IB M5 FDI.pdf

Unit 5 : FDI

FDI

• Flow of funds into facilities from one destination to another, for any activity as industrial development, infrastructure & manufacturing.

Prof Purshottam Patil IB 2014 2

Forms of FDI

• i. Greenfield Investment: Establish entirely new operation in a nation

• ii. Acquire/ merge with existing firm in foreign nation: Acquisitions can be minority (foreign interest of 10-49%) & Majority (foreign interest of 50-99%) or full outright stake(foreign interest of 100%)

FDI : Concept

Re-investing earnings of FDI Enterprises are also FDI.

Foreign investment useful if focus is more on projects than equity of Cos. as investments into equity are ‘hot money’ that leaves at first sign of trouble. E.g. Crisis in S. Korea, S. Africa & Argentina were partially due to these problems. Hence, FDI excludes Foreign Investment in stock markets.

Investment Outflow: Investment from home nation to other nation

Investment Inflow : Investment from other nation to home nation


To establish in N. American Market, Japanaesecar maker Toyota had to options: exports or FDI?

Although it was successfully exporting, it increasingly turned to FDI.

Now, Toyota has capability to produce 1.45 million cars yearly, only in N. America.


FDI : Concept

Need of FDI:


For Developing Nations : Housing, Power

Generation, Infrastructure,

Healthcare, Explore & Produce Primary Goods.

For Developed Nations : Modernization & Further

Develop Technology

FDI : Concept

FDI Patterns

1. Follow Competitors

• Strategic approach to follow one's competitors

• e.g. American Motor Co.( AMC) invested in Shanghai Motor Co. in China. Then Cos. in US, Japan & S. Korea followed investment in China.

2. International PLC

• Cost cut by shifting production to developing nations

• e.g. Essel Propack moved to China

3. Location

• At times, FDI better vis-a-visexporting / licensing

• e.g. Mahindra tractors manufactured in N. America

4. Contract Manufacturing

• Reduce manu. costs to improve competency

• e.g. Honda Motors manufactures its vehicles in Europe.

5. Assured R.O.I.

• R&D, futuristic projects enable investor better success & revenues. Swiss global healthcare Co. Roche invested heavily in Genentech, California for innovative products.


FDI : Concept

Horizontal FDI

• In same industry operating at home

• e.g. Cemex, Mexican largest Cement Manufacturer, acquired RMC in Britain(2004)

Vertical FDI

• In industry providing inputs for firm’s domestic operations or selling outputs of firm’s domestic operations. 2 types, viz.,

• Backward VFDI: e.g. extractive industries providing inputs for domestic processes, as oil extraction, copper mining, etc

• Forward VFDI: sells output of domestic production e.g. e.g. Volkswagen acquired many dealers when it entered US, instead of distributing its cars through independent dealers.


FDI : ConceptFDI: Types

Flow of FDI

• Amount of FDI undertaken over given time(usually yearly)

Stock of FDI

• Total accumulated value of foreign assets at given time


FDI : Concept

e.g. Average annual FDI outflow ^sed from $25 Bln(1975) to $1.2 Trillion (2001)

before falling back to $620Bln(2004).

By 2003 global FDI stock exceeded $8.1Tln. 61,000 parent Cos. Had 9,00,000 affiliates in foreign markets, collectively employing 54 Mln people & accounting for 1/10th global

growth.

Host Country: Benefits


1. Capital: long term MNCs investment in projects yields profits

2. Technology: FDI drives rate of technology development,

diffusion & transfer. Transfer of technology through FDI

contributes +vely to national productivity.

3. Market Access: Investors provide export

markets’ access & enhances exports

4. Increase in domestic investt: Rise in FDI flow enhances

national investors’ investt

5. Employment Generation: FDI enhances

direct & indirect employment opportunities

in host country

6. Infrastructure: To facilitate FDI, host nation focuses on

infrastructure dev. e.g. MBP in NaviMumbai, Silver valley in Bangalore, Hitech City in Hyderabad & Tidel

Park in Chennai.

7. Social Effects: Due to FDI, employment,

infrastructure, literacy & healthcare improves.

8. Formation of Clusters: groups where R &D, training & pollution

control systems provided to competing companies. worked well in Italy, Brazil

& India

9. Spin-Offs: Individuals trained in cos. start own ventures. e.g.: spin-offs of Silicon Valley, US. Fairchild: spin-

off & now competitor of Intel. Several Machine tool industries in Pune,

Ludhiana & Bangalore are spin-offs of SKF, Bosch & MICO

FDI : Benefits & Costs

Host Country: Costs


1. Investing Cos. may not serve the interest of host

nation

2. Outflow of earnings due to repatriation to

home nation

3. Import of substantial inputs from investor's

home nation

4. Cos will hire expartiate managers

for management positions

5. ^ expensive Controlling

technologies of investor Co. not in interest of

host nation

6. Home nation producers lack money /

technical expertise, hence incompetent &

may get wiped out.


Home Country: Benefits


1. Inflow of earnings on a

long term basis

2. High salaries for employees

3. Exposure to foreign markets


Home Country: Costs


1. Initial extremely large capital

outflow

2. Exports may decrease

3. Imports may ^ if FDI intended to

serve home nation

4. Home nation looses employment

opportunity

5. Profits are repatriated abroad, if not re-invested in

home nation

6. Major tax heavens enjoy

money at the cost of home nation


Automatic Route : Foreign Investors do not need mandatory FIPB (Foreign Investt. Promotion

Board) of RBI permission for 100% ownership, for categories below:


1. where sophisticated technology is proposed to

be brought in.

