role of fdi in sme.doc

8/9/2019 role of FDI in SME.doc

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CONTENTS

1. ACKNOWLEDGEMENT 4

2. INTRODUCTION 5

3. FOREIGN DIRECT INVESTMENT 8

4. FOREIGN DIRECT INVESTMENT IN INDIA 14

5. SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT

IN INDIA 50

6. OBJECTIVE OF TE STUD! 5"#. PURPOSE OF TIS STUD! 60

8. STATEMENT OF PROBLEM 61

". RESEARC METODOLOG! 64

10. DATA ANAL!SIS #0

11. CONCLUSION 8#

12. RECOMMENDATIONS "1

13. BIBLIOGRAP! "4

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FOREIGN DIRECT INVESTMENT

2

http://images.google.co.in/imgres?imgurl=http://www.transfuture.net/transart/future_city_249.jpg&imgrefurl=http://www.positivedetroit.net/2009_06_21_archive.html&usg=__AV2ueiTxnevX2qLo2K9pLVkeVxo=&h=800&w=1280&sz=951&hl=en&start=177&um=1&tbnid=kRK2MkVOdLUX2M:&tbnh=94&tbnw=150&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26ndsp%3D20%26hl%3Den%26sa%3DN%26start%3D160%26um%3D1http://images.google.co.in/imgres?imgurl=http://propertybytes.indiaproperty.com/Images/Nov06/funds%25202.bmp&imgrefurl=http://propertybytes.indiaproperty.com/index.php/newsbytes/foreign-direct-investments-fdi-in-the-indian-resl-estate&usg=__79n69uT0zzQ8h9LBWf5ZZztmdvo=&h=225&w=300&sz=198&hl=en&start=8&um=1&tbnid=1W6GgysKt9DONM:&tbnh=87&tbnw=116&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://www.thehindu.com/pp/2006/06/24/images/2006062400050101.jpg&imgrefurl=http://www.thehindu.com/pp/2006/06/24/stories/2006062400050100.htm&usg=__9HcTIkrKuxdyx_4mcA1M3Izmug4=&h=363&w=351&sz=23&hl=en&start=1&um=1&tbnid=tvIGakDd1YskzM:&tbnh=121&tbnw=117&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://ucatlas.ucsc.edu/lgraphics/Fdi_2000.gif&imgrefurl=http://gibsdiscussions.blogspot.com/2007/02/different-version-on-foreign-direct.html&usg=__6a6P9GHPbF-bBzB5wkkchrC0YqY=&h=557&w=720&sz=39&hl=en&start=2&um=1&tbnid=g8cPrpxgJ8w2xM:&tbnh=108&tbnw=140&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://www.rajkishoreassociates.com/images/fdi.jpg&imgrefurl=http://www.rajkishoreassociates.com/fdi.htm&usg=__zyMUDXRyGcL-j3uDWZuNofSM6_Y=&h=199&w=180&sz=20&hl=en&start=3&um=1&tbnid=mObhs-Cpmr0CQM:&tbnh=104&tbnw=94&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1


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STUDENT DECLARATION

I undersign SHIKHA JAIN student of MBA here by declared that the research

report entitled ‘ROLE OF FDI IN SME is completed and submitted under the

guidance of Ms. Akanskha is my original work. The imperial finding in this report

is based on the data collected by me. I have not submitted this project report to

MIT, Meerut or any other niversity for the purpose of compliance of any

re!uirement of any e"amination or degree.

DATE:

SHIKHA JAIN

PLACE: Roll No. 1129270042

MBA IV Sem

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ACKNOWLEDGEMENT

I express my sincerest grtit!"e n" t#n$s to M$. A%&'%$(&

%&.'.(.) Mngement*) +or ,#ose $in"ness I #" t#e precio!s opport!nity

o+ ttining reserc#. -n"er #is rillint !ntiring g!i"nce I co!l" complete

t#e pro/ect eing !n"ert$en on t#e )ROLE OF FOREIGN DIRECT

INVESTMENT IN SME* s!ccess+!lly in time. &is metic!lo!s ttention

n" inl!le s!ggestions #e #elpe" me in simpli+ying t#e prolem

inole" in t#e ,or$.

SIKA JAIN

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INTRODUCTION

G+'+,&- B&%/,'

In t#e recent yers) oreign (irect Inestment %(I* policies #s ecome one o+ t#e

centrl economic policies +or t#e "eeloping co!ntries) lerne" +rom t#e experiences o+

ne,ly in"!strilise" co!ntries %NIs* li$e In"i) Singpore) &ong ong n" i,n

,#ic# promote" (I s t#e ctlyst o+ rpi" economic gro,t# in t#e erly stges o+ t#eir

economic "eelopment. 5mpiricl st!"ies on t#e impct o+ (I on economic gro,t#

#e s#o,n positie impct in t#e #ost co!ntries. &ence) it #s ecome n re o+ gret

interest ,it# empiricl "eterminnts o+ policy implictions +or en#nce" (I in+lo,s n"

t#e mec#nism t#ro!g# ,#ic# it +cilittes gro,t# n" str!ct!rl c#nge in recipient

co!ntries.

#e role o+ (I in economic gro,t# in t#e "eeloping co!ntries is t#t (I generte

more ene+its to t#e recipient co!ntries rt#er t#n /!st +!ll +illing t#e s#ort6term cpitl

"e+iciency prolems. rns+er o+ tec#nologies n" its spill oer e++ect to t#e locl +irms

,ill m$e t#e locl +irms more competitie n" #ig# stn"r"s ,#ic# is necessry to

compete ,it# t#e +oreign pro"!cts. Anot#er) spill oer e++ect o+ MN5s is t#t MN5s my

proi"e trining n" lo!r mngement ,#ic# my m$e t#em ille to t#e economy

in generl. #e trining to locl s!ppliers y MN5s my increse t#e #ig# stn"r"

pro"!ction n" mngeril stn"r"s.

#e reltions#ip et,een +oreign "irect inestment n" economic gro,t# is one t#e ,ell

st!"ie" s!/ect in t#e +iel" o+ "eelopment economics. 5specilly) +ter t#e "ent o+

en"ogeno!s gro,t# mo"el %Borenteins) et al ) 1998) Bls!rmnym) et al ) 199*

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m"e t#is reltions#ip more itl +or long r!n economic gro,t#. #e reserc# interest in

t#is +iel" #s increse" +ter 1990s ,e o+ glolistion n" mssiely increse" (I

cross t#e gloe n" economic gro,t# o+ (I receiing co!ntries.

-NA( %200:* +oreign "irect inestment #s potentil to generte employment) rise

pro"!ctiity) trns+er s$ills n" tec#nology) en#nce export n" contin!e to t#e long6term

economic "eelopment o+ t#e ,orl";s "eeloping co!ntries. M!ltintionl ompnies

%MN5s* n" rnsltionl orportions %Ns* re importnt s t#eir +oreign ++ilites)

some 4)000 rnsltionl orportions) generte 83 million /os. (I is lso t#e lrgest

so!rce o+ externl +inncing +or "eeloping co!ntries.

oreign (irect Inestment is "irectly lin$e" to t#e interntionl tr"e o+ t#e co!ntry

,#ic# proi"es t#e opport!nities to integrte t#e locl economy ,it# t#e ,orl" economy.

5normo!s litert!res on signi+icnce o+ (I #s s#o,n positie role in t#e economic

gro,t# %Borentein) et al 1998) (e Mello) 199 n" Bls!rmnym) 199*. &o,eer)

t#ere re controersies s some c"emics rg!e t#t t#e reltions#ip et,een (I n"

gro,t# is non6liner. #is is complex iss!e ,#et#er (I c!se gro,t# or gro,t# c!ses

t#e increse o+ (I. M!ltintionl compnies go cross t#e ,orl" ,it# t#e o/ecties

mximiing pro+its. &ence) co!ntries re proi"ing most s!itle inestment enironment

to MN5s to ttrct t#e inestment.


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In+lo,s o+ (I cn e importnt e#icle +or tec#nologicl c#nge n" #!mn cpitl.

Blomstrom et al %1994) 199* emp#sie" (I t#t in"!ce" #!mn cpitl !gmenttion

n" economic gro,t# y t#e #elp o+ t#e tec#nology trns+er) cc!m!ltion o+ #!mn

cpitl n" $no,le"ge spill oer in t#e (I receiing co!ntries.

#ere re t,o ,ys to "elier goo"s n" serices to +oreign mr$ets= interntionl

pro"!ction n" tr"e. #is mens t#t t#ere s#o!l" e some interreltions#ip et,een t#e

t,o. #is is con+irme" y t#e positie correltion et,een ,orl" oreign (irect

Inestment %(I* n" ,orl" exports. #!s) economic gro,t# n" tr"e n" inestments

re interconnecte".

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History

F,+/' ,+ '+$+' %(I* is mes!re o+ 7,+/' o,ners#ip o+ pro"!ctie ssets)

s!c# s +ctories) mines n" ln". Incresing 7,+/' '+$+' cn e !se" s one

mes!re o+ gro,ing economic glolition. Mps elo, s#o, net in+lo,s o+ 7,+/'

,+ '+$+' s percentge o+ gross "omestic pro"!ct %>(


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• gro!p o+ relte" enterprisesE

• goernment o"yE

• n estte %l,*) tr!st or ot#er societl orgnistionE or

• ny comintion o+ t#e oe.

9

http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust


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M+($ 7 F,+/' D,+ I'+$+'$

#e 7,+/' ,+ inestor my cF!ire 10G or more o+ t#e oting po,er o+ n

enterprise in n economy t#ro!g# ny o+ t#e +ollo,ing met#o"s=

• y incorporting ,#olly o,ne" s!si"iry or compny

• y cF!iring s#res in n ssocite" enterprise

• t#ro!g# merger or n cF!isition o+ n !nrelte" enterprise

• prticipting in n eF!ity /oint ent!re ,it# not#er inestor or enterprise

F,+/' ,+ '+$+' incenties my t$e t#e +ollo,ing +orms=citation needed

• lo, corporte tx n" income tx rtes

• tx #oli"ys

• ot#er types o+ tx concessions

• pre+erentil tri++s

• specil economic ones

• '+$+' +inncil s!si"ies

• so+t lon or lon g!rntees

• +ree ln" or ln" s!si"ies

• reloction H exptrition s!si"ies

• /o trining H employment s!si"ies

• in+rstr!ct!re s!si"ies

• RH( s!pport

• "erogtion +rom reg!ltions %!s!lly +or ery lrge pro/ects*

10

http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructure


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Debates about the benefits of FDI for low-income countries

Some co!ntries #e p!t restrictions on (I in certin sectors. In"i) ,it# its restriction

on (I in t#e retil sector is goo" exmple.In co!ntry li$e In"i) t#e ,lmrtitionJ

o+ t#e co!ntry co!l" #e signi+icnt negtie e++ects on t#e oerll economy y re"!cing

t#e n!mer o+ people employe" in t#e retil sector %c!rrently t#e secon" lrgest

employment sector ntionlly* n" "epressing t#e income o+ people inole" in t#e

gric!lt!re sector %c!rrently t#e lrgest employment sector ntionlly*.

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F,+/' D,+ I'+$+' %(I* is normlly "e+ine" s +orm o+ '+$+' m"e in

or"er to gin !n,ering n" long6lsting interest in enterprises t#t re operte" o!tsi"e

o+ t#e economy o+ t#e s#re#ol"erK "epositor. In (I) t#ere is prent enterprise n"

7,+/' ssocite) ,#ic# !nites to +orm M!ltintionl orportion %MN*. In or"er to

e "eeme" s (I) t#e '+$+' m!st gie t#e prent enterprise po,er n" control

oer its 7,+/' ++ilite.

