Business Environment Unit 2 PDF
Business Environment Unit 2 PDF
Business Environment Unit 2 PDF
Unemployment :-
Any investment from an individual or firm that is located in a foreign country into a country is
called Foreign Direct Investment.
Generally, FDI is when a foreign entity acquires ownership or controlling stake in the
shares of a company in one country, or establishes businesses there.
It is different from foreign portfolio investment where the foreign entity merely buys
equity shares of a company.
In FDI, the foreign entity has a say in the day-to-day operations of the company.
FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills
and expertise/know-how.
It is a major source of non-debt financial resources for the economic development of a
country.
FDI generally takes place in an economy which has the prospect of growth and also a
skilled workforce.
FDI has developed radically as a major form of international capital transfer since the last
many years.
The advantages of FDI are not evenly distributed. It depends on the host country’s
systems and infrastructure.
The determinants of FDI in host countries are:
Policy framework
Rules with respect to entry and operations/functioning (mergers/acquisitions and
competition)
Political, economic and social stability
Treatment standards of foreign affiliates
International agreements
Trade policy (tariff and non-tariff barriers)
Privatisation policy
Foreign Direct Investment (FDI) in India – Latest update
1. From April to August 2020, total Foreign Direct Investment inflow of USD 35.73 billion was
received. It is the highest ever for the first 5 months of a financial year. FDI inflow has increased
despite Gross Domestic Product (GDP) growth contracted 23.9% in the first quarter (April-June
2020).
2. FDI received in the first 5 months of 2020-21 (USD 35.73 billion) is 13% higher as compared to the
first five months of 2019-20 (USD 31.60 billion).
FDI in India
The investment climate in India has improved tremendously since 1991 when the government
opened up the economy and initiated the LPG strategies.
The improvement in this regard is commonly attributed to the easing of FDI norms.
Many sectors have opened up for foreign investment partially or wholly since the
economic liberalization of the country.
Currently, India ranks in the list of the top 100 countries in ease of doing business.
In 2019, India was among the top ten receivers of FDI, totalling $49 billion inflows, as
per a UN report. This is a 16% increase from 2018.
In February 2020, the DPIIT notifies policy to allow 100% FDI in insurance
intermediaries.
In April 2020, the DPIIT came out with a new rule, which stated that the entity of nay
company that shares a land border with India or where the beneficial owner of investment
into India is situated in or is a citizen of such a country can invest only under the
Government route. In other words, such entities can only invest following the approval of
the Government of India
In early 2020, the government decided to sell a 100% stake in the national airline’s Air
India.
Benefits of FDI
FDI brings in many advantages to the country. Some of them are discussed below.
Disadvantages of FDI
However, there are also some disadvantages associated with foreign direct investment. Some of
them are:
Companies Act
Securities and Exchange Board of India Act, 1992 and SEBI Regulations
Foreign Exchange Management Act (FEMA)
Foreign Trade (Development and Regulation) Act, 1992
Civil Procedure Code, 1908
Indian Contract Act, 1872
Arbitration and Conciliation Act, 1996
Competition Act, 2002
Income Tax Act, 1961
Foreign Direct Investment Policy (FDI Policy)
Important Government Authorities in India concerning FDI
1. FDI is a major driver of economic growth and an important source of non-debt finance
for the economic development of India. A robust and easily accessible FDI regime, thus,
should be ensured.
2. Economic growth in the post-pandemic period and India’s large market shall continue to
attract market-seeking investments to the country.
India's FDI inflows have increased 20 times from 2000-01 to 2021-22. According to the
Department for Promotion of Industry and Internal Trade (DPIIT), India's cumulative FDI inflow
stood at US$ 871.01 billion between April 2000-June 2022; this was mainly due to the
government's efforts to improve the ease of doing business and relax FDI norms. The total FDI
inflow into India from January to March 2022 stood at US$ 22.03 billion, while the FDI equity
inflow for the same period was US$ 15.59 billion. From April 2021-March 2022, India's
computer software and hardware industry attracted the highest FDI equity inflow amounting to
US$ 14.46 billion, followed by the automobile industry at US$ 6.99 billion, trading at US$ 4.53
billion and construction activities at US$ 3.37 billion. India also had major FDI flows coming
from Singapore at US$ 15.87 billion, followed by the US (US$ 10.54 billion), Mauritius (US$
9.39 billion) and the Netherlands (US$ 4.62 billion). The state that received the highest FDI
during this period was Karnataka at US$ 22.07 billion, followed by Maharashtra (US$ 15.43
billion), Delhi (US$ 8.18 billion), Gujarat (US$ 2.70 billion) and Haryana (US$ 2.79 billion). In
2022 (until August 2022) India received 811 Industrial Investment Proposals which were valued
at Rs. 352,697 crores (US$ 42.78 billion).
FDI has a distinct advantage over the external borrowings considered from
the balance of payments point of view. Loan creates fixed liability. The
governments or corporations have to repay. The resulting international debt
of the government and the corporation parts a fixed liability on balance of
payments.
This means that they have to repay loans along with interest over a specific
period. In the context of FDI this fixed liability is not there. The foreign
investor is expected to generate adequate resources to finance outflows on
account of the activity generated by the FDI. The foreign investor will also
bear the risk.
The free flow of private foreign capital is not in the best interests of the developing
countries. Most of the developing countries have adopted the technique of planned
development and direct foreign investments have no place in the planned economy.
Strongly condemning the private foreign capital in economy, Dr. H.W. Singer has stated,
“It did little or nothing to promote and on occasion, may even have impeded the
economic development of the debtor countries”.
He further observes that in the past it has not done much the spread industrial
development of the backward agricultural countries but has concentrated mainly on
primary production for export to advanced countries. In addition to this private foreign
investments have positive disadvantages for the underdeveloped countries. Thus there
must be cautious use of this fund. However, disadvantages of Private Foreign Capital are
highlighted.
5. Limited Coverage:
Private capital usually restricts itself to certain limited spheres of economic life. For
example, it chooses those industries where it can make large and quick profits,
irrespective of the fact whether the development of those industries is in the development
interest. Such industries are largely consumer goods industries or those industries in
which the gestation period is not too long. It is for these reasons that in India before
Independence, foreign capital mostly British, was directed to such industries as
plantations, etc.
6. More Dependence:
The use of private capital often increases dependence on foreign sources. This happens at
least on two counts. One is that the use of foreign technology appropriate to the resource-
endowments of advanced countries does not permit the development of indigenous
technology appropriate to the conditions of the recipient country.
7. Restrictive Conditions:
In many cases foreign collaboration agreements contain restrictive clauses in respect of
such things as exports. For example, foreign collaborators make investments to exploit
the Indian market because they find it difficult to approach this market from outside.
But these collaborators do not want the Indian concern to export its goods to other
countries which are already being supplied by the foreign collaborators from their
concerns operating in other countries. Obviously, such agreements are of limited value
for the country.
The rest of the resources are made available through internal sources. Since the rate of
return on initial investment is usually very high, it makes it possible for the foreign
collaborator to recover his amount in a relatively short time. Yet the payment on account
of such things as technical services, royalty payments, etc., continues.
From the above cited discussion, it can easily be concluded that private foreign capital is
not very safe for less developed countries, it does not fit into their planned development.
Again it does not provide hope for their rapid industrialization and economic growth.