CHAPTER - 1

INTRODUCTION TO FDI
1.1 OVERVIEW
The last two decade of the 20th century witnessed a dramatic world-wide increase in
foreign direct investment (FDI), accompanied by a marked change in the attitude of most
developing countries towards inward FDI. As against a highly suspicious attitude of these
countries towards inward FDI in the past, most countries now regard FDI as beneficial for
their development efforts and compete with each other to attract it. Such shift in attitude
lies in the changes in political and economic systems that have occurred during the
closing years of the last century.
The wave of liberalisation and globalization sweeping across the world has opened many
national markets for international business. Global private investment, in most part, is
now made by multinational corporations (MNCs). Clearly these corporations play a major
role in world trade and investments because of their demonstrated management skills,
technology, financial resources and related advantages. Recent developments in global
markets are indicative of the rapidly growing international business. The end of the 20 th
century has already marked a tremendous growth in international investments, trade and
financial transactions along with the integration and openness of international markets.
FDI is a subject of topical interest. Countries of the world, particularly developing
economies, are vying with each other to attract foreign capital to boost their domestic
rates of investment and also to acquire new technology and managerial skills. Intense
competition is taking place among the fund-starved less developed countries to lure
foreign investors by offering repatriation facilities, tax concessions and other incentives.
However, FDI is not an unmixed blessing. Governments in developing countries have to

be very careful while deciding the magnitude, pattern and conditions of private foreign
investment.
In the 1980s, FDI was concentrated within the Triad (EU, Japan and US). However, in the
1990s, the FDI flows to developed countries declined, while those to developing countries
increased in response to rapid growth and fewer restrictions. Most FDI flows continue
still to be concentrated in 10 to 15 host countries overwhelmingly in Asia and Latin
America. South, East and Southeast Asia has experienced the fastest economic growth in
the world, and emerged as the largest host region. China is now the largest host country in
the developing world.
In India, prior to economic reforms initiated in1991, FDI was discouraged by

Imposing severe limits on equity holdings by foreigners and

Restricting FDI to the production of only a few reserved items.

The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by Foreign Exchange
Management Act [FEMA]), prescribed the detailed rules in this regard and the firms
belonging to this group were known as FERA firms. All foreign investors were virtually
driven out from Indian industries by FERA. Technology transfer was possible only
through the purchase of foreign technology.
Foreign investment policies in the post-reforms period have emphasized greater
encouragement and mobalisation of non-debt creating private inflows for reducing
reliance on debt flows. Progressively liberal policies have led to increasing inflows of
foreign investment in the country.
Though India has one of the most transparent and liberal FDI regimes among the
developing countries with strong macro-economic fundamentals, its share in FDI inflows
is dismally low. The country still suffers from weaknesses and constraints, in terms of
policy and regulatory framework, which restricts the inflow of FDI.
2

1.2 WHAT IS FOREIGN DIRECT INVESTMENT?

FDI is the process whereby residents of one country (the home country) acquire
ownership of assets for the purpose of controlling the production, distribution and other
activities of a firm in another country (the host country).
IMF Definition
According to the BPM5, FDI is the category of international investment that reflects the
objective of obtaining a lasting interest by a resident entity in one economy in an
enterprise resident in another economy. The lasting interest implies the existence of a
long-term relationship between the direct investor and the enterprise and a significant
degree of influence by the investor on the management of the enterprise.
UNCTAD Definition
The WIR02 defines FDI as an investment involving a long-term relationship and
reflecting a lasting interest and control by a resident entity in one economy (foreign direct
investor or parent enterprise) in an enterprise resident in an economy other than that of
the FDI enterprise, affiliate enterprise or foreign affiliate. FDI implies that the investor
exerts a significant degree of influence on the management of the enterprise resident in
the other economy. Such investment involves both the initial transaction between the two
entities and all subsequent transaction between them among foreign affiliates, both
incorporated and unincorporated. Individuals as well as business entities may undertake
FDI.
As is evident from the above definitions, there is a large degree of commonality between
the IMF, UNCTAD definitions of FDI. The IMF definition is followed internationally.

