Research Report On tudy of FDI Activity in India and its Implications

Research Report On “Study of FDI Activity in India and its Implications”

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Acknowledgement I take this opportunity to extend my sincerest and unflappable admiration to Mrs XYZ, Faculty, XYZ for the cooperation and support she has rendered me in my endeavor. She provided me with the facilities and utmost co-operation for working on my project. She helped me facilitate my dissertation by providing me with adequate assistance at all times, valuable inputs & guidance at every stage of research process thus charting the project towards its successful completion.

I would also like to thank XYZ for having presented me with the opportunity to undertake such a project which has helped me develop deep insights about the Study of FDI Activity in India and its implications. Every kind of possible help and support was shown by the to make this project a success.

XYZ

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CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN This is to certify that the dissertation titled “Study of FDI activity in India and its implications” submitted by XYZ for the award of degree in Master of Business Administration has been completed under my supervision and guidance. This proves the candidate’s capacity for critical examination and sound judgment over the problem studied by him.

The work is satisfactory and complete in every respect and the dissertation is in a suitable form for submission.

Mrs. XYZ (Faculty Guide)

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TABLE OF CONTENTS

Index •

Synopsis

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Executive Summary

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What and Why is FDI

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Effect of FDI

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Different between Foreign and Domestic Investment

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Risks of FDI

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Argument against FDI

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Investment in Developing Countries

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Theory of FDI

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Variables in FDI Model

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Investment facilitation factors

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Investment promotions Model

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Cost and Benefit of FDI

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Strategy of FDI

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From India Scenario

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Policy towards FDI

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NRIs and PIOs

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Why we are Here?

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Why China

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Steps Taken By Government 4

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The Research •

Statement Of The Objective

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Primary Objective Of The Study:

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Scope Of The Study:

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Research Methodology

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Research Design.

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Sampling Plan:

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Data Collection

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Limitations Of The Study

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SYNOPSIS The success of the software industry has created a new faith in Indian brain power and this brain power is required to harness in production with efficiency and cheaper cost. NRIs can now acquire a few acre of land to construct multi-storage apartment.

This will give a flip to the housing sector which shows a slowdown in the economy.

The tax administration in India is perceived to be extremely hostile to the nonresident doing business in or with India.

A comprehensive legislature and policy framework needs to be promoted for a healthy market any move to facilitate, quick, efficient and transparent transaction in the real estate is the most soughed.

Will The current budget enable india to attract more foreign funds 23% no yes

cannot say 9%

68%

The Govt. recent idea of raising the FDI in the Public Sector Banks is most welcome but there are many hurdles in the way yet to be amended reduction of Govt. holding from 51% to 33% and increase of the voting right above 10%. The Govt. is yet to clear the program of allowing 100% FDI in the private sector bank through automatic route.

Deepak Parekh, chairman of the HDFC, private bank will be benefited from this increased in the limit from 44% to 74% and allowed voting right beyond 10%. By raising the FDI limit from 74% telecom operators like Bharti Televenture, Hutchison, BPL, Idea and spice will be able to raise its fund in the international market through equity route. An investment of Rs 5000 crores is required in the telecom sector in the next 3 years to meet the growing demand.

The union budget of 2003-2004 proposes to extent the facility of seeking an advances indirect tax ruling to wholly-owned subsidies of the foreign companies from the coming fiscal at present this facility is available only to the joint ventures.

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In India it cost the same for the firm to employ and to fire. Firm should be allowed to trim employee according to the market conditions. Extensive labour’s reform is the most sought. Higher income growth coupled with a persistence approach to reforms will attract substantially more FDI into India.

The Pravasi Bharatiya Divas Jamboree raises an important question what an important contribution can Non-resident and people of India origin can contributed?

Why Indian perform better outside rather when they are in India? We have everything but still we cannot convert them in to higher productivity.

According to recent survey, India is losing its sheen as a foreign investment destination, This does not gel with the recent increase in the flow of FDI OF $1.08 Billion in the first quarter of 2002-2003 which could go up to $8 billion once the RBI begin to align FDI data with international practices. But the worrying point is that we are receiving a lot less FDI than what we required. The tenth plan targeted a growth of 8% over 2% then the average annual growth rate achieving during the ninth plan. A two per cent increase in the GDP required a 7 percentage point increase in the investment. With saving continue to be 23% of GDP for quit sometime it will be impossible that it will go up by 5 percentage point to the required 28% of the GDP in the short run. China has demonstrated that this is possible in the short run if we can create a sound, investment friendly environment.

There are lesson from China that we should learned, in fact China FDI’s constitutes 90% from NRCs from Hong Kong, Thailand and Singapore in view of the labour intensive goods when it open its market in 1978. Despite being centralized economy it delegated powers for the FDI approvals in favours of the local authorities and provincial govt. which compete with each other to woo investors.

In the first place we have to put in place legislation on FDI to give the policy requisite visibility and build confidence among the investors. The policy have to be integrated in the over all national economic policy. Second states need to be given primacy in the approvals and taken on boards as stakeholders. Authorized local authority to set up SEZs and approvals of FDI. We need to provide quick international competitive platforms as strategic locations for relocation of labor intensive manufacture. Forth export oriented FDI to be given top priority with political and bureaucratic apparatus to catalyze export led growth. And last but not the least we have to think big, plan well and implement fast and speed up privatization process. Concentration on education is no doubt an important objective for long lasting benefits.

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My Project is base on the discussion of the above references by paying special emphasized on WHAT, WHY AND HOW.

EXECUTIVE SUMMARY Realizing the important contribution that private foreign capital can make to the economic development, the Industrial Policy Resolution of 1991 ushered in major changes to attract foreign investment in India. Such a positive and open-door policy of India towards foreign investment and technology transfer has been in contrast to the earlier restrictive approach. The sectors opened to foreign investment now are larger as compared to the earlier policy. The enlarged spheres of FDI entry now include mining, oil exploration, refining and marketing, power generation and telecommunications, insurance, defense, print media and tourist and hotel industries.

The government also announced the opening of the Indian stock markets to direct participation by Foreign Institutional Investors. The government has also amended the foreign Exchange Regulation Act, introduced current account convertibility, eased Statutory Liquidity Ratio and Cash Reserve Ratio on banks, reduced customs and excise duties, provided insurance for non-business risks including expropriation and so on. Following these liberalization, there has been an unprecedented growth in the inflow of foreign investment and technology transfer into the country. Since 1991, the composition of capital account has changed to a large extent. Non-debt creating inflows have replaced the debit creating inflows and have increased from about 6% during seventies and eighties to 43% during nineties. However, foreign investment is much lesser than the country’s potential to attract and absorb it.

Between 1991 and 2001, India has received on an average US$ 2.2 billion annually as foreign investment, as against China’s US$ 32.2 billion during the same period. India is placed at the 119th position in the foreign direct investment performance index of UNCTAD. India’s index value has been pt at 0.2 against China’s 1.2 and Sri Lanka’s 0.4 and even Pakistan’s 0.2 which ranked higher at 114 th position (performance measured by standardizing a country’s inflows to the size of its economy.

One can correlate the deceleration in macro fundamentals in recent years, adversely affecting India’s FDI potential rating.

India’s burgeoning population, debt and fiscal deficit are sustainable only if the country’s economy grows by at least 8% annually. This requires raising the level of investment from 22% of the GDP to 30%. As per the classical theory of economics 8

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by Keynes, this investment-saving gap must be financed through foreign investment.

Foreign investment should touch $8billion if India has to achieve 8% growth.

The special features of the book are as follows: It highlights the salient features of the policy, followed by the Government of India, as updated up to recent Budget, with regard to foreign investment.

It portrays the patterns in the FDI and portfolio flows by country sources, major industrial sectors and major recipient states of India.

It analyzes the extent and pattern of dependence of Indian corporate Sector on the foreign sources.

A study of the subsidiaries of foreign companies operating in India is the special feature of this book.

The impact analysis highlights the impact of interest rates on NRI deposits, the impact of FII investment of Stock Market Development in India and the impact of FDI and technology transfer on the FDI recipient companies with regard to technological capability building, export performance and foreign exchange inflow.

A study of the determinants of FDI and portfolio flow in India points out as to what factors affect the FDI and portfolio flows and what policy reforms are required to attract more foreign investment.

Special emphasized for the NRIs and PIOs ,their prospects ,problems and new policy to lure them. suggestion. some theory of FDI is explained which being useful to analyzed. other topics like some expert’s comments, risks of FDI, policy and brief comment on the improvement of this segment.

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What and why is FDI? Direct Investments are those investments in which the inflows of funds is for setting up the infrastructural sites i.e., if a foreign company wants to set up a car manufacturing plant, then this will be considered as direct investment. Every country would go for wooing more such investments, as it is very difficult to withdraw once the unit set-up starts functioning.

Foreign direct investment (FDI). It is certainly seen as being preferable to other forms of foreign capital inflow, such as commercial borrowing and portfolio investment. Furthermore, it is considered to be eminently advantageous in its own terms, and something to be actively sought by governments of developing countries.

Foreign investment is said to be “direct” when a company invests to take control of a venture abroad. For example, a company might buy land, buildings, equipment and inventory to set up a company abroad.

Foreign direct investments (FDIs) influence a host country’s economics in areas such as trade balance, technology transfer, competitive structure, and employment. Some studies, which have examined the effects of foreign direct investments in a host country’s economy, have found that foreign firms export a higher proportion of their output than local firms (Cohen 1975, Jo 1976).

Since the launch of "Manmohan-economics" by the Narasimha Rao government in 1991 - FDI has been touted as the magic word that will transform "under-developed" India into an advanced nation with a "modern" infrastructure.

Every government that has followed has dutifully talked of taking steps to encourage and expand FDI. Mr. Vajpayee in his inaugural address also spoke about the priority the NDA government would give to promoting FDI. In his speech, Mr. Vajpayee assumed that everyone understood and appreciated the benefits of FDI. Attracting foreign direct investment is at the top of the agenda of most countries around the world. Much recent research has focused on identifying which factors and policies can influence the location decision of multinational companies. These factors range from market size, to taxes, red-tape alleviation, laws, infrastructure, and investment promotion. The debate is still open on what combination of factors is the most effective for attracting FDI, especially in small developing countries The protection of foreign investment is typically considered a matter of international law, but domestic lawmakers have from time to time sought to influence the

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treatment of investors abroad through domestic legislation. In the early 1960s, for example, the United States Congress passed what would become known as the "First Hickenlooper Amendment." This law requires that the President terminate aid to any country that has seized American-controlled property, has repudiated or nullified contracts with Americans, or has "imposed or enforced discriminatory taxes or other exactions, or restrictive maintenance or operational conditions," and that has failed to "discharge its obligation under international law including speedy compensation for such property in convertible foreign exchange, equivalent to the full value thereof.

The statute represents an attempt on the part of the United States to provide an enforcement mechanism, through domestic law, that could carry out the American interpretation of international law. Since its adoption, however, the First Hickenlooper Amendment has been applied only twice, once against Ceylon in 1963 and once against Ethiopia in 1979.

It was already noted that effects (e.g., technology transfer) of FDIs on a host country’s economy depend on the nature of the undertaken investments (Chen 1987).

In this regard, Dunning (1994) emphasized “re-evaluating the benefits of FDI by explaining that each type of FDI has its own particular way of upgrading the competitiveness of host countries….” A fundamental distinction, therefore, needs to be made both in promotional methods and in incentives offered by host countries across types of FDI projects (Contractor 1995).

The greater resilience in FDI flows than that of capital market flows in the face of the financial crisis may be partly due to the fact that FDI is more responsive to long-term growth trends than short-term changes in financial returns. FDI inflows are also influenced in part by access to natural resources and human capital, which were not immediately affected by the crisis.

World FDI flows have continued to grow rapidly and even accelerated somewhat in the second half of the 1990s. These flows reached $1.3 trillion in 2000, increasing by 14% from 1999, though this pace was slightly slower than in the previous two years.

Industrial countries accounted for much of this upsurge in FDI flows. Their share in the world FDI inflows has risen from a low of 65% in 1994 to 84% in 2000.

Why does a company invest abroad?

There are a myriad of reasons why a company decides to invest abroad. It may be seeking new customers, it may find that there is a higher profit margin abroad it may wish to benefit from economies of scale by increasing total output, it may which to access new sources of material or new technology abroad it may face high tariff

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barriers if it does not invest directly in a foreign county y rather than import to that country and so on.

Types of FDI: Vertical vs. Horizontal The types of FDI can be categorized as vertical vs. horizontal based on the production function activities. Caves (1982,p.2) described a horizontal FDI as establishing factory facilities in different countries in order to make same or similar goods he referred to a vertical FDI for establishing plants abroad in order to produce output that serves an input to its other parent or subsidiary plants. Furthermore, vertical FDI projects can be divided into two types based on the flow of interrelated production process functions, i.e.; downstream vs. upstream integration. In the case of downstream vertical integration, a foreign subsidiary performs an assembly function by using inputs supplied by the parent firm or other sister subsidiaries. on the contrary, in the case of upstream vertical integration (component specialization), the role of a foreign subsidiary is to produce inputs and to supply them to the parent or other sister subsidiaries. The effects of FDI on a host country’s economy are different across the vertical vs. horizontal FDI projects.

Trade effects It is generally known that foreign affiliates play a significant role in the expansion of the host (especially developing)country’s manufactured exports (Helliner 1973, Cohen 1975, Nayyar 1978). For instance, it is a known fact that “transnational corporations account for a considerable share of exports (i.e., approximately onethird or more) in at least six newly industrializing countries. These corporations have been responsible for the strong export performance of this group of countries. In Argentina, the Republic of Korea and Mexico, the export amount approaches onethird. in Brazil, it is over 40 percent and in Singapore it exceeds 90 percent” (UNCTC 1985,p. 113). It is also noted that the trade effects of foreign investments very among industries, regions as well as foreign ownership (Blomstrom 1990).

However, it is believed that the role of FDI in a host country’s trade can vary with different types of projects.

The impact of FDI on the trade balance of a host country should be analysed base on four distinct categories: (1) “export-creating”, (2) “export-discouraging”, (3) “importsaving”, and (4) “import-creating” (Mac Dougall 1960). However, focusing on the FDI project as a unit of analysis is difficult to capture the effects of “exportdiscouraging” and “import-saving”.

Export-Creating Effects 12

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Export-creating effects are greater in vertical FDI projects than in horizontal FDI projects.

Vertical integration represents an interdependency of the stages of production, which are linked by a flow of intermediatesz (parts, semi-processed) products between countries. Therefore, vertical FDI, by nature, induces intra-firm trade activities. In the case of upstream vertical integration, a foreign subsidiary especially performs assembly functions and supplies end products to the parent firm and/or other sister subsidiaries that are located in different countries.

Import-Creating Effects Import-creating effects are greater in vertical FDI projects than in horizontal FDI projects.

Due to the nature of the adjacent stage to a related set or production processing activities, vertical FDI tends to rely more on parent companies and other subsidiaries for tangible and intangible resources. This reflects an activity that is more importcreating in view of host country. For instance, in an off-shore assembly operation which is a typical type of vertical FDI, core inputs are usually imported from the parent company or other subsidiaries.

In contrast to vertical foreign investments, the horizontal foreign investments target relative to local market demands has an import-substitution effect. This demonstrates that horizontal FDI projects are less import creating than vertical FDI projects.

Since the effects of FDIs on the host country’s economy depended on the nature of the undertaken investment projects, FDI ramifications should be examined depending on the types of FDI projects. Various types of foreign investment projects were categorized on the basis of production function, i.e., the vertical vs. horizontal investment.

Based on the 108 FDI projects undertaken. It was found that vertical investment projects have a grater effect on both export-creation and import-creation activities than so horizontal foreign investment projects.

Considering the impact of FDI inflows on the domestic financial resources and investment for development, it can be recognized that the FDI inflows can supplement the two in the host developing countries. While all developing countries try to attract FDI inflows do not have a major influence on the total investment in most developing countries. In fact for all developing countries the ratio of FDI to

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gross domestic capital formation averaged only 7.4% over the 1991-98 period, although it is higher in the manufacturing sector.

DIFFERENCES BETWEEN FOREIGN AND DOMESTIC INVESTMENT When an investor considers a foreign investment, however, he immediately faces a number of complications found in the domestic marketplace.

