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A
Research Project Report
ON
“ROLE OF FDI IN SME”
TO BE SUBMITTED TO DR. APJ ABDUL KALAMTECHNICAL UNIVERSITY, LUCKNOW
IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE
OF
MASTER OF BUSINESS ADMINISTRATIONBatch 2014-16
Submitted to : Submitted By :
Dr. NEHA VERMAFaculty ! Ma"a#$%$"t
SA&SHI 'AR'MBA-IV SEMRO(( NO.140)4)00))
DEWAN INSTITUTE OF MANAGEMENT STUDIESDEWAN INSTITUTE OF MANAGEMENT STUDIES
Meerut By-Pass Road, Partapur, Meerut.(U.P.) INDIA Pin-250 10Ph.!"1-121-2##015, 2##0$5, Fax: "1-121-2##0$
Email!in%o&de'ninstitutes.or,We Site: '''.de'aninstitutes.or
1
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!ON"EN"S
#$ A!%NOWLED&EMEN" '
($ IN"ROD)!"ION *
+$ FOREI&N DIRE!" IN,ES"MEN" -
'$ FOREI&N DIRE!" IN,ES"MEN" IN INDIA #'
*$ SE!"OR SPE!IFI! FOREI&N DIRE!" IN,ES"MEN"
IN INDIA *.
/$ O01E!"I,E OF "2E S")D3 *45$ P)RPOSE OF "2IS S")D3 /.
-$ S"A"EMEN" OF PRO0LEM /#
4$ RESEAR!2 ME"2ODOLO&3 /'
#.$ DA"A ANAL3SIS 5.
##$ !ON!L)SION -5
#($ RE!OMMENDA"IONS 4#
#+$ 0I0LIO&RAP23 4'
2
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FOREI&N DIRE!" IN,ES"MEN"
http://images.google.co.in/imgres?imgurl=http://www.transfuture.net/transart/future_city_249.jpg&imgrefurl=http://www.positivedetroit.net/2009_06_21_archive.html&usg=__AV2ueiTxnevX2qLo2K9pLVkeVxo=&h=800&w=1280&sz=951&hl=en&start=177&um=1&tbnid=kRK2MkVOdLUX2M:&tbnh=94&tbnw=150&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26ndsp%3D20%26hl%3Den%26sa%3DN%26start%3D160%26um%3D1http://images.google.co.in/imgres?imgurl=http://propertybytes.indiaproperty.com/Images/Nov06/funds%25202.bmp&imgrefurl=http://propertybytes.indiaproperty.com/index.php/newsbytes/foreign-direct-investments-fdi-in-the-indian-resl-estate&usg=__79n69uT0zzQ8h9LBWf5ZZztmdvo=&h=225&w=300&sz=198&hl=en&start=8&um=1&tbnid=1W6GgysKt9DONM:&tbnh=87&tbnw=116&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://www.thehindu.com/pp/2006/06/24/images/2006062400050101.jpg&imgrefurl=http://www.thehindu.com/pp/2006/06/24/stories/2006062400050100.htm&usg=__9HcTIkrKuxdyx_4mcA1M3Izmug4=&h=363&w=351&sz=23&hl=en&start=1&um=1&tbnid=tvIGakDd1YskzM:&tbnh=121&tbnw=117&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://ucatlas.ucsc.edu/lgraphics/Fdi_2000.gif&imgrefurl=http://gibsdiscussions.blogspot.com/2007/02/different-version-on-foreign-direct.html&usg=__6a6P9GHPbF-bBzB5wkkchrC0YqY=&h=557&w=720&sz=39&hl=en&start=2&um=1&tbnid=g8cPrpxgJ8w2xM:&tbnh=108&tbnw=140&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1http://images.google.co.in/imgres?imgurl=http://www.rajkishoreassociates.com/images/fdi.jpg&imgrefurl=http://www.rajkishoreassociates.com/fdi.htm&usg=__zyMUDXRyGcL-j3uDWZuNofSM6_Y=&h=199&w=180&sz=20&hl=en&start=3&um=1&tbnid=mObhs-Cpmr0CQM:&tbnh=104&tbnw=94&prev=/images%3Fq%3Dforeign%2Bdirect%2Binvestment%26hl%3Den%26sa%3DN%26um%3D1
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STUDENT DECLARATION
I undersign SAKSHI GARG student of MBA- IV here by declared that the
research report entitled “ROLE OF FDI IN SME” is completed and submitted
under the guidance of Dr. NEHA VERMA , Faculty ! Ma"a#$%$"t, DIMS
M$$rut is my original work. The imperial finding in this report is based on the
data collected by me. I have not submitted this proect report to MIT! Meerut or
any other "niversity for the purpose of compliance of any re#uirement of any
e$amination or degree.
DATE&
SAKSHI GARG
'LACE& Ro No. 1#0$#$00$$
MBA I* +e
#
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A!%NOWLED&EMEN"
I epress y sinerest ratitude and t/ans to Dr. NEHA VERMA ,
Faculty ! Ma"a#$%$"t, DIMS M$$rut, %or '/ose indness I /ad t/e preious
opportunity o% attainin resear/. Under /is riiant untirin uidane I
oud opete t/e proet ein undertaen on t/e “ROLE OF FOREI&N
DIRE!" IN,ES"MEN" IN SME” suess%uy in tie. 3is etiuous
attention and in4auae suestions /a4e /eped e in sipi%yin t/e
proe in4o4ed in t/e 'or.
SA%S2I &AR&
5
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IN"ROD)!"ION
&e6eral 0ac78ro96
In t/e reent years, orein Diret In4estent (DI) poiies /as eoe one o% t/e
entra eonoi poiies %or t/e de4eopin ountries, earned %ro t/e eperienes o%
ne'y industriaised ountries (NI6s) ie India, +inapore, 3on 7on and 8ai'an
'/i/ prooted DI as t/e atayst o% rapid eonoi ro't/ in t/e eary staes o% t/eir
eonoi de4eopent. 9piria studies on t/e ipat o% DI on eonoi ro't/
/a4e s/o'n positi4e ipat in t/e /ost ountries. 3ene, it /as eoe an area o% reat
interest 'it/ epiria deterinants o% poiy ipiations %or en/aned DI in%o's and
t/e e/anis t/rou/ '/i/ it %aiitates ro't/ and strutura /ane in reipient
ountries.
8/e roe o% DI in eonoi ro't/ in t/e de4eopin ountries is t/at DI enerate
ore ene%its to t/e reipient ountries rat/er t/an ust %u %iin t/e s/ort-ter apita
de%iieny proes. 8rans%er o% te/nooies and its spi o4er e%%et to t/e oa %irs
'i ae t/e oa %irs ore opetiti4e and /i/ standards '/i/ is neessary to
opete 'it/ t/e %orein produts. Anot/er, spi o4er e%%et o% MN9s is t/at MN9s ay
pro4ide trainin and aour anaeent '/i/ ay ae t/e a4aiae to t/e eonoy
in enera. 8/e trainin to oa suppiers y MN9s ay inrease t/e /i/ standard
prodution and anaeria standards.
8/e reations/ip et'een %orein diret in4estent and eonoi ro't/ is one t/e 'e
studied suet in t/e %ied o% de4eopent eonois. 9speiay, a%ter t/e ad4ent o%
endoenous ro't/ ode (Boren:teins, et al , 1""5, Baasuraanya, et al , 1"";)
;
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ade t/is reations/ip ore 4ita %or on run eonoi ro't/. 8/e resear/ interest in
t/is %ied /as inreased a%ter 1""0s 'a4e o% oaisation and assi4ey inreased DI
aross t/e oe and eonoi ro't/ o% DI reei4in ountries.
UN68AD (200
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In%o's o% DI an e iportant 4e/ie %or te/nooia /ane and /uan apita.
Bostro et al (1""#, 1"";) ep/asi:ed DI t/at indued /uan apita auentation
and eonoi ro't/ y t/e /ep o% t/e te/nooy trans%er, auuation o% /uan
apita and no'ede spi o4er in t/e DI reei4in ountries.
8/ere are t'o 'ays to dei4er oods and ser4ies to %orein arets! internationa
prodution and trade. 8/is eans t/at t/ere s/oud e soe interreations/ip et'een t/e
t'o. 8/is is on%ired y t/e positi4e orreation et'een 'ord orein Diret
In4estent (DI) and 'ord eports. 8/us, eonoi ro't/ and trade and in4estents
are interonneted.
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FOREI&N DIRE!" IN,ES"MEN"
History
Forei86 irect i6;estme6t (DI) is a easure o% -4 C 20;.2$ n C 2".2 n - C 122."; n
#44.>44 C "50.#$ n C "0$.# n C #.1 n
(...>.5 C 1,;2".05 n C 1,#21.1 n C 20$.$# n
"otal C 2,"50.;" n C 2,$0.
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• a roup o% reated enterprisesE
• a o4ernent odyE
• an estate (a'), trust or ot/er soieta oranisationE or
• any oination o% t/e ao4e.
10
http://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trusthttp://en.wikipedia.org/wiki/Estate_(law)http://en.wikipedia.org/wiki/Trust
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Methos o< Forei86 Direct I6;estme6ts
8/e
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Debates about the benefits of FDI for low-income countries
+oe ountries /a4e put restritions on DI in ertain setors. India, 'it/ its restrition
on DI in t/e retai setor is a ood eape.In a ountry ie India, t/e 'aarti:ationJ
o% t/e ountry oud /a4e sini%iant neati4e e%%ets on t/e o4era eonoy y reduin
t/e nuer o% peope epoyed in t/e retai setor (urrenty t/e seond arest
epoyent setor nationay) and depressin t/e inoe o% peope in4o4ed in t/e
ariuture setor (urrenty t/e arest epoyent setor nationay).
12
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FOREI&N DIRE!" IN,ES"MEN"
Forei86 Direct I6;estme6t (DI) is noray de%ined as a %or o% i6;estme6t ade in
order to ain un'a4erin and on-astin interest in enterprises t/at are operated outside
o% t/e eonoy o% t/e s/are/oderK depositor. In DI, t/ere is a parent enterprise and a
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Forei86 Direct I6;estme6t i6 I6ia is 6ot allo=e 96er the
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FOREI&N DIRE!" IN,ES"MEN" IN INDIA
I6tro9ctio6
+ine 1""1-"2 India /as een tryin to attrat %orein apita to ride t/e ap
et'een intended in4estent and atua sa4in o% t/e ountry. 8o inrease t/e rate o%
ro't/ o% >DP in t/e rane o% $ per ent, t/e rate o% net apita %oration s/oud e
inreased in t/e 4iinity o% 2< to 0G. 8/e sa4ins o% t/e ountry /as een /anin
around 2#G. 8/ere is a ap and t/is ap is to e rided y (a) Port%oio in4estent y
%orein %inania institutions () endin y %orein ans and ot/er institutions and ()
orein Diret In4estent. L% t/ese t/ree routes, de4eopin ountries pre%er t/e t/ird
t/at is orein Diret In4estent, as t/is i4es ertain ad4antaes to t/e /ost ountry.
