Foreign Investment-Introduction When people think about globalization, they often first think of the increasing volume of trade

e in goods and services. Trade flows are indeed one of the most visible aspects of globalization. But many analysts argue that international investment is a much more powerful force in propelling the world toward closer economic integration. Investment can alter entire methods of production through transfers of knowledge, technology, and management techniques, and thereby can initiate much more change than the simple trading of goods. Over the past years, foreign investment has grown at a significantly more rapid pace than either international trade or world economic production generally. Foreign Investment- Introduction contd.., But as with many of the other aspects of globalization, foreign investment is raising many new questions about economic, cultural, and political relationships around the world. Flows of investment and the rules which govern or fail to govern it can have profound impacts upon such diverse issues as economic development, environmental protection, labor standards, and economic and political stability. At the same time, focusing entirely inward on domestic production to limit foreign investment and international interaction is largely detrimental to ones economy. For some nations, this has manifested itself in import substitution industrialization (ISI), which refers to an international economic and trade policy based on the belief that a nation should reduce its dependency on foreign investment and goods by domestic production of industrial goods. Foreign Investment Definition of 'Foreign Investment' Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature. Currently there is a trend toward globalization whereby large, multinational firms often have investments in a great variety of countries. Many see foreign investment in a country as a positive sign and as a source for future economic growth. The U.S. Commerce Department encourages foreign investment through its Invest in America initiative. Different Types of Foreign Investment There are four different types of foreign investments. They are Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), official flows, and commercial loans. These types of foreign investment differ primarily in who gives the loan and how engaged the investor is with the receiver of the loan. Foreign Direct Investment (FDI) FDIs occur when a company invests in a business that is located in another country. In order for a private foreign investment to be considered an FDI, the company that is investing must have no less than 10% of the shares belonging to the foreign company. In these international business relationships, the company that is investing is known as the parent company, whereas the foreign company is known as a subsidiary of the parent company. Multinational corporations, which spread among several nations, often begin with FDIs. Foreign Portfolio Investment (FPI)

FPIs also occur when foreign investments are made by a company. They may also be made by an individual who has mutual funds. Whereas an FDI allows the investing company to own shares of the subsidiary company, an FPI may be more temporary. Investment instruments, such as stocks and bonds, are normally traded in FPIs. Stocks and bonds are examples of investments that are easily traded. A company that has stocks and bonds from a foreign company does not necessarily have a share in that company in which it is investing. Official flows The foreign investment known as official flow occurs between nations instead of between companies. In cases of official flow, a more developed or economically prosperous nation will invest money in a nation that is less developed. A recipient nation of an official flow investment will typically receive financial support, as well as higher grade technology and aid in government and economic management. Commercial loans A commercial loan is a type of foreign investment that normally occurs in the form of a bank loan. This kind of investment may occur between nations or between businesses that are in different countries. While a commercial loan may be made by an individual, it would normally occur between a larger organizations. FDI and FPI The difference between FDI and FPI can sometimes be difficult to discern, given that they may overlap, especially in regard to investment in stock. Ordinarily, the threshold for FDI is ownership of 10 percent or more of the ordinary shares or voting power of a business entity (IMF Balance of Payments Manual, 1993). Calculating Investment: Calculations of FDI and FPI are typically measured as either a flow, referring to the amount of investment made in one year, or as stock, measuring the total accumulated investment at the end of that year. Until the 1980s, commercial loans from banks were the largest source of foreign investment in developing countries. However, since that time, the levels of lending through commercial loans have remained relatively constant, while the levels of global FDI and FPI have increased dramatically. Over the period 1991-1998, FDI and FPI comprised 90 percent of the total capital flows to developing countries. Over the period of 1996-2006, FDI and FPI outflows from the United States more than doubled. Similarly, when viewed against the tremendous and growing volume of FDI and FPI, the funds provided in the past by governments through official development assistance, or lending by commercial banks the World Bank or IMF, are diminishing in importance with each passing year. Foreign Investment Theories International investment theory explains the flow of investment capital into and out of a country by investors who want to maximize the return on their investments. One of the major factors that influences international investment is the potential return on alternative investments in the home country or other foreign markets. Owner-Location-Internalization Paradigm The Owner-Location-Internalization (OLI) paradigm illustrates how a firm maximizes its investment in a foreign market. Under this paradigm, the advantages must benefit the owners, the business must profit from the location, and there must be internal benefits to the business as well. Opportunity Cost of Investment Opportunity costs measure the potential losses or gains from other investments. Foreign investors measure the potential gains from other investments to increase the likelihood of a maximum return on investment.