What then is different about foreign investment? On the financial front, multiple currencies and multiple interest rates complicate financial management. Equally important, the operating environment involves multiple legal system, tax authorities, and government policies. In a nutshell, foreign investments must contend with a simple feature that has little impact in a domestic environment: international borders.

Crossing an international border will generally result in a number of important consequences.

Most of the financial complications resulting from crossing an international border can be traced to two factors which have not yet been covered in this chapter: crossing a border means that (1) multiple currencies have to be used and (2) multiple governments can intervene. Multiple currencies imply that investors must worry about exchange rates and exchange rate changes as well as confront multiple interest rates and costs of capital. Multiple governments imply that investors must decipher multiple tax codes, as well as the way domestic and foreign tax codes interact, and must consider additional political interventions which affect operations.

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RISK OF FDI HEDGING THE RISKS INVOLVED IN FOREIGN INVESTMENT Whether the method used for measuring the risk attached to foreign investment and adjusting the return for this risk all analysts agree that an attempt should be made to eliminate or at least minimize the risks attached to a specific foreign project if this is feasible The more common risks encountered in foreign ventures are: •

Country and political risk

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Technological risk

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Exchange rate and inflation risk

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Cost and pricing risk

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Credit risk

When two parties enter into a contract in a domestic setting, we expect them to negotiate, subject to transaction costs, the most efficient possible agreement. When a potential investor enters into an agreement with a host nation, however, the two will not generally arrive at the most efficient agreement. The parties are unable to reach the optimal agreement because of the unusual nature of their relationship and the dual roles played by the host country. The host country is not merely one of the contracting parties, but is also able, through legislation, to establish and change the legal rules under which the investor must operate.

Domestic legal structures, critical to the bargain struck between two private parties under domestic law, are no longer adequate. The central problem is that a sovereign state is not able to bind itself to a particular set of legal rules when it negotiates with a prospective investor. Regardless of the assurances given by the host prior to the investment and, importantly, regardless of the intention of the host at the time, if it later feels that the existing rules are less favorable to its interests than they could be, it can change them.

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Because the host may decide to change the domestic laws to suit their own purposes, the investor cannot rely on those laws to protect his interests. The only alternative legal structure is international law.87 unlike domestic law, the host cannot change the requirements of international law in order to suit itself. Unfortunately for both the potential investor and the potential host who wishes to reassure a potential investor, international law does not directly govern the relationship between states and firms.

Because the host may decide to change the domestic laws to suit their own purposes, the investor cannot rely on those laws to protect his interests. The only alternative legal structure is international law. Unlike domestic law, the host cannot change the requirements of international law in order to suit itself..

That potential hosts and investors cannot sign a binding and enforceable contract under international law explains why the debate over the protections afforded by customary international law was so important. The lack of a mechanism to allow contracting between firms and states creates a dilemma that is sometimes referred to as a problem of "dynamic inconsistency." Dynamic inconsistency describes situations in which a "future policy decision that forms part of an optimal plan formulated at an initial date is no longer optimal from the viewpoint of a later date, even though no new information has appeared in the meantime."

The particular problem facing foreign direct investment, one must consider how the lack of contracting options affects the incentives of a government in its dealings with a particular foreign investor. Initially, while negotiations with a firm are taking place, the government of a potential host country, by assumption, wishes to encourage the investor to invest in its country. The firm, on the other hand, would like to achieve the greatest possible return and will invest in the host country only if that country offers the greatest anticipated profit. the host may agree to offer certain tax advantages to the investor, it may agree to allow the repatriation of profits and it may waive certain import restrictions that are in place in the country. The firm, on the other hand, will provide benefits to the country in the form of employment, technology transfers, and so on. The firm might also agree to a set of conditions on its behavior. It might reinvest a certain percentage of profits in the business, may agree to certain labor and environmental standards, and may offer to provide some services to the community in which it is located.

It is not possible to write such a contract. This makes the investment problem much more difficult. Even if an investment is valuable enough to make it worthwhile for 16

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the country to commit to some form of concessions to benefit the investor -favorable tax treatment, for example -- it cannot do so. The host country can do no more than make non-binding promises to the potential investor. If the investment takes place, it will be based on these promises and nothing more.

Once the firm has sunk its capital into the investment, the relationship between the parties undergoes a dramatic transformation. The host country, in particular, faces an entirely different set of incentives. It no longer needs to offer benefits sufficient to attract the investment; it only has to treat the investor well enough to keep the investment. The difference between the two time periods (before and after investment) comes about because both the host and the investor know that once the firm has made its investment, it typically cannot disinvest fully. In other words, once it has invested, withdrawal would impose a cost on the firm. The host country can take advantage of this situation, and extract additional value from the firm by, for example, increasing the tax rate beyond the level that was agreed upon when the investment took place. Had the firm known that the tax rate would be higher than the agreed upon level, it may have chosen to invest elsewhere, or not to have invested at all. Once the investment is made, however, it may be cheaper for the firm to simply pay the higher tax rather than attempting to disinvest in order to reinvest in a different country.

In global terms, the efficient outcome is achieved if investment takes place where it will earn the greatest total return. The dynamic inconsistency problem will discourage investment that would be desirable because the firm realizes that the host will squeeze additional value from the firm after the investment is made -- causing the firm to avoid certain investments altogether. Furthermore, in cases in which the host is considering expropriation, it does not face expectation damages.

Regardless of the agreement that might be reached between an investor and the host state, once the investment is in place, the host can abrogate the agreement and impose whatever conditions it chooses, including expropriation, as long as it pays "appropriate" compensation. The dynamic inconsistency problem will increase the expected cost of investment, and will, therefore, deter some investors. Given the assumption that investment decisions are not price sensitive, however, there will be only a modest reduction in investment relative to a contracting regime.

Jayati Ghosh - (professor of economics at Jawaharlal Nehru University, and columnist for Frontline magazine) - have been warning of the potential dangers associated with FDI. He have pointed out how the majority of FDI has come in the form of speculative investments in India's stock market, where select scripts have

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seen phenomenal jumps in their stock prices, while stocks of some major Indian manufacturing companies have languished at very low valuations. They have also warned that such speculative investments could leave just as easily as they came, leading to greater instability in India's financial markets.

It was pointed out how 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. Neither have these companies brought in any valuable nor improve new technology.

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ARGUMENTS AGAINST FOREIGN INVESTMENT Although foreign investment tends to contribute much needed resources to host countries and developing countries sin particular, many view it with misgivings.

There are many arguments against foreign investment. Most of these arguments have to do with conflicts between company goals and host government aspirations: Foreign investment brings about the loss of political and economic sovereignty.

It controls key industries and export markets.

It exploits local natural resources and unskilled workers.

It undermines indigenous cultures and societies by imposing Western values and lifestyles on developing countries.

It seems that, while foreign direct investment has the potential to contribute positively to development, there is no guarantee that it would have no harmful impact on host countries. But the question of foreign investment need not be a zero-sum game. A feasible framework for investment must be set up to define the rights and responsibilities of both parties. This framework should allow for a reasonable return to the investor and positively contribute to the development of a host country.

Sucheta Dalal, (columnist for the Economic Times and the Indian Express) reveal that even in the power and telecom sectors, FDI has come at a very heavy price. In a detailed review of the highly controversial Enron Power project, Sucheta Dalal exposed the Maharashtra Government's lies and obfuscations in this regard. She pointed out how the Maharashtra State Electricity Board (MSEB) was paying roughly 5 Rs. a unit to Enron, but had reduced it's purchases from the Tata Electric Company which was selling power at under 2 Rs. a unit. Since the MSEB was selling power at 3 Rs. a unit, it was effectively subsidizing the Enron Power Co.

That it may either bankrupt the state electricity board - or make the electricity generated completely u that it may either bankrupt the state electricity board - or make the electricity generated completely unaffordable for the Indian consumer. But it isn't the power sector alone, where FDI flows have been problematic.

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Unaffordable for the Indian consumer. But it isn't the power sector alone, where FDI flows have been problematic.

David Woodward (The next crisis? Direct and Equity Investment in Developing Countries; Zed Books, London and New York, 2001), in his book reveals how little we actually know about even the extent of FDI, and especially stocks of FDI, in different countries. It emerges that official data - including those produced by the International Monetary Fund (IMF) and the World Bank - almost certainly underestimate to a substantial extent, the true value of inward FDI stocks and their absolute rate of increase. Far from trying to improve this state of affairs, the Fund and the Bank have promoted the liberalization of foreign investment regimes, which actually tends to reduce the availability of data and even the possibility of collecting it. Such lack of knowledge of the extent of inward FDI stocks can even be dangerous in other ways.

Similarly, Woodward indicates how misleading it may be to assume that FDI necessarily contributes to increased employment. In fact, the employment effect will depend on a whole range of variables, including the balance between Greenfield FDI and the purchase of existing assets; the labour intensity of new productive capacities or new organizational techniques; the extent to which FDI-based production substitutes for existing production and their relative labour intensities, and so on. In general, therefore, it is not the case that FDI creates much more net employment unless it is really very large in scale and heavily involved in Greenfield activities, and even in such cases it need not be more employment-intensive.

Large-scale flows of FDI also have effects on other domestic economic policies.

Imposes severe constraints on domestic government policy because of the fear of withdrawal, FDI is embodied in the presence of multinational corporations (MNC’s) which tend to be large and powerful lobbies in the matter of domestic policies. To attract more FDI by governments with over-optimistic expectations regarding such investment means that all sorts of concessions are offered, which may turn out to be very expensive for the economy in the medium or long term. Woodward suggests that such FDI promotion tends to focus heavily on the demand side, in terms of requirements imposed on host countries, which involve changing their own policies in order to make themselves more attractive.

FDI can contribute to the underlying fragility of an economy and make it more susceptible to balance of payments crises.

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First, as rapidly growing stocks of inward FDI generate similarly growing profits that form part of the foreign exchange outflow. Secondly, when FDI fuels an increase in imports, such as capital goods for investment projects and other such payments.

Thirdly, because current foreign exchange costs of MNCs typically exceed the foreign exchange they tend to earn through exports of import substitution. Fourthly, through the role played by foreign affiliates, including those FDI can contribute to large current account deficits, which tend to precede financial crises. They can also add to both the economic shocks preceding crises and to the process of contagion. this involved in retailing, in changing patterns of consumption through advertising and brand promotion.

Woodward shows that positive effects arise only where new productive capacity is created in the export sector, or in very strongly import-substituting sectors. If FDI takes the form of purchase of existing capacity, even in the export sector it will have a negative foreign exchange effect even if export production goes up, unless the productivity of capital increases enough to offset the other increased foreign exchange costs. At lower levels of import substitution, the effects of "Greenfield" FDI on new capacity are much more ambiguous, and may be negative.

But in the new climate, in which developing country markets are seen as riskier and international investors are becoming more risk-averse, efforts to attract more FDI will involve even more concessions on the terms of such investment. "The result will be to accelerate the build-up of liabilities without a commensurate effect on the now seriously limited capacity of national economies to bear them".

The Budget speech of the Finance Minister, in which he announced a reduction on corporate tax paid by foreign companies from 48 per cent to 40 per cent, despite the shocking shortfalls in tax collection. This concession was explicitly declared to be a means of wooing more FDI into the economy.

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IS FOREIGN INVESTMENT RISKIER THAN HOME INVESTMENT? The traditional view of foreign direct investment is that type of investment is riskier than investment in the home country. The main differential factor is knowledge, a company knows more about local conditions than conditions in a foreign country.

In recent years the traditional view that foreign investment is riskier than home investment has been questioned.

The incremental risk added to the earnings of a company undertaking a direct foreign investment can be measured in much the same way as one can measure the risk added to the current earnings of the company by introducing a new product or project onto the market.

A new product can diversify the existing product portfolio of a company in such a way that it reduces the variance on the income from the product portfolio. The new product can help to stabilize the earnings of a company and so reduce the “beta” or risk attached to the earnings figure.

Much of the research that found that foreign trading and investment actually reduced the risk attached to the earnings of a company worldwide was conducted and published in the 1970s.

Rugman (19750), after adjusting for several factors, found that the share price or US companies with a higher than average percentage of foreign sales was less volatile than companies with a lower percentage or foreign sales.

Agmon and Lessard (1977) found that the share of multinational companies with a high fraction of foreign sales enjoyed lower betas than companies with a low fraction of their sales being sole abroad. For example, firms with 1% to 7% of foreign sales had betas averaging 1.04. Firms with 42% to 62% of foreign sales had betas averaging 0.88. As on e would expect companies with a high fraction of foreign sales tend to invest more abroad.

The basic cause of this apparent anomaly is the lack of correlation between the growth rates of the different countries of the world. Whereas local sales are falling during a recession in one country the sales in some other country are booming. It is true that the growth rates of the economies of the advanced industrial countries are

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auto correlated (correlated through time) but the rise and fall in economic activity do not coincide in time.

When this low correlation between the growth pattern of different countries is plugged into the model of foreign investment the result reduces the variance on the income stream of the multinational company whose income is diversified over many countries.

Investment in developing country In recent years, foreign direct investment ("FDI") has grown at an unprecedented rate. Between 1986 and 1990, total world FDI flows increased from US$88 billion dollars to US$234 billion, representing an average rate of increase of twenty-six percent in nominal terms and eighteen percent in real terms. From 1980 to 1993, the stock of foreign investment increased at an average annual rate of eleven percent in real terms, reaching a total of $2.1 trillion in 1993. A significant proportion of FDI flows is directed at developing countries. FDI flows to these countries grew from $13 billion in 1987 to $22.5 billion in 1989 to $90.3 billion in 1995.

Developing countries have two options of raising capital. First, by creating capital surplus from internal sources of capital formation such as controlling consumption, reducing foreign imports and other measures such as taxation, public borrowing, budgetary savings from current revenue and profits of public enterprises.

Bilateral Investment Treaties (BITs) have become the dominant mechanism for the international regulation of foreign direct investment. The tremendous popularity of these treaties is puzzling because they provide investment protections that exceed those offered by the former rule of customary international law, the Hull Rule, to which developing countries have long objected on sovereignty grounds. Furthermore, as the paper demonstrates, BITs may be welfare reducing for developing countries.

By forcing LDCs to compete for inward foreign investment, and by providing a mechanism through which developing countries are able to make binding commitments to investors, BITs may reduce the benefit developing countries obtain from foreign investment.

Because the treaties are bilateral in nature, however, they offer an LDC an advantage over other countries in the competition to attract investment. For this reason, individual countries are willing to sign such agreements, despite the fact that LDCs as a group are harmed.

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The conflicting views of developed and developing nations on the question of compensation for expropriation is evidence of the predictable fact that one's view regarding the appropriate standard of compensation is determined by whether one is a net importer or exporter of investment capital. It is the direction of the flow of investment capital and wealth and power disparities between developed and developing countries that gives them different perspectives on questions of investment regulation.

A developing country would not be able to commit itself credibly to respect agreements with investors and would, therefore, have a reduced ability to negotiate with prospective investors in order to attract investment. This will drive up the cost of investment and cause profitable investments that both the host and the investor wish to undertake to be foregone because they are not rendered unprofitable by the dynamic inconsistency problem. This is an inefficient result.

Most importantly, the investor may choose to invest without any binding commitments from the host country because LDCs( least develop countries) offer advantages that are unavailable in the investor's home country (e.g., low labor costs, favorable environmental or labor laws, locational advantages, natural resources, and so on). The risk that the host will attempt to seize value from the investor can be thought of as a random tax. The investor knows that he may or may not be subject to this tax. He will invest despite this risk if the benefits are sufficiently large.

For developing countries as a group, however, the sensitivity of investment demand is likely to be much lower. Consider a particular firm that is considering an investment in a developing country. If the cost of investment rises in one country, it is likely that the firm could find another country that also meets its needs. On the other hand, if the cost of investment rises in all developing countries, the firm must either invest despite the increased cost or abandon its intention to invest in a developing country. Because the advantages offered by one developing country are much more likely to be found in another developing country than in a developed country, the firm is much more likely to invest in a developing country despite such an increase in the cost of investment Because investment decisions, with respect to investment in LDCs as a group, are relatively inelastic -- meaning that a change in price leads to only a small change in the amount invested -- a large amount of foreign investment will take place even in the absence of a binding contractual regime between host governments and firms.

