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FACTORS FOR INFLOW OF Foreign direct investment (FDI)

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FACTORS FOR INFLOW OF Foreign direct investment (FDI)
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Abhijeet S
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abhishreshthaa
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FACTORS FOR INFLOW OF Foreign direct investment (FDI) - September 10th, 2010


Foreign direct investment


Foreign investment can take two forms: foreign equity investors can simply buy a stake in an enterprise or take a direct interest in its management. The first, indirect form of investment is called foreign portfolio investment. Foreign direct investment (FDI) involves more than just buying a share or a security.


It is the amount of financing provided by a foreign owner who is also directly involved in the management of the enterprise. For statistical purposes, the International Monetary Find (IMF) defines foreign investment as (FDI) when the investor holds 10% or more of the equity of an enterprise.

Foreign investment has clearly been a major factor in stimulating economic growth and development in recent times. Foreign Direct Investment (FDI) is one of the most important sources of capital. FDI links the host economy with the global markets and fosters economic growth.



The main factors are:

1. Market size and growth rate are principal determinants of FDI flows - Every nation has to compete in the international market for scarce resources. Macro-Economic stability and low inflation have been successful in attracting external capital.


Maintaining inflation under 5% and recording a growth rate of 7% would make India an attractive place for foreign investments. India is a favorite among Asian countries because of it's sheer size.



2. A hospitable environment for foreign investors - by providing essential guarantees for investors to:
- Enter and exit
- Operate on equal terms alongside local operators
- Repatriate their investments when needed



3. Availability of the required infrastructure - in form of serviceable roads, ports, telecommunications, airports, water and power facilities is a pre-requisite for attracting large volumes foreign investments.



4. Method and ease of entry - There are currently six possible entry routes/ clearing mechanisms for FDI, depending on the sector, extent of foreign equity desired, level of investment and geographical location of the project. This system is perceived to be complex by many foreign investors and analysts. Consequently it appears that the number of entry routes should be reduced to only two, viz. the Automatic Approval (AA) Route of RBI and the FIPB.




5. Scope of operations - The Indian system has both a positive list and a negative list. The positive list comprises of sectors where automatic approval is granted, subject to certain conditions. In the negative list foreign investment is currently not allowed.



6. Political stability - Different governments follow a different policy framework for FDI. One government may follow a liberal approach whereas the other may follow a conservative one. Thus political instability deters FDI from coming to any country. While India has now emerged as the second most-sought-after FDI destination in Asia after China, the actual inflows into India are less than a tenth of those received by China.


This should make the government reflect on the shortcomings in the policy framework. Incidentally, successive governments wasted considerable time identifying the desirable sectors where the FDI could be encouraged and those where it must be discouraged. Some coalition partners in the present as well as the previous government were totally opposed to inviting FDI because of their misplaced sense of Swadeshi.



7. Access to resources and low production costs - the availability of natural, capital, technological and human resources are an important consideration when attracting FDI inflows. Also, the costs at which these resources can be obtained are a deciding factor.



8. Cultural-cum-geographic proximity – the similarities in culture and geographic nearness to the foreign investors own land makes the destination country easier for the investor to enter, since he is surer of certain factors, or rather, more comfortable getting into a land which is as similar as home.



9. Access to export markets – the markets that one can service from the destination country, i.e. it's strategic location gives the country a one-up against competing nations in attracting foreign investments. Not only the location, but also its trade relations with the neighboring nations is an important factor.
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Re: FACTORS FOR INFLOW OF Foreign direct investment (FDI)
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Rose Marry
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Re: FACTORS FOR INFLOW OF Foreign direct investment (FDI) - April 11th, 2016

Quote:
Originally Posted by abhishreshthaa View Post

Foreign direct investment


Foreign investment can take two forms: foreign equity investors can simply buy a stake in an enterprise or take a direct interest in its management. The first, indirect form of investment is called foreign portfolio investment. Foreign direct investment (FDI) involves more than just buying a share or a security.


It is the amount of financing provided by a foreign owner who is also directly involved in the management of the enterprise. For statistical purposes, the International Monetary Find (IMF) defines foreign investment as (FDI) when the investor holds 10% or more of the equity of an enterprise.

Foreign investment has clearly been a major factor in stimulating economic growth and development in recent times. Foreign Direct Investment (FDI) is one of the most important sources of capital. FDI links the host economy with the global markets and fosters economic growth.



The main factors are:

1. Market size and growth rate are principal determinants of FDI flows - Every nation has to compete in the international market for scarce resources. Macro-Economic stability and low inflation have been successful in attracting external capital.


Maintaining inflation under 5% and recording a growth rate of 7% would make India an attractive place for foreign investments. India is a favorite among Asian countries because of it's sheer size.



2. A hospitable environment for foreign investors - by providing essential guarantees for investors to:
- Enter and exit
- Operate on equal terms alongside local operators
- Repatriate their investments when needed



3. Availability of the required infrastructure - in form of serviceable roads, ports, telecommunications, airports, water and power facilities is a pre-requisite for attracting large volumes foreign investments.



4. Method and ease of entry - There are currently six possible entry routes/ clearing mechanisms for FDI, depending on the sector, extent of foreign equity desired, level of investment and geographical location of the project. This system is perceived to be complex by many foreign investors and analysts. Consequently it appears that the number of entry routes should be reduced to only two, viz. the Automatic Approval (AA) Route of RBI and the FIPB.




5. Scope of operations - The Indian system has both a positive list and a negative list. The positive list comprises of sectors where automatic approval is granted, subject to certain conditions. In the negative list foreign investment is currently not allowed.



6. Political stability - Different governments follow a different policy framework for FDI. One government may follow a liberal approach whereas the other may follow a conservative one. Thus political instability deters FDI from coming to any country. While India has now emerged as the second most-sought-after FDI destination in Asia after China, the actual inflows into India are less than a tenth of those received by China.


This should make the government reflect on the shortcomings in the policy framework. Incidentally, successive governments wasted considerable time identifying the desirable sectors where the FDI could be encouraged and those where it must be discouraged. Some coalition partners in the present as well as the previous government were totally opposed to inviting FDI because of their misplaced sense of Swadeshi.



7. Access to resources and low production costs - the availability of natural, capital, technological and human resources are an important consideration when attracting FDI inflows. Also, the costs at which these resources can be obtained are a deciding factor.



8. Cultural-cum-geographic proximity – the similarities in culture and geographic nearness to the foreign investors own land makes the destination country easier for the investor to enter, since he is surer of certain factors, or rather, more comfortable getting into a land which is as similar as home.



9. Access to export markets – the markets that one can service from the destination country, i.e. it's strategic location gives the country a one-up against competing nations in attracting foreign investments. Not only the location, but also its trade relations with the neighboring nations is an important factor.
Hey abhi,

I am also uploading a document which will give more detailed explanation on Foreign Direct in Investment in Developing Countries.
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