Production Cycle Theory of Vernon Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in the manufacturing industry. Vernon believes that there are four stages of production cycle: innovation, growth, maturity and decline. According to Vernon, in the first stage the U.S. transnational companies create new innovative products for local consumption and export the surplus in order to serve also the foreign markets. According to the theory of the production cycle, after the Second World War in Europe has increased demand for manufactured products like those produced in USA.. Thus, American firms began to export, having the advantage of technology on international competitors. If in the first stage of the production cycle, manufacturers have an advantage by possessing new technologies, as the product develops also the technology becomes known. Manufacturers will standardize the product, but there will be companies that you will copy it. Thereby, European firms have started imitating American products that U.S. firms were exporting to these countries. US companies were forced to perform production facilities on the local markets to maintain their market shares in those areas. This theory managed to explain certain types of investments in Europe Western made by U.S. companies between 1950-1970. Although there are areas where Americans have not possessed the technological advantage and foreign direct investments were made during that period. The Theory of Exchange Rates on Imperfect Capital Markets This is another theory which tried to explain FDI. Initially the foreign exchange risk has been analyzed from the perspective of international trade. Itagaki (1981) and Cushman (1985) analyzed the influence of uncertainty as a factor of FDI. In the only empirical analysis made so far, Cushman shows that real exchange rate increase stimulated FDI made by USD, while a foreign currency appreciation has reduced American FDI. Cushman concludes that the dollar appreciation has led to a reduction in U.S. FDI by 25%. However, currency risk rate theory cannot explain simultaneous foreign direct investment between countries with different currencies. The sustainers argue that such investments are made in different times, but there are enough cases that contradict these claims. The Internalization Theory This theory tries to explain the growth of transnational companies and their motivations for achieving foreign direct investment. The theory was developed by Buckley and Casson, in 1976 and then by Hennart, in 1982 and Casson, in 1983. Initially, the theory was launched by Coase in 1937 in a national context and Hymer in 1976 in an international context. In his Doctoral Dissertation, Hymer identified two major determinants of FDI. One was the removal of competition. The other was the advantages which some firms possess in a particular activity (Hymer, 1976). Buckley and Casson, who founded the theory demonstrates that transnational companies are organizing their internal activities so as to develop specific advantages, which then to be exploited. Internalization theory is considered very important also by Dunning, who uses it in the eclectic theory, but also argues that this explains only part of FDI flows. Hennart (1982) develops the idea of internalization by developing models between the two types of integration: vertical and horizontal. Hymer is the author of the concept of firm-specific advantages and demonstrates that FDI take place only if the benefits of exploiting firm-specific advantages outweigh the relative costs of the operations abroad. According to Hymer (1976) the MNE appears due to the market imperfections that led to a divergence from perfect competition in the final product market.