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It is demonstrated that although an individual country has a strong incentive to negotiate with potential investors -- thereby making itself a more attractive location than other potential hosts -- developing countries as a group are likely to benefit from forcing investors to commit to a country through their investment before the final terms are established . Thereby giving the host a much greater ability to gain value from the investment. Put another way, developing countries as a group may have sufficient market power in the "sale" of their resources as host countries that if they act collectively they stand to gain more than if they compete against one another and bid down they receive.

The customary international law that has traditionally applied to takings by the host state is referred to as the "Hull Rule," in reference to Secretary of State Cordell Hull who authored the most famous articulation of the rule in 1932. The key words, penned by Hull, that have come to represent the traditional "full compensation" position is that the expropriation of property owned by foreigners requires "prompt, adequate and effective" compensation.

The world is very different today. The customary international law that once governed foreign investment was successfully called into question by developing states who advocated an alternative international norm and who ultimately left the international community without any legal standard having the status of customary law. The Hull rule was challenged by developing countries who claimed, on sovereignty grounds, the right to determine how they would treat investors and the standard of compensation that should apply if that treatment was sufficiently harmful.

Although many countries continue to advocate the Hull Rule, a sufficient number of developing states oppose it to ensure that it can no longer be considered a rule of customary law.

Furthermore, had developing countries decided, as a group, that it served their interest to provide greater protections for foreign investors, they could have adopted additional General Assembly Resolutions or signed multilateral agreements to that effect. They have done neither. One possible explanation of the behavior of LDCs is that they have come to conclude that they will be better off if they allow themselves to be bound through a contractual mechanism with investors.

LDC behavior can best be understood through a strategic analysis of the incentives facing developing countries individually and as a group. first considers the efficiency implications of each regime, and then examines the impact of each regime on the distribution of the gains from investment.

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Once an investment is made, the firm and the host state face one another in a new negotiating posture. The host has the power to unilaterally change the conditions under which the firm operates and the firm's only defenses are the ability to stop operations and pull out of the country and the reputation concerns of the host. It would, therefore, be possible for the host to extract considerable surplus from the firm through increased tax rates, restrictions on the repatriation of profits, domestic content regulations, and so on. LDCs, therefore, are better off. Although there may be a small reduction in total investment, developing countries will gain much more from each dollar of foreign investment that does take place.

Most developing countries have moved to market oriented and private sector led economies.

There is widespread reduction and removal of trade barriers, deregulation of internal markets privatization and liberalization of technology and investment flows at the national level.

Many developing countries and economies in transition have concluded bilateral treaties to protect foreign direct investment (FDI) and avoid double taxation. A number of regional schemes such as the EU (European Union), NAFTA (North American Free Trade Agreement), ASEAN (Association of South-East Asian Nations) and MERCOSUR (Southern Common Market), have reduced barriers to FDI or are in the process of doing so, facilitating intra-regional investment and trade flows. At the multilateral level, the General Agreement on Trade in Services has contributed to the liberalization of FDI in services. The FDI global regime that has emerged after these changes though uneven, is much friendlier towards foreign investors than in the past. This is in the context of the unprecedented changes of the late 1980s and early 1990s. The first section of this chapter focuses on these changes. The second section specifies the policy challenge for the developing countries. The third section specifies some serious concerns for the Indian economy.

Finally, we must consider whether or not it is reasonable to assume that investment in developing countries would continue even if LDCs were unable to make binding commitments. Because the lack of a method for creating binding contracts has the effect of raising the costs of investing, whether it is reasonable to assume that the demand for the resources of LDCs is relatively insensitive to changes in the cost of investing. In other words, we are asking whether developing countries, if they behave as a group, have monopolistic power. If they do not have monopolistic power, potential investors faced with the dynamic inconsistency problem will simply choose to invest in developed countries -- where the risks to the investment may be considered less severe. The assumption can be justified on at least two grounds. First, although developing countries and developed countries share certain traits, there are 27

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enough identifiable traits of developing countries that are different from those of the developed world to support our assumption. For example, labor in developing countries is often extremely inexpensive relative to developed countries. Even the threat of an increase in the wage rate in an LDC may not deter an investor because even if there were a substantial increase in the cost of labor, it would remain below that of the developed world. Similarly, developing countries have natural resources that do not exist in developed countries, or that are not as abundant. In addition, the legal and regulatory climate of developing countries may be more advantageous for investors.

Economic development remains an urgent global need. The need for economic development is self-raised as an automatic consequence of the globalization.

Although many countries have achieved significant increases in income in the last few years, there still exist great international inequalities in the level of income. The lower class of nations is still far bigger. More than two-third of the people live in countries where the per capita income is only a tiny fraction of what it is in the highly developed countries. To raise the standard of living of the people in such countries and to enable them to use the fruits of scientific and technological miraculous advances in agriculture, industry transport, communication, education, health services ad other fields, it is almost essential that in such economies, capital formation should take place at a higher rate than before, so that the big developmental projects may be financed properly. Thus, for rapid economic development, the central problem is capital formation.

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Theories of FDI

Major theories of direct foreign investment There are many theories of DFI some compete with each other in explaining DFI, and some complement each other. In this section, we will cover six major, distinct theories, although there will occasionally be overlap.

Technological Advantages A technological advantages theory of DFI asserts that firm specific advantages which explain why firms expand domestically also explain why they expand aboard.

This theory is most closely identified with Hymer (19860, 1976), but is also examined by Kindle berger (1969) and Caves (1971).

Oligopoly Models Some industrial organization approaches to DFI have been formulated. Oligopoly models of DFI that use a growth motive for corporations or a desire to maintain and increase market share as the starting point are principal among them.

Furthermore, no specific advantages are associated with the host countries. In this situation, DFI would be determined by variables other than the rates of return.

Exchange Risk Theory Another macroeconomic theory of DFI is Aliber’s (1970) exchange risk theory, in which the risk that exchange rate changes will severely alter the home currency value of a foreign investment provides a barrier to portfolio investment and intermediated investment by risk averse investors.

Evaluation of theories of DFI This section briefly assesses how each theory of DFI meets the following three criteria (1) locational advantages (2) why DFI is chosen over portfolio investment

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and intermediated investment – or the existence of an overcompensating ownership advantage, and (3) the prevalence of cross-hauling in DFI. It accounts for locational advantage by viewing source countries as those countries with technological advantages and host countries as those without.

Currency based Approaches The currency based theories are normally based on the imperfect foreign exchange and capital market. One such theory developed by Aliber (1971) postulates that internationalization of firms can best be explained in terms of the relative strength of different currencies. Firms from strong currency countries move out to weak currency countries. in a weak- currency country, the income stream is fraught with greater exchange risk. As a result, the income of a strong currency country firm is capitalized at a higher rate. In other words, such a firm is able to acquire a large segment of income generation in the weak currency country’s corporate sector. The merit of Aliber’s hypothesis lies in the fact that it has stood up to empirical testing.

FDI in United States, Canada and the United Kingdom has been found in consistency with the hypothesis. However, the theory fails to explain why there is FDI in the same currency area.

MacDougall-Kemp Hypothesis: The literature explaining why a firm seeks to make FDI is ample. One of the earliest theory was developed MacDougall (1958) , subsequently elaborated by Kemp (1964) . Assuming a two-country model—one being the investing country and the other being the host country and the price of capital being equal to its marginal productivity. They explain that when capital move freely from one country to another, its marginal productivity tends to equalize between the two countries. This lead to improvement, in efficiency in the use of resources which leads ultimately to an increase in welfare. So long as the income from foreign investment is greater than the loss of output the investing country continues to invest abroad because it enjoy greater national income than prior to foreign investment. The host country too witnesses increases national income as a sequel to the greater magnitude of investment that it is not possible in the absent of foreign investment inflow.

PRODUCT CYCLE THEORY:

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Hymer explained ‘why ‘ foreign investment takes place, Hood and Young explain “ where “ foreign investment takes place , but it was Raymond Vernon (1966) who added “when” to the “why” and “where” based on data obtained from US corporate activities. Raymond Vernon theory is known as the Product cycle theory.

Raymond feels that most of the products follow a life cycle that is divided into three stages. The first is known as the “innovation” stage. In order to compete with other firms and to have a lead in the market the firms innovates a product through research and development. The product is manufactured in the home country primarily to meet the domestic demand, but a portion of the output is also exported to other developed countries. The quality of the product, and not the price, forms the basis of demand because the demand is price – inelastic at this stage.

The second stage is known as “maturing product’ stage. At this stage, demand for the new product in other developed countries grows substantially and turns price elastic.

Rival firms in the host countries itself began to appear at this stage to supply similar products at the lower price owing to lower distribution cost, whereas the product of the innovator involves the transportation cost and tariff which are imposed by the importing government. Thus in order to compete with the rival firm, the innovator decides to set up production unit in the host countries itself that would eliminate the transportation cost and tariff. This leads to internationalization of production. The imposition of tariff in the host country encouraging foreign direct investment is confirmed by Uzawa and Hamada, but they feel that entry of foreign capital in protected industry reduces welfare in the host country.

Politico-economic Theories The politico-economic theories concentrate on political risk. Political stability in the host countries leads to foreign investment therein (Fdatehi-Sedah and Safizedah, 1989). Similarly, political instability in the home country encourages investment in foreign countries (Tallman, 1988). However, Schneider and Frey (1985) believe that the theory underlying the political determinants of FDI is less well developed than those involving economic determinants. The political factors are only additive ones influencing foreign investment.

The Electric Paradigm Dunning’s eclectic paradigm is combination of the major imperfect market based theories of FDI, viz., industrial organisation theory, internalization theory and location theory. It postulates that at any given time, the stock of foreign assess owned by a multinational firm is determined by a combination of firm specificity or 31

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ownership advantage (O), the extent of location bound endowments (L), and the extent to which these advantages are marketed within the various units of the firm (I).

Dunning is conscious that configuration of the O-L-I advantages varies from one country to another and from one activity to another and that foreign investment will be greater where the configuration is more pronounced.

What should a theory of DFI seek to explain?

The first challenge for a theory of DFI is to determine which countries will be source countries (or home countries) and which will be host countries, an issue often referred to as the locational indication. In other words, a theory of DFI should explain data one country patterns of investment, or why certain countries (such as Japan) tend to be home countries and certain countries (such as Mexico) tend to be host countries.

Theories of DFI should therefore indicate something in addition to or instead of the interest rate argument for locational indication in an effort to explain why project rates of return are higher abroad than they are domestically.

Government policies that create market imperfections can also play a part in creating locational advantage. Large expanding markets may offer high rates of return too. A company may wish to set up production in such a country, rather than simply export, to lower transportation costs and to take full advantage of the opportunities such markets present. This may be another explanation for the manufacturing rush into Europe. A tax argument is also associated with location advantage

WHAT ARE THE KEY VARIABLES IN THE DIRECT FOREIGN INVESTMENT MODEL? The following questions need to be asked before a company decides to make a direct investment in a foreign country: What increase in “incremental” demand for the products of the Company will result from the foreign investment?

At what price in terms of foreign currency can the goods or services be sold in the foreign market? What is the price elasticity of demand for the product in the foreign market?

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What are the fixed cost and variable costs of production in the foreign market at various levels of output?

What is the full cost of the investment? How much of this cost can be recovered if the project fails? What proportion of the cost of the investment can be bought in the foreign county and how much needs to be imported? Imported from where? What grants and tax concessions can be negotiated with the government in the foreign country?

What are the working capital requirements for the foreign project? Will these requirements be very different from the requirement in the home country? For example, must higher levels of inventory be maintained to service production because of increased distance from suppliers?

What is the expected future rate of inflation in the foreign country? How disruptive would a high rate of inflation be to production and sales abroad? How will the predicted rate of inflation impact on the exchange rate between the home and the foreign currency?

What is the cost of funds in the foreign country? What proportion of these funds can be faired locally and what proportion must be imported from abroad? How has the cost of funds moved in recent years in the foreign country?

Is this investment project likely to be a permanent project or a capital venture with a fixed life? If the lifetime is short what is the likely terminal value of the project?

What are the exchange control regulations in this country? What are the rules regarding repatriation of profits from this country? Are these rules applied rigorously?

How stable is the exchange rated between the foreign and home currency? Are devices such as forward markets, options and swaps available in the foreign country or elsewhere to hedge exchange rate risk?

How stable is the government of the country in which the investment is to be made?

What is the political risk index attached to this country by political risk assessors? what tax rates and regulations are imposed in the profits made by companies in the foreign country? Are any subsidies available to encourage foreign investment? What is the-holding tax rate on dividends?

The above set of questions presents a formidable list of things that need to be found out before a foreign direct investment can be properly assessed, yet it represents only

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a fraction of the facts that need to be garnered by an investment team before a decision can be taken to make a foreign investment.

The Eclectic Theory of John Dunning sets out a background for the motives for and determinants of foreign direct investment and portfolio investment. the ownership, location and internationalization factors have been identified for the analysis of the determinants of the Foreign Direct Investment and Portfolio Equity Investment flows in India.

Economic Stability of the Country Monetary and fiscal policies, which determine the parameters of economic stability such as the interest rates, tax rates and the state or external and budgetary balances, influence all types of investment, domestic or foreign.

Investment and Savings Rates in East and South East Asian economies have, by and large, averaged higher than those registered in Latin American economies. Besides, such rates have risen from one sub-period to the other in the former region. The proportion of FDI in domestic investment has been found low till 1990 but has gone up subsequently in all the sample economies except in Korea and Thailand where it has gone down.

The influence of FDI on savings and investment has been positive (statistically significant) only in three economies namely Chile, Korea and Thailand. The experience of Argentina and Philippines in contrast where FDI has had a negative influence on savings. The influence of FDI flows on national economies of the developing countries, therefore, may be viewed with caution.

MODE OF INVESTMENT Economic Determinants Natural Resources The most important host-country determinant of FDI has been the availability of natural resources. According to Dunning, in the nineteenth century much of FDI by European, United States and Japanese firms was prompted by the need to secure and economic and reliable source of minerals, primary products for the investing industrializing nations of Europe and North America.

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From a host-country’s perspective, the relevant economic determinants for attracting market seeking FDI include market size, in absolute terms as well as in relation to the size and income of its population, and market growth.

Created Assets The availability of low-cost unskilled labour largely immobile, has been the most prominent economic determinant of FDI. This is so especially for TNCs seeking greater efficiency in producing labour intensive final products or for TNCs producing final products for which some stage of production, geographically, separable from other stages, is intensive in the use of unskilled labour.

Investment Facilitation factors Investment facilitation factors include promotion efforts, the provision of incentives to foreign investors, the reduction of the “Hassle costs” of doing business in a hostcountry (e.g., reducing or eliminating corruption and improving administrative efficiency), and the provision of amenities that contribute to the quality of life of expatriate personnel.

Investment promotional measures Promotional measures are taken to shorten the delayed reactions of investors to emerging investment opportunities or to help investors, especially small and medium sized firms, discover new opportunities that they would not find on their won. Such actions are aimed at shortening the psychic distances between the host and home countries.

Investment incentives A large number of governments, especially of developed countries, compete among themselves by offering a variety of investment incentives to attract FDI. There is competition among OECD countries in offering investment incentives to attract FDI. E.g., Mercedez was paid US $ 2,00,000 per job created in 1996 in the US.

Earlier studies, their conclusions and limitations Research on the effects of policy variables on FDI, especially with respect to developing countries, more particularly India, is rather limited. While there has been much research on the general determinants of FDI in less developed countries with survey by Agarwal (1980). This study focuses on factors like comparative labour

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costs, country size, the nature of exchange rate regime and political including political instability.

Several more recent empirical studies on the determinants of FDI mention the potential importance of policy-related variables such as tax rates, foreign investment incentives and openness in the determinants of FDI. Yet in their empirical analysis, they do not analyze them. Tsai (1994) notes the importance of qualitative factors, such as qualitative stability and incentives, but does not include them in the empirical analysis on the ground that such variables are difficult to define and quantify.

Study has confined its analysis to trace signs of the impact of foreign collaboration onNational Technological Capability of the Indian History, Export performance of the subsidiaries of Foreign Companies, and Foreign Exchange Inflows into India.