1.3 NATURE OF FDI

Almost all modern (FDI) is carried out by corporations rather than individuals. Somewhat
like portfolio investment, the flows of FDI have historically been highly concentrated,
both in terms of geography and by industry and at both the investor and receptor poles.
Geographically, the ownership of global stocks of FDI is highly skewed towards only a
few large, high income countries. Each investing country has, whether by accident or
design , tended to direct the major part of its FDI to only a very few receiving countries;
in fact the pattern of global distribution of FDI have been highly similar to historical
relationships based on colonial ties or other forms of political hegemony.
Viewed industrially, for any given country, FDI generally comes from less than four or
five out of twenty or so major industry groups and inflows into those same industries in
the receptor country.
General attribute of FDI is that it has evoked by type over time. Prior to First World War,
a crude but valid generalization would that a large part of FDI was in service sector of the
host economy (particularly transportation, power, communication and trading) while most
of the rest was of the backward vertical integration type. During the inter-war period,
most of the currently largest manufacturing multinational corporations (MNCs) made
their initial foreign investments, but these horizontal or market extension types of
investments have now become major category.
The fourth recognized characteristic of manufacturing FDI is that it originates in
industries that are technologically intensive, skill oriented or progressive. In addition,
the FDI prone industries are typically more concentrated, have higher advertising outlays
per unit of sales and exhibit above average export propensities. Industries from which
FDI tends to originate display many characteristics associated with oligopoly.

1.4 FDI IN DEVELOPING COUNTRIES

FDI is now increasingly recognized as an important contributor to a developing countrys
economic performance and international competitiveness.
After the debt-crisis that hit the developing world in early 1980s, the conventional
wisdom quickly became that it had been unwise for countries to borrow so heavily from
international banks or international bond markets. Rather countries should try to attract
non-debt-creating private inflows (DFI). The financial advantage is that such capital
inflows need not be repaid and that outflow of funds (remittance of profits) would
fluctuate with the cycle of the economy. It has also been widely observed that the
structural adjustment efforts of the 1980s failed to lead to new patterns of sustained
growth in developing countries. In particular, structural adjustment programs failed to
restore private investment to desirable levels. Again it is hoped that FDI could play an
important role; the World Bank observes that FDI can be an important complement to the
adjustment effort, especially in countries having difficulty in increasing domestic savings.
Against this background of balance of payments problems and low level of private
investment, it is probably not surprising that attitudes in developing countries towards
FDI have shifted. In the 1960s and 1970s many countries maintained a rather cautious,
and sometimes an outright negative position with respect to FDI. In the 1980s, however
the attitudes shifted radically towards a more welcoming policy stance. This change was
not so much due to new research finding on the impact of FDI but to the economic
problems facing the developing world. Developing countries are liberalizing their foreign
investment regimes and are seeking FDI not only as a source of capital funds and foreign
exchange but also as a dynamic and efficient vehicle to secure the much needed industrial
technology, managerial expertise and marketing know-how and networks to improve on
growth, employment, productivity and export performance.
5

1.5 ADVANTAGES OF FDI

Foreign Direct Investment has the following potential benefits for less developed
countries.
1.

Raising the Level of Investment: Foreign investment can fill the gap between
desired investment and locally mobilised savings. Local capital markets are often not
well developed. Thus, they cannot meet the capital requirements for large investment
projects. Besides, access to the hard currency needed to purchase investment goods
not available locally can be difficult. FDI solves both these problems at once as it is a
direct source of external capital. It can fill the gap between desired foreign exchange
requirements and those derived from net export earnings.

2.

Upgradation of Technology: Foreign investment brings with it technological

knowledge while transferring machinery and equipment to developing countries.
Production units in developing countries use out-dated equipment and techniques that
can reduce the productivity of workers and lead to the production of goods of a lower
standard.

3.

Improvement in Export Competitiveness: FDI can help the host country

improve its export performance. By raising the level of efficiency and the standards of
product quality, FDI makes a positive impact on the host countrys export
competitiveness. Further, because of the international linkages of MNCs, FDI
provides to the host country better access to foreign markets. Enhanced export
possibility contributes to the growth of the host economies by relaxing demand side
constraints on growth. This is important for those countries which have a small
domestic market and must increase exports vigorously to maintain their tempo of
economic growth.

4.

Employment Generation: Foreign investment can create employment in the

modern sectors of developing countries. Recipients of FDI gain training of employees
in the course of operating new enterprises, which contributes to human capital
formation in the host country.

