A) Why the Need for Foreign investment?
- In most developing countries like ours, domestic capital is inadequate to meet the purpose of economic growth.
- The inflow of foreign capital helps in removing the balance of payment over time.
- By taxing the profits of foreign enterprise, the developing countries mobilize funds for development projects.
- Foreign capital contributes to the generation of employment.
- Foreign investment fills the gaps in management, entrepreneurship, technology and skill.
B) Forms of Foreign Investment
- It includes foreign direct investment (FDI) and foreign portfolio investment (FPI)
- Foreign direct investment is the investment in physical assets by foreign individuals, companies or financial institutions.
- Foreign portfolio investment in the investment made in financial assets. It includes investments made by foreign institutional investors.
C) Foreign Direct Investment
- Investment in the businesses by foreign citizens usually involving majority stock ownership of the enterprise
- Joint ventures between the foreign and domestic companies
D) Forms of FDI
- Greenfield Investment: It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries.
- Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place.
E) Why FDI preferred?
- It is of non-debt creating nature.
- It is also less prone to quick reversals. South-east Asian crisis emanated due to the reversals of short-term capital inflows.
F) Forbidden Territories
- FDI is not permitted in the following industrial sectors:
- Arms and ammunition
- Atomic Energy
- Railway Transport
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Gambling & BettingLottery
- Chit Funds
- Nidhi Companies
G) Foreign Institutional Investors
- Foreign Institutional Investors (FII s) means an entity established or incorporated outside India which proposes to make investment in India. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for FIIs.
- FII inflows are called ‘hot money’ because they can be taken out any time.
- According to recently changed guidelines, the investment of up to 10% of the project cost is categorized as FPI and above that limit comes under the category of FDI.