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Foreign Direct Investment

By rohit0210 Dec 30, 2012 7646 Words

“Analytical Study of Foreign Direct Investment in India”

Project submitted to the Department of Commerce
Shri Ram College of Commerce, University of Delhi,
in fulfillment of the requirement of
B.Com (H) - 3rd Years

Submitted to :Submitted by :


I hereby declare that the project report named “Analytical Study of Foreign Direct Investment in India” is based on my understanding of the subject and has not been copied from some published source or website. My indebtedness to other works on the subject has been duly acknowledged at the relevant places.


The present work is an effort to throw some light on “Foreign Direct Investment” in India. The work would not have been possible to come to the present shape without the able guidance, supervision and help to me by number of people.

With deep sense of gratitude I acknowledge the encouragement and guidance received from my mentor Mr. VK Singhania who helped and supported me during the course of completion of my project. His supervision, logical insight and patient encouragement enabled me to complete the present work. The association has been a very great opportunity.


Introduction 4
Meaning 5
Definition 9
Types of FDI12
Methods of FDI13
Importance of FDI14
FDI in India18
Analysis of FDI30

Foreign Direct Investment
These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporation’s home country. The investing corporation must control 10 percent or more of the voting power of the new venture. According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago. The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. In recent years, however, companies have been able to make a foreign direct investment that is actually long-term management control as opposed to direct investment in buildings and equipment. FDI growth has been a key factor in the “international” nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the world’s economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan).But flows to non-industrialized countries are increasing sharply. Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) .Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (‘‘direct investor’’) in an entity resident in an economy other than that of the investor (‘‘direct investment enterprise’’).The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. * Foreign Direct Investment – when a firm invests directly in production or other facilities, over which it has effective control, in a foreign country. * Manufacturing FDI requires the establishment of production facilities. * Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities. * Foreign subsidiaries – overseas units or entities.

* Host country – the country in which a foreign subsidiary operates. * Flow of FDI – the amount of FDI undertaken over a given time. * Stock of FDI – total accumulated value of foreign-owned assets. * Outflows/Inflows of FDI – the flow of FDI out of or into a country. * Foreign Portfolio Investment – the investment by individuals, firms, or public bodies in foreign financial instruments. * Stocks, bonds, other forms of debt.

* Differs from FDI, which is the investment in physical assets.

Portfolio theory – the behavior of individuals or firms administering large amounts of financial assets.

Product Life-Cycle Theory

* Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. * The FDI impact is similar: FDI flows to developed countries for innovation, and from developed countries as products evolve from being innovative to being mass-produced.

The Eclectic Paradigm
* Distinguishes between:
* Structural market failure – external condition that gives rise to monopoly advantages as a result of entry barriers * Transactional market failure – failure of intermediate product markets to transact goods and services at a lower cost than internationalization

The Dynamic Capability Perspective
* A firm’s ability to diffuse, deploy, utilize and rebuild firm-specific resources for a competitive advantage. * Ownership specific resources or knowledge are necessary but not sufficient for international investment or production success. * It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based deployment that is transferable to the multinational environment. * Firms develop centers of excellence to concentrate core competencies to the host environment.

Monopolistic Advantage Theory
* An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad more profitably than local competitors. * Monopolistic Advantage comes from:
* Superior knowledge – production technologies, managerial skills, industrial organization, knowledge of product. * Economies of scale – through horizontal or vertical FDI Internationalization Theory

* When external markets for supplies, production, or distribution fails to provide efficiency, companies can invest FDI to create their own supply, production, or distribution streams. * Advantages

* Avoid search and negotiating costs
* Avoid costs of moral hazard (hidden detrimental action by external partners) * Avoid cost of violated contracts and litigation
* Capture economies of interdependent activities
* Avoid government intervention
* Control supplies
* Control market outlets
* Better apply cross-subsidization, predatory pricing and transfer pricing


Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. 'Control' as defined by the UN, is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. For an unincorporated firm one needs to consider an equivalent criterion. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor.  FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply.

Foreign Direct investor
A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors.

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:
1 Outward FDIs
2 Inward FDIs
This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments.  Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.'  Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. 