5.

Benefits to Consumers: Consumers in developing countries stand to gain from

FDI through new products, and improved quality of goods at competitive prices.

6.

Resilience Factor: FDI has proved to be resilient during financial crisis. For
instance, in East Asian countries such investment was remarkably stable during the
global financial crisis of 1997-98. In sharp contrast, other forms of private capital
flows like portfolio equity and debt flows were subject to large reversals during the
same crisis. Similar observations have been made in Latin America in the 1980s and
in Mexico in 1994-95. FDI is considered less prone to crises because direct investors
typically have a longer-term perspective when engaging in a host country.

7.

Revenue to Government: Profits generated by FDI contribute to corporate tax

revenues in the host country.

1.6 DISADVANTAGES OF FDI

FDI is not an unmixed blessing. Governments in developing countries have to be very
careful while deciding the magnitude, pattern and conditions of private foreign
investment. Possible adverse implications of foreign investment are the following:
1.

When foreign investment is competitive with home investment, profits in

domestic industries fall, leading to fall in domestic savings.

2.

Contribution of foreign firms to public revenue through corporate taxes is

comparatively less because of liberal tax concessions, investment allowances,
disguised public subsidies and tariff protection provided by the host government.
7

3.

Foreign firms reinforce dualistic socio-economic structure and increase income

inequalities. They create a small number of highly paid modern sector executives.
They divert resources away from priority sectors to the manufacture of sophisticated
products for the consumption of the local elite. As they are located in urban areas,
they create imbalances between rural and urban opportunities, accelerating flow of
rural population to urban areas.

4.

Foreign firms stimulate inappropriate consumption patterns through excessive

advertising and monopolistic market power. The products made by multinationals for
the domestic market are not necessarily low in price and high in quality. Their
technology is generally capital-intensive which does not suit the needs of a laboursurplus economy.

5.

Foreign firms able to extract sizeable economic and political concessions from
competing governments of developing countries. Consequently, private profits of
these companies may exceed social benefits.

6.

Continual outflow of profits is too large in many cases, putting pressure on foreign
exchange reserves. Foreign investors are very particular about profit repatriation
facilities.

7.

Foreign firms may influence political decisions in developing countries. In view

of their large size and power, national sovereignty and control over economic policies
may be jeopardized. In extreme cases, foreign firms may bribe public officials at the
highest levels to secure undue favours. Similarly, they may contribute to friendly
political parties and subvert the political process of the host country.

CHAPTER - 2
FOREIGN DIRECT INVESTMENT IN INDIA

Since independence till 1990, the performance of Indian economy has been dominated by
a regime of multiple controls, restrictive regulations and wide ranging state intervention.
Industrial economy of the country was protected by the state and insulated from external
competition. As a result of which, India was thrown a long way behind the world of rapid
expanding technology. The cumulative effect of these policies started becoming more and
more pronounced. By the year 1989-90, the situation on the balance of payment and
foreign exchange reserves became precarious and the country was driven to the brink of
default. The credibility reached the sinking level that no country was willing to advance
or lend to India at any cost. In such circumstances, the government quickly followed a
liberalized economic policy in July 1991.
The main objectives of the liberalized economic policy are twofold. At the country level
the reform aims at freeing domestic investors from all the licensing requirements, virtual
abolition of MRTP restriction on the investment by large houses, and a competitive
industrial structure for Indian companies to achieve a global presence by becoming as
competitive as their counterparts worldwide. Secondly, the focus on structural reforms
intended to tap foreign investment for economic growth and development.
Gradually & systematically the government has taken a series of measures like
devaluation of rupee, lowering of import duties and allowing foreign investment upto
51% of the equity in a large number of industries and investment of large foreign equity
(even up to 100%) in selected areas especially for export oriented products.
9

