Describe about the FDI in India for Organizational Investment.
FDI is foreign direct investment. It is a kind of investment in an organization where an investor from different country invests in a business situated at different one. The investors have the control over that organization in which they have invested. Control is something where investor is having 10% or more then that shares in their hand. FDI is of two types: Greenfield and Brownfield. Greenfield investments are those investments where a company start its operations in foreign company from the ground up. Brownfield are those, where an investor or government take a lease or purchase the entire business for launching a new production activity. (MOON, 2015)
Sectors:
Investor are getting more attracted towards Infrastructure, automotive, service, pharmaceuticals, railways, textile, chemical, airlines etc. Indian government is allowing 100% FDI in all of these sectors. 10% of Indian GDP depends on construction activity. Indian government has plans for growing this industry more by investing $1 trillion in this sector till 2017. It is planning that 40% of total investment will be funded by private sector. Automotive sector is increasing rapidly in India. Its share is 7% of total GDP of India. Pharmaceutical sector is expected to grow at the rate of 20% annually till 2020. It is world’s 3rd largest sector in terms of volume. (Khandare and Baber 2012).
Service sector includes banking, research and development, outsourcing, insurance, technology and courier. Railway is also allowing 100% FDI in other then operation department. Currently US $13 billion is expected by Indian government for railway projects by FDI. Chemical industry is expected to grow at the rate of 7% till 2020. Textile sector is one of the major contributors in Indian export share. During last financial year FDI is increased by 91%. Airlines industry is allowing 49% FDI under automatic route and beyond it, through an approval of government.
Indian Economy:
India has already presented itself as one of the world’s fastest growing economies of the world. India is in top 10 as an attractive destination for foreign investors. After adopting LPG policy, India has become more investment-friendly (Make in India, 2016). FDI is continuously increasing in India. India is currently having 3% of the total share in world’s FDI (Ray,2007).
Indian economy is world’s third largest economy measured by PPP (purchasing power parity) with a US $3.611 trillion GDP. It is one of the tenth largest economies in whole world, with a US $800.8 GDP. It is the second major economy who is growing at the rate of 8.9% in the first quarter of financial year 2006-2007. The Indian economy is so diverse and encompasses handicrafts, textile, manufacturing, agriculture and many services. Although still two third of Indian workforce is earning directly or indirectly from agriculture. Services are growing very rapidly in Indian market and playing an important role in Indian economy. Because of large number of educated and young people, India is becoming first choice of every global company for ‘back office’ destination, companies are outsourcing for their technical support and customer care from India. India is one of the major exporters of highly skilled workforce in financial services, software engineering etc.
FDI is playing an important role since beginning of liberalization. Globalization and privatization plays an important role in FDI inflows for developing countries like India. According to a report of World Bank, developing countries increased six times in 1990-1998. The share of FDI in GDI (gross domestic investment) was increased to 2.25%. If GDI is not too high then it shows an important effect on country’s economy due to FDI flows (Pan and Sen, 2007). Only with government liberalization policy, FDI inflows can be more. FDI inflows always play an important role in growth of human capital, technological, research and development etc.FDI can be of two types: short run and long run. Short run FDI is attracted through government policy, low labour cost, availability of workforce etc. Long run FDI is attracted through technology, infrastructure etc. Cointegration theory is used to check the short and long run impact of FDI on Indian’s growth and GDI. The advantages of this approach are to identify the restrictions on both the dimensions, short and long run. There are 2 more variable added to identify the relationship of growth of India and FDI as ULC (unit labour cost) and share IMPDT (Import duty in tax revenue). VECM (vector error correction model) introduced for clarifying many questions.
FDI flows for India:
For countries that are allowing FDI; cost structure, firm size is essential determinants. This cost structure; market size may create an impact on FDI inflow whether direct or indirect. To study these impacts, FDI flows are necessary to intimate. GDP of a nation reflects size of market indirectly, but it has been eliminated from model. ULC plays an important role because labour rate is too low in India in comparison of other countries.