2. where min. 50%production is to be

exported

3. where Co. offers for consultancy services

4. where Co. offers proposals for power,

roads, ports & industrial model towns / industrial

parks/estates

5. where Co seeks to establish SEZs, AEZs (Agri.

Export Zone) Techno Parks & EOUs

•Such above units enjoy 100% profit repatriation to their home nations.

FDI: FIs in India

Strategies for Indian Cos. to raise funds:


Strategies for Indian

Cos. to raise funds

1. GDRs ( Global

Depository Receipts)

2. ADRs ( American

Depository Receipts

3. FCCBs(Foreign Currency

Convertible Bonds)

FDI: FIs in India

No ceilings on investment & no. of GDRs, ADRs & FCCBs to be floated by Co. in a financial year.

No end use restrictions on GDRs/ADRs issue proceeds, except a ban on invest. in real estate & stock market.

25% FCCB proceeds may be used for general corporate restructuring(redesigning one/more aspects of a company as spinning off depts. or take advantage of tax breaks)

Co. seeking Govt. approval to have min. 3 years sound financial performance record. This may be relaxed for infrastructure projects as power generation, telecommunication, petroleum exploration & refining, ports, airports & roads.


FDI: FIs in India

Policy Implications:

• Liberal policies helped NRI investt. in India grown 20%< annually since 2001, until 2007.

• NRIs from Middle East & Europe invested ^ly in real estate & SEZs


FDI Policy

Recent FDI Policy Initiatives:


• Cos having foreign technology agreements, allowed to pay royalties on automatic route to a limit of 8% of Exports & 5% on domestic sales, without any restrictions on royalty payments.

Liberalized Policy on Foreign Technology Collaboration:

• FDI limit in private sector banks allowed up to 74% under automatic route, including investment by FIIs (Foreign Institutional Investors)

Foreign Investment in the Banking Sector

• By permission to hold 100% paid up capital, if regulated by home country banking supervisory authority & meeting RBI licensing criteria.

Foreign Bank wholly owned subsidiary in India

• 100% FDI permitted subject to legal compliance & Govt Approvals.

Scientific & Technical Journal/Magazine Printing

FDI Policy

• 100% FDI allowed on automatic route, subject to regulatory framework in oil marketing sector

Marketing of Petroleum Products

• 100% FDI permitted on automatic route subject to & under Govt. policy.

Oil exploration sector

• 100% FDI permitted on automatic route for Natural Gas / LNG(liquefied natural gas) with prior Govt. approval.

Petroleum Product Pipelines

• 100% FDI permitted, as a developer. same also applicable to agricultural zones & techno parks

SEZs & EOUs


FDI Policy

FDI Policy Initiatives contd..:

State wise distribution of Approvals:

• The Central Government supplements efforts of state governments by providing fiscal incentives for investments in high priority sectors as infrastructure, IT through schemes as Growth centre schemes, transport subsidy schemes, the new industrial policy for the north east & other hill states, the Electronics Hardware Technology Park (EHTP), the Software Technology Park (STP), Export Promotion Zones(EPZs) & Special Economic Zones (SEZs)

• During 1991-2004, states accounting for major FDI investment approvals were Maharashtra, Gujarat, Delhi, Tamil Nadu, Karnataka, Andhra Pradesh, Madhya Pradesh, WB & Uttar Pradesh.


FDI: India

2000< MNCs from US & Europe invested in Chinese SEZs & EPZs (Export Processing Zones)

Attractive Destinations: Philippines, Indonesia, Thailand & Malaysia

L. America, Brazil, Argentina & Columbia are now attracting investments.

Growth only due to FDI: Malta, Cyprus, Panama & Mauritius.


FDI : Trends

Between 2000-04 FDI value slumped 50% from $1.2 Tln to 620 Bln.

In 2000, US, being largest FDI recipient ($314 Bln of $1.2Tln in global FDI, it share dropped to $121 Bln in 2004 .


FDI : Trends

Developing Nations

• 1985-90: annual FDI FLOW OF 27.4 Bln (17.4% of global FDI flow).

• 2004: 44% global FDI, with share of China as largest, followed by Mexico & Brazil. In contrast, Africa had smallest amount of inward FDI flow, of $20Bln.

Global Stock: Among 100 largest MNCs (2003), 27% US, 14% French, 12% German & Britain each, 7% Japanese. In global stock, 25% of US, 14% Britain, 8% French & German each & 4% Japanese.

Services: In 2003, 67%. Initially focused on Trade & Financial services, now in electricity, water, telecom & business services as IT are prominent.

Rise in Internet based global telecom networks. E.g. P&G shifted back office accounting functions to Philippines. Dell has call answering centers in India. Microsoft & IBM have software developing & testing centers in India.


FDI : Trends

FDI inflow ^sed 5 times to USD 15.7 Bln in 2006-07 from USD 2.2 Blnin 2003-04.

Mauritius was dominant nation investing in India, followed by USA & UK

Capital inflows via GDRs/ADRs from abroad was USD 5.67 Bln in Apr-Nov’2007 vs. USD 1.85 Bln during corresponding period in 2006. FDI Global Trends 2013.pptx


India: FDI Trends

FDI Global Trends 2013.pptx

IB M5 FDI.pdf

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