31166996 Foreign Capital

8/8/2019 31166996 Foreign Capital

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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

Foreign CapitalForeign CapitalKalika Bansal

Amity Global Business School, Ahmedabad.

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Ahmedabad

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

ComponentsComponents

y Two main forms

Private foreign investment

x Direct

x Portfolio

Foreign aid

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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

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BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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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Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOL

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



Ahmedabad

AMITY GLOBAL

BUSINESS SCHOOLKey issues?Key issues?

y Capital Flows and Balance of Payments

y Displacement of Indigenous production

y Extent of technology transfer

y Income distribution

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