F,+/' D,+ I'+$+' ' I'&

In I'&) F,+/' D,+ I'+$+'


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F,+/' D,+ I'+$+' ' I'& $ ' &--+ '+, (+ 7--'/ '$,&-

$+,$9

• Arms n" mm!nition

• Atomic 5nergy

• ol n" lignite

• Ril rnsport

• Mining o+ metls li$e iron) mngnese) c#rome) gyps!m) s!l+!r) gol") "imon"s)

copper) inc

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FOREIGN DIRECT INVESTMENT IN INDIA

I','

Since 1991692 In"i #s een trying to ttrct +oreign cpitl to ri"ge t#e gp

et,een inten"e" inestment n" ct!l sing o+ t#e co!ntry. o increse t#e rte o+

gro,t# o+ >(< in t#e rnge o+ 7 per cent) t#e rte o+ net cpitl +ormtion s#o!l" e

increse" in t#e icinity o+ 2: to 30G. #e sings o+ t#e co!ntry #s een #nging

ro!n" 24G. #ere is gp n" t#is gp is to e ri"ge" y %*


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#e ,orl" inestment report 2000 reels t#t in t#e line o+ co!ntries receiing

+oreign "irect inestment) In"i rn$s 17 t# t#t mens t#t 1 co!ntries re #e" o+ In"i

regr"ing t#eir ility to ttrct (I. o!ntries li$e Vietnm re lso #e" o+ In"i.

In"iLs s#re o+ totl (I in+lo, into "eeloping co!ntries +or t#e perio" 1997 to 2000 is

1.4G only. #ere is no point o+ comprison ,it# #in n" t#is is +or t,o resons.

1* #in co!l" ttrct o!t 28G o+ totl (I in+lo, into t#e "eeloping co!ntries.

#e next co!ntry in t#e line) t#t is) Bril co!l" ttrct only 10G. #e

pre"ominnt position o+ #in in ttrcting (I +rom 1998 on,r"s cnnot e

expline" y norml economic prmeters.

2* Secon") some economists point o!t #!ge mo!nt o+ cpitl +lig#t +rom #in t#t

is ery #ig# compre" to co!ntries o+ t#e similr sit!tions. #is remin"s one t#e

reoling "oor sit!tions o+ some co!ntries s!++ering +rom cpitl +lig#t.

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#e co!ntryLs lrgest retilers!t!re >ro!p) SpencerLs Retil n" S#oppers Stop#e

line" !p inestments o+ t lest -SC 12:.8 million +or 2010 n" tr"e nlysts re o+ t#e

opinion t#t t#e yer ,ill see n!mer o+ retilers incresing t#eir presence in $ey ier6II

cities.

o$yo6se" 5isi o t") ,#ic# +oc!ses on t#e mn!+ct!ring n" mr$eting o+

c#emicls) +oo" ""ities s ,ell s mc#inery n" eF!ipment +or p#rmce!ticl

pro"!ction) #s ineste" -SC 83.8 million +or setting !p p#rmce!ticl

mn!+ct!ring plnt in Vig) An"#r V) #s m"e its secon" m/or !y ,ort#

-SC 2.3: million in Bnglore6se" iN!rt!re 5"!ction Sol!tions imite" +rom its SM5

ec#nology !n".

P-; I'&+$

#e goernment #s promise" to ring o!t n !p"te" (I policy eery six mont#s s

stte" in compre#ensie press note consoli"ting t#e entire regime +or +oreign

inestments in one plce +or esy re+erence.

#e proposls to improe inestment enironment in t#e co!ntry in t#e -nion B!"get +or

2010611 nno!nce" y t#e -nion innce Minister) Mr


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• Met#o"ology +or clc!ltion o+ in"irect +oreign inestment in In"in compnies

#s een clerly "e+ine".

• omplete lierlistion o+ pricing n" pyment o+ tec#nology trns+er +ee n"

tr"emr$) rn" nme n" roylty pyments.

!rt#ermore) t#e goernment #s llo,e" t#e oreign Inestment


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APPROAC TOWARDS FDI IN INDIA

#e exct position o+ (I in In"i ,ill e p!t !p +irst t t#ree leelsE t t#e leel

o+ t#e Stte) t t#e leel o+ t#e sector n" t t#e leel o+ t#e in"!stry. #e o/ectie o+

"oing t#is is to exmine seerl #ypot#eses li$e t#e role o+ in+rstr!ct!re in ttrcting

(I) t#e role o+ lor sit!tion) t#e role o+ l, n" or"er etc. ?e re to see lso ,#et#er

t#e in+lo, o+ (I in In"i #s certin +o!rle "estintion 6 region ,ise or sector ,ise.

A ro" explntion o+ t#e oe ,ill enle !s to ero in to certin res t#t

co!l" e explore" +!rt#er to scertin t#e c!ses o+ slo, in+lo, o+ (I. It cn +cilitte

t#e "r,ing o+ o!r concl!sion.

R-+ 7 I'7,&$,,+

#ere is pop!lr perception t#t oreign (irect Inestment +lo,s to t#e region

,#ere in+rstr!ct!re is etter. B!t stte o+ in+rstr!ct!re in prtic!lr region coers

mny spects. Bro"ly in+rstr!ct!re cn e plce" !n"er t,o ctegories.

*


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c!lt!re n" common gro,t# oriente" #!mn psyc#ology. In mny "eeloping

co!ntries t#e ,or$ c!lt!re my e not con"!cie to mo"ern ge in"!stril society.

Also t#e oer ll impression regr"ing t#e ,or$ c!lt!re on t#e min" o+ t#e

potentil inestors is importnt.

#e role o+ >oernment in t#e "eelopment o+ t#e economy is importnt +ctor in

t#e secon" ctegory o+ in+rstr!ct!re. ?#ile >oernment s +cilittor is pprecite"

eery,#ere s it #elps rpi" economic "eelopment) too m!c# >oernment control) n"

prtic!lrly !re!crtic re"6tpism is not li$e" y +oreign inestors.

In spite o+ plnne" economic "eelopment in In"i "!ring t#e lst +ie "ec"es)

t#e "eelopment o+ in+rstr!ct!re #s not een !ni+orm in 2: SttesKRegions o+ t#e

co!ntry. 'ne st!"y plces t#e sit!tion o+ in+rstr!ct!re in t#e +orm o+ n in"ex. $ing

t#e erge In"i sit!tion s #!n"re") t#e st!"y s#o,s t#e in"ex o+ (el#i 730) erl

12)

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#is is t#e !sge si"e o+ (I. ?e re to see lso t#e so!rce si"e. So +r (I

in+lo, into In"i is concerne") t#e -SA n" t#e 5!ropen In"in proi"es t#e lionLs s#re

o+ (I to In"i. @pn comes next in importnce o+ so!rce. or some yers M!riti!s

ecme importnt n" t#e role o+ Non6Resi"ents In"ins %NRI* is it complex. Some

people rg!e t#t mny NRILs re t$ing "ntge o+ t#e M!riti!s ro!te regr"ing t#e

s!pply si"e o+ (I. #ere is not#er prolem n" t#is is t#e ,i"ening gp et,een t#e

pprol n" ct!l in+lo, o+ (I. I+ ,e see t#e interntionl sit!tion) ,e +in" t#t t#ere

is normlly gp o+ 30G et,een t#e pprol n" t#e ct!l in+lo,. B!t) in In"i t#e

gp is m!c# ,i"er n" sometimes it ecomes "i++ic!lt to gie explntion +or t#t gp.

#ere #e een some st!"ies on t#e "eterminnts o+ (I in+lo, into t#e #ost

co!ntries in t#e litert!re. #e economic prmeters o+ten mention s explntory

riles re = >ro,t# rte o+ >(oernment. #e mo"els) ,#ic# re implicit in t#e st!"y

o+ t#ese riles) re se" on mr$et economy +rme,or$. In In"i t#e pr"igm

s#i+t occ!rre" +rom 1991692) t#t is) t#e In"in t#in$6tn$ ecme cc!stome" to explore

t#e role o+ mr$et mec#nism in explining t#e moement o+ economic riles. #is

#ppene" +rom 1991692 on,r"s. A ro" section o+ people 6 exec!ties in t#e

corporte) o++icils o+ +oreign 5mssies) c"emicins) in"epen"ent cons!ltnts n"

in"!strilists 6 o+ten express t#e opinion t#t In"i #s gret prolem regr"ing t#e

min" set) t#t is) pop!lr elie+ is t#t +oreign cpitl in+lo, le"s to t#e exploittion o+

t#e "omestic economy y t#e o,ners o+ +oreign cpitl. #ere is not#er pop!lr elie+

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t#t In"i s!++ers +rom Otoo m!c# goernment Syn"romeO. #e ltter mens t#t t#e role

o+ goernment in In"i is spre" eery,#ere) !t ironiclly t#e goernnce is ,e$ in

res ,#ere it is clle" +or. #e ltter re res o+ externl sec!rity) tr!e s+eg!r"s o+ t#e

"o,ntro""en people) presertion o+ t#e enironment n" tr!e re+orm in t#e +inncil

sector. #e perception is prtly F!littie in nt!re. #e extent to ,#ic# t#is perception

exists cn e mes!re" only y s!rey met#o") n" t#is is eyon" t#e scope o+ t#is

c#pter

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INDUSTRIES RESERVED FOR SMALL AND MEDIUM

ENTERPRISES

T+('-/; T,&'$7+,< C&=&- 7,&' &' I'+,'&'&- T,&+

oreign r"e Inestment is ssocite" ,it# lrge m!ltintionl orportions

%MNs*. 5conomic t#eory explins #o, oreign (irect Inestment %(I* in"!ces

t#e +irms +or interntionl opertions. or t#is) t#e reltions#ip et,een (I n"

MNs is ery strong. In t#e context o+ (I) t#e oerses expnsion o+ +irm is

"etermine" y t#ree +ctors n" t#ese re 6 o,ners#ip "ntges) loction

"ntges n" internlition o+ incenties. A +irm ,is#ing to operte ro" s#o!l"

possess "eF!te "ntges so t#t it cn o++set t#e #n"icp o+ ,or$ing in n lien

tmosp#ere n" lso coer +or #ig#er ris$. #e "ntges mentione" in t#e

eginning come +rom t#e o,ners#ip o+ proprietry intngile ssets possesse" y t#e

+irm n" t#is cn e employe" ro" in n e++icient mnner. #ese intngile ssets

incl!"e rn" goo",ill) tec#nology mngement s$ills) ccess to c#eper so!rces o+

r, mterils n" cpitl etc. #e +irm my exploit t#ese "ntges t#ro!g# exports

+rom t#e #ome se in t#e initil stge. ter pro"!ction +cility is crete" ro" to

cter to t#e +oreign mr$et. #is prctice is to exploit ot#er "ntges li$e tri++s

n" F!ntittie restrictions impose" y #ost co!ntries) trnsport n" comm!niction

cost n" c#eper inp!t prices.

Mny +ctors li$e imper+ect mr$et) licensing o+ intngile ssets n" lso

internlition o+ incenties ille on locl pro"!ction le" to t#e in+lo, o+ (I in

22


23/93

1970s. #e nt!re o+ (I +lo,s c#nge" ,it# t#e improement o+ comm!niction

n" "nce o+ in+ormtion tec#nology. ?#eneer cost o+ mr$et trnsctions o+

intngile ssets ecome ery #ig#) +irms ten" to oi" t#ese costs y internliing

t#e trnsctions o+ t#e intngile ssets. #is is "one t#ro!g# oreign (irect

Inestment lso.

itert!re lso reels t#t exporting commo"ities "irectly +rom t#e #ome se n"

pro"!ction o+ t#e sme in +oreign co!ntries to sere t#e +oreign mr$ets eit#er

t#ro!g# licensing or oreign (irect Inestment re t,o lterntie mo"es o+ oerses

opertions. rom t#is ngle it ecomes oio!s t#t i+ tr"e lierlition ecomes

extreme) t#e loction "ntge o+ t#e co!ntry +or t#e locl mr$et my e lost.

