Foreign Direct Investment (FDI)

India recently relaxed Foreign Direct Investment(FDI) rules in a wide range of industries to harness rupee slide and trigger economic growth.
That ignites various queries in our mind. What exactly is FDI? Why it is important and what are the menaces involved? Which sectors are top FDI destinations and how it is different from existing business model?

About FDI 

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.The investment made through FDI becomes a source of external finance which could strengthen the economy.

Major sectors attracting FDI in India

Infrastructure

The number of FDI projects in the Infrastructure sector grew by 90 percent in 2011 in India. The sector contributed 4 percent to the total number of FDI projects and 9 percent to the total jobs created.

Automotive Industry

The automotive sector in India attracted 78 FDI deals during 2011, an increase of 28 percent in comparison to the same period in 2010. Although the sector made up 8 percent of total FDI projects in India, it created most jobs (16 percent). India is now the world’s seventh-largest passenger vehicle manufacturer, and the second-largest medium and heavy commercial vehicles and 2-wheelers market.

Retail and Consumer Products

The number of projects in the consumer products sector grew by 31 percent in 2011. The sector made up 10 percent of total FDI projects in India and created over 28,400 jobs.  The Government of India, however, did not back down from allowing 100 percent foreign investment in single brand retail from the current 51 percent. This will help some of the well-known apparel single brand firms that are keen on entry into India.

Technology

The technology sector in India has a major impact on the Indian economy. The industry has grown from US$4 billion in 1998 to more than US$80 billion in 2011, employing directly and indirectly more than 10 million people.

Financial Services

In 2011, the number of projects in the Indian financial services sector increased by 21 percent, whereas the value of FDI projects increased by 75 percent. Despite a high growth potential, FDI in the industry remains low compared with other rapidly developing economies, due to capital account convertibility, capital lock-ins and numerous regulations. However, the demand for a wide array of financial services products, ranging from credit to insurance, is growing.

Life Sciences

India has a disease burden which is around 37 percent higher when compared to Brazil and 86 percent higher when compared to China. Government also permits 100 percent FDI for health and medical services under the automatic route.

India's top FDI Destinations 

Destination	Sector	No of FDI projects (2007-2011)	No of job created(2007-2011)
Bangalore	Attractive policies for investment in IT, Engineering and Biotech	474	110,140
Chennai	Automotive sector, especially in automobile and railway coach manufacturing and design	338	108,708
Pune	Manufacturing sector, Software and IT services	248	70,700
Mumbai	Manufacturing, Infrastructure, IT, Tourism, Transportation, Bank and financial services	461	54900
New Delhi	IT and Consulting	305	34100

Difference between Franchise and FDI Module

Many companies have established their franchised business in India so how is the FDI module different?

In a franchising arrangement, the franchiser usually does not make any contribution to the business in terms of equity. According to Franchise India, the franchisers contribution is in terms of grant of rights for the use of their intellectual property and business method. The equity is contributed by the Indian franchisee and the economic interest of the franchiser is limited to the franchisee fees that he receives from the franchisee.

Whereas an  FDI occurs when an investor, based in one country (the home country), acquires some asset in another country (the host country) with intent to manage the asset.

Some arguments in favour of FDI

• FDI will generate employment in the country it invests
• It could benefit farmers by eliminating middlemen
• FDI gives consumers a wide variety of products to choose from at reasonable prices
• It can improve food distribution systems
• FDI can bring in better quality and standard products
• FDI can increase the standard of living through its goods and services
• It could raise the bar among other domestic companies in the same sector
• It contributes to the health of the economy

Some arguments against FDI

• Allowing foreign players could destroy the livelihoods of millions of small store owners
• Market prices could be manipulated by foreign retail giants
• Local jobs could be at threat since the foreign players could purchase many products from abroad
• There is no established correlation between advent of FDI and improvement of a country’s infrastructure

View of FDI Investors about India

• Only 11 percent of the respondents of the survey see India as being surpassed by competition from other dynamic countries like Brazil, China, Germany, Korea, Russia, United Kingdom and United States.
• Sixty–nine percent of the survey respondents that have an international presence intend to increase it by 50 percent or maintain 19 percent their operations in the country.
• Forty-three percent of investors think that it needs to improve the quality of its labs and research institutions.
• With recent government education policies aiming to expand the number of educational institutions, FDI will continue to rise in the coming years making India as one of the best education and higher learning systems.
• Indian business conditions raise concerns among global leaders. The E&Y survey believes that improving infrastructure network and better governance and transparency system will have a high impact on India’s attractiveness.
• India is among the world's leading three destinations for manufacturing and investors increasingly see India as the destination for their new manufacturing projects.
• India’s fundamental advantages will help the country maintain its position as one of the leading destinations for shared services. According to the survey, India will retain its position as one of the top three destinations for such centers in 2020.