In India, since the 1960s foreign investment and/or foreign collaborations by the
multinationals have been principally viewed as an instrument to facilitate the much
needed transfer of technology. In technological as well as financial collaborations with
foreign firms, the approval and extent of ownership participation had been predominantly
determined by the technology component of the respective products. Import of
technology as against the direct foreign investment was the main focus of the policies till
mid-eighties.
The New Industrial Policy (NIP) of July 1991 and subsequent policy amendments have
significantly liberalized the industrial policy regime in the country especially as it applies
to FDI. The industrial approval system in all industries has been abolished except for
some strategic or environmentally sensitive industries. In 35 high priority industries, FDI
up to 51% is approved automatically if certain norms are satisfied. FDI proposals do not
necessarily have to be accompanied by technology transfer agreements. Trading
companies engaged primarily in export activities are also allowed up to 51% foreign
entity. A Foreign Investment Promotion Board (FIPB) has been set up to invite and
facilitate investment in India by international companies. The use of foreign brand names
for goods manufactured by domestic industry which had earlier been restricted was also
liberalized. New sectors have been opened to private and foreign investment. The
international trade policy regime has been considerably liberalized too. The rupee was
made convertible first on trade and finally on the current account. Capital market has
been strengthened. In spite of all these liberalization measures taken by the Indian
government- foreign investments have not been up to expectations. Actual inflow of FDI
has been less than the approval FDI.

10

CHAPTER - 3
POLICIES AND PROCEDURES OF FDI
The initial policy stimulus to foreign direct investment in India came in July 1991 when
the new industrial policy provided, inter alia, automatic route approval for projects with
foreign equity participation up to 51 percent in high priority areas. In recent years, the
government has initiated the second generation reforms under which measures have been
taken to further facilitate and broaden the base of FDI in India. The policy of FDI allows
freedom of location, choice of technology repatriation of capital and dividends. The rate
at which FDI inflow has grown during the post-liberalisation period is a clear indication
that India is a fast emerging as an attractive destination for overseas investors. As part of
the economic reforms programme, policy and procedures governing foreign investment
and technology transfer have been significantly simplified and streamlined. Today FDI is
allowed in all sectors including the service sector except in cases where there are sectoral
ceilings.
FDI Policy Regime
Most of the problem for investors arises because of domestic policy, rules and procedures
and not the FDI policy per se or its rules and procedure. India has one of the most
transparent and liberal FDI regimes among the emerging and developing economies. By
FDI regime it means those restrictions that apply to foreign nationals and entities but not
to Indian nationals and Indian owned entities. The differential treatment is limited to a
few entry rules, spelling out proportion of equity that the foreign entrant can hold in an
11

Indian company or business. There are a few banned sectors and some sectors with limits
on foreign equity proportion. The entry rules are clear and well defined and equity limits
for FDI in selected sectors such as telecom quite explicit and well-known.Subject to these
foreign equity conditions a foreign company can set up a registered company in India and
operate under the same laws, rules and regulations as any Indian owned company would.
There is absolutely no discrimination against foreign invested companies registered in
India or in favour of domestic owned ones. There is however a minor restriction on those
foreign entities who entered a particular sub-sector through a joint venture with an Indian
partner. If they want to set up another company in the same sector it must get a noobjection certificate from the joint venture partner. This condition is explicit and
transparent unlike many hidden conditions imposed by some other recipients of FDI.
Routes for Inward Flows of FDI
FDI can be approved either through the automatic route or by the Government.
1. Automatic Route: Companies proposing FDI under automatic route do not require any
government approval provided the proposed foreign equity is within the specified ceiling
and the requisite documents are filed with Reserve Bank of India (RBI) within 30 days of
receipt of funds. The automatic route encompasses all proposals where the proposed items
of manufacture/activity does not require an industrial license and is not reserved for
small-scale sector. The automatic route of the RBI was introduced to facilitate FDI
inflows. However, during the post-policy period, the actual investment flows through the
automatic route of the RBI against total FDI flows remained rather insignificant. This was
partly due to the fact that crucial areas like electronics, services and minerals were left out
of the automatic route. Another limitation was the ceiling of 51 percent on foreign equity
holding. Increasing number proposals were cleared through the FIPB route while the
12

automatic route was relatively unimportant. However, since 2000 automatic route has
become significant and accounts for a large part of FDI flows.
2. Government Approval: For the following categories, government approval for FDI
through the Foreign Investment Promotion Board (FIPB) is necessary:

Proposals attracting compulsory licensing

Items of manufacture reserved for small scale sector.

Acquisition of existing shares.

