Chapter 1

INTRODUCTION

BACKGROUND OF THE STUDY

Capital formation plays an important role in the Indian economy. In India foreign direct
investment is a major source of non-debt financial resource for the economic development of
India. Foreign Direct Investment (FDI) is an investment in a business by an investor from
another country for which the foreign investor has control over the company purchased.
Generally, FDI takes place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling from home company.
Indian policy makers are encouraged to attract more FDI inflows into the country to accelerate
the industrial production and thereby addressing the supply-side gap to contain inflationary
pressures in the economy. And also accumulate foreign exchange reserves which can enhance
the international creditworthiness of a country. There are different factors that affect the FDI
inflow into a country. For FDI inflows in India, there are many possible determinates which
influence the FDI inflow into India. The factors such as GDP, inflation, interest rate, wage rate,
business environment, etc.Foreigna Direct Investment is a vital requirement for sustained
economic growth in India. It can generate employment, supplementary domestic savings,
stipulating export of goods and services. In order to attract more FDI into India Govt of India is
liberalizing its economic policy. FDI Plays an important role in the long-term development of a
country ot only a source of capital but also for enhancing competitiveness of the domestic
economy through transfer of technology, strengthening infrastructure, raising productivity. The
present study analyses the determinants and impact of FDI in India.

NEED AND SIGMIFICANCE OF THE STUDY

The FDI plays an important role in Indian economy and it is a non-debt creating long- term
private capital. It also provides a stimulus to competition, innovation, savings and capital
formation and enhances job creation, industrial growth and economic development Foreign
Investment serves as a substitute for import and export, many courtiers recognized it as the tool
for industrial development and upliftment of the economy. In this globalization era FDI has an
important role which brings new production technology and other inputs from the host economy
thus generating benefits to both the host and the source country. The main aim of study is to
analyze the factors and impact of FDI inflows in India

STATEMENT OF THE PROBLEM

During the colonial period, FDI was used to exploit the Indian resources that mainly used
in export sectors. Before liberalization India lacked significantly in capital, technology,skills and
entrepreneurship. In recent years FDI occupy a very important role for economic development.
But in India, there is a gap between the volume of the FDI approval and the actual flows which
may cause pressure in foreign exchange reserves for financing economic and industrial
development. And also FDI by facilitating imports of capital and technology, managerial skills
and finance can play a leading role in the development of the industrial sector in developing
countries Therefore it is important to analyze the determinant and impact of FDI inflows in India
which may fill up the gasps between actual and approvals.

OBJECTIVES OF THE STUDY.

 To find out the various determinants of FDI inflows.

 To understand the impact of FDI on the Indian economy.
 To understand the flow of investment in India

SCOPE OF THE STUDY

This study is mainly focuses on analyzing the determinants and impact of FDI in India..it
analyses in-depth determinants of FDI inflows and its impact. Through the FDI, the country can
bring new technology, which generates benefits for both the host and the source country. The
study on the importance of the Foreign Direct Investment from the direction of industrial
development and growth, which will be useful to the nation to evaluate and implement suitable
policy and approaches for the benefits of the economy in the forthcoming period
LIMITATIONS OF THE REPORT

 Research is based on secondary data which makes difficult to analyze.

 The study is conducted based on quantitative aspects not used any qualitative
aspects.
 Lack of time for conducting study.
 CHAPTER 2

LITERATURE REVIEW

 According to Balasubramanyan et al (1996) discuseed expect beneficial of FDI on the