COSTS AND BENEFITS OF FDI When direct investment flows from one country to another, it creates benefits both for the home country and the host country. Thus when a firm decides to make FDI, it takes into account the benefits and costs to be accrued to not only its home country but also to the host country.

Benefits to the Host country Availability of scarce factors of production Some times FDI is accompanies by labour force that performs those jobs that the local labour force is either not willing to do or is incapable of doing on account of lack of skill. Besides, the foreign labour force infuses non-traditional mental attitudes among the local labour force. Also, foreign inventors make available raw material and improved technology. At the same time, the host countries often encourage FDI inflow because they get improved technology, and more importantly, an ongoing access to continued research and development programmes of the investing country.

Improvement in the balance of payments

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FDI helps improve the balance of payments of the host country. The inflow of investment is credited to the capital account. At the same time, the currency account improves because FDI helps either import substitution or export promotion.

Building of economic and social infrastructure When the foreign investors invest in sectors such as the basic economic infrastructure, social infrastructure, financial markets and the marketing system, the host country is able to develop a support system that is necessary for rapid industrialization.

Fostering of economic linkages Foreign firms have forward and backward linkages. They make demand for various inputs that in turn helps develop the input –supplying industries. They employ labour force and so help raise the income of the employed people that in turn raises the demand and industrial production in the country.

Strengthening of government budget The foreign firms are a source of tax income for the government. They pay not income tax, but tariff on their import as well.

Benefits for the Home Country FDI benefits the home country too. The country gets a supply of necessary raw material if the investor makes investment in the exploration for a particular raw material. The balance of payments improves insofar as the parent company gets dividend, royalty, technical service fees and other payments and from the rising export of the parent company to the subsidiary. If FDI takes place in order to develop a vertical set up aboard, the export is quite significant.

Cost to the Host Country As far as employment of locals is concerned, the MNCs normally show reluctance to train the local people. Technology being normally capital intensive does not assure larger employment. Sometimes, the manufacturing processes followed by the foreign investors do no abide by the pollution norms or by the norms regarding optimal use of the natural resources or the norms regarding location of industries. All this is not in the host country’s interest.

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The foreign investors are generally more powerful and the domestic industrialists do no compete with hem wit the result that the domestic industry fails to grow. The foreign companies charge higher prices for their products in view of their oligopolistic position in the market. The foreign companies infuse foreign culture into the industrial set up and also into the society. Sometimes they are so powerful that they are even able to subvert the government.

STRATEGY FOR FDI When a firm decides to operate in a foreign land, it needs to follow a specific strategy in order to make its operation a viable one. The strategy must be designed so as to enable it to have an edge over competing firms, to this end, the firm may concentrate either on product innovation, product differentiation, on the cartels and collusion, or on some other strategies. In fact, the strategy depends to a great extent on how mature the product is or how designed its cost structure is. The existence of competing firms and the opening up of the sectors to foreign investors in the host country are some of the factors, which would influence the strategy to be employed.

Firm-specific Strategy When a firm has already spent a huge sum of money on research and development, it normally stresses on serving the consumers abroad with an innovated product and this gives it a definite edge over competing firms.

When the product innovation strategy fails to work, a firm may adopt a product differentiation strategy. This is done through putting a trademark on the product, or in other worlds, through branding the product. Branding substitutes to a great extent the product-innovation strategy insofar as the branded product enjoys an exclusive status, quite different from similar products in the market.

A single brand gives a better marketing impact, eliminates confusion and reduces advertising cost.

Cost –economizing Strategy When a firms product becomes standardized and it faces competition from similar products of other firms, the firm tried to locate its subsidiary in a country where

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either raw material or labour is cheap. Cheapness of these factors of production provides the firm an opportunity to reduce the cost of production and to maintain an edge over other firms. For instance, if an MNC invests broad in the raw material sector, it would be able to get that particular raw material at a lower cost and to export it either to he parent unit or to any other subsidiary.

Joint venture with a rival firm Sometimes when a rival firm in the host country is so powerful that it is not easy for the MNC to compete, the latter prefers to join hands with the host country firm for a joint venture agreement and the MNC thus is able to penetrate the host country market.

Whatever strategy is adopted by the MNCs abroad, there are certain necessary preconditions. First of all, they should have an idea of the profitable investment opportunities and the ways to tap those opportunities. Secondly, each and every strategy must be carefully evaluated since a particular project may no be competitive on all fronts. If one strategy is not useful, the firm should go in for another strategy.

If one strategy is not useful, the firm should go in for another strategy. Thirdly, the firm must evaluate the life span of each strategy. It must possess the flexibility of switching over from one strategy to another, especially when the life span of a particular strategy comes to an end.

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India scenario In 1951 India adopted the path of planned development on the lines of the Soviet model, but within a mixed economy framework in which both the public and private sectors played their roles. In the following decades the union and state governments in India made investments directly and through their instrumentalities, while at the same time regulating private sector investment towards realizing social goals set by the planners. In the process India relied largely on domestic resource mobilization and to a far lesser extent on external aid, mostly in the form of debt capital from multilateral institutions. The inward-oriented development strategy pursued over three-and-a-half decades did not yield expected outcomes in terms of targeted growth rates, self-reliance or better spatial and interpersonal income distribution. On the contrary, greater protectionist measures and multistage government interventions made India a high cost economy.

In June 1991 the Indian govt. went all out for foreign investments and initiated a programme of macro economic stabilization and structural adjustment support by IMF and World Bank. The equity participation, which was kept under 40%, has been increased to 51% and subsequently this has been further raised. A foreign Investment Promotion Board (FIPB) authorized to provide a single window clearance has been set up in PMO to invite and facilitate investments in India by international companies. The Foreign Exchange regulation Act of 1973 has been emended and restriction placed on foreign companies by FERA has been lifted.

During the pre-reform period neither India nor China preferred FDI though India was open to foreign investment to a very limited extent. The policy regimes in both the countries drastically changed in the post-reform periods, which began from 1978 for

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China and mildly in 1985 and more rapidly in 1991 for India. During the reform period both the countries welcomed FDI to play a role in their economies.

FDI SURVEY 2002 SHOWS 385 respondents from across sectors: automobiles, engineering and machinery, energy, infrastructure, information technology, food and beverages, tourism, drugs and pharmaceuticals, consumer goods and electronics.

Turnover ranged from Rs 10 crore to Rs 850 crore.

Performance of foreign investors is satisfactory with 61% reporting profits or breakeven (36% making profits, 25% breaking even). 70% said their CAPACITY UTILISATION was in the range of 50%-75%. This is fairly positive considering most are new entrants.

AP is ranked 6th in terms of FDI approvals but 3rd according to investor rankings.

These perceptions are a powerful indicator as to which states can expect to receive higher FDI inflows in the near future. Haryana is also strikingly different. Ranking of other states more or less coincide with FDI Approval rankings.

POLICY issues have shown a marked improvement over the last year with 93% saying handling of approvals at the center is Good to Average, and policy related issues such as funds flow mechanisms are effective.

It is seen that the policy framework in India dealing with foreign private investment has changed from cautious welcome policy during 1948-66 to selective and restrictive policy during 1967 to 1979. in the decade of eighties, it was the policy having partial liberalization with many regulations. Liberal investment climate has been created only since 1991. The period from 1991 till date the characterized by transparency and openness and is intended to seek more foreign investment inflows.

However, there are some specific aspects, (e.g. lack of transparency in the approval of FIPB/ SIA cases regulations at the levels of state governments for accessing operating facilities and rates of taxes and tariffs especially with regard to corporate taxation, capital gains tax and customs duty) which need detailed review and revisions for rendering the Indian environment relatively more competitive for FDI inflows than before.

The FDI inflows in 2001-2002 April - January show a 79% hike to $2.95 billion compared to the same period last year. The Government facilitates Foreign Direct Investment (FDI) and investment from Non-Resident Indians (NRIs) including Overseas Corporate Bodies (OCBs), predominantly owned by them, to complement and supplement domestic investment. Foreign technology induction is encouraged through FDI and foreign technology collaboration agreements. FDI and Foreign

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technology collaborations are approved through automatic route by Reserve Bank of India (RBI) or otherwise by FIPB (Foreign Investment Promotion Board).

Actual inflow of FDI

1995 1996 1997 1998 l999 2000 2001 2002 (April)

Government's Approval 38.7 57.6 101.3 82.4 61.9 63.4 96.4

32.9

RBI Approval

Automatic 5.3

6.2

8.7

6.1

7.6

17.0 32.4

12.6

3.5

3.5

0.1

NRI Schemes

19.7 20.6 10.4 3.6

2.3

Total

63.7 84.4 120.4 92.1 73.0 83.9 131.1 45.6

Year-wise Foreign Investments in India

Year

Direct Rs. (Crore)

Portfolio Rs. (Crore)

Total Rs. (crore)

1990-91

417.6

25.3

442.9

1991-92

554.7

17.2

571.9

1992-93

1354.5

1049.2

2403.7

1993-94

2519.7

15338.1

17857.8

1994-95

5650.2

16443.2

22093.4

1995-96

9171.9

11816.4

20988.3

1996-97

11592.8

14241.6

25834.4

1997-98

13747.1

7860.4

21607.5

1998-99

8866.6

(-) 262.3

8604.3

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State wise ranking

State

Ranking by Investors

Ranking according to FDI Approvals

Maharashtra

1

Maharashtra

1

Karnataka

2

Delhi

2

Andhra Pradesh 3

TamilNadu

3

Tamilnadu

4

Karnataka

4

Gujarat

5

Gujarat

5

Haryana

6

Andhra Pradesh 6

Madhya Pradesh 7

MadhyaPradesh 7

West Bengal

8

WestBengal

8

Uttar Pradesh

9

Orissa

9

Uttar Pradesh

10

Haryana

11

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Gross FDI/GDP US UK Switzerland Sweden Singapore Netherlands Ireland India Finland Denmark China Belgium 0

20

40

60

80

Source: World Bank

Will The current budget enable india to attract more foreign funds 23% no yes

cannot say 9%

68%

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Foreign Direct

KEY SECTORS FOR INVESTMENT To attract greater FDI for accelerating economic development, the Government of India has formulated a sectoral FDI policy that gives special incentives for investing in certain key sectors.

The key sectors identified for Foreign Direct Investment, include: •

Bio-Technology

•

Civil Aviation

•

Drugs and Pharmaceuticals

•

E-Business

•

Electronics and Information Technology

•

Entertainment Industry

•

Food Processing

•

Insurance Banking and Financial Markets

•

Mining

•

Oil and Natural Gas

•

Ports

•

Power

•

Roads

•

Telecommunications

•

Tourism

•

Urban Infrastructure and Housing

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Foreign Direct Investment (FDI) is permitted as under the following forms of investments.

•

Through financial collaborations.

•

Through joint ventures and technical collaborations.

•

Through capital markets via Euro issues.

•

Through private placements or preferential allotments.

Forbidden Territories: FDI is not permitted in the following industrial sectors: •

Arms and ammunition.

•

Atomic Energy.

•

Railway Transport.

•

Coal and lignite.

•

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Foreign Investment through GDRs is treated as Foreign Direct Investment.

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs

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SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT INVESTMENT Sl.No.

Sector

1.

Private Banking

Guidelines Sector 100% from all sources on the automatic route subject to guidelines issued from RBI from time to time.

Non Banking FDI/NRI/OCB investments allowed in the following 19 NBFC Financial activities shall be as per levels indicated below: Companies (NBFC) Merchant banking Insurance Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Forex Broking Credit card business Money changing Business Micro Credit

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Rural Credit Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months Minimum capitalisation norms for non-fund based activities: Minimum capitalisation norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.

RBI would issue appropriate guidelines in this regard.

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA) 2.

Domestic Airlines

(Detailed guidelines have been issued by Ministry of Civil Aviation)

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In the domestic Airlines Sector FDI up to 40% permitted subject to no direct or indirect equity participation by foreign airlines.

Airports

100% investment by NRIs/OCBs. The automatic route is not available.

Up to 100% with FDI, beyond 74% requiring Government approval

3.

Telecommunication In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the licence conditions for foreign equity cap and lock- in period for transfer and addition of equity and other licence provisions.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licencing and security requirements.

No equity cap is applicable to manufacturing activities.

FDI upto 100% is allowed for the following activities in the telecom sector : ISPs not providing gateways (both for satellite and submarine cables); Infrastructure Providers providing dark fiber (IP Category 1); Electronic Mail; and Voice Mail The above would be subject to the following conditions: FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in flavor of Indian public in 5 years, if these companies are listed in other parts of

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the world.

The above services would be subject to licensing and security requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

4.

Petroleum Under the exploration policy, FDI up to 100% is allowed for (other than Refining) small fields through competitive bidding; up to 60% for unincorporated JV; and up to 51% for incorporated JV with a Petroleum No Objection Certificate for medium size fields.

(Refining) For petroleum products and pipeline sector, FDI is permitted up to 51%.

FDI is permitted up to 74% in infrastructure related to marketing and marketing of petroleum products.

100% wholly owned subsidiary(WOS) is permitted for the purpose of market study and formulation.

100% wholly owned investment/Financing.

subsidiary

is

permitted

for

For actual trading and marketing, minimum 26% Indian equity is required over 5 years.

The automatic route is not available.

FDI is permitted up to 26% in case of public sector units(PSUs). PSUs will hold 26% and balance 48% by public.

Automatic route is not available.

In case of private Indian companies, FDI is permitted upto 100% under automatic route.

5.

Housing Estate

&

Real No foreign investment is permitted in this sector except for development of integrated townships and settlements where FDI upto 100% is permitted with prior Government approval.

NRIs/OCBs are allowed to invest in the following activities.

Development of serviced plots and construction of built up residential premises

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Investment in real state covering construction of residential and commercial premises including business centres and offices Development of townships City and regional level urban infrastructure facilities, including both roads and bridges Investment in manufacture of building materials, which is also opened to FDI Investment in participatory ventures in (a) to (e) above Investment in housing finance institutions, which is also opened to FDI as an NBFC 6.

Coal and Lignite

Private Indian companies setting up or operating power projects as well as coal or lignite mines for captive consumption are allowed FDI up to 100%.

100% FDI is allowed for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing.

FDI up to 74% is allowed for exploration or mining of coal or lignite for captive consumption.

In all the above cases, FDI is allowed up to 50% under the automatic route subject to the condition that such investment shall not exceed 49% of the equity of a PSU.

7.

Venture Capital Offshore Venture Capital Funds/Companies are allowed to Fund(VCF) and invest in domestic venture capital undertaking as well as other Venture Capital companies through the automatic route, subject only to SEBI Company(VCC) regulations and sector specific caps on FDI.

8.

Trading

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading

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house/star trading house. However, under the FIPB route:100% FDI is permitted in case of trading companies for the following activities: exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales. ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: Companies for providing after sales services (that is not trading per se) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.

Trading of hi-tech items/items requiring specialized after sales service Trading of items for social sector Trading of hi-tech, medical and diagnostic items.

Trading of items sourced from the small-scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name.

Domestic sourcing of products for exports.

Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up

52

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manufacturing facilities commences simultaneously with test marketing.

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) ecommerce and not in retails trading.

9.

Investing companies In respect of the companies in infrastructure/service sector, in infrastructure/ where there is a prescribed cap for foreign investment, only service sector the direct investment will be considered for the prescribed cap and foreign investment in an investing company will not be set off against this cap provided the foreign direct investment in such investing company does not exceed 49% and the management of the investing company is with the Indian owners. The automatic route is not available.

10.

Atomic Minerals

The following three activities are permitted to receive FDI/NRI/OCB investments through FIPB (as per detailed guidelines issued by Department of Atomic Energy vide Resolution No.8/1(1)/97-PSU/1422 dated 6.10.98): Mining and mineral separation Value addition per se to the products of (a) above Integrated activities (comprising of both (a) and (b) above.

The following FDI participation is permitted: Up to 74% in both pure value addition and integrated projects.

For pure value addition projects as well as integrated projects with value addition upto any intermediate stage, FDI is permitted upto 74% through joint venture companies with Central/State PSUs in which equity holding of at least one PSU is not less than 26%.

In exceptional cases, FDI beyond 74% will be permitted subject to clearance of the Atomic Energy Commission before

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FIPB approval.

11.

Defence and Foreign Direct Investment, including NRI/OCB investment, is strategic industries permitted up to 26% with prior Government approval subject to licensing and security requirements.