FIPB ensures a single window approval for the investment and acts as a screening agency.
FIPB approvals are normally received in 30 days. Some foreign investors use the FIPB
application route where there may be absence of stated policy or lack of policy clarity.
3. Industrial Licensing in FDI Policy : Industrial Licensing is regulated by Industries
(Development and Regulation) Act 1951. Following are the sectors which require
Industrial Licensing:

Industries which abide by compulsory licensing

Manufacturing of items by the larger industrial units for small sector industries

Locational restrictions on the proposed sites

4. Restricted List of sectors: FDI is not permissible in the following cases:

Gambling and Betting, or

Lottery Business, or
13

Business of chit fund

Housing and Real Estate business (to a certain extent has been opened.)

Trading in Transferable Development Rights (TDRs)

Retail Trading

Railways,

Atomic Energy , atomic minerals,

Agricultural or plantation activities or Agriculture (excluding Floriculture,

Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and
Cultivation of Vegetables, Mushrooms etc. under controlled conditions and
services related to agro and allied sectors) and Plantations(other than Tea
plantations)

Post-approval Procedures
1. Project Clearance: After the approval has been obtained, the applicant may get his
unit/company registered with the Registrar of Company. Subsequently, the company
needs to obtain various clearances such as land clearance, building design clearance, preconstruction clearance, labour clearance, etc. from different authorities before beginning
its operations. These clearances differ from sector to sector and may also differ from state
to state.
2. Registration and Inspection: Each industrial unit is supposed to maintain records in
regard to production, sale and export, use of specified raw materials including public
utilities like water and electricity, labour related details financial details and details in
regard to industrial safety and environment.
The unit is also subject to periodic inspection by the factories inspector, labour inspector,

14

food inspector, fire inspector, central excise inspector, air and water inspector, mines
inspector, city inspector and the like, the list of which may go up to thirty or more.
3. Foreign Exchange Management Act (FEMA), 2000: The additional provisions which
apply only to entry of FDI emanate from the provisions of FEMA. According to FEMA,
no person resident outside India shall without the approval/knowledge of the RBI may
establish in India a branch or a liaison office or a project office or any other place of
business.
FDI in a particular industry may, however, be made through the automatic route under
powers delegated to the RBI or with the approval accorded by the FIPB. The automatic
route means that foreign investors only need to inform the RBI within 30 days of bringing
in their investment. Companies getting foreign investment approval through FIPB route
do not require any further clearance from RBI for the purpose of receiving inward
remittance and issue of shares to foreign investors. RBI has granted general permission
under FEMA in respect to proposals approved by FIPB. Such companies are, however,
required to notify the concerned regional office of the RBI of receipt of inward
remittances within 30 days of such receipts and again within 30 days of issue of shares to
the foreign investors.

Entry Options for Foreign Investors

A foreign company planning to set up business operations in India has the following
options:
By incorporating a company under the Companies Act, 1956 through

Joint Ventures; or

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the

15

requirements of the investor, subject to equity caps in respect of the area of activities
under the Foreign Direct Investment (FDI) policy.
Enter as a foreign Company through

Liaison Office/Representative Office

Project Office

Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management
Regulations, 2000.
1.

Incorporation of Company: For registration and incorporation, an application

has to be filed with Registrar of Companies (ROC). Once a company has been duly
registered and incorporated as an Indian company, it is subject to Indian laws and
regulations as applicable to other domestic Indian companies.

2.

Liaison Office/Representative Office: The role of the liaison office is limited to

collecting information about possible market opportunities and providing information
about the company and its products to prospective Indian customers. It can promote
export/import from/to India and also facilitate technical/financial collaboration
between parent company and companies in India. Liaison office can not undertake
any commercial activity directly or indirectly and can not, therefore, earn any income
in India. Approval for establishing a liaison office in India is granted by Reserve Bank
of India (RBI).

3.

Project Office: Foreign Companies planning to execute specific projects in India

can set up temporary project/site offices in India. RBI has now granted general
permission to foreign entities to establish Project Offices subject to specified
conditions. Such offices can not undertake or carry on any activity other than the
activity relating and incidental to execution of the project. Project Offices may remit
16

outside India the surplus of the project on its completion, general permission for
which has been granted by the RBI.
4.

