UNIT III

Foreign Investment
Benefit & Risk
 Foreign Investment
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 A concept related to Globalization

 Firms are becoming Global by investing
Globally
 When a country receives investment from other
countries, it is termed as foreign investment
 It can be in form of
 Setting up a production unit or
 Just an investment in shares of a company
 Types of Foreign Investment
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Foreign Investment

Foreign Direct Investment Portfolio Investment

Wholly Owned Acquisition Joint Investment by Investment in GDRs,

Subsidiary Venture FIIs ADRs & FCCBs
 Foreign Investment
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1. Foreign Direct Investment (FDI)
 When a foreign invest bring his money to invest

 As well as control this investment by managing

day-to-day activities

 It can be in different forms like:

 Wholly Owned Subsidiary
 Acquisitions
 Joint Ventures
 Foreign Investment
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1. Foreign Direct Investment (FDI)
 Wholly Owned Subsidiary
 Green Field Investment (GFI)
 Foreign Company setup a NEW production unit
 By his own investment
 Also Manage it – Carried out Operations
 Full profit belongs to Parent Company
 Example: Honda of Japan having subsidiary in
India as Honda Scooters and Motorcycle India
Pvt. Ltd.
 Foreign Investment
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1. Foreign Direct Investment (FDI)
 Acquisition
 Instead of setting up a new production facility
 Foreign Firm acquire an Old Domestic
Production Unit
 By paying consideration to old owner
 Now Investment as well as Management is of
Foreign Company
 For Example: Vodafone acquires Hutch
 Foreign Investment
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1. Foreign Direct Investment (FDI)
 Joint Ventures
 When a foreign firm join hand with a domestic
firm for starting a business
 Both of them contribute Capital
 Both of them Manage the Operations
 Both shares the profit
 For example: Prudential – Wallmart-Bharti,
ICICI, Tata-AIG
 Foreign Investment
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2. Portfolio Investment
 A Sort of Property Interest only
 Invest Capital (Money) in existing or new
businesses
 Just to earn a return (interest, profit, dividend etc.)
 Do not manage the operations
 Can be in two forms
 Foreign Institutional Investment (FII)
 Investment in GDRs, ADRs & FCCBs
 Foreign Investment
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2. Portfolio Investment

 Foreign Institutional Investment (FII)

 Foreign Banks, Foreign Mutual Funds and

other institutional investor

 When invest in domestic business to earn a

return on their investment
 Foreign Investment
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2. Portfolio Investment
 Investment in GDRs, ADRs & FCCBs
 Domestic companies approaches to foreign
investors (individuals) with their proposals
 GDR – Global Depository Receipts
 ADR – American Depository Receipts
 FCCB – Foreign Currency Convertible Bonds
 Foreign Public subscribe to these
instruments of a domestic company.
 Foreign Investment
Why? (Benefits to Firm)
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 New Sources of Demand

 Existence of Market Imperfection
 Economies of Scale
 Use of Foreign raw-material & Technology
 Exploit Monopolistic Advantage
 Diversify Internationally
 Political Safety Seekers
 Foreign Investment
Why Not? (Risk to Firm)
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 Foreign Exchange Risk

 Political Risk
 Social & Cultural Risk
 Outflow of Capital from Home Country
 Impact on Balance of Payment
 Foreign Investment
Why? (Benefits to Host Country)
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 Availability of Scarce Factors of Production

 Improvement in Balance of Payment
 Backward Economic Linkage
 More tax revenues to Government
 Technological Development
 Employment Generation
 Overall Economic Development
 Foreign Investment
Why Not? (Risk to Host Country)
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 Competition to Local Business

 Cultural and Political Interference
 Exploits Natural Resources
 Inappropriate Technology
 Negative impact on BOP
 Employment of Home Country Citizens
 May not disclose Technology
 Foreign Investment
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In INDIA – Before 1991
 Very limited up to 1991 because of:
 Dominant position of Public Sector
 Foreign Investment was permitted in priority
areas only
 FDI limited to minority stake
 FERA – Foreign Exchange Regulation Act-1973
 High Corporate Tax Rates and Rigid Laws
 Lack of Infrastructure
 Foreign Investment
In INDIA – Now
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 INDIA ranks second in terms of

 Financial attractiveness,
 People and skills availability and
 Business environment
CUMULATIVE FDI EQUITY INFLOWS 

In US$
In Rs Crore
Million
Cumulative amount of FDI inflows (From April 2000
270,100 62509
to March 2008)
Amount of FDI inflows during 2008-09 (From April 
31568 7681
to May 2008)
Cumulative amount of FDI Inflows (Up to May 2008) 301,668 70190
SOURCE: DIPP,  Federal Ministry of Commerce & Industry, Government of India
 Foreign Investment
In INDIA – Now
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 A major outcome of the economic reforms

 Aimed at opening up the economy and

embracing globalization

 And Branding India as a "safe and stable"

investment destination

 Led to tremendous increase in Foreign Direct

Investment inflows into India
 Foreign Investment
In INDIA – Now
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Year Wise FDI inflows into Infrastructure sector during April 2000 to
December 2007
(In US$ million)

YEAR AMOUNT
2000-01 292.37
2001-02 1902.26
2002-03 347.33
2003-04 388.37
2004-05 456.00
2005-06 914.04
2006-07 2179.39
2007-08 (Up to December 2007) 4095.80
TOTAL 10575.56
SOURCE: Federal Ministry of Commerce and Industry, Government of India
 Foreign Investment
In INDIA – Now
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 Foreign Investment
In INDIA – Now
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 Still far behind our immediate competitor -

China

 Not able to attain our targets

 Need to improve on lot many factors

 Foreign Investment
In INDIA – Now
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 Surely, we are many step ahead from we

were in pre-90 phase

 But Still far behind our immediate

competitor - China

 Not able to attain our targets

 Need to improve on lot many factors

 Foreign Investment
In INDIA – Problems & Measures
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 Need of Infrastructural Development

 Urge States to have special law relating to
infrastructure

 Huge time involved in approval of FDI

 Empower FIPB to give initial approval
(automatic)

 Problem of Sectoral Limits

 Sectoral Caps should be reduced to minimum
 Foreign Investment
In INDIA – Problems & Measures
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 Domestic Policy Reforms

 Related to Labour Laws, Power Sector, Urban
Infrastructure, Corruption and Law & Order

 FDI Target should be sector wise

 Fiveyear FDI plans target should be segregated
sector wise to create accountability

 Promotion of Brand “India”

 Embassies in foreign can be used as Marketing
Dept.

We are on Right Track, But still to move a lot!