Download Chapter 1 Foreign Direct Investment

BASIS OF
DIFFERENCE
FOREIGN DIRECT
INVESTMENT
FOREIGN PORTFOLIO
INVESTMENT
1. OBJECTIVE
It is done with the primary Done with the intention to
objective to manage the
acquire an income stream
asset .
without the operational
control .
2. INVOLVEMENT
Direct involvement in
management and
ownership control .
3. NATURE
More permanent in nature More liquid in nature as it
as it is difficult to sell off or is easy to sell securities
put out .
and pull out .
No active involvement in
management .
4. SOURCE
Most of FDI is done by
Multinational Companies .
Comes from more diverse
sources, from large
multinational to small
companies, banks
5. ASSETS TRANSFERRED
Along with physical and
financial assets there is also
transfer of non-financial
assets.
Involves investment of
financial assets only .
6. TIME PERIOD
It is generally for long term in
nature.
It is temporary and is of
relatively short term.
7. TARGET MARKET
Flows into primary market.
Flows into secondary market.
FACTOR EFFECTING FDI FLOWS IN
HOST COUNTRY
Market size : Host country with larger
market size will attract more market oriented FDI
Differential rate of return: The
flow of capital will be in those countries which
ensure the highest possible rate of return on
investments.
•Internationalization: Need for
internationalization of traction cost determines
the FDI flows.
•Openness: More an emerging market tries
to open its economy to outside external trade, the
more this host country can attract FDI.
•Government regulations: Open
policies are basically intended to induce FDI while
restrictive policies such as sweeping
nationalization of foreign affiliations , can
effectively close the door to FDI.
Tax policies: A country with lower tax
rates should stand a greater chance of
attracting FDI project than a country with
higher rates.
The level of external indebtedness :
It is expected to have a negative impact on FDI.
•
Political stability: the reliability and
political stability determines the FDI inflows .
TNCs prefer stable government so that their
investment is protected.
• Foreign exchange reserves : A
positive relationship is postulated b/w the
foreign exchange Reserve and the inflow of
foreign direct investment.
• Portfolio diversification: The
appropriate mix of bonds , debentures, Securities, stock etc
is called portfolio. Investors are able to invest in or take
out their capital for diversification of their portfolio assets
due to perceived risk in the country.
•
Industrial organization: Industrial
organization theory states that firm specific advantages ,
competition , Capabilities , managerial skills and practice
etc are some of the crucial points for industrial
organization to survive.
Foreign exchange rate: High
volatility of the exchange rate of the currency in
the host country discourages investment by the
foreign firms.
Inflation :Changes in inflation rates of the
domestic or foreign country are anticipated to
alter the net returns and optional investment
decisions .
 Removal of restriction on FDI in the
services sector :•
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Performance requirement.
Advertisement restriction.
International agency may not use the
name until they are not professionally
used in India.
Govt. project financed by foreign company
must make payment only in foreign
currency.
Reasons for the restrictions
 To avoid the risk of competition of foreign
investors and domestic investor.
 Domestic country may not provide the required
services.
Sale of public utilities to the foreign firms may
comprise of complex issue related to privatization
and regulation of natural monopolies.
Entry by large organization involve company
policy many host country may not feel free to deal
with legal and technical issue.
So removal on these restriction help in
the easy transaction between the
consumers and business.
Image building in manufacturing
sector:- Promote the manufacturing hub.
Grant subsidy on manufacturing in India.
MAKE IN INDIA :- Started in Mid-2014 by Prime
minister Narendra Modi to increase the
manufacturing in India.
Well developed financial markets:Provide Corporate liquid debt market(is a
market in which trade can be executed easily
and quickly because large number of buyers
and seller supply and demand has small
impact on prices)
Investment promotion policies:-Govt.
should make those policy and procedure
which promote our country as a investment
destination . FIPB(Foreign Investment
Promotion Board) make policies regarding
FDI.
Fiscal and Financial incentives:Fiscal Incentives :- Tax exemption
Accelerated Depreciation
Investment allowance
Reduced corporate income tax
Financial incentives:- Grants
Subsidized loan
Credit facilities
Subsidies
Focus on Quality Rather than on
quantity:- Focus should be on quality rather
than on quantity which means that our focus
should be on the type of investment like
technology , methodologies not on the inflows.
Skilled Manpower:- Increase the pool of
talented manpower in terms of improved
qualification improving skill base . So that
foreigner found cheap and skilled labour and
get attracted towards the country for
investment.
Co-ordination Between the centre and
state:-Both the centre and state should agree
with each other’s policies and coordinate with
each other.
Govt. initiatives:-Govt. should also take
initiative to attract FDI to country make such
policy and form regulation that have an
influence on the foreign investors and they
look at our country as the investment
destination.
Investment-promotion policies:-Over
and above the creation of a business-friendly
environment, it may be important for a
potential host country to actively undertake
investment-promotion policies to fill in
information gaps or correct perception gaps
that may hinder FDI inflows .
Access to capital :FDI provides
capital which is usually missing in the target
country. Long term capital is suitable for
economic development and long term growth of an
economy .
Availability of scarce factors of
production :Foreign investors are able to
finance their investment projects better and
cheaper.
FDI fosters competition :FDI
enhances the competition by adopting new
technologies, skills, etc.
Enhancement of the host
country :FDI enhances the global presence of
host country.
Improvement in the balance of
payments :Foreign Corporations usually
have a positive effect on the trade balance.
FDI impacts foreign trade; More
and more FDI impacts foreign trade.
Building economics & social
infrastructure: Foreign corporations can
help to change the economic and social structure
of the target country.
FDI promotes research: It
promotes research and development in host
country.
Foster economic linkage; FDI
helps to build better economic linkages and
relations with other countries so as to attract
more and more Fdi in country and to bring
additional investors into the target country
(example their usual subcontractors ). Hence
employment also increases .
To reduce cost of production
To have diversified sourcing facilities
To gain economics of scale
To promote knowledge sharing
To retain domestic customers
• PROVIDE CAPITAL
• ABLE TO FINANCE
• EFFICIENCY TECHNIQUES
• NEW TECHLONOGIES
• MANAGERIAL SKILLS
• CHANGES THE ECONOMIC
STRUCTURE.
• INCREASES EMPLOYMENT.
• IMPROVES THE BUSINESS
ENIVRONMENT .
• IMPROVE THE ENVIRONMENTAL
CONDITIONS.
• INCREASE THE LEVEL OF WAGES.
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MONOPOLY
CROWDING OUT EFFECT
LEAD TO UNEMPLOYMENT
TENDENCY TO USE SUPPLIERS
MISSING TAX REVENUES
DUAL ECONOMY
ENVIRONMENTAL DAMAGE
DECREASING COMPETITIVENESS OF DOMESTIC COMPANIES
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RATIONALISATION OF INVESTMENT PROCEDURES:
INFRACTRUCTURE DEVELOPMENT:
CREATION OF SPECIAL ECONOMIC ZONES:
PROMOTE INDIA AS A INVESTMENT DESTINATION:
FISCAL INCENTIVES:
FINANCIAL INCENTIVES:
FAVOURABLE LABOUR LAWS:
AMENDMENT TO VARIOUS ACTS:
ENVIRONMENT POLICY:
INCENTIVES UNDER ‘MAKE IN INDIA’: