project report fdi final
TRANSCRIPT
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PROJECT REPORT
ON
ROLE OF BPO IN BANKING SECTOR
BACHELOR OF COMMERCE
BANKING & INSURANCE
SEMESTERV
SUBMITTED TO,
UNIVERSITY OF MUMBAI
In partial fulfillment of the requirements for the award of
Degree of bachelor of commerce ebanking & insurance
PREPARED BY
KANCHAN RAMESH VALECHAROLL NO. 43
UNDER GUIDANCE OF
PROF. JAYA GEMNANI
SMT. CHANDIBAI HIMATHMAL MANSUKHANI
COLLEGE, ULHASNAGAR - 421003
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DECLARATION
I KANCHAN VALECHA at SMT. C.H.M. COLLEGE, T.Y.
B.COM. Banking & insurance (Semester-v) hereby declare that i have
completed the project on ROLE OF BPO IN BANKING SECTOR
academic year 2011-2012.
The information submitted is true and original to the test at my
knowledge.
SIGNATURE OF THE STUDENT
(KANCHAN VALECHA)
ROLL NO.43.
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SMT. CHANDIBAI HIMATHMAL MANSUKHANI
COLLEGE, ULHASNAGAR- 421003
CERTIFICATE
This is to certify that student MISS. KANCHAN VALECHA
have submitted the report for the project titled ROLE OF BPO IN
BANKING SECTOR in the partial fulfillment of degree of bachelor
of commerce banking & insurance semester-v in the academic year
2011-2012 under the guidance of prof. Jaya Gemnani
COURSE H.O.D PRINCIPAL
PROF. KAJAL BHOJWANI. BHAVNA MOTWANI.
PROJECT GUIDE
PROF. JAYA GEMNANI. INTERNAL EXAMINER.
EXTERNAL EXAMINER.
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ACKNOWLEDGMENT.
It is my pleasure to be indebted to various people, who directly or
indirectly contributed in the development of this project and who
influenced my thinking, behavior and acts during the course of study.
I express my sincere gratitude to the UNIVERSITY OF
MUMBAI and my college for giving me this opportunity for taking this
project, which has enhanced my knowledge about ROLE OF BPO IN
BANKING SECTOR.
It is with my deep gratitude, I would like to thank PROF. JAYA
GEMNANI, under the guidance of whom I was able to complete my
project successfully. I wish to thank her for all useful discussions and
timely suggestions of the related topic and invaluable help during
preceding the project.
I also extend my sincere appreciation to all the people who
helped me to complete this project by their suggestions and valuable
information.
SIGNATURE OF STUDENT
KANCHAN VALECHA.
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CHAPTER-1
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INTRODUCTION:Foreign direct investment (FDI) plays
an extraordinary and growing role in
global business. It can provide a firm
with new markets and marketing
channels, cheaper production facilities,
access to new technology, products,
skills and financing. For a host country
or the foreign firm which receives the
investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management skills,
and as such can provide a strong impetus to economic development.
As such, it may take many forms, such as a direct acquisition of a
foreign firm, construction of a facility, or investment in a joint venture or
strategic alliance with a local firm with attendant input of technology,
licensing of intellectual property, in the past decade, FDI has come to
play a major role in the internationalization of business. Reacting to
changes in technology, growing liberalization of the national regulatory
framework governing investment in enterprises, and changes in capital
markets profound changes have occurred in the size, scope and methods
of FDI.
DEFINITION:-
Foreign direct investment (FDI) is defined as an investment
involving a long-term relationship and reflecting a lasting interest and
control by a resident entity in one economy other than that of the foreign
direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).
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NEED OF FOREIGN DIRECT INVESTMANT:
The need for larger FDI is because India is at a stage whrere it needs US
investments, technology, and management policies to sustain and enhanceits economic growth. In 2006, Foreign Direct Investment (FDI) in India
amounted to US$37 billion, out of which only $5 billion was from the
US.
This was not a very encouraging figure in view of the goal of increasingthe GDP by 34-36%. Therefore, there is a need for larger FDIs.
India still requires an FDI component equal to 4% of the GDP. The USneeds to invest more in various sectors of the Indian economy. There is apotential to attract more FDIs in areas like infrastructure, IT hardware,automobiles, leather, textiles, gems, jewelry, and the financial sector. Assuch, India is rated as the 2nd best economy to invest in, after China.Surprisingly, the US is rated 3rd in this domain!
Focus is on the insurance and bankingsector, in context with Foreign Direct
Investments. Only 10% of the insurancesector has been tapped for foreigninvestment. Foreign companies need topersuade the parliament for increasingForeign Direct Investment capital.
The banking sector is in the process ofliberalization which will continue till2009. The insurance sector is looking
forward to increase in the capital as moreand more FDIs happen. So the insurancesector is also planning on liberalization,taking a cue from the banking sector.
The need for larger FDI calls for major issues and areas to be taken intoconsideration, such as:
Market potential and accessibility Political stability Market infrastructure
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Easy currency conversionIndia is the ideal country to make Foreign Direct investments in becauseof its features like :
Developing economy Low salaried employees Low wage workers Abundant human resources Big private economyIndia is looking forward to a high growth rate of almost 16% double
that of the current 8%. Hence, there is a distinct need for larger FDI.
Further, FDI prospects are expected to be bright if liberalization is
initiated in the telecom sector as well. Already, brands like Hutchison,
Vodafone, and SingTel are in the Indian market and thanks to these
investors, the FDI capital in this sector has been raised to 74%. There are
others necessities which a larger FDI will cater to viz., employment
generation, income generation, technology transfer, and economic
stability. Hence, the need for larger FDI is a pressing situation these daysin India. Foreign countries are well aware of this, and many of them are
taking extra initiative to invest in the Indian economy.
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IMPORTANCE OF F FOREIGN DIRECT
INVESTMENT:
Foreign direct investment (FDI) or
foreign investment refers to the net
inflows ofinvestment to acquire a
lasting management interest (10
percent or more of voting stock) in
an enterprise operating in an
economy other than that of the
investor.[1]. It is the sum of equity
capital, reinvestment of earnings, other long-term capital, and short-term
capital as shown in the balance of payments. It usually involves
participation in management, joint-venture, transfer of
technology and expertise. There are two types of FDI: inward foreign
direct investment and outward foreign direct investment, resulting ina net FDI inflow (positive or negative) and "stock of foreign direct
investment", which is the cumulative number for a given period. Direct
investment excludes investment through purchase of shares.
http://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-0http://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-0http://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-0http://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Expertisehttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttp://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Expertisehttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Transfer_of_technologyhttp://en.wikipedia.org/wiki/Joint-venturehttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-0http://en.wikipedia.org/wiki/Investment -
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CHAPTER-2
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HISTORY OF F FOREIGN DIRECT
INVESTMENT IN INDIA:
FDI is a measure offoreign
ownership of productive assets, such as
factories, mines and land. Increasing
foreign investment can be used as one
measure of growing economic
globalization. The figure below shows
net inflows of foreign direct investment
in the United States. The largest flows of
foreign investment occur between the industrialized countries (North
America, Western Europe and Japan). But flows to non-industrialized
countries are increasing sharply.