I'+,:I'$,; V&,&' ' FDI

#e #ypot#esis t#t some in"!stries in t#e #ost co!ntry co!l" contrct more (I

t#n ot#ers #s een teste" empiriclly in t#e litert!re. #ese st!"ies #e ignore"

t#e possiility o+ "iscrimintion in licensing n" #e concentrte" on e#io!r o+

(I regr"ing its "estintion to prtic!lr in"!stries. #e common elements o+ t#e

st!"y incl!"e (I intensity to ry positiely ,it# t#e intensity o+ "ertisement)

s$ill intensity) RH( expen"it!re) cpitl o!tp!t rtio n" certin ot#er +ctors. Also

in t#e sence o+ ny prtic!lr strong policy +ctor) t#e c#oice et,een (I n"

licensing ,ill e "etermine" y t#e trnsction cost. Since trnsction cost re F!ite

#ig# +or rn"e" cons!mer goo"s) t#ere prono!nce" ten"ency t#t (I ,ill e

23


24/93

concentrte in t#ose in"!stries. #is +in"ing #s one impliction n" t#is is s

+ollo,s=

A "eeloping co!ntry ,it# t#e "esire to contrct more (I s#o!l" +ollo,

lierlition policy in s!c# ,y t#t it m$es t#e ++ects o+ intngile sset n"

internlition incenties to e more prono!nce".

FDI and Economic Growth= #ere is common #ypot#esis in t#e litert!re t#t

#ig#er rte o+ >ross (omestic


25/93

I'&' E'; &' F,+/' C&=&-

#e "omintion o+ +oreign cpitl in t#e In"in in"!stril scene /!st e+ore

in"epen"ence ,s t#e res!lt o+ #istory. oreign cpitl in generl n" Britis# cpitl

in prtic!lr) plye" cr!cil role in t#e "eelopment o+ /!te textiles n" engineering

in"!stries in t#e In"in s!6continent. #e p#ilosop#y o+ economic "eelopment to e

p!rs!e" in post in"epen"ent In"i #" c#nge" r"iclly n" it ,s t#o!g#t t#t lest

importnce s#o!l" e ttc#e" to t#e role o+ +oreign cpitl in In"i;s economic

gro,t#. #e res!lt ,s socilist pttern o+ in"!stril "eelopment se" on sel+6

s!++iciency.

#e import6s!stit!tion n" in,r" loo$ing in"!strilition le" to minim!m role o+

+oreign cpitl n" t#e p!city o+ +oreign exc#nges in"!ce" t#e !t#ority to enct t#e

stringent l, li$e oreign 5xc#nge Reg!ltion Act % 5RA*) 1973. #e strictness o+

t#is piece o+ legisltion #" een responsile +or m!c# o+ cpitl +lig#t +rom In"i in

t#e seenties n" eig#ties. In"in plnners ,ere so m!c# immerse" ,it# sel+6"el!sion

t#t t#ey co!l" not eliee t#e relity o+ cpitl +lig#t !ntil t#e ntionl co++er ecme

lmost empty in 1990. #e grity o+ t#e sit!tion c#nge" t#e ,#ole perspectie n"

t#e pr"igm s#i+t #ppene". #is le" to t#e ttempt o+ economic re+orms.

28


26/93

F,+/' D,+ I'+$+' &' D++-=+'

#e politicl economy o+ t#e role o+ (I in t#e "eelopment process o+ n

economy is +!ll o+ controersy. #e rg!ments re on ot# si"es. #ose ,#o

"octe more lierl regime clim t#t (I ,ill proi"e t#e m!c#6nee"e"

reso!rces n" +oreign exc#nge +or reiing In"in in"!stry) improe t#e cr!mling

in+rstr!ct!re) n" llo, In"i to mo"ernie its tec#nologicl se. Also greter

competition in In"in mn!+ct!ring ,ill ene+it t#e In"in cons!mer. 'n t#e ot#er

#n") critics point to t#e poor recor" o+ m!ltintionl corportions in In"i) t#eir

excessie pro+itility. Also t#ey rg!e o!t t#e "erse impct o+ pro+it remittnces

on In"iLs lnce o+ pyments.

(oes +oreign inestment contri!te to gro,t#Q 5mpiricl inestigtion

"oes not o++er ny cler ns,er. o!ntries li$e #in #e experience" lrge (I

in+lo,s n" #ig# gro,t# in recent yers) ,#ile In"i gre, rpi"ly ,it#o!t signi+icnt

leels o+ +oreign cpitl. In tin Americ) mny co!ntries #e perio"s o+ slo,

gro,t# "espite openness to +oreign cpitl. 5en i+ ,e "i" +in" some positie

correltion et,een (I n" gro,t#) t#e iss!e o+ c!slity remins !nresole"

2


27/93

T+('-/;9 P-; &' R+&-;

&ost co!ntry goernments o+ten enco!rge +oreign inestment in t#e #ope o+

improing t#e pro"!ctiity o+ "omestic +irms. oreign "irect inestment potentilly

rings ne, tec#nologies to t#e #ost economy. ec#nology in+lo,s cn lso improe

t#e pro"!ctiity o+ "omestic +irms t#ro!g# LspilloersL) s etter pro"!ction n"

mngement tec#niF!es "i++!se in t#e #ost economy. In some sit!tions +oreign

inestment cn e ctlyst +or gro,t#. #e litert!re isoltes t,o c#nnels +or t#is

spilloer process. #e more "isemo"ies spects o+ s!perior tec#nologies !se" y

+oreign +irms cn spre" to "omestic +irms t#ro!g# t#e moility o+ trine" ,or$ers

n" mngers) n" t#ro!g# tec#nicl g!i"nce proi"e"

FDI 9 A S+/+'+ A'&-;$$

In t#e +ollo,ing prgrp#s ,e ,ill explin t#e c!rrent position o+ (I in In"i in

"i++erent prts. #is met#o" o+ nlysis ,ill #elp !s to #e n in "ept# nlysis o+

"ynmics o+ t#e +lo, o+ (I in "i++erent sectors o+ t#e economy.

A M&, V+

#e so!rce co!ntries +rom ,#ic# (I +lo,s into In"in economy re lrge in n!mer

!t t#e m/or prtners re t#e -SA) #e 5!ropen -nion co!ntries n" co!ple o+

co!ntries in Asi li$e @pn) In"i) Singpore) &ong ong n" M!riti!s.

Interesting p#enomenon is t#t een +ter t#e ccession o+ &ong ong to minln"

27


28/93

#in) cpitl #s +ollo,e" +rom &ong ong into In"i. All t#e 5!ropen -nion

co!ntries) prtic!lrly co!ntries li$e -.) >ermny) rnce n" Net#erln"s re

importnt so!rce co!ntries o+ (I. As single co!ntry o!tsi"e 5- loc$) @pn is

ery importnt s so!rce co!ntry.

le 1 reels t#t t#o!g# t#e n!mer o+ co!ntries +rom ,#ic# (I +lo,s into In"i

is impressie) only #n"+!l o+ co!ntries re importnt s t#e so!rce o+ (I in+lo,.

Some co!ntries re rel!ctnt to m$e inestment in In"i) i,n is n exmple.

Non6resi"ent In"ins %NRI* is ctegory in tle 1 n" t#e +ct reele" in t#e tle is

t#t t#e contri!tion o+ NRI in t#e (I inestment in In"i is not impressie.

2:


29/93

F,+/' D,+ I'+$+' ' I'&

oreign "irect inestment %(I* in In"i #s plye" n importnt role in t#e "eelopment

o+ t#e In"in economy. (I in In"i #s in lot o+ ,ys enle" In"i to c#iee

certin "egree o+ +inncil stility) gro,t# n" "eelopment. #is money #s llo,e"

In"i to +oc!s on t#e res t#t my #e nee"e" economic ttention) n" ""ress t#e

rio!s prolems t#t contin!e to c#llenge t#e co!ntry.

In"i #s contin!lly so!g#t to ttrct (I +rom t#e ,orl";s m/or inestors. In 199: n"

1999) t#e In"in ntionl goernment nno!nce" n!mer o+ re+orms "esigne" to

enco!rge (I n" present +orle scenrio +or inestors.

(I inestments re permitte" t#ro!g# +inncil collortions) t#ro!g# prite eF!ity or

pre+erentil llotments) y ,y o+ cpitl mr$ets t#ro!g# 5!ro iss!es) n" in /oint

ent!res. (I is not permitte" in t#e rms) n!cler) ril,y) col H lignite or mining

in"!stries.

A n!mer o+ pro/ects #e een nno!nce" in res s!c# s electricity genertion)

"istri!tion n" trnsmission) s ,ell s t#e "eelopment o+ ro"s n" #ig#,ys) ,it#

opport!nities +or +oreign inestors.

#e In"in ntionl goernment lso proi"e" permission to (Is to proi"e !p to 100G

29


30/93

o+ t#e +inncing reF!ire" +or t#e constr!ction o+ ri"ges n" t!nnels) !t ,it# limit on

+oreign eF!ity o+ INR 1)800 crores) pproximtely C382.8m.

!rrently) (I is llo,e" in +inncil serices) incl!"ing t#e gro,ing cre"it cr"

!siness. #ese serices incl!"e t#e non6n$ing +inncil serices sector. oreign

inestors cn !y !p to 40G o+ t#e eF!ity in prite n$s) lt#o!g# t#ere is con"ition

t#t stip!ltes t#t t#ese n$s m!st e m!ltilterl +inncil orgnitions. -p to 48G o+

t#e s#res o+ compnies in t#e glol moile personl comm!niction y stellite

serices %>M


31/93

S+,$ A,&'/ FDI

#o!g# t#e serices sector in In"i constit!tes t#e lrgest s#re in t#e >ross (omestic

yps!m


32/93

#e In+lo, o+ (I into t#e co!ntry oer rio!s yers is s +ollo,s=

!+&, >A=,-:M&,(?A' 7 FDI '7-$

>I' US@ --'?

199161992 %A!g6Mrc#* 17

199261993 393

199361994 84

199461998 1)374

19986199 2)141

19961997 2)770

19976199: 3):2199:61999 3)0:3

199962000 2)439

200062001 2)90:

200162002 4)222

200262003 3)134

200362004 2)34

200462008 3)788

20086200 %-pto Mrc# 200* 8)849

INDIA rn$s secon" in t#e ,orl" in terms o+ +inncil ttrctieness) people n"

s$ills ilility n" !siness enironment. #is is reele" in A erneyLs 2007

>lol Serices oction In"ex. o!ntryLs +inncil stility in t#e c!rrent

enironment o+ +inncil t!r!lence n" possile !n,in"ing o+ mcro imlnces

sen"s cler messge to t#e prospectie +oreign inestors o!t In"iLs position s n

expn"ing inestment "estintion. OIn"iLs externl sector #s "isplye" consi"erle

strengt# n" resilience since t#e re+orms in 19916 "espite seerl "omestic s ,ell s

glol politicl eents n" s!pply s#oc$s in +oo" n" +!el........,e prtner ,it# t#e

32


33/93

glol economy +!lly on t#e tr"e n" c!rrent cco!nt ,#ile t#ere is progressie

lierlistion o+ t#e cpitl cco!nt) consistent ,it# t#e progress in re+orms in t#e

rel) +iscl n" +inncil sectorsO) osere" (r T.V.Re""y) >oernor o+ In"iLs

centrl n$ing !t#orities) Resere Bn$ o+ In"i %RBI* t t#e ?orl" e"ers or!m

in Ne, Tor$ in April t#is yer. O#e strong mcro economic +!n"mentls) gro,ing

sie o+ t#e economy n" improing inestment climte #s ttrcte" glol

corportion to inest in In"i. A m/or o!tcome o+ t#e economic re+orms process

ime" t opening !p t#e economy n" emrcing glolition #s le" to to

tremen"o!s increse in oreign (irect Inestment in+lo,s into In"iO) sys co!ntryLs

po,er+!l in"!stry loy II.

