investment models

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An investment model is constructed withcertain objectives in mind. Investment is carriedout in an economy for creation of infrastructure,industrialization and welfare. Some forms ofinvestment are only financial in nature in so faras they are meant for maximizing returns interms of capital gains, dividends, interest, etc.Therefore, we can say that investment is alsodone for speculative gains. In finance, investmentis putting money into an asset with theexpectation of capital appreciation, usually overthe long-term future. This may or may not bebacked by research and analysis. Most or allforms of investment involve some form of risk,such as investment in equities, property, and evenfixed interest securities which are subject, inter–alia, to inflation risk. Thus, every model ofinvestment is conceived according to the objectivesit has to fulfil.

What is Investment?

In economic theory and macroeconomicsinvestment refers to expenditure over goods,which are used for future production rather thanpresent consumption. Examples of investmentinclude expenditure on plant, machinery,equipments, expenditure on infrastructure suchas power plants, irrigation dams, rail-road or factory construction. Besides this,investment may be done in human capital inorder to improve the capacity of labour forcethrough better education, training, health andnutrition. Investment in human capital includescosts of additional schooling or on-the-jobtraining. Inventory investment is theaccumulation of goods inventories, which maybe positive or negative, and it can be intended orunintended.

Investment is related to saving anddeferring consumption. Investment is the amountpurchased per unit time of goods which are notconsumed but are to be used for futureproduction (i.e. capital). In measures of nationalincome and output, "gross investment"

(represented by the variable I) is also acomponent of gross domestic product (GDP),given in the formula GDP = C + I + G + NX,where C is consumption, G is governmentspending, and NX is net exports, given by thedifference between the exports and imports, X - M. Thus investment is everything that remainsof total expenditure after consumption,government spending, and net exports aresubtracted (i.e. I = GDP - C- G - NX).

Different types of Investment

Gross and net Investment

Investment can be split up into gross and netinvestment. Gross investment is the total amountof investment that is undertaken in an economyover a specified time period (usually one year).Net investment is gross investment minusreplacement investment or capital consumption(depreciation) i.e., investment which is necessaryto replace part of the economy’s existing capitalstock, which is used up in producing this year’soutput. Sum total of non-residential fixedinvestment (such as new factories) and residentialinvestment (new houses) combine with inventoryinvestment to make up gross investment I. "Netinvestment" deducts depreciation from grossinvestment. Net fixed investment is the value ofthe net increase in the capital stock per year.

Real, financial and inventory Investment

In economics real investment meansinvestment in plants, machinery, projects,industries or land development. It is differentfrom ordinary parlance of real Investment usedfor investments made in real estate, properties,plots, apartments, land, etc. Real investment ineconomics means investment in economicactivities that enhance GDP (creation of newgoods and services) and create employment.Investment in real estate means investment inland and building which does both—bothcreations of assets as well as speculativetransactions (subsequent sale and purchases),

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which means transfer of already existing wealthfor speculative reasons. Financial investment isthe investment made in Mutual Funds, Insurance,Shares and many other where the money grows.

Inventory Investment

The stocks of finished goods, work-in progressand raw materials held by business constituteinventory. The investment in raw materials, work-in-progress, and finished stock is called inventoryinvestment. Inventories, in contrast to fixedinvestment are constantly being ‘turned over’ asthe production cycle repeats itself, with rawmaterials being purchased, converted first intowork-in-progress, then finished goods, thenfinally being sold.

The level of inventory investment made byfirm will depend upon:

� its forecasts about future demand and itsresulting output plans, and the amount ofstock it needs to allow for delivery delays onraw materials and production delays inserving customers, with appropriate bufferstocks to cover unforeseen contingencies.

� frequently firms find that actual levels ofdemand differ from their forecasts, so thatdemand is less than expected and firms findthat stocks of unsold build up (unintentendedinventory investment); or demand exceedsexpectations so that stocks run down(unintended inventory disinvestment).

� the cost of inventory investment includesorder and delivery costs, deterioration andobsolescence of stock and interest chargeson funds invested in stock.

� firms seek to minimize these costs byestablishing economic order quantities andoptimum stock holding.

What is Capital?

Goods meant for future production are calledcapital goods in contrast to the goods which areused to satisfy our current needs (consumptiongoods). There are broadly two types of capital-(1) tangible (material) capital and (2) intangiblecapital. Tangible capital refers to manufacturedproducts or finance capital, which are meant forfuture production. Thus, capital goods, realcapital, or capital assets are already-produceddurable goods or any non-financial asset that isused in production of goods or services.Manufactured or physical capital is distinct

from land (or natural capital) in that capital mustitself be produced by human labour before it canbe a factor of production. At any given momentin time, total physical capital may be referred toas the capital stock. All other inputs than materialcapital to production are called intangibles inclassical economics. This includes organization,entrepreneurship, knowledge, goodwill, ormanagement (which some characterizeas talent, social capital or instructional capital).

Difference between Capital and Investment

While capital is a stock concept, investmentis a flow concept. There is a difference betweencapital and investment. Fixed investment, asexpenditure over a period of time ("per year"), isnot capital. As such, the value of capital can beestimated at a point in time. By contrast,investment, as production to be added to thecapital stock, is described as taking place overtime ("per year"), thus a flow. Although the twoconcepts depend on each other they are treatedas different concepts in economics. However, therate of capital formation is taken as a proxymeasure of investment.

Importance of investment

� Investment is an important pre-requisite ofeconomic growth and development.Economic growth crucially depends oncapital formation whereas economicdevelopment requires investment oneconomic and social overheads. Some viewsof classical and neo-classical school are listedbelow, which emphasize the role ofinvestment for economic growth anddevelopment.

� Adam Smith emphasized the role of thrift(read savings) to enhance capital formationand investment so that the cycle of economicgrowth continues in a sustainable way.

� Ragnar Nurkse is one of the founding fathersof Classical Development Economics.Together with Rosenstein-Rodan andMandelbaum, he promoted a 'theory of thebig push', emphasized the role of savingsand capital formation in economicdevelopment, and argued that poor nationsremained poor because of a vicious circle ofpoverty. Nurkse was of the view that it isimportant to raise productivity to break thevicious circle of poverty, which in turn was

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only possible by raising the rate of capitalformation.