US International Direct Investment Flows:[3]
Period FDI Inflow FDI Outflow Net Inflow
1960-69$ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79$ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89$ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99$ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07$ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn
http://en.wikipedia.org/wiki/Foreign_ownershiphttp://en.wikipedia.org/wiki/Foreign_ownershiphttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/Western_Europehttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-2http://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-2http://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-2http://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-2http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Western_Europehttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Foreign_ownershiphttp://en.wikipedia.org/wiki/Foreign_ownership -
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The last two decades of the 20th century witnessed a dramatic world-
wide increase in foreign direct investment (FDI), accompanied by a
marked change in the attitude of most developing countries towards
inward FDI. As against a highly suspicious attitude of these countries
towards inward FDI in the past, most countries towards inward FDI in the
past, most countries now regard FDI as beneficial for their development
efforts and complete with each other to attract it. In India, prior to
economic reforms initiated in 1991, FDI was discouraged by (a) imposing
severe limits no equity holdings by foreigners and (b) restricting FDI to
the production of only a few researched items. The initial policy stimulus
to foreign direct investment in India came in July 1991 when the new
industrial policy provided, inter alia, automatic approval for projects with
foreign equity participation up to 51 per cent in high priority areas. In
recent years, the Government has initiated the second generation reforms
under which measures have been taken to further facilitate in India. The
Policy for FDI allows freedom of location, choice of technology,
repatriation of Capital and dividends. As a result of these measures, there
has been a strong surge of international interest in the Indian economy.
The rate at which foreign direct investment has grown during the post-
liberasation period is a clear indication that India is fast emerging as an
attractive destination for overseas investors. Though India has one of themost transparent and liberal FDI regimes among the developing countries
with strong macro-economic fundamentals, it share in FDI inflows is
dismally low. The country still suffers from weaknesses and constraints,
in terms of policy and regulatory framework, which restricts the inflow of
FDI. This book is devoted to a descriptive and analytical study of FDI
trends and policies in India during the post-Independence period.
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CHAPTER-3
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production, Part B of the IEM has to be filled in the prescribed format.
The facility for amendment of existing IEMs has also been introduced.
LOCATIONAL POLICY:Industrial undertakings are free to select the location of a project. In the
case of cities with population of more than a million (as per the 1991
census), however, the proposed location should be at least 25 KM away
from the Standard Urban Area limits of that city unless, it is to be located
in an area designated as an "industrial area" before the 25th July,
1991.(List of cities with population of 1 million and above is given at
Annexure-V). Electronics, Computer software and Printing (and any
other industry which may be notified in future as "non polluting
industry") are exempt from such location restriction. Relaxation in the
aforesaid lavational restriction is possible if an industrial license is
obtained as per the notified procedure.
The location of industrial units is further regulated by the local zoning
and land use regulations as also the environmental regulations. Hence,
even if the requirement of the locational policy stated in paragraph 1.3 is
fulfilled, if the local zoning and land use regulations of a State
Government, or the regulations of the Ministry of Environment do not
permit setting up of an industry at a location, the entrepreneur would be
required to abide by that decision.
POLICY RELATING TO SMALL SCALE UNDERTAKINGS:An industrial undertaking is defined as a small scale unit if the investment
in fixed assets in plant and machinery does not exceed Rs 10 million. The
Small Scale units can get registered with the Directorate of
Industries/District Industries Centre in the State Government concerned.
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Such units can manufacture any item including those notified as
exclusively reserved for manufacture in the small scale sector. Small
scale units are also free from locational restrictions cited in paragraph 1.3
above. However, a small scale unit is not permitted more than 24 per cent
equity in its paid up capital from any industrial undertaking either foreign
or domestic.
Manufacture of items reserved for the small
scale sector can also be taken up by non-
small scale units, if they apply for and obtain
an industrial license. In such cases, it is
mandatory for the non-small scale unit to
undertake minimum export obligation of 50
per cent. This will not apply to non-small
scale EOUs that are engaged in the manufacture of items reserved for the
SSI sector, as they already have a minimum export obligation of 66 per
cent of their production. In addition, if the equity holding from another
company (including foreign equity) exceeds 24 per cent, even if the
investment in plant and machinery in the unit does not exceed Rs 10
million, the unit loses its small scale status. An IEM is required to be filed
in such a case for de-licensed industries, and an industrial license is to be
obtained in the case of items of manufacture covered under compulsory
licensing.
A small scale unit manufacturing small scale reserved item(s), on
exceeding the small scale investment ceiling in plant and machinery by
virtue of natural growth, needs to apply for and obtain a Carry-on-
Business (COB) License. No export obligation is fixed on the capacity for
which the COB license is granted. However, if the unit expands itscapacity for the small scale reserved item(s) further, it needs to apply for
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and obtain a separate industrial license. (For procedure to obtain COB
license.
It is possible that a chemical or a by-product recoverable throughpollution control measures is reserved for the small scale sector. With a
view to adopting pollution control measures, Government have decided
that an application needs to be made for grant of an Industrial Licence for
such reserved items which would be considered for approval without
necessarily imposing the mandatory export obligation.
ENVIRONMENTAL CLEARANCES:Entrepreneurs are required to obtain Statutory clearances relating to
Pollution Control and Environment for setting up an industrial project. A
Notification (SO 60(E) dated 27.1.94) issued under The Environment
Protection Act 1986 has listed 29 projects in respect of which
environmental clearance needs to be obtained from the Ministry of
Environment, Government of India. This list includes industries like
petro-chemical complexes, petroleum refineries, cement, thermal power
plants, bulk drugs, fertilizers, dyes, paper etc. However if investment is
less than Rs. 500 million, such clearance is not necessary, unless it is for
pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos
products, integrated paint complexes, mining projects, tourism projects of
certain parameters, tarred roads in
Himalayan areas, distilleries, dyes,
foundries and electroplating
industries. Further, any item reserved
for the small scale sector with
investment of less than Rs 10 million
is also exempt from obtaining
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environmental clearance from the Central Government under the
Notification. Powers have been delegated to the State Governments for
grant of environmental clearance for certain categories of thermal power
plants. Setting up industries in certain locations considered ecologically
fragile (eg Aravalli Range, coastal areas, Doon valley, Dahanu, etc.) are
guided by separate guidelines issued by the Ministry of Environment of
the Government of India.
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CHAPTER-4
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PROCEDURE OF FOREIGN DIRECT
INVESTMENT:
Foreign direct investment policies play a very important role in the
economic growth of developing countries. The primary aim of these
policies is to create a friendly business environment where foreign
investors feels comfortable with the legal and financial frame work of the
company, and have potential to reap profits from economical viable
business Foreign Direct Investment is investment of foreign assets into
domestic structures, equipment and organizations. Foreign direct
investment is thought to have more useful to a country then investments
in the equity of its companies because equity investments are hot money
which can leave at the first sign of trouble, whereas FDI is durable
whether things go well or badly.