8/e ad4antaes o% %orein diret in4estent (DI) are!
i) It inreases apita %or in4estent autoatiay. I% 'e opare t/is 'it/ t/e
aFuisition route, 'e see t/at %orein apita repaes t/e doesti apita y a
tae o4er or pur/ase. 8/e reeased doesti apita ay e in4ested in soe
ot/er setors o% t/e eonoy.
ii) DI in reen %ied 4entures rins ne' te/nooy and odern anaeent
te/niFue. In t/ese areas, de4eopin ountries are ain e/ind.
iii) orein apita in%o' t/rou/ DI route reates a peranent stae o% %orein
apita in t/e doesti eonoy. 8/is ay e ene%iia %or t/e /ost ountry in
t/e sense t/at it rins a staii:in %ore in t/e eonoy.
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8/e 'ord in4estent report 2000 re4eas t/at in t/e ine o% ountries reei4in
%orein diret in4estent, India rans 1$ t/ t/at eans t/at 1; ountries are a/ead o% India
reardin t/eir aiity to attrat DI. 6ountries ie *ietna are aso a/ead o% India.
Indias s/are o% tota DI in%o' into de4eopin ountries %or t/e period 1""$ to 2000 is
1.#G ony. 8/ere is no point o% oparison 'it/ 6/ina and t/is is %or t'o reasons.
1) 6/ina oud attrat aout 25G o% tota DI in%o' into t/e de4eopin ountries.
8/e net ountry in t/e ine, t/at is, Bra:i oud attrat ony 10G. 8/e
predoinant position o% 6/ina in attratin DI %ro 1""5 on'ards annot e
epained y nora eonoi paraeters.
2) +eond, soe eonoists point out /ue aount o% apita %i/t %ro 6/ina t/at
is 4ery /i/ opared to ountries o% t/e siiar situations. 8/is reinds one t/e
re4o4in door situations o% soe ountries su%%erin %ro apita %i/t.
1;
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8/e ountrys arest retaiersuture >roup, +peners Retai and +/oppers +top/a4e
ined up in4estents o% at east U+C 12
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• Met/odooy %or auation o% indiret %orein in4estent in Indian opanies
/as een eary de%ined.
• 6opete ieraisation o% priin and payent o% te/nooy trans%er %ee and
tradear, rand nae and royaty payents.
urt/erore, t/e o4ernent /as ao'ed t/e orein In4estent Prootion Board
(IPB), under t/e Ministry o% 6oere and Industry, to ear DI proposas o% up to
U+C 5
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APPROA!2 "OWARDS FDI IN INDIA
8/e eat position o% DI in India 'i e put up %irst at t/ree e4esE at t/e e4e
o% t/e +tate, at t/e e4e o% t/e setor and at t/e e4e o% t/e industry. 8/e oeti4e o%
doin t/is is to eaine se4era /ypot/eses ie t/e roe o% in%rastruture in attratin
DI, t/e roe o% aor situation, t/e roe o% a' and order et. ?e are to see aso '/et/er
t/e in%o' o% DI in India /as ertain %a4ourae destination - reion 'ise or setor 'ise.
A road epanation o% t/e ao4e 'i enae us to :ero in to ertain areas t/at
oud e epored %urt/er to asertain t/e auses o% a so' in%o' o% DI. It an %aiitate
t/e dra'in o% our onusion.
Role o< I6
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uture and a oon ro't/ oriented /uan psy/ooy. In any de4eopin
ountries t/e 'or uture ay e not ondui4e to odern ae industria soiety.
Aso t/e o4er a ipression reardin t/e 'or uture on t/e ind o% t/e
potentia in4estors is iportant.
8/e roe o% >o4ernent in t/e de4eopent o% t/e eonoy is iportant %ator in
t/e seond ateory o% in%rastruture. ?/ie >o4ernent as a %aiitator is appreiated
e4ery'/ere as it /eps rapid eonoi de4eopent, too u/ >o4ernent ontro, and
partiuary ureaurati red-tapis is not ied y %orein in4estors.
In spite o% panned eonoi de4eopent in India durin t/e ast %i4e deades,
t/e de4eopent o% in%rastruture /as not een uni%or in 2< +tatesKReions o% t/e
ountry. Lne study paes t/e situation o% in%rastruture in t/e %or o% an inde. 8ain
t/e a4erae India situation as a /undred, t/e study s/o's t/e inde o% De/i $0, 7eraa
1;2, Puna 1$2 ,8ai Nadu 1"5, '/ie >uarat is 105 ?est Bena 102. +tates ie
Raast/an, Me/aaya, Manipur are ain e/ind as t/eir inde is %ar eo' 100. ?/en
'e pae t/e %o' o% DI in di%%erent +tates in ontrast to t/e indies o% in%rastruture o%
di%%erent states, 'e %ind t/at '/ie t/e states suess%uy attratin DI are eneray t/e
states t/at /a4e ood in%rastruture, ut t/e on4erse is not true. 8/e +tates /a4in ood
in%rastruture inde /a4e not een ae to attrat DI.
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8/is is t/e usae side o% DI. ?e are to see aso t/e soure side. +o %ar DI
in%o' into India is onerned, t/e U+A and t/e 9uropean Indian pro4ides t/e ions s/are
o% DI to India. @apan oes net in iportane o% soure. or soe years Mauritius
eae iportant and t/e roe o% Non-Residents Indians (NRI) is a it ope. +oe
peope arue t/at any NRIs are tain ad4antae o% t/e Mauritius route reardin t/e
suppy side o% DI. 8/ere is anot/er proe and t/is is t/e 'idenin ap et'een t/e
appro4a and atua in%o' o% DI. I% 'e see t/e internationa situation, 'e %ind t/at t/ere
is noray a ap o% 0G et'een t/e appro4a and t/e atua in%o'. But, in India t/e
ap is u/ 'ider and soeties it eoes di%%iut to i4e epanation %or t/at ap.
8/ere /a4e een soe studies on t/e deterinants o% DI in%o' into t/e /ost
ountries in t/e iterature. 8/e eonoi paraeters o%ten ention as epanatory
4ariaes are ! >ro't/ rate o% >DP, state o% in%rastruture, e/ane rate staiity,
eFuitae 4aue o% t/e e/ane rate, openness o% t/e eonoy, ea struture o% t/e /ost
ountry and t/e attitude o% t/e >o4ernent. 8/e odes, '/i/ are ipiit in t/e study
o% t/ese 4ariaes, are ased on a aret eonoy %rae'or. In India t/e paradi
s/i%t ourred %ro 1""1-"2, t/at is, t/e Indian t/in-tan eae austoed to epore
t/e roe o% aret e/anis in epainin t/e o4eent o% eonoi 4ariaes. 8/is
/appened %ro 1""1-"2 on'ards. A road setion o% peope - eeuti4es in t/e
orporate, o%%iias o% %orein 9assies, aadeiians, independent onsutants and
industriaists - o%ten epress t/e opinion t/at India /as a reat proe reardin t/e
ind set, t/at is, a popuar eie% is t/at %orein apita in%o' eads to t/e epoitation o%
t/e doesti eonoy y t/e o'ners o% %orein apita. 8/ere is anot/er popuar eie%
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t/at India su%%ers %ro too u/ o4ernent +yndroe. 8/e atter eans t/at t/e roe
o% o4ernent in India is spread e4ery'/ere, ut ironiay t/e o4ernane is 'ea in
areas '/ere it is aed %or. 8/e atter are areas o% eterna seurity, true sa%euards o% t/e
do'ntrodden peope, preser4ation o% t/e en4ironent and a true re%or in t/e %inania
setor. 8/e pereption is party Fuaitati4e in nature. 8/e etent to '/i/ t/is pereption
eists an e easured ony y a sur4ey et/od, and t/is is eyond t/e sope o% t/is
/apter
22
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IND)S"RIES RESER,ED FOR SMALL AND MEDI)M
EN"ERPRISES
"ech6olo8? "ra6s
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1"$0s. 8/e nature o% DI %o's /aned 'it/ t/e ipro4eent o% ouniation
and ad4ane o% in%oration te/nooy. ?/ene4er ost o% aret transations o%
intanie assets eoe 4ery /i/, %irs tend to a4oid t/ese osts y internai:in
t/e transations o% t/e intanie assets. 8/is is done t/rou/ orein Diret
In4estent aso.
Oiterature aso re4eas t/at eportin oodities direty %ro t/e /oe ase and
prodution o% t/e sae in %orein ountries to ser4e t/e %orein arets eit/er
t/rou/ iensin or orein Diret In4estent are t'o aternati4e odes o% o4erseas
operations. ro t/is ane it eoes o4ious t/at i% trade ierai:ation eoes
etree, t/e oation ad4antae o% t/e ountry %or t/e oa aret ay e ost.
I6ter>I69str? ,ariatio6 i6 FDI
8/e /ypot/esis t/at soe industries in t/e /ost ountry oud ontrat ore DI
t/an ot/ers /as een tested epiriay in t/e iterature. 8/ese studies /a4e inored
t/e possiiity o% disriination in iensin and /a4e onentrated on e/a4iour o%
DI reardin its destination to partiuar industries. 8/e oon eeents o% t/e
study inude DI intensity to 4ary positi4ey 'it/ t/e intensity o% ad4ertiseent,
si intensity, RHD ependiture, apita output ratio and ertain ot/er %ators. Aso
in t/e asene o% any partiuar stron poiy %ator, t/e /oie et'een DI and
iensin 'i e deterined y t/e transation ost. +ine transation ost are Fuite
/i/ %or randed onsuer oods, t/ere a pronouned tendeny t/at DI 'i e
2#
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onentrate in t/ose industries. 8/is %indin /as one ipiation and t/is is as
%oo's!
A de4eopin ountry 'it/ t/e desire to ontrat ore DI s/oud %oo' a
ierai:ation poiy in su/ a 'ay t/at it aes t/e a%%ets o% intanie asset and
internai:ation inenti4es to e ore pronouned.
FDI and Economic Growth! 8/ere is a oon /ypot/esis in t/e iterature t/at
/i/er rate o% >ross Doesti Produt needs to a /i/er in%o' o% DI. 8/e iterature
aso opares t/e reati4e produti4ity o% DI 4is-Q-4is doesti apita. +o %ar as
DI inreases t/e a4aiaiity o% apita, t/is s/oud inrease t/e rate o% ro't/ o%
>DP. 8/us 'e /a4e a iruarity and it is '/et/er /i/er ro't/ rate eads to /i/er
in%o' o% DI, or /i/er in%o' DI eads to /i/er ro't/ rate. 8/is is a standard
ausaity proe in eonoetris iterature. Many studies /a4e epiriay tried to
see t/e diretion o% ausaity and resut is a ied one.