� Investment is also important for pulling upa recession-hit economy. It was JohnMaynard Keynes who pointed out that thekey to coming out of the great depression (adeep and prolonged recession) of 1930s layin “autonomous investment” (investment bystate) as the “induced investment”(investment by private sector) would not becoming at such time when the level of“expectations” is low.

� In normal conditions also investment helpsthe countries to industrialize and diversifytheir export baskets.

� Agricultural productivity could be raisedonly through investment in technology,inputs and land development because landbeing fixed in supply, diseconomies of scalesets in a little earlier in the production cycleof agriculture sector.

� Investment in social sector convertspopulation into human resources. A. W.Lewis began the idea of human capital whenhe wrote in 1954 the "EconomicDevelopment with Unlimited Supplies ofLabour." Theodore William Schultz, whowas awarded the Nobel Prize in 1979 withLewis for his work in development economics,promulgated the idea of educational capital,an offshoot of the concept of human capital,relating specifically to the investments madein education. According to Schultz post-World War II the miraculous recovery ofGermany and Japan after the widespreaddevastation, in contrast to the UnitedKingdom (which was still rationing food longafter the war) was due to a healthy andhighly educated population; educationmakes people productive and goodhealthcare keeps the education investmentaround and able to produce. One of his maincontributions was later called Human CapitalTheory, and inspired a lot of workin international development in the 1980s.Schulz’s prescriptions were later embracedby multilateral funding agencies and nationalgovernments for investments in vocationaland technical education.

Determinants of Investment

1. Investment is a positive function of incomeand inverse function of interest. Thus

investment rises with rising income but fallswith rising interest rate. Investment is oftenmodeled as a function of Income and Interestrates, given by the relation I = f(Y, r), whereI is investment, Y is income and r is the rateof interest.

2. An increase in income encourages higherinvestment, whereas a higher interest ratemay discourage investment as it becomesmore costly to borrow money. Even if a firmchooses to use its own funds in aninvestment, the interest rate representsan opportunity cost of investing those fundsrather than lending out that amount ofmoney for interest.

3. Apart from the above factors, investment alsoincrease or decreases due to institutional andstructural problems.

4. A country or state, which has abundantminerals and other resources, cheap labour,skilled labour, robust infrastructure,including power, transport and telecommu-nication attracts more investment.

5. The size of the market and the purchasingcapacity of the population are majordeterminants of investment.

6. Efficient institutions, good governance, quickdecision, transparency and accountability,facilitation, etc. lead to an increase ininvestment.

7. Government’s policies, controls andregulatory mechanisms, national treatment,good fiscal and monetary policies, especiallymodest taxes and strong financial sectorattract more investment. It is also anestablished fact that foreign investmentincreases if a level playing field is availableto investors.

Sources of Investment

The investment models could be consideredfrom several points of view. Firstly, it dependswho is the investor or what is the source ofinvestment. Secondly it depends on the objectiveof investment. An economy can receiveinvestment from domestic sources and/or fromforeign sources, which have different objectives.

Domestic sources

1. Government- Government invests forcreation of infrastructure, industrialization,human capital formation and welfare.


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2. Corporate sector- Business or the corporatesector invests for maximizing profits andrates of return over investment throughmodernization and expansion of their firmsand industries, technological innovations andResearch and Development. Corporate sectorinvests in land, building, plant, machinery,equipments, inventories etc. Corporate sectormay invest in financial instruments as well.

3. Household sector- Household sector investsfor maximization of returns either by earningprofits, dividends, and higher rates of returnin the form of dividends, interest or capitalgains. Households invest in land andbuilding, in bank deposits, insuranceschemes and other financial instrumentssuch as bonds, debentures, equities etc.

Foreign sources

The other source of investment is foreigninvestment, which is of two types.

1. Foreign Direct Investment– includesinvestment in directly productive activitiesby setting up subsidiaries, joint ventures orany other arrangement and

2. Portfolio investmentincludes investmentin the capital market, i.e., shares, bonds,debentures, saving instruments, mutualfunds etc. are other sources of foreigninvestment.

These two kinds of investment are motivatedby profit motive, yet lead to increase in incomeoutput and employment.

Multilateral Agencies such as the World Bankand the ADB are the other sources of foreigninvestment. They usually provide finance forinfrastructure and social overheads like schoolsand hospitals.

Models and Theories of Investment

There is no disagreement among theeconomist regarding the important roleinvestment plays in economic development.However, the economists widely differ on modelsof investment. The investment models could bestudied by categorizing them on the basis of whothe investor is and what is the purpose ofinvestment. The investment models of states aredifferent from investment models for householdand corporate sector. The investment models forstates are meant for maximizing social advantage

or maximizing benefits over the costs ofinvestment. The main difference among theeconomists regarding state level models ofinvestment is whether they prefer balancedgrowth models or unbalanced growth models.Both of these models have their advantages anddisadvantages.

Another difference of view arises because ofdifference on the role of state sector and privatesector in investment. While state aims atmaximum social advantage, the private sectorwants to maximize profit. Both the models aimat increasing output, employment and income.However, the state investment policy focuses ongrowth and development of the economy, theprivate sector aims at maximizing its own profit.Both these processes are not mutually exclusiveand these affect each other. For example, if statesector increases its public expenditure and investsin infrastructure, private investment “crowds in”to reap external economies. Make an irrigationdam, farmers would invest in constructingchannels up to their farms. Make a power plant,improve roads and communication, privateinvestment would follow or “crowd in”. But theopposite of this is also possible. If state has amassive plan for investment through deficitfinancing, the rate of interest would go up asthere would be lesser funds available to theprivate sector, so private investment would“crowd out.”

Private investment- be it households orcorporate sector- is always induced investment.This inducement comes from the expectations toearn more profit, earn interests, dividends orcapital gains. The state sector investment doesnot depend on inducements. It is a policydetermined decision. In fact state sector can alonetake decisions for autonomous investment,investment that is free from profit expectationsin the short run at least.