Foreign direct investment is very important for the growth of a country,
therefore Government is therefore making all efforts to attract and
facilitate FDI and investment from Non Resident(NRIs) including
overseas corporate bodies, that are predominantly owned by them, to
complement and supplement domestic investment. The procedure by
which foreign direct investment in India comes is by two ways one is
automatic route and the next is through government approval. Foreign
direct investment has become a key battle ground for emerging markets
and some developed countries. Government level policies are needed to
enable FDI inflows and maximize their returns for investors and recipient
countries. If you want to have knowledge about the foreign direct
investment policy and procedures 365 companies will help you in doing
this.
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1. Project Clearance: After the approval
has been obtained, the applicant may get
his unit/company registered with the
Registrar of Company. Subsequently, the
company needs to obtain various
clearances such as land clearance, building
design clearance, pre-construction
clearance, labour clearance, etc. from
different authorities before beginning its
operations. These clearances differ from
sector to sector and may also differ from state to state.2. Registration and Inspection: Each industrial unit is supposed to
maintain records in regard to production, sale and export, use of specified
raw materials including public utilities like water and electricity, labour
related details financial details and details in regard to industrial safety
and environment. The unit is also subject to periodic inspection by the
factories inspector, labour inspector, food inspector, fire inspector, central
excise inspector, air and water inspector, mines inspector, city inspector
and the like, the list of which may go up to thirty or more.
3. Foreign Exchange Management Act (FEMA), 2000: The additional
provisions which apply only to entry of FDI emanate from the provisions
of FEMA. According to FEMA, no person resident outside India shall
without the approval/knowledge of the RBI may establish in India a
branch or a liaison office or a project office or any other place of
business. FDI in a particular industry may, however, be made through the
automatic route under powers delegated to the RBI or with the approval
accorded by the FIPB. The automatic route means that foreign investors
only need to inform the RBI within 30 days of bringing in their
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investment. Companies getting foreign investment approval through FIPB
route do not require any further clearance from RBI for the purpose of
receiving inward remittance and issue of shares to foreign investors. RBI
has granted general permission under FEMA in respect to proposals
approved by FIPB. Such companies are, however, required to notify the
concerned regional office of the RBI of receipt of inward remittances
within 30 days of such receipts and again within 30 days of issue of
shares to the foreign investors.
ENTRY OPTIONS FOR FOREIGN INVESTORS:
A foreign company planning to set up business operations in India has the
following options:
By incorporating a company under the Companies Act, 1956through
Joint Ventures; or Wholly Owned Subsidiaries Foreign equity in such Indian companies can be up to 100%
depending on
the requirements of the investor, subject to equity caps in respect ofthe area
of activities under the Foreign Direct Investment (FDI) policy. Such offices can undertake activities permitted under the Foreign
Exchange Management Regulations, 2000.
1. INCORPORATION OF COMPANY : For registration andincorporation, an application has to be
filed with Registrar of Companies
(ROC). Once a company has been duly
registered and incorporated as an Indian
company, it is subject to Indian laws
and regulations as applicable to other
domestic Indian companies.
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2. LIAISON OFFICE/REPRESENTATIVE OFFICE : The
role of the liaison office is limited to collecting information about
possible market opportunities and providing information about the
company and its products to prospective Indian customers. It can promote
export/import from/to India and also facilitate technical/financial
collaboration between parent company and companies in India. Liaison
office can not undertake any commercial activity directly or indirectly
and cannot, therefore, earn any income in India. Approval for establishing
a liaison office in India is granted by Reserve Bank of India (RBI).
3. PROJECT OFFICE: Foreign Companies planning to execute
specific projects in India can set up temporary project/site offices in
India. RBI has now granted general permission to foreign entities to
establish Project Offices subject to specified conditions. Such offices can
not undertake or carry on any activity other than the activity relating and
incidental to execution of the project. Project Offices may remit outside
India the surplus of the project on its completion, general permission for
which has been granted by the RBI.
4. BRANCH OFFICE : Foreign companies engaged in
manufacturing and trading activities abroad are allowed to set up Branch
Offices in India for the following purposes:
Export/Import of goods Rendering professional or consultancy services Carrying out research work, in which the parent company is engaged. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. Representing the parent company in India and acting as buying/selling agents in India.
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Rendering services in Information Technology and development of software in India. Rendering technical support to the products supplied by the parent/ group companies. Foreign airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its
own but is permitted to subcontract these to an Indian manufacturer.
Branch Offices established with the approval of RBI may remit outside
India profit of the branch, net of applicable Indian taxes and subject to
RBI guidelines Permission for setting up branch offices is granted by the
Reserve Bank of India (RBI).5. BRANCH OFFICE ON STAND-ALONE BASIS IN
SPECIAL ECONOMIC ZONES (SEZS): Such branch offices
would be isolated and restricted to the SEZ
and no business activity/transaction will be
allowed outside the SEZ in India, which
include branches/subsidiaries of their
parent office in India. No approval shall be
necessary from RBI for a company to
establish a branch/unit in SEZs to
undertake manufacturing and service
activities, subject to specified conditions.6. INVESTMENT IN A FIRM OR A PROPRIETARY
CONCERN BY NRIS : A Non- Resident Indian (NRI) or a Person of
Indian Origin (PIO) resident outside India may invest by way of
contribution to the capital of a firm or a proprietary concern in India on
non-repatriation basis provided:
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The amount is invested by inward remittance or out of specifiedaccount types (NRE/FCNR/NRO accounts) maintained with an
Authorized Dealer. The firm or proprietary concern is not engaged in any
agriculture/plantation or real estate business, i.e. dealing in land
and immovable property with a view to earning profit or earning
income there from.
The amount invested shall not be eligible for repatriation outsideIndia. NRIs/PIOs may invest in sole proprietorship
concerns/partnership firms with repatriation benefits with the
approval of Government/ RBI.
7. INVESTMENT IN A FIRM OR A PROPRIETARY
CONCERN OTHER THAN NRIS : No person resident outside
India other than NRI/PIO shall make any investment by way of
contribution to the capital of a firm or a proprietorship concern or any
association of persons in India. The RBI may, on an application made to
it, permit a person resident outside India to make such an investment
subject to such terms and conditions as may be considered.
