Group 4(ii)
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Transcript of Group 4(ii)
![Page 1: Group 4(ii)](https://reader035.fdocuments.in/reader035/viewer/2022081811/54503ab0af79590a418b8764/html5/thumbnails/1.jpg)
• FOREIGN DIRECT INVESTMENT (FDI)
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DEFINITION :• “Foreign direct investment occures when an
investor based in one country acquires assets in another country with the interest to manage the asset.”
• Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets.
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THEORIES OF FDI
1. THEORY OF IMPERFECT MARKET : The firms having comparative technological
or organizational advantage invest abroad to gain firm specific advantages
2. PRODUCT LIFE CYCLE THEORY : The product life cycle theory tries to explain
that when the product reaches the maturity stage the firm starts investing abroad
to low cost production areas
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3. INTERNATIONALISATION : Firms invest abroad in order to retain inside
the group the firms competitive advantage4. ELECTIC THEORY OF FDI : According to this theory it is not possible for a
single theory to explain all forms of multinational strategies as there are a
wide range of factors that influence FDI decision
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Factors influencing :
A. Ownership advantages : It arise due to the firm owning a special
knowledge or because of economies of scale or due to monopolistic advantage
B. Locational advantages : It is due to location bound endowments enjoyed
by a firmC. Internationalization advantage : It refers to the extent to which the firm can
market its advantages within the various units of the firm
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WHY DO FIRMS INVEST ABROAD ?
• To reduce cost of production
• To have diversified sourcing facilities
• To increase volume of sale
• To promote knowledge sharing
• To retain domestic customers
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FDI STRATEGIES :
• BRANCHES : Parent company open up branches in foreign
country• JOINT VENTURE : It is a partnership between the foreign and
domestic company where the partnership firms share equity and a new firm is formed
Eg : Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion
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EXAMPLES :
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• WHOLLY OWNED SUBSIDIARY : If the foreign investment is equal to the
entire equity capital it is called as a wholly owned subsidiary
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Examples :
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• MERGER : A merger is a combination of two or more
companies being merged into an existing company or a new company may be formed
Eg : Reliance Petrochemicals Ltd. Merged with Reliance Industries Ltd. In 2010
• ACQUISITION AND TAKEOVER : Acquisition is a simple act of acquiring control over
the management of other companies
Eg : HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion
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BENEFITS OF FDI
• FDI supplements domestic capital• Availability of scarce factors of production• Improvement in Balance of Payment• Influence on foreign trade• Development of social and economic
infrastructure• FDI promotes research
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ARGUMENTS AGAINST FDI
• Capital flow may not be real : FDI may not bring fresh capital if the foreign
company purchases equity financed by domestic lenders.
• Obsolete and mismatched technology : The technology being brought by the MNCs is
one that run its course in the home country and has been rendered obsolete
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• FDI may cause in loss of competition : When FDI is through mergers and
acquisition , it may reduce competition in the host country
• Exploitation of resources
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FDI IN INDIA
• Foreign Direct Investment (FDI) is permitted as under the following forms of investments –
1. Through financial collaborations2. Through joint ventures and technical
collaborations3. Through capital markets via Euro issues4. Through private placements or preferential
allotments
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• FDI is not permitted in the following industrial sectors :
1. Arms and ammunition2. Atomic Energy3. Railway Transport4. Coal and lignite5. Mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamonds, copper, zinc
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FDI-TOP INVESTERS IN INDIAMAURITIUS 38 %
SINGAPORE 10 %
U.K 9 %
JAPAN 7 %
U.S.A 6 %
NETHERLANDS 4 %
CYPRUS 4 %
GERMANY 3 %
FRANCE 2 %
U.A.E 1 %
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FDI - LEADING SECTORS
SERVICES SECTOR 19 %
TELECOMMUNICATIONS 7 %
CONSTRUCTION ACTIVITIES 7 %
COMPUTER SOFTWARE & HARDWARE 7 %
HOUSING & REAL ESTATE 7 %
CHEMICALS 6 %
DRUGS & PHARMACEUTICALS 5 %
POWER 4 %
AUTOMOBILE INDUSTRY 4 %
METALLURGICAL INDUSTRIES 4 %