Foreign Investment

Module 5
• Foreign investment is when
a company or individual
from one nation invests in
assets or ownership stakes
of a company based in
another nation
• Eg: if you live in the U.S and
you invest money into a
company that is in Spain,
which is outside of the U.S
 Types of Foreign Investments

Funds from foreign country could be invested

in shares, properties, ownership /
management or collaboration. Based on this,
Foreign Investments are classified as below.
1. Foreign Direct Investment (FDI)
2. Foreign Portfolio Investment (FPI)/Foreign
Institutional Investment (FII)
 1. Foreign Direct Investment (FDI)

• Foreign direct investment (FDI) is the process whereby

residents of one country (the source 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).

• foreign direct investment includes "mergers and

acquisitions, building new facilities, reinvesting profits
earned from overseas operations, and intra company loans.
• FDI is the sum of equity capital, long-term capital, and
short-term capital as shown in the balance of payments.
II.Foreign Portfolio Investment (FPI)
• Foreign Portfolio Investment (FPI) is
investment by non-residents in Indian
securities including shares, government
bonds, corporate bonds, convertible
securities, infrastructure securities etc.
• The class of investors who make investment in
these securities are known as Foreign Portfolio
Investors.
• When a foreign individual or institution do
invest in our physical properties,
like,electricity,drinking water,road,factory etc
then this type of investment will be known as
FDI.
• a foreign individual or institution do invest in
our banking,insurance,pension,share market
etc then this type of investment will called
FII/FPI
 Theories of Foreign Investment
1. Theory of Capital Movement
2. Market Imperfection Theory
3. Internalisation Theory
4. Location Specific Theory
5. Eclectic Theory
6. Other Theories
 1. Theory of International Capital
Movement
• This theory is based on the gold standard system ,
centered around trade imbalances and interest
differentials for the securities of equal risk, given a
purely perfect market condition.
• The trade imbalances and interest differentials were
both self-correcting with an automatic mechanism
that, over a period of time, would re- distribute
wealth and economic power from exporting nations
to importing nations via price and income
adjustments.
Kindleberger’s market imperfections’ theory

Kindleberger proposes the model of market imperfections as a reason for the FDI
existence.
 The author finds four types of imperfections that generate FDI: imperfections on
the goods market, due to product differences and different marketing techniques;
 Imperfections on the factors market, due to different access to the capital market,
the property over technology (patents, know-how) and differences relating to
managerial expertise;
 the distortions caused by government intervention (tariff and non tariff barriers,
taxes, price controls and profits, antitrust regulations, etc.) and
 economies of scale as they are contributing to increased production efficiency.
In this way, Kindleberger emphasize important FDI determinants for host countries,
such as the effect of the governmental intervention, the product differentiation,
new technologies
 Internalisation Theory
• According to this theory, foreign investment results
from the decision of a firm to internalize a superior
knowledge (i.e.., keeping the knowledge within the
firm to maintain the competitive edge)
• This theory explains the process by which firms
acquire and retain one or more value-chain
activities inside the firm, minimizing the
disadvantages of dealing with external partners and
allowing for greater control over foreign operations.
 Location Specific Advantage Theory
• According to Hood and Young, there are 4 factors
which are pertinent to the location specific theory.
• They are:
1. Labour costs
2. Marketing factors such as market size, market
growth, stage of development and local
competition
3. Tariff barriers
4. Government policy
 Eclectic paradigm
• The concept of the eclectic paradigm was presented for the first time in 1976
by Professor John Dunning
•  It is a holistic economic model to determine whether a business should expand
abroad through foreign direct investment
• The eclectic paradigm is a theory that provides a three-tiered framework for
companies to follow.
• They follow the frameworks when deciding whether they should invest abroad.
• The eclectic paradigm theory posits three kinds of advantages for a
multinational company:
1. ownership advantages (O),
2. location advantages (L) and
3. internalization advantages(I)
• The ownership advantage (O) regards both the tangible assets of a company
(such as the natural resources at its disposal, the labour force and the
available capital) and the intangible ones (information and technology,
managerial and entrepreneurial skills, organizational systems, the brand
awareness).

• The internalization advantage (I) is represented by the ability of the company

to produce and trade the goods through the network of subsidiaries.