CUMULATIVE FDI EUIT! INFLOWS

I' R$

C,,+

I' US@

M--'

C-&+ &' 7 FDI '7-$

>F, A=,- 2000 M&,( 200"?

3F, A=,- 2008 J&'&,; 200"?

105


34/93

C-&+ &' 7 FDI I'7-$ >U=

A=,- 200"?

4I' US@ --'?

!EAR AMOUNT

2000601 292.37

2001602 1902.2

34


35/93

2002603 347.33

2003604 3::.37

2004608 48.00

200860 914.04

200607 2179.39

200760: %-p to (ecemer 2007* 4098.:0

TOTAL 105#5.56

SOURCE9 F++,&- M'$,; 7 C+,+ &' I'$,;< G+,'+' 7

I'&


36/93

MONTS I' R$ ,,+

I' US@

M--'

A=,- 2008 15005 3#4"

M&; 2008 16563 3"32

J'+ 2008 10244 23"2

J-; 2008 "62# 224#

A/$ 2008 """5 2328

S+=++, 2008 116#6 2562

O+, 2008 #284 14"#

N++, 2008 5305 1083

D+++, 2008 6626 1362

J&'&,; 200" 1334# 2#33

!+&, 2008:0" >U= J&'&,; 200"? 1056#3 23885

!+&, 200#:08 >U= J&'&,; 2008? 58203 14466

!O! G,( >? >? 81 >? 65

SOURCE9 DIPP< F++,&- M'$,; 7 C+,+ I'$,;< G+,'+' 7

I'&

3


37/93

In (I eF!ity inestments M!riti!s tops t#e list o+ +irst ten inesting co!ntries

+ollo,e" y -S) -) Singpore) Net#erln"s) @pn) >ermny) rnce) ypr!s n"

S,iterln". Bet,een April 2000 n" @!ly 200: (I in+lo,s +rom M!riti!s stoo"

t C 30.1: illion +ollo,e" y C8.:0 illion +rom SingporeE C 8.47 illion +rom t#e

-SE C 4.:3 illion +rom t#e -E C 3.12 illion +rom t#e Net#erln"sE C 2.2 illion

+rom @pnE C1.:3 illion +rom >ermnyE C 1.41 illion +rom ypr!sE n" C1.02

illion +rom rnce.

T= +' '+$'/ >FDI E;? ',+$ >I' R$. ,,+?

COUNTR! 2005:

06

2006:0# 200#:08 2008:0"

>7,

A=,-:

M&,(<

200"?

C-&+

>F, A=,-

2000

A=,-

200"?

(

&-

>'7-$

' +,$

7 ,=++$?

M&,$

11441

%2870*

2:789

%33*

444:3

%1109*

80794

%1120:*

1:4:8

%3:308*44G

USA

2210

%802*

3:1

%:8*

4377

%10:9*

:002

%1:02*

2:303

%404*7G

UK

114

%2*

:3:9

%1:7:*

490

%117*

3:40

%:4*

23002

%824*G

S'/&=,+

121:

%278*

22

%87:*

12319

%3073*

18727

%3484*

3447

%7934*9G

N+(+,-&'$

340

%7*

2908

%44*

27:0

%98*

3922

%::3*

18987

%311*4G

37


38/93

J&=&'

928

%20:*

3:2

%:8*

333

%:18*

1::9

%408*12041%294* 3G

G+,&';

1348

%303*

840

%120*

2078

%814*

2780

%29*

98:0

%2191* 3G

F,&'+

:2

%1:*

82:

%117*

8:3

%148*

209:

%47*

84:9

%1229*1G

C;=,$

310

%70*

2

%8:*

33:8

%:34*

89:3

%12:7*

11140

%2491*3G

UAE

219

%49*

1174

%20*

1039

%28:*

1133

%287*

414

%94:*

1G

T&- FDI

'7-$

2413

%884*

7030

%1872*

9:4

%24879*

122919

%27309*

40472:

%9218:*6

SOURCE9 DIPP< F++,&- M'$,; 7 C+,+ &' I'$,;< G+,'+'

7 I'&

F/,+$ ' ,&%+ &,+ ' US@ --'

3:


39/93

FDI POLICIES IN INDIA9

#e primry im o+ t#ese policies is to crete +rien"ly !siness enironment ,#ere

+oreign inestors +eel com+ortle ,it# t#e legl n" +inncil +rme,or$ o+ t#e co!ntry)

n" #e t#e potentil to rep pro+its +rom economiclly ile !sinesses. #e prospect

o+ ne, gro,t# opport!nities n" o!tsie" pro+its enco!rges lrge cpitl in+lo,s cross

rnge o+ in"!stry n" opport!nity types.

Inestors ten" to loo$ +or pre"ictle enironments ,#ere t#ey !n"erstn" #o, "ecision6

m$ing processes ,or$. >oernments t#ere+ore re incentiie" to !il" !p trc$

recor" o+ rtionl "ecision m$ing. #e !siness enironment o+ten reF!ires ,or$ to

remoe onero!s reg!ltions) re"!ce corr!ption n" enco!rge trnsprency. >oernments

o+ten lso see$ to improe t#eir "omestic in+rstr!ct!re to meet t#e opertionl nee"s o+

inestors.


40/93

>oernments re incresingly setting !p promotionl gencies to +oster +oreign "irect

inestment. #ese gencies promote (I6+rien"ly policies) i"enti+y prospectie sectors

n" inestors) n" str!ct!re speci+ic "els n" incenties +or m/or +oreign inestors s!c#

s m!lti6ntionl corportions %MNs*.

>lol tr"e ssocitions lso ply m/or role in some o+ t#ese inestment ctiities.

#ese ssocitions re ts$e" ,it# creting positie enironment +or +oreign "irect

inestors n" ens!ring t#t ot# inestors n" recipient co!ntries en/oy +orle

enironment.

#e +ormtion o+ #!mn cpitl is itl +or t#e contin!e" gro,t# o+ (I in+lo,s. o

enle t#e most ene+icil) tec#nology n" Ioernments m!st t#ere+ore enct policies to proi"e trining n" s$ills

!pgr"ing to "eelop t#eir ,or$+orce n" meet t#e employment nee"s o+ +oreign

inestors.

GUIDELINES FOR TE CONSIDERATION OF FDI PROPOSALS B! TE

FOREIGN INVESTMENT PROMOTION BOARD >FIPB?

%#e >!i"elines re ment to ssist t#e I


41/93

nt!re o+ "ministrtie >!i"elines n" ,o!l" not in ny ,y e leglly in"ing in

respect o+ ny recommen"tion to e m"e y t#e IoernmentLs rig#t to iss!e +res# g!i"elines or c#nge t#e

legl proisions n" policies ,#eneer consi"ere" necessry.*

#ese g!i"elines stn" mo"i+ie" to t#e extent c#nges #e een noti+ie" y Secretrit

+or In"!stril Assistnce +rom time to time.

#e +ollo,ing >!i"elines re li"6"o,n to enle t#e oreign Inestment


42/93

?#ile consi"ering cses n" m$ing recommen"tions) I


43/93

• ?#et#er t#e proposl inoles relxtion o+ loctionl restrictions stip!lte" in

t#e in"!stril licensing policyE

• ?#et#er t#e proposl #s ny strtegic or "e+ence relte" consi"ertions) n"

• ?#et#er t#e proposl #s ny preio!s /oint ent!re or tec#nology

trns+erKtr"emr$ greement in t#e sme or llie" +iel" in In"i) t#e "etile"

circ!mstnce in ,#ic# it is consi"ere" necessry to set6!p ne, /oint ent!reKenter

into ne, tec#nology trns+er %incl!"ing tr"e mr$*) n" proo+ t#t t#e ne,

proposl ,o!l" not in ny ,y /eopr"ie t#e interest o+ t#e existing /oint ent!re

or tec#nologyKtr"e mr$ prtner or ot#er st$e #ol"ers.

?#ile consi"ering proposls t#e +ollo,ing my e prioritise".

• ItemsKctiities coere" !n"er !tomotie ro!te %i.e. t#ose) ,#ic# "o not F!li+y

!n"er !tomtic ro!te*.

• Items +lling in in+rstr!ct!re sector.

•

Items ,#ic# #e n export potentil

• Items ,#ic# #e lrge scle employment potentil n" especilly +or r!rl

people.

• Items) ,#ic# #e "irect or c$,r" lin$ge ,it# gro !sinessK+rm sector.

• Item ,#ic# #e greter socil relence s!c# s #ospitls) #!mn reso!rce

"eelopment) li+e sing "r!gs n" eF!ipment.

•


44/93

• #e extent o+ +oreign eF!ity propose" to e #el" %$eeping in ie, sectorl cps i+

ny 6 e.g. 24G +or SSI !nits) 40G +or ir txiKirlines opertors) 49G in

sicKcell!lrKpging in elecom sector etc*.

• 5xtent o+ eF!ity ,it# composition o+ +oreignKNRI %,#ic# my incl!"e

'B*Kresi"ent In"ins.

• 5xtent o+ eF!ity +rom t#e point o+ ie, ,#et#er t#e propose" pro/ect ,o!l"

mo!nt to #ol"ing compnyK,#olly o,ne" s!si"iryK compny ,it# "ominnt

+oreign inestment %i.e. 78G or more* /oint ent!re.

•

?#et#er t#e propose" +oreign eF!ity is +or setting !p ne, pro/ect %/oint ent!re

or ot#er,ise* or ,#et#er it is +or enlrgement o+ +oreignKNRI eF!ity or ,#et#er it

is +or +res# in"!ction o+ +oreign eF!ityKNRI eF!ity in n existing In"in compny.

• In t#e cse o+ +res# in"!ction o+ +oreignKNRI eF!ity n"Kor cses o+ enlrgement

o+ +oreignK NRI eF!ity in existing In"in compnies ,#et#er t#ere is resol!tion

o+ t#e Bor" o+ (irectors s!pporting t#e si" in"!ctionK enlrgement o+

+oreignKNRI eF!ity n" ,#et#er t#ere is s#re#ol"ers greement or not.

• In t#e cse o+ in"!ction o+ +res# eF!ity in t#e existing In"in compnies n"Kor

enlrgement o+ +oreign eF!ity in existing In"in compnies) t#e reson ,#y t#e

proposl #s een m"e n" t#e mo"lity +or in"!ctionK en#ncement i.e.

,#et#er y increse o+ pi" !p cpitlK!t#orise" cpitl) trns+er o+ s#res

%#ostile or ot#er,ise* ,#et#er y rig#ts iss!e) or y ,#t mo"lity.

ses pertining to I


45/93

compny n" en#ncement o+ pi"6!p cpitl in ,#olly o,ne" s!si"iry "o not

reF!ire I


46/93

in ie, consi"ertions s!c# s t#e extent o+ cpitl nee"e" +or t#e pro/ect) t#e

nt!re n" F!lity o+ tec#nology) t#e reF!irements o+ mr$eting n" mngement

s$ills n" t#e commitment +or exports.