Other categorizations of FDI :
Greenfield Investment – It is a form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. Vertical Foreign Direct Investment – It takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.  Horizontal Foreign Direct Investments – It happens when a multinational company carries out a similar business operation in different nations. * Horizontal FDI – the MNE enters a foreign country to produce the same products product at home. * Conglomerate FDI – the MNE produces products not manufactured at home. * Vertical FDI – the MNE produces intermediate goods either forward or backward in the supply stream. * Liability of foreignness – the costs of doing business abroad resulting in a competitive disadvantage. Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: * by incorporating a wholly owned subsidiary or company

* by acquiring shares in an associated enterprise
* through a merger or an acquisition of an unrelated enterprise * participating in an equity joint venture with another investor or enterprise Foreign direct investment incentives may take the following forms: * low corporate tax and income tax rates, tax holidays

* other types of tax concessions
* preferential tariffs
* special economic zones
* investment financial subsidies
* soft loan or loan guarantees
* free land or land subsidies
* relocation & expatriation subsidies
* job training & employment subsidies
* infrastructure subsidies
* R&D support
* derogation from regulations (usually for very large projects) Entry Mode

The manner in which a firm chooses to enter a foreign market through FDI –

* International franchising

* Branches

* Contractual alliances

* Equity joint ventures

* Investment approaches:
* Greenfield investment (building a new facility)
* Cross-border mergers
* Cross-border acquisitions
* Sharing existing facilities

Why is FDI important for any consideration of going global? The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: | 1 .Avoiding foreign government pressure for local production.| | 2. Circumventing trade barriers, hidden and otherwise.| | 3. Making the move from domestic export sales to a locally-based national sales office.| | 4. Capability to increase total production capacity.|

| 5.Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;| A more complete response might address the issue of global business partnering in very general terms.  While it is nice that many business writers like the expression, “think globally, act locally”, this often used cliché does not really mean very much to the average business executive in a small and medium sized company.   The phrase does have significant connotations for multinational corporations.  But for executives in SME’s, it is still just another buzzword.  The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies.  Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets.  Small and medium sized companies tend to be more concerned with selling their products in overseas markets.  The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues.  SME’s in particular are now focusing on access to markets, access to expertise and most of all access to technology.

The Strategic Logic behind FDI -
* Resources seeking – looking for resources at a lower real cost. * Market seeking – secure market share and sales growth in target foreign market. * Efficiency seeking – seeks to establish efficient structure through useful factors, cultures, policies, or markets. * Strategic asset seeking – seeks to acquire assets in foreign firms that promote corporate long term objectives. Enhancing Efficiency from Location Advantages

* Location advantages - defined as the benefits arising from a host country’s comparative advantages.- Better access to resources * Lower real cost from operating in a host country
* Labor cost differentials
* Transportation costs, tariff and non-tariff barriers * Governmental policies
Improving Performance from Structural Discrepancies
* Structural discrepancies are the differences in industry structure attributes between home and host countries. Examples include areas where: * Competition is less intense
* Products are in different stages of their life cycle * Market demand is unsaturated
* There are differences in market sophistication

Increasing Return from Ownership Advantages
* Ownership Advantages come from the application of proprietary tangible and intangible assets in the host country. * Reputation, brand image, distribution channels
* Technological expertise, organizational skills, experience * Core competence – skills within the firm that competitors cannot easily imitate or match. Ensuring Growth from Organizational Learning

* MNEs exposed to multiple stimuli, developing:
* Diversity capabilities
* Broader learning opportunities
* Exposed to:
* New markets
* New practices
* New ideas
* New cultures
* New competition

The Impact of FDI on the Host Country

* Firms attempt to capitalize on abundant and inexpensive labour. * Host countries seek to have firms develop labor skills and sophistication. * Host countries often feel like “least desirable” jobs are transplanted from home countries. * Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises
* Foreign invested companies are likely more productive than local competitors. * The result is uneven competition in the short run, and competency building efforts in the longer term. * It is likely that FDI developed enterprises will gradually develop local supporting industries, supplier relationships in the host country.

Foreign Direct Investment in India
The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006), is the second fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007. However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal. The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earns their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering. India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. India faces a burgeoning population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the Government: Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a previous/existing venture/tie up in India FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI (foreign direct investment) and FII (foreign institutional investors) are a separate case study while preparing a report on FDI and economic growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India and outflow from India. The FDI statistics and data are evident of the emergence of India as both a potential investment market and investing country.  FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort - but with $5.3 billion in FDI, India gets less than 10% of the FDI of China. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.  India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?  Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.