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I6ia6 Eco6om? a6 Forei86 !apital
8/e doination o% %orein apita in t/e Indian industria sene ust e%ore
independene 'as t/e resut o% /istory. orein apita in enera and Britis/ apita
in partiuar, payed a ruia roe in t/e de4eopent o% ute teties and enineerin
industries in t/e Indian su-ontinent. 8/e p/iosop/y o% eonoi de4eopent to e
pursued in post independent India /ad /aned radiay and it 'as t/ou/t t/at east
iportane s/oud e atta/ed to t/e roe o% %orein apita in India=s eonoi
ro't/. 8/e resut 'as a soiaist pattern o% industria de4eopent ased on se%-
su%%iieny.
8/e iport-sustitution and in'ard ooin industriai:ation ed to iniu roe o%
%orein apita and t/e pauity o% %orein e/anes indued t/e aut/ority to enat t/e
strinent a' ie orein 9/ane Reuation At ( 9RA), 1"$. 8/e stritness o%
t/is piee o% eisation /ad een responsie %or u/ o% apita %i/t %ro India in
t/e se4enties and ei/ties. Indian panners 'ere so u/ iersed 'it/ se%-deusion
t/at t/ey oud not eie4e t/e reaity o% apita %i/t unti t/e nationa o%%er eae
aost epty in 1""0. 8/e ra4ity o% t/e situation /aned t/e '/oe perspeti4e and
t/e paradi s/i%t /appened. 8/is ed to t/e attept o% eonoi re%ors.
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Forei86 Direct I6;estme6t a6 De;elopme6t
8/e poitia eonoy o% t/e roe o% DI in t/e de4eopent proess o% an
eonoy is %u o% ontro4ersy. 8/e aruents are on ot/ sides. 8/ose '/o
ad4oate a ore iera reie ai t/at DI 'i pro4ide t/e u/-needed
resoures and %orein e/ane %or re4i4in Indian industry, ipro4e t/e ruin
in%rastruture, and ao' India to oderni:e its te/nooia ase. Aso reater
opetition in Indian anu%aturin 'i ene%it t/e Indian onsuer. Ln t/e ot/er
/and, ritis point to t/e poor reord o% utinationa orporations in India, t/eir
eessi4e pro%itaiity. Aso t/ey arue aout t/e ad4erse ipat o% pro%it reittanes
on Indias aane o% payents.
Does %orein in4estent ontriute to ro't/ 9piria in4estiation
does not o%%er any ear ans'er. 6ountries ie 6/ina /a4e eperiened are DI
in%o's and /i/ ro't/ in reent years, '/ie India re' rapidy 'it/out sini%iant
e4es o% %orein apita. In Oatin Aeria, any ountries /a4e periods o% so'
ro't/ despite openness to %orein apita. 94en i% 'e did %ind soe positi4e
orreation et'een DI and ro't/, t/e issue o% ausaity reains unreso4ed
2$
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"ech6olo8?: Polic? a6 Realit?
3ost ountry o4ernents o%ten enourae %orein in4estent in t/e /ope o%
ipro4in t/e produti4ity o% doesti %irs. orein diret in4estent potentiay
rins ne' te/nooies to t/e /ost eonoy. 8e/nooy in%o's an aso ipro4e
t/e produti4ity o% doesti %irs t/rou/ spio4ers, as etter prodution and
anaeent te/niFues di%%use in t/e /ost eonoy. In soe situations %orein
in4estent an e a atayst %or ro't/. 8/e iterature isoates t'o /annes %or t/is
spio4er proess. 8/e ore diseodies aspets o% superior te/nooies used y
%orein %irs an spread to doesti %irs t/rou/ t/e oiity o% trained 'orers
and anaers, and t/rou/ te/nia uidane pro4ided
FDI : A Se8me6te A6al?sis
In t/e %oo'in pararap/s 'e 'i epain t/e urrent position o% DI in India in
di%%erent parts. 8/is et/od o% anaysis 'i /ep us to /a4e an in dept/ anaysis o%
dynais o% t/e %o' o% DI in di%%erent setors o% t/e eonoy.
A Macro ,ie=
8/e soure ountries %ro '/i/ DI %o's into Indian eonoy are are in nuer
ut t/e aor partners are t/e U+A, 8/e 9uropean Union ountries and oupe o%
ountries in Asia ie @apan, India, +inapore, 3on 7on and Mauritius.
Interestin p/enoenon is t/at e4en a%ter t/e aession o% 3on 7on to ainand
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6/ina, apita /as %oo'ed %ro 3on 7on into India. A t/e 9uropean Union
ountries, partiuary ountries ie U.7, >erany, rane and Net/erands are
iportant soure ountries o% DI. As a sine ountry outside 9U o, @apan is
4ery iportant as a soure ountry.
8ae 1 re4eas t/at t/ou/ t/e nuer o% ountries %ro '/i/ DI %o's into India
is ipressi4e, ony a /and%u o% ountries are iportant as t/e soure o% DI in%o'.
+oe ountries are reutant to ae in4estent in India, 8ai'an is an eape.
Non-resident Indians (NRI) is a ateory in tae 1 and t/e %at re4eaed in t/e tae is
t/at t/e ontriution o% NRI in t/e DI in4estent in India is not ipressi4e.
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Forei86 Direct I6;estme6t i6 I6ia
orein diret in4estent (DI) in India /as payed an iportant roe in t/e de4eopent
o% t/e Indian eonoy. DI in India /as S in a ot o% 'ays S enaed India to a/ie4e a
ertain deree o% %inania staiity, ro't/ and de4eopent. 8/is oney /as ao'ed
India to %ous on t/e areas t/at ay /a4e needed eonoi attention, and address t/e
4arious proes t/at ontinue to /aene t/e ountry.
India /as ontinuay sou/t to attrat DI %ro t/e 'ord=s aor in4estors. In 1""< and
1""", t/e Indian nationa o4ernent announed a nuer o% re%ors desined to
enourae DI and present a %a4orae senario %or in4estors.
DI in4estents are peritted t/rou/ %inania oaorations, t/rou/ pri4ate eFuity or
pre%erentia aotents, y 'ay o% apita arets t/rou/ 9uro issues, and in oint
4entures. DI is not peritted in t/e ars, nuear, rai'ay, oa H inite or inin
industries.
A nuer o% proets /a4e een announed in areas su/ as eetriity eneration,
distriution and transission, as 'e as t/e de4eopent o% roads and /i/'ays, 'it/
opportunities %or %orein in4estors.
8/e Indian nationa o4ernent aso pro4ided perission to DIs to pro4ide up to 100G
0
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o% t/e %inanin reFuired %or t/e onstrution o% rides and tunnes, ut 'it/ a iit on
%orein eFuity o% INR 1,500 rores, approiatey C52.5.
6urrenty, DI is ao'ed in %inania ser4ies, inudin t/e ro'in redit ard
usiness. 8/ese ser4ies inude t/e non-anin %inania ser4ies setor. orein
in4estors an uy up to #0G o% t/e eFuity in pri4ate ans, at/ou/ t/ere is ondition
t/at stipuates t/at t/ese ans ust e utiatera %inania orani:ations. Up to #5G o%
t/e s/ares o% opanies in t/e oa oie persona ouniation y sateite
ser4ies (>MP6++) setor an aso e pur/ased.
By 200#, India reei4ed C5. iion in DI, i ro't/ opared to pre4ious years, ut
ess t/an 10G o% t/e C;0.; iion t/at %o'ed into 6/ina. ?/y does India, 'it/ a stae
deoray and a soot/er appro4a proess, a so %ar e/ind 6/ina in DI aounts
At/ou/ t/e 6/inese appro4a proess is ope, it inudes ot/ nationa and reiona
appro4a in t/e sae proess.
edera deoray is per4ersey an ipedient %or India. Ooa aut/orities are not part
o% t/e appro4as proess and /a4e t/eir o'n ri/ts, and t/is o%ten eads to proets ettin
oed do'n in red tape and ureauray. India atuay reei4es ess t/an /a% t/e DI
t/at t/e %edera o4ernent appro4es.
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Sectors Attracti68 FDI
8/ou/ t/e ser4ies setor in India onstitutes t/e arest s/are in t/e >ross Doesti
Produt, sti it /as %aied to soe etent in attratin ore %unds in t/e %ors o%
in4estents.
Iportant setors o% t/e Indian 9onoy attratin ore in4estents into t/e ountry are
as %oo's!
• 9etria 9Fuipents (Inudin 6oputer +o%t'are H 9etroni)
• 8eeouniations (radio pain, euar oie, asi teep/one ser4ie)
• 8ransportation Industry
• +er4ies +etor (%inania H non-%inania)
• ues (Po'er Li Re%inery)
• 6/eia (ot/er t/an %ertii:ers)
• ood Proessin Industries
• Drus H P/araeutias
• 6eent and >ypsu Produts
• Metauria Industries
FDI I6Wise
Lpenin up o% door poiies adopted y t/e >o4ernent o% India t/rou/ its ne'
eonoi poiies /as attrated ore in4estents in to t/e ountry. Indian Industries
/a4e one oa and in t/e sae diretion t/e in%o' o% DI in to t/e ountry /as
inreased at a %aster rate.
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8/e In%o' o% DI into t/e ountry o4er 4arious years is as %oo's!
3ear April>MarchBAmo96t o< FDI i6
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oa eonoy %uy on t/e trade and urrent aount '/ie t/ere is proressi4e
ieraisation o% t/e apita aount, onsistent 'it/ t/e proress in re%ors in t/e
rea, %isa and %inania setors, oser4ed Dr .*.Reddy, >o4ernor o% Indias
entra anin aut/orities, Reser4e Ban o% India (RBI) at t/e ?ord Oeaders oru
in Ne' or in Apri t/is year. 8/e stron aro eonoi %undaentas, ro'in
si:e o% t/e eonoy and ipro4in in4estent iate /as attrated oa
orporation to in4est in India. A aor outoe o% t/e eonoi re%ors proess
aied at openin up t/e eonoy and erain oai:ation /as ed to to
treendous inrease in orein Diret In4estent in%o's into India, says ountrys
po'er%u industry oy 6II.
!)M)LA"I,E FDI E)I"3 INFLOWS
I6 Rs
!rore
I6 )SC
Millio6
!9m9lati;e amo96t o< FDI i6
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!9m9lati;e amo96t o< FDI I6
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2002-0 #$.
200-0#
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MON"2S I6 Rs crore
I6 )SC
Millio6
April (..- #*..* +5'4
Ma? (..- #/*/+ +4+(
196e (..- #.('' (+4(
19l? (..- 4/(5 (('5
A989st (..- 444* (+(-
Septemer (..- ##/5/ (*/(
Octoer (..- 5(-' #'45
No;emer (..- *+.* #.-+
Decemer (..- //(/ #+/(
1a69ar? (..4 #++'5 (5++
3ear (..->.4 )p to 1a69ar? (..4B #.*/5+ (+--*
3ear (..5>.- )p to 1a69ar? (..-B *-(.+ #''//
3O3 &ro=th GB HB -# HB /*
SO)R!E: DIPP@ Feeral Mi6istr? o< !ommerce I69str?@ &o;er6me6t o<
I6ia
$
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In DI eFuity in4estents Mauritius tops t/e ist o% %irst ten in4estin ountries
%oo'ed y U+, U7, +inapore, Net/erands, @apan, >erany, rane, 6yprus and
+'it:erand. Bet'een Apri 2000 and @uy 200< DI in%o's %ro Mauritius stood
at C 0.1< iion %oo'ed y C5.
