What is FDI?
Expanding one’s market is something a company eagerly looks for. When it invests into business interests located in another country, it is said to have made a foreign direct investment.
Generally, FDI is the establishment of foreign business operations or acquisition of foreign trade business assets including establishment of ownership or controlling interest in a foreign company. FDI is preferred, among all other investment techniques, as it is considered as an integral part of an open and effective international economic system and referred as the major catalyst to development.
Types
There are many methods through which FDI is done. The most important ones among them are Greenfield and Brownfield investment.
Greenfield investment:
When a company is interested in FDI, it believes that it must start from scratch. It would want to build its own company, train its employees and try to provide offerings as per the culture of the country. Basically, it is a type of FDI where the operations in a foreign country is built from level zero by the parent company. The popular greenfield investments in India are by Starbucks and Mcdonalds. Both the companies started everything from scratch, and they are now one of the prominent brands in India.
While this method is the riskiest form of all FDI, it gives high level of control over business operations and bypasses trade restrictions. It provides high quality control over the manufacturing and sale of products and services but there are a few government regulations that may prevent foreign direct investments. Between 2005 to 2016, India was the top [1]recipient for greenfield investment.
Brownfield investment:
This is an easier method for a company to establish itself in a foreign country. When a company does not want to face the high start-up costs associated with the greenfield investment, it invests in an existing facility to start its operations. An example of this is Tata motors’ acquisition of jaguar. Tata Motors didn’t need to build a new factory in the UK but started running the business from the existing factory of Jaguar. Vodafone’s acquisition of a majority stake in India-based Hutchison Essar is an example of a foreign company’s brownfield investment in India. While brownfield investments give immediate access to the foreign market, there may be unforeseen tax and regulatory issues.
The need for FDI
Developing countries like India require funds for investing in technologies and infrastructure to contribute towards development. This lack in capital is fulfilled by the capital from foreign companies through FDI. Moreover, FDI has a distinct advantage over the external borrowings considered from the balance of payment[2]s point of view. A foreign company must bear the risk of the liabilities associated with the external borrowings of the country in which it has invested. This reduces a country’s repayment sum. Furthermore, FDI induces new job opportunities and introduces advanced technology which lead to the National Employment gain higher skill and experience. The substantial inflows from FDI boosts a country’s economy and helps in developing its economic infrastructure.
Factors affecting FDI
There are many factors which affect foreign direct investment. The important ones are given below.
· Government and political stability will positively affect the infusion of FDI.
· Wage cost- lower wage costs increase vertical FDI [3](investing in a business which plays the role of a supplier or a distributor)
· Trade policy and privatisation policy.
· Access to raw materials.
· Tax and custom laws.
· Public and infrastructural facilities
FDI in developed countries vs India
Until 2018, China was ahead of India in the inflows through FDI since it opened its economy before India could. Though India tried to catch up with China, it was not able to while China enjoyed a steady flow. In 2018, India went past China [4] in FDI inflow for the first time in two decades with its highest ever $38 billion of inbound deals compared with China’s $32 billion. China’s trade standoff with the US is seen as a major reason for this slowdown.
The trend in FDI in India has been non uniform since 2000. While India saw an increase in the year 2007–08 and subsequent decrease thereafter till 2011, the United States has long been the world’s premiere destination for foreign direct investment. The current standing in FDI in India is $38 billion while US reduced to $277 billion as of 2018.
FDI In India
India is one of the fastest growing economies of the world. It has been ranked among the top 10 attractive countries for inbound investments. Government of India has started many programs to attract FDI inflows to improve the Indian economy following the initiation of economic reforms in 1991. Promoting efficiency in production and increasing exports have always been the two key objectives of promoting FDI in India and other developing countries.
Foreign Direct Investment (FDI) is a major source of non-debt financial resource for the economic development of India. The foreign investment in a country like India will lead in generating employment and the Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country. The government has taken many initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others. The measures taken by the government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. FDI policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment in the country.
Recent Policy measures by Government of India.