Factors which affect FDI:
Political impact on FDI in India: India has enjoyed so many successive years of elected government at union and federal level both. India always suffered with political instability as no party won with clear majority and hence parties have to form a coalition government. However, stability in Indian politics returned with Modi Government in 2014 with a very healthy and strong coalition government (Gunti, 2002).
India’s economy get brighter after this government as this government is taking many decisions in favour of FDI. Now, every party has accepted this policies as these are increasing the GDP of nation. Even now, there are less chances of political instability in future. Now, if political instability occurs, India would hardly be affected. Hence, now political risk in FDI in India is very less (Lim, 2001).
Economical impact on FDI in India:
A country, whose economy continuously grows up, attracts more foreign direct investment because investor feel more confident in investing such countries sector. Countries with a good rate of economy growth attract many investors towards it as they feel that their amount is safe and they can earn more from this country. FDI often targets the consumer from the host company to sell out their good directly. Therefore, the size of economy, people are more important to attract any investor. Just like India, as the economy of India is rising up, so investor feel more confident while investing there. India is a new target for FDI’s now as new emerging market, their policies; middle class have a strong demand for goods and services of multinational brands.
Technical impact on FDI in India:
Technology level of a country attracts FDIs more because they always want to set up their business at such place where they can take advantage of new resources and technology. FDI also introduce technical knowhow, new technology in the developing countries. Foreign expertise is the key factor for upgrading the technical process of host country. The best example of it is “the deal between India and US for nuclear energy”, where both the companies have dealt about nuclear, in which both the countries would transfer the nuclear energy knowhow and allow India for upgrading its civilian nuclear facilities. FDIs are more attracting in Indian market because of Indian civilians are more technology friendly.
Socio cultural impacts on foreign direct investment more. Because some countries people are against towards foreign goods, they don’t like to avail and consume foreign services and products (Adams, 1999). Foreign investors study the country and their people more before investing in that country. If they find that civilian of that country are okay with buying and adopting foreign goods, then only they invest in that country. In context of India, investors feel attraction because all Indians are a big fan of foreign brands (Adams,1999).
Thus all these factors affect FDI more.
National resources:
National property can be created, not inherited. National resources can never grow out of a nation’s natural endowment, its currency’s value, labour pool, interest rate and classical economics insist.
A country’s competitiveness depends upon the capacity of country and the industry to innovates the product and upgrade the products. Company can always gain benefits against its competitor because of challenge and pressure. The benefit of company is the domestic rivals, aggressive suppliers and demanding local customers.
Competitive advantage of national resources:
National resources of a country attracts investor more for investing their amount in the country as investor finds that investing in that country is a nice platform for increasing their money. FDI investigates country detail and about their resources before investing in that country, and according to that investigation only, they make investments. If investor finds that there is no labour, investor is definitely not going to invest in that country.
India is a very rich company in context of resources as there are coal, iron pre, manganese ore, mica bauxite, diamonds, natural gas, thorium and limestone are in huge. Around the world, all companies who are involving in natural resources business are doing outstanding as there are unexpected demand in the market. Nowadays, middle class families in developing countries are increasing their demand for house, energy, transportation etc.
Porter’s theory of national competitive advantage: Porter developed a theory named by “Diamond of competitive advantage” for international trade. This theory says that success of a industry depends on 4 factors: demand condition, factor condition, company strategy, rivalry and structure and related and supporting industries. Factor conditions are a country’s factor endowment. Demand condition describes a large and already existed consumer base and their demand. Related and supporting industries describe local supplier developments that are eager to meet industry’s marketing and distribution needs. Firm structure, strategy and rivalry describes environment of the competitive firm.
Porter also argues that national policies affect the firm’s international opportunity and strategy. This theory combines the firm and country level theory together for focusing on individual firm. Further, he said that every nation play an essential role in creating a surrounding that impact on firm’s success.