12.

Agriculture (including plantation)

No FDI/NRI/OCB investment is permitted

13.

Print media

No FDI/NRI/OCB investment is permitted

14.

Broadcasting

a. TV Software Production 100% foreign investment allowed subject to: all future laws on broadcasting and no claim of any privilege or protection by virtue of approval accorded, and not undertaking any broadcasting from Indian soil without Government approval. b.

Satellite Broadcasting

T.V. Channels irrespective of the ownership or management control to uplink from India provided they undertake to comply with the broadcast (programme and advertising) code. c. Setting up hardware facilities, such as uplinking, HUB, etc.

Private companies incorporated in India with permissible FII/NRI/OCB/PIO equity within the limits (as in the case of telecom sector FDI limit up to 49% inclusive of both FDI and portfolio investment) to set up uplinking hub (teleports) for leasing or hiring out their facilities to broadcasters. d.

Cable Network

Foreign investment allowed up to 49% (inclusive of both FDI and portfolio investment) of paid up share capital. Companies with minimum 51% of paid up share capital held by Indian citizens are eligible under the Cable Television Network Rules (1994) to provide cable TV services.

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e.

Direct-to-Home

Company with a maximum of foreign equity including FDI/NRI/OCB/FII of 49% would be eligible to obtain DTH License. Within the foreign equity, the FDI component not to exceed 20%. f.

Terrestrial Broadcasting FM

The licensee shall be a company registered in India under the Companies Act. All share holding should be held by Indians except for the limited portfolio investment by FII/NRI/PIO/OCB subject to such ceiling as may be decided from time to time. Company shall have no direct investment by foreign entities, NRIs and OCBs. As of now, the foreign investment is permissible to the extent of 20% portfolio investment. g.

Terrestrial TV

No private operator is allowed in terrestrial TV transmission.

15.

Power

16.

Drugs Pharmaceuticals

Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment. & FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval.

17.

Roads & Highways, FDI up to 100% under automatic route is permitted in projects Ports and Harbors. for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.

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Dissertation Report Investment

18.

Foreign Direct

Hotels & Tourism

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.

19.

Mining.

For exploration and mining of diamonds and precious stones FDI is allowed up to 74% under automatic route.

For exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing FDI is allowed up to 100% under automatic route.

Press Note No. 18 (1998 series) dated 14.12.98 would not be applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and / or the particular mineral.

20.

Postal services

21.

Pollution

FDI up to 100% is permitted in courier services with prior Government approval excluding distribution of letters, which is reserved exclusively for the state.

Control FDI up to 100% in both manufacture of pollution control 56

Dissertation Report Investment

and management

22.

Advertising films

Foreign Direct

equipment and consultancy for integration of pollution control systems is permitted on the automatic route. and a)

Advertising

sector

FDI up to 100% allowed on the automatic route b) Film sector (film production, exhibition and distribution including related services/products) FDI up to 100% allowed on the automatic route with no entry-level condition 23.

Mass Rapid Metro FDI up to 100% is permitted on the automatic route in mass Transit System rapid transport system in all metros including associated real estate development.

24.

Township Development

25.

Establishment and FDI up to 74% is permitted with prior Government approval Operation of satellite

FDI up to 100% is permitted for development of integrated townships including houses, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit system; and manufacture of building materials. Development of land and providing allied infrastructure will form an integral part of township’s development. FDI in this sector would be permissible with prior Government approval..

Just in time of the announcement of the budget the GOM ( group of minister ) on Foreign Investment on 24th of February 2003 recommended an increase in the ceiling of foreign direct investment. In the following sectors 100 % in Refineries and Airport Infrastructure.

74 % in Telecom.

49 % in Air Lines.

100 % in Non-News Scientific and Technical Journals.

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For internet services providers without gateways, the GOM favored e-mail and voice mail tobe allow up to 100 % through route subject to the condition that the FDI beyond 49 % would required FIPB clearance.

A country service framework (CSF) - for India, making it the focus of a newly set up regional centre for South Asia. The main objective of the CSF, which will conform to India's priorities, is to help attract more foreign direct investment not only in new sectors but also to increase productivity in existing sectors. With the Indian private sector as a driving force in the formulation of the programme, the CSF will also integrate all the UNIDO ongoing and future projects under one umbrella.

Automatic Approval by RBI for Foreign Technology Collaboration Agreements.

RBI grants automatic permission for foreign technology agreement in all areas of electronics and IT provided: Lump sum payment of the price of the technology does not exceed USD 2 million and Royalty payments do not exceed 5% of domestic sales and 8% of exports. (The royalty rates are net of taxes).

The payments are subject to an overall ceiling of 8 percent of total sales over a period of 10 years from the date of agreement or over 7 years period from the date of commencement of commercial production, whichever is earlier. Application for investment under the automatic process is to be made to the RBI and approval is generally granted within three weeks.

In fact India has done well precisely because it has received so little aid, and depended largely on its own resources and foreign investment. The net aid inflow exceeded $ 2 billion in 1991-92, fell sharply in the next three years, and turned into a net outflow of $ 486 million in 1995-96. The net outflow is estimated at $ 621 million in 200-01. India’s success in the 1990s has been based not on aid but on the lack of it.

Between 1991 and 2001, India has received on an average US$ 2.2 billion annually as foreign investment, as against China’s US$ 32.2 billion during the same period.

India is placed at the 119th position in the foreign direct investment performance index of UNCTAD. India’s index value has been pt at 0.2 against China’s 1.2 and Sri

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Lanka’s 0.4 and even Pakistan’s 0.2 which ranked higher at 114 th position (performance measured by standardizing a country’s inflows to the size of its economy.

One can correlate the deceleration in macro fundamentals in recent years, adversely affecting India’s FDI potential rating. India’s burgeoning population, debt and fiscal deficit are sustainable only if the country’s economy grows by at least 8% annually.

This requires raising the level of investment from 22% of the GDP to 30%. As per the classical theory of economics by Keynes, this investment-saving gap must be financed through foreign investment. Foreign investment should touch $8billion if India has to achieve 8% growth. There is moderate relationship between foreign investment and economic development of India during the period 1990-91 to 1998-99 but the relationship is not significant. FI should be attracted more towards Direct Investment rather than Portfolio Investment. For during any recession time the portfolio investment could easily pull out as a result of which the overall foreign investment would suffer. More of direct investment would give employment opportunities which would have increased the per capita income to great extent.

POLICY TOWARDS FDI India's post-independence economic policy combined a vigorous private sector with state planning and control, treating foreign investment as a necessary evil. Prior to 1991, foreign firms were allowed to enter the Indian market only if they possessed technology unavailable in India. Almost every aspect of production and marketing

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was tightly controlled, and many of the foreign companies that came to India eventually abandoned their projects.

Corporate Taxation The government also used taxation to pursue its objective of ensuring that the majority control of enterprises was in India hands. There were three level of discrimination: A company registered in India was taxed at a lower rate than one registered aboard.

A company in which the public was substantially interested was taxed at a lower rate than one in which it was not substantially interested. Thus discriminatory taxation was designed to persuade foreign (and Indian) companies to keep their stake in subsidiaries below a certain level. Amongst closely held companies, trading and investment companies were taxed at a higher rate than other companies. The tax differential between Indian and foreign companies was raised to 20 per cent in 195657, and has remained around 15-20 per cent since then.

Thus the list of products where foreign investment could be considered mainly consisted of two types of products (1) products which were not being produced in the country and for which setting up production was proving difficult, and (2) products which had a single producer in the country, generally a foreign firm, for which it was proving difficult to set up competitors.

Prior to 1991, foreign equity participation was limited to 40 percent, and foreign investors were saddled by numerous operating constraints. Foreign equity investments in excess of 51 percent, or those which fall outside the specified "high priority" areas, must be approved by the Foreign Investment Promotion Board (FIPB) and approved by a Cabinet Committee.

Foreign Investment Policy: The Ministry of Industry has expanded the list of industries eligible for automatic approval of foreign investments and, in certain cases, raised the upper level of foreign ownership from 51 percent to 74 percent and further in certain cases to 100 percent.

In January 1998, the RBI announced simplified procedures for automatic FDI approvals. The announcement further provided that Indian companies will no longer require prior clearances from the RBI for inward remittances of foreign exchange or for the issuance of shares to foreign investors.

New policies 60

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The industrial policy announced in July 1991 was vastly simpler, more liberal and more transparent than its predecessors, and it actively promoted foreign investment as indispensable to India's international competitiveness. The new policy permits automatic approval for foreign equity investments of up to 51 percent, so long as these investments are made in one of 35 "high priority" industries that account for the lion's share of the industry.

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on.

Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent..

TRIMs Agreement The agreement on Trade Related Investment Measures (TRIMs Agreement) states explicitly that certain measures governing the treatment of investment have restrictive or distortive effects on trade. The agreement, which applies only to investment measures related to trade in goods, provides that no signatories shall apply any TRIM inconsistent with Articles iii (National Treatment) and xi (General Elimination of Quantitative Restrictions) of the GATT 1994. to this end, an illustrative list of TRIMs, deemed to be consistent with the above articles, was appended to the Agreement. This list covers the following types of prohibited TRIMs. Those that require particular levels of local sourcing by an enterprise (i.e. local content requirements); Those which restrict the volume or value of imports which enterprise can buy or use, to the volume or value of products it exports (i.e., trade-balancing requirements).

Those that restrict the volume of imports to the amount of foreign exchange inflow attributable to an enterprise, and those which restrict he exportation by an enterprise of products whether specified in terms of the particular type, volume or value of products or a proportion of volume or value of local production.

POLICY IMPLICATIONS The findings of the present study suggest that in a developing country like India which seeks Foreign Direct Investments as development resource the focus of the 61

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FDI policy should be on maximization of its contribution to India’s development rather than on maximization of the magnitude of inflows by themselves. One respect where substantial, potential remains to be exploited with respect to foreign companies contribution to India development is expansion of the countries exports.

Attracting export-oriented FDI is not an easy task given the stiff competition among developing countries. Transnational corporations pick up the winners among competing developing countries. For TNCs in a number of industries India’s large domestic market is an important attraction. This attraction can be used as a bargaining leverage to induce transitional corporations to set-up export oriented units in the country. This however is possible only through a selective policy with respoect to entry. The government may identify a number of industries in which large domestic market may be particularly attractive for foreign companies such as consumer durables and non-durables and office equipment. Entry into such industries by foreign companies may be restricted to proposals having substantial export obligations. Export requirements on foreign companies would not only generate foreign exchange but would also ensure that companies bring to the country an internationally competitive technology.

INVESTMENT BY NRI An Indian Citizen who stays abroad for employment/ carrying on business or occupation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay abroad is a non-resident. Persons posted in UN organizations and officials deputed abroad by Central/State Governments and public 62

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Foreign Direct

Sector undertakings on temporary assignments are also treated as non-residents. Nonresident foreign citizens of Indian Origin are treated on par with non-resident Indian citizens (NRIs) for the purpose of certain facilities.

Foreign citizen is deemed to be of Indian origin if: He held an Indian passport at any time, or He or his father or paternal grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 provided that citizens of Pakistan, Bangladesh, Afghanistan, Bhutan, Sri Lanka and Nepal shall be deemed to be not of Indian origin.

Reserve Bank would consider applications for repatriation of original investment in commercial property in respect of properties purchased on or after 26th May 1993 up to the consideration amount remitted in foreign exchange for the acquisition of the property provided the property is sold after a period of three years from the date of the final purchase deed or from the date of payment of final installment of consideration amount, whichever is later.

Investment facilities for NRIs and OCBs The government of India has given several special benefits to NRIs and OCBs for investing in India.

Maintenance of bank accounts in India Full convertibility of NRI deposit accounts NRIs can maintain rupee or foreign currency denominated bank accounts in India with banks holding authorised dealer license.

Depending on the currency of account and its repatriability, NRIs can chose from five different types of such accounts as per their convenience.

Investment in securities, shares and deposits of Indian firms and companies NRIs are permitted to make direct investments in firms/ companies in India and in government securities, national savings certificates and units of domestic mutual funds. Sale proceeds of these instruments can be repatriated, provided they were bought out of funds remitted from abroad or from the investor's repatriable accounts in India.

Investment in shares and debentures of companies is allowed without any limits, provided the investment was made on a non repatriable basis. However, repatriation

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of income/interest earned on such investments may be made subject to satisfying certain conditions.

There are various schemes for investment in domestic companies, with repatriation benefits. NRIs/ OCBs can invest up to 100 percent in shares and debentures of domestic companies in accordance with the foreign direct investment policy. Under all these schemes, repatriation of the capital invested along with interest and dividend is freely allowed.

Investment in immovable property in India, whether residential or commercial, by NRIs/ OCBs is permitted.

Free repatriation of NRIs Indian earnings such as rent, dividend, pension, interest etc.

Existing or new public/ private companies can issue upto 100 percent of equity/convertible debentures to NRIs/OCBs for projects relating to development of commercial and residential real estate.

NRIs/OCBs are allowed to invest in urban development and housing sector.

NRIs/OCBs are allowed to invest upto 100 percent in the Civil Aviation Sector.

The government on occasion has denied requests for a foreign equity stake exceeding 51 percent. Non-resident Indians (NRI's) and Overseas Corporate Bodies (firms with NRI majority ownership) may hold 100 percent ownership in all industries except those reserved for the public sector.

These reserved industries are: •

arms,

•

ammunition and defense equipment;

•

atomic energy;

•

mineral oils;

•

minerals used in atomic energy; and

•

railway transport

To allow more NRI investments, the GOI recently allowed repatriation of investment in all activities, except agriculture and plantations, subject to certain conditions. As of June 1995, NRIs and PIOs may invest on a repatriable basis in

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new issues of shares/debentures only of industrial or manufacturing companies.

NRI Portfolio Investment Non Residents of Indian Nationality/Origin may make investment in shares (both equity and preferential) and debentures (convertible and non-convertible) quoted on Stock Exchange in India with full benefit of repatriation of capital investment and income earned thereon, provided the shares/debentures, purchased through a recognized Stock Exchange in India at the rate prevailing on the floor of the Stock Exchange and the purchase of equity shares/convertible debentures in any one company by each Non Resident investor does not exceed 1% of the paid up value of the equity capital/convertible debentures of the company with the provision that an investor may purchase debentures up to 1% of the total value of each debenture series if the company has issued convertible debentures in different series.

Investment of OCB Overseas Companies, partnership firms, and the corporate bodies which are owned directly or indirectly to the extent of at least 60% by NRIs/PIOs or Overseas Societies and Trusts in which at least 60% of the beneficial interest is irrevocably held by such persons shall be permitted to invest in the development of serviced plots, construction of built up residential premises, construction of residential and commercial premises, development of townships, development of infrastructure facilities, manufacture of building materials and participatory ventures in these areas and in housing finance institutions, repatriate the principal investment in foreign exchange and in net profits upto 16% earned after the first three years of investment, and repatriate dividend on equity/interest on shares/debentures subject to the payment of applicable taxes without any lock-in-period.

Acquisition of Immovable Properties by the NRI / PIO

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NRIs/PIOs shall be allowed to repatriate an original investment in equivalent foreign exchange in residential properties upto a maximum of two houses NRIs/PIOs can acquire by way of purchase or inheritance and transfer or dispose of by sale, commercial immovable properties situated in India. Repatriation of original investment in equivalent foreign exchange will be allowed by the Reserve Bank of India on receipt of application NRIs/PIOs can acquire, transfer or dispose of residential properties upto two houses situated in India by way of a gift from or to a relative, whether resident in India or not. The rental income or proceeds of any such investment will be allowed to be repatriated in a phased manner over a period of 3 year as per the Circular No. 18of RBI Exchange Control Department dated 19.8.1994.

GOVERNMENT SECURITIES/UTI UNITS NRIs are freely permitted to invest their funds in Government securities/National Savings Certificates/Units of UTI through authorized dealers (Banks authorized to deal in foreign exchange). Units of UTI can also be purchased and resold directly from UTI. If the securities were purchased out of funds remitted from abroad or out of NRE/FCNB accounts, sale/maturity proceeds can be repatriated. However, sale/maturity proceeds of securities purchased out of funds in NRO accounts would not be repatriable and can only be credited to NRO accounts. But the interest earned on such investments is fully repatriable, subject to production of a Chartered Accountant's certificate and an undertaking/certificate regarding payment of tax from the Income Tax Authorities.