FDI Policy in India
Foreign Direct Investment Policy
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India . These include FDI limits in India for example: * Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores. * FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies. * FDI limit of maximum 49% in telecom industry especially in the GSM services * FDI of 51% is allowed in single brand retail and 100% to cash-and-carry stores that can only sell to other retailers and businesses.|


Government Approvals for Foreign Companies Doing Business in India Government Approvals for Foreign Companies Doing Business in India or Investment Routes for Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been formulated with a view to invite and encourage FDI in India.  The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options: * Investment under automatic route; and

* Investment through prior approval of Government.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors. List of activities or items for which automatic route for foreign investment is not available include : * Banking

* NBFC's Activities in Financial Services Sector
* Civil Aviation
* Petroleum Including Exploration/Refinery/Marketing
* Housing & Real Estate Development Sector for Investment from Persons other than NRIs/OCBs.
* Venture Capital Fund and Venture Capital Company
* Investing Companies in Infrastructure & Service Sector * Atomic Energy & Related Projects
* Defense and Strategic Industries
* Agriculture (Including Plantation)
* Print Media
* Broadcasting
* Postal Services
Procedure under Government approval
FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy & Promotion. Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India. New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one. General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Participation by International Financial Institutions
Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc., in domestic companies is permitted through automatic route, subject to SEBI/RBI regulations and sector specific cap on FDI. FDI in Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector.

India Further Opens Up Key Sectors for Foreign Investment
India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the provision that no single entity will hold more than 5% of the stake.  Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India. Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions.

Sector-wise FDI Inflows ( From April 2000 to January 2010)| SECTOR | AMOUNT OF FDI INFLOWS|
| In Rs Million| In US$ Million| |
Services Sector| 787420.81| 18118.40| 22.39|
Computer Software & hardware| 391109.74| 8876.43| 11.12| Telecommunications| 275441.38| 6215.55| 7.83|
Construction Activities| 213595.12| 5029.01| 6.07|
Automobile| 146799.41| 3310.23| 4.17|
Housing & Real estate| 217936.02| 5118.85| 6.20|
Power| 137089.37| 3129.66| 3.90|
Chemicals (Other than Fertilizers)| 87008.07| 1964.06| 2.47| Ports| 63290.50| 1551.88| 1.80|
Metallurgical industries| 109563.20| 2612.85| 3.11|
Electrical Equipments| 57379.63| 1324.92| 1.63|
Cement & Gypsum Products| 70781.19| 1621.03| 2.01|
Petroleum & Natural Gas| 94417.17| 2244.17| 2.68|
Trading| 62416.85| 1480.94| 1.77|
Consultancy Services| 48647.43| 1112.92| 1.38|
Hotel and Tourism| 52500.05| 1217.50| 1.49|
Food Processing Industries| 34362.49| 760.32| 0.98|
Electronics| 33914.75| 748.57| 0.96|
Misc. Mechanical & Engineering industries| 28310.13| 648.86| 0.80| Information & Broadcasting (Incl. Print media)| 52115.90| 1194.20| 1.48| Mining| 21204.94| 522.86| 0.60|

Textiles (Incl. Dyed, Printed)| 26736.94| 611.03| 0.76| Sea Transport| 17653.81| 402.59| 0.50|
Hospital & Diagnostic Centers| 27241.42| 644.73| 0.77| Fermentation Industries| 27743.46| 658.04| 0.79|
Machine Tools| 10955.32| 247.88| 0.31|
Air Transport ( Incl. air freight)| 10552.19| 240.71| 0.30| Ceramics| 17462.43| 409.92| 0.50|
Rubber Goods| 11392.76| 247.60| 0.32|
Agriculture Services| 7937.13| 188.39| 0.23|
Industrial Machinery| 13748.27| 316.97| 0.39|
Paper & Pulp| 18612.76| 429.06| 0.53|
Diamond & Gold Ornaments| 11014.62| 248.15| 0.31|
Agricultural Machinery| 6649.12| 148.37| 0.19|
Earth Moving Machinery| 5749.34| 134.22| 0.16|
Commercial, Office & Household Equipments| 5798.71| 132.74| 0.16| Glass| 5683.60| 126.51| 0.16|
Printing of Books (Incl. Litho printing industry)| 6066.23| 135.80| 0.17| Soaps, Cosmetics and Toilet Preparations| 4984.88| 114.54| 0.14| Medical & Surgical Appliances| 8087.87| 177.42| 0.23| Education| 14374.11| 309.09| 0.41|

