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International Business

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UNIT IV

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 KEY CONCEPT
1. FDI Policy

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 FDI Policy of Government
⊡ of India
Foreign Direct Investment mean an individual, a group of individuals, an incorporated or un-
incorporated entity or a public or private company investing his money in other country.
⊡ Increasing foreign direct investment is usually used as one indicator of growing economy.
⊡ Foreign direct investment (FDI) plays a positive role in the process of economic growth.
⊡ The Foreign Direct Investment Policy (FDI Policy) of the Government of India prescribes the
foreign investment cap in specified industrial sectors. But in the recent times many activities
have been transferred to unrestricted sectors in which 100% Foreign Direct investment is
permitted. Broadly, the industrial sectors are categorized as:
⊡ Restricted
⊡ Prohibited
⊡ Unrestricted Sectors (Up to 100% foreign ownership)

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 FDI Policy of Government
of India
⊡ All the sectors other than those mentioned below subject to terms and conditions in the FDI
policy come under unrestricted sectors for example:
• Mining Manufacturing related commercial activities
• Information Technology related activities
• E-commerce (permitted in marketplace model and not the inventory based model. Also, it
applies only to Business to Business e-commerce and not business to consumer e-commerce).

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 FDI Policy of Government
of India
⊡ Restricted Sectors-

Sector Entry Route

Upto 20% foreign ownership
Banking- Public Sector (Subject to Banking Companies Government permission necessary
(Acquisition & Transfer of Undertakings) Acts 1970/80)
Upto 26% foreign ownership
Broadcasting Content Service (Terrestrial Broadcasting Government permission necessary
FM(FM Radio) and Up-linking of ‘News & Current Affairs’
TV
Channels (Other conditions specified by Ministry of Government permission necessary
Information and Broadcasting, Government of India ))
Print Media (Publishing of newspaper and periodicals Government permission necessary
dealing with news and current affairs and Publication of
Indian editions of foreign magazines dealing with news and
current affairs)

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Up to 49% foreign ownership
Cable Networks (Other Multi System Operators not Automatic route
undertaking upgradation of networks towards
digitalization and addressability and Local Cable Operators)
Petroleum and Natural Gas (Petroleum refining by the Public Automatic route
Cabinet Committee Sector Undertakings (PSU), without any
disinvestment or dilution of domestic equity in the existing
PSUs.)
Scheduled Air Transport Service/ Domestic Scheduled Automatic route
Passenger Airline
Insurance Automatic route
Private Security Agencies Automatic route
Telecom & related Services (including Telecom Infrastructure Automatic up to 49% and Government route beyond 49%
Providers Category-I) All telecom and up to 100%.
services including Telecom Infrastructure Providers
Category-I, viz. Basic, Cellular, United Access Services,
Unified License (Access Services), Unified License,
National/International Long Distance, Commercial V-Sat,
Public Mobile Radio Trunked Services

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Commodity Exchange Automatic route
Single Brand product retail trading Automatic up to 49% and Government route beyond 49%
Asset Reconstruction Company Automatic up to 49% and Government route beyond 49%
Pension Sector Automatic route
Power Exchanges (Power Exchanges registered under the Central Automatic route
Electricity Regulatory Commission (Power Market) Regulations,
2010.)
Infrastructure Company in the Securities Market (namely, stock Automatic route
exchanges, depositories and clearing corporations, in compliance
with SEBI Regulations)
Upto 51% foreign ownership
Multi Brand Retail Trading Government
Upto 74% foreign ownership
Credit Information Companies Automatic
route
Civil Aviation (Ground Handling Services subject to sectoral Automatic up to 49% and Government route beyond 49% and up to
regulations and security clearance) 74%
Airports (Existing projects) Automatic up to 74% and Government route beyond 74%
Satellites (Establishment and operation, subject to the sectoral Government
guidelines of Department of Space/ISRO)
Banking & Finance - Private Sector Automatic up to 49% and Government route beyond 49% and up to
74%.

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 FDI Policy of Government
of India
Prohibited Sectors
•Lottery Business including Government/private lottery, online lotteries etc.
•Gambling and Betting including casinos etc.
•Chit funds
•Real Estate Business or Construction of Farm Houses
•Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes
•Activities/sectors not open to private sector investment are Atomic Energy and
Railway Operations

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 Types Of FDI

1) Inward Foreign Direct Investment: Inward FDI for an economy can be defined as the capital
provided from a foreign direct investor (i.e. the coca cola company) residing in a country, to that
economy, which is residing in another country. Example: Procter & Gamble (P &G) decides to
open a factory in India. They are going to need some capital. That capital is inward FDI for India.
2) Outward Foreign Direct Investment: Foreign direct investment by a domestic firm establishing
a facility abroad. Contrasts with outward FDI. Example: Q mobile wants to establish a new
facility in UAE. Q mobile needs capital to establish new facility in UAE. It is outward FDI for
India.

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 Forms Of FDI

Two main forms of FDI:

1) Greenfield Investment - A green field investment is a form of foreign direct investment where a
parent company builds its operations in a foreign country from the ground up. In addition to
building new facilities, most parent companies also create new long-term jobs in the foreign
country by hiring new employees. Example : A company start its operations in new country from
the ground up that is Greenfield investment.
2) Merger & Acquisition - Mergers and acquisitions (M&A) is a general term that refers to the
consolidation of companies or assets. While there are several types of transactions classified
under the notion of M&A, a merger means a combination of two companies to form a new
company, while an acquisition is the purchase of one company by another in which no new
company is formed. Example : Pakistani operation of America and emirates banks were sold to
union bank. Later on Union Bank and Standard Charted Bank merge and new name is Standard
Charted Bank.

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 GREENFIELD VS
MERGER & ACQUISITION

Greenfield: M & A:
 You will have control over your staff.  You gain access to an established market.

 You will have control over your brand.  You have skilled workers.

 It is likely to cost more.  Easy and Less Risky.

 The entry process may take years.  A merger can lead to less choice for
consumers

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 Advantages of FDI

1. Inflow of equipment and Technology

2. Competitive advantage and innovation
3. Financial resources for expansion
4. Employment generation
5. Contribution to Export growth
6. Improved consumer welfare through reduced cost, wider choice and improved quality
7. Improved infrastructure

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 Disdvantages of FDI

1. Effect on natural environment

2. Effect on local culture
3. Loss of control
4. Flow of investment into high profit area
5. Entry of MNC supermarket chain will replace the small shopkeepers and traders
6. MNC bring own management teams
7. MNC use capital intensive techniques

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“

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Thanks!

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