FIRMS/COMPANIES: NRIs can make direct investments in proprietory/partnership concerns in India as also in the primary issues of shares/debentures of Indian companies. They can also make portfolio investments, i.e. purchase of shares/debentures of Indian companies through stock exchanges in India. These facilities are available on both repatriation and nonRepatriation basis. a) With repatriation benefits: There are no separate schemes for NRIs/OCBs for direct investment in India on repatriation basis as the 24%, 51%, and 100% schemes have since been withdrawn under FEMA. NRIs/OCBs are now on par with any other foreign investor and they may invest in shares/convertible debentures issued by an Indian company under the Foreign Direct investment.

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the citizens of Bangladesh/Pakistan/Sri Lanka)/OCBs can purchase shares/convertible debentures of Indian companies under FDI subject to the following conditions:(i) The company should not engage in the following activities/manufacturing: a. Banking b. NBFC's activities in Financial Services Sector c. Civil Aviation d. Petroleum including exploration/refinery/marketing e. Venture Capital Fund & Venture Capital Company f. Investing companies in Infrastructure & Service Sector g. Atomic Energy & related projects h. Defence & Strategic industries i. Print Media j. Postal services k. Agriculture (including plantation) (ii) The investment should not exceed the specified ceiling in the following sectors:

Sector

Investment

a) Telecommunications

Services: Manufacturing: 100%

b) Housing & Real Estate

100%

c) Coal and Lignite

PSUs : Other than PSUs: 50%

d) Drugs & Pharmaceutical

74%

e) Hotel & Tourism

51%

f) Mining

Exploration & mining of diamonds & precious stones: 74% Exploration & mining of gold, silver and minerals other than diamonds and precious stones: 100%

g) Advertising

74%

h) Films

100%

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49%

49%

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i) Any other sector/activity

100%

b) On Non-Repatriation Basis Investments in shares and debentures of companies through recognized stock exchanges in India by Non Residents of Indian Nationality/Origin are permitted, provided the non-resident investor undertakes not to seek repatriation of the capital invested and income earned thereon. In respect of equity shares and convertible debentures, investment is allowed upon an overall ceiling of 24 per cent of the total paid-up equity of the company concerned and 24 per cent of the total paid-up value of each series of convertible debentures by all eligible non- resident investors taken together. The limit of 24 per cent applies to purchase of equity shares and convertible debentures by all eligible non-resident investors taken together.

The Indian Government has launched a scheme to attract NRI investment in housing and real estate development. A nodal cell in the National Housing Bank (NHB) has been created to co-ordinate decisions. The cell has representatives from State Governments and other agencies and will finalize policies and procedures related to NRI investment under the agencies of the Ministry of Urban Development.

Non Resident Indian persons of Indian origin/overseas corporate bodies are allowed to invest up to 100 percent equity in such industries. The term `Hotels' includes, among others restaurants, beach resorts and other tourist complexes providing accommodation and or catering and food facilities to tourists. The term Tourism Related Industry includes

It apprises them of Government policies and procedures and the facilities and incentives available to them It provides them the necessary data for the selection of projects.

It assists them in obtaining the approval of the Government authorities.

It is represented on the State Level Review Committees, which monitor the implementation of the projects, and thereby helps them in removing difficulties, if any, in the process of implementation.

In the recent budget, the finance minister announced the government's commitment to a 90-day period for approving all foreign investments. Government officers will be assigned to larger foreign investment proposals and will facilitate Central and State clearances in a time-bound manner. Unlisted companies with a good 3 year track

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record, have been permitted to raise funds in international markets through the issue of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).

A number of recent policy changes have reduced the discriminatory bias against foreign firms.

The government has amended exchange control regulations previously applicable to companies with significant foreign participation.

The ban against using foreign brand names/trademarks has been lifted.

The FY 1994/95 budget reduced the corporate tax rate for foreign companies from 65 percent to 55 percent. The tax rate for domestic companies was lowered to 40 percent.

The long-term capital gains rate for foreign companies was lowered to 20 percent; a 30 percent rate applies to domestic companies.

The Indian Income Tax Act exempts export earnings from corporate income tax for both Indian and foreign firms.

Other policy changes have been introduced to encourage foreign direct and foreign institutional investment.

For instance, the Securities and Exchange Board of India (SEBI) recently formulated guidelines to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional Investors (FII's). These brokers can now open foreign currency-denominated or rupee accounts for crediting inward remittances, commissions and brokerage fees The condition of dividend balancing (offsetting the outflow of foreign exchange for dividend payments against export earnings) has been eliminated for all but 22 consumer goods industries. A 5-year tax holiday is extended to enterprises engaged in development of infrastructural facilities. Even without a registered office in India, foreign companies are allowed to start multimode transport services in India.

The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the construction of roads/bridges. The peak custom duty rate was reduced to 50 percent from 65 percent in the March 1995 budget. Import regime changes included enhancement of the scope of Special Import License (SIL) programs, and the expansion of freely importable items on the Open General License (OGL) list to include some consumer goods.

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THE labour law reforms proposed in the Union Budget for 2001-2002 is a major step forward in the area of full scale implementation of economic reforms in India. After participating in an interactive session with members of The Bengal Chamber of Commerce and Industry (BCCI), Mr. Hiroshi Hirabayashi, Ambassador of Japan in India, told newspersons here that this was an important step for attracting foreign investments into the country, including from Japanese companies, which always felt the need for an ``exit policy.'' Mr. Hirabayashi said the management must have the right to fire and hire, and a proper exit policy was a pre-requisite for speedier investment flows into the country. He, however, strongly reiterated that the rights of workers must be fully protected while initiating such labour law reforms.

MEMORANDUM OF UNDERSTANDING In order to promote investment and technology transfer from abroad, the Indian Investment Center has signed Memoranda of Understanding with the following organizations The Bank of Tokyo-Mitsubishi Ltd ANZ Grind lays Bank Oman International Bank Korea Institute of Industry and Technology Information Hong Kong and Shanghai Banking Corporation Belgian Corporation for International Investment Industrialization Fund for Developing Countries, Denmark Sanpaolo Bank, Italy Industrial Development Corporation of Trinidad and Tobago Singapore Trade Development Board Commerzbank Germany On 16-30 June 2002 TERI Newswire certainly has more than peripheral interest in the government's recent decision to open up the print medium to FDI or foreign direct investment. Typically, the reaction has been mixed. In Hyderabad, for instance, one Telugu newspaper is reported to have come out strongly against the move whereas

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another, an English-language daily, has welcomed it. As information and communication technology continues to expand its reach, providing easy, fast, and increasingly cheap access to a wide range of news sources, be it the television channels such as CNN and BBC or web sites such as netscape.com and msn.com, sometimes one wonders whether the debate on the impact of allowing FDI in the print medium on society is largely academic. However, it is not. Given the enormous reach of the print medium, the authority that it commands even now not only because of the decades of tradition but also because of the permanence of print, and its ability to convey subtle and abstract concepts - something that is much harder to accomplish through moving images - the matter can never be purely of academic interest. The increasingly consumerist orientation of Indian society can be attributed in a large measure to the wide reach of television, particularly cable television, not only in space but also in time. It is a reasonable assumption to believe that print will complement such impact.

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WHY WE ARE HERE? The alarm bells have been ringing for a while to warn the country that it is becoming less and less attractive to the foreign investor. Busy as the nation's leaders are in their never-ending internecine battles, no one seems to have taken note of it.

Despite repeated assurances from the top that India is committed to economic reforms, the world remains skeptical. The words are not being matched by action.

Whether India sells loss-making public undertakings or not, is her business. That is the way the world looks at it. But covering the growing budgetary deficit is a matter of concern to every investor, foreign or Indian. Being glued to a perennial deficit is a clear pointer to an impending economic crisis and a deterrent to any soundminded investor.

The recent volubility of the anti reform lobby is not the only reason for foreign investors being put off; increasingly Indian entrepreneurs are finding it difficult to convince potential partners that India is stable both politically and economically and that the system works. Terrorism threats, law and order, rampant corruption and Pakistan as neighbour are enough factors to scare any one away from the country.

India's economy stood fourth in the world when she became free in 1947. The rupee was a hard currency and was the legal tender in the Gulf countries. Foreign exchange reserves were ample. The inherited infrastructure was among the finest the roads were good, there was a 24-hour supply of good running drinking water in the cities, electric power supplies did not fail, the telephone system worked.

When Sashtri’s successor, Indira Gandhi, having shaken herself loose from the old guard of the Congress Party, was forced to rule with a minority government from 1969 she became dependent on the Left and the Communists. The result was the consolidation of the "license permit raj". A host of measures, including bank nationalization, gave India's economy the pink hue of near communism. It was no longer an attractive destination for foreign investment. Then India's economic growth came to be known as the 'Hindu' rate of growth, achieving on average of between two and three percent - a growth that was wiped out by burgeoning population and inflation.

The economy became a victim of circumstances beyond the control of India's hardworking and enterprising people, whose misfortune it became to be ruled by politicians and bureaucrats enjoying the ill-gotten wealth provided by a regime of regulation.

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The problems for a foreign visitor on a scouting mission to India begin as he lands in the country. Delhi's airport has seen little improvement in the last ten or fifteen years; it hardly deserves the status of "international air terminal". The immigration procedures do not include a 'Fast Track' for business and first class travelers.

Government has failed to evolve a foolproof control system to protect passengers arriving from abroad.

Non Resident Indians are treated much the same - indeed, they seem to face greater problems. But, they know how to handle the situation - they know that mutual advantage can be bought at a price. The loser is India, in terms of both tax collected and the country's reputation.

Currently, there are no investment disputes over expropriation or nationalization.

Government demands for penalty payments for alleged overcharging by pharmaceutical companies during the 1980's could lead to de-facto expropriation of some foreign drug companies' assets in India.

A committee has been named to study these longstanding disputes, but the failure of successive governments to produce a swift and transparent resolution has led to a virtual standstill in foreign investment in India's pharmaceutical sector. Indian courts provide adequate safeguards for the enforcement of property and contractual rights.

However, case backlogs frequently lead to long procedural delays. India is not a member of the International Center for the Settlement of Investment Disputes, nor of the New York Convention of 1958. Commercial arbitration or other alternative dispute resolution (ADR) methods are not yet popular ways of commercial dispute settlement in India. The recent introduction in Parliament of a new Arbitration Bill signals the importance now accorded to this matter by the GOI. Citing slow infrastructure development, continuing red-tapes (bureaucratic malaise) and problems foreign companies face when dealing with income-tax and customs departments as the three main impediments for lack of further Japanese investments into the country, he said overall, India was an excellent investment location for overseas companies. As pointed by Mr. Hiroshi Hirabayashi, Ambassador of Japan in India in a seminar held recently in Kolkata. Listing information technology (IT), infrastructure develop-ent (mainly power, roads and flyovers) and food-processing as the three key areas for future Japanese investments in India, Mr. Hirabayashi said Japan India Business Council was already coordinating work in all these three areas.

As Japan ranked fourth in FDI in India, behind the US, Mauritius and the UK. India has been talking about creating Special Economic Zones along the lines that China has done to make life easy for the foreign investor to do business, but 73

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here again progress is tardy. Meanwhile China is leaving India far behind in securing foreign investment, as are other developing countries seeking. The answer lies in making India itself a "Welcome Economic zone" of a globalize world. India's health care system is another deterrent to the foreigner. In contrast, China has created special hospitals to deal with foreigners, and their doctors are usually available.

The Prime Minister has been making every effort in his visits abroad to get the Indian Diaspora to bring into India the story of their successes. He is listened to with respect. But the voices of dissent and controls in the garb of 'swadeshi' that many of his party men raise leave every one confused. Day to day hassles, pinpricks and chaotic atmosphere at the country's airports need to be removed.

Traditionally, India has been reluctant to adopt the sort of free-market reforms insisted on by international lenders such as the International Monetary Fund, instead forging a highly regulated and idiosyncratic form of capitalism. This has led to complaints from international investors, on whom India is increasingly relying as it strives to build a competitive hi-tech industry. Economists have become concerned that the Indian economy, although relatively robust, is not growing as quickly as it needs to in order to eradicate poverty. And heavy regulation of capital flows have irked the huge and often wealthy overseas Indian community, another potential source of finance.

What is it that makes China, or for that matter Singapore, Thailand and Taiwan the darling of investors? Can India ever be gripped by the investment fever that China has experienced? India is mainly involved in low-end work such as outsourcing and trading of human resources as compared to countries such as China, Taiwan and Singapore which are involved in more high-end work such as hardware manufacturing, telecommunication, software product development, broadband infrastructure building and convergence.

S Jagadeesan, joint secretary, Department of Industrial Policy and Research, accepts that point: “If India is to realize its full FDI-drawing potential, it must become more competitive with reforms. FDI in the auto sector will enable to import cheap import in to India but tariff barrier induced them to invest in high cost production in a highly protected market

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WHY CHINA? THE dumping of Chinese goods is not only threatening India's domestic industry but is also likely to affect foreign direct investment (FDI) flows. The dragon has cast its shadow even on the domestic industries of developed nations such as Japan. While the dumping is hitting the small-scale sector and the chemical industry in India, it is the textile industry that threatened in Japan.

Like many other developing countries, both China and India have made the remarkable transformation from being hostile to FDI in the 1970s to eagerly attracting it now – although India seriously lags behind China in level of inflows.

Both countries have high levels of corruption and red tape.

Both India and Japan are on their feet to counter the dumping, but their approaches are different. While India is using anti-dumping measures and tariffs to shield its domestic industry, Japan is using economic measure -- that is, by investing more in China to produce and sell to its own domestic market at half the price of similar products produced in Japan.

In the latter part of the 1990s, foreign investments did not pour into China as expected. After logging $91 billion in 1995, FDI into China slipped to $41 billion in 1999. The charm of investing in China seemed to have abated. But the current interest of the developed nations in China reveals an altogether new purpose: Salvaging their own domestic industries. This would mean a shrinking of FDI flows into India, as both China and India are treated on a par with regard to investment potential.

FDI has played a big role in promoting China's technological progress. Such as electronics, automobiles, pharmaceuticals, telecommunications equipment and engineering machinery, are foreign firms. As a result, these firms have emerged as the engine for China's hi-tech exports.

China has, since 1998, stepped up its efforts to encourage foreign investments into technology development and innovation. Several incentives, such as import duty exemption for equipment and technology brought into China by foreign-invested research companies, tax breaks for incomes obtained from transfer of technology, and business tax exemption to foreign enterprises transferring advanced technology, are luring foreign investors to China.

China's accession to the WTO is a major reason for the return of their foreign investors. This would mean opening up of China's high-potential service sector --

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such as retailing, wholesaling, banking, insurance, information technology, and telecommunications as also professional services of accountancy, and management consultancy -- to foreign investors. The service sector accounts for one-third of China's GDP.

Actual FDI inflows in India and China

FDI as a % of Gross Fixed Capital Formation Year

India billion)

($ China billion)

(1)

(2)

(3)

1991

0.155

1992

($ Ratio

India

China

(4)

(5)

(6)

4.4

3.52

0.3

2.9

0.233

11.2

2.08

0.4

7.4

1993

0.574

27.5

2.09

1.0

12.2

1994

0.958

33.8

2.83

1.4

17.3

1995

2.1

35.9

5.85

2.4

15.0

1996

2.383

40.2

5.93

2.9

17.0

1997

3.33

44.3

7.52

n.a.

n.a.

1998

2.23

45.6

4.89

n.a.

n.a.

On the contrary, in its decade of liberalizations, India has failed to provide a competitive manufacturing base to MNC’s -- neither for their export efforts nor to meet the needs of the large middle-class market. Attention has been paid largely to the development of the software sector. Foreign enterprises have, therefore, hardly made any effort to use India as their production base for exporting to their own countries.

If India wants to compete with China, it will have to strengthen its manufacturing facilities. But this is not easy. Hence, the only alternative would be to open up its service sector more boldly, that is, well before China does so after gaining WTO entry.