It has been now agreed that state sector cantake care of investment in basic infrastructure,core industries and social sector including welfareactivities. The private sector is expected toundertake all investments need for expansion anddiversification of the industrial sector. While theessential services should be provided by the statesector, purely economic services should be largelyprovided by the private sector. Household’sinvestments are meant for maximization ofreturns or accumulation of private wealth and

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assets.

Investment Models for States

Thus, investment decisions would depend onthe perception of the planners- whether theyfavour balanced growth model or unbalancedgrowth model on the one hand and on the otherwhether investment should be undertaken bystate sector or private sector.

Balanced Growth Models of Investment

Nurkse’s model of balanced growth andinvestment to break the vicious circle of poverty

1. Ragnar Nurkse has given emphasis oninvestment and capital formation to enhanceproductivity, which would break the viciouscircle of poverty in underdevelopedeconomies.

2. Nurkse was in favour of attaining balancedgrowth in both the industrial and agriculturalsectors of the economy. He recognized thatthe expansion and inter-sectoral balancebetween agriculture and manufacturing isnecessary so that each of these sectorsprovides a market for the products of theother and in turn, supplies the necessary rawmaterials for the development and growthof the other.

3. Nurkse's theory discusses how the poor sizeof the market in underdeveloped countriesperpetuates its underdeveloped state.

4. Nurkse has also clarified the variousdeterminants of the market size and putsprimary focus on productivity.

5. According to him, if the productivity levelsrise in a less developed country, its marketsize will expand and thus it can eventuallybecome a developed economy.

6. Apart from this, Nurkse has been nicknamedan export pessimist, as he feels that thefinances to make investments in under-developed countries must arise from theirown domestic territory. No importanceshould be given to promoting exports.

Big Push theory of Investment: (Rosenstein-Rodan)

1. Rosenstein-Rodan’s Big Push theory orinvestment model emphasizes that under-developed countries require large amounts ofinvestments to embark on the path of

economic development from their presentstate of backwardness.

2. This theory proposes that a 'bit by bit'investment programme will not impact theprocess of growth as much as is required fordeveloping countries. He opined thatinjections of small quantities of investmentswill merely lead to wastage of resources.

3. Rosenstein-Rodan argued that the entireindustry which is intended to be createdshould be treated and planned as a massiveentity (a firm or trust). He supports thisargument by stating that the social marginalproduct of an investment is always differentfrom its private marginal product, so whena group of industries are planned togetheraccording to their social marginal products,the rate of growth of the economy is greaterthan it would have otherwise been.

4. According to Rosenstein-Rodan, there existthree indivisibilities, namely indivisibility inthe production function, indivisibility in thedemand and indivisibility in the supply ofsavings in underdeveloped countries. Theseindivisibilities are responsible forexternal economies and thus justify the needfor a big push.

5. The externalities that help to reap externaleconomies include indivisibility in productionfunction with respect to inputs, processes andoutputs. These lead to increasing returns(i.e., economies of scale), and may require ahigh optimum size of a firm. This can beachieved even in developing countries sinceat least one optimum scale firm can beestablished in many industries.

6. Investment in social overhead capitalcomprises investment in all basic industries(like power, transport or communications)which must necessarily come before directlyproductive investment activities.

7. Investment in social overhead capital is'lumpy' in nature. Such capital requirementscannot be imported from other nations.Therefore, heavy initial investmentnecessarily needs to be made in socialoverheads.

8. The large-scale programme of industria-lization advocated by this model requireshuge investments, which are beyond themeans of the private sector. Even if the


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private sector had the requisite resources toinvest in such a programme, it would not doso since it is driven by profit motives. Manyinvestments are profitable in terms of socialmarginal net product but not in terms ofprivate marginal net product. Due to thisthere is no incentive for individualentrepreneurs to invest and take advantageof external economies.

9. The investment in infrastructure and basicindustries (like power, transport andcommunications) is 'lumpy' and has longgestation periods. The role of the state inthis theory is, therefore, critical for investmentin social overhead capital.

Nevertheless, this model has been criticizedfor its several limitations, including difficulty inexecution due to unexpected and unavoidablechanges in implementation process, shortages ofresources in an underdeveloped economy, lackof absorptive capacity because implementationof industrial programme may be constrained byineffective disbursement, short-term bottlenecks,macro economic problems and volatility, loss ofcompetitiveness due to Dutch disease effect.Thereis historical inaccuracy in the theory of big pushbecause over the last two centuries, no countrydisplayed any evidence of development due tomassive industrialization programmes. Stationaryeconomies do not develop simply by makinglarge-scale investment in social overhead capital.Further, in a mixed economy, where the privateand public sectors co-exist, the environment forgrowth may not be conducive. One of the biggestcriticisms of this model is that it ignoresagricultural sector. With its heavy emphasis onindustry, the model finds no place for agriculture.This model has also potential to createinflationary pressure due to huge investmentwhose results would bring forth goods andservices with a time lag and also due to shortageof foodgrains consequent upon lack of focus onagriculture. This theory is also criticized for itstoo much dependence on various indivisibilities.

Investment and Rostow’s Stages ofEconomic Growth

The Rostow's Stages of Growth model is oneof the major historical models of economicgrowth. It was developed by W. W. Rostow in1960. The model postulates that economic growthoccurs in five basic stages, of varying length:

1. Traditional society2. Preconditions for take-off

3. Take-off

4. Drive to maturity

5. Age of High mass consumption

Main features:

1. Rostow’s stages of economic growth haveassumed vital role of investment forgraduating from one level to the other level.

2. Rostow argued that economic take-off mustinitially be led by a few individual sectors. According to him a traditional society ischaracterized by subsistence agriculture andother primary economic activities.

3. In the second stage pre-conditions of takeoff are prepared with widespread andenhanced investment, which changes thephysical environment of production(irrigation, canals, ports etc.). Technology alsoimproves due to investment in research anddevelopment. Agriculture is commercializedand exports increase.

4. In the take –off stage there is an increase ininvestment in industry and manufacturing.The secondary sector expands.

5. In the maturity stage industrial sector isdiversified and production shifts from capitalgoods to consumer goods. This stage ischaracterized by huge investments intransport and communication and socialsector.