./
(../>.5 (..5>.- (..->.4
March@
(..4B
!9m9lati;e
From April
(... to
April
(..4B
G =ith
total
i6
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1apa6
"25
(20
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FDI POLI!IES IN INDIA:
8/e priary ai o% t/ese poiies is to reate a %riendy usiness en4ironent '/ere
%orein in4estors %ee o%ortae 'it/ t/e ea and %inania %rae'or o% t/e ountry,
and /a4e t/e potentia to reap pro%its %ro eonoiay 4iae usinesses. 8/e prospet
o% ne' ro't/ opportunities and outsi:ed pro%its enouraes are apita in%o's aross
a rane o% industry and opportunity types.
In4estors tend to oo %or preditae en4ironents '/ere t/ey understand /o' deision-
ain proesses 'or. >o4ernents t/ere%ore are inenti4i:ed to uid up a tra
reord o% rationa deision ain. 8/e usiness en4ironent o%ten reFuires 'or to
reo4e onerous reuations, redue orruption and enourae transpareny. >o4ernents
o%ten aso see to ipro4e t/eir doesti in%rastruture to eet t/e operationa needs o%
in4estors.
Pro4idin %isa inenti4es %or attratin DI is a suet o% ontro4ersy S anaysts /a4e
arued ot/ in %a4or and aainst t/e idea. A enera onsensus is de4eopin in %a4or o%
ertain inenti4es '/i/ /a4e een pro4en /istoriay to ro' pro%its and t/ere%ore
%orein in4estents.
?/en poiies are e%%eti4e, sini%iant DI in4estents are ineted into ountries t/at
/ep t/e doesti eonoy to ro'. Di%%erent ountries and reions o%%er 4arious inds
o% %isa inenti4es, 'it/ a reated 4ariane in t/e e4e o% DI in4estents attrated.
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>o4ernents are inreasiny settin up prootiona aenies to %oster %orein diret
in4estent. 8/ese aenies proote DI-%riendy poiies, identi%y prospeti4e setors
and in4estors, and struture spei%i deas and inenti4es %or aor %orein in4estors su/
as uti-nationa orporations (MN6s).
>oa trade assoiations aso pay a aor roe in soe o% t/ese in4estent ati4ities.
8/ese assoiations are tased 'it/ reatin a positi4e en4ironent %or %orein diret
in4estors and ensurin t/at ot/ in4estors and reipient ountries enoy a %a4orae
en4ironent.
8/e %oration o% /uan apita is 4ita %or t/e ontinued ro't/ o% DI in%o's. 8o
enae t/e ost ene%iia, te/nooy and IP-dri4en DI, /i/y sied personne are
neessary. >o4ernents ust t/ere%ore enat poiies to pro4ide trainin and sis
upradin to de4eop t/eir 'or%ore and eet t/e epoyent needs o% %orein
in4estors.
&)IDELINES FOR "2E !ONSIDERA"ION OF FDI PROPOSALS 03 "2E
FOREI&N IN,ES"MEN" PROMO"ION 0OARD FIP0B
(8/e >uideines are eant to assist t/e IPB to onsider proposas in an oeti4e and
transparent anner. 8/ese 'oud not in any 'ay restrit t/e %eiiity or ind t/e IPB
%ro onsiderin t/e proposas in t/eir totaity or ain reoendation ased on ot/er
riteria or speia irustanes or %eatures it onsiders ree4ant. Besides t/ese are in t/e
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nature o% adinistrati4e >uideines and 'oud not in any 'ay e eay indin in
respet o% any reoendation to e ade y t/e IPB or deisions to e taen y t/e
>o4ernent in ases in4o4in orein Diret In4estent (DI). 8/ese uideines are
issued 'it/out preudie to t/e >o4ernents ri/t to issue %res/ uideines or /ane t/e
ea pro4isions and poiies '/ene4er onsidered neessary.)
8/ese uideines stand odi%ied to t/e etent /anes /a4e een noti%ied y +eretariat
%or Industria Assistane %ro tie to tie.
8/e %oo'in >uideines are aid-do'n to enae t/e orein In4estent Prootion
Board (IPB) to onsider t/e proposas %or orein Diret In4estent (DI) and
%oruate its reoendations.
A appiations s/oud e put up e%ore t/e IPB y t/e +IA (+eretariat %or
Industria Assistane) 'it/in 15 days and it s/oud e ensured t/at oents o%
t/e adinistrati4e inistries are paed e%ore t/e Board eit/er prior toKor in t/e
eetin o% t/e Board.
Proposas s/oud e onsidered y t/e Board eepin in 4ie' t/e tie %rae o%
0 days %or ouniatin >o4ernent deision (i.e. appro4a o% 6HIMK669A
or reetion as t/e ase ay e).
In ases in '/i/ eit/er t/e proposa is not eared or %urt/er in%oration is
reFuired, in order to o4iate deays presentation y appiant in t/e eetin o% t/e
IPB s/oud e resorted to.
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?/ie onsiderin ases and ain reoendations, IPB s/oud eep in
ind t/e setora reFuireents and t/e setora poiies 4is-a-4is t/e proposa(s).
IPB 'oud onsider ea/ proposa in totaity (i.e. i% it inudes apart %ro
%orein in4estent, te/nia oaorationK industria iene) %or oposite
appro4a or ot/er'ise. 3o'e4er, t/e IPBs reoendation 'oud reate ony to
t/e appro4a %or %orein %inania and te/nia oaoration and t/e %orein
in4estor 'i need to tae ot/er presried earanes separatey.
8/e Board s/oud eaine t/e %oo'in '/ie onsiderin proposas suitted
to it %or onsideration!
• ?/et/er t/e ites o% ati4ity in4o4e industria iene or not and i% so t/e
onsiderations %or rant o% industria iene ust e one intoE
• ?/et/er t/e proposa in4o4es te/nia oaoration and i% so!- (a) t/e soure
and nature o% te/nooy sou/t to e trans%erred.
• ?/et/er t/e proposa in4o4es any andatory reFuireent %or eports and i% so
'/et/er t/e appiant is prepared to undertae su/ oiation (t/is is %or ites
reser4ed %or +MAOO and Mediu 9nterprises as aso %or di4idend aanin, and
%or 100G 9LUsK+9V units)E
• ?/et/er t/e proposa in4o4es any eport proetion and i% so t/e ites o% eport
and t/e proeted destinationsE
•
?/et/er t/e proposa /as onurrent oitent under ot/er s/ees su/ as
9P6> +/ee et.
• In t/e ase o% 9port Lriented Units (9LUs) '/et/er t/e presried iniu
4aue addition nors and t/e iniu turn o4er o% eports are et or notE
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• ?/et/er t/e proposa in4o4es reaation o% oationa restritions stipuated in
t/e industria iensin poiyE
• ?/et/er t/e proposa /as any stratei or de%ene reated onsiderations, and
• ?/et/er t/e proposa /as any pre4ious oint 4enture or te/nooy
trans%erKtradear areeent in t/e sae or aied %ied in India, t/e detaied
irustane in '/i/ it is onsidered neessary to set-up a ne' oint entureKenter
into ne' te/nooy trans%er (inudin trade ar), and proo% t/at t/e ne'
proposa 'oud not in any 'ay eopardi:e t/e interest o% t/e eistin oint 4enture
or te/nooyKtrade ar partner or ot/er stae /oders.
?/ie onsiderin proposas t/e %oo'in ay e prioritised.
• ItesKati4ities o4ered under autooti4e route (i.e. t/ose, '/i/ do not Fuai%y
under autoati route).
• Ites %ain in in%rastruture setor.
•
Ites '/i/ /a4e an eport potentia
• Ites '/i/ /a4e are sae epoyent potentia and espeiay %or rura
peope.
• Ites, '/i/ /a4e a diret or a'ard inae 'it/ aro usinessK%ar setor.
• Ite '/i/ /a4e reater soia ree4ane su/ as /ospitas, /uan resoure
de4eopent, i%e sa4in drus and eFuipent.
• Proposas, '/i/ resut in indution o% te/nooy or in%usion o% apita.
8/e %oo'in s/oud e espeiay onsidered durin t/e srutiny and onsideration
o% proposas!
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• 8/e etent o% %orein eFuity proposed to e /ed (eepin in 4ie' setora aps i%
any - e.. 2#G %or ++I units, #0G %or air taiKairines operators, #"G in
asiKeuarKpain in 8eeo setor et).
• 9tent o% eFuity 'it/ oposition o% %oreinKNRI ('/i/ ay inude
L6B)Kresident Indians.
• 9tent o% eFuity %ro t/e point o% 4ie' '/et/er t/e proposed proet 'oud
aount to a /odin opanyK'/oy o'ned susidiaryKa opany 'it/ doinant
%orein in4estent (i.e. $5G or ore) oint 4enture.
•
?/et/er t/e proposed %orein eFuity is %or settin up a ne' proet (oint 4enture
or ot/er'ise) or '/et/er it is %or enareent o% %oreinKNRI eFuity or '/et/er it
is %or %res/ indution o% %orein eFuityKNRI eFuity in an eistin Indian opany.
• In t/e ase o% %res/ indution o% %oreinKNRI eFuity andKor ases o% enareent
o% %oreinK NRI eFuity in eistin Indian opanies '/et/er t/ere is a resoution
o% t/e Board o% Diretors supportin t/e said indutionK enareent o%
%oreinKNRI eFuity and '/et/er t/ere is a s/are/oders areeent or not.
• In t/e ase o% indution o% %res/ eFuity in t/e eistin Indian opanies andKor
enareent o% %orein eFuity in eistin Indian opanies, t/e reason '/y t/e
proposa /as een ade and t/e odaity %or indutionK en/aneent i.e.
'/et/er y inrease o% paid up apitaKaut/orised apita, trans%er o% s/ares
(/ostie or ot/er'ise) '/et/er y ri/ts issue, or y '/at odaity.
6ases pertainin to IPB appro4as, '/i/ in4o4e inrease in t/e non-resident
eFuity 'it/in t/e appro4ed perentae o% non-resident eFuity in a oint 4enture
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opany and en/aneent o% paid-up apita in a '/oy o'ned susidiary do not
reFuire IPB appro4a pro4ided t/e intent %or inrease in t/e aount o% %orein
eFuity is duy noti%ied to +IA and %ora douentation y 'ay o% intiation is
ade to +IA 'it/in 0 days o% reeipt o% %unds and aotent o% s/ares (to non-
resident s/are/oders).
• IssueKtrans%erKpriin o% s/ares 'i e as per +9BIKRBI uideines.
• ?/et/er t/e ati4ity is an industria or a ser4ie ati4ity or a oination o% ot/.
• ?/et/er t/e ite o% ati4ity in4o4es any restrition y 'ay o% reser4ation %or t/e
+MAOO and Mediu 9nterprises.
• ?/et/er t/ere are any setora restritions on t/e ati4ity (e.. t/ere is an on
%orein in4estent in rea estate '/ie it is not so %or NRI in4estent).