• The location advantage (L) is mainly due to the differences between the
home and the host country as regards the factors’ endowment, the market
structure, legal system, political and cultural environment, market access and
so on.
• The company will invest on a foreign market given that the attractions of the
foreign market are higher than the ones of the home market
 The product life cycle theory
This theory was developed by Raymond Vernon
• There are three stages in the life cycle of a product.
• In the first stage, the new and innovative product is sold on the
internal market.
• In the second stage, the product is exported due to standardization
and scale economies.
• In the third stage, the company will decide to have subsidiaries in
other counties in order to find cheaper inputs and lower production
costs, as its objective is to reduce the costs.
• More specifically, Vernon analyses the evolution and the interactions
from three different views: the demand for the product, the
competitive environment and the location of production.
Factors affecting International Investment
• Resources:
Availability and therefore exploitation of resources in the
host country.
• Markets:
FDI largely flows to the countries which have large markets
with comparatively good infrastructure and political stability.
• Efficiency:
Low cost of production, derived from cheap labor is the
driving force of many FDIs in developing countries.
• Rate of interest:
Difference in the rate of interest acts as a stimuli to attracting
foreign investment. Capital has a tendency to move from a country
with a low rate of interest to a country where interest rate is higher.
• Exchange rate :
A weak exchange rate in the host country can attract more FDI
because it will be cheaper for the multinational to purchase assets.
However, exchange rate volatility could discourage investment.
• Profitability:
Private foreign capital is largely influenced by the profit motive.
It is attracted to countries where the return on investment is higher.
• Economic conditions:
Economic conditions particularly market potential and
infrastructural facilities influence foreign investment
• Government Policies and Political Factors:
Policies encouraging FIIS and FDIs and a stable Government
largely encourages the movement of foreign capital into the country
Foreign Portfolio Investment
• Portfolio investment is defined as cross-border transactions
and positions involving equity or debt securities, other than
those included in direct investment or reserve assets
• Portfolio investments are investments in the form of a group
(portfolio) of assets, including transactions in equity,
securities, such as common stock, and debt securities, such
as banknotes, bonds, and debentures.
• The characteristic feature of securities is their negotiability.
ie, their legal ownership is readily transferable from one unit
to another unit by delivery or endorsement.
Some benefits that come to investors from
utilizing foreign portfolio investments include
• Portfolio diversification: FPI gives investors a fairly simple way to
diversify their portfolio internationally.
• International Credit: FPI gives investors a larger credit base
because they are able to access credit in the foreign countries
that they have large amounts of investment in.
• Benefits from the Exchange rates: If an investor has an FPI in a
foreign country with a stronger currency than their own country
the difference in exchange rates between the two countries can
benefit the investor
• Access to a larger market: Investors can take advantage of the
less competitive markets internationally by using these Foreign
portfolio investments.
Foreign Direct Investment By Indian Companies