Factor Endowment: factor endowment of a country is commonly land, capital, labour, entrepreneurship etc that a country can possesses and exploit for manufacturing. Countries that are having large endowment attract FDIs more rather than those who are having small endowment, if rest things are equal in a country. India is having large endowment as India is having land and labour in excessive.
Competitive advantage of Factor endowment:
The natural resources had passed through some challenging phase in India. Clearance delays, blanket bans etc. had bought it to a temporary position. Even India was not able to capitalize its economic strength such as resources, minerals etc. All countries are not blessed with rich mineral resources and the countries which are blessed with such minerals use it for country’s overall growth, development of their civilians, securing employment, decreasing the poverty and growing up their economies.
Factor endowment varies country to country. Factor condition refers to a factor of production of a country. If a country’s factor empowerment is impressive, then FDI will invest in that country. For a business Land, labour, capital etc are more important, if in a country there is no labour, a business can never run over there. In India, there are huge labour and even in low cost. It attracts foreign direct investor because they can get a product in minimum investment.
FDI is a flow of funds provided to a multinational organization or any parent company. By 2005, FDI inflow rose all over the world to $916 billion, more than half of FDI flows received by developing countries business. FDI activities play an important role in influencing the nature of exchange rates (Aizenman, 1992). Exchange rate is the value of domestic currency in exchange of foreign currency. Exchange rate can influence FDI as well as concerned countries. If currency depreciates of any country, it means the value of that currency is relatively declined of to the value of any another country (Grewal, 2013).
India is one of the biggest emerging economies in the world. India has become an investing country after adopting Liberalization in 1991. The average exchange rate of INR is Rs 65.04 per US $ in 2015-16. It was happen due to a strong growth in US economy that impacted on US $ against all other major currencies (Blonigen, 1997). It is found that Indian rupee performed better then EDME currency. A study was done to examine the relation between real exchange rate and FDI during globalization period. It was found that the worker’s remittance and exchange rate have a positive relation in India (World Trade Organization, 2015).
Country’s existing trade policies, incentive, barriers and system:
Today India is fastest growing economy. India’s rank has been improved by 12 places by “The world bank” in 2016. FDI in India had been gone up by 40% in 2016. India’s growth is objected at 7.5% by World Bank and it has been declared as the brightest spot by IMF. India’s existing policies was not so much investment-friendly. There were so many barriers for FDIs, which were making investor’s interest less in Indian market. System and government was not so helping for foreign investors. (Government of India, 2016).
Existing trade policy:
New government in India is allowing 100% FDI in many sectors in India, which was earlier 49% only in Indian sector. Earlier, there were so many restrictions, formalities for foreign investors to enter into Indian market. They were not even allowed to do 100% investment (Economist, 1999). They had to tie up with any Indian company for settling down their business in Indian market. In construction development sector, there were conditions related to land, capital etc which used to demotivate investors. In defence sector, FDI were allowed till 29% only. Broadcasting sector was not allowing 100% FDI. Banking sector was not so much investment friendly. Even FDIs were not even allowed to make 49%+ investments without special approval of government (Cardenas and Berg, 2010).
Existing incentive, barriers and system:
Earlier, there were huge barriers for Investors and foreign countries to enter in Indian market and invest in that market. An investor needed to tie up with any Indian company and they had to full fill many conditions applied by Indian government on them. Government was not even entertaining foreign investors by providing them facilities. Therefore, Indian market was not so attractive for foreign Direct Investors. They used to give priority to China Market because the policies, facilities were better in China market for FDI. The system was not Investment friendly at all. Earlier Indian Government was not at all focusing on FDI.
Existing level of FDI:
Existing level of FDI in India was not as better as it is in present scenario. Their policies were not Investment-friendly. Modi government has changed the policies now, and thus GDP, economy have been increased.
(The Financial Express, 2015).
The main sectors in India are Healthcare & pharma, Telecom and oil & gas. And the main FDIs are from UK, Us and Japan. The above data is offering a better situation to understand about the foreign direct investor as well as the Indian sectors which are attracting FDI in India more. This data only includes foreign investment not any kind of domestic investment.
