have wide variety of international branded goods. Employment opportunity for both direct and indirect have been increased and farmers get the better prices for their products through the improvement of value added food chain due to there is no middle man and the farmers gets the actual rate of the product which they produce on a land. FDI has also contributed to the large scale of investment in the real estate/infrastructure sector. Real estate sector is booming after FDI. In India income of middle class is increasing which is resulting into high purchasing power, also size of Indian domestic market is increasing, due to which consumer will get better product at cheaper price.

4.2.2 WEAKNESS: The main weakness of FDI in Indian retailing sector is small size outlets, 96% of the outlets are less than 500 sq. ft. Retail chain is not settled down properly, it has to be settled with mall outlets. Still 70% of population lives in rural areas, FDI will mainly invest in metros which will exclude high proportion of Indian population to take benefit of high-end multi-brand stores. In the short period of time there is a sharp improvement in the retail sector and the improvement in the retail space and the prices of property and real estate rentals have increased remarkably. 4.2.3 OPPORTUNITIES: As we know that in the small roadside shops there are only limited number of

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items and only local products are available in the shop. If the FDI comes in existence then there will be the up-gradation of the retail trade and there will be choice to the consumer for the products. If there will be the organized retail sector then it is expected the there will strong rise in the GDP in the next five years and due to which there will be change in lifestyle, increase in the income and favorable demographic outline. The retailing key drivers of growth are food and apparels. If FDI comes in India then it will become one of the largest industries in terms of employees and establishment because if the big retail stores open then the workers will get work to do and will get money to run the home. If the big retail stores like Reliance, Wall-Mart, Big Bazaar, etc. comes to the India then the consumers have wide variety of products and as compared to Indian products then they are relatively cheap and of good quality.

4.2.4 THREATS: As there is no proper supply chain in India so its a great barrier for the growth of modern retail formats. As there are the lack of infrastructure, regulations, and investment. As it is difficult for FDI to target all the sectors of India. As companies need big investment to set up there outlets in India and need wide space to set up there retail outlet and they have large competition with other companies. As sector is unable to employ retail staff on the contract basis because everyone need permanent employs in there organization not on contracts basis.

SR. NO. 1. 2. 3. 4.

SECTOR/ACTIVITY

FDI cap/Equity

Entry/Route

Hotel & Tourism NBFC Insurance Telecommunication: Cellular, value added services ISPs with gateways, radiopaging Electronic Mail & Voice Mail

5.

Trading companies: Primarily export activities bulk

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imports, cash and carry wholesale trading 6. Power (other than atomic reactor power plants) Drugs & Pharmaceuticals Roads, Highways, Ports and Harbors Pollution Control and Management Call Centers BPO For NRIs and OCBs: i. ii. iii. iv. 34 High Priority Industry Group Export Trading Companies Hotels and Tourismrelated Projects Hospitals, Diagnostic

7. 8.

9. 10. 11. 12.

MAURITIES USA SINGAPORE UK NETHERLAND JAPAN GERMANY CYPRUS FRANCE SW 39.9 8.8 7.2 6.1 4.4 3.4 2.9 2.1 1.5

1.1

SOURCE: compiled & computed from the various issues of Economic Survey, RBI Bulletin, Ministry of commerce India has broadened the sources of FDI in the period of reforms. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. Thus the number of countries investing in India increased after reforms. After liberalization of economy, Mauritius, South Korea, Malaysia, Cayman Island and many more countries predominantly appears on the list of major investors apart from U.S., U.K., Germany, Japan, Italy, and France which are not only the major investor now but during pre-liberalization era also. The analysis in presents the major investing countries in India during 1991-2008 is the largest investor in India during 1991-2008. FDI inflows from Mauritius constitute about 39.9% of the total FDI in India and enjoying the top position on Indias FDI map from 1995. This dominance of Mauritius is because of the Double Taxation Treaty i.e. DTAA-Double Taxation Avoidance Agreement between the two countries, which favours routing of investment through this country. This (DTAA) type of taxation treaty has been made out with Singapore also. 19

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PESTLE ANALYSIS: The full form of pestle is Political, Economical, Social, Technological, Environmental, and Legal Analysis.

CHAPTER 5: Recommendation: After researching on FDI topic I came to know that India is still lagging behind in matter of FDI as compared to other developing and developed nations. Though situation is getting better with every successive year and this we can say from the facts and figures that shown drastic increment for inflow of FDIs from the year 19912013. Basically India is agrarian economy and around 52% of population is indulged in this sector. I would recommend India should do something for this sector and then in other sectors because of % of Indias population engaged in agriculture sector. Other sectors like infrastructure, telecommunication and insurance sector should be allowed for FDIs as these sectors are not performing well and for any developing economy, development of these sectors are must. In India, problems lies with coalition government as decision making is very slow and strong discouragement of opposition parties on matter of FDI leads to closure of gates of FDI for India economy. If India wants to develop at faster scale like its neighbor China then FDI is must for India. Though some people argue that by FDI India can face problem of high unemployment, to get away from this problem, proper training mechanism will need to be developed by government.

CHAPTER 6: CONCLUSION In chapter 1,I tried to give background of Indian economy and how it has shown sign of improvement in recent years. I also tried to give basic background about Sectors and population involved in different sectors of our economy. In chapter 2,literature review, I gave different approaches and determinants of FDI with limitations and positive from each sector.

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In chapter 3, methodology, I tried to depict method I used for this research and reason of choosing secondary method and its advantages and limitations. In chapter 4,Data analysis, I done SWOT and PEST analysis of Indian economy, I also done comparison of Indian economy with rest of the world. In chapter 5, i gave my recommendations after researching of this project that enhanced my knowledge to high extent with regards to Indian economy and where India stands at world level.

CHAPTER 7:

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