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IMPACT OF FOREIGN DIRECT INVESTMANT:
Supporters of FDI contend that foreign investors introduce a packageof highly productive resources into the host economy, includingproduction and process technology, managerial expertise, accounting
and auditing standards, and knowledge of international markets. The
challenge or the host economy is to benefit t from the MNE presence,
and to appropriate some of the increased income accruing from the
resultant productivity growth. The large literature on FDI impacts
concludes that the host economy benefits are quite uneven, both acrossand within countries. This suggests that host country policies are an
important factor in the distribution of these benefits. Of particular
relevance here, as postulated in this literature, are the commercial
environment, institutional
quality, and supply-side
capacities. It should be
emphasized that many FDI
impacts are inherently
difficult to measure. The
academic literature
typically approaches the issue in one of three ways. The first is in the
context of the determinants of growth
In international comparisons of economic growth, FDI, or some othermeasure of foreign presence, is introduced as an explanatory variable,
together with a range of interactive or conditional variables (e.g.,
trade orientation, human capital, institutional quality). The hypothesis
is that, other things being equal, a larger presence is associated with
faster economic growth. The other two methodologies focus on
technology spillovers within countries, from foreign to domestic
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firms, as measured either through firm-level case studies or an
analysis of cross-section industry data.
Both provide only a proximate and partial picture: the former islimited by the sample size and the flows are generally not quantified;
the latter is presumptive band inferential rather than demonstrated.
The relative importance of the various channels through which
spillovers occur emulation, inter firm worker mobility, subcontracting
networks is generally not demonstrated conclusively.
A range of non-equity channels (international labor migration,international buying groups, licensing arrangements) could be just as
important as FDI in some circumstances. A related set of literature
attempts to draw a distinction between positive, crowding-in effects
of FDI, and negative, crowding-out effects. Among the former are
the positive technology and trade effects alluded to above, together
with various dynamic externalities such as clustering and countryreputation.
The latter draws attention to a range of possible outcomes:anticompetitive impacts (e.g., displacement of domestic firms or
investment), bidding scarce resources (e.g., skilled labor, credit) away
from domestic firms, or squeezing out domestic supply networks as
new foreign entrants bring with them integrated upstream anddownstream supply chains.
It is now generally accepted that the distinguishing characteristics ofFDI are its stability and ease of service relative to commercial debt or
portfolio investment, as well as its inclusion of non financial assets in
production and sales processes. Aside from increasing output and
income, potential benefits to host countries from FDI inflows include
the following:
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Foreign firms bring superior technology. The extent of benefits to hostcountries depends on whether the technology spills over to domestic
and other foreign-invested firms.
Foreign investment increases competition in the host economy. Theentry of a new firm in a non tradable sector increases industry output
and may thereby reduce the domestic price, leading to a net
improvement in welfare.
Foreign investment typically results in increased domesticinvestment. In an analysis of panel data for 58 developing countries,
Bosworth and Collins (1999) found that about half of each dollar of
capital inflow translates into an increase in domestic investment.
The findings suggest a foreign resource transfer equal to 5369% ofthe inflow of financial capital. However, when the capital inflows take
the form of FDI, there is a near one-for-one relationship between the
FDI and domestic investment. Foreign investment gives advantages in
terms of export market access arising eitherf rom foreign firmseconomies of scale in marketing or from The ability to gain market
access abroad. Besides The contributions through joint ventures,
foreign firms can serve as catalysts for other domestic exporters.
In an empirical analysis, the probability that a domestic plant willexport was found to be positively correlated with proximity to
multinational firms (Aitken et al. 1997). One implication is thatgovernments may encourage Potential exporters to locate near each
other by :-
creating special economic zones (SEZs) or export processing zones,,Or promoting clusters, or by
conferring special benefits, such as duty-free imports of inputs,subsidized infrastructure, or tax holidays, to help reduce costs for
domestic firms in breaking into foreign markets.
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Foreign investment typically results in increased domestic investment.In an analysis of panel data for 58 developing countries, Bosworth and
Collins (1999) found that about half of each dollar of capital inflow
translates into an increase in domestic investment. The findings
suggest a foreign resource transfer equal to 5369% of the inflow of
financial capital. However, when the capital inflows take the form of
FDI, there is a near one-for-one relationship between the FDI and
domestic investment.
Foreign investment gives advantages in terms of export market accessarising either from foreign firms economies of scale in marketing or
from The ability to gain market access abroad. Besides The
contributions through joint ventures, foreign firms can serve as
catalysts for other domestic exporters. In an empirical analysis, the
probability that a domestic plant will export was found to be positively
correlated with proximity to multinational firms (Aitken et al. 1997).
One implications that governments may encourage potential exportersto locate near each other by
creating special economic zones (SEZs) or export processing zones, orpromoting clusters, or by
Conferring special benefits, such as duty-free imports of inputs,subsidized infrastructure, or tax holidays, to help reduce costs for
domestic firms in breaking into foreign markets. Foreign investmentcan aid in bridging a host Countrys foreign exchange gap. Two gaps
may exist in the economy: insufficient savings to support capital
accumulation to achieve a Given growth target, and insufficient
foreign exchange to purchase imports.
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CHAPTER-6
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SECTOR WISE FOREIGN DIRECT
INVESTMENT:
A large portion of the FDI flows into skill intensive and high value-added
services industries, particularly financial services and information
technology. Service sector and computer software and hardware industry
together account for about 35.49 per cent of the total FDI into India
between April 2000 to December 2007. India, in fact, dominates the
global service industry in terms of attracting FDI with its unbeatable mix
of low costs, deep technical and language skills, mature vendors and
supportive government policies. India topped the AT Kearney's 2007
Global Services Location Index, emerging as the most preferred
destination in terms of financial attractiveness, people and skills
availability and business environment.Global investors have also shown
increasing interest in other sectors as
well. Particular amongst them have been
telecommunication, energy,
construction, automobiles, electrical
equipment among others. For example,
all the five leading global telecom
companies have made significant
investment in India. Similarly, leading
automobile companies have set up their
manufacturing base in India.
Country-wise, Mauritius has been the leading nation for FDI inflows into
India, followed by USA, UK, Singapore, Netherlands and Japan during
April 2000 to December 2007. It is to be noted that Mauritius pre-
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eminence has been due to its stature as a tax haven and most volume of
FDI inflows through Mauritius has been from the USA.
FDI IN THE FINANCIAL SECTORS AMONGMARKET ECONOMIES:
Opening up of doors by many countries of the world has resulted foreign
participation in the financial sectors of emerging market economies
(EMEs) during the 1990s. It has continued to expand so far in this
decade, on balance - although its pace fell somewhat following problems
in Argentina in 2002 and the global slowdown in mergers and
acquisitions. It is seen that banks accounted for the majority of financial
sector foreign direct investment (FSFDI). In a number of countries in
Latin America and central and eastern Europe (CEE), foreign banks now
account for a major share of total banking assets. In Asia, the share of
foreign banks is, overall, much lower, but still substantial. The integration
of EME financial firms into the global market has resulted a wider
diversity of financial institutions operating in EMEs and given greater
emphasis on risk-adjusted profitability. These include expansion into
local retail banking and securities markets, where elements such as client
relationships and reputation are important components of the franchise
value of operations. Such factors have tended to raise the costs of exiting
a country and hence increased the permanence of FSFDI.
