Political Economy of FDI (Download PDF)

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Foreign direct investment (FDI) is an important element of the global economy and a central component of economic development strategies of both developed and developing countries. Democratic political systems attract higher levels of FDI inflows both across countries and within countries over time.

Foreign Direct Investment

Foreign Direct Investment

Foreign Direct Investment

Highlights

  • The world today is far more inter connected than half a century ago.
  • It has been observed that ‘the pattern of FDI inflows in India Has gradually evolved from the period of anti-FDI inflows (1969 - 75) to selective FDI in flows (1975 - 91) and finally to pro-FDI inflows after the economic reforms of 1991.
  • India has built a strong and sustainable economic infrastructure and institutional mechanism that allowed it to face the challenges of globalization on its own terms.
  • Institutional reform is the key to the success of the policy to attract FDI in the country.
  • The government has been actively pursuing the goal of making India a manufacturing hub through its ‘Make in India’ initiative and invitation to foreign companies to invest in India.

FDI Indian scenario

  • FDI relationship consists of a parent enterprise and a foreign affiliates which together from a multinational Corporation (MNC).
  • In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.
  • UN defines control in this case as owning10 % or more of the ordinary shares or voting power of an incorporated firm or equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.

FDI is permitted as under the following forms of investments In India

  • Through financial collaborations
  • Through joint ventures and technical collaborations
  • Through capital market via Euro issues
  • Through private placements or preferential allotments
FDI permitted investments In India

FDI Permitted Investments in India

FDI permitted investments In India

Types of FDI

  • Direction

    • Inward FDI: Inward Direct Investment, also called direct investment in the reporting economy, includes all liabilities and assets transferred between resident direct investment enterprises and their direct investors.
    • Outward FDI: Outward direct investment, also called direct investment abroad, includes assets and liabilities transferred between resident direct investors and their direct investment enterprises.
  • Target

    • Horizontal: Company carries out same activities abroad as at home country.
    • Vertical: Different stages of activities are added abroad.
    • Conglomerate: An unrelated business is added abroad. It is the most unusual form of FDI as it involves attempting to overcome two barriers simultaneously.
  • Motive

    • Natural resource-seeking investment: Motivated by investor interest in accessing and exploiting natural resources.
    • Market-seeking investment: Motivated by investor interest in serving domestic or regional markets.
    • Strategic asset-seeking investment: Motivated by investor interest in acquiring strategic assets (brands, human capital, distribution networks, etc. ) that will enable a firm to compete in a given market. Takes place through mergers and acquisitions.
    • Efficiency-seeking investment: FDI that comes into a country seeking to benefit from factors that enable it to compete in international markets.
    Types of FDI

    Types of FDI

    Types of FDI

- Published/Last Modified on: March 16, 2017

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