6. All this leads to an age of high massconsumption led by services sector andconsumer goods.

The critical minimum effort theory: HarveyLeibenstein

Harvey Leibenstein’s “critical minimum efforttheory”, expounded in his book EconomicBackwardness and Economic Growth, relates tooverpopulated and underdeveloped or deve-loping nations. This theory is based onMalthusian theory of population. This theory isone of the balanced growth theories. In thistheory Leibenstein essentially talks about howlarge doses of investments in an economy canhelp the economy in development. The theoryassumes that output is subject to diminishingreturns with respect to population growth, whichis a function of per capita income. The rate ofinvestment is a function of per capita income.

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The theory asserts that for every disturbance, nomatter how large it is, the long run populationgrowth effects will be more significant than theeffects of induced investment. The system is quasi-stable for small displacement but not large ones.Equilibrium is unstable to begin with.

Main ideas:

1. The critical minimum effort theory is moreor less an extension of the Harrod-Domarmodel. Critical minimum effort theory is oneof the balanced growth theories. It talksabout how a minimum amount of push isrequired by an economy for it to be set onthe path of development. This push can bein the form of investments. The "minimum"amount of effort that is required is "critical"for the economy to move towardsdevelopment hence this theory is calledcritical minimum effort theory.

2. Because of the high population inunderdeveloped countries the capitalaccumulation and labour supply are notsufficient to increase the per capita income.Nelson and Leibenstein have stressed on theimportance of Social structure, Humancapital, and Entrepreneurship, but they saythat the development of these depend oninvestment in these.

3. The vicious circle needs to be broken andthe per capita income should increase. Thisis possible by pushing investment in theeconomy to a certain critical minimum level.So it is necessary that the initial investmentlevels are sufficiently above a minimummagnitude.

4. Now since this type of investment sometimesbecomes difficult for underdevelopednations, Leibenstein stresses on the fact thatthe investment can be spread over a periodof time and does not necessarily have to bemade instantaneously.

The theory critical minimum effort is betterthan big push theory in the sense that it is morepractical than the latter as critical minimum efforttheory can be better timed and can be broken upinto a series of smaller efforts. Critical minimumeffort theory as opposed to big push theory doesnot stress on the fact that a lump some amountof investment has to be made instantaneously.So it is more relevant for under developednations. The theory is also consistent with theconcept of decentralised democratic planning as

practiced in India. But the theory has beencriticized for concluding that population wouldfall with a rise in per capita income and ignoringthe role of the monetary and fiscal policies whichare important factors in deciding the investmentand income levels of an economy. The theory istrue only for a closed economy. It does not takeinto consideration international trade, foreigncapital, etc.

Unbalanced Growth Models and Investment

The two well known propounders ofunbalanced growth investment models are O.Hirschman and Hans Singer. Supporters of theunbalanced growth doctrine include PaulStreeten and Marcus Fleming. These economistsbelieved that unbalanced growth is a natural pathof economic development. Undeveloped countriesstart from a position that reflects their previousinvestment decisions and development.Accordingly, at any point in time desirableinvestment programmes that are not inthemselves balanced investment packages maystill advance welfare. Unbalanced investment cancomplement or correct existing imbalances. Oncesuch an investment is made, a new imbalance islikely to appear, requiring further compensatinginvestments.

Hirschman stressed the fact that under-developed economies are called underdevelopedbecause they face a lack of resources, maybe notnatural resources, but resources such as skilledlabour and technology. Thus, to hypothesise thatan underdeveloped nation can undertake largescale investment in many industries of itseconomy simultaneously is unrealistic due to thepaucity of resources. Hans Singer asserted thatthe balanced growth theory is more applicableto cure an economy facing a cyclical downswing.Cyclical downswing is a feature of an advancedstage of sustained growth rather than of thevicious cycle of poverty.

Main features of the theory

1. Hirschman contends that deliberate unbalan-cing of the economy according to the strategyis the best method of development and if theeconomy is to be kept moving ahead, thetask of development policy is to maintaintension, disproportions and disequilibrium.

2. Balanced growth should not be the goal, butrather the maintenance of existing imbalances,which can be seen from profit and losses.


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Therefore, the sequence that leads away fromequilibrium is precisely an ideal pattern fordevelopment.

3. Balanced growth of DPA (DirectlyProductive Activities) and SOC (SocialOverhead Cost) is not achievable inunderdeveloped countries, nor it is adesirable policy, as it does not set up theincentives and the pressure that make forthis dividend of induced investmentdecisions.

4. Unequal development of various sectors oftengenerates conditions for rapid development.More-developed industries provideundeveloped industries an incentive to grow.Hence, development of underdevelopedcountries should be based on this strategy.

5. These investments create a new imbalance,requiring another balancing investment. Onesector will always grow faster than another,so the need for unbalanced growth willcontinue as investments must complementexisting imbalance.

6. The path of unbalanced growth is describedby three phases: complementarity, whichinduces investment and produces externaleconomies as desirable investmentprogrammes always exist within a countrythat represent unbalanced investment tocomplement the existing imbalance. The othertwo are Directly Productive Activities (DPA)and Social Overhead Costs(SOC).

7. Backward and forward linkage- Hirschmanintroduces the concept of backward andforward linkages. A forward linkage iscreated when investment in a particularproject encourages investment in subsequentstages of production. A backward linkage iscreated when a project encouragesinvestment in facilities that enable the projectto succeed.

8. Normally, projects create both forward andbackward linkages. Investment should bemade in those projects that have the greatesttotal number of linkages. Projects with manylinkages will vary from country to country;knowledge about project linkages can beobtained through input and output studies.Agriculture and primary economic activitiesmay not have high backward and forwardlinkages due to several constraints.

9. Lead sector is one, which has the highestbackward and forward linkage. An exampleof an industry that has excellent forwardand backward linkages is the steel industry.Backward linkages include coal and iron oremining. Forward linkages include items suchas canned goods. While this industry hasstrong linkages, it is not a good leading sector.Any industry that has a high capital/outputratio and causes significant costs to otherbusinesses has the potential to hurt thedeveloping economy more than it helps it. Abetter leading sector would be the beer industry.

