BASIS OF DIFFERENCE

1. OBJECTIVE

2. INVOLVEMENT

3. NATURE

FOREIGN DIRECT INVESTMENT

It is done with the primary objective to manage the asset .

Direct involvement in management and ownership control .

More permanent in nature as it is difficult to sell off or put out .

FOREIGN PORTFOLIO INVESTMENT

Done with the intention to acquire an income stream without the operational control .

No active involvement in management .

More liquid in nature as it is easy to sell securities and pull out .

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

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 :-

• 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 exemptionAccelerated DepreciationInvestment allowanceReduced corporate income tax

Financial incentives:- GrantsSubsidized loanCredit facilitiesSubsidies

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:-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 productionTo have diversified sourcing facilitiesTo gain economics of scaleTo promote knowledge sharingTo 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.

• MONOPOLY• CROWDING OUT EFFECT• LEAD TO UNEMPLOYMENT• TENDENCY TO USE SUPPLIERS• MISSING TAX REVENUES• DUAL ECONOMY• ENVIRONMENTAL DAMAGE• DECREASING COMPETITIVENESS OF

DOMESTIC COMPANIES

• 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’: