Foreign direct investment (FDI) refers to long term participation by country A into country B.

It usually involves participation in management, joint-venture, transfer of technology and expertise. There are three types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a 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.[1]

History
(FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment. 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:[2] Period 1960-69 1970-79 1980-89 1990-99 2000-07 Total FDI Outflow FDI Inflows Net $ 42.18 bn $ 5.13 bn + $ 37.04 bn $ 122.72 bn $ 40.79 bn + $ 81.93 bn $ 206.27 bn $ 329.23 bn - $ 122.96 bn $ 950.47 bn $ 907.34 bn + $ 43.13 bn $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Types
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organisation; or any combination of the above.

Methods

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ - Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

Foreign direct investment in the United States

"Invest in America" is an initiative of the US Department of Commerce and aimed to promote the arrival of foreign investors to the country.[3] The Invest in America policy is focused on:

Facilitating investor queries. Carrying out maneuvers to aid foreign investors. Provide support both at local and state levels. Address concerns related to the business environment by helping as an ombudsman in Washington DC for the international venture community. Offering policy guidelines and helping getting access to the legal system.

The United States is the worlds largest recipient of FDI. More than $325.3 billion in FDI flowed into the United States in 2008, which is a 37 percent increase from 2007. The $2.1 trillion stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent of U.S. gross domestic product (GDP).55

Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs have been created by foreign companies, resulting in close to $314 billion in investment.[citation needed] Unarguably, US affiliates of foreign companies have a history of paying higher wages than US corporations.[citation needed] Foreign companies have in the past supported an annual US payroll of $364 billion with an average annual compensation of $68,000 per employee.[citation needed] Increased US exports through the use of multinational distribution networks. FDI has resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US.[4] Affiliates of foreign corporations spent more than $34 billion on research and development in 2006 and continue to support many national projects. Inward FDI has led to higher productivity through increased capital, which in turn has led to high living standards.[5]

Foreign direct investment in China

FDI in China has been one of the major successes of the past 3 decades.[citation needed] Starting from a baseline of less than $19 billion just 20 years ago, FDI in China has grown to over $300 billion in the first 10 years. China has continued its massive growth and is the leader among all developing nations in terms of FDI.[citation needed] Even though there was a slight dip in FDI in 2009 as a result of the global slowdown, 2010 has again seen investments increase.[citation needed] The Chinese continue to steamroll with expectations that economic growth will be 10% this year.[6]

Foreign direct investment and the developing world

Foreign investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Many of the East Asian tigers such as China, South Korea, Malaysia, and Singapore benefited from investment abroad. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.

Indian Economy Overview

India is a South Asian country that is the seventh largest in area and has the second largest population in the world. The land covers an area of 3,287,240 square km (India geography) and the population stands at 1,202,380,000 people (India population) . India has great plains, long coastlines and majestic mountains. Thus, the land has abundant resources. India shares its borders with China, Bangladesh, Pakistan, Nepal, Sri Lanka and Myanmar.

Understanding the Indian Economy

Large, dynamic and steadily expanding, the Indian economy is characterized by a huge workforce operating in many new sectors of opportunity.

The Indian economy is one of the fastest growing economies and is the 12th largest in terms of the market exchange rate at $1,242 billion (India GDP). In terms of purchasing power parity, the Indian economy ranks the fourth largest in the world. However, poverty still remains a major concern besides disparity in income. The Indian economy has been propelled by the liberalization policies that have been instrumental in boosting demand as well as trade volume. The growth rate has averaged around 7% since 1997 and India was able to keep its economy growing at a healthy rate even during the 2007-2009 recession, managing a 5.355% rate in 2009 (India GDP Growth). The biggest boon to the economy has come in the shape of outsourcing. Its English speaking population has been instrumental in making India a preferred destination for information technology products as well as business process outsourcing.

The economy of India is as diverse as it is large, with a number of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its livelihood from this area.

However, the service sector is greatly expanding and has started to assume an increasingly important role. The fact that the Indian speaking population in India is growing by the day means that India has become a hub of outsourcing activities for some of the major economies of the world including the United Kingdom and the United States. Outsourcing to India has been primarily in the areas of technical support and customer services.

Other areas where India is expected to make progress include manufacturing, construction of ships, pharmaceuticals, aviation, biotechnology, tourism, nanotechnology, retailing and telecommunications. Growth rates in these sectors are expected to increase dramatically.

Despite the liberalization the economy still largely controlled by the government and the 500+ major companies it owns, which together are worth around US$500 billion, or around 40% of GDP at current exchange rates. Thanks to past profligate spending, government debt is running at around 80% of GDP. Servicing the interest payments on that debt is now the single largest component of the federal budget. Fiscal discipline and deficit reduction is therefore vital for India's future prospects.

It is also crucial to understand that India is driven primarily by domestic (consumer) consumption. This stands in marked contrast to Japan, the Asian Tigers and now China, all of whom have followed the export-oriented model.

With the massive growth of the Indian middle class, this vast country may become Asia's first major 'buy' economy.

Indian Economy: Statistics

In 2009, India's PPP Gross Domestic Product stood at $3.548 trillion, and was the fourth largest economy by volume.

The services sector, backed by the IT revolution, remained the biggest contributor to the national GDP, with a contribution of 58.4%. The industry sector contributed 24.1% and the agriculture sector contributed 17.5% to the GDP.