FSFDI was fostered by financial liberalization and market-based reforms
in many EMEs. The liberalization of the capital account and financial
deregulation paved the way for foreign acquisitions and the integration of
EME financial firms into an expanding global market for corporate
control. This is the character of FSFDI as part of a broader trend towards
consolidation and globalization in the financial industry. In some cases
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competition in traditional markets increased pressure on major
international banks to find new areas for growth. Financial institutions in
advanced economies increasingly searching for profit opportunities at the
customer and product level, FSFDI offered a means of access to EME
markets with attractive strategic opportunities to expand. Local financial
infrastructure is growing which reduces the risks of conducting business
in EMEs.but events such as the Russian default in 1998 and Argentine
actions in 2002 also made financial institutions more sensitive. Thus,
financial institutions in industrial countries now tend to evaluate country
risk separately. An important benefit of FSFDI is its effect on financial
sector efficiency that arises from local banks' exposure to global
competition Host countries benefit from the technology transfers and
innovations in products and processes commonly associated with foreign
bank entry.
Foreign banks exert competitive pressures and demonstration
effects on local institutions. This results better risk management, more
competitive pricing and in general a more efficient allocation of credit in
the financial sector as a whole. Foreign banks presence helps to achieve
greater financial stability in host countries. Host countries benefit
immediately from foreign entry.
The better capitalization and wider diversification of foreign banks,
along with the access of local operations to parent funding, may reduce
the sensitivity of the host country banking system to local business cycles
and changing financial market conditions. Their use of risk-based credit
evaluation tends to reduce concentration in lending and in times of
financial distress, fosters prompter recognition of losses and more timely
resolution of problems.
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The growing involvement of
foreign firms in the financial systems
of EMEs has given rise to a situation
where majorities of EME bankin
assets have become foreign owned.
The growing involvement of foreign
firms in the financial systems of EMEs
has given rise to a situation where
majorities of EME banking assets have become foreign owned.
Accordingly, developing pertinent technical skills is considered be
an important area of cooperation between authorities in advanced and
EME countries. In some markets, foreign-owned banks have been
prominent in the rapid expansion of consumer lending and foreign
currency lending to both households and businesses.
Appropriate supervision is needed to assess such credit managed
by banks, and authorities in charge of financial stability. Accordingly,
public policy should be focused on maximizing these benefits by
continuing to encourage diversity and competition in financial systems
not only between foreign and domestic banks but also between banks and
other financial institutions.
One essential component among host country policy is
commitment for growth and stability. Another is the protection of
property rights and equal treatment of banks irrespective of ownership.
From this point of view a more extensive implementation of the
internationally recognized set of financial standards and codes can help to
reduce country risk. Strengthening of legal frameworks act as a parameter
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for reducing country risk. Smooth functioning of the market for corporate
control would be assisted by greater international compatibility of
accounting standards, takeover rules, and insolvency codes.
Regional integration among EME financial systems, often within a
framework for broader economic integration in the region, is another
complementary approach to this objective. There is substantial evidence
of major benefits from regional compacts such as those of the European
Union and NAFTA. In the case of very poor countries where there is
some special support for FSFDI may be merited provided political risk
insurance if properly designed, could be useful.
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CHAPTER-7
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CURRENT STATUS:
LAST UPDATED: APRIL-JUNE 2008 :
The liberal investment regime, rapid growth of the economy, strong
macro economic fundamentals, progressive de-licensing of sectors and
the ease in doing business has attracted global corporations to invest in
India
And consequent to policy changes and procedural simplifications, FDI
equity inflows have registered a phenomenal upswing. FDI inflows have
recorded over five-fold increase in the last three years, from US$ 2.2
billion in 2003-04 to US$ 15.7 billion in 2006-07. Simultaneously, FDI
share in India's GDP has increased from 0.77 per cent to 2.31 per cent.
Significantly, FDI has come to play an increasing role in the economic
growth of the country. The share of FDI in total investment has more than
doubled from 2.55 per cent in 2003-04 to 6.42 2006-07.
In fact, the US$ 5.67 FDI inflows
recorded in February 2008 was the
highest-ever during any month since
1991 and more than the entire
annual inflows from 1991-92 to
2004-05. This surge in FDI is likely
to further boost India's attraction as
an investment destination. Already, India recorded a higher change in
Investor outlook than China in the latest FDI Confidence Index of A T
Kearney, implying bridging the gap between the two countries in terms
investment attractiveness. Also, India has emerged as the preferred
investment destination for European investors, ahead of even china.
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FDI INFLOW AT $20.13 BILLIONSFDI:
India received $20.13 billion as Foreign Direct Investment (FDI) between
April-February 2007-08, almost 70 per cent higher compared to the year-ago period. "This is the highest FDI equity in the country during any
year," an official release said here. FDI inflows in February 2008 stood at
$5.67 billion, up 712 per cent over February 2007. "The inflows in the
month of February have surpassed the inflows received in any single year
since 1991, barring last year 2006-07,"
AMOUNTS
APRIL
FEBRUARY
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CHAPTER:8
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GUIDELINES FOR FOREIGN DIRECT
INVESTMENT:
The following Guidelines are laid-down to enable the Foreign Investment
Promotion Board (FIPB) to consider the proposals for Foreign Direct
Investment (FDI) and formulate its recommendations.
All applications should be put up before the FIPB by the SIA (Secretariatof Industrial Assistance) within 15 days and it should be ensured that
comments of the administrative ministries are placed before the Board
either prior to/or in the meeting of the Board.
Proposals should be considered by the Board keeping in view the time-frame of 6 weeks for communicating Government decision (i.e. approval
of IM/CCFI or rejection as the case may be)
In cases in which either the proposals is not cleared or further informationis required, in order to obviate delays presentation by applicant in the
meeting of the FIPB should be resorted to
While considering cases and making recommendations, FIPB shouldkeep in mind the sectoral requirements and the sectoral policies vis-a-vis
the proposal(s).
FIPB would consider each proposal in totality (i.e. if it includes apartfrom foreign investment, technical collaboration/industrial licence) for
composite approval or otherwise. However, the FIPB's recommendation
would relate only to the approval for foreign financial and technical
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collaboration and the foreign investor will need to take other prescribed
clearances separately.
The Board should examine the following while considering proposalssubmitted to it for consideration:
whether the items of activity involve industrial licence or not and ifso the considerations for grant of industrial licence must be gone
into;
whether the proposal involves technical collaboration and if so:- (a)the source and nature of technology sought to be transferred, (b)
the terms of payment (payment of royalty by 100% subsidiaries is
not permitted);
whether the proposal involves any mandatory requirement forexports and if so whether the applicant is prepared to undertake
such obligation (this is for Small Industry units, as also for
dividend balancing and for 100% EOUs/EPZ Units);
whether the proposal involves any export projection and if so theitems of export and the projected destinations;
whether the proposal has concurrent commitment under otherschemes such as EPCG Scheme, etc.;
in the case of Export Oriented Units (EOUs) whether theprescribed minimum value addition norms and the minimum turn
over of exports are met or not;
whether the proposal involves relaxation of locational restrictionsstipulated in the industrial licensing policy; and
whether the proposal has any strategic or defence relatedconsiderations.