Branch Office: Foreign companies engaged in manufacturing and trading

activities abroad are allowed to set up Branch Offices in India for the following
purposes:

Export/Import of goods

Rendering professional or consultancy services

Carrying out research work, in which the parent company is engaged.

Promoting technical or financial collaborations between Indian companies and

parent or overseas group company.

Representing the parent company in India and acting as buying/selling agents in

India.

Rendering services in Information Technology and development of software in

India.

Rendering technical support to the products supplied by the parent/ group

companies.

Foreign airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its own but is
permitted to subcontract these to an Indian manufacturer. Branch Offices established with
the approval of RBI may remit outside India profit of the branch, net of applicable Indian
taxes and subject to RBI guidelines Permission for setting up branch offices is granted by
the Reserve Bank of India (RBI).

17

CHAPTER - 4
SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA
Hotel & Tourism Sector
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:
49% FDI is allowed from all sources on the automatic route subject to guidelines issued
from RBI from time to time.
Insurance Sector
FDI up to 26% in the Insurance sector is allowed on the automatic route subject to
obtaining licence from Insurance Regulatory & Development Authority (IRDA)
Telecommunication sector

18

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.

Trading Companies
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:Power Sector
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.
Infrastructure Sector

19

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.
Call Centers in India / Call Centres in India
FDI up to 100% is allowed subject to certain conditions.

CHAPTER - 5
FACTORS AFFECTING FDI

The factors that can narrow the gap between FDI approvals and actual foreign direct
investment inflows and indeed make India a preferred destination for global capital are,
1. Availability of infrastructure in all areas i.e. transports hospitality, telecom, power,
etc.
2. Transparency of processes, policies and decision making and reduction of government
decision making lead time.
3. Stability of policies i.e. entry, exit, labour laws, etc. over a definite time horizon so
that definite plans can be made.
4. Acceptance of International Standards including accounting standards.
5. Capital account convertibility so that all capital and payments can flow easily in and
out of the economy.
6. Simplification of the regulatory framework in general and tax laws.
7. Improvement in bandwidth for internet and data communication.
20

8. Improvement in the enforcement of intellectual property rights.

9. Implementation of the WTO agreement full.
All investments foreign and domestic are made under the expectation of future profits.
The economy benefits if economy policy fosters competition, creates a well functioning
modern regulatory system and discourages artificial monopolies created by the
government through entry barriers. A recognition and understanding of these facts can
result in a more positive attitude towards FDI. The future policies should be designed in
the light of the above observations.

The most important initiatives that need attention are:

1. Empowering the State Governments with regard to FDI.
2. Developing fast track clearance system for legal disputes.
3. Changing the mind set of bureaucracy through HR practices.
4. Developing basic infrastructure.
5. Improving Indias image as an investment destination.
While the magnitudes of inflows have recorded impressive growth, they are still at a
small level compared to Indias potential. The policy reforms undertaken have
undoubtedly enabled the country to widen the sectoral and source composition of FDI
inflows. Within a generation, the countries of East Asian transformed themselves. China,
Indonesia, Korea, Thailand and Malaysia today have living standards much above ours.
When competing for FDI, policy makers have to be aware that various measures intended
to induce FDI are necessary. These include liberalisation of FDI regulations and various
business facilitation measures. Other reforms, such as privatization, tend to be more
effective in stimulating FDI inflows, but need to be complemented by reform in other

21

areas, in order to ensure that FDI inflows are beneficial. Other determinants of FDI,
which were sufficient in the past, may prove to be less relevant in the future

CHAPTER - 6
FDI TRENDS IN INDIA

India is the second most populous country and the largest democracy in the world. The far
reaching and sweeping economic reform undertaken since 1991 have unleashed the
enormous growth potential of the economy. There has been a rapid, yet calibrated, move
towards deregulation and liberalisation, which has resulted in India becoming a favourite
destination for investment. Undoubtedly, India has emerged as one of the most vibrant
and dynamic of the developing economies.