economy of host country depends on the deveplopment of import substitution and export
promotion. The empiriacal study of the relationship between FDI and economic growth find
different inherent characteristics of the host country. Some important factors include level of
local develpoment,level of infrastructure,level of educationof the workplace and degree of
openness.
 According to Laura(2003) discussed that the benefits of FDI varied across sectors, by
analyzing the FDI growth in primary sector, manufacturing sector, and service sector. In this
study found that FDI inflows into these sectors have different effects on economic
growth.FDI inflows in primary sector have negative effect and FDI inflow in manufacturing
sector has a positive effect. And also suggested that not all determinants of FDI not to be
much beneficial to the economies.
 According to the Balance of Payments and International Investment Position Manual,
Sixth Edition (BPM6) of the International Monetary Fund (IMF), “Foreign Direct
Investment (FDI) is a category of cross-border investment associated with a resident in one
economy having control or a significant degree of influence on the management of an
enterprise that is resident on another economy.”
 Agarwale(2007) suggested that FDI contributes positively to the Nigeria’s economic
growth. He also found that FDI in manufacturing sector has a negative relationship with
economic growth. The reasons is business climate is not sound for manufacturing sector to
make postive impact on economic growth.
 Bornschier and Chase-Dunn (1985) in their research ‘Transnational Corporations and
Underdevelopment’, says that FDI has a short term effect on the economic growth and stock
of foreign capital has long term effect on the economic growth which is inturn related with
greater income inequality.
 Chen C (1997) The location determinants of foreign direct investment in develpoing
countries according to this study suggest that larger market size, higher perception income,a
hogher level of FDI stock and more liberalized trade policies where attracted more inflows in
other hand higher efficiency wages and greater remoteness from the rest of the world prevent
FDI inflows.
 De Mello (1997) found that the impact of FDI on economic growth of the host country
depends on the degree of efficiency of domestic firms,the longterm of growth rate depends
on the rate of time preference and productivity of domestic capital and the degree of
complementarity between domestic and foreign technologies.
 Kumar N (2007)Emerging TNC’s ,Trends,Patterns and Determinants of outward FDI
by Indian Enterprises”, suggested that there is a rise in OFDI since 1991 has been
accompanied by a shift in the geographical and sectoral focus of Indian
investments..Enterprises that are already engaged in exporting are more likely to the outward
investors. Finally policy liberalization of the 1990s has encouraged Indian enterprises to
venture capital.
 Morris (2004) discussed that the determinants of FDI in India developed a framework which
was adopted from the advantage concept of Kindleberger and from location theories of
regional science. This study concluded that there are lot of gains which were attracted to FDI
especially in services, high tech, skilled labour which rose high investment from competing
firms.
 MULTI NATIONAL ENTERPRISES (MNEs)conventionally devoted only modest
amount of resources to their initial FDI and subsequently expansion of their activities are
carried out by reinvesting local profits. As a result ,it has been postulated that there is
positive relationship between internal cashflows and the investment outlays of subsidaries of
multinational firms. The relationship is said to arise because the cost of internal funds which
is lower than the cost of externall funds.
 Rana and others (1998) develpoed a simultaneous equation system to examine the effect of
foreign capital on growth of sample oof nine ( Burma,
China,India,Korea,Nepal,Philippines,Singapore,Srilanka, and Thailand)asian developing
countries. While foreign direct investment has contributed for capital formation and by
improving investment efficiency
 Saaho (2004) focused on the the trends ,growth and patterns of FDI inflows into post
liberalization period of India. It discussed the impacts of FDI at both macro level and sectoral
level and also find out strategy to attract more FDI into the Indian economy. It was observed
that the inflows had not helped to reduce the price level of the economy rather than growing
price at the macro level which was a motivation for the investors to invest more in India.
The main finding in sectoral level suggested that the FDI inflows to the major sector had a
positive impact on labour productivity, increasing output and export.
 Sapna Hooda (2011) analysed the impact of FDI on economic growth of Indian economy for
the period 1991-1992 to 2008-2009. She used OLS method for this purpose. The empirical
results found that FDI is vital and significant factor influencing the level of growth of Indian
economy. She also estimated the determinant of FDI inflows and found that trade GDP
,Research and Develpoment GDP are the important macroeconomic determinants of FDI
inflows in India.
 Sathyanarayana (1995) discussed that the role of FDI in achieving economic develpoment
in leass develpoed countries. He sugested certain measures to attract more FDI which include
infrastructure,training and human resources develpoment,basic machinery and parts made
proper development for the industries,components testing services to foreign investors,better
administration and bureacracy and lastly by providing better information on investment
oppurtunities in their economies.
 Singh (2011) analyzed that the FDI inflows to India for the period of 1970-2007 using time
series data. It was concluded that there were various reasons behind the fluctuations of FDI
inflows in India. Most important contribution to FDI inflows were portfolio investors and
round tripping investments, and also there was a obscure in the direct portfolio investors and
foreign and domestic investors.
 Singh J (2010) “Economic reforms and foreign direct investment in India policy trends
and patterns”analysed about the various trends and patterns of FDI inflows into India in
response to various measures announced by the Govt of India since mid 1980. They
suggested there is an increasing trend in FDI inflows started during the post reform period
and also FDI inflows increased as compared to other developing economies. This study
indicated that there is a positive impact over FDI after the liberalization measures introduced
in the early 1990’s.
 CHAPTER 3

RESEARCH METHODOLOGY

OBJECTIVE

 To find out the various determinants of FDI inflows.

 To understand the impact of FDI on the Indian economy.
 To understand the trend of foreign direct investment in India

HYPOTHESIS

 Ho : There is no significant depends on the determinants

 Ho : There is no significant impact of foreign direct investment on Indian economy.
 Ho : There is no significant growth of foreign direct investment in India

RESERCH DESIGN

This study is mainly an analytical approach. Primary data is not applicable for this research.
Most of the data were collected from the secondary data. The relevant secondary data has been
collected from the various govt reports, various journals,and internet too

SOURCES OF DATA

Secondary data are mainly used in this project. Mostof the datas were collected from Statistics of
Economy puiblished by RBI,Past data were from BSE Stock Index, journals and internet too.