MCom I Semester Business Environment Foreign Investment Study Material notes

MCom I Semester Business Environment Foreign Investment Study Material notes : Importance of Foreign capital Types of Foreign Capital New Foreign Investment Policy Trends of Foreign Investment in India Exercise Questions Long Answer Questions Short Answer Questions Objectives ”

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Foreign Investment

IMPORTANCE OF FOREIGN CAPITAL

Foreign capital contributed in many important ways to the process of economic growth and industrialization in developing countries. In developing countries domestic capital is inadequate for the purpose of economic growth and is necessary to invite foreign capital. For wants of experience, domestic capital and entrepreneurship may not flow into certain lines of production. Foreign capital can show the way for domestic capital. The need for foreign capital for a developing country like India can arise on account of the following reasons:

1 Primary risk: Private enterprise does not like to invest capital in basic industries and new ventures where the element of risk is high. Foreign direct investment serves as venture capital and thus makes up for this deficiency.

2. Complete the losses of balance of payment : In initial phase of economic development, the developing countries need much larger imports in the form of machinery, capital goods, raw materials, spares and components, etc., as compared to their exports. As a result, the balance of payments generally turns adverse. Foreign capital presents a short-term solution to the problem.

3. Utilisation of natural resources : A number of developing countries possess huge natural resources which await exploitation. These countries themselves do not possess the required technical skill and expertise to accomplish this task. As a result they have to depend upon foreign capital to undertake the exploitation of resources.

4 Increases in investment rate : For the industrialization of developing countries, it is necessary to raise the level of their investment substantially. This requires in turn a high level of savings. Because of general poverty, savings are often very low. Hence, there is a gap between investments and savings. This gap can be filled up through foreign capital.

5. Receipt of modern technology: The developing countries have very low level of technology as compared to the advanced countries. This raises the necessity for importing technology from the developed countries.

6. Development of Infrastructure: The economic infrastructure includes the system of transport and communications, generation and distribution of octricity, development of irrigation facilities, railway, roads etc. The domestic the developing countries is often too inadequate to build by economic restructure of the country on its own. Thus, they require the assistance of foreign capital to undertake this task.

This shows that the economic development of developing countries should obviously receive a boost as a result of foreign capital.

TYPES OF FOREIGN CAPITAL

Foreign capital is made available mainly in three forms:

1 Foreign Investment

2. Loans from first government to second government.

3. Loans from international institutions.

1 Foreign Investment : Foreign Investment refers to investment in a foreign country where the investor retains control over the investment. It typically takes the form of starting a subsidiary, acquiring a stake in an existing firm or starting a joint venture in the foreign country. Direct investment and management of the firm concerned normally go together. Foreign investment is of two types: (i) Foreign direct investment; and (ii) Portfolio investment.

A country’s outflow FDI means that it is to buy or build foreign productive capacity, whose ownership will remain in the first country’s hands. For a country, attracting inflow of FDI strengthen the connection to world trade networks and finances its development path. While, if the investor only subscribes to the shares, bonds and debentures or other securities abroad, it is called portfolio investment. In this investment, the investor gets a return on his investment but he has no control over the use of capital.

2. Loans from international institutions : International institutions like IBRD, International Monetary Fund (IMF) etc. have been providing external assistance to India since second world war. Loans have generally to be :

(i) Liberal; and (ii) Non-liberal. Liberal loans are in the form of concessional assistance. It includes loans obtained at low rates of interest with long maturity period. Non-liberal loans are non-concessional assistance including mainly external commercial borrowing.

3. Loans from first government to second government : Since the Second World War, there has been a growing tendency towards direct intergovernment loans and grants. These loans are of two types : liberal and nonliberal.

NEW FOREIGN INVESTMENT POLICY

The new policy can be broadly classified into following categories :

1 Liberal Approach: In 1991, the government announced a specified list of high technology and high investment priority industries (listed in Annexure III) wherein automatic permission was granted for foreign direct investment (FDI) upto 51 percent foreign equity. The limit was raised from 51 percent to 74 percent and subsequently to 100 percent for many of these industries. Moreover, many new industries have been added to the list over the years.

2. Various Forms of Foreign Capital : Earlier foreign capital was raised mainly through foreign aid and commercial borrowings. But now it is classified in various forms, such as:

(1) Foreign Equity Participation : It is in the form of foreign direct investment and portfolio investment.

3. Investment in Indian Capital statement in Indian Capital Market: The Government has allowed foreign institutional investors to invest in investors to invest in Indian capital market. This permission will be applicable only if they are registered with SEBI and get approval From RBI. The portfolio investment by Foreign Institutional Investors (FII) in primary and secondary markets has and secondary markets has been increased from 24% to 40% of are capital of any company, subject to the approval of the Board of Directors of the concerned company. This limit is further raised to 49% in 20012002 budget. FIIs have been directed to allocate their total investments between equity and debentures in the ratio of 70:30.

4. Organization of Boards : A special empowered board has been constituted to negotiate with a number of large international firms and approve direct foreign investment in selected areas. There would be a special programmed Lo attract substantial investment that would provide access to high technology and world markets. The investment programmes of such firms would be considered in totality, free from pre-determined parameters or procedures.

5 . Special Incentives : FDI policy has special incentives for foreign investors. Original investment and the returns on investment are fully repatriable.

Payment of lump-sum fee and royalty to foreign technology provider is permitted under the automatic route within prescribed limits.

Payment of royalty on use of trademarks and brand name without transfer of technology is also permitted.

6. Technological Collaborations : For promoting the inflow of modern technology, the new foreign investment policy granted various concessions to technical collaboration agreements. Under the new policy, no approval will be needed to make payment in foreign currency to foreign technical experts or for getting indigenously developed techniques tested abroad.