• ?/et/er t/e ite in4o4es ony tradin ati4ity and i% so '/et/er it in4o4es
eport or ot/ eport and iport, or aso inudes doesti tradin and i%
doesti tradin '/et/er it aso inudes retai tradin.
• ?/et/er t/e proposa in4o4es iport o% ites '/i/ are eit/er /a:ardous,
anned or detrienta to en4ironent (e.. iport o% pasti srap or reyed
pastis).
In respet o% ati4ities to '/i/ eFuity aps appy, IPB ay onsider
reoendin /i/er e4es o% %orein eFuity as opared to t/e presried aps,
eepin in 4ie' t/e speia reFuireents and erits o% ea/ ase.
In respet o% ot/er industriesKati4ities t/e Board ay onsider reoendin 51
per ent %orein eFuity on eaination o% ea/ indi4idua proposa. or /i/er
e4es o% eFuity up to $# per ent t/e Board ay onsider su/ proposas eepin
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in 4ie' onsiderations su/ as t/e etent o% apita needed %or t/e proet, t/e
nature and Fuaity o% te/nooy, t/e reFuireents o% aretin and anaeent
sis and t/e oitent %or eports.
IPB ay onsider reoendin proposas %or 100 perent %orein o'ned
/odinKsusidiary opanies ased on t/e %oo'in riteria!
• '/ere ony /odin operation is in4o4ed a suseFuentKdo'nstrea
in4estents to e arried out 'oud reFuire prior appro4a o% t/e >o4ernentE
• '/ere proprietary te/nooy is sou/t to e proteted or sop/istiated
te/nooy is proposed to e rou/t inE
• '/ere at east 50G o% prodution is to e eportedE
• proposas %or onsutanyE and
• proposas %or industria ode to'nsKindustria pars or estates.
In speia ases, '/ere t/e %orein in4estor is unae initiay to identi%y an Indian
oint 4enture partner, t/e Board ay onsider and reoend proposas
perittin 100 per ent %orein eFuity on a teporary asis on t/e ondition t/at
t/e %orein in4estor 'oud di4est to t/e Indian parties (eit/er indi4idua, oint
4enture partners or enera pui or ot/) at east 2; per ent o% its eFuity 'it/in
a period o% -5 years.
+iiary in t/e ase o% a oint 4enture, '/ere t/e Indian partner is unae to raise
resoures %or epansionK te/nooia upradation o% t/e eistin industria
ati4ity t/e Board ay onsider and reoend inrease in t/e
proportionKperentae (up to 100 per ent) o% t/e %orein eFuity in t/e enterprise.
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In respet o% tradin opanies, 100 per ent %orein eFuity ay e peritted in
t/e ase o% t/e ati4ities in4o4in t/e %oo'in!
•
eportsE
• u iports 'it/ e-portKe-onded 'are/ouse saesE
• as/ and arry '/oesae tradinE
• ot/er iport o% oods or ser4ies pro4ided at east $5G is %or proureent and
sae o% oods and ser4ies aon t/e opanies o% t/e sae roup.
In respet o% t/e opanies in t/e in%rastrutureKser4ies setor '/ere t/ere is a
presried ap %or %orein in4estent, ony t/e diret in4estent s/oud e
onsidered %or t/e presried ap and %orein in4estent in an in4estin opany
s/oud not e set o%% aainst t/is ap pro4ided t/e %orein diret in4estent in
su/ in4estin opany does not eeed #" per ent and t/e anaeent o% t/e
in4estin opany is 'it/ t/e Indian o'ners.
No ondition spei%i to t/e etter o% appro4a issued to a %orein in4estor 'oud
e /aned or additiona ondition iposed suseFuent to t/e issue o% a etter o%
appro4a. 8/is 'oud not pro/iit /anes in enera poiies and reuations
appiae to t/e industria setor.
?/ere in ase o% a proposa (not ein 100G susidiary) %orein diret
in4estent /as een appro4ed up to a desinated perentae o% %orein eFuity in
t/e oint 4enture opany t/e perentae 'oud not e redued '/ie perittin
indution o% additiona apita suseFuenty. Aso in t/e ase o% appro4ed
ati4ities, i% t/e %orein in4estor(s) onerned 'is/ed to rin in additiona apita
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on ater dates eepin t/e in4estent to su/ appro4ed ati4ities, IPB 'oud
reoend su/ ases %or appro4a on an autoati asis.
As reards proposa %or pri4ate setor ans, t/e appiation 'oud e onsidered
ony a%ter in prinipe perission is otained %ro t/e Reser4e Ban o% India
(RBI).
8/e restritions presried %or proposas in 4arious setors as otained, at present,
are i4en in t/e anneure - I* and t/ese s/oud e ept in 4ie' '/ie onsiderin
t/e proposas.
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SE!"OR SPE!IFI! FOREI&N DIRE!" IN,ES"MEN" IN
INDIA
FDI i6 I6ia
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!rivate Sector Ban"ing:
#on-Ban"ing Financial $ompanies %#BF$&
#"G DI is ao'ed %ro a soures on t/e autoati route suet to uideines issued
%ro RBI %ro tie to tie.
a. DIKNRIKL6B in4estents ao'ed in t/e %oo'in 1" NB6 ati4ities s/a e
as per e4es indiated eo'!
i. Mer/ant anin
ii. Under'ritin
iii. Port%oio Manaeent +er4ies
i4. In4estent Ad4isory +er4ies
4. inania 6onsutany
4i. +to Broin
4ii. Asset Manaeent
4iii. *enture 6apita
i. 6ustodia +er4ies
. atorin
i. 6redit Re%erene Aenies
ii. 6redit ratin Aenies
iii. Oeasin H inane
i4. 3ousin inane
4. orein 9/ane Broerin
4i. 6redit ard usiness
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4ii. Money /anin Business
4iii. Miro 6redit
i. Rura 6redit
. Miniu 6apitai:ation Nors %or %und ased NB6s!
i) or DI up to 51G - U+C 0.5 iion to e rou/t up%ront
ii) or DI ao4e 51G and up to $5G - U+ C 5 iion to e rou/t up%ront
iii) or DI ao4e $5G and up to 100G - U+ C 50 iion out o% '/i/ U+ C $.5
iion to e rou/t up%ront and t/e aane in 2# ont/s
. Miniu apitai:ation nors %or non-%und ased ati4ities!
Miniu apitai:ation nor o% U+ C 0.5 iion is appiae in respet o% a peritted
non-%und ased NB6s 'it/ %orein in4estent.
d. orein in4estors an set up 100G operatin susidiaries 'it/out t/e ondition to
disin4est a iniu o% 25G o% its eFuity to Indian entities, suet to rinin in U+C 50
iion as at ) (iii) ao4e ('it/out any restrition on nuer o% operatin susidiaries
'it/out rinin in additiona apita)
e. @oint *enture operatin NB6s t/at /a4e $5G or ess t/an $5G %orein in4estent
'i aso e ao'ed to set up susidiaries %or undertain ot/er NB6 ati4ities, suet
to t/e susidiaries aso opyin 'it/ t/e appiae iniu apita in%o' i.e. ()(i)
and ()(ii) ao4e.
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%. DI in t/e NB6 setor is put on autoati route suet to opiane 'it/
uideines o% t/e Reser4e Ban o% India. RBI 'oud issue appropriate uideines in t/is
reard.
Insurance Sector: FDI in Insurance sector in India
DI up to 2;G in t/e Insurane setor is ao'ed on t/e autoati route suet to
otainin iene %ro Insurane Reuatory H De4eopent Aut/ority (IRDA)
Telecommunication: FDI in Telecommunication sector
i. In asi, euar, 4aue added ser4ies and oa oie persona
ouniations y sateite, DI is iited to #"G suet to iensin and
seurity reFuireents and ad/erene y t/e opanies ('/o are in4estin and t/e
opanies in '/i/ in4estent is ein ade) to t/e iense onditions %or
%orein eFuity ap and o- in period %or trans%er and addition o% eFuity and ot/er
iense pro4isions.
ii. I+Ps 'it/ ate'ays, radio-pain and end-to-end and'idt/, DI is peritted up
to $#G 'it/ DI, eyond #"G reFuirin >o4ernent appro4a. 8/ese ser4ies
'oud e suet to iensin and seurity reFuireents.
iii. No eFuity ap is appiae to anu%aturin ati4ities.
i4. DI up to 100G is ao'ed %or t/e %oo'in ati4ities in t/e teeo setor !
a. I+Ps not pro4idin ate'ays (ot/ %or sateite and suarine aes)E
. In%rastruture Pro4iders pro4idin dar %ier (IP 6ateory 1)E
. 9etroni MaiE and
d. *oie Mai
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8/e ao4e 'oud e suet to t/e %oo'in onditions!
e. DI up to 100G is ao'ed suet to t/e ondition t/at su/ opanies
'oud di4est 2;G o% t/eir eFuity in %a4or o% Indian pui in 5 years, i%
t/ese opanies are isted in ot/er parts o% t/e 'ord.
%. 8/e ao4e ser4ies 'oud e suet to iensin and seurity
reFuireents, '/ere4er reFuired.
Proposas %or DI eyond #"G s/a e onsidered y IPB on ase to ase asis.
Trading: FDI in Trading $ompanies in India
8radin is peritted under autoati route 'it/ DI up to 51G pro4ided it is priariy
eport ati4ities, and t/e undertain is an eport /ouseKtradin /ouseKsuper tradin
/ouseKstar tradin /ouse. 3o'e4er, under t/e IPB route!-
i. 100G DI is peritted in ase o% tradin opanies %or t/e %oo'in ati4ities!
• eportsE
• u iports 'it/ e-portKe-onded 'are/ouse saesE
• as/ and arry '/oesae tradinE
• ot/er iport o% oods or ser4ies pro4ided at east $5G is %or proureent and
sae o% oods and ser4ies aon t/e opanies o% t/e sae roup and not %or
t/ird party use or on'ard trans%erKdistriutionKsaes.
ii. 8/e %oo'in inds o% tradin are aso peritted, suet to pro4isions o% 9WIM
Poiy!
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a. 6opanies %or pro4idin a%ter saes ser4ies (t/at is not tradin per se)
. Doesti tradin o% produts o% @*s is peritted at t/e '/oesae e4e %or su/
tradin opanies '/o 'is/ to aret anu%atured produts on e/a% o% t/eir
oint 4entures in '/i/ t/ey /a4e eFuity partiipation in India.
. 8radin o% /i-te/ itesKites reFuirin speiai:ed a%ter saes ser4ie
d. 8radin o% ites %or soia setor
e. 8radin o% /i-te/, edia and dianosti ites.
%. 8radin o% ites soured %ro t/e +MAOO and Mediu 9nterprises under '/i/,
ased on te/nooy pro4ided and aid do'n Fuaity spei%iations, a opany
an aret t/at ite under its rand nae.
. Doesti sourin o% produts %or eports.
