CHAPTER-1:
INTRODUCTION
The last two decade of the 20th century witnessed a dramatic world-wide increase
in foreign direct investment (FDI), accompanied by a marked change in the attitude
of most developing countries towards inward FDI. As against a highly suspicious
attitude of these countries towards inward FDI in the past, most countries now
regard FDI as beneficial for their development efforts and compete with each other
to attract it. Such shift in attitude lies in the changes in political and economic
systems that have occurred during the closing years of the last century.
The wave of liberalisation and globalization sweeping across the world has opened
many national markets for international business. Global private investment, in
most part, is now made by multinational corporations (MNCs). Clearly these
corporations play a major role in world trade and investments because of their
demonstrated management skills, technology, financial resources and related
advantages. Recent developments in global markets are indicative of the rapidly
growing international business. The end of the 20th century has already marked a
tremendous growth in international investments, trade and financial transactions
along with the integration and openness of international markets.
FDI is a subject of topical interest. Countries of the world, particularly developing
economies, are vying with each other to attract foreign capital to boost their
domestic rates of investment and also to acquire new technology and managerial
skills. Intense competition is taking place among the fund-starved less developed
countries to lure foreign investors by offering repatriation facilities, tax
concessions and other incentives. However, FDI is not an unmixed blessing.
Governments in developing countries have to be very careful while deciding the
magnitude, pattern and conditions of private foreign investment.
In the 1980s, FDI was concentrated within the Triad (EU, Japan and US).
However, in the 1990s, the FDI flows to developed countries declined, while those
to developing countries increased in response to rapid growth and fewer
restrictions. Most FDI flows continue still to be concentrated in 10 to 15 host
countries overwhelmingly in Asia and Latin America. South, East and Southeast
Asia has experienced the fastest economic growth in the world, and emerged as the
largest host region. China is now the largest host country in the developing world.
However, small markets with low growth rates, poor infrastructure, and high
indebtedness, slow progress in introducing market and private-sector oriented
economic reforms and low levels of technological capabilities are not attractive to
foreign investors.
The remarkable expansion of FDI flows to developing countries had belied the fear
that the opening of central and Eastern Europe and the efforts of the countries of
that region to attract such investment would divert investment flows from
developing countries. The most important factors making developing countries
attractive to foreign investors are rapid economic growth, privatization
programmes open to foreign investors and the liberalisation of the FDI regulatory
framework.
In India, prior to economic reforms initiated in1991, FDI was discouraged by
Imposing severe limits on equity holdings by foreigners and
Restricting FDI to the production of only a few reserved items.
The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by Foreign
Exchange Management Act [FEMA]), prescribed the detailed rules in this regard
and the firms belonging to this group were known as FERA firms. All foreign
investors were virtually driven out from Indian industries by FERA. Technology
transfer was possible only through the purchase of foreign technology. However,
due to severe limits on royalty payments to foreigners to reduce foreign exchange
use, this option was ineffective. However, the government granted liberal tax
incentives to encourage indigenous generation of technology by domestic firms. In
the absence of foreign technology, Indian industry suffered both in terms of cost of
production and quality.
The initial policy stimulus to foreign direct investment in India came in July 1991
when the new industrial policy provided, inter alia, automatic approval for project
with foreign equity participation up to 51 percent in high priority areas. In recent
years, the government has initiated the second generation reforms under which
measures have been taken to further facilitate and broaden the base of foreign
direct investment in India. The policy for FDI allows freedom of location, choice
of technology, repatriation of capital and dividends. As a result of these measures,
there has been a strong surge of international interest in the Indian economy. The
rate at which FDI inflow has grown during the post-liberalisation period is a clear
indication that India is fast emerging as an attractive destination for overseas
investors. Encouragement of foreign investment, particularly for FDI, is an integral
part of ongoing economic reforms in India.
Though India has one of the most transparent and liberal FDI regimes among the
developing countries with strong macro-economic fundamentals, its share in FDI
inflows is dismally low. The country still suffers from weaknesses and constraints,
in terms of policy and regulatory framework, which restricts the inflow of FDI.
Foreign investment policies in the post-reforms period have emphasized greater
encouragement and mobalisation of non-debt creating private inflows for reducing
reliance on debt flows. Progressively liberal policies have led to increasing inflows
of foreign investment in the country.