7. Further Liberalisation in the Foreign Direct Investment : In January 2004, guidelines on equity cap on FDI, including investment by NRIs and Overseas Corporate Bodies (OCBs) were revised as under: (i) FDI upto 100 percent is permitted in printing scientific and technical magazines, periodicals and journals subject to compliance with legal framework and with the prior approval of the Government. (ii) FDI upto 100 percent is permitted through automatic route for petroleum product marketing, subject to existing sectoral policy and regulatory framework. (iii) FDI upto 100 percent is permitted through automatic route in oil exploration in both small and medium sized fields subject to and under the policy of the Government on private participation in exploration of oil fields and the discovered fields of national oil companies. (iv) FDI upto 100 percent is permitted through automatic route for petroleum products pipelines subject to and under the Government policy and regulations thereof. (v) FDI upto 100 percent is permitted for Natural Gas/LPG pipelines with prior Government approval. (vi) In 2014, FDI policy has been further liberalized. FDI upto 49 percent through the government route has been permitted in the defence industry. Higher FDI has also been allowed on a case-to-case basis. FDI upto 100 percent through the automatic route has been permitted in construction, operation and maintenance of identified railway transport infrastrue.

8. Other Incentives: (i) NRIs have been granted investment permission with cent-percent (1009) equity for reparability in high priority industries. GB The condition of installing new machinery has also been removed for foreign capital investment. RBI has granted permission to foreign nationals of Indian origin for acquiring housing assets without seeking prior permission of RBI. (iii) FERA conditions were liberal were liberalized with effect from January 8, 1993 and later on FERA was replaced with FEMA. (iv) Foreign companies have been granted permission to use their trademarks for selling their commodities in India since May 14, 1992

TRENDS OF FOREIGN INVESTMENT IN INDIA

Trends in foreign investment in India are as follows:

1 Inflow of Foreign Investment: Inflow of foreign investment is clear from the given Table :.

Table 1: Foreign Investment Inflows in India

Foreign Investment Study Material

(i) The data about FDI shows a gradual upward growth from 97 billion in 1990-91 to $32,955 billion in 2011-12

(ii) Portfolio investment also rose considerably from $ 6 million in 1990-91 to 17,171 million in 2011-12. This was primarily on account of a massive increase in investment by FIIs.

2. Sources of Foreign Direct Investment: A study of country-wise sources of foreign direct investment shows that the largest sources of FDI to India over the period April 2000 to September 2014 was Mauritius and its share in total FDI inflows was 36 percent (i.e., more than one-third). The second position was occupied by Singapore with its share FDI being 10%, followed by UK 9%, Japan 7%, USA 6% and Netherland 5%.. • The FDI inflow from Mauritius is so high because our government has given special tax incentives to investment from Mauritius. Infact, Mauritius based investments are nothing but US investments and investments of other developed countries. They are routed through Mauritius because of the tax advantages.

3. Sectoral Composition of FDI : Considering the sectoral composition of FDI over the period April 2000 to January 2013, one finds that the largest recipient of such investment was the service sector (financial and non-financial services), share of construction activities, telecommunication, computer software was also sizeable in the total inflow of FDI (see the table on the next page).

Table 2: Share of Top Seven sectors Attracting FDI in India (2013)

Foreign Investment Study Material

4. FDI in Different States : In terms of destination of FDI flows Mumbai, New Delhi, Ahmedabad maintained the first three position in order as shown in Table 3. These three regions together account for more than 56% of the total FDI inflow. It implies that 56% of FDI inflows goes into developed regions with better infrastructure and connectivity, leaving the backward regions to receive some crumbs.

Table 3: FDI in Different States (From April 2000 to March 2012)

5. FDI Inflows in India with other Developing Countries: The amount ! of FDI in India is still very small as compared to China (13.30%), Hong Kong (5.77%) and Brazil (4.32%), whereas India’s percentage share in FDI of total world is 1.95 percent. It reflects that there is large scope of FDI investment in India. Government aims to raise India’s share in global FDI to 5 percent by 2017.

EXERCISE QUESTIONS

Long Answer Questions

1 What are the major trends of foreign investment in India? Explain the various initiatives taken by the government to attract foreign direct investment.

2. Evaluate the foreign capital in India.

3. Evaluate Foreign Direct Investment in India.

Short Answer Questions

1 What do you understand by Foreign Investment?

2. What do you know about Foreign Direct Investment?

3. Which investments constitute Foreign Portfolio Investment?

Objective Questions

(I) Select the Correct Alternatives :

1 Types of foreign investment are :

(a) two

(b) four

(c) five

(d) two

[Ans: 1. (a)

(II) Write True or False :

1 A number of underdeveloped and developing countries possess huge mineral resources which wait exploitation.

2. For rapid economic development, a developed technique is required.

3. Underdeveloped and developing countries suffer from acute scarcity of entrepreneurs to bear initial risk and as a result the rate of development is high.

4. Savings are very low in developing countries and as a result the rate of investment is very high.

[Ans. : 1. True, 2. True, 3. False, 4. False)

(III) Fill in the Blanks :

1 Advanced country provide grants and ………….. to the governments of developing countries.

2…………… includes grants and loans obtained at low rates of interest with liberal terms and conditions.

3. The new industrial policy ……….. can be described as a minor revolution as far as decision concerning foreign investment.

4. Prior to announcement of the Industrial Policy, 1991, there was a little inflow of ………….. in India.

[Ans. : 1. loans, 2. liberal loans, 3. 1991, 4. Foreign capital)

Foreign Investment Study Material