I


47/93

In respect o+ tr"ing compnies) 100 per cent +oreign eF!ity my e permitte" in

t#e cse o+ t#e ctiities inoling t#e +ollo,ing=

•

exportsE

• !l$ imports ,it# ex6portKex6on"e" ,re#o!se slesE

• cs# n" crry ,#olesle tr"ingE

• ot#er import o+ goo"s or serices proi"e" t lest 78G is +or proc!rement n"

sle o+ goo"s n" serices mong t#e compnies o+ t#e sme gro!p.

In respect o+ t#e compnies in t#e in+rstr!ct!reKserices sector ,#ere t#ere is

prescrie" cp +or +oreign inestment) only t#e "irect inestment s#o!l" e

consi"ere" +or t#e prescrie" cp n" +oreign inestment in n inesting compny

s#o!l" not e set o++ ginst t#is cp proi"e" t#e +oreign "irect inestment in

s!c# inesting compny "oes not excee" 49 per cent n" t#e mngement o+ t#e

inesting compny is ,it# t#e In"in o,ners.

No con"ition speci+ic to t#e letter o+ pprol iss!e" to +oreign inestor ,o!l"

e c#nge" or ""itionl con"ition impose" s!seF!ent to t#e iss!e o+ letter o+

pprol. #is ,o!l" not pro#iit c#nges in generl policies n" reg!ltions

pplicle to t#e in"!stril sector.

?#ere in cse o+ proposl %not eing 100G s!si"iry* +oreign "irect

inestment #s een pproe" !p to "esignte" percentge o+ +oreign eF!ity in

t#e /oint ent!re compny t#e percentge ,o!l" not e re"!ce" ,#ile permitting

in"!ction o+ ""itionl cpitl s!seF!ently. Also in t#e cse o+ pproe"

ctiities) i+ t#e +oreign inestor%s* concerne" ,is#e" to ring in ""itionl cpitl

47


48/93

on lter "tes $eeping t#e inestment to s!c# pproe" ctiities) I


49/93

SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN

INDIA

FDI ' I'& 7, F,+/' I'+$,$

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100G (I is permissile in t#e sector on t#e !tomtic ro!te.

#e term #otels incl!"e rest!rnts) ec# resorts) n" ot#er to!rist complexes proi"ing

ccommo"tion n"Kor ctering n" +oo" +cilities to to!rists. o!rism relte" in"!stry

incl!"e trel gencies) to!r operting gencies n" to!rist trnsport operting gencies)

!nits proi"ing +cilities +or c!lt!rl) "ent!re n" ,il" li+e experience to to!rists)

s!r+ce) ir n" ,ter trnsport +cilities to to!rists) leis!re) entertinment) m!sement)

sports) n" #elt# !nits +or to!rists n" onentionKSeminr !nits n" orgnitions.

or +oreign tec#nology greements) !tomtic pprol is grnte" i+

i. !p to 3G o+ t#e cpitl cost o+ t#e pro/ect is propose" to e pi" +or tec#nicl n"

cons!ltncy serices incl!"ing +ees +or rc#itects) "esign) s!perision) etc.

ii. !p to 3G o+ net t!rnoer is pyle +or +rnc#ising n" mr$etingKp!licity

s!pport +ee) n" !p to 10G o+ gross operting pro+it is pyle +or mngement

+ee) incl!"ing incentie +ee.

49


50/93

Private ector !an"ing:

#on-!an"ing Financial $ompanies %#!F$

49G (I is llo,e" +rom ll so!rces on t#e !tomtic ro!te s!/ect to g!i"elines iss!e"

+rom RBI +rom time to time.

. (IKNRIK'B inestments llo,e" in t#e +ollo,ing 19 NB ctiities s#ll e

s per leels in"icte" elo,=

i. Merc#nt n$ing

ii. -n"er,riting

iii.


51/93

xii. Money c#nging B!siness

xiii. Micro re"it

xix. R!rl re"it

. Minim!m pitlition Norms +or +!n" se" NBs=

i* or (I !p to 81G 6 -SC 0.8 million to e ro!g#t !p+ront

ii* or (I oe 81G n" !p to 78G 6 -S C 8 million to e ro!g#t !p+ront

iii* or (I oe 78G n" !p to 100G 6 -S C 80 million o!t o+ ,#ic# -S C 7.8

million to e ro!g#t !p+ront n" t#e lnce in 24 mont#s

c. Minim!m cpitlition norms +or non6+!n" se" ctiities=

Minim!m cpitlition norm o+ -S C 0.8 million is pplicle in respect o+ ll permitte"

non6+!n" se" NBs ,it# +oreign inestment.

". oreign inestors cn set !p 100G operting s!si"iries ,it#o!t t#e con"ition to

"isinest minim!m o+ 28G o+ its eF!ity to In"in entities) s!/ect to ringing in -SC 80

million s t * %iii* oe %,it#o!t ny restriction on n!mer o+ operting s!si"iries

,it#o!t ringing in ""itionl cpitl*

e. @oint Vent!re operting NBLs t#t #e 78G or less t#n 78G +oreign inestment

,ill lso e llo,e" to set !p s!si"iries +or !n"ert$ing ot#er NB ctiities) s!/ect

to t#e s!si"iries lso complying ,it# t#e pplicle minim!m cpitl in+lo, i.e. %*%i*

n" %*%ii* oe.

81


52/93

+. (I in t#e NB sector is p!t on !tomtic ro!te s!/ect to complince ,it#

g!i"elines o+ t#e Resere Bn$ o+ In"i. RBI ,o!l" iss!e pproprite g!i"elines in t#is

regr".

Insurance ector: FDI in Insurance sector in India

(I !p to 2G in t#e Ins!rnce sector is llo,e" on t#e !tomtic ro!te s!/ect to

otining licence +rom Ins!rnce Reg!ltory H (eelopment A!t#ority %IR(A*

Telecommunication: FDI in Telecommunication sector

i. In sic) cell!lr) l!e ""e" serices n" glol moile personl

comm!nictions y stellite) (I is limite" to 49G s!/ect to licensing n"

sec!rity reF!irements n" "#erence y t#e compnies %,#o re inesting n" t#e

compnies in ,#ic# inestment is eing m"e* to t#e license con"itions +or

+oreign eF!ity cp n" loc$6 in perio" +or trns+er n" ""ition o+ eF!ity n" ot#er

license proisions.

ii. ISoernment pprol. #ese serices

,o!l" e s!/ect to licensing n" sec!rity reF!irements.

iii. No eF!ity cp is pplicle to mn!+ct!ring ctiities.

i. (I !p to 100G is llo,e" +or t#e +ollo,ing ctiities in t#e telecom sector =

. IS


53/93

#e oe ,o!l" e s!/ect to t#e +ollo,ing con"itions=

e. (I !p to 100G is llo,e" s!/ect to t#e con"ition t#t s!c# compnies

,o!l" "iest 2G o+ t#eir eF!ity in +or o+ In"in p!lic in 8 yers) i+

t#ese compnies re liste" in ot#er prts o+ t#e ,orl".

+. #e oe serices ,o!l" e s!/ect to licensing n" sec!rity

reF!irements) ,#ereer reF!ire".


54/93

. ompnies +or proi"ing +ter sles serices %t#t is not tr"ing per se*

. (omestic tr"ing o+ pro"!cts o+ @Vs is permitte" t t#e ,#olesle leel +or s!c#

tr"ing compnies ,#o ,is# to mr$et mn!+ct!re" pro"!cts on e#l+ o+ t#eir

/oint ent!res in ,#ic# t#ey #e eF!ity prticiption in In"i.

c. r"ing o+ #i6tec# itemsKitems reF!iring specilie" +ter sles serice

". r"ing o+ items +or socil sector

e. r"ing o+ #i6tec#) me"icl n" "ignostic items.

+. r"ing o+ items so!rce" +rom t#e SMA n" Me"i!m 5nterprises !n"er ,#ic#)

se" on tec#nology proi"e" n" li" "o,n F!lity speci+ictions) compny

cn mr$et t#t item !n"er its rn" nme.

g. (omestic so!rcing o+ pro"!cts +or exports.

#. est mr$eting o+ s!c# items +or ,#ic# compny #s pprol +or mn!+ct!re

proi"e" s!c# test mr$eting +cility ,ill e +or perio" o+ t,o yers) n"

inestment in setting !p mn!+ct!ring +cilities commences sim!ltneo!sly ,it#

test mr$eting.

(I !p to 100G permitte" +or e6commerce ctiities s!/ect to t#e con"ition t#t s!c#

compnies ,o!l" "iest 2G o+ t#eir eF!ity in +or o+ t#e In"in p!lic in +ie yers) i+

t#ese compnies re liste" in ot#er prts o+ t#e ,orl". S!c# compnies ,o!l" engge

only in !siness to !siness %B2B* e6commerce n" not in retil tr"ing.

84


55/93

Power: FDI In Power ector in India

-p to 100G (I llo,e" in respect o+ pro/ects relting to electricity genertion)

trnsmission n" "istri!tion) ot#er t#n tomic rector po,er plnts. #ere is no limit on

t#e pro/ect cost n" F!nt!m o+ +oreign "irect inestment.

Drugs & Pharmaceuticals

(I !p to 100G is permitte" on t#e !tomtic ro!te +or mn!+ct!re o+ "r!gs n"

p#rmce!ticl) proi"e" t#e ctiity "oes not ttrct comp!lsory licensing or inole !se

o+ recominnt (NA tec#nology) n" speci+ic cell K tiss!e trgete" +orm!ltions.

(I proposls +or t#e mn!+ct!re o+ licensle "r!gs n" p#rmce!ticls n" !l$

"r!gs pro"!ce" y recominnt (NA tec#nology) n" speci+ic cell K tiss!e trgete"

+orm!ltions ,ill reF!ire prior >oernment pprol.

'oads( Highways( Ports and Harbors

(I !p to 100G !n"er !tomtic ro!te is permitte" in pro/ects +or constr!ction n"

mintennce o+ ro"s) #ig#,ys) e#ic!lr ri"ges) toll ro"s) e#ic!lr t!nnels) ports

n" #rors.

Pollution $ontrol and )anagement

(I !p to 100G in ot# mn!+ct!re o+ poll!tion control eF!ipment n" cons!ltncy +or

integrtion o+ poll!tion control systems is permitte" on t#e !tomtic ro!te.

88


56/93

$all $enters in India * $all $entres in India

(I !p to 100G is llo,e" s!/ect to certin con"itions.

B!siness


57/93

xi. Sic$ In"!stril -nits

xii. In"!stries ReF!iring omp!lsory icensing

xiii. In"!stries Resere" +or SMA n" Me"i!m 5nterprises

3. -p to 40G 5F!ity ,it# +!ll reptrition= Ne, Iss!es o+ 5xisting ompnies

rising pitl t#ro!g#

4. 'n non6reptrition sis= -p to 100G 5F!ity in ny oernment Sec!rities) -nits o+ -I) Ntionl


58/93

OBJECTIVE OF TE STUD!

• o +in" o!t t#e contri!tion o+ (I mong t#e t#ree sectors

• &o, cn t#is contri!tion e increse"

• ?#et#er (I is plying signi+icnt role in t#e eco gro,t# o+ in"i.

8:


59/93

PURPOSE OF TIS STUD!

At t#eoreticl leel) (I rings ot# cpitl n" tec#nology ,#ic# m$es t#e locl

+irms more competitie n" enco!rges t#e economic "eelopment in t#e +ster ,y. #e

spill oer e++ect o+ +oreign compnies ,ill #e long6term e++ect in t#e #ost co!ntries.

In t#e prcticl leel) t#is st!"y explores t#e role o+ (I in economic gro,t# in In"i.