The employment scenario was dominated by the services sector, creating 62.6% of the jobs for the 467 million workforce. The industry sector contributed 25.8% to the GDP and employed 20% of the workforce. The agriculture sector contributed 15.8% to the GDP and created 17.5% jobs (India Labor Force). The unemployment rate remained around 10% in 2009. However, rising inflation became a major concern, and measures to check it are being implemented. In 2009, the rate of inflation was around 10.7% (India Inflation Rate Change).

The Poverty Challenge

One of the major challenges for the Indian economy and those responsible for operating it, is to remove the economic inequalities that are still persistent in India after its independence in 1947. Poverty is still one of the major issues although these levels have dropped significantly in recent years. Over 25% of the working Indian populace is living below the poverty line (India Poverty Line and Gini Index).

Poverty is a challenge thats becoming increasingly important in relationship to the alarming rate of new births. This implies that ever more rapid change, or birth control policies like the One Child policy in China, are needed to reduce the numbers affected by poverty in the vast Indian economy.

The per capita income of India is 4,542 US Dollars in the context of Purchasing Power Parity. This is primarily due to the 1.1 billion population of India, the second largest in the world after China. In nominal terms, the figure comes down to 1,089 US Dollars, based on 2007 figures. According to the World Bank, India is classed as a low-income economy.

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1. What is Foreign Direct Investment (FDI)? o A source of capital and investment involving foreign control of production o A source of exploitation? o A channel of technology transfer and industrial development? 2. What is FDI? o Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. o The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). o In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. o The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm. 3. Types of FDI o Greenfield investment : direct investment in new facilities or the expansion of existing facilities. o Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. o downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth. 4. Types of FDI Continued. o Mergers and Acquisition o transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. o Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. 5. Types of FDI Continued. o Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. o Vertical Foreign Direct Investment: Takes two forms:

1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production 6. Types of FDI based on the motives of the investing firm o Resource Seeking : Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. o In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). o This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. o Market Seeking : Investments which aim at either penetrating new markets or maintaining existing ones. 7. o Efficiency Seeking : Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. o It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. o Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU). 8. Global Trends.. o Concentrated in the USA, Japan and Western Europe o FDI of developed countries in 1998: Inflows: USD 460 billion Outflows: USD 595 billion o Top five host countries: China Brazil Mexico Singapore Indonesia o had 55% of FDI inflows to developing countries in 1998 9. Attractiveness as FDI Destination o Strong and stable government o Pro-active government policies o Investor-friendly and transparent decision making process o Sound diversified industrial infrastructure o Comfortable power situation o Abundant skilled manpower o Harmonious industrial relations o Quality work culture

Peaceful life Incentive packages Cosmopolitan composition Fluent English Chennai ranked second-best by BT Gallup Survey of Best Cities to do Business (Dec. 2001) 10. Dollar Flows to Asia 11. Dollar Flows to Asia 12. Dollar Flows Growth Rate 13. FDI Inflow 14. April-September 15. Advantages of FDI in India o Domestic Investment o Advantages o FDI encourages domestic investment by providing: New markets Demand for inputs New technology o Labor is mobile and often moves from multinational firms to domestic firms o Increased competition makes markets more efficient o Investments in new sectors simulates the growth of new industry and new products 16. o Employment Generation and Labor Skills o Foreign firms generate hundreds or thousands of jobs o They generate employment in suppliers 17. o Technology o Advantages o Foreign firms bring new technology Increased productivity of labor and capital Improved product standardization Reduced error rates o Foreign firms invest in new technology Upgrades overall stock of capital More efficient in raising and using financial resources Unrestricted access to parent company's technology Access to tacit knowledge 18. o Export Competitiveness o Advantages o Dominant technologies brought in by foreign companies makes products suitable for export o Foreign technology increases production, reduces error rates and improves quality
o o o o o

Foreign firms have strong distribution and marketing facilities Foreign firms have brand names that help exports 19. Disadvantages of FDI in India o Domestic Investment o Disadvantages o FDI crowds out domestic investment by: Being a monopolistic competitor Raises demand for money Raises interest rates o Foreign firms have more: Advertising power Ability to dominate the market Predatory pricing to prevent entry o Financial inflows raise the exchange rates, making exports unattractive 20. o Technology o Disadvantages o Technology brought may be inappropriate o The technology may be too capital-intensive o Pollution-intensive technologies may be exported from countries where they are banned o Sometimes, external transactions allow foreign technology to be acquired more cheaply, especially if the technology is mature 21. o Environment o Disadvantages o Foreign firms operating in regions where rules are non-existent or not enforced have greatly exceeded emissions and effluent levels allowed in their home countries o Foreign firms have exercised significant political influence to prevent the imposition of rules regarding the environment 22. Some of the major pitfalls. o FDI flows have simply enabled trans-national giants like Coke and Pepsi to set up monopolies in highly profitable sectors where Indian business concerns were already meeting the requirements of the market. Coke and Pepsi, with their monopolistic stranglehold on the bottling and distribution chain have wiped out niche producers; consumers have less choice than they did before, and must pay more. Neither have these companies brought in any valuable new technology. 23. Contd .. o Highly controversial Enron Power project o The Emerging Telecom Scandal o FDI has come in the form of speculative investments in India's stock market 24. Conclusion. o Foreign firms do generate technological development in the host country
o o

o o o

Crowding out is not a major problem Host countries should enforce environmental regulations This will not make foreign firms leave the country, as the cost of conforming to regulations is much lower than the difference in cost of labor Benefits in increased: Competition Efficiency Innovation