While considering proposals the following may be prioritised.
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Items falling withinAnnexure-IIIof the New Industrial Policy (i.e.those which do not qualify for automatic approval).
Items falling in infrastructure sector. Items which have an export potential. Items which have large scale employment potential and especially
for rural people.
Items which have a direct or backward linkage with agrobusiness/farm sector.
Items which have greater social relevance such as hospitals, humanresource development, life saving drugs and equipment.
Proposals which result in induction of technology or infusion ofcapital.
8. The following should be especially considered during the scrutiny andconsideration of proposals:
The extent of foreign equity proposed to be held (keeping in viewsectoral caps if any - e.g. 24% for SSI units, 40% for air
taxi/airlines operators, 49% in basic/cellular/paging, etc. in
Telecom sector).
Extent of equity with composition of foreign/NRI (which mayinclude OCB)/ resident Indians.
Extent of equity from the point of view whether the proposedproject would amount to a holding company/wholly owned
subsidiary/a company with dominant foreign investment (i.e. 76%
or more)/joint venture.
Whether the proposed foreign equity is for setting up a new project(joint venture or otherwise) or whether it is for enlargement of
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foreign/NRI equity or whether it is for fresh induction of foreign
equity/NRI equity in an existing Indian company.
In the case of fresh induction of foreign/NRI equity and/or in casesof enlargement of foreign/NRI equity in existing Indian companies
whether there is a resolution of the Board of Directors supporting
the said induction/enlargement of foreign/NRI equity and whether
there is a shareholders agreement or not.
In the case of induction of fresh equity in the existing Indiancompanies and/or enlargement of foreign equity in existing Indian
companies, the reason why the proposal has been made and the
modality for induction/enhancement (i.e. whether by increase of
paid up capital/authorised capital, transfer of shares (hostile or
otherwise) whether by rights issue, or by what modality).
Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines. Whether the activity is an industrial or a service activity or a
combination of both.
Whether the item of activity involves any restriction by way ofreservation for the small scale sector.
Whether there are any sectoral restrictions on the activity (e.g.there is ban on foreign investment in real estate while it is not so
for NRI/OCB investment).
Whether the item involves only trading activity and if so whether itinvolves export or both export and import, or also includes
domestic trading and if domestic trading whether it also includes
retail trading.
Whether the proposal involves import of items which are eitherhazardous, banned or detrimental to environment (e.g. import of
plastic scrap or recycled plastics).
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9. In respect of industries/activities listed in Annexure - III of the NewIndustrial Policy automatic approval for majority equity holding
(50/51/74 per cent) is accorded by the Reserve Bank of India. FIPB may
consider recommending higher levels of foreign equity in respect of these
activities keeping in view the special requirements and merit of each case.
10. In respect of other industries/activities the Board may considerrecommending 51 per cent foreign equity on examination of each
individual proposal. For higher levels of equity up to 74 per cent the
Board may consider such proposals keeping in view considerations such
as the extent of capital needed for the project, the nature and quality of
technology, the requirement of marketing and management skills and the
commitment for exports.
11. FIPB may consider and recommend proposals for 100 per centforeign owned holding/subsidiary companies based on the following
criteria :
where only "holding" operation is involved and allsubsequent/downstream investments to be carried out would
require prior approval of the Government;
where proprietary technology is sought to be protected orsophisticated technology is proposed to be brought in;
where at least 50% of production is to be exported; proposals for consultancy ; and proposals for power, roads, ports and industrial model
towns/industrial parks or estates.
12 In special cases, where the foreign investor is unable initially toidentify an Indian joint venture partner, the Board may consider and
recommend proposals permitting 100 per cent foreign equity on a
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temporary basis on the condition that the foreign investor would divest to
the Indian parties (either individual, joint venture partners or general
public or both) at least 26 per cent of its equity within a period of 3-5
years.
13. Similarly in the case of a joint venture, where the Indian partner isunable to raise resources for expansion/technological upgradation of the
existing industrial activity the Board may consider and recommend
increase in the proportion/percentage (up to 100 per cent) of the foreign
equity in the enterprise.
14. In respect of trading companies, 100 per cent foreign equity may bepermitted in the case of activities involving the following :
export; bulk imports with export/expanded warehouse sales ; cash and carry wholesale trading ; other import of goods or services provided at least 75% is for
procurement and sale of goods and services among the companies
of the same group.
15. In respect of the companies in the infrastructure/services sector wherethere is a prescribed cap for foreign investment, only the direct
investment should be considered for the prescribed cap and foreign
investment in an investing company should not be set off against this cap
provided the foreign direct investment in such investing company does
not exceed 49 per cent and the management of the investing company is
with the Indian owners.
16. No condition specific to the letter of approval issued to a foreigninvestor would be changed or additional condition imposed subsequent to
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the issue of a letter of approval. This would not prohibit changes in
general policies and regulations applicable to the industrial sector.
17. Where in case of a proposal (not being 100% subsidiary) foreigndirect investment has been approved up to a designated percentage of
foreign equity in the joint venture company, the percentage would not be
reduced while permitting induction of additional capital subsequently.
Also in the case of approved activities, if the foreign investor(s)
concerned wishes to bring in additional capital on later dates keeping the
investment to such approved activities, FIPB would recommend such
cases for approval on an automatic basis.c
18. As regards proposal for private sector banks, the application would beconsidered only after "in principle" permission is obtained from the
Reserve Bank of India (RBI)
19. The restrictions prescribed for proposals in various sectors asobtained, at present, are given in theAnnexureand these should be kept
in view while considering the proposals.
These Guidelines are meant to assist the FIPB to consider proposals in an
objective and transparent manner. These would not in any way restrict the
flexibility or bind the FIPB from considering the proposals in their
totality or making recommendations based on other criteria or special
circumstances or features it considers relevant. Besides these are in the
nature of administrative Guidelines and would not in any way be legally
binding in respect any recommendation to be made by the FIPB or
decisions to be taken by the Government in cases involving Foreign
Direct Investment (FDI).
These guidelines are issued without prejudice to the Government's right
to issue fresh guidelines or change the legal provisions and policieswhenever considered necessary.
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CHAPTER-9
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ADVANTAGES AND DIS-ADVANTAGES OF FDI:
ADVANTAGES OF FDI:1.STIMULATION OF NATIONAL ECONOMY:-
FDI is thought to bring certain benefits to national economies. It can
contribute to gross domestic product (GDP). Gross fixed formation (total
investment in a host economy) and balance of payment. There have been
empirical studies indicating a positive link between higher GDP and FDI
inflows (OECD).however the link does not hold for all region e.g. over
the last ten year FDI has increased in central Europe whilst GDP has
dropped. FDI can also contribute toward debt servicing repayment,
Simulate export markets and produce foreign exchange revenue.