/. 8est aretin o% su/ ites %or '/i/ a opany /as appro4a %or anu%ature
pro4ided su/ test aretin %aiity 'i e %or a period o% t'o years, and
in4estent in settin up anu%aturin %aiities oenes siutaneousy 'it/
test aretin.
DI up to 100G peritted %or e-oere ati4ities suet to t/e ondition t/at su/
opanies 'oud di4est 2;G o% t/eir eFuity in %a4or o% t/e Indian pui in %i4e years, i%
t/ese opanies are isted in ot/er parts o% t/e 'ord. +u/ opanies 'oud enae
ony in usiness to usiness (B2B) e-oere and not in retai tradin.
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!ower: FDI In !ower Sector in India
Up to 100G DI ao'ed in respet o% proets reatin to eetriity eneration,
transission and distriution, ot/er t/an atoi reator po'er pants. 8/ere is no iit on
t/e proet ost and Fuantu o% %orein diret in4estent.
Drugs !harmaceuticals
DI up to 100G is peritted on t/e autoati route %or anu%ature o% drus and
p/araeutia, pro4ided t/e ati4ity does not attrat opusory iensin or in4o4e use
o% reoinant DNA te/nooy, and spei%i e K tissue tareted %oruations.
DI proposas %or t/e anu%ature o% iensae drus and p/araeutias and u
drus produed y reoinant DNA te/nooy, and spei%i e K tissue tareted
%oruations 'i reFuire prior >o4ernent appro4a.
'oads( Highways( !orts and Harbors
DI up to 100G under autoati route is peritted in proets %or onstrution and
aintenane o% roads, /i/'ays, 4e/iuar rides, to roads, 4e/iuar tunnes, ports
and /arors.
!ollution $ontrol and )anagement
DI up to 100G in ot/ anu%ature o% poution ontro eFuipent and onsutany %or
interation o% poution ontro systes is peritted on t/e autoati route.
5;
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$all $enters in India * $all $entres in India
DI up to 100G is ao'ed suet to ertain onditions.
Business Proess Lutsourin BPL in India
DI up to 100G is ao'ed suet to ertain onditions.
+peia aiities and Rues %or NRIs and L6Bs
NRIs and L6Bs are ao'ed t/e %oo'in speia %aiities!
1. Diret in4estent in industry, trade, in%rastruture et.
2. Up to 100G eFuity 'it/ %u repatriation %aiity %or apita and di4idends in t/e
%oo'in setors!
i. # 3i/ Priority Industry >roups
ii. 9port 8radin 6opanies
iii. 3otes and 8ouris-reated Proets
i4. 3ospitas, Dianosti 6enters
4. +/ippin
4i. Deep +ea is/in
4ii. Li 9poration
4iii. Po'er
i. 3ousin and Rea 9state De4eopent
. 3i/'ays, Brides and Ports
5$
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i. +i Industria Units
ii. Industries ReFuirin 6opusory Oiensin
iii. Industries Reser4ed %or +MAOO and Mediu 9nterprises
. Up to #0G 9Fuity 'it/ %u repatriation! Ne' Issues o% 9istin 6opanies
raisin 6apita t/rou/ Pui Issue up to #0G o% t/e ne' 6apita Issue.
#. Ln non-repatriation asis! Up to 100G 9Fuity in any Proprietary or Partners/ip
enaed in Industria, 6oeria or 8radin Ati4ity.
5. Port%oio In4estent on repatriation asis! Up to 1G o% t/e Paid up *aue o% t/e
eFuity 6apita or 6on4ertie Deentures o% t/e 6opany y ea/ NRI.
In4estent in >o4ernent +eurities, Units o% U8I, Nationa PanK+a4in
6erti%iates.
;. Ln Non-Repatriation Basis! AFuisition o% s/ares o% an Indian 6opany, t/rou/
a >enera Body Resoution, up to 2#G o% t/e Paid Up *aue o% t/e 6opany.
$. Lt/er aiities! Inoe 8a is at a at Rate o% 20G on Inoe arisin %ro
+/ares or Deentures o% an Indian 6opany.
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O01E!"I,E OF "2E S")D3
• 8o %ind out t/e ontriution o% DI aon t/e t/ree setors
• 3o' an t/is ontriution e inreased
• ?/et/er DI is payin a sini%iant roe in t/e eo ro't/ o% india.
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P)RPOSE OF "2IS S")D3
At a t/eoretia e4e, DI rins ot/ apita and te/nooy '/i/ aes t/e oa
%irs ore opetiti4e and enouraes t/e eonoi de4eopent in t/e %aster 'ay. 8/e
spi o4er e%%et o% %orein opanies 'i /a4e a on-ter e%%et in t/e /ost ountries.
In t/e pratia e4e, t/is study epores t/e roe o% DI in eonoi ro't/ in India.
8/is ase study epores, '/et/er DI payed roe in eonoi ro't/ or not Anot/er
reason %or t/e study is 'ord=s i institutions ie IM, ?8L and UN68AD prootin
internationa trade and ati4ities o% Mutinationa ati4ities %or t/e ro't/ o% 'ord
eonoies. India is ae to attrat a sini%iant aount o% DI aon Asian ountries.
8/is study epores t/e DI poiies adopted in India to attrat ore DI o4er t/e years.
+u/ poiy reoendation 'oud e use%u %or t/e de4eopin ountries to attrat ore
DI. urt/er ore, t/is study 4eri%ies t/e t/eoretia ode o% endoenous ro't/ t/eory
o% eonoi ro't/ y usin t/e aro eonoi %iures o% India. 8/e present study
eaines t/e epiria assessent o% t/e ipat o% DI in eonoi ro't/ o% India
o4er t/e period o% 1"
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S"A"EMEN" OF PRO0LEM
8oday, India stands as one o% t/e de4eoped L96D eer ountry in t/e 'ord. 8/e
ountry /as a and o% "
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resoures a4aiae in t/e /ost ountries. 3o' t/e ro't/ is a%%eted y t/ese 4ariaes
Does /i/ e4e o% DI inrease t/e /i/er e4e o% eonoi ro't/ ?/at 'oud e t/e
interation et'een DI and 8rade, /uan apita and doesti in4estent 8/e study
eaines t/e e%%et o% t/is 4ariae in eonoi ro't/.
#$* Research Ojecti;es
8/e ain oeti4e o% t/is study is to epore t/e ipat o% DI on Indian eonoy
ro't/ and spi o4er e%%et o% MN9s to t/e Indian %irs. 8/e study aso re4ie's t/e
India=s %orein diret in4estent poiies and initiati4es %or attratin DI o4er t/e years
%or en/anin eonoi ro't/ and in4estent. 8/e study ais to reoend t/e trade
and in4estent poiies %ro t/e Indian eperienes to t/e de4eopin ountries ie
India.
#$/ Scope o< the St9?
8/is resear/ estiates t/e ipat o% DI on eonoi ro't/ in India o4er t/e period
o% 1"
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#$5 Or8a6iJatio6 o< the issertatio6
8/is dissertation is di4ided in to se4en /apters. 6/apter one epains t/e around o%
t/e study, purpose o% t/e study, stateent o% t/e proe, oeti4es o% t/e study, sope o%
t/e study and orani:ation o% t/e study. 6/apter t'o re4ie's t/e iterature t/e t/eoretia
and epiria resear/ on t/eories o% DI and ipat o% DI on eonoi ro't/ o% t/e
pre4ious resear/ 'ors. 6/apter t/ree (A) pro4ides a rie% /istory and urrent o4er4ie'
o% Indian eonoy '/i/ i4es t/e ipse o% Indian eonoy and 6/apter t/ree (B)
pro4ides an o4er4ie' o% Indiaese eonoy. 6/apter %our eaorates t/e oneptua
%rae'or o% t/is study, detais o% resear/ et/odooy and odes spei%iation %or
eonoetri ode o% t/e study. 6/apter %i4e presents an o4er4ie' o% reent DI in%o'
to India 'it/ re4ie' o% DI poiies o4er t/e study period. 6/apter +i presents t/e
disussion and anaysis o% epiria study. 6/apter se4en presents suary, %indins and
reoendations o% t/is dissertation.
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RESEAR!2 ME"2ODOLO&3
Resear/ et/odooy is a systeati 'ay, '/i/ onsists o% series o% ation steps,
neessary to e%%eti4ey arry out resear/ and t/e desired seFuenin to t/ese steps. 8/e
aretin resear/ is a proess o% in4o4es a no. o% inter-reated ati4ities, '/i/ o4erap
and do riidy %oo' a partiuar seFuene. It onsists o% t/e %oo'in steps!-
• oruatin t/e oeti4e o% t/e study
• Desinin t/e et/ods o% data oetion
• +eetin t/e sape pan
• 6oetin t/e data
• Proessin and anay:in t/e data
• Reportin t/e %indins
8/e ain oeti4e o% t/e study is to assess t/e ipat o% DI in Indian eonoy o4er
t/e period o% 1"
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!o6cept9al Frame =or7
Basiay, t/e oneptua %rae 'or o% t/e study is deri4ed %ro t/e Borens:tein, @ose
de >raorio and @o/n-?/a Oee, 1""5. 8/ey /a4e s/o'n t/e ipat o% DI on eonoi
ro't/ in t/e %oo'in inae.
!apital acc9m9latio6
Diret Y DIIndiret Yro'din in o'er ost o% inno4ation
Pro9cti;it? 8ro=th
Maor soure o% inno4ation8e/nooy trans%er
6ontaion e%%etIpat on /uan apita %oration Li67a8esPeuniary (ro'din in)8e/nooia (ontaion, trans%ers)
Aordin to t/eir aruent, orein Diret In4estent aeerates apita auuation
in /ost ountry y inreasin tota in4estent and o'erin t/e ost o% inno4ation and
indirety y ro'din in doesti in4estent and sare resoures o% t/e eonoy and
produti4ity is en/aned y te/nooy trans%er ut it is onstrained y /uan apita in
t/e /ost eonoy. 8/ey arue t/at DI de4eops sto o% /uan apita. 8/ere s/oud e
a inae et'een doesti in4estent and /uan apita to a/ie4e t/e /i/er
produti4ity.
;5
FDI Eco6omic&ro=th
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Research Methoolo8? a6 Moel
8/e present study is %oused on t/e e4auatin t/e ipat o% DI in eonoi ro't/ in
India=s eonoy durin t/e period o% 1" Z Per apita >DP ro't/ rate
7 Z Doesti 6apita In4estent
DI Z orein Diret In4estent
36 Z 3uan 6apita
9p Z 9ports
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9p Z 9poyent
8/e 4ariaes 7, DI, and 9ports are easured as perentae o% >DP. 8/e ode is
etended to t/e 'or Borens:tein, >raorio and Oee and inuded ot/er 4ariaes to
oser4e t/e interation et'een DI and 8rade, Doesti In4estent and 3uan
6apita. Past studies /ad s/o'n a positi4e ipat o% DI, 9port, /uan apita and
doesti in4estent on eonoi ro't/.
