Economics for Everyone: Going Global–FDI Fables–FDI in Multibrand Retail

India Infoline News Service | Mumbai |

The FDI policy was liberalized progressively through review of the policy on an ongoing basis and allowing FDI in more industries under the automatic route.

FDI- Foreign Direct Investment

 

Context:

 

NEWS

 

FDI in multi-brand retail to go ahead,TNN (TIMES OF INDIA)

 

Govt says committed to multi-brand retail FDI FE BUREAU

 

Aviation FDI: Cautious, Centre set to take allies on board, BUSINESS STANDARD

 

India has been ranked at the third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2011' released in July 2009.

 

A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14.

 

 

BACKGROUND -Economic Reforms

The Government embarked upon major economic reforms since mid-1991 with a view to integrate with the world economy, and to emerge as a significant player in the globalization process. Reforms undertaken include decontrol of industries from the stringent regulatory process; simplification of investment procedures, promotion of foreign direct investment (FDI), liberalisation of exchange control, rationalization of taxes and public sector divestment. The FDI policy was liberalized progressively through review of the policy on an ongoing basis and allowing FDI in more industries under the automatic route.

 

FDI-Concept

FDI stands for Foreign Direct Investment. It's 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.

 

Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology.”

 

According to the Benchmark Definition of OECD, the most referred to and relied upon definition of FDI: Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long‐term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship....Direct investment is not solely limited to equity investment but also relates to reinvested earnings and inter‐company debt.

 

Thus, FOREIGN DIRECT INVESTMENT (FDI) indicates

A direct investment by a corporation in a commercial venture in another country FDI is the process where by resident of one country  (the home country) acquires ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country)

 

PURPOSE AND NEED FOR FDI

FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. According to the National Manufacturing Competitiveness Council “Foreign investments mean both foreign portfolio investments and foreign direct investments (FDI). FDI brings better technology and management, access to marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. This efficiency contribution of FDI is much more important”.


There can be three ways by which a foreign market can differentiate itself from others – Economic – Size of the foreign market, growth rate, market concentration, infrastructure, availability of talent, competitive cost structures etc

 

Political: These include the political risk of the country, the judicial mechanisms and how transparent the judicial system is, labour laws, ease of doing business etc

 

Social: These include similarities of culture, ways of doing business, social structure between the country of origin of the firm and the foreign country etc.

 

Thus the predominant intents for investing abroad were identified as follows:

Market Seeking: Market seeking investment is driven by gaining access to local or regional market and investing locally could help prevent some operational costs such as those of distribution.

  • Technology or Brand Seeking: Firms may also invest in order to gain access to new technology or to acquire some brands or products.

  • Resource Seeking: Resource seeking investment is driven by gaining access to natural resources.

  • Thus, FDI helps in Gain a foothold in a new

 

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