• Indian firms invest in foreign shores primarily through Mergers and

Acquisition (M&A) transactions.
• With rising M&A activity, companies will get direct access to newer and
more extensive markets, and better technologies, which would enable
them to increase their customer base and achieve a global reach.
Market size
• According to the data provided by Reserve Bank of India (RBI), India’s
outward Foreign Direct Investment (OFDI) in equity, loan and
guaranteed issue stood at US$ 12.59 billion in 2018-19 and US$ 2.841
million in April-June 2019.
• India’s cumulative stock of Overseas Foreign Direct Investment (OFDI)
stood at US$ 155 billion in 2017.
Some of the major overseas investments by
Indian companies were
• In September 2019, Liquefied Natural Gas (LNG) importer Petronet entered into agreement
with US LNG developer Tellurian Inc. and invest US$ 2.5 billion.
• In September 2019, Reliance Power announced joint venture with Japanese energy major
JERA, to jointly set up a 750 MW gas-based combined cycle power project (phase-1) at
Meghnaghat in Bangladesh.
• In September 2019, Oyo acquired Copenhagen-based data science firm Danamica. This
marks it as the fast-growing lodging start-up works to expand its business in Europe.
• In August 2019, Sun Pharma entered into licensing agreement with China System Medical
Holdings (CMS) to develop and commercialize seven generic products in Mainland China.
• In March 2019, Infosys announced that it would acquire 75 per cent stake in ABN AMRO’s
subsidy..
• In February 2019, auto components major JBM Group has purchased a majority stake in
Linde-Wiemann, a German structural components and assemblies producer.
• Hospitality start-up Oyo is planning to invest US$ 1.2 billion for its expansion.
• Ashok Leyland has set up a new facility in Dhaka, Bangladesh in a joint venture with IFAD
Autos. The sales, service and spares facility is spread over 138,000 square feet and is going
to cater to the entire range of Ashok Leyland vehicles.
• Indian IT major Infosys is going to set up a technology and innovation hub in Texas and hire
500 American workers by 2020.
• Tyre Manufacturer Balkrishna Industries is going to set up a US$ 100 million production facility in
US. The plant will have an annual production capacity of 20,000 MT and will serve the entire
American region.
• Pharmaceutical major Cipla’s subsidiary, Cipla Maroc, opened a manufacturing plant for metered-
dose inhalers in Ain Aouda in the Rabat region in Morocco. The facility is spread over a total area
of 4,000 square meters and has a capacity of 1.5 million HFA metered-dose inhalers.
• Apollo Tyres has commenced commercial production of its truck tyres at its facility in Hungaria.
This is the company’s second facility in Europe and has an installed capacity of 14,000 passenger
car tyres a day and 1,200 truck tyres a day.
• Pidilite Lanka Pvt Ltd, ahesives manufacturer Pidilite’s joint venture (JV) company with
Macbertan Pvt Ltd, unveiled a new world class manufacturing plant in Sri Lanka. The plant is
spread over an area of four acres and will help the company enhance its market share in the
country.
• India’s cinema companies are planning to foray into the Middle East and North Africa (MENA)
region. Carnival Cinema’s is planning to open 500 screens in Saudi Arabia over the next five years.
Also, PVR Cinemas has signed a memorandum of understanding (MoU) with Dubai-based Al-
Futtaim Group to explore opportunities for entering the cinema business in the MENA region.
• Thirumalai Chemicals’ subsidiary in Malaysia is going to enhance its Maleic Anhydride production
capacity to 65,000 tons per year. Further, Thirumalai Chemicals is exploring the possibility of
setting up a greenfield facility for production of food ingredients in US, which will serve the North
American and European markets.
Government initiatives

• Government of India’s Public Sector Undertakings (PSUs) have invested over US$
15 billion in Russia’s oil and gas projects and are planning to undertake more
investments in the country’s oil and gas fields.
• The RBI, encouraged by adequate forex reserves, has relaxed the norms for
domestic companies investing abroad by doing away with the ceiling for raising
funds through pledge of shares, domestic and overseas assets
• The RBI also liberalised/ rationalised guidelines for foreign investments abroad
by Indian companies. It raised the annual overseas investment ceiling to US$
125,000 from US$ 75,000 to establish JV and wholly owned subsidiaries.
• The government's supportive policy regime complemented by India Inc.’s
experimental outlook could lead to an upward trend in OFDI in future.
• The Union Cabinet has permitted ONGC Videsh to acquire 11 per cent stake in
Russian oil company JSC Vankorneft from Rosneft Oil Co. for US$ 930 million.
Transfer of Technology
Definition
• Technology transfer is a process that permits the flow of
technology from a source to a receiver. The source is the
owner or holder of knowledge while the recipient is the
beneficiary of such knowledge.
• Technology transfer is a process by which science and
technology are transferred from one individual or group to
another that incorporates this new knowledge into its way
of doing things - Jain and Triandis
• It is the process of providing the technology developed
from one organisation for other potentially useful purposes
- NASA
Categories of technology transfer
Reasons for Technology Transfer:
1) Due to lack of manufacturing capacity: A production of similar products
are producing with minimum quantity so they need to transfer for larger
manufacturing.
2) Due to lack of resources: Transfer of technology because there need of
such resources which are not available to him/her.
3) Due to lack of marketing distribution and distribution capability:
May have fully developed technology and even has approvals for
launching the products but it may not have marketing and distribution
channels.
4) Forming alliances with partners: that leads technology to take it to
market. It forms marketing and distribution with partners and increases
distribution capability.
5) Exploitation in field of transferring technology: If the inventing
organization is a government laboratory, that laboratory is forbidden in
general by law or policy (in the United States) from competing with the
private sector by selling products or processes. Therefore, the technology
can only be brought to market by a private firm.
• In the passive mode only the knowledge part of technology is
transferred.
The skills surrounding the technology are not transferred.
These mechanisms can include presentations in a report.
• In the semi-active mode there is intervention from a third party in
the transfer process.
This is usually in the form of a transfer agent.
In the semi-active mode the role of the transfer agent is limited
to that of adviser.
• The transferring process is carried out to
demonstrate by the transfer agent or the consultant.
Agent fully involved and acts as a bridge in
technology transfer from enterprise.