WHAT IS GLOBALIZATION? The trend toward countries joining together economically, Education Society Politics and Viewing themselves not only through their national identity but also as part of the world as a whole.

CONCEPT OF FDI AND DETERMINANTS OF FDI

DEFINITION OF FDI What is FDI? FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country Example: Nokia sets up a plant in India to manufacture cell phones A category of international investment that reflects the objective of obtaining a lasting interest by a resident in one economy (the direct investor) in an entity resident in an economy other than that of the investor (the direct investment enterprise). --3 rd edition of the OECD Benchmark Definition of Foreign Direct Investment The numerical guideline of direct investment ownership is set at a threshold of 10 percent.

FDI FLOWS IN INDIA, The ratio of domestic savings to GDP has been generally lower than that of gross capital formation(GCF) to GDP. During this gap was 1.3 % of GDP which was filled by FDI Since the liberalization of Indian economy inflows of FDI has greatly increased The total FDI inflow(net) was mere US$ 0.13 billion in rose to US$ 2.15 in and further to US$ 8.96 billion in and further to billion in In the year 2000 government allowed FDI up to 100% on the automatic route for most activities; with a small negative list where either the automatic route was not available or there were limits on FDI

FDI IN INDIA According to the latest A. T. Kearny Report, India is the 2 nd most attractive destination for FDI after china for the year Low cost of production Vast domestic market Skilled labor Good legal system

Source: DIP & P, Ministry of commerce,2012

POSITIVE IMPACTS OF FDI Resource Transfer Effect Superior scientific or managerial technology. Employment Effects MNEs, by investing in foreign countries, can create employment opportunities for the local workforce Effect on competition Steers up competition in the host economy. Balance of Payment Effects Balance of Payment: A country’s balance-of-payment is the difference between the payments to and receipts from other countries FDI can have beneficial effects on a country’s balance of payment

POTENTIAL THREATS OF FDI TO HOST COUNTRIES Adverse effects on competition Direct investors, which have certain advantages like economies of scale and scope inherited in their global value chains, can even eliminate competition by crowding out relatively low-efficiency domestic firms.. Adverse effects on the balance of payments After the initial capital inflow there is normally a subsequent outflow of earnings Foreign subsidiaries could import a substantial number of inputs National sovereignty and autonomy Some host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation

FORMS OF FDI Forms of FDI(I) Acquisitions Greenfield Investments Forms of FDI(II) Wholly Owned Subsidiary Joint Ventures

FDI: HORIZONTAL VS. VERTICAL Horizontal Investment in the “same” industry as a firm operates in at home Examples: Starbucks and its international expansion MacDonald’s and its international expansion Vertical Investment in a downstream supplier (backward) or upstream purchaser (forward) as compared to the business that the firm operates in its home country Examples: Backward: Volkswagon + SAIC + FAW to produce gearbox (an input to Volkswagon’s home operation) Forward: Less common. Volkswagon’s acquisitions of dealers in the US (Volkswagon “sold” cars to the dealers in the US. I.e., Volkswagon sold the output of its home country operations to the US dealers that it acquired)