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India, for instance, has a vast potential to attract FDI into retail and wholesale trading. Following the removal of the Quantitative Restrictions and the gradual reduction in tariffs, the distribution industry has emerged as a high-potential area for investment. Considering India's size and the diversified nature of its regional markets, the domestic private sector alone cannot pump in the investment required.

Hence, foreign investors should be encouraged to supplement the enlarged distribution industry with resources and technology, rather than be paranoid about protecting the domestic players. the inflow of foreign capital in the form of foreign aid (ODA), loans and private foreign investments in the form of direct foreign investment (DFI) and portfolio investment (PFI). The economic sanctions imposed on India in May, 1998, have reduced the inflow of foreign capital. ODA and bilateral loans flow to India seem to suffer the most The Indian economic situation is quite critical in view of the falling credit rating of India as Down-Graded by S&P have shake foreign institutional investor's confidence.

The government should make efforts to introduce more reforms in the trade and financial sector to attract foreign capital and also to provide incentives to encourage domestic savings.

Even as India has been trying hard to get augmented flow of foreign direct investment (FDI) unsuccessfully, China, the darling of foreign investors, is focusing its energy to evolve strategies to attract FDI in less favoured regions. the Chinese authorities and the Organization for Economic Cooperation and Development (OECD) are cooperating in a policy dialogue designed to encouraging investment in less favoured regions.

In response, the Chinese authorities launched last year the Great Western Development - or ``Go West'' - campaign. This is an ambitious top down bid to steer State investment We have a plural and diverse country where auto manufacturers want to ban import of vehicles and are trying to put up as many non-tariff barriers as possible, we have media barons who want to ban entry of foreign media, Dr. Anantha Nageswaran argues in one of his article” The Incestuous Indian Elite” Coded India needs to be saved and protected from Indians first and then from global predators and monsters.

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Portfolio Investment One of the main risks of investing in India is that of poor liquidity, given the extremely poor volumes and the impact costs that this implies. The other systematic risk of investing in India is the macroeconomic risks of unbridled government deficits financed through borrowing and the consequent impact on GDP growth, interest rates and potential inflation and rupee foreign exchange rates.

Another risk is that of ownership and it is an element, which is dramatically increasing in importance. There are four main types of investors – FIIs, domestic mutual funds, retail investors and corporate investors (largely through buybacks and open offers) – whose behavior needs to be analyzed. Ownership patterns are available in annual reports.

FIIs are the swing investors in most cases and they make a huge impact on the price of the stock, especially when there are relaxations on the ceilings of foreign portfolio investment. Value investing does not seem to be working at the moment in India cheap just gets cheaper.

IT SECTORS Though the IT industry has been registering staggering growth rates over the last five years, direct foreign investment has not been forthcoming. In fact, these figures are headed southwards. Vineet Joshi says that unless the usual suspects such as bureaucratic red tape and other issues are sorted out, India will not be able to reap the fruit. the country has registered staggering growth rates during the last five years, the amount of foreign investment in the sector has been heading southwards. Couple this with the fact that most other smaller Asian countries raked in billions of dollars through FDI, The numbers say it all China virtually rode on the Foreign Direct Investment (FDI) boom last year with a massive $40 billion investment, 20 percent of which ($8 billion) was in IT and telecommunication. While FDI investment in hardware was a complete zero in the past 10 years, software also didn’t show up well with just $2 billion. Telecommunication accumulated a total of $4 billion through FDI. China and Malaysia, which have made FDI a ‘provincial issue’. This gives power to each and every province to manage its own IT investments. Every province is allowed to take independent decisions, improve infrastructure and compete amongst themselves. Contrast this with India, where FDI is strictly a centralized issue.

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Another policy initiative, which favours foreign investment in China and Taiwan is the creation of a number of hi-tech clusters, in India the only visible example is Pondicherry. And even though the government may try to pass off Cyberabad, Tidel Park in Tamil Nadu and Hi-tech city in Gurgaon as places on par with Silicon Valley.

Kamiah Singhal, secretary, Internet Service Provider Association of India (ISPAI), “Only two years after the ISP policy was announced were the guidelines for setting up international gateways laid down. What is even more disturbing is the fact that the norms for landing station rights for fiber optic cables are yet to be drafted. Our processes are too complex. After a policy decision is taken, it takes so long before it is implemented, and even after implementation, there is no saying when the policy will be altered. Approaching the FIPB and filing an interest for investing in India is by itself not a simple process, forget about the spate of approvals, litigation, sanctions required henceforth. This scares away investors.

This is perhaps exactly opposite of what other Asian countries such as Malaysia and Thailand are doing. The governments in these countries have started giving counter guarantees to IT companies for investing in their country, apart from single window clearance and extra tax benefits.

In fact, all these factors coupled with poor infrastructure has led to the cost of doing business in India being higher than other Asian countries.

To ensure increased investments in the country. it can applied the ‘entry barrier policy’ to the hardware and software market, whereby a foreign player needs to invest in the country before tapping the local market. Though it has applied this policy to the automobile sector, IT went a begging and this resulted in decreased of FDI inflow. Experts feel the hardware sector, which today has zero FDI could have garnered at least $1 billion if entry barriers were put in place.

We are already seen as a corrupt nation, but what is even more alarming is the fact that we refuse to do anything about it. While connectivity no longer remains an issue, the administrative process needs to be cleaned up.

Indian policymakers should spend time in introspection and see where they have failed. While the cross ministry meeting marked the first step towards the ironing out of issues blocking the free flow of investments into the country, the government needs to move on from there and flush out at least some if not all of the problems faced by the FDI.

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Indeed, the World Bank itself keeps warning that India’s fiscal deficit is too high, and that the government should borrow less. The World Bank says it now knows how to use aid productively. The secret, apparently, is to give aid only to countries with sound policies and governance, and deny it to others. But this approach should surely mean reducing aid to most existing recipients. Why then is more aid being demanded from donors? Which recipients can productively absorb tens of billions of dollars of additional aid?

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Expert view’s In The India Economic Submit 2000, Percy Barnevik, Chairman, Investor AB, Sweden, started the session by saying that India received less than US$ 2 billion last year, which is less than a fifteenth of what China receives and is about 1% of the total FDI flow to developing countries, which in turn is a fraction of the world FDI flow.

Barnevik pointed out that for the foreign investor India is appealing because of low wages and size of the Indian market, but this is sometimes offset by negatives such as unfriendly bureaucracy, poor infrastructure, slowdown of reforms and so on. In this regard he mentioned that when considering India we should look at the actual physical investments that have taken place and not approvals. On the positive side, Barnevik mentioned that India is underrated as its reputation has improved. It has come a long way from the socialist times of the 70s and 80s. He suggested that India should leverage the image that it has gained in sectors like IT. Presenting the perspective of a foreign investor in India, Alex von Behr, President and Chief Executive Officer, Coca-Cola India, said that the scenario in India has changed. Now the consumer is the king, looking for high quality at low cost and at choices and brands. This is still in conflict with a system that is trying to free itself from a mindset which tends to frown upon consumption and thinks along the lines of essentials, non-essentials, luxuries and minimal quality at controlled prices. Von Behr stated that recent research has shown that FDI has emerged as a principal source of capital and economic development, and that it can create 3 to 5 million jobs each year and add 1.5% to GDP growth. Today, in developing countries, it accounts for 50% of total inflows, exceeding portfolio investments, bank loans and development aid put together, and is the most stable form of inflow.

Von Behr pointed out that there is no one model for attracting FDI. As examples, he cited the case of Poland, which resorted to shock therapy, China, which succeeded by focusing on manufacturing and export and developing coastal areas, as well as offering attractive incentives, and Malaysia, which created conditions to attract export-oriented and capital intensive industries. Von Behr expressed concern over the fact that India attracts one fifth of what it desires and converts less than a third of its approvals. He stressed the need for an objective study of the existing US$ 12 billion FDI in India. According to von Behr successful FDI is the best attraction for getting more. However, he also focused on three domestic issues that need immediate attention: taxes, regulation and labour issues.

Drawing attention to the issue of excise duty, von Behr said that there exists an irrational structure with some luxury items such as yachts, fur skins, firearms and so

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on being subject to an excise duty of 24%, air-conditioners and beer subject to 32%, while items like soft drinks are subject to 40% duty. Turning to sales tax, he said that sales tax in various states can range from 4% to 25% spanning more than 20 different rates. On top of this, von Behr said, these are open to subjective interpretation.

Commenting further on the system, he said that there are entry taxes, municipal taxes and so on added to this. He pointed out that it is almost impossible for a company to plan out a profitable project under these circumstances.

Talking of regulations, von Behr said that more than 40 different licenses/approvals must be obtained from 15 different agencies of central and state governments to set up any "non-controversial" manufacturing operation in India. And time frames vary from six months to four years. As an example, he reported that setting up a franchising operation in India for fast foods takes 221 approvals. He also referred to some of the outdated laws that hinder operating businesses in India.

Piyush G. Mankad, Secretary, Ministry of Industry, Chairman, Foreign Investment Promotion Board, India, reminded the gathering that India is now much more open and that all sectors are open to FDI except the ones on the negative list. Among the other initiatives being taken by the government, Mankad mentioned one on labour sector reforms and the one on small-scale Industry reservation policy. He said that the thrust of the government is shifting to micro aspects, whereby a lot of procedural simplification can be expected. He also mentioned that a greater degree of synergy with the states is being targeted. Mankad informed the investors that the government would ultimately withdraw from non-essential activities and would leave issues like certification to industry associations.

The Industry Secretary reiterated the need for looking at issues like corruption, lacks of efficiency, risk and reward, and so on. He said there is an urgent need to create a conducive package and for that the country needs double-digit growth. This in turn would only be possible if infrastructure facilities were made conducive.

During the discussions, the issue of small-scale industry reservation was raised, along with the suggestion of reducing barriers to entry of small FDI in this sector, especially in high-tech areas. Some investors also pointed out that on paper there are no problems in investing in India - neither is there a problem of discrimination against foreign investors in terms of approval. The actual problem starts when the investor actually tries to set up business. Interview by INDIA TODAY Associate Editor Rohit Saran. “We cannot deny that India suffers from an image problem."

India and the EU: Bilateral and Multilateral Partners on the road from Doha, Indian Institute for Foreign Trade New Delhi, 22 November 2001, The impact of this 82

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is already felt in telecommunications, insurance, foreign exchange control, removal of caps on FDI, to name just a few. We are following closely the progress on the next wave of reform: The bills in the area of competition, on fiscal responsibility, on labour reform, on infrastructure funding, and banking reform are some examples. But the Indian economy as a whole would also benefit from more trade openness. Tariffs lowered to the level of South East Asian neighbours, the removal of technical barriers to trade, rationalizations of customs rules, quality and standards would go a long way towards realizing India's economic ambitions. This is where the "Joint Initiative to Enhance Trade and Investment" comes in.

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STEPS TAKEN BY INDIAN GOVT. FIPB The FDI/Foreign technology collaboration agreement proposals that do not conform to the guidelines for automatic approval require Government approval through the Foreign Investment Promotion Board (FIPB). The Government has set up a special 'Foreign Investment Promotion Board' (FIPB) as a fast track mechanism to invite and facilitate foreign investments in large projects in India, which are considered beneficial to the Indian economy but are not covered by the automatic approval process and norms under which SIA is authorized to grant investment approvals.

Special Economic Zones (SEZs) Automatic approval for all manufacturing activities in SEZs up to 100%, except the following activities: (a) Arms and ammunition explosives and allied items of defence aircraft & warships; (b) Atomic substances; (c) Narcotics and psychotropic substances and hazardous chemicals; (d) Distillation and brewing of alcoholic drinks; and (e) Cigarettes/cigars and manufactured tobacco substitutes. Items ineligible for automatic route will have to follow FIPB route. This is indeed an important scheme for companies to operate in a business environment that is expected to match other competing nations.

The Indian Investment Center The Indian Investment Center, a Government of India organization, with more than three decades of rich experience in investment promotion, is the first contact point and is the single window agency for authentic information or any assistance that may be required for investments, technical collaborations and joint ventures. All its services are free of charge The Indian Investment Center promotes wider knowledge and understanding in the capital exporting countries of the world, of conditions, laws, policies, procedures and incentives pertaining to investment and the infrastructural facilities available and of investment opportunities in India.

It advises and assists foreign entrepreneurs on matters pertaining to financial and technical collaborations in India. It functions as a single reference point for foreign investment projects and assists Indian and foreign entrepreneurs in meeting the procedural requirements of project approvals and in over-coming bottlenecks, if any, in the process for implementation of the project. It advises foreign investors on setting up industrial projects in India by providing information regarding investment

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environment and opportunities, the Government industrial and foreign investment policies, taxation laws and facilities and incentives and assists them in identifying collaborators in India. It assists Indian companies in identifying source of capital and technology abroad facilitating foreign collaborations. It undertakes promotional work and guides entrepreneurs abroad through designated officers in the Indian Diplomatic Missions and other organizations.

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Investment Scenario in India Q-1 How would you rate current economic conditions in India vs. 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-2 What do you expect Indian economy to be in 2005 - 2006?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-3 How would you rate current investment climate in India vs. 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-4 What do you expect investment climate in India to be in 2006?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-5 How would you rate performance of your portfolio company vs. 2004 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse

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Q-6 What do you expect performance of your portfolio company to be in 2004 – 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-7 How would you rate current new fund raising climate vs. 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-8 What do you expect new fund raising climate to be in 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-9 How would you rate current Indian Business climate vs. 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse Q-10 What do you expect Indian Business climate to be in 2004 - 2005?

1. Substantially better

2. Moderately better

3. Same

4. Moderately worse

5. Substantially worse

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Q – 11 What are the largest external factors influencing business opportunities during Q2, 2005?

1. Emerging Technological Innovations

2. Public Sector Growth

3. Stock Market BSE/NSE

4. Steel Prices Hike

5. Petrol Price Hike

6. Manufacturing sector growth

Q – 12. Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

1. Biotech

2.Automobile

3..Retailing

4.Manufacturing

5..KPO

6.IT

7..Health Care

8.Telecommunication

9..Any other

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Analysis Frequency Tables How would you rate current economic conditions in India vs. 2004 - 2005?

Frequency Valid

Missing Total

Substantially better Moderately better Same Moderately worse Substantially worse Total System

Percent

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

4

23.5

26.7

53.3

5

29.4

33.3

86.7

1

5.9

6.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

What do you expect Indian economy to be in 2005 - 2006?

Frequency Percent Valid

Missing Total

Substantially better Moderately better Same Moderately worse Substantially worse Total System

Valid Percent

Cumulative Percent

3

17.6

20.0

20.0

5

29.4

33.3

53.3

4

23.5

26.7

80.0

1

5.9

6.7

86.7

2

11.8

13.3

100.0

15 2 17

88.2 11.8 100.0

100.0

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What do you expect investment climate in India to be in 2006?

Frequency Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Total System

Percent

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

7

41.2

46.7

73.3

3

17.6

20.0

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

What do you expect performance of your portfolio company to be in 2004 -

Valid

Missing Total

Substantial ly better Moderately better Same Moderately worse Total System

Valid Percent

Cumulative Percent

Frequency

Percent

7

41.2

46.7

46.7

6

35.3

40.0

86.7

1

5.9

6.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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How would you rate current new fund raising climate vs. 2004 - 2005?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Total System

Percent

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

9

52.9

60.0

86.7

2 15 2 17

11.8 88.2 11.8 100.0

13.3 100.0

100.0

How would you rate current Indian Business climate vs. 2004 - 2005?

Frequenc y Valid Missing Total

Moderately better System

Valid Percent

Percent

2

11.8

15 17

88.2 100.0

Cumulative Percent

100.0

100.0

What are the largest external factors influencing business opportunities during Q2, 2005?

Frequenc y Valid

Missing Total

Emerging Technological Innovations Stock Market BSE/NSE Steel Prices Hike Petrol Price Hike Manufacturing sector growth Total System

Percent

Valid Percent

Cumulative Percent

3

17.6

20.0

20.0

7

41.2

46.7

66.7

3

17.6

20.0

86.7

1

5.9

6.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

Valid

Missing Total

Biotech Automobi le Retailing Manufact uring ..KPO IT Total System

Frequenc y 3

Percent 17.6

Valid Cumulative Percent Percent 20.0 20.0

1

5.9

6.7

26.7

4

23.5

26.7

53.3

1

5.9

6.7

60.0

3 3 15 2 17

17.6 17.6 88.2 11.8 100.0

20.0 20.0 100.0

80.0 100.0

Frequency Table How would you rate current economic conditions in India vs. 2004 - 2005?