Hymer has discussed the problem of information costs for foreign firms respected to local firms, different treatment of governments, currency risk (Eden and Miller, 2004). The result meant the same conclusion: transnational companies face some adjustment costs when the investments are made abroad. Hymer recognized that FDI is a firm-level strategy decision rather than a capital-market financial decision. The Eclectic Paradigm of Dunning The eclectic theory developed by professor Dunning is a mix of three different theories of direct foreign investments (O-L-I): 1) O from Ownership advantages: This refer to intangible assets, which are, at least for a while exclusive possesses of the company and may be transferred within transnational companies at low costs, leading either to higher incomes or reduced costs. 2) L from Location: When the first condition is fulfilled, it must be more advantageous for the company that owns them to use them itself rather than sell them or rent them to foreign firms. Location advantages of different countries are de key factors to determining who will become host countries for the activities of the transnational corporations. 3) I from Internalization: Supposing the first two conditions are met, it must be profitable for the company the use of these advantages, in collaboration with at least some factors outside the country of origin (Dunning, 1973, 1980, 1988). This third characteristic of the eclectic paradigm OLI offers a framework for assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies. As cross-border market Internalization benefits is higher the more the firm will want to engage in foreign production rather than offering this right under license, franchise. Eclectic paradigm OLI shows that OLI parameters are different from company to company and depend on context and reflect the economic, political, social characteristics of the host country. Barriers in foreign direct investment Foreign Direct Investment (FDI) is subject to different barriers. These include: exclusion of foreign investors from certain economic activities, Quantitative limitations whether in the form of quotas or economic needs tests, foreign ownership caps, limitations on the type of establishment (subsidiary or branch), joint venture requirements and discriminatory treatment (e.g. as regards taxation and other forms of state intervention). International Business in India International Business in India looks really lucrative and every passing day, it is coming up with only more possibilities. The growth in the international business sector in India is more than 7% annually. There is scope for more improvement if only the relations with the neighboring countries are stabilized. The mind-blowing performance of the stock market in India has gathered all the more attention (in comparison to the other international bourses). India definitely stands as an opportune place to explore business possibilities, with its high-skilled manpower and budding middle class segment. With the diverse cultural setup, it is advisable not to formulate a uniform business strategy in India. Different parts of the country are well-known for its different traits. The eastern part of India is known as the 'Land of the intellectuals', whereas the southern part is known for its 'technology acumen'. On the other hand, the western part is known as the 'commercial-capital of the country', with the northern part being the hub of political power'. With such diversities in all the four segments of the country, international business opportunity in India is surely huge. International Business in India contd., Sectors having potential for International business in India :

Information Technology and Electronics Hardware. Telecommunication. Pharmaceuticals and Biotechnology. R&D. Banking, Financial Institutions and Insurance & Pensions. Capital Market. Chemicals and Hydrocarbons. Infrastructure. Agriculture and Food Processing. Retailing. Logistics. Manufacturing. Power and Non-conventional Energy. Sectors like Health, Education, Housing, Resource Conservation & Management Group, Water Resources, Environment, Rural Development, Small and Medium Enterprises (SME) and Urban Development are still not tapped properly and thus the huge scope should be exploited. International Business in India contd., To foster the international business scenario in India, bodies like CII, FICCI and the various Chambers of Commerce, have a host of services like : These bodies work closely with the Government and the different business promotion organizations to infuse more business development in India. They help to build strong relationships with the different international business organizations and the multinational corporations. These bodies help to identify the bilateral business co-operation potential and thereafter make apt policy recommendations to the different overseas Governments. With opportunities huge, the International Business trend in India is mind boggling. India International Business community along with the domestic business community is striving towards a steady path to be the Knowledge Capital of the world. It was evident till a few years back that India had a marginal role in the international affairs. The image was not bright enough to be the cynosure among the shining stars. The credit rating agencies had radically brought down the country's ratings. But, as of now, after liberalization process and the concept of an open economy - international business in India grew manifold. Ecological issues Ecological issues are an integral and important part of environmental issues challenging India. Poor air quality, water pollution and garbage pollution - all affect the food and environment quality necessary for ecosystems. Air pollution, poor management of waste, growing water scarcity, falling groundwater tables, water pollution, preservation and quality of forests, biodiversity loss, and land/soil degradation are some of the major environmental issues India faces today. India's population growth adds pressure to environmental issues and its resources. Ecological issues affecting business Key environmental issues affecting business include industrial waste, sustainable development of raw material water and air emissions. These issues affect business because laws require businesses to change equipment and procedures to meet imposed standards, which costs businesses money. Many businesses undertake stricter changes in an effort to preserve the environment. The businesses pay for the protective and proactive

environmental measures and attempt to recover the expenses through consumer good will or the added consumer base gained from an environmentally friendly policy. Social aspects In order to achieve sustainable development within the international community, it is essential that those who engage in business, to take account of harmony with society , local communities and healthy relationships with stakeholders. Be with Customers, Be with Business Partners, Be with Shareholders and Investors, Be with Employees. As a teacher I am with my students, to clarify doubts if any.., THANK YOU