10. The development of an economy using theunbalanced method depends on the linkagesbetween sectors. Hirschman suggests that thebest strategy is induced industrialization. Thistype of development will create morebackward and forward linkages and shouldbe the first step taken. Industries thattransform semi-manufactured goods intogoods needed by final demand are called"last industries" or "enclave import industries".

The theory of unbalanced growth paysinsufficient attention to the question of the precisecomposition, direction and timing of imbalances.What is the optimum degree to which imbalanceshould be created in order to accelerate growth?This theory leaves too much to chance. There islittle discussion on how to overcomediscrepancies between private and socialprofitabilities of development projects. It neglectsagriculture. In heavily-populated countries withagricultural economies, neglect of agriculturecould be suicidal. Shortage of agricultural goodscan emerge as a serious constraint toindustrialization; unless income from agriculturalgoods expands, the market for industrial productsremains limited. Unbalanced growth can alsolead to emergence of inflationary pressures inthe economy, as a shortage of agriculturalcommodities will push up commodity prices. Thistheory is useful in those countries where there issignificant state control. For instance,in socialist countries, this strategy is followed withsome success. In a socialist society, the consumptionof all people is maintained at a modest level,thus reducing demand for consumer goods.

Role of State in Investment

1. The role of state in investment is crucial,especially for the development of

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Infrastructure, basic and core industries andsocial sector.

2. State, is, however, not considered to beefficient for investment in other industrialand commercial economic activities.

3. The lumpiness and long gestation periodregarding investment in infrastructure andcore/basic industries provides poor incentivesfor the private sector to take the lead ininvestment in these sectors.

4. On the other hand state is not considered tobe a profit maximiser, hence it is not anefficient user of resources, so far investmentin commercial activity is concerned.

5. State could enter into commercial activitiesonly to provide competition to the privatesector so as to tame monopolistic tendencies.

6. In social sector, market pricing of varioussocial services, including public utilities woulddefeat the purpose of a welfare state; hence,in these areas the role of the private sector islimited.

7. State is concerned about generation ofemployment and welfare of labour.

Principle of Maximum Social Advantage

State is guided by the principle of maximumsocial advantage in its investment decisions. The'Principle of Maximum Social Advantage (MSA)'is the fundamental principle of Public Finance.The Principle of Maximum Social Advantagestates that public finance leads to economicwelfare when pubic expenditure & taxation arecarried out up to that point where the benefitsderived from the MU (Marginal Utility) ofexpenditure is equal to (=) the Marginal Disutilityor the sacrifice imposed by taxation. MarginalSocial Sacrifice (MSS) refers to that amount ofsocial sacrifice undergone by public due to theimposition of an additional unit of tax. Everyunit of tax imposed by the government taxesresult in loss of utility. While imposition of taxputs burden on the people, public expenditureconfers benefits. The benefit conferred on thesociety, by an additional unit of public expenditureis known as Marginal Social Benefit (MSB).

A technical extension of this principle instate’s investment decision in particular and forall investment decisions in general is Cost-BenefitAnalysis.

Cost –Benefit Analysis

Cost benefit analysis (CBA) is a systematicprocess for calculating and comparing benefitsand costs of a project, decision or governmentpolicy (hereinafter, "project").

Purpose of CBA

1. To determine if it is a sound investment/decision (justification/feasibility),

2. To provide a basis for comparing projects. Itinvolves comparing the total expected costof each option against the total expectedbenefits, to see whether the benefits outweighthe costs, and by how much.

Main features

1. In CBA, benefits and costs are expressed inmonetary terms, and are adjusted for the timevalue of money, so that all flows of benefitsand flows of project costs over time (whichtend to occur at different points in time) areexpressed on a common basis in terms oftheir "net present value."

2. Closely related, but slightly different, formaltechniques include cost-effectiveness analysis,cost–utility analysis, economic impactanalysis, fiscal impact analysis, and Socialreturn on investment (SROI) analysis.

3. Cost–benefit analysis is often used bygovernments and other organizations, suchas private sector businesses, to evaluate thedesirability of a given policy. It is an analysisof the expected balance of benefits and costs,including an account of foregone alternativesand the status quo. CBA helps predictwhether the benefits of a policy outweigh itscosts, and by how much relative to otheralternatives (i.e. one can rank alternatepolicies in terms of the cost-benefit ratio).

4. Generally, accurate cost-benefit analysisidentifies choices that increase welfare froma utilitarian perspective.

5. Assuming an accurate CBA, changing thestatus quo by implementing the alternativewith the lowest cost-benefit ratio canimprove Pareto efficiency.

6. An analyst using CBA should recognize thatperfect evaluation of all present and futurecosts and benefits is difficult, and while CBAcan offer a well-educated estimate of the bestalternative, perfection in terms of economicefficiency and social welfare are notguaranteed.


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Process of cost-benefit analysis

� List alternative projects/programs.

� List stakeholders.

� Select measurement(s) and measure all cost/benefit elements.

� Predict outcome of cost and benefits overrelevant time period.

� Convert all costs and benefits into a commoncurrency.

� Apply discount rate.

� Calculate net present value of project options.

� Perform sensitivity analysis.

� Adopt recommended choice.

CBA attempts to measure the positive ornegative consequences of a project, which mayinclude:

� Effects on users or participants

� Effects on non-users or non-participants

� Externality effects

� Option value or other social benefits.

For example, a similar breakdown isemployed in environmental analysis of totaleconomic value. Both costs and benefits can bediverse. Financial costs tend to be mostthoroughly represented in cost-benefit analysesdue to relatively abundant market data. The netbenefits of a project may incorporate cost savingsor public willingness to pay compensation(implying the public has no legal right to thebenefits of the policy) or willingness toaccept compensation (implying the public has aright to the benefits of the policy) for the welfarechange resulting from the policy. The guidingprinciple of evaluating benefits is to list all(categories of) parties affected by an interventionand add the (positive or negative) value, usuallymonetary, that they ascribe to its effect on theirwelfare.