Fertilizers| 4282.17| 96.59| 0.12|
Photographic raw Film & Paper| 2580.20| 63.90| 0.07| Railway related components| 3281.85| 75.11| 0.09|
Vegetable oils and Vanaspati| 3769.18| 83.69| 0.11|
Sugar| 1836.64| 41.58| 0.05|
Tea & Coffee | 3774.81| 84.28| 0.11|
Leather, Leather goods & Piackers| 1621.56| 36.74| 0.05| Non-conventional energy| 3640.58| 86.84| 0.10|
Industrial instruments| 1368.36| 29.47| 0.04|
Scientific instruments| 511.44| 11.64| 0.01|
Glue and Gelatine| 385.80| 8.44| 0.01|
Boilers & steam generating plants| 238.67| 5.40| 0.01| Dye-Stuffs| 406.48| 9.52| 0.01|
Retail Trading (Single brand)| 1074.67| 25.18| 0.03|
Coal Production| 614.10| 15.42| 0.02|
Coir| 50.17| 1.12| 0.00|
Timber products| 139.59| 3.10| 0.00|
Prime Mover (Other than electrical generators| 178.30| 3.72| 0.01| Defence Industries| 6.87| 0.15| 0.00|
Mathematical, Surveying & drawing instruments| 50.35| 1.27| 0.00| Misc. industries| 180561.54| 4162.55| 5.19|
| | | |
Sub Total| 3517310.79| 81010.63| 100.00|
Stock Swapped (from 2002 to 2008)| 145466.35| 3391.07| -| Advance of Inflows (from 2000 to 2004)| 89622.22| 1962.82| -| RBI's NRI Schemes| 5330.60| 121.33| -|
Grand Total| 3757729.96| 86395.85| -|

Sector wise FDI inflows
SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India|

Foreign Investment through GDRs (Euro Issues) –
Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and 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.

1. Clearance from FIPB –
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB ( Foreign Investment Promotion Board ) clearance before seeking final approval from Ministry of Finance.

2. Use of GDRs –
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes –

1. Automatic approval by RBI –
The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases – FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Analysis of sector specific policy for FDI

Sr. No.| Sector/Activity| FDI cap/Equity| Entry/Route|
1.| Hotel & Tourism| 100%| Automatic |
2.| NBFC| 49%| Automatic |
3.| Insurance| 26%| Automatic |
4.| Telecommunication:cellular, value added servicesISPs with gateways, radio-pagingElectronic Mail & Voice Mail| 49%74%100%| AutomaticAbove 49% need Govt. license| 5.| Trading companies:Primarily export activitiesbulk imports, cash and carry wholesale trading| 51%100%| AutomaticAutomatic| 6.| Power(other than atomic reactor power plants)| 100%| Automatic| 7.| Drugs & Pharmaceuticals | 100%| Automatic |

8.| Roads, Highways, Ports and Harbors| 100%| Automatic | 9.| Pollution Control and Management| 100%| Automatic | 10| Call Centers| 100%| Automatic |
11.| BPO| 100%| Automatic |
12.| For NRI's and OCB's:  i. 34 High Priority Industry Groups ii. Export Trading Companies iii. Hotels and Tourism-related Projects iv. Hospitals, Diagnostic Centers v. Shipping vi. Deep Sea Fishing vii. Oil Exploration viii. Power ix. Housing and Real Estate Development x. Highways, Bridges and Ports xi. Sick Industrial Units xii. Industries Requiring Compulsory Licensing xiii. Industries Reserved for Small Scale Sector| 100% | Automatic | 13.| Airports:Greenfield projectsExisting projects| 100%100%| AutomaticBeyond 74% FIPB | 14| Assets reconstruction company| 49%| FIPB|

15.| Cigars and cigarettes | 100%| FIPB|
16.| Courier services| 100%| FIPB|
17.| Investing companies in infrastructure (other than telecom sector)| 49%| FIPB|