#is cse st!"y explores) ,#et#er (I plye" role in economic gro,t# or notQ Anot#er

reson +or t#e st!"y is ,orl";s ig instit!tions li$e IM) ?' n" -NA( promoting

interntionl tr"e n" ctiities o+ M!ltintionl ctiities +or t#e gro,t# o+ ,orl"

economies. In"i is le to ttrct signi+icnt mo!nt o+ (I mong Asin co!ntries.

#is st!"y explores t#e (I policies "opte" in In"i to ttrct more (I oer t#e yers.

S!c# policy recommen"tion ,o!l" e !se+!l +or t#e "eeloping co!ntries to ttrct more

(I. !rt#er more) t#is st!"y eri+ies t#e t#eoreticl mo"el o+ en"ogeno!s gro,t# t#eory

o+ economic gro,t# y !sing t#e mcro economic +ig!res o+ In"i. #e present st!"y

exmines t#e empiricl ssessment o+ t#e impct o+ (I in economic gro,t# o+ In"i

oer t#e perio" o+ 19:062008.

89


60/93

STATEMENT OF PROBLEM

o"y) In"i stn"s s one o+ t#e "eelope" '5( memer co!ntry in t#e ,orl". #e

co!ntry #s ln" o+ 9:)799 SF m ,it# 49.232 million pop!ltions %-N5S') 200:*.

In"ins en/oy one o+ t#e ,orl";s #ig#est stn"r"s o+ liing to"y ,it# t#e per cpit

income o+ -S C19)73: %?orl" Bn$) 200:* ,#ic# ,s one o+ t#e poorest co!ntries in t#e

,orl" ,it# -S C 100 in 190s. #is st!"y explores t#e role o+ (I in t#is ming

gro,t# o+ In"i n" t#e (I policies "opte" y In"in policy m$ers.

(I #s een seen one o+ t#e ig reso!rces +or in"!stril "eelopment in In"i oer t#e

yers. (I stoc$ increse" to -S C 119.illions in 2007 +rom -S C 1.13 illions in 19:0

%?IR) 200:* n" In"i #s gine" t#e nme o+ Wmircle on t#e &n rierJ. It is

interesting to explore t#e impct o+ (I on t#e rpi" gro,t# o+ In"in economy.

(espite t#e nt!rl reso!rces ilility in t#e co!ntry) economic policies n" politicl

enironment lso in+l!ence t#e in+lo, o+ +oreign inestments in t#e co!ntries. #e

t#eoreticl concept o+ impct o+ (I is t#t (I "oes not only ring cpitl !t lso it

rings tec#nology) $no,le"ge n" "!e to t#e spill oer e++ect "eelopment o+ process

remins +or t#e long r!n. (I ,or$s s t#e ctlyst +or t#e economic gro,t# o+ co!ntry)

especilly +or t#e "eeloping co!ntries. (I is not only single +ctor "etermining t#e

economic gro,t#) rt#er +oreign tr"e) "omestic inestment) employment leel)

goernment cons!mption re lso m/or +ctors ++ecting gro,t#. 'n t#e ot#er #n")

stoc$ o+ #!mn cpitl is +ctors "etermining t#e leel o+ (I in+lo, esi"es t#e

0


61/93

reso!rces ille in t#e #ost co!ntries. &o, t#e gro,t# is ++ecte" y t#ese rilesQ

(oes #ig# leel o+ (I increse t#e #ig#er leel o+ economic gro,t#Q ?#t ,o!l" e t#e

interction et,een (I n" r"e) #!mn cpitl n" "omestic inestmentQ #e st!"y

exmines t#e e++ect o+ t#is rile in economic gro,t#.

1.5 R+$+&,( OH++$

#e min o/ectie o+ t#is st!"y is to explore t#e impct o+ (I on In"in economy

gro,t# n" spill oer e++ect o+ MN5s to t#e In"in +irms. #e st!"y lso reie,s t#e

In"i;s +oreign "irect inestment policies n" initities +or ttrcting (I oer t#e yers

+or en#ncing economic gro,t# n" inestment. #e st!"y ims to recommen" t#e tr"e

n" inestment policies +rom t#e In"in experiences to t#e "eeloping co!ntries li$e

In"i.

1.6 S=+ 7 (+ S;

#is reserc# estimtes t#e impct o+ (I on economic gro,t# in In"i oer t#e perio"

o+ 19:0 2010. #is "isserttion ttempts to "etermine empiricl impct o+ (I on

In"i;s economy !sing mcro economic time series "t. (omestic inestment)

employment) (I) exports n" #!mn cpitl re consi"ere" s t#e en"ogeno!s rile

+or economic gro,t#. #e st!"y tries to explore t#e F!estion ,#ere #ig# leel o+ (I

c!se #ig#er leel o+ economic gro,t#.

1


62/93

1.# O,/&'&' 7 (+ $$+,&'

#is "isserttion is "ii"e" in to seen c#pters. #pter one explins t#e c$gro!n" o+

t#e st!"y) p!rpose o+ t#e st!"y) sttement o+ t#e prolem) o/ecties o+ t#e st!"y) scope o+

t#e st!"y n" orgnition o+ t#e st!"y. #pter t,o reie,s t#e litert!re t#e t#eoreticl

n" empiricl reserc# on t#eories o+ (I n" impct o+ (I on economic gro,t# o+ t#e

preio!s reserc# ,or$s. #pter t#ree %A* proi"es rie+ #istory n" c!rrent oerie,

o+ In"in economy ,#ic# gies t#e glimpse o+ In"in economy n" #pter t#ree %B*

proi"es n oerie, o+ In"iese economy. #pter +o!r elortes t#e concept!l

+rme,or$ o+ t#is st!"y) "etils o+ reserc# met#o"ology n" mo"els speci+iction +or

econometric mo"el o+ t#e st!"y. #pter +ie presents n oerie, o+ recent (I in+lo,

to In"i ,it# reie, o+ (I policies oer t#e st!"y perio". #pter Six presents t#e

"isc!ssion n" nlysis o+ empiricl st!"y. #pter seen presents s!mmry) +in"ings n"

recommen"tions o+ t#is "isserttion.

2


63/93

RESEARC METODOLOG!

Reserc# met#o"ology is systemtic ,y) ,#ic# consists o+ series o+ ction steps)

necessry to e++ectiely crry o!t reserc# n" t#e "esire" seF!encing to t#ese steps. #e

mr$eting reserc# is process o+ inoles no. o+ inter6relte" ctiities) ,#ic# oerlp

n" "o rigi"ly +ollo, prtic!lr seF!ence. It consists o+ t#e +ollo,ing steps=6

• orm!lting t#e o/ectie o+ t#e st!"y

• (esigning t#e met#o"s o+ "t collection

• Selecting t#e smple pln

• ollecting t#e "t

•


64/93

C'+=&- F,&+ ,%

Bsiclly) t#e concept!l +rme ,or$ o+ t#e st!"y is "erie" +rom t#e Borenstein) @ose

"e >rgorio n" @o#n6?# ee) 1998. #ey #e s#o,n t#e impct o+ (I on economic

gro,t# in t#e +ollo,ing lin$ge.

C&=&- &-&'

(irect X (IIn"irect Xcro,"ing in lo,er cost o+ innotion

P,; /,(

M/or so!rce o+ innotionec#nology trns+er

ontgion e++ectImpct on #!mn cpitl +ormtion L'%&/+$


65/93

R+$+&,( M+(-/; &' M+-

#e present st!"y is +oc!se" on t#e el!ting t#e impct o+ (I in economic gro,t# in

In"i;s economy "!ring t#e perio" o+ 19:062008. 'nly secon"ry "t re !se" +or t#e

nlysis o+ t#e reserc# o/ecties. #e mssie in+lo, o+ +oreign cpitl n" "o!le "igit

gro,t# in t#e economy in In"i #s ttrcte" t#e reserc# interest on it.

#is st!"y employs t#e en"ogeno!s gro,t# t#eory s "eelope" y Bls!rmnym)

Slis! n" Sps+or") 199 n" Borenstein) >rgorio n" ee 199:. #is mo"el ss!mes

t#t (I contri!tes to economic gro,t# "irectly t#ro!g# ne, tec#nologies n" ot#er

inp!ts s ,ell s in"irectly t#ro!g# improing #!mn cpitl) in+rstr!ct!re n"

instit!tions n" co!ntry;s leel o+ pro"!ctiity "epen"s on (I) tr"e) "omestic

inestment. #e impct o+ (I on economic gro,t# is nlyse" y !sing t#e +ollo,ing

econometric eF!tion.

G + , K , .FDI , /E= , 0C , 1E= $ FDIK $ .FDIC$ / FDI E=

+

?#ere)

> Y (< gro,t# rte

Y (omestic pitl Inestment

(I Y oreign (irect Inestment

& Y &!mn pitl

5xp Y 5xports

8


66/93

5mp Y 5mployment

#e riles ) (I) n" 5xports re mes!re" s percentge o+ >((< gro,t# rte s ,ell s positie interction et,een (I n"

#!mn cpitl in ccelerting t#e economic gro,t#. #e iss!e relting to t#e interction

et,een (I n" "omestic inestmentE it is ss!me" t#t t#ere is positie interction

et,een (I n" "omestic inestment ec!se (I #s is consi"ere" s n importnt

me"i!m +or trns+erring cpitl) tec#nologies n" #ost co!ntries t#t enco!rges t#e

"omestic inestment leel. #e interction term estimtes t#e comine" e++ect o+ (I n"

"omestic inestment in economic gro,t# n" positie coe++icient +or t#e interction

term ,o!l" in"icte t#t (I n" "omestic inestment rein+orce %complementry* to ec#

ot#er.


67/93

#is st!"y !ses t#e time series "t +or t#e perio" o+ 19:062008 +or t#e nlysis o+ t#e

o/ecties n" !ses t#e m!ltirite regression nlysis %'S* +or t#e nlysis o+ "t.

#e "t is processe" y !sing 'xMetrics so+t,re %ie. All l!es o+ >(


68/93

&ypot#esis o+ t#e st!"y s p!rs!e" in t#e c#pter

?e re trying to test t#e +ollo,ing #ypot#eses=

1* oreign (irect Inestment +lo,s to t#e region ,#ere ret!rns on cpitl

re #ig#er. #is is tr!e ot# in t#e cse o+ inter6co!ntry comprison n" intr6co!ntry

regions. 'ne importnt +ctor in t#is st!"y is t#e rte o+ gro,t# o+ >ross (omestic

(< ens!res #ig#er sorption cpcity o+ t#e economy. It implies t#t t#e necessry

con"ition +or ttrcting #ig#er ol!me o+ (I is t#e #ig#er gro,t# rte o+ gross "omestic

pro"!ct in t#e region.

%2* ?#ile t#e +irst #ypot#esis s#o,s t#e necessry con"ition +or in+lo, o+ (I in

region) t#is my not e s!++icient. #e s!++icient con"ition is t#e existence o+ ot#

in+rstr!ct!re in t#e region t#t cn +cilitte t#e pro+itle inestment n" long term

s!stennce o+ t#e inestment proce"!re. By in+rstr!ct!re ,e p!t emp#sis on t#e ,y

,e #e "e+ine" in+rstr!ct!re in F!littie ,y. It implies t#t ,#ile t#e existence o+

goo" p#ysicl in+rstr!ct!re is importnt) t#e ot#er spects o+ non6p#ysicl in+rstr!ct!re

s expline" e+ore re lso importnt.

?e ,ill test t#e oe t,o #ypot#eses ,it# t#e #elp o+ nlysis t#ro!g# tles) "igrms

n" lso ,it# some rigoro!s nlysis in t#e +orm o+ testing o+ mo"els.

