10-04-2017, 08:25 PM
Presented By
K.VAMSI KRISHNA
[attachment=14771]
INTRODUCTION OF FOREIGN DIRECT INVESTMENT
The last two decade of the 20th century witnessed a dramatic world-wide increase in
foreign direct investment (FDI), accompanied by a marked change in the attitude of
most developing countries towards inward FDI. As against a highly suspicious
attitude of these countries towards inward FDI in the past, most countries now regard
FDI as beneficial for their development efforts and compete with each other to attract
it. Such shift in attitude lies in the changes in political and economic systems that
have occurred during the closing years of the last century.
The wave of liberalization and globalization sweeping across the world has opened
many national markets for international business. Global private investment, in most
part, is now made by multinational corporations (MNCs). Clearly these corporations
play a major role in world trade and investments because of their demonstrated
management skills, technology, financial resources and related advantages. Recent
developments in global markets are indicative of the rapidly growing international
business. The end of the 20th century has already marked a tremendous growth in
international investments, trade and financial transactions along with the integration
and openness of international markets.
FDI is a subject of topical interest. Countries of the world, particularly developing
economies, are vying with each other to attract foreign capital to boost their domestic
rates of investment and also to acquire new technology and managerial skills. Intense
competition is taking place among the fund-starved less developed countries to lure
foreign investors by offering repatriation facilities, tax concessions and other
incentives. However, FDI is not an unmixed blessing. Governments in developing
countries have to be very careful while deciding the magnitude, pattern and
conditions of private foreign investment.
In the 1980s, FDI was concentrated within the Triad (EU, Japan and US). However, in
the 1990s, the FDI flows to developed countries declined, while those to developing
countries increased in response to rapid growth and fewer restrictions. Most FDI
flows continue still to be concentrated in 10 to 15 host countries overwhelmingly in
Asia and Latin America. South, East and Southeast Asia has experienced the fastest
economic growth in the world, and emerged as the largest host region. China is now
the largest host country in the developing world.
However, small markets with low growth rates, poor infrastructure, and high
indebtedness, slow progress in introducing market and private-sector oriented
economic reforms and low levels of technological capabilities are not attractive to
foreign investors.
The remarkable expansion of FDI flows to developing countries had belied the fear
that the opening of central and Eastern Europe and the efforts of the countries of that
region to attract such investment would divert investment flows from developing
countries. The most important factors making developing countries attractive to
foreign investors are rapid economic growth, privatization programmes open to
foreign investors and the liberalization of the FDI regulatory framework.
In India, prior to economic reforms initiated in1991, FDI was discouraged by
Imposing severe limits on equity holdings by foreigners and
Restricting FDI to the production of only a few reserved items.
The Foreign Exchange Regulation Act (FERA), 1973 (now replaced by Foreign
Exchange Management Act [FEMA]), prescribed the detailed rules in this regard and
the firms belonging to this group were known as FERA firms. All foreign investors
were virtually driven out from Indian industries by FERA. Technology transfer was
possible only through the purchase of foreign technology. However, due to severe
limits on royalty payments to foreigners to reduce foreign exchange use, this option
was ineffective. However, the government granted liberal tax incentives to encourage
indigenous generation of technology by domestic firms. In the absence of foreign
technology, Indian industry suffered both in terms of cost of production and quality.
The initial policy stimulus to foreign direct investment in India came in July 1991
when the new industrial policy provided, inter alia, automatic approval for project
with foreign equity participation up to 51 percent in high priority areas. In recent
years, the government has initiated the second generation reforms under which
measures have been taken to further facilitate and broaden the base of foreign direct
investment in India. The policy for FDI allows freedom of location, choice of
technology, repatriation of capital and dividends. As a result of these measures, there
has been a strong surge of international interest in the Indian economy. The rate at
which FDI inflow has grown during the post-liberalization period is a clear indication
that India is fast emerging as an attractive destination for overseas investors.
Encouragement of foreign investment, particularly for FDI, is an integral part of
ongoing economic reforms in India.
Though India has one of the most transparent and liberal FDI regimes among the
developing countries with strong macro-economic fundamentals, its share in FDI
inflows is dismally low. The country still suffers from weaknesses and constraints, in
terms of policy and regulatory framework, which restricts the inflow of FDI.
Foreign investment policies in the post-reforms period have emphasized greater
encouragement and mobilization of non-debt creating private inflows for reducing
reliance on debt flows. Progressively liberal policies have led to increasing inflows of
foreign investment in the country.