2. STABILITY OF FDI:-
FDI inflows can be less affected by affected by change in nationalexchange rate as compared to other private sources. This is partly because
currency devaluation means a drop in the relative cost of production and
assets. For foreign companies and there by increases the relative
attraction of a host country. FDI can stimulate product diversification
though investments into new businesses, so reducing market reliance on a
limited number of sectors/products. However, if international flows of
trade and investment fall globally and for lengthy periods
Then stability is less certain. New inflows of FDI are especially
affected by these global trends. Because it is harder for a foreign
company to de-invest or reverse from foreign affiliates as compared to
portfolio investment. Companies are therefore more likely to be careful to
ensure they will accrue benefits before making any new investments.E.g.
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Korea and Thailand, during the 1996/97 crisis, it fell in others e.g.
Indonesia. During Latin Americas financial crisis in the 80,s many Latin
American countries experienced a sharp fall in FDI suggesting that
investment sensitivity varies according to a countrys particular
circumstances.
3. SOCIAL DEVELOPMENT:FDI. Where it generates and expands
businesses. Can help stimulate
employment. Raise wages and replace
declining market sectors. However, the
benefits may only be felt by small
portion of the population, `E.g. where
employment and training is given to
more educated. Typically wealthy cities
or there is an urban emphasis, wagedifferentials between income groups
will be exacerbated. Cultural and social impacts may occur with
investment directed at non-traditional goods. For example, if financial
resources are diverted away from food and subsistence production
towards more sophisticated products and encouraging a culture of
consumerism can also have negative environmental impacts. Within local
economies small scale and rural business of FDI host countries there is
less capacity to attract foreign investment and business or to use more
informal sources of finance.
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4. INFRASTUCTURE DEVELOPMENT AND
TECHNOLOGY TRANSFER:-
Parent companies can support their foreign subsidiaries by ensuringadequate human resources and infrastructure are in place. In particular
Greenfield investments into new business sectors can stimulate new
Infrastructure development and technologies to host economies. These
developments can also result in social and environmental benefits, but
only where they spill over into host communities and businesses.
Investment in research & development (R&D) from parent companies
can stimulate innovation In-house investment will result in
improvements.Foreign technology/organizational techniques may
actually be inappropriate to local needs, capital intensive and have a
negative affect on local competitors, especially smaller businesses who
are less able to make equivalent adoptions.
5. CROWDING IN OR COROWDING OUT:-
Crowding in occurs where FDI companies can stimulate growth in
up/down stream domestic businesses within the national economies.
Whilst crowding out is a scenario where parent companies dominate
local competition and entrepreneurship. One reason for crowding out is
policy chilling or regulatory arbitrage where government regulationsSuch as labour and environmental standards are kept artificially low to
attract foreign investors. This is because lower standards can reduce the
short term operative costs for businesses in a country For example:- In
industries where demand or supply for a product or service is highly price
elastic (market sensitive) and capital intensive.Hence regulation brings
additional costs of compliance and is therefore much more likely to
influence a companys decision to in vest in that country
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DIS-ADVANTAGES OF FDI:
1. RESTRICTIVE FDI REGIME:
The FDI regime in India is still quite restrictive. As a consequence, with
regard to Cross border ventures, India ranks 57 th in the GCR 1999.foreign
ownership of between 51 and 100 percent of equity still requires a long
procedure of governmental approval. In our view, there does not seem to
be any justification for continuing with this rule. This rule should be
scrapped in flavor of automatic approval for 100% foreign ownership
except on a small list of sectors that may continue to require government
authorization.
The banking sector, for example, would be an area where India would
like to negotiate reciprocal investment rights. Besides, the government
also needs to ease the restrictions on FDI outflows by non-financial
Indian enterprises so as allow these enterprises to enter into joint ventures
and FDI arrangements in other countries. Further deregulation of FDI in
industry and simplification of FDI procedures in infrastructure is called
for.
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2. LACK OF CLEAR CUT $ TRANSPARENT SECTORAL
FOR FDI:
Expeditious translation of approved FDI into actual investment wouldrequire more transparent sectoral policies, and a drastic reduction in time-
consuming redtapism.
3.HIGH TARIFF RATES BY INTERNATIONAL
STANDARDS:
Indias tariff rates are still among the highest in the world, and continueto block Indias attractiveness as an export platform for labor-intensive
manufacturing production. On tariffs and quotas, India is ranked 52nd in
the 1999GCR, and on average tariff rate, India is ranked 59 th out of 59
countries being ranked. Much greater openness is required which among
other things would include further reductions of tariff rates to average in
East Asia (between zero and 20 percent). Most importantly, tariffs rates
on imported capital goods used for export, and on import inputs into
export production, should be duty free, as has been true for decades in the
successful exporting countries of East Asia.
4. LACKS OF DECISION-MAKING AUTHORITY WITH
THE STATE GOVERNMENTS:-
The reform process so far has mainly concentrated at the central level.
India has yet to free up its state government sufficiently so that they can
add much greater dynamism to the reform. In most key infrastructure
area, the central government remains in control or at least with veto over
state actions. Greater freedom to the state will help foster greater
competition among themselves. The state in India needs to be viewed as
potential agents of rapid and salutary change.
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5. LIMITED SCALE OF EXPORT PROCESSING
ZONES:-
The very modest contributions ofIndias export processing zones to
attracting FDI overall export
development call for are vision of
policy. Indias export processing zones
have lacked dynamism because of
several reasons, such as their relativelylimited scale; the governments general
ambivalence about attracting FDI; the unclear and changing incentive
packages attached to the zones; and the power of the central government
in the regulation of the zones, in comparison with the major responsibility
of local and provincial governments in china. Ironically, while India
established her first EPZ in 19654 compared with chinas initial efforts in
1980, the Indian EPZ never seemed to take offeither in attracting
investment or in promoting exports.
6. NO LIBERALIZATION IN EXIT BARRIERS:-
While the reforms implemented so far have helped remove the entry
barriers, the liberalization of exit barriers has yet to take place. In our
view, this is a majors deterrent to large volume of FDI flowing to India.
An exit policy needs to be formulated such that firms can enter and exit
freely from the market. While it would be incorrect to ignore the need and
potential merit of certain safeguards, it is also important to recognize that
Safeguards if wrongly designed and/ore poorly enforced would turn into
barriers that may adversely affect the heath of the form. The regulatory
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framework, which is in place, does not allow the firms to undertake
restructuring.
7. STRENGENT LABOUR LAWS:-
Large firms in India are not allowed to retrench or layoff any workers, or
close drown the unit without the permission of the state governments.
While the law was enacted with a view to monitor unfair retrenchment
and layoffs, in effects it has turned out to be a provision for job security
provided to public sector employees most importunately, with 100 or
more employees paralyzes firms in hiring new workers. With regard to
labours regulations and hiring and firing practices, India is ranked 55 th
and 56th respectively in the GCR 1999.so India remains an unattractive
base for such production in part because of the continuing obstacles to
flexible managements of the labour force.