8/e sto o% e%%iient /uan apita is reFuired to asor t/e te/nooies rou/t y
DI and it deterines '/et/er t/e potentia spio4er e%%et is reai:ed. 8/e /ost ountry
reFuires su%%iient nuer o% /uan apita to utii:e t/e te/nooies rou/t y DI,
eanin t/at /i/er t/e e4e o% /uan apita in t/e /ost ountry, /i/er t/e e%%et o%
DI in eonoi ro't/ o% t/e /ost ountry. 8/e study assues a positi4e reations/ip
et'een DI and >DP ro't/ rate as 'e as a positi4e interation et'een DI and
/uan apita in aeeratin t/e eonoi ro't/. 8/e issue reatin to t/e interation
et'een DI and doesti in4estentE it is assued t/at t/ere is positi4e interation
et'een DI and doesti in4estent eause DI /as is onsidered as an iportant
ediu %or trans%errin apita, te/nooies and /ost ountries t/at enouraes t/e
doesti in4estent e4e. 8/e interation ter estiates t/e oined e%%et o% DI and
doesti in4estent in eonoi ro't/ and a positi4e oe%%iient %or t/e interation
ter 'oud indiate t/at DI and doesti in4estent rein%ore (opeentary) to ea/
ot/er.
;$
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8/is study uses t/e tie series data %or t/e period o% 1"
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3ypot/esis o% t/e study as pursued in t/e /apter
?e are tryin to test t/e %oo'in /ypot/eses!
1) orein Diret In4estent %o's to t/e reion '/ere returns on apita
are /i/er. 8/is is true ot/ in t/e ase o% inter-ountry oparison and intra-ountry
reions. Lne iportant %ator in t/is study is t/e rate o% ro't/ o% >ross Doesti
Produt. 8/e atter /as anot/er iportant roe and t/is is t/at a /i/er ro't/ rate o%
>DP ensures /i/er asorption apaity o% t/e eonoy. It ipies t/at t/e neessary
ondition %or attratin /i/er 4oue o% DI is t/e /i/er ro't/ rate o% ross doesti
produt in t/e reion.
(2) ?/ie t/e %irst /ypot/esis s/o's t/e neessary ondition %or in%o' o% DI in a
reion, t/is ay not e su%%iient. 8/e su%%iient ondition is t/e eistene o% ot/
in%rastruture in t/e reion t/at an %aiitate t/e pro%itae in4estent and a on ter
sustenane o% t/e in4estent proedure. By in%rastruture 'e put ep/asis on t/e 'ay
'e /a4e de%ined in%rastruture in a Fuaitati4e 'ay. It ipies t/at '/ie t/e eistene o%
ood p/ysia in%rastruture is iportant, t/e ot/er aspets o% non-p/ysia in%rastruture
as epained e%ore are aso iportant.
?e 'i test t/e ao4e t'o /ypot/eses 'it/ t/e /ep o% anaysis t/rou/ taes, diaras
and aso 'it/ soe riorous anaysis in t/e %or o% testin o% odes.
;"
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DA"A ANAL3SIS
FDI: A Moel i6 the ma7i68:
orein Diret In4estent is one aspet o% %orein apita %o' in t/e doesti eonoy.
In t/e open eonoy set-up, apita %unds %o' 'i aintain eFuiiriu y adustent
in t/e rea 4ariaes in t/e eterna setors.
In an open eonoy areate deand AD 'i e
ADZ 6 I > W 8T , '/ere, 6, I, >, and W are
onsuption, in4estent,
o4ernent ependiture and eport
respeti4ey. 8T is trans%er o% %unds
aroad.
8/e areate suppy A+ 'i e
A+ Z 6 + 8 M 8rT, '/ere, 6, +, M and 8 are
onsuption, sa4ins, iport and
taation respeti4ey. 8rT is t/e %unds
trans%er in%o' in t/e ountry.
$0
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Usin traditiona aroeonoi assuptions t/at o4ernent udet is aaned, '/i/
eans > Z8, and onsuption pan is a'ays satis%ied, t/at eans 'e an eiinate 6
%ro ot/ sides 'e an 'rite a%ter imposing equilibrium in the economy,
I W 8T Z + M 8rT,
Lr, 8T - 8rT Z (+ - I) ( M - W)
Lr, 8rT - 8T Z ( I -+ ) ( W -M ) [[.. 15.1
In our s/ee o% t/ins, 8rT - 8T is t/e eess %unds in%o' into t/e ountry t/at an e
taen as t/e %orein diret in4estent DI. Bot/ + and I are %untions o% inoe and
rate o% interest r. Aain, W and M are %untions o% doesti prie P, %orein prie PT and
e/ane rate e$ Aso,
P Z e $ PT [[.. 15.2
ro 1 'e an 'rite usin %untions,
DI Z \ I( , r) - + ( , r)] \ W( P@ e ) - M ( P, e )]
Lr, DI Z % ( , r , e @ P ) [[. 15.
$1
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+ine noina e/ane rate and prie e4e o4e in t/e sae diretion e is t/e prie o%
%orein urreny in ters o% doesti urreny, and noina interest rate inudes
in%ation epetations, eepin a t/e t/ree-- noina interest rate, e/ane rate and
prie e4e--- ay ead to uti-oinearity, a partiuar proe in eonoetris '/en
soe o% t/e independent 4ariaes are orreated aon t/ese4es. +o 'e drop prie
e4e %or t/e purpose o% eonoetri estiation. +o eFuation 15. in estiae %or
oos ie t/rou/ oarit/i trans%oration,
Oo DI Z a0 a1 o a2 o e a r u [[. 15. #
8/eoretia 4aue 'i e a1 ^ 0, a2 _ 0, a ^ 0
8/e estiation an e ade in e4e %or aso. 8/at s/o's t/e reati4e strent/ o%
di%%erent deterinants o% DI in a de4eopin ountry.
8/e 4ariae 'i apture t/e iportane o% t/e asorption apaity o% t/e eonoy. It
is epeted t/at a %aster ro't/ an asor arer aount o% apita, doesti or %orein,
into t/e eonoy. 8/e e/ane rate taes are ot/ t/e potentia return and opportunity
ost o% in4estent. Aain, t/e interest rate re4eas t/e re%erene rate o% t/e %easie return
on apita and aso t/e ost o% doesti apita.
$2
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Empirical Exercise
8/e data on DI in India an e /ad ony %ro 1""1 on'ards and as su/ t/e
data ase is 'ea. ?e /a4e taen t/e tie series 1""1 to 1""$ %or t/e eonoetri
estiation o% t/e ode (9Fuation 15.#). 8/e resuts %or India and Maaysia are paed
eo'. ?e %ind t/at t/e oe%%iient o% o e i4es 'ron sin t/ou/ t/e t-4aue is not
satis%atory. Lt/er oe%%iients are o% orret sins.
I6ia6 case o< re8ressio6 res9lts$
Dependent *ariae!
DIMet/od! Oeast +FuaresDate! 0$K0;K00 8ie!
1$!10+ape! 1""1 1""$Inuded oser4ations!
$
*ariae 6oe%%iient +td. 9rror t-+tatisti Pro.
6 -""$.50 55;DP 0.00;"; 0.00
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+.9. o%
reressio
n
##0.52 Aaie in%o
riterion
15.0";
+u
sFuared
resid
5
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1""0 101< #2
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+u
sFuared
resid
20" +/'ar: riterion 1;.2$""
Oo
iei/oo
d
-;
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#ature of FDI Inflow
As indiated in t/e ao4e pararap/s t/e nature o% DI in%o' into India is not
uni%or o% t/e t'o routes o% DI in%o', autoati route and >o4ernent route. 8/ere
/as een a steady rise %ro 1""1 S 1""$, ut a%ter t/ere /as een a perspeti4e deine
in%o' to DI into India. 8/is aspet is re4eaed in e/iit 1 s/oud e in4estiated t/e
%ators responsie %or t/e deeeration o% DI in%o's into India %ro 1""$. 8/e sae
piture in a di%%erent %orat is presented in e/iit .
Exhiit #: FDI I6
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Exhiit (: Shares o< A9tomatic Ro9te a6 &o;er6me6t Ro9te i6 the "otal I6
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Exhiit +: FDI i6 I6ia > Appro;e to Act9al
Bet'een t/e t'o routes o% DI in%o' into India t/e >o4ernent route is
predoinant as t/e perentae o% s/ares t/rou/ t/e >o4ernent route is u/ /i/er
opared to t/e autoati route. 8/is aspet is re4eaed in e/iit 2.
8/ou/ t/e nuer o% soure ountries %ro '/i/ DI in%o's into India
/appens is ipressi4e, t/e prinipa soures are E U+A, U7, @apan, >erany, rane,
India, Mauritius and NRI. 8/is aspet /as een re4eaed in e/iit #.
$"
#orei)n Direct !nvestment in !ndia * Actua and A++roved
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
1991 1992 1993 1994 1995 1996 1997 1998 1999
F D I "
A # t u a l a n d A $ $ % o & d "
R s M i l l i o n
0
5
10
15
20
25
30
( ' a % & ) o f A # t u a l t o A $ $ % o & d
A#tl
A$$%
'a%&
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Exhiit ': FDI I6
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Exhiit *
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Exhiit 5$
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Exhiit -
Exhiit 4
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Exhiit #.
Exhiit ##
ost
*
'
'*
(
(*
+
. *. '. '*. (. (*. +. +*. ,.
9 Ma"+ay( l(t
F D I A ) ) r * $ +
)&I
=elationship between 8tate level )&I and "rbanaisation -rowth
*
'
'*
(
(*
+
-, -( ( , 1 / ' '(
Ur5a"a2(at2" Gr1t4
F D I A ) ) r * $ +
)&I
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Atua in%o' o% DI as a perentae tota appro4a %or t/e period 1""1-1""" is
not uni%or ountry 'ise and t/is interestin aspet is re4eaed in e/iit 5. ?e see t/at
t/e perentae is Fuite /i/ %or ountries ie Russia, Net/erands, Mauritius and 3on
7on. But ountries ie U7, U+A, 6anada s/o' 4ery o' perentae o% atua in%o'
as a perentae o% t/e tota appro4a. Lne epanation ay e t/at tota 4oue o% in%o'
%ro t/ese ountries is 4ery /i/ opared to ot/er ountries t/at reister /i/er
perentae, ut t/is %es to i4e t/e tota epanation.=
?e /a4e seen earier t/at DI in%o's in aor setors in India durin t/e period
1""1 S 1""" is not uni%or and t/e distriution is 4ery se'ed. 8/is is re4eaed in
e/iit ;. ?e see t/at '/ie transportation industry oents $.G, teeouniation
5.
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CONCLUSION
8/e de4eopin ountries 'i need DI to suppeent t/e inadeFuate doesti
sa4ins in %ae o% ro'in reFuireent o% apita to aintain a ruia rate o% eonoi
ro't/ so t/at t/e peope eo' t/e po4erty ine an e i%ted 'it/in a reasonae tie.
?e /a4e seen t/at t/e s/are o% DI in%o' in t/e de4eopin ountries is 4ery u/ /i/,
'it/ soe ountries ie 6/ina /a4e een ae to attrat /ue aount on %orein apita.