:


69/93

DATA ANAL!SIS

FDI9 A M+- ' (+ &%'/9

oreign (irect Inestment is one spect o+ +oreign cpitl +lo, in t#e "omestic economy.

In t#e open economy set6!p) cpitl +!n"s +lo, ,ill mintin eF!iliri!m y "/!stment

in t#e rel riles in t#e externl sectors.

In n open economy ggregte "emn" A( ,ill e

A(Y D I D > D D ) ,#ere) ) I) >) n" re

cons!mption) inestment)

goernment expen"it!re n" export

respectiely. is trns+er o+ +!n"s

ro".

#e ggregte s!pply AS ,ill e

AS Y D S D D M D r) ,#ere) ) S) M n" re

cons!mption) sings) import n"

txtion respectiely. r is t#e +!n"s

trns+er in+lo, in t#e co!ntry.

9


70/93

-sing tr"itionl mcroeconomic ss!mptions t#t goernment !"get is lnce") ,#ic#

mens > Y) n" cons!mption pln is l,ys stis+ie") t#t mens ,e cn eliminte

+rom ot# si"es ,e cn ,rite +ter imposing equilibrium in the economy,

I D D Y S D M D r)

'r) 6 r Y %S 6 I* D % M 6 *

'r) r 6 Y % I 6S * D % 6M * ZZ.. 18.1

In o!r sc#eme o+ t#ings) r 6 is t#e excess +!n"s in+lo, into t#e co!ntry t#t cn e

t$en s t#e +oreign "irect inestment (I. Bot# S n" I re +!nctions o+ income T n"

rte o+ interest r. Agin) n" M re +!nctions o+ "omestic price


71/93

Since nominl exc#nge rte n" price leel moe in t#e sme "irection + is t#e price o+

+oreign c!rrency in terms o+ "omestic c!rrency) n" nominl interest rte incl!"es

in+ltion expecttions) $eeping ll t#e t#ree66 nominl interest rte) exc#nge rte n"

price leel666 my le" to m!lti6collinerity) prtic!lr prolem in econometrics ,#en

some o+ t#e in"epen"ent riles re correlte" mong t#emseles. So ,e "rop price

leel +or t#e p!rpose o+ econometric estimtion. So eF!tion 18.3 in estimle +orm

loo$s li$e t#ro!g# logrit#mic trns+ormtion)

og (I Y 0 D 1 log T D 2 log + D 3 r D ! ZZ. 18. 4

#eoreticl l!e ,ill e 1 ] 0) 2 ^ 0) 3 ] 0

#e estimtion cn e m"e in leel +orm lso. #t s#o,s t#e reltie strengt# o+

"i++erent "eterminnts o+ (I in "eeloping co!ntry.

#e rile T ,ill cpt!re t#e importnce o+ t#e sorption cpcity o+ t#e economy. It

is expecte" t#t +ster gro,t# cn sor lrger mo!nt o+ cpitl) "omestic or +oreign)

into t#e economy. #e exc#nge rte t$es cre ot# t#e potentil ret!rn n" opport!nity

cost o+ inestment. Agin) t#e interest rte reels t#e re+erence rte o+ t#e +esile ret!rn

on cpitl n" lso t#e cost o+ "omestic cpitl.

71


72/93

E=,&- E+,$+

#e "t on (I in In"i cn e #" only +rom 1991 on,r"s n" s s!c# t#e

"t se is ,e$. ?e #e t$en t#e time series 1991 to 1997 +or t#e econometric

estimtion o+ t#e mo"el %5F!tion 18.4*. #e res!lts +or In"i n" Mlysi re plce"

elo,. ?e +in" t#t t#e coe++icient o+ log e gies ,rong sign t#o!g# t#e t6l!e is not

stis+ctory. 't#er coe++icients re o+ correct signs.

I'&' &$+ 7 ,+/,+$$' ,+$-$.

(epen"ent Vrile=

(IMet#o"= est SF!res(te= 07K0K00 ime=

17=10Smple= 1991 1997Incl!"e" osertions=

7

Vrile oe++icient St". 5rror t6Sttistic (< 0.009 0.00:1 0.:0778 0.47:3R 143.4031 20.9004 0.93102 0.83:15R 212.:4 130.:48: 1.297 0.2023

R6

sF!re"

0.943273 Men "epen"ent

r

1431.871

A"/!ste"

R6

sF!re"

0.::848 S.(. "epen"ent

r

1307.:4:

72


73/93

S.5. o+

regressio

n

440.8233 A$i$e in+o

criterion

18.3093

S!m

sF!re"

resi"

8:21:2.2 Sc#,r criterion 18.27:48

og

li$eli#oo

"

649.8:277 6

sttistic

1.2:18

(!rin6

?tson

stt

1.70:88 (< en"ing

Rte

5xc#nge

Rte

Million

-S(

Million

-S(19:4 810 32737 11.38 2.4319:8 73:: 31912 11.84 2.4319: 111 2783 10.9 2.19:7 :0 3197: :.19 2.4919:: 7084 33408 7.28 2.7219:9 :09 37948 7 2.7

73


74/93

1990 1031: 42:82 7.17 2.71991 12440 4:9 :.13 2.721992 1:0 8911 9.31 2.11993 20891 11:7 9.08 2.71994 2291 7432 7.1 2.8

1998 :091 7.3 2.84199 9:1: :.:9 2.831997 707:: 9.83 3.:9199: 10.1 3.:

(epen"ent Vrile=

(IMet#o"= est SF!res

(te= 07K17K00 ime=

12=01Smple%"/!ste"*=

19: 1994Incl!"e" osertions= 9 +ter

"/!sting en"points

Vrile oe++icient St". 5rror t6Sttistic (< 0.37:78 0.02:102 13.47:48 0R 303.98 223.411 1.3022 0.23195R 1378.409 3818.937 0.391193 0.711:

R6

sF!re"

0.977099 Men "epen"ent

rile

904.77:

A"/!ste"

R6

sF!re"

0.9338: S.(. "epen"ent

rile

38:.831

S.5. o+

regressio

n

:3.0949 A$i$e in+o

criterion

1.19228

74


75/93

S!m

sF!re"

resi"

2333093 Sc#,r criterion 1.2799

og

li$eli#oo

"

6:.:811 6

sttistic

71.10::9

(!rin6

?tson

stt

1.429221


76/93

#ature of FDI Inflow

As in"icte" in t#e oe prgrp#s t#e nt!re o+ (I in+lo, into In"i is not

!ni+orm o+ t#e t,o ro!tes o+ (I in+lo,) !tomtic ro!te n" >oernment ro!te. #ere

#s een ste"y rise +rom 1991 1997) !t +ter t#ere #s een perspectie "ecline

in+lo, to (I into In"i. #is spect is reele" in ex#iit 1 s#o!l" e inestigte" t#e

+ctors responsile +or t#e "ecelertion o+ (I in+lo,s into In"i +rom 1997. #e sme

pict!re in "i++erent +ormt is presente" in ex#iit 3.

E( 19 FDI I'7-$ ' I'&

7

FDI Inflow into India (Rs Million)

0

20000

40000

60000

80000

100000

120000

1991 1992 1993 1994 1995 1996 1997 1998 1999

Aut

Go

!otal


77/93

E( 29 S(&,+$ 7 A& R+ &' G+,'+' R+ ' (+ T&- I'7- 7

FDI

77

0

10

20

30

40

50

60

70

8090

100

1992 1993 1994 1995 1996 1997 1998 1999

Distribution of Automatic and Government Route in Tota !nfo" of #D! in !nda

$% &'ares( Go

Aut


78/93

E( 39 FDI ' I'& : A==,+ A&-

Bet,een t#e t,o ro!tes o+ (I in+lo, into In"i t#e >oernment ro!te is

pre"ominnt s t#e percentge o+ s#res t#ro!g# t#e >oernment ro!te is m!c# #ig#er

compre" to t#e !tomtic ro!te. #is spect is reele" in ex#iit 2.

#o!g# t#e n!mer o+ so!rce co!ntries +rom ,#ic# (I in+lo,s into In"i

#ppens is impressie) t#e principl so!rces re E -SA) -) @pn) >ermny) rnce)

In"i) M!riti!s n" NRI. #is spect #s een reele" in ex#iit 4.

7:

#orei)n Direct !nvestment in !ndia * Actua and A++roved

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

1991 1992 1993 1994 1995 1996 1997 1998 1999

F D I "

A # t u a l a n d A $ $ % o & d "

R s M i l l i o n

0

5

10

15

20

25

30

( ' a % & ) o f A # t u a l t o A $ $ % o & d

A#tl

A$$%

'a%&


79/93

E( 49 FDI I'7- ' I'& 7, S+-+ C',+$.

79

0

10

20

30

40

50

60

70

80

90

100

1992 1993 1994 1995 1996 1997 1998 1999

*RI

'+ ,o%&a

F%an#&

G&%-an.

/a$an

+,+Mau%itius

+'+A+


80/93

E( 5

:0

0

10

20

30

40

50

60

70

Actual FDI as P!cnta" #$ A%%!#&' FDI ()**)+)***,

(C#unt!-+./s,

Actual as#of Approval


81/93

E( #.

:1

E0h/1/t 2: FDI In$l#s ()**)+)***, /n Ma3#! Sct#!s

$rugs and

pharmaceuticals

%.

'uels

(.

'ood processing

industries

).*#

+lass

.-#

lectricals e!uipment

/./#

0ommercial, office 1

household e!uipment

.-#0hemicals 2other than

fertili3ers4

(.5#

Trading

%.#

6ervice sector

(.-#

Transportation industry

5.)#Te"tiles 2includ dyed,

printed4

%.

Telecommunications

(.-#

7aper and pulp including

paper product

%.

8ri scheme

%%.

9otel 1 tourism

.*#

Industrial machinery

.(#

Mettallurgical industr ies

.:#

Miscellaneous

mechanical 1

engineering

%.

Miscellaneous industries

):.:#

FDI (A%%!#&' an' In$l#.,

%

&

)

*

(

/

% : : %

% : : &

% : : )

% : : *

% : : (

% : : /

% : : 5

% : : -

% : : :

4a!

F D I

Approved

Inf low


82/93

E( 8

E( "

:2

Rlat/#nsh/% 1t.n Stat l&l FDI an' In$!ast!uctu! In'0

(

%

%(

&

&(

)

/ - % %& %* %/

In$!ast!uctu! In'0

F D I A % % ! # & '

'$I

25

50

75

100

125

150

175

0

5000

10000

15000

20000

25000

30000

Infrastr '$I


83/93

E( 10

E( 11

:3

;elationship between 6tate level '$I and # mandays


84/93

Act!l in+lo, o+ (I s percentge totl pprol +or t#e perio" 199161999 is

not !ni+orm co!ntry ,ise n" t#is interesting spect is reele" in ex#iit 8. ?e see t#t

t#e percentge is F!ite #ig# +or co!ntries li$e R!ssi) Net#erln"s) M!riti!s n" &ong

ong. B!t co!ntries li$e -) -SA) n" s#o, ery lo, percentge o+ ct!l in+lo,

s percentge o+ t#e totl pprol. 'ne explntion my e t#t totl ol!me o+ in+lo,

+rom t#ese co!ntries is ery #ig# compre" to ot#er co!ntries t#t register #ig#er

percentge) !t t#is +ells to gie t#e totl explntion.;

?e #e seen erlier t#t (I in+lo,s in m/or sectors in In"i "!ring t#e perio"

1991 1999 is not !ni+orm n" t#e "istri!tion is ery s$e,e". #is is reele" in

ex#iit . ?e see t#t ,#ile trnsporttion in"!stry comments 7.3G) telecomm!niction

8.:G) serice sector 8.:G) c#emicls 8.7G) electricl eF!ipment .7G n" +!els 8.2G)

ot#er t#ings li$e #otel n" to!rism) tr"ing) in"!stry mc#inery etc. #e +ile" to ttrct

siele (I in+lo,.