Role of Private Sector in Investment

Everywhere in the world, the corporate sectorand the household sectors are major investors inindustrial and commercial investment. Theprivate investors are profit maximisers. They useresources efficiently. Their effort is to minimizecost and maximize profit. In the process ofcompetition, they are able to provide betterquality products at lower costs throughinnovations, research and development. They are

not directly concerned with generation ofemployment and condition of labour force.Private investment is guided by the rate of returnfrom investment. J.M Keynes’ concept of MarginalEfficiency of Capital is useful in such investmentmodels.

Marginal Efficiency of Capital

The term “marginal efficiency of capital” wasintroduced by John Maynard Keynes inhis General Theory, and defined as “the rate ofdiscount, which would make the present value ofthe series of annuities given by the returns,expected from the capital asset during its life justequal its supply price”. The marginal efficiencyof capital (MEC) is that rate of discount, whichwould equate the price of a fixed capital assetwith its present discounted value of expectedincome. The discount, or charge, is simply thedifference between the original amount owed inthe present and the amount that has to be paidin the future to settle the debt. . All future cashflows are estimated and discounted to givetheir present values (PVs)—the sum of all futurecash flows, both incoming and outgoing, isthe net present value (NPV), which is taken asthe value or price of the cash flows in question.

Any investment decision depends not onlyon rate of interest but also whether or not theexpected rate of returns on the investment isgreater than cost of borrowing the funds. In thesetwo factors, the MEC is an important factorbecause MEC is the expected rate of returns fromthe investment. If the returns expected are low,the investment is not profitable, because in shortrun, rate of interest is stable. In MEC, capitalmeans the real productive assets. MEC dependson expected rate of returns of a capital assetover its life time which is also called ProspectiveYield and the supply price of capital assets. Anybusiness man will weigh the prospective yieldwith the supply price before investing. 'Investmentand rate of interest: Rate of interest is consideredthe most important factor in investment will below and vice-versa. This was a view given byclassical economists. They considered rate ofinterest as the only factor determininginvestment.The businessmen will decide whetherto purchase on the marginal unit of capital bycomparing the prevailing rate of interest withthe MEC. ““If MEC is greater than the rate ofinterest, this additional investment will get profitand investment is profitable. There are many

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factors that affect MEC. Some of the short termfactors are: expected demand for future, level ofincome, change in consumption, businessexpectation. On the other hand there are longterm factors that include population growth,economic policies of the government,infrastructure facilities, etc. There are somelimitations of the MEC. Investment done by theGovernment for social purpose has no connectionwith the MEC. Practically it is difficult to estimateMEC. Whenever there is contractionary monetarypolicy, the firms may not find funds even if theprojects or investments are profitable. Also everytime the businessmen do not necessarily go forloans. Sufficient funds are gathered by thebusinessmen for some projects, which areplanned for a long time.

Internal Rate of Return

Private investment is also guided by anothersimilar concept called the internal rate of return.The internal rate of return (IRR) or economic rateof return (ERR) is a rate of return used in capitalbudgeting to measure and compare the profit-ability of investments. It is also called the discoun-ted cash flow rate of return (DCFROR) or therate of return (ROR). In the context of savingsand loans the IRR is also called the effectiveinterest rate. The term internal refers to the factthat its calculation does not incorporateenvironmental factors (e.g., the interest rate orinflation).

The internal rate of return on an investmentor project is the "annualized effectivecompounded return rate" or "rate of return" thatmakes the net present value (NPV) of all cashflows (both positive and negative) from aparticular investment equal to zero. It can alsobe defined as the discount rate at which thepresent value of all future cash flow is equal tothe initial investment or in other words the rateat which an investment breaks even. In morespecific terms, the IRR of an investment isthe discount rate at which the net presentvalue of costs (negative cash flows) of theinvestment equals the net present value of thebenefits (positive cash flows) of the investment.

IRR calculations are commonly used toevaluate the desirability of investments or projects.The higher a project's IRR, the more desirable itis to undertake the project. Assuming all projectsrequire the same amount of up-front investment,

the project with the highest IRR would beconsidered the best and undertaken first. A firm(or individual) should, in theory, undertake allprojects or investments available with IRRs thatexceed the cost of capital. Investment may belimited by availability of funds to the firm and/or by the firm's capacity or ability to managenumerous projects.

Foreign Investment

1. In a narrow sense, foreign direct investmentrefers just to building new facilities. Thenumerical FDI figures based on varieddefinitions are not easily comparable.

2. As a part of the national accounts of acountry, and in regard to the national incomeequation Y=C+I+G+(X-M), I is investmentplus foreign investment, FDI is defined asthe net inflows of investment (inflow minusoutflow) to acquire a lasting managementinterest (10 percent or more of voting stock)in an enterprise operating in an economyother than that of the investor. FDI is thesum of equity capital, other long-term capital,and short-term capital as shown the balanceof payments. FDI usually involvesparticipation in management, joint-venture,transfer of technology and expertise. Thereare two types of FDI: inward and outward,resulting in a net FDI inflow (positive ornegative) and "stock of foreign directinvestment", which is the cumulative numberfor a given period. Direct investment excludesinvestment through purchase of shares.

3. Foreign direct investment is a directinvestment into production or business in acountry by an individual or company inanother country, either by buying a companyin the target country or by expandingoperations of an existing business in thatcountry.

4. Foreign direct investment is in contrastto portfolio investment which is a passiveinvestment in the securities of anothercountry such as stocks and bonds.

5. Basically NGP (non government player) aforeign direct investment is allowing overseasmarkets for booming consumer in manyforms. Broadly, foreign direct investmentincludes "mergers and acquisitions, building


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new facilities, reinvesting profits earned fromoverseas operations and intra companyloans". FDI is one example of internationalfactor movements.

Types

� Horizontal FDI arises when a firm duplicatesits home country-based activities at the samevalue chain stage in a host country throughFDI.

� Platform FDI Foreign direct investment froma source country into a destination countryfor the purpose of exporting to a thirdcountry.

� Vertical FDI takes place when a firm throughFDI moves upstream or downstream indifferent value chains i.e., when firmsperform value-adding activities stage bystage in a vertical fashion in a host country.

� Horizontal FDI decreases international tradeas the product of them is usually aimed athost country; the two other types generallyact as a stimulus for it.

