FDI Foreign Direct Investment
BASIC MOTIVE To acquire controlling interest in a foreign entity or set up an entity with controlling interest SOURCE FDI comes from MNCs and Corporates so as to derive benefit of new market, cheaper resources, Labour, efficiency and skills, strategic asset seeking ( like oil fields, Mines, etc) and time geography( BPO Transcriptions)
DURATION
FDI investment is more enduring and has longer time stability
FORM
FDI generally comes as Subsidiary or a Joint Venture
PURPOSE
FDI is made with core thought of business philosophy of diversification, integration, consolidation, expansion and /or core business formation. Calculation of gains is always prime criteria but never the sole criteria.
UNCTAD
According to the United Nations Conference On Trade and Development The global expansion of FDI is currently being driven by over 60,000 transnational corporations with more than 8,00,000 foreign affiliates.
FDI and INDIA
After LPG India Emerging Market In India approvals through 2 routes (1) Automatic Approvals by RBI : Period : 2 Weeks ( with certain parameters ) Foreign Equity : Upto 50% in 3 categories relating to mining Upto 51% in 48 specified industries Upto 74% in 9 categories (2) The FIBP Route : Foreign Investment Promotion Board All other cases approved where the parameters of automatic approval are not met Period : 4 to 6 Weeks. FDI s are possible through : Financial Collaborations Joint Ventures and Technical Collaborations Capital Markets VIA Euro Issues Private placements or Preferential allotments
Advantages and Benefits in General
STRATEGIC APPROACH Monopolistic/Oligopolistic Industries and Interdependence of a few major competitors INTERNATIONAL PLC Reduces cost by shifting production to DCs LOCATIONAL ADVANTAGES FDI is easier than exporting or Licensing CONTRACT MANUFACTURES Cost Reduction : Manufacturing & Consolidation of Competitive Sourcing ASSURED ROI R&D Centers & Future Projects High Revenue
Benefits for Host Countries
Capital : Long Term Profit Repatriation Technology: Knowledge Transfer -Market Access -Increase in domestic Investment -Export promotion -Generating employment -Social effects -Spill Over : M/c tool industries in Ludhiana and Bangalore are due to SKF, Bosch, Mico, etc.
Cost for the Host Country
Investing Cos : May not serve the host countrys interests Out flow of earnings : Repatriation to home country - Import of substantial inputs from country of investor - Hiring expatriate managers - Investing country has controlling technology (ie) Charges huge technology fee - FDI can eliminate local firms : Infant and other home industries may suffer if they cannot compete
Benefits for Home Country
- Inward flow of earnings on a long term basis - High salaries for employees - Exposure to foreign markets COST FOR THE HOME COUNTRY - Initial capital flow is extremely large - Exports may decrease - Imports may increase if FDI is intended to serve the home country - Employment loss to the home country population - Profits are repatriated abroad They may not stay in the country for reinvestment
Impact Of FDI On Distribution Of Wealth
FDIs may affect countries BOP growth and employment objectives Under different conditions, countries want capital inflows because such inflows allow them to increase their imports The influx of capital may be from unilateral transfers ( such as foreign aid) or from receipt of FDI The more capital inflow a country receives , the more it can import and more it can run the trade deficit, FDI has become a more crucial factor in the effort to contribute capital to developing countries, particularly in the light of stagnating contributions from foreign aid
Impact On Individual FDI
Two extreme hypothetical scenarios of FDI highlight why countries need to evaluate the effects of each investment on their balance of payments. In the FIRST CASE : A MEXICAN MNE makes FDI when purchasing a Haitian owned company by depositing US Dollars in a Bermudan Bank for the former owners. The MNE makes no changes in management, capitalisation or operations therefore profitability remains the same However the dividends now go to the foreign owners rather than remaining in Haiti which means there is DRAIN on foreign exchange for Haiti and corresponding INFLOWS to MEXICO - In the SECOND CASE : A foreign MNE purchase idle resource( land, labour, materials or equipment ) in Haiti and converts them to the production of formerly imported goods.
Host Country Gains
Inflows of investments from FDIs can stimulate local development through the employment of idle resources. Companies will want to move resources , such as capital and technology abroad when the potential return is high especially to those markets where they are scarce. Certainly the mere existence of resources in a country does not guarantee that they will contribute to output. FDIs however may enable idle resources to be used. Oil Productions for instance requires not only the presence ot under ground oil deposits but also the knowledge of how to find them the capital equipment to extract it and the facilities to refine it. Simply pumping oil is wasteful without markets and transportation facilities FDIs can initiate the up gradation of resources by educating local personnel to use the equipment, technology, and new production methods seemingly minor programs such as promoting on job safety, can reduce lost worker time and machine downtime, etc.