According to an analysis, FDI inflows were more in Service sector in the period of 2000-2012. The service sector includes telecom, banking etc.
Healthcare and pharma sector is the emerging sector in India. As Indians are more in Population. So more people need more precautions, medicines etc. and Policies for FDI in pharma sector were quite good. So, investor invested more in this sector. In 2013-2015, foreign investment was 18% of total foreign investment.
Telecom Sector:
Telecom sector is increasing rapidly in Indian market. As in India, there are huge population and 60% are youth of them. All youths are Tech friendly. So Telecom sector is increasing day by day. Indians are adopting foreign techniques, so FDIs are more interesting in this sector. In 2013-15, There were 17% of total Foreign investment was in Telecom sector Itself. Policies made by Indian Government were also not hectic for investors. So They invested more in this sector.
Oil and gas Sector:
India is very rich in terms of minerals. There are many mines of oil, gas, gold etc. Every country doesn’t have such minerals So Foreign direct investors come to India to make investment in this sector. This sector is more beneficial for investors as they can earn more money from this sector. In 2013-15 there was 10% of total foreign investment was in Oil and gas sector.
Conclusion:
Thus, Indian economy is growing up very rapidly. After the new government, GDP, FDI has been increased. Investors are feeling more impressed towards Indian economy. World trade organization has declared Indian Market as brightest market for FDI. It is an emerging economy nowadays. FDI is increasing day by day in Indian Market.
References:
MOON H. C. (2015). Foreign Direct Investment: A global Perspective. World scientific.
Adams, J (1999), Foreign Direct Investment and the Environment: The Role of Voluntary Corporate Environmental Management, Paper Presented at an OECD Conference on Foreign Direct Investment and the Environment, 28-29 January, 1999; The Hague, Netherlands.
BIAC – Business and Industry Advisory Committee to the OECD (1999), BIAC Discussion Paper on FDI and the Environment, Paper presented at an OECD Conference on Foreign Direct Investment and the Environment, 28-29 January, 1999; The Hague, Netherlands.
Economist (1999). “Down, but not out of hope”, 351 (8117); pg. 76, The Economist, London.
Aizenman, J (1992). “Exchange Rate Flexibility, Volatility and Patterns of Domestic and Foreign Direct Investment,” International Monetary Fund Staff Papers vol.39 no. 4 (1992) 890-922.
Blonigen, B. (1997). “Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment.” The American Economic Review, Vol. 87, No. 3. (Jun.1997), pp. 447-465.
Grewal A. (2013). Impact of Rupee- Dollar Fluctuations on Indian Economy: Challenges for Rbi & Indian Government, International Journal of Computer Science and Management Studies.
Government of India (2016). Economic Survey of India, 2015- 16. Retrieved on 30 Nov 2016 https://indiabudget.nic.in/es2015-16/echapter-vol1.pdf
World Trade Organization (2015). International Trade Statistics. Retrieved on 30 Nov 2016 from https://www.wto.org/english/res_e/statis_e/its2015_e/its15_toc_e.htm
Khandare VB and Baber SN (2012). Structure of Foreign Direct Investment in India during Globalization Period, Indian Streams Research Journal, 2012.
Ray S. K. (2007). The Indian Economy. PHI learning pvt ltd.
Make in India (2016). Foreign Direct Investment. Retrieved on 30 Nov 2016 from https://www.makeinindia.com/policy/foreign-direct-investment.
Pan S. And Sen R. (2007). Foreign Direct Investment and Trade in India. Deep and Deep Publications.
Lim E. (2001). Determinants Of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature. International Monetary fund.
Gunti A. (2002). Liberalisation of Indian Economy. Diplom.de.
Cardeans B. And Berg Z. (2010). Conditions for Foreign Direct Investment in India. Nova Science.
The financial Express (2015). FDI inflows: who is investing in India and in what sectors. Retrieved on 30 Nov 2016 from https://www.financialexpress.com/opinion/fdi-inflows-who-is-investing-in-india-and-in-what-sectors/28737/
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