India as an Investment Destination

FDI is seen as a means to supplement domestic investment for achieving a higher level of
economic growth and development. FDI benefits domestic industry as well as the Indian
consumers by providing opportunities for technological upgradation, access to global
managerial skills and practices, optimal utilization of human and natural resources,
22

making Indian industry internationally competitive, opening up export markets, providing

backward forward linkages and access to international quality goods and services. FDI
policy has been constantly reviewed and necessary steps have been taken to make India a
most favourable destination for FDI. There are several good reasons for investing in
India.
1. Third largest reservoir of skilled manpower in the world.
2. Large and diversified infrastructure spread across the country.
3. Abundance of natural resources and self-efficiency in agriculture.
4. Package of fiscal incentives for foreign investors.
5. Large and rapidly growing consumer market.
6. Democratic government with independent judiciary.
7. English as the preferred business language.
8. Developed commercial banking network of over 63000 branches supported by a
number of National and State level financial institutions.
9. Vibrant capital market consisting of 22 stock exchanges with over 9400 listed
companies.
10. Congenial foreign investment environment that provides freedom of entry,
investment, location, choice of technology, import and export, and
11. Easy access to markets of Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri
Lanka.

Indias Performance in the Global Context

According to UNCTAD World Investment Report, 2007, FDI inflows to South Asia
surged by 126% amounting to $22 billion in 2006, mainly due to investment in India. The
country received more FDI than ever before equivalent to the total inflows during 2003-

23

2005. Inward FDI inflows to China declined for the first time in 7years. The modest
decline by 4% or $69 billion was mainly due to reduced inflows of financial services.
UNCTADs World Investment Report publishes a set of benchmarks for inward FDI
performance that ranks countries by how they do in attracting inward direct investment.
In contrast, despite enjoying a healthy rate of economic growth India ranked 120 th on
UNCTADs inward FDI performance index 1999-2001, far below China which ranked
59th and lower than both Pakistan (116 th) and Srilanka (111th). As far as inward FDI
potential index is concerned, India ranks 84 th as against Chinas 40th rank. The World
Investment Report, 2005 noted, While India has been catching up in inward FDI, it still
ranks near the bottom.

CONCLUSION

Economic reforms in India have deregulated the economy and stimulated domestic and
foreign investment, taking India firmly into the forefront of investment destinations. The
Government, keen to promote FDI in the country, has radically simplified and
rationalized policies, procedures and regulatory aspects. Foreign direct investment is
welcome in almost all sectors; expect those strategic concerns (defence and atomic
energy).
Since the initiation of the economic liberalisation process in 1991, sectors such as
automobiles, chemicals, food processing, oil and natural gas, petro-chemicals, power,
services, and telecommunications have attracted considerable investments. Today, in the
changed investment climate, India offers exciting business opportunities in virtually every
sector of the economy. Telecom, electrical equipment (including computer software),
energy and transportation sector have attracted the highest FDI.

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Despite its market size and potential, India has yet to convert considerable favourable
investor sentiment into substantial net flows of FDI. Overall, India remains high on
corporate investor radar screens, and is widely perceived to offer ample opportunities for
investment. The market size and potential give India a definite advantage over most other
comparable investment destinations.
Indias investment profile, however, is also conditioned by factors that affect the flow of
FDI, which are bureaucratic delays, wide spread corruption, poor infrastructure facilities
pro-labour laws, political risk and weak intellectual property regime.
In short, this means accelerating Indias integration with the global economy.

BIBLIOGRAPHY

BOOKS:

Alhijazi, Yahya Z.D (1999): Developing Countries and Foreign Direct

Investment, digitool.library.mcgill.ca.8881/dtl_publish/7/21670.htm.
Basu P., Nayak N.C, Archana (2007): Foreign Direct Investment in India:

Emerging Horizon, Indian Economic Review, Vol. XXXXII. No.2, pp. 255-266.
Dexin Yang (2003): Foreign Direct Investment from Developing Countries: A

case study of Chinas Outward Investment, wallaby.vu.edu.au/adtvvut/public/adt.

Johnson Andreas (2004): The Effects of FDI Inflows on Host Country Economic

Growth, http://www.infra.kth.se\cesis\research\publications\working
Yew Siew Youg (2007): Economic Integration, Foreign Direct Investment and

Growth in ASEAN five members, psarir.upm.edu.my/5038.

Foreign Investment in India: 1947-48 to 2007-08, Dr. Kamlesh Gakhar
Foreign Direct Investment in India: 1947 to 2007, Dr. Nitin Bhasin

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INTERNET :

www.eximbank.com
www.imf.org
www.rbi.org
www.worldbank.org

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