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CHAPTER:9
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CONCLUSION:
A number of studies have been undertaken to determine whether
FDI impacts positively one economic growth. Two types of studiesmacro and microhave generally been conducted to study the
relationship between FDI and growth. Micro studies usually find no
positive evidence that FDI makes a positive contribution to growth.
Macro studies, on the other hand,
often find FDI to positively affect economic growth under certain
conditions.
The findings indicate that FDI is a positive and a significant
contributor to growth for EP countries, while having no influence on
growth for IS countries. In addition, as far as EP countries are concerned,
it is FDI and not domestic investment that acts as a driving force in the
growth process.
FDI can promote growth in the presence of a liberal trade regime; a threshold level of human endowment is necessary for the promotion of
growth through FDI;
effective utilization of human capital in conjunction with FDI requires anadequate domestic market for the goods produced; and technology and
skill spillovers from FDI do not materialize became statistically
significant with the inclusion of the domestic market
The findings, meanwhile, show strong evidence of considerableheterogeneity across countries. This indicates that incorrectly imposing
the homogeneity assumption on the data can lead to biased estimates and
faulty policy implications. To circumvent the problem, the authors use
mixed, fixed, and random (MFR) panel data estimation to test for
causality between FDI and economic growth in developing countries.
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CHAPTER-10
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FUTURE STRATEGIES OF FDI:
FDI flows will likely remain disappointing through 2011, according tothe 2010 A.T. Kearney Foreign Direct Investment Confidence Index, a
regular assessment of senior executive sentiment at the worlds largestcompanies.
The Index also found executives are wary of making investments in thecurrent economic climate and revealed that they expect the economicturnaround to happen no earlier than 2011. Half of the companiessurveyed also report that they are postponing investments as a result ofmarket uncertainty and difficulties in obtaining credit.
Conducted regularly since 1998 by global management consulting firm
A.T. Kearney, the Index provides a unique look at the present and futureprospects for international investment flows. Companies participating inthe survey account for more than $2 trillion in annual global revenue.
China remains the top-ranked destination by foreign investors, a title ithas held since 2002. The United States retakes second place from India,which had surpassed it in 2005. India, Brazil and Germany complete thetop five favored investment destinations.
Overall, developed economies rose in the Index as investors looked forsafety. The most striking exception is the United Kingdom, whosereliance on financial services left it exposed in the current crisis. At thesame time, the placement of China, India and Brazil in the top five showsa strong vote of confidence for the strength of these economies. Investorsalso expressed the most optimism about the future outlook for China,India and Brazil.
The results indicate a return to market fundamentals and a flight to
quality for corporate executives, said Paul A. Laodicea, managing
officer and chairman of A.T. Kearney. Companies are looking for the
antidote to uncertainty and increasingly looking to invest in the nearabroad.
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CHAPTER-11
CASE STUDY:
(CASE-1)
TATAS To BENEFIT FROM REMOVAL OF BAN ON
BANGLADESH FDI
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The $3-billion investment proposal of the Tata group in the power, steel
and fertilizer sectors in Bangladesh is closer to reality because of Indias
decision to lift the ban on Bangladeshi investment into India.
That Bangladesh was not allowed to invest in India while India wanted to
invest in that country had been a sore point in the bilateral relationship
between the two nations, according to the Union Minister of State for
Commerce and Industry,
Mr. Jairam Ramesh.
Mr. Ramesh told Business Line that it was hypocritical on the part of
India to push for Tata investment while not allowing Bangladesh to
invest in India. He said that there were rich possibilities of Bangladesh
investing in India, especially in the North East, in areas such as food
processing, textiles and bamboo-related industries.
He said that Indias proposal to develop the Sitwe project did not
imply that the country thought it could develop the North East ignoring
Bangladesh.
Logistics-wise the Sit we project is very good, but we cannot operate on
the assumption that we can develop the North East ignoring Bangladesh,
he said, adding that Bangladesh, Indias North East, Myanmar and
Thailand formed a growth quadrilateral.
Noting that along the 1,600-km border with Myanmar, the only border
trade post was Morah in Manipur, Mr. Ramesh said that India was in
talks with Myanmar to open border trade with Myanmar at two more
pointsPangsau in Arunachal Pradesh, Zokhawthar in Mizoram.
Right now, our notion of border trade is that the trade is restricted
to a list of goods. For example, at Nathu La, there are only 37 items that
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can be traded. In Morah, there are only 22 items that can be traded. We
must get out of this restrictive approach of border trade and move to a
more liberal trade at border. Of course, our security establishment is not
very comfortable with this concept because it feels it could be used by
China to dump its goods.
The goodwill generated by India developing the Sitwe port would
put India in a favourable position to win oil and gas
exploration/production blocks.
Asked if US or China might oppose India developing the Sitwe project,Mr Ramesh said, Undoubtedly we cannot minimize the possibility that
there will be sometimes overt, sometimes covert opposition to our
enhanced relations with Myanmar. Im sure will be attacked by human
rights groups. It is a fine line that we have to treat.
(CASE 2)
RETAIL WILL CREATE PURCHASING POWER, JOBS
MUKESH AMBANI:-
On being quizzed about FDI in multi-brand retail, during India
Economic Summit, Reliance chairman Mukesh Ambani, said that,
considering that the sector offered immense potential, it should be
allowed. FDI in the sector was welcome as the retail potential was real
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and no single large company or an MNC would be able to capture it, he
added.
The retail segment had the potential to aid not only in Indias
economic growth but also to provide employment opportunities, said
Ambani. 10 to 15 million jobs would be generated over the next three to
five years due to the explosion in the retail sector, he added.
One of the biggest opportunities offered by the retail, according to
Ambani, was to create purchasing power, even at the bottom of the
pyramid
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CHAPTER-11
Annexures:
Article: india- an attractive destination to fdi.
Article from: The Economic Times, New Delhi.
Article date: april.22,2000.
Auther: ashoksheel.
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NEW DELHI: Despite regulatory hurdles, India continues to be among
the preferred destinations for FDI due to the country's high economic
growth, with both Mumbai and Delhi being touted as among the cities
likely to produce the next Microsoft or Google, a survey said.
According to the '9th Annual European Attractiveness Survey' by Ernst &
Young, India will rank fifth among the most attractive destinations for
European firms within the next three years, mainly on account of India's
perceived specialization as a hub for low cost outsourcing business.
"Foreign investors are not deterred by current regulatory issues to invest
in India... India's perceived specialization as a low-cost business process
outsourcing (BPO) hub continues to appeal the investors across the
globe," the report said.
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BIBLIOGRAPHY:
Books:
Foreign Investment in India: 1947-48 to 2007-08, Dr. Kamlesh
Gakhar
Foreign Direct Investment in India: 1947 to 2007, Dr. Nitin Bhasin
Websites:
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