:4


85/93

CONCLUSION

#e "eeloping co!ntries ,ill nee" (I to s!pplement t#e in"eF!te "omestic

sings in +ce o+ gro,ing reF!irement o+ cpitl to mintin cr!cil rte o+ economic

gro,t# so t#t t#e people elo, t#e poerty line cn e li+te" ,it#in resonle time.

?e #e seen t#t t#e s#re o+ (I in+lo, in t#e "eeloping co!ntries is ery m!c# #ig#)

,it# some co!ntries li$e #in #e een le to ttrct #!ge mo!nt on +oreign cpitl.

#o!g# t#e comprison ,it# #in regr"ing t#e in+lo, o+ (I is not tr!ly /!sti+ie")

In"i s#o!l" #e een le to ttrct t#e reltiely lrger ol!me o+ oreign pitl t#n

,#t s#e #s "one so +r. In t#e erlier prgrp#s ttempts #e een m"e to point o!t

t#e +ctors ,#ic# re responsile +or t#e in+lo, o+ (I. In certin F!rters st!"ies #e

een m"e to nlye t#e nt!re o+ (I in+lo, in "eeloping co!ntries prtic!lrly in

Asin n" tin Americn co!ntries. iltering "o,n t#e st!"ies ille in t#e litert!re

#elp !s to i"enti+y certin +ctors) ,#ic# re lso relent in In"in sit!tion. ?e s#o!l"

e cler t#t some o+ t#ese riles re F!littie in nt!re n" t#ose re mentione"

o+ten in c"emic litert!re to #iln". B!t #in is n exmple #o, export orienttion

cn e properly !tilie" to ttrct +oreign cpitl n" lso to mximie t#e gro,t#

process. Not only t#t #in #s een le to !se (I on selectie sis to mximie

t#e rte o+ gro,t#) !t #in #s one !niF!e "ntge) ,#ic# In"i is lc$ing n" t#is

s#o!l" e mentione" to $eep t#e comprison strig#t.

#in is l!c$y to #e t,o #ig#ly "eelope" regions li$e &ong6ong n" i,n.

#e +irst it #s otine" +rom t#e -nite" ing"om in 1997 n" lrge c#!n$ o+ (I in

#in is +rom &ong6ong. i,n is re$,y proince o+ #in n" in spite o+

politicl ro,) i,n inests #!ge mo!nt o+ cpitl in #in. Aprt +rom t#ese t,o

:8


86/93

#ig#ly "eelope" regions n" lrge s!pplier o+ +oreign cpitl #in #s lrge et#nic

(ispor in Asin co!ntries. #is gro!p is +inncilly ery ric# n" t#ey inest #!ge

mo!nt in t#e minln".

#ese t,o +ctors i.e. t#e existence o+ &ong6ong n" i,n n" lrge

#inese (ispor #ing strong economic lin$ge m$e #in !niF!e mong t#e

"eeloping co!ntries regr"ing t#e in+lo, o+ (I. #is is tr!e in spite o+ politicl

regime ,#ic# is totlly opposite o+ t#e cpitlist system. #is spect is interesting. #in

#s ecome cpitlist economic system ,it# totlitrin politicl set6!p s only

#inese omm!nist


87/93

1. &o, ,ell "o interntionl mr$ets ,or$ in pportioning (I in line ,it# comprtie

"ntgeQ

2. ?#t inestment "ierting ctions re eing t$en y ot#er co!ntries to set loction

o+ interntionl mn!+ct!ring pro"!ction in t#eir o,n "irectionsQ

3. ?#t ostcles in#iit interntionl mr$ets +rom +!nctioning more e++ectiely.

#ese F!estions re cr!cil to !n"erstn" t#e nt!re o+ (I in+lo, in "eeloping

co!ntries. It is +ct t#t t#e "eeloping co!ntries re competing mong t#emseles to

ttrct +oreign cpitl.

Sometimes t#e loction iss!e ecomes importnt +or t#e in+lo, o+ (I n" t#e

nt!re o+ in"!stry ecomes relte" to t#t. Some prtic!lr in"!stries li$e !tomoile)

petroc#emicl n" electronics re mentione" +or t#e initil p#se o+ inestment. #e

so!rces o+ inp!ts n" loction o+ c#ep lo!r ecomes importnt sometimes in t#e

"etermintion o+ loction o+ prtic!lr in"!stries.

Anot#er importnt iss!e #s come in st!"y relte" to t#e "ynmism o+ (I in

"eeloping co!ntries. ?#ile t#e #ost goernment tries to conince t#e interntionl

inestor to commit cpitl to "eelop ne, pro"!ction si"e) co!ntry ,o!l" #e to

spen" more reso!rces to !il" !p in+rstr!ct!re so t#t +oreign +irmLs commitment

remins. B!t t#e concern o+ t#e #ost co!ntry "oes not en" #ere. itert!re in t#is

prtic!lr res #s i"enti+ie" +ie ro" ctegories o+ concern in "eeloping co!ntries

,#ic# re in t#e process o+ trnsition=

:7


88/93

1. !lt!rl ctors %,or$erLs motition) c!lt!rl preprtion*

2. o!r reg!ltions %lexiility in #iring n" lying o+ ,or$ers*

3. Responsieness o+ t#e s!rro!n"ing economy in proi"ing s!pporting goo"s n"

serices

4. Instit!tionl se o+ commercil l, to gie g!i"nce ,#en "isp!te rises

8. #e cre"iility o+ p!lic sector commitments o!t txes) in+rstr!ct!re n" ot#er

reg!ltory iss!es.

itert!re lso reels t#e concern o+ +oreign inestors regr"ing t#e cre"iility o+

promises o+ t#e #ost goernment n" t#e instit!tionl +ctors li$e t#e /!"icil systems o+

sec!rity. #ese re t#e pttern o+ in+ormtion gp ,#ic# t#e +oreign compnies "esire to

ri"ge in or"er to el!te t#e ret!rns ssocite" ,it# t#e inestment opport!nity. #e

MNs re most o+ten oligopolies n" t#e co!ntries ,#ere t#ey re #ing #e" F!rters

e#e lso s oligopolies. #ey intro"!ce entry rriers n" trns+er $no,le"ge only

,#en it ecomes p!lic goo". In most cses tec#nologicl $no,le"ge is strictly $ept

!n"er control. #is prctice preents "issemintion o+ ltest tec#nology in t#e #ost

co!ntry. In t#is cse experience ,it# ll t#e co!ntries is not t#e sme.

::


89/93

RECOMMENDATIONS

#e st!"y +oc!se" on t#e role o+ role o+ (I in economic gro,t# in In"i. (espite t#e

F!littie ei"ences o+ role o+ (I in t#e economic gro,t# in In"i) F!ntittie

regression nlysis s#o,e" negligile impct o+ (I in economic gro,t#. In"in policy

m$ers "irecte" t#e +oreign "irect inestment in t#e priority sector o+ t#e "eelopment t

t#e time o+ t$ing o++ economic p#se. Bsiclly) economic n" tr"e policies s#o!l" e

cre+!lly "eelope" +or long term n" economic gro,t# in t#e co!ntries especilly

"eeloping co!ntries. ster economic gro,t# is t#e reF!irement o+ lest "eelope"

co!ntries %(s*. In"in mo"el o+ economic gro,t# co!l" e !se+!l +or "eeloping

economies li$e In"i. oc!sing on (I n" economic gro,t# in In"i) (I ,s one o+

t#e c#nge gents +or in"!stril re+orms. #e cre+!l policy +orm!ltion n" opening o+

s!6sectors #elpe" to !pgr"e competitie positions o+ locl +irms in In"i. #e st!"y

recommen"s t#e +ollo,ing m/or points to t#e In"in policy m$ers +or $eep gro,ing its

economy n" to ccelerte t#e In"iese economic gro,t# i +oreign "irect inestment.

T I'&' =-; &%+,$9

1. oreign "irect inestment s#o!l" e enco!rge" especilly in t#e #ig#6tec#

in"!stries n" l!e ""e" pro"!cts ec!se In"i cn not compete ,it#

neig#o!ring co!ntry in terms o+ cost n" locl mr$ets.

2. In"i #s ttrcte" ery smll mo!nt o+ in


90/93

3. (I in RH( ctiities is ery negligile in In"i. MN5s ,or$ing in R H (

s#o!l" e enco!rge" to estlis# in In"i.

4. (I in electricity n" gs sectors #s een negtie (I in t#e recent yers.

In"in policy m$ers s#o!l" proi"e +o!rle enironment +or MN5s to retin

t#eir inestment n" increse t#e inestment in t#e energy sectors.

F, ++-='/ ',+$ -%+ I'&9

(I plye" importnt role on c#nging t#e in"!stril ptterns o+ In"in +irms to

c#iee interntionl competitieness ,#ic# #elpe" to c#iee rpi" economic

"eelopment in In"i. Bsiclly) In"in +irms lerne" t#e tec#nologies n" s$ills

+rom MN5s ,#ic# m"e In"in +irms competitie. (eeloping co!ntries li$e In"i

cn lern +rom t#e In"in experiences regr"ing (I policies to ccelerte t#e

economic gro,t#. #e In"in experiences n" some litert!re s#o, export6le"

economic gro,t#. &o,eer) ,orl" +inncil crisis o+ 200: c#llenge" t#is #ypot#esis

"!e to "ecline o+ goo"s n" serices in t#e interntionl mr$ets. &ence) In"i cn

lern +rom t#ese experiences t#t export6le" gro,t# my e s#ort term gro,t#.

1. I"enti+y t#e sectors +or (I ,#ere goernment;s strtegic economic pln is

"irecte" n" c#nnelies t#e in+lo, o+ (I in t#e erly stge o+ economic

"eelopment.

2. In"i is ric# in ,ter reso!rces. >oernment s#o!l" ttrct more (I in t#is sector

to trns+orm t#e In"iese economy y pro"!cing s!++icient energy +or sel+ n"

export.

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3. #e nt!rl e!ties n" &imlyn rnges #s #!ge potentil +or to!rism

in"!stry) #o,eer) smll mo!nt o+ (I #s een ttrcte" in t#ese in"!stry in

In"i. In"iese to!rism in"!stry cn trns+orm In"iese economy y "eeloping

In"i s t#e est plce to isit in t#e ,orl".

4. reen+iel" inestors s#o!l" e enco!rge".

8. >oernment s#o!l" "eelop sic in+rstr!ct!re n" +ree ones to +cilitte n"

ttrct (I in "i++erent regions o+ t#e co!ntry.

. (I incenties s#o!l" e proi"e" t#e +oreign inestors n" estlis# grience

#n"ling instit!tions to sole t#e prolems y +oreign inestors.

7. 'ne stop serices s#o!l" e proi"e" to t#e +oreign inestors to +ster

estlis#ment o+ MN5sE slo, registrtion process) !re!crtic #!r"les)

corr!ptions n" poor in+rstr!ct!re re t#e min prolems o+ +oreign inestors in

t#e "eeloping co!ntries.

:. lexile lo!r l,s s#o!l" e permitte" +or t#e +oreign +irms to en#nce t#e

e++iciency o+ reso!rces.

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BIBLIOGRAP!

Alier) R.U %199*) The International Corporation) e"ite" y #rles 92


93/93

Borenstein) >rgorio n" ee %1998* how does foreign direct inestment affect

economic growth# ) Ntionl B!re! o+ 5conomic Reserc# ?or$ing pper 8087.

B!c$ley)

role of fdi in sme.doc

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