2. An investment made by a company or entity based in one
country into a company or entity based in another country
Entities making direct investments typically have a
significant degree of influence and control over the
company into which the investment is made
3. Threshold-10% of voting stock or shares of
investee company as by OECD
By acquiring shares
of overseas
company
Setting up a subsidiary or
associate company
Merger or a joint
venture
4. Types of FDI-Horizontal, Vertical and Platform
1.Horizontal FDI
When a firm duplicates its home country based activities at the same value
chain stage in a host country through FDI
Decreases international trade as the product of them is usually aimed at
host country
E.g. Toyota assembling cars in both Japan and UK
2.Vertical FDI
When a firm through FDI moves upstream or downstream in different
value chains
•Backward Vertical FDI ( as a supplier)
e.g. Toyota acquires tyre manufacturer
•Forward Vertical FDI (as a distributor)
e.g. Toyota acquiring distributorship in USA
5. Platform FDI adds to the export-led growth of both
source as well as destination countries
3. Platform FDI
Source
Country
INVESTMENT
Destination
Country
Third
Country
( High -Cost Economy )
( Low-Cost Economy )
6. Liberalisation policies helped FDI enter India in 1991
and since then it has seen unprecedented growth
Causes
•India faced a balance of payment crisis.
•IMF required India to take a series of structural economic reforms
Key features of the reforms
•Opening up of international trade and investment
•De-regulation
•Initiation of privatisation
•Tax reforms
•Inflation controlling measures
After independence in 1947,FDI gained attention of the
policy makers for acquiring advanced technology and to
mobilize foreign exchange resources. However the socialist
policies of the leaders hindered the approach
7. Due to the liberalisation policies undertaken in 1991, the
FDI inflows had seen a boom
0.094471
0.86114
0.981494
2.530522
2.745551
0
0.5
1
1.5
2
2.5
3
1992-93 1997-98 2001-02 2007-08 2009-10
FDI as % of GDP
256 565.5 916 933.2 2705
18486
123378
0
20000
40000
60000
80000
100000
120000
140000
Mid 1948 Mar-64 Mar-74 Mar-80 Mar-90 Mar-00 Mar-10
Amount of FDI (in crore)
Source: Research Journal of Management Sciences, Sept. 2012 Source: Reserve Bank of India (RBI), various bulletins
The marked transition in the FDI
inflows from 1990 to 2000 proves the
positive impact of liberalisation
policies in India on the FDI inflows
There is a significant increase in
the % contribution of FDI to GDP
and is expected to grow in the
coming years
8. Approval of FDI in various sectors in India
1. Automatic route
• Without prior approval either of Government or RBI in all
activities/sectors as specified in the consolidated FDI policy issued by
Government of India
e.g. Agriculture , Civil Aviation etc.
2. Government route
• FDI in activities not covered under the automatic route requires
approval of Government of India considered by Foreign Investment
Promotions Board ( FIPB )
• FIPB set up the government for processing of FDI proposals in the
country
e.g. Print Media, Multi-brand retail etc.
9. FDI is permitted up to some extent in the
below mentioned Sectors
Sector FDI Cap / Equity Route
Agriculture 100 % Automatic
Mining & Iron-Steel
industry
100 % Automatic
Alcohol 100 % Automatic
Defence production 26 % FIPB
Drugs and
Pharmaceutical
100 % Automatic
Power 100 % Automatic
Civil Aviation 49 % FIPB
Banking( Pvt.) 74 %( FDI + FII ) Automatic
Retail 100 %- single brand
51 %- multi-brand
Automatic
FIPB
Insurance 26 % Automatic
Petroleum and Refining 49 %( PSUs), 100 %( Pvt.
Companies)
FIPB( PSUs), Automatic (
Pvt. )
Telecommunications 100 % Automatic
Source : Reserve Bank of India ( RBI )
The Government
of India (GoI) has
been selective in
opening various
sectors for FDI.
Gradually different
sectors were opened
for investment in FDI
with varying rates of
sectoral caps.
10. The services sector accounts for most of the FDI inflows
relatively than the manufacturing and primary sector
19.9
8
7.4
6.9 6.8
2
6.5
2.2 2 2
0.6
0
5
10
15
20
25
Percent Share ( 2000-2011)
Telecom, software, Housing
and Real estate and
construction have witnessed
more than 5% increment of FDI
during 2000 and 2012
The sectors who have
given support by the
government have got good
share of FDI inflow
Source: International Journal of Scientific and Research Publications, Volume 2, Issue 12, December 2012
The conditions for the
growth of services
sector is apt in India
11. Though India constitutes very less amount of the total share of
FDI of the world, it has the potential to increase it significantly
0
2
4
6
8
10
12
14
% of world FDI
12.41
8.96
4.83
3.81
1.89
0.49
0.13
Source : UNCTAD, 2012
India with 1.89% of world FDI inflows is
catching up major economies like USA
and China and emerging economies of
Brazil and Russia
0
5
10
15
20
25
30
35
40
45 42
38
25
18
15
12
Developed Economies
Developing Economies
( x )- Ranking in 2011
Source : UNCTAD
(Percentage of respondents selecting
economy as a top destination)
India is turning out to overtake
developed economies to become the
best host country for FDI
12. Few Policy recommendations for enhancing
FDI inflows into India
Particular attention should also be paid to the removal of restrictions on
FDI in the services sectors -- including telecoms, banking and
insurance, aviation etc as this will help ease transactions costs for both
consumers and business
Over and above the creation of a business-friendly environment, it may
be important for a potential host country to actively undertake
investment-promotion policies to fill in information gaps or correct
perception gaps that may hinder FDI inflows
While India must do image-building exercises to promote it as a
favourable investment location; it desperately needs to get rid of the tag
that it can only do services and not manufacturing
13. India needs to put in place a comprehensive development
strategy, which includes being open to trade and FDI
There need to be greater coordination between the centre and states to
ensure that the substantial foreign interest in investing in India gets
translated into actual investment flows to the state
India should continue to work towards developing a deep and liquid
corporate debt market
India should consciously work towards attracting greater FDI into
R&D as a means of strengthening the country’s technological prowess
and competitiveness
India needs massive investments to sustain high-quality
economic growth, particularly in the energy and infrastructure
sectors
14. Thank You!
"There is a need of minutely analysing the effects
of FDI in a country and the economic rationale
behind it and it is not correct to look for a general
consensus of whether FDI should be allowed or
protested“
- Amartya Sen , Nobel laureate