8/ou/ t/e oparison 'it/ 6/ina reardin t/e in%o' o% DI is not truy usti%ied,
India s/oud /a4e een ae to attrat t/e reati4ey arer 4oue o% orein 6apita t/an
'/at s/e /as done so %ar. In t/e earier pararap/s attepts /a4e een ade to point out
t/e %ators '/i/ are responsie %or t/e in%o' o% DI. In ertain Fuarters studies /a4e
een ade to anay:e t/e nature o% DI in%o' in de4eopin ountries partiuary in
Asian and Oatin Aerian ountries. iterin do'n t/e studies a4aiae in t/e iterature
/ep us to identi%y ertain %ators, '/i/ are aso ree4ant in Indian situation. ?e s/oud
e ear t/at soe o% t/ese 4ariaes are Fuaitati4e in nature and t/ose are entioned
o%ten in aadei iterature to 8/aiand. But 6/ina is an eape /o' eport orientation
an e propery utii:ed to attrat %orein apita and aso to aii:e t/e ro't/
proess. Not ony t/at 6/ina /as een ae to use DI on a seeti4e asis to aii:e
t/e rate o% ro't/, ut 6/ina /as one uniFue ad4antae, '/i/ India is ain and t/is
s/oud e entioned to eep t/e oparison strai/t.
6/ina is uy to /a4e t'o /i/y de4eoped reions ie 3on-7on and 8ai'an.
8/e %irst it /as otained %ro t/e United 7indo in 1""$ and a are /un o% DI in
6/ina is %ro 3on-7on. 8ai'an is a reaa'ay pro4ine o% 6/ina and in spite o%
poitia ro', 8ai'an in4ests /ue aount o% apita in 6/ina. Apart %ro t/ese t'o
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/i/y de4eoped reions and a are suppier o% %orein apita 6/ina /as a are et/ni
Diaspora in Asian ountries. 8/is roup is %inaniay 4ery ri/ and t/ey in4est /ue
aount in t/e ainand.
8/ese t'o %ators i.e. t/e eistene o% 3on-7on and 8ai'an and a are
6/inese Diaspora /a4in stron eonoi inae ae 6/ina uniFue aon t/e
de4eopin ountries reardin t/e in%o' o% DI. 8/is is true in spite o% a poitia
reie '/i/ is totay opposite o% t/e apitaist syste. 8/is aspet is interestin. 6/ina
/as eoe a apitaist eonoi syste 'it/ a totaitarian poitia set-up as ony
6/inese 6ounist Party is t/e eitiate poitia party t/ere.
8/e in%o' o% DI is soeties assoiated 'it/ t/e e4e o% te/nooia
de4eopent in t/e ountry. In t/is ase aain t/e 6/ina eape s/oud e entioned.
+o on as %orein apita is %o'in in and partiuary in areas '/ere 6/ina is ain,
t/e 6/inese aut/ority is not ot/ered aout t/e type o% te/nooy t/e %orein in4estor is
rinin. 8/e syste is reiented and it /as rued aout a deate in poitia ires
'/i/ are 4ery oon in a deorati set up in India. 8/is type o% syste /as een
%ound to e 4ery suitae %or t/e %orein in4estors. India aso /as een ae to iport
odern te/nooy in ruia industries so t/at it an aintain opetiti4e ede in t/e
eport %ront.
+oeties t/e eport per%orane reFuireents are taed 'it/ t/e in%o' o% DI
and aut/ority o% de4eopin ountries puts ep/asis on t/is aspet. Ln t/is point se4era
Fuestions are iportant.
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1. 3o' 'e do internationa arets 'or in apportionin DI in ine 'it/ oparati4e
ad4antae
2. ?/at in4estent di4ertin ations are ein taen y ot/er ountries to set a oation
o% internationa anu%aturin prodution in t/eir o'n diretions
. ?/at ostaes in/iit internationa arets %ro %untionin ore e%%eti4ey.
8/ese Fuestions are ruia to understand t/e nature o% DI in%o' in de4eopin
ountries. It is a %at t/at t/e de4eopin ountries are opetin aon t/ese4es to
attrat %orein apita.
+oeties t/e oation issue eoes iportant %or t/e in%o' o% DI and t/e
nature o% industry eoes reated to t/at. +oe partiuar industries ie autooie,
petro/eia and eetronis are entioned %or t/e initia p/ase o% in4estent. 8/e
soures o% inputs and oation o% /eap aour eoes iportant soeties in t/e
deterination o% oation o% partiuar industries.
Anot/er iportant issue /as oe in a study reated to t/e dynais o% DI in
de4eopin ountries. ?/ie t/e /ost o4ernent tries to on4ine t/e internationa
in4estor to oit apita to de4eop a ne' prodution side, a ountry 'oud /a4e to
spend ore resoures to uid up a in%rastruture so t/at %orein %irs oitent
reains. But t/e onern o% t/e /ost ountry does not end /ere. Oiterature in t/is
partiuar areas /as identi%ied %i4e road ateories o% onern in de4eopin ountries
'/i/ are in t/e proess o% transition!
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1. 6utura ators ('orers oti4ation, utura preparation)
2. Oaour reuations (eiiity in /irin and ayin o% 'orers)
. Responsi4eness o% t/e surroundin eonoy in pro4idin supportin oods and
ser4ies
#. Institutiona ase o% oeria a' to i4e uidane '/en dispute arises
5. 8/e rediiity o% pui setor oitents aout taes, in%rastruture and ot/er
reuatory issues.
Oiterature aso re4eas t/e onern o% %orein in4estors reardin t/e rediiity o%
proises o% t/e /ost o4ernent and t/e institutiona %ators ie t/e udiia systes o%
seurity. 8/ese are t/e pattern o% in%oration ap '/i/ t/e %orein opanies desire to
ride in order to e4auate t/e returns assoiated 'it/ t/e in4estent opportunity. 8/e
MN6s are ost o%ten oiopoies and t/e ountries '/ere t/ey are /a4in /ead Fuarters
e/a4e aso as oiopoies. 8/ey introdue entry arriers and trans%er no'ede ony
'/en it eoes a pui ood. In ost ases te/nooia no'ede is strity ept
under ontro. 8/is pratie pre4ents disseination o% atest te/nooy in t/e /ost
ountry. In t/is ase eperiene 'it/ a t/e ountries is not t/e sae.
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RE!OMMENDA"IONS
8/e study %oused on t/e roe o% roe o% DI in eonoi ro't/ in India. Despite t/e
Fuaitati4e e4idenes o% roe o% DI in t/e eonoi ro't/ in India, Fuantitati4e
reression anaysis s/o'ed neiie ipat o% DI in eonoi ro't/. Indian poiy
aers direted t/e %orein diret in4estent in t/e priority setor o% t/e de4eopent at
t/e tie o% tain o%% eonoi p/ase. Basiay, eonoi and trade poiies s/oud e
are%uy de4eoped %or a on ter and eonoi ro't/ in t/e ountries espeiay
de4eopin ountries. aster eonoi ro't/ is t/e reFuireent o% east de4eoped
ountries (OD6s). Indian ode o% eonoi ro't/ oud e use%u %or de4eopin
eonoies ie India. ousin on DI and eonoi ro't/ in India, DI 'as one o%
t/e /ane aents %or industria re%ors. 8/e are%u poiy %oruation and openin o%
su-setors /eped to uprade opetiti4e positions o% oa %irs in India. 8/e study
reoends t/e %oo'in aor points to t/e Indian poiy aers %or eep ro'in its
eonoy and to aeerate t/e Indiaese eonoi ro't/ 4ia %orein diret in4estent.
"o I6ia6 polic? ma7ers:
1. orein diret in4estent s/oud e enouraed espeiay in t/e /i/-te/
industries and 4aue added produts eause India an not opete 'it/
nei/ourin ountry in ters o% ost and oa arets.
2. India /as attrated 4ery sa aount o% in P/araeutia and io-edia
setors. More DI s/oud e attrated in t/ese setors to ead in t/is industry in
t/e reion.
"0
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. DI in RHD ati4ities is 4ery neiie in India. MN9s 'orin in R H D
s/oud e enouraed to estais/ in India.
#. DI in eetriity and as setors /as een neati4e DI in t/e reent years.
Indian poiy aers s/oud pro4ide %a4ourae en4ironent %or MN9s to retain
t/eir in4estent and inrease t/e in4estent in t/e enery setors.
For e;elopi68 co96tries li7e I6ia:
DI payed iportant roe on /anin t/e industria patterns o% Indian %irs to
a/ie4e internationa opetiti4eness '/i/ /eped to a/ie4e rapid eonoi
de4eopent in India. Basiay, Indian %irs earned t/e te/nooies and sis
%ro MN9s '/i/ ade Indian %irs opetiti4e. De4eopin ountries ie India
an earn %ro t/e Indian eperienes reardin DI poiies to aeerate t/e
eonoi ro't/. 8/e Indian eperienes and soe iterature s/o' eport-ed
eonoi ro't/. 3o'e4er, 'ord %inania risis o% 200< /aened t/is /ypot/esis
due to deine o% oods and ser4ies in t/e internationa arets. 3ene, India an
earn %ro t/ese eperienes t/at eport-ed ro't/ ay e s/ort ter ro't/.
1. Identi%y t/e setors %or DI '/ere o4ernent=s stratei eonoi pan is
direted and /annei:es t/e in%o' o% DI in t/e eary stae o% eonoi
de4eopent.
2. India is ri/ in 'ater resoures. >o4ernent s/oud attrat ore DI in t/is setor
to trans%or t/e Indiaese eonoy y produin su%%iient enery %or se% and
eport.
"1
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. 8/e natura eauties and 3iaayan ranes /as /ue potentia %or touris
industry, /o'e4er, sa aount o% DI /as een attrated in t/ese industry in
India. Indiaese touris industry an trans%or Indiaese eonoy y de4eopin
India as t/e est pae to 4isit in t/e 'ord.
#. Poor In%rastruture and transportation inaessiiity are t/e ottene %or
Indiaese eonoy. DI in >reen%ied in4estors s/oud e enouraed.
5. >o4ernent s/oud de4eop asi in%rastruture and %ree :ones to %aiitate and
attrat DI in di%%erent reions o% t/e ountry.
;. DI inenti4es s/oud e pro4ided t/e %orein in4estors and estais/ rie4ane
/andin institutions to so4e t/e proes y %orein in4estors.
$. Lne stop ser4ies s/oud e pro4ided to t/e %orein in4estors to %aster
estais/ent o% MN9sE so' reistration proess, ureaurati /urdes,
orruptions and poor in%rastruture are t/e ain proes o% %orein in4estors in
t/e de4eopin ountries.
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0I0LIO&RAP23
Aier, R.V (1";"), The International Corporation, edited y 6/ares P. 7indeBerer,
8/e MI8 Press, Massa/usetts, U+.
A/oin, P. and 3o'itt, P. (1""
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Borens:tein, >raorio and Oee (1""5) how does foreign direct inestment affect
economic growth# , Nationa Bureau o% 9onoi Resear/ ?orin paper 505$.
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