Analysis of FDI inflow in India –

From April 2000 to August 2009-10
(Amount US$ in Millions)
S.No | Financial Year| Total FDI Inflows| % Growth Over Previous Year| 1.| 2000-01| 4,029| ----|
2.| 2001-02| 6,130| (+) 52|
3.| 2002-03| 5,035| (-) 18|
4.| 2003-04| 4,322| (-) 14|
5.| 2004-05| 6,051| (+) 40|
6.| 2005-06| 8,961| (+) 48|
7.| 2006-07| 22,826| (+) 146|
8.| 2007-08| 34,362| (+) 51|
9.| 2008-09| 35,168| (+) 02|
10.| 2009-10| 16,232| ----|
| | | |

Analysis of share of top ten investing countries FDI equity in flows

From April 2000 to January 2010
(Amount in Millions)
Sr. No| Country| Amount of FDI Inflows| % As To Total FDI Inflow| 1.| Mauritius| 19,18,633.61| 44.01|
2.| Singapore| 3,80,142.56| 8.72|
3.| U.S.A.| 3,32,935.60| 7.64|
4.| U.K.| 2,40,974.98| 5.53|
5.| Netherlands| 1,78,047.76| 4.08|
6.| Japan| 1,50,129.05| 3.44|
7.| Cyprus| 1,32,448.04| 3.04|
8.| Germany| 1,12,242.06| 2.57|
9.| France| 61,686.39| 1.42|
10.| U.A.E.| 50,915.59| 1.17|

Analysis of sectors attracting highest FDI equity inflows -

From April 2000 to March 2010
(Amount in Millions)
Sr. No | Country| Amount of FDI Inflows| % As To Total FDI Inflow| 1.| Service Sector(Financial & Non Financial)| 9,65,210.77| 22.14| 2.| Computer Software & Hardware| 4,13,419.03| 9.48| 3.| Telecommunication | 3,68,899.62| 8.46|

4.| Housing & Real Estate| 3,25,021.36| 7.46|
5.| Construction Activities| 2,65,492.96| 6.09|
6.| Automobile Industry| 1,90,172.22| 4.36|
7.| Power| 1,79,849.92| 4.13|
8.| Metallurgical Industries| 1,25,785.57| 2.89|
9.| Petroleum & Natural Gas| 1,11,957.00| 2.57|
10.| Chemical | 1,01,680.18| 2.33|

The sectors receiving the largest shares of total FDI inflows up to March 2010 were the service sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent respectively. These were followed by the telecommunications, real estate, construction and automobile sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 – March 2009 as compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million FDI in FY ‘09 as compared to USD 229 million in FY ’08.

During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY ‘09 as compared to the USD 1261 million in FY ’08, acquired 9.37 per cent share in total FDI inflow. India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY ’09 over FY ’08. The other sectors which registered growth in highest FDI inflow during April – March 2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities including road & highways (16.35 per cent) and power (1.86 per cent).

Foreign Investment Promotion Board
The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window clearance for proposals on foreign direct investment in the country that is not allowed access through the automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary ,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200 crores soon. The Board thus plays an important role in the administration and implementation of the Government’s FDI policy. In circumstances where there is ambiguity or a conflict of interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it has established its reputation as a body that does not unreasonably delay and is objective in its decision making. It therefore has a strong record of actively encouraging the flow of FDI into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important initiative of the Secretariat to further the cause of enhanced accessibility and transparency.


A large number of changes that were introduced in the country’s regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy and maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India came from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius which was protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. Foreign direct investment (FDI) provides a major source of capital which brings with it up-to-date technology. It would be difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad, since the transfer of technology to firms with no previous experience of using it is difficult, risky, and expensive. Over a long period of time FDI creates many externalities in the form of benefits available to the whole economy which the TNCs cannot appropriate as part of their own income. These include transfers of general knowledge and of specific technologies in production and distribution, industrial upgrading, work experience for the labour force, the introduction of modern management and accounting methods, the establishment of finance related and trading networks, and the upgrading of telecommunications services. FDI in services affects the host country's competitiveness by raising the productivity of capital and enabling the host country to attract new capital on favourable terms. It also creates services that can be used as strategic inputs in the traditional export sector to expand the volume of trade and to upgrade production through product and process innovation.


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