Frequency Percent Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Substantiall y worse Total System

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

4

23.5

26.7

53.3

5

29.4

33.3

86.7

1

5.9

6.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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What do you expect Indian economy to be in 2005 - 2006?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Substantiall y worse Total System

Percent

Valid Percent

Cumulative Percent

3

17.6

20.0

20.0

5

29.4

33.3

53.3

4

23.5

26.7

80.0

1

5.9

6.7

86.7

2

11.8

13.3

100.0

15 2 17

88.2 11.8 100.0

100.0

How would you rate current investment climate in India vs. 2004 - 2005?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Total System

Percent

Valid Percent

Cumulative Percent

5

29.4

33.3

33.3

6

35.3

40.0

73.3

3

17.6

20.0

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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What do you expect investment climate in India to be in 2006?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Total System

Percent

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

7

41.2

46.7

73.3

3

17.6

20.0

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

How would you rate performance of your portfolio company vs. 2004 - 2005?

Frequency Percent Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Substantiall y worse Total System

Valid Percent

Cumulative Percent

3

17.6

20.0

20.0

5

29.4

33.3

53.3

3

17.6

20.0

73.3

3

17.6

20.0

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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How would you rate current new fund raising climate vs. 2004 - 2005?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Total System

Percent

Valid Percent

Cumulative Percent

4

23.5

26.7

26.7

9

52.9

60.0

86.7

2 15 2 17

11.8 88.2 11.8 100.0

13.3 100.0

100.0

What do you expect new fund raising climate to be in 2004 - 2005?

Frequenc y Valid

Missing Total

Substantiall y better Moderately better Same Moderately worse Substantiall y worse Total System

Percent

Valid Percent

Cumulative Percent

6

35.3

40.0

40.0

2

11.8

13.3

53.3

2

11.8

13.3

66.7

4

23.5

26.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

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How would you rate current Indian Business climate vs. 2004 - 2005?

Frequenc y Valid Missing Total

Moderately better System

Percent

2

11.8

15 17

88.2 100.0

Valid Percent

Cumulative Percent

100.0

100.0

What do you expect Indian Business climate to be in 2004 - 2005?

Frequenc y Valid

Missing Total

Moderately better Substantiall y worse Total System

Percent

Valid Percent

Cumulative Percent

1

5.9

50.0

50.0

1

5.9

50.0

100.0

2 15 17

11.8 88.2 100.0

100.0

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What are the largest external factors influencing business opportunities during Q2, 2005?

Frequenc y Valid

Missing Total

Emerging Technological Innovations Stock Market BSE/NSE Steel Prices Hike Petrol Price Hike Manufacturing sector growth Total System

Valid Percent

Percent

Cumulative Percent

3

17.6

20.0

20.0

7

41.2

46.7

66.7

3

17.6

20.0

86.7

1

5.9

6.7

93.3

1

5.9

6.7

100.0

15 2 17

88.2 11.8 100.0

100.0

Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

Valid

Missing Total

Biotech Automobi le Retailing Manufact uring ..KPO IT Total System

Frequenc y 3

Percent 17.6

1

5.9

6.7

26.7

4

23.5

26.7

53.3

1

5.9

6.7

60.0

3 3 15 2 17

17.6 17.6 88.2 11.8 100.0

20.0 20.0 100.0

80.0 100.0

97

Valid Cumulative Percent Percent 20.0 20.0

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Bar Chart

How would you rate current economic conditions in India vs.

2004 - 2005?

5

4

y c n u q re F

3

2

1

0 Substantially better

Moderately better

Same

Moderately worse

Substantially worse

How would you rate current economic conditions in India vs.

2004 - 2005?

The graph clearly indicates that most of the investors feel that the investment climate in India the same and a number of the them also feel that the climate has increased over a period and will continue to improve in future. Most of the investors feel that current growth momentum is likely to continue at a steady pace.

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What do you expect Indian economy to be in 2005 - 2006?

5

4

y c n u q re F

3

2

1

0 Substantially better

Moderately better

Same

Moderately worse

Substantially worse

What do you expect Indian economy to be in 2005 - 2006?

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What are the largest external factors influencing business opportunities during Q2, 2005?

7

6

5

y c n u q re F

4

3

2

1

0 Emerging Technological Innovations

Stock Market BSE/NSE

Steel Prices Hike

Petrol Price Hike Manufacturing sector growth

What are the largest external factors influencing business opportunities during Q2, 2005?

Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

4

3

y c n u q re F

2

1

0 Biotech

Retailing Automobile

100 Manufacturing

..KPO IT

Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

Dissertation Report Investment

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How would you rate performance of your portfolio company vs. 2004 - 2005?

5

4

y c n u q re F

3

2

1

0 Substantially better

Moderately better

Same

Moderately worse

Substantially worse

How would you rate performance of your portfolio company vs.

2004 - 2005?

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Bar Chart How would you rate current economic conditions in India vs. 2004 - 2005?

3.0

2.5

Substantially better Moderately better

2.0

Same

1.5

Substantially worse

t n u o C

Moderately worse

1.0

0.5

0.0 Substantially Moderately better better

Same

Moderately Substantially worse worse

What do you expect new fund raising climate to be in 2004 - 2005?

Crosstabs Case Processing Summary

N

Valid Percent

102

Cases Missing N Percent

N

Total Percent

Dissertation Report Investment

How would you rate current economic conditions in India vs. 2004 - 2005? * What do you expect performance of your portfolio company to be in 2004 -

Foreign Direct

15

88.2%

2

11.8%

17

100.0%

How would you rate current economic conditions in India vs. 2004 - 2005? * What do you expect performance of your portfolio company to be in 2004 Crosstabulation Count What do you expect performance of your portfolio company to be in 2004 Substantially Moderately Moderately better better Same worse How would you rate current economic conditions in India vs. 2004 - 2005?

Substantially better Moderately better Same Moderately worse Substantially worse

Total

103

Total

0

3

0

1

4

3 3 0

0 2 1

1 0 0

0 0 0

4 5 1

1

0

0

0

1

7

6

1

1

15

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Bar Chart What do you expect performance of your portfolio company to be in 2004 -

3.0

2.5

Substantially better 2.0

Moderately better Same

t n u o C

Moderately worse 1.5

1.0

0.5

0.0 Substantially Moderately better better

Same

Moderately Substantially worse worse

How would you rate current economic conditions in India vs. 2004 - 2005?

Crosstabs Case Processing Summary

Valid N Percent How would you rate current investment climate in India vs. 2004 2005? * What do you expect new fund raising climate to be in 2004 - 2005?

15

88.2%

104

Cases Missing N Percent

2

11.8%

Total N Percent

17

100.0%

Dissertation Report Investment

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Bar Chart What do you expect new fund raising climate to be in 2004 - 2005?

3.0

2.5

Substantially better Moderately better

2.0

Same

1.5

Substantially worse

t n u o C

Moderately worse

1.0

0.5

0.0 Substantially better

Moderately better

Same

Moderately worse

How would you rate current investment climate in India vs. 2004 - 2005?

Crosstabs Case Processing Summary

What are the largest external factors influencing business opportunities during Q2, 2005? * Please specify the segment specific Investment made by your company in following

Valid N Percent 15 88.2%

105

Cases Missing N Percent 2 11.8%

Total N Percent 17 100.0%

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subcategories during 2004 - 2005?

Bar Chart

P le a s e s p e c if y th e

3 .0

s e g m e n t s p e c ific In v e s tm e n t m a d e b y 2 .5

y o u r c o m p a n y in f o llo w in g s u b c a t e g o r ie s

2 .0

d u r in g

2004 -

t n u o C

2005?

B io t e c h

1 .5

A u t o m o b ile R e t a ilin g 1 .0

M a n u f a c t u r in g ..K P O IT

0 .5

0 .0 Pe tro lP ric

ric lP ee St

Te ch no log ica l In no va

es

SE tB ke ar M

er gin g

k oc St

Em

e

H

Hi ke

M an uf ac tu rin g

ik e

/N

se cto rg

SE

ro wt

h

tio ns

What are the largest external factors ...

Crosstabs Case Processing Summary

Valid N Percent

106

Cases Missing N Percent

Total N Percent

Dissertation Report Investment

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How would you rate current new fund raising climate vs.

2004 - 2005? * What do you expect Indian Business climate to be in 2004 - 2005?

2

11.8%

15

88.2%

17

100.0%

How would you rate current new fund raising climate vs. 2004 - 2005? * What do you expect Indian Business climate to be in 2004 - 2005? Crosstabulation Count What do you expect Indian Business climate to be in 2004 - 2005?

Moderately Substantially better worse How would you rate current new fund raising climate vs. 2004 2005?

Total

Total

Moderately better 1

1

2

1

1

2

Crosstabs Case Processing Summary Cases 107

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Valid N Percent How would you rate performance of your portfolio company vs.

2004 - 2005? * Please specify the segment specific Investment made by your company in following subcategories during 2004 - 2005?

15

Missing N Percent

88.2%

2

11.8%

Bar Chart How would you rate current economic conditions in India vs. 2004 - 2005?

3.0

2.5

Substantially better Moderately better

2.0

Same

1.5

Substantially worse

t n u o C

Moderately worse

1.0

0.5

0.0 Substantially better

Moderately better

Same

Moderately worse

What do you expect performance of your portfolio company to be in 2004 -

108

Total N Percent

17

100.0%

Dissertation Report Investment

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Bar Chart How would you rate current new fund raising climate vs.

2004 - 2005?

4

Substantially better

3

Moderately better

t n u o C

Same

2

1

0 Substantially better

Moderately better

Same

Moderately worse

Substantially worse

How would you rate current economic conditions in India vs. 2004 - 2005?

Bar Chart How would you rate current investment climate in India vs.

2004 - 2005?

3.0

2.5

Substantially better Moderately better

2.0

Same

t n u o C

Moderately worse 1.5

1.0

0.5

0.0 Substantially better

Moderately better

Same

Moderately Substantially worse worse

What do you expect Indian economy to be in 2005 - 2006?

Conclusion

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European Union Trade commission, Pascal Lamy has coded that FDI is a key factor in the economics growth and wealth, leading to sustainable development. But such investment needs transparent, stable Govt. and non-discriminatory climate. The current budget is emphasizing on the attracting FDI including scraping the need from case to case clearance of FDI by FIBP to the extend as possible.

In general, India needs to do a lot of work on the basics to make life a little easier, not just for the foreign visitor, but also for its own people. It has to devise a regime that does not leave the individual so frustrated that he finds it necessary to resort to unfair means to get anywhere.

Under a regime without contracting, however, the order of events is different. The firm must first commit itself to a particular country by investing. Only then does the country choose the conditions under which it will allow the firm to operate. The host faces some constraints. It must provide the protections to which investment is entitled under international law, it must not impose conditions that are so arduous that the investor will prefer to pull out rather than continuing to operate its business, and it must consider the effect of its actions on its reputation and on future investors.

Despite these constraints on its choice of conditions, the host is in a much better position under the no-contract case than it is under the contract case. FDI is a saleable product and even developed nations like Japan look at FDI flows to fill up the hollow in the domestic investment market.

Bilateral investment treaties have become the dominant vehicle through which NorthSouth investment is protected from host country behavior. Because these treaties allow investors and hosts to establish binding and enforceable contracts, there is little doubt that Bits increase the efficiency and reduce the cost of foreign investment. In particular, the treaties solve the dynamic inconsistency problem by permitting the host state to bind itself to a particular course of action before the investment takes place.

Step to improve

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1 Study the economic performance of existing FDIs and identify their key problems. Move from subjective perceptions to researched facts.

2 Align tax categories with national priorities of FDI, employment, growth and revenue generation instead of age-old labels of luxuries, necessities and so on. Make the process transparent.

3 Reform the regulatory framework on a time-frame and work with industry associations to formulate effective rules and regulations.

4 Form a new innovative joint body between government and business so that expectations.can be managed on both sides and progress monitored regularly - this will lead to joint shouldering of the responsibility for economic progress.

Like In Rome Italian investors were told that the government is considering appointing an official assistant with each big foreign investment project to take it through all the clearances.

Opening of Independent Research center which will provide information to the Investors and MNCs, These reports may also contain a rating and target price that are based upon those assumptions of forecasting. FDI in more important sectors such as Power and Telecommunications, India must permit FDI even in industries where it isn't beneficial. Most experts feel that India can extensively attract FDI in IT are in the area of convergence, hardware manufacturing and software services. FDI in IT in India would result in faster growth of the IT sector and subsequently growth of the New Economy. Currently, IT makes up just 1.68 percent of GDP. This figure will significantly rise if we have more FDI. It will also result in increased skill levels, much better infrastructure, greater job access and a wider market. The current trends in global FDI flows reveal that the cross-border merger and acquisition (M&As) is the main route and the service sector the major recipient.

Today, FDI is not just about getting foreign money, but has become a clear statement of the health of the economy. FDI’s also helped recoveries, notably in South Korea and Latin American countries. It also helps bring with it-advanced technology in the area where the country lags.

Continued political stability is important, reducing ground-level hassles were imperative for future FDI inflows and adequate Market Growth, Boosting investor sentiments, Stepping up Image-Building Efforts, Confidence-building measure, Drastically improving Infrastructure facilities are the most important factors to attract FDI.The empirical analysis of selected FDI companies confirms the postulated 111

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complementary relationship between domestic research expenditure and technology import. However, the empirical analysis does not validate the hypothesis that technology import and FDI stake are significant positive factors in explaining the variations in the export performance of Indian subsidiaries of foreign companies. It, therefore, stands to reason that subsidiaries of foreign firms continue to confine their operations to cater to Indian domestic market, despite the ease with which they can seek access to their holding companies advanced technology, investment related intellectual property, marketing networks, etc., The justification of FDI as a means of bridging the B-O-P gap is conclusive in case of India. The FDI companies, during 1987-88 to 1999-2000 have reported a shortfall of foreign exchange earnings over the expenditure in foreign exchange. On the other hand, the subsidiaries of foreign companies, during the same period, have reported net accretions to foreign exchange earnings.

It is suggested that a policy targeting export- oriented FDI or high technology FDI may be very favourable for the country’s B-O-P rather than one attempting to maximise the magnitude of FDI irrespective of its composition. And to accelerate India’s exports, on sustainable basis, the focus has to be centered around “Technology-based exports”.

The Pravasi Bharatiya Divas Jamboree raises an important question what an important contribution can Non-resident and people of India origin can contributed ? why Indian perform better outside rather when they are in India ? we have everything but still we cannot convert them in to higher productivity.What NRIs and PIOs can do is to kick start the focus about the poor quality of the infrastructure and governance. They can be quite influential in promoting India’s economics through investment and savings.

We need a system that will penalize undesirable behavior and rewards desirable ones.in the first place we have to put in place legislation on FDI to give the policy requisite visibility and build confidence among the investors. The policy have to be integrated in the over all national economic policy. Second states need to be given primacy in the approvals and taken on boards as stakeholders. Authorized local authority to set up SEZs and approvals of FDI. We need to provide quick international competitive platforms as strategic locations for relocation of labor intensive manufacture. Forth export oriented FDI to be given top priority with political and bureaucratic apparatus to catalyze export led growth. and last but not the least we have to think big, plan well, implement fast and speed up privatization.

Concentration on education is no doubt an important objective for long lasting benefits.

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REFERENCES Liberalization and WTO By Chanchal Chopra.

Trade and Local Linkages by Yung-Chul Kwon.

International Financial Management by V.Sharan.

My Economics Affairs.

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Foreign Investment and Economic Development of India By H.Ramananda Singh and Saikat Nag Prospects of Trade and Investment in India and China By Atul Sarma.

Destroying India's economy in an age of globalization by Prem Prakash.

Global Corporate Finance by Suk.h.Kim and Seung.H.Kim Articles and Publications in the following Websites on FDI ficci@ficci.com ani@ndc.vsnl.net.in labourhindu@com. www.rbi.org.in. www.hindu@net.com. indmin.nic.in. federation of India export organization.

World forum on FDI. csmweb2.smcweb.com. www.valuenotes.com.

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