Some of the recent policy measures taken by the Government of India under Make in India are,
Ø Foreign Investment up to 49% in Defence, Insurance and Pension sectors permitted under automatic route. The foreign investment in access of 49% in defence sector has been allowed on case to case basis with Government approval in cases resulting in access to modern technology in the country or for other reasons to be recorded.
Ø FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.
Ø FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks, Mobile TV, Headend-in- the Sky Broadcasting Service, Up-linking of Non- ‘News & Current Affairs’ TV Channels, Down-linking of TV Channels.
Ø For the single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products, sourcing norms can be relaxed up to three years and sourcing regime can be relaxed for another 5 years subject to Government approval.
Ø FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond 49% through Government approval
Ø To provide clarity to the e-commerce sector, the Government has issued guidelines for foreign investment in the sector. 100% FDI under automatic route permitted in the marketplace model of e-commerce.
Ø The establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting, approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted.
There are the major policies taken up by the Government to promote FDI under Make in India. Other minor policies are also there which are mentioned in details by the Government of India on their Make in India website.
Market Size of FDI.
The total FDI investments in India during April-December 2018 stood at US $33.49 billion according to Department for promotion of Industry and Internal Trade (DPIIT) which indicates that government’s is making effort to improve ease of doing business and relaxation in FDI norms. The services sector attracted the highest FDI equity inflow of US$ 6.59 billion, followed by computer software and hardware — US$ 5.00 billion, trading — US$ 3.04 billion and telecommunications — US$ 2.29 billion. The total FDI equity inflows for the month of December 2018 touched US$ 4.39 billion.
During April-December 2018, India received the maximum FDI equity inflows from Singapore (US$ 12.98 billion), followed by Mauritius (US$ 6.02 billion), Netherlands (US$ 2.95 billion), USA (US$ 2.34 billion), and Japan (US$ 2.21 billion).
India emerged as the top recipient of greenfield FDI Inflows from the Commonwealth, as per a trade review released by The Commonwealth in 2018.
Some of the recent significant FDI announcements are as follows:
- In October 2018, VMware, a leading software innovating enterprise of US has announced investment of US$ 2 billion in India between by 2023.
- In August 2018, Bharti Airtel received approval of the Government of India for sale of 20 per cent stake in its DTH arm to an America based private equity firm, Warburg Pincus, for around $350 million.
- In June 2018, Idea’s appeal for 100 per cent FDI was approved by Department of Telecommunication (DoT) followed by its Indian merger with Vodafone making Vodafone Idea the largest telecom operator in India
- In May 2018, Walmart acquired a 77 per cent stake in Flipkart for a consideration of US$ 16 billion.
- In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million) in the state of Maharashtra to set up multi-format stores and experience centres.
- Kathmandu based conglomerate, CG Group is looking to invest Rs 1,000 crore (US$ 155.97 million) in India by 2020 in its food and beverage business, stated Mr Varun Choudhary, Executive Director, CG Corp Global.
- International Finance Corporation (IFC), the investment arm of the World Bank Group, is planning to invest about US$ 6 billion through 2022 in several sustainable and renewable energy programmes in India.
Future in India.
India has become the most attractive emerging market for Global partners (GP) investment for next 1 year. In next five years, the annual FDI inflows in the country are expected to rise to US$ 75 billion whereas the Government of India is aiming to achieve US$ 100 billion worth of FDI inflows in the next two years.
The private investments in India is also expected to grow by 8.8% by the next year and is going to overtake the private consumption growth of 7.4% which will drive the growth in India’s GDP in FY 2019–19.
[1] <https://www.livemint.com/Politics/Q0Lqq50o0J2rOd9mEK81gN/India-top-recipient-of-Commonwealth-FDI-says-a-new-report.html>
[2] <https://www.investopedia.com/terms/b/bop.asp>
[3] https://www.sciencedirect.com/science/article/pii/S0264999315001996>
[4] <https://economictimes.indiatimes.com/news/economy/indicators/india-pips-china-in-fdi-inflows-for-the-first-time-in-20-years/articleshow/67281263.cms>
[5] <https://www.gfmag.com/magazine/december-2018/fdi-superstars-2018>
