BUSINESS ENVIRONMENT

FACULTY - I B RAJU

Since mid 1980s significant change in
Foreign Investment
World Investment rather than world trade will
be driving the international economy.
Exchange rates, taxes and legal rules will
become more important than wage rates and
tariffs P F Drucker

Foreign Investment
Direct Investment
a) Wholly Owned Subsidiary
b) Joint Venture
c) Acquisition
Portfolio Investment
a) Investment by FIIS
b) investment in GDRs, ADRs and
FCCBs etc
It is the intent and objective of the
Government of India to attract and promote
foreign direct investment in order to
supplement domestic capital, technology and
skills, for accelerated economic growth.
Foreign Direct Investment, as distinguished
from portfolio investment, has the
connotation of establishing a lasting interest
in an enterprise that is resident in an
economy other than that of the investor
FDI means investment by non-resident entity/person resident
outside India in the capital of an Indian company under Schedule 1
of Foreign Exchange Management

Depository Receipt (DR) means a negotiable security issued outside
India by a Depository bank, on behalf of an Indian company, which
represent the local Rupee denominated equity shares of the
company held as deposit by a Custodian bank in India. DRs are
traded on Stock Exchanges in the US, Singapore, Luxembourg, etc.
DRs listed and traded in the US markets are known as American
Depository Receipts (ADRs) and those listed and traded
anywhere/elsewhere are known as Global Depository Receipts
(GDRs).


Foreign Currency Convertible Bond (FCCB)
means a bond issued by an Indian company
expressed in foreign currency, the principal and
interest of which is payable in foreign currency.
FCCBs are issued in accordance with the Foreign
Currency Convertible Bonds and ordinary shares
(through depository receipt mechanism) Scheme,
1993 and subscribed by a non-resident entity in
foreign currency and convertible into ordinary
shares of the issuing company in any manner,
either in whole, or in part.

Foreign Institutional Investor(FII) means an entity
established or incorporated outside India which
proposes to make investment in India and which
is registered as a FII in accordance with the
Securities and Exchange Board of India (SEBI)
(Foreign Institutional Investor) Regulations 1995.

Foreign Portfolio Investor(FPI)2 means a person
registered in accordance with the provisions of
Securities and Exchange Board of India (SEBI)
(Foreign Portfolio Investors) Regulations, 2014,
as amended from time to time.

In the FDI, Investor retains control over the
investment
It typically takes the form of starting a
subsidiary, acquiring a stake in an existing
firm or starting a joint venture in the foreign
country
Direct Investment and management of the
firms concerned normally go together

If the investor has only a sort of property
interest in investing the capital in buying
equities, bonds or the other securities abroad
it is referred to as portfolio investment
The investor uses his capital in order to get a
return on it, but has no control over the use
of the capital
FDIs are governed by long term
considerations because these investments
can not be easily liquidated

Raising the level of Investment
Up gradation of Technology
Exploitation of Natural Resource
Development of Basic Economic Infrastructure
Improvement in Export competitiveness
Improvement in BoP Position
Benefit to consumers
Revenue to Government


Factors affecting FDI
Long term political stability
Government policy
Industrial and economic prospects etc
influence the FDI decision
However, Portfolio investments are which can
be liquidated easily are influenced by short
term gains
Portfolio investments much more sensitive
than FDI

Foreign capital and technology play a very
important role in the socio economic
development of the country - Ex: China
Foreign capital helps accelerate pace of economic
growth is by facilitating essential imports
required for carrying out development
programmes
Capital Goods, Technical knowhow, raw materials
and other inputs to some extent consumer goods
When the export earnings are insufficient to
finance such vital imports it can reduce foreign
exchange gap

Exploitative Character of Foreign Investment
FDI is required loco technology and highly
profitable consumer goods but not long
gestation industries
FDI is not in the physical movement of capital
from a developed country to on LDC but in the
capital formation in the later through the local
operation of MNC
Discrimination against the employment of local
nationals in the high salaried jobs against local
transport, insurance or credit organizations

FDI builds enclave character means that small
pockets of affluence that are isolated from the
mainstream of the host countrys social economic
development
It affects indigenous and industrial entrepreneurship
adversely
The cost of foreign capital is very high
FDI companies lowers the profitability of the local
firms
The contribution of the foreign firm to public revenue
through corporate tax comparatively less because of
different incentives
The foreign firms may influence political decisions in
the developing countries