Greenfield Investment

Greenfield investment refers to freshinvestment in any country by a foreign investor.A greenfield project has no constraints imposedby prior work. The analogy is to that ofconstruction on greenfield land where there isno need to remodel or demolish an existingstructure. In green field investment, a new plantis constructed. It is a form of foreign directinvestment where a parent company starts a newventure in a foreign country by constructing newoperational facilities from the ground up. Inaddition to building new facilities, most parentcompanies also create new long-term jobs in theforeign country by hiring new employees.

Brownfield investment

In a brownfield investment, a company orgovernment entity purchases or leases existingproduction facilities, in order to launch a newproduction activity.

Turnkey Project

Sometimes investment is sought in turn keyprojects. A turnkey or a turnkey project (alsospelled turn-key) is a type of project that isconstructed so that it could be sold to any buyeras a completed product. This is contrastedwith build to order, where the constructor builds

an item to the buyer's exact specifications, orwhen an incomplete product is sold with theassumption that the buyer would complete it.Turn key projects involve the sale of anestablished business, including all the equipmentnecessary to run it, or by a business-to-businesssupplier providing complete packages for businessstart-up. An example would be the creation of a"turnkey hospital" which would be building acomplete medical center with installed high-techmedical equipment. In real estate, turnkey isdefined as delivering a location that is ready foroccupation. The turnkey process includes all ofthe steps involved to open a location, includingthe site selection, negotiations, space planning,and construction coordination and completeinstallation.

Mergers and Acquisition

Mergers and acquisitions (abbreviated M&A)is an aspect of corporate strategy, corporatefinance and management dealing with thebuying, selling, dividing and combining ofdifferent companies and similar entities that canhelp an enterprise grow rapidly in its sector orlocation of origin, or a new field or new location,without creating a subsidiary, other child entityor using a joint venture. The distinction betweena "merger" and an "acquisition" has becomeincreasingly blurred in various respects(particularly in terms of the ultimate economicoutcome), although it has not completelydisappeared in all situations.

Acquisition is also one of the ways ofinvestment. It refers to takeover of a companyby an investor. In business, a takeover is thepurchase of one company (the target) by another(the acquirer, or bidder). In UK, the term refersto the acquisition of a public company whoseshares are listed on a stock exchange, in contrastto the acquisition of a private company. There arebroadly two types of acquisition. A "friendlytakeover" is an acquisition which is approved bythe management. Before a bidder makesan offer for another company, it usually firstinforms the company's Board of Directors. In anideal world, if the Board feels that accepting theoffer serves the shareholders better than rejectingit, it recommends the offer be accepted by theshareholders. On the other hand a "hostiletakeover" allows a suitor to take over a targetcompany whose management is unwilling toagree to a merger or takeover. A takeover isconsidered "hostile" if the target company's Boardrejects the offer, but the bidder continues to

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pursue it, or the bidder makes the offer directlyafter having announced its firm intention to makean offer. There are some other types as well.

A "reverse takeover" is a type of takeoverwhere a private company acquires a publiccompany. This is usually done at the instigationof the larger, private company, the purpose beingfor the private company to effectively float itselfwhile avoiding some of the expense and timeinvolved in a conventional IPO. An individualor organization, sometimes known as corporateraider, can purchase a large fraction of thecompany's stock and, in doing so, get enoughvotes to replace the Board of Directors andthe CEO. With a new agreeable managementteam, the stock is a much more attractiveinvestment, which would likely result in a pricerise and a profit for the corporate raider and theother shareholders.

A "backflip takeover" is any sort of takeoverin which the acquiring company turns itself intoa subsidiary of the purchased company. This typeof takeover can occur when a larger but lesswell-known company purchases a strugglingcompany with a very well-known brand.

The terms merger and acquisition meanslightly different things. The legal concept of amerger (with the resulting corporate mechanics,statutory merger or statutory consolidation,which have nothing to do with the resultingpower grab as between the management of thetarget and the acquirer is different from thebusiness point of view of a "merger", which canbe achieved independently of the corporatemechanics through various means such as"triangular merger", statutory merger, acquisition,etc. When one company takes over another andcompletely establishes itself as the new owner,the purchase is called an "acquisition". From alegal point of view, in an acquisition, the targetcompany still exists as an independent legalentity, which is controlled by the acquirer.However, in the pure sense of the term, a mergerhappens when two firms agree to go forward asa single new company rather than remainseparately owned and operated. This kind ofaction is more precisely referred to as a "mergerof equals". The firms are often of about the samesize. Both companies' stocks are surrendered andnew company stock is issued in its place. For theexample, in the 1999 merger of Glaxo Wellcomeand SmithKline Beecham, both firms ceased toexist when they merged, and a newcompany,GlaxoSmithKline, was created. In

practice, however, actual mergers of equals don'thappen very often. Usually, one company willbuy another and, as part of the deal's terms,simply allow the acquired firm to proclaim thatthe action is a merger of equals, even if it istechnically an acquisition. Being bought out oftencarries negative connotations; therefore, bydescribing the deal euphemistically as a merger,deal makers and top managers try to make thetakeover more palatable. An example of thiswould be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as amerger at that time.

Public Private Partnership Model

A public–private partnership (PPP) is agovernment service or private business venture,which is funded and operated through apartnership of government and one ormore private sector companies.

In PPP the private party provides a publicservice or project and assumes substantialfinancial, technical and operational risk in theproject.

Broadly there are two types of PPP. In thefirst type, the cost of using the service is borneexclusively by the users of the service and not bythe taxpayer. In the second type (notablythe private finance initiative), capital investmentis made by the private sector on the basis of acontract with government to provide agreedservices and the cost of providing the service isborne wholly or in part by the government.

In a PPP model there are various ways ofgovernment’s contribution. It may be a fundingand administrative partner. Governmentcontributions to a PPP may also be in kind(notably the transfer of existing assets). In projectsthat are aimed at creating public goods like inthe infrastructure sector, the government mayprovide a capital subsidy in the form of a one-time grant, so as to make it more attractive tothe private investors. In some other cases, thegovernment may support the project byproviding revenue subsidies, including taxbreaks or by removing guaranteed annualrevenues for a fixed time period.

