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AMITY GLOBAL
BUSINESS SCHOOL
Foreign CapitalForeign CapitalKalika Bansal
Amity Global Business School, Ahmedabad.
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AMITY GLOBAL
BUSINESS SCHOOL
Need for Foreign CapitalNeed for Foreign Capital
y Sustaining a high level of investment
y The technological gapy Exploitation of natural resources
y Undertaking the initial risk
y Development of basic economicinfrastructure
y The foreign exchange gap
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ComponentsComponents
y Two main forms
Private foreign investment
x Direct
x Portfolio
Foreign aid
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Foreign AidForeign Aid
y Includes ́ all official grants and concessional
loans, which are broadly aimed attransferring resources from developed to
less developed nations on developmental or
income distributional grounds.
y Lower r
y Longer maturity period
y Foreign Governments, IMF, World Bank etc.
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India· policy towards Foreign CapitalIndia· policy towards Foreign Capital
y No discrimination between foreign and
domestic capital
y Full opportunities to earn profits
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Reasons for sharp increase in FDIReasons for sharp increase in FDI
y Among the developing countries, India hasnow emerged as the second mostpreferred destination for FDI
y India·s share (2.3% in 05 to 4.5% in 06)y Expansion in domestic activityy P
ositive investment climatey Progressive liberalisation of the FDI policyy Simplification of proceduresy Growth in financial services, information
technology etc. 6
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SectoralSectoral CompositionCompositiony Largest recipient- Electronic equipment and
computer software (17.54% = one ² sixth)
y Followed by services sector (12.69%)y Telecommunication (10.39%)
y Transportation (9.31%)
y P
ower and oil refinery (7.45%)y Chemicals (5.79%)
y Food processing industry (3.12%)
y Drugs and pharmaceuticals (2.19%)
y Metallurgical industries (2.14%) 7
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Determinants of FDI inflowsDeterminants of FDI inflows: :
market size (income levels and population)
extent of urbanization quality of infrastructure
policy factors such as
tax rates,
investment incentives,
performance requirements.
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Impact of FDI inflows: someImpact of FDI inflows: someissuesissues
y Generation of Outputy Employment Generation
y Balanced Regional Development
y Export Expansiony Technological spillovers
y Augmenting Capital Stock
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y FDI - Growth relationship is a two way
relationship
Some times FDI projects actually crowd out
domestic investment with their well-knownbrand names and other resources.
Indian evidence suggests that regulations have
prompted foreign enterprises in undertaking
exports.
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India as a destination for F.D.I.India as a destination for F.D.I.
y Investors are generally upbeat about the
country, but somewhat hesitant to invest
because of a perception that India has
done less than other emerging markets to
reduce fundamental obstacles toinvestment. Companies operating in
India continue to face serious business
constraints.11
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y
This is partly because the government hasdeliberately moved to liberalize the
economy at a measured pace.
y FDI caps or restrictions continue to apply
in a few key sectors.
y Meanwhile, a variety of other factors--such
as
y excessive red tape,
y an opaque and complex tax system, and
y concerns about corruption--can dampen
investors' enthusiasm. 12
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y Other types of regulations also continue
to hamper the flow of investment.
y For example, foreign companies are
required to obtain a "no-objection"
certificate from their existing joint-
venture partner if they wish to set up a
new venture in the same line of businessin India.
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y The World Bank ranks India 121st out of
181 countries as a place to start a
business.
y However, India's high level of bureaucracy
dampens interest from companies, whichlike to respond quickly to market forces,
and slows down the growth of the private
sector14
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y
Besides direct corporate income taxes,firms are subject to indirect taxes such as
y excise duties and levies from individualstates and municipalities. The indirect tax
system is frighteningly complicated.y Corruption is another major deterrent.
y India's plethora of red tape and slow legal
system create an environment that fosterscorruption.
y India ranked 85th out of 180 countries inTransparency International's Corruption
Perceptions Index 2008. 15
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What is the government doingWhat is the government doingabout it?about it?y Successive Indian governments have
repeatedly emphasised their openness to
foreign investment.y In 2008, the FDI limit in state-run
refineries has been increased;
y
the FDIcap in the mining sector has beenremoved;
y and foreign airlines have been givenpermission to buy stakes in certain
domestic civil-aviation companies. 16
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y raising the upper limit on FDI in private
insurance companies from 26% to 49%.
y The government is also currently
reviewing some aspects of FDI policy to
ease bureaucratic controls and to define
FDI rules more systematically.
y Most foreign investment has been broughtunder the automatic-approval facility.
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y This means that companies need not obtain
permission from the government or thecentral bank before investing;
y they simply file documents ex post factowith the central bank.
y The government has promised to decide onproposed FDI projects within 30 days.
y The dismantling of this "licence raj" and the
computerisation of certain services havehelped to decrease corruption by reducingthe number of interactions requiredbetween the private sector and the
government. 18