Special Purpose Vehicle

Some of the PPP models are executed andadministered by a special purpose vehicle.Typically, a public sector consortium forms aspecial company called a "special purpose


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vehicle" (SPV) to develop, build, maintain andoperate the asset for the contracted period. Theconsortium is usually made up of a buildingcontractor, a maintenance company and banklender(s). It is the SPV that signs the contractwith the government and with subcontractors tobuild the facility and then maintain it. In caseswhere the government has invested in the project,it is typically (but not always) allottedan equity share in the SPV.

Viability Gap Funding

The Viability Gap Funding Scheme providesfinancial support in the form of grants, one timeor deferred, to infrastructure projects undertakenthrough public private partnerships with a viewto make them commercially viable. Governmentof India has established a Viability Gap Fund toaid the PPP infrastructure projects which facethe viability gap due to inherent nature of theproject. The Scheme is administered by theMinistry of Finance.

Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT)

Build–operate–transfer (BOT) or build–own–operate–transfer (BOOT) is a form of projectfinancing, wherein a private entity receivesa concession from the private or public sector tofinance, design, construct, and operate a facilitystated in the concession contract. This enablesthe project proponent to recover its investment,operating and maintenance expenses in theproject. Traditionally, such projects provide forthe infrastructure to be transferred to thegovernment at the end of the concession period.

BOT finds extensive application in theinfrastructure projects and in public–privatepartnership. In the BOT framework a third party,for example the public administration, delegatesto a private sector entity to design and buildinfrastructure and to operate and maintain thesefacilities for a certain period. During this periodthe private party has the responsibility to raisethe finance for the project and is entitled to retainall revenues generated by the project and is theowner of the regarded facility. The facility willbe then transferred to the public administrationat the end of the concession agreement, withoutany remuneration of the private entity involved.

BOT involves the following types of parties:

The Host Government: Normally, thegovernment is the initiator of the infrastructureproject and decides if the BOT model is

appropriate to meet its needs. In addition, thepolitical and economic circumstances are themain factors for this decision. The governmentprovides normally support for the project in someform. (provision of the land/ changed laws)

The Concessionaire: The project sponsorswho act as concessionaire create a specialpurpose entity which is capitalised through theirfinancial contributions.

Lending Banks: Most BOT project are fundedto a big extent by commercial debt. The bankwill be expected to finance the project on “non-recourse” basis meaning that it has recourse tothe special purpose entity and all its assets forthe repayment of the debt.

Other Lenders: The special purpose entitymight have other lenders such as national orregional development banks

Parties to the Project Contracts: Becausethe special purpose entity has only limitedworkforce, it will subcontract a third party toperform its obligations under the concessionagreement. Additionally, it has to assure that ithas adequate supply contracts in place for thesupply of raw materials and other resourcesnecessary for the project

Conclusion

The selection of investment model dependson the objectives before the investor and thefunding requirements. The government usuallytakes up the bigger infrastructure projects,creation of public utility and social overheads.On the other hand the private investment iscarried out with the profit motive. Governmentinvestment leads to creation of economic andsocial overheads and to reap the economies ofthese facilities private investment comes up thatleads to industrial development. In the times ofdown turn of the business cycle it is thegovernment which takes up autonomousinvestment or does pump priming to raise theexpectations and increase the effective demand.Today there is an increasing trend of PPPinvestment models, which have manyadvantages. Apart from pooling together fundsand expertise, these models are based more onthe principle of economic rationality so that thefunds invested are also covered by ensuringreasonable returns. However, success of the PPPmodels depends on creating sound institutionaland regulatory mechanism based on theprinciples of transparency and accountability.

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FOREIGN DIRECT

INVESTMENT

CHRONICLEIAS ACADEMYA CIVIL SERVICES CHRONICLE INITIATIVE

OECD defines FDI as-cross-border investmentby a resident entity in one economy with theobjective of obtaining a lasting interest in anenterprise resident in another economy. Thelasting interest implies the existence of a long-term relationship between the direct investor andthe enterprise and a significant degree ofinfluence by the direct investor on themanagement of the enterprise. It may take theform of cash, securities, plant, equipment, andother factors of production, such as managerialskills, technology, or know how.

Developed economies consider FDI as anengine of market access in developing and lessdeveloped countries vis-à-vis for their owntechnological progress and in maintaining theirown economic growth and development.Developing nations looks at FDI as a source offilling the savings, foreign exchange reserves,revenue, trade deficit, management andtechnological gaps. FDI is considered as aninstrument of international economic integrationas it brings a package of assets, including capital,technology, managerial skills and capacity andaccess to foreign markets. The impact of FDIdepends on the country’s domestic policy andforeign policy.

Types of FDI:

By Direction: Inward and Outward FDI

Inward foreign direct investment is whenforeign capital is invested in local resources.Inward FDI is encouraged by tax breaks,subsidies, low interest loans, grants, lifting ofcertain restrictions. Inward FDI is restricted byOwnership restraints or limits and Differentialperformance requirements.

Outward foreign direct investment,sometimes called "direct investment abroad", iswhen local capital is invested in foreign resources.Outward FDI is encouraged by Government-backed insurance to cover risk. Outward FDI isrestricted by tax incentives or disincentives on

firms that invest outside of the home country oron repatriated profits and subsidies for localbusinesses.

By Target: Greenfield Investment, Mergers andAcquisitions.

Green field investments are direct investmentin new facilities or the expansion of existingfacilities. Green field investments are the primarytarget of a host nation’s promotional effortsbecause they create new production capacity andjobs, transfer technology and know-how, andcan lead to linkages to the global marketplace.The Organization for International Investmentcites the benefits of greenfield investment (orinsourcing) for regional and national economiesto include increased employment (often at higherwages than domestic firms); investments inresearch and development; and additional capitalinvest-ments. Criticism of the efficiencies obtainedfrom greenfield investments include the loss ofmarket share for competing domestic firms.Another criticism of greenfield investment is thatprofits are perceived to bypass local economies,and instead flow back entirely to themultinational's home economy. Critics contrastthis to local industries whose profits are seen toflow back entirely into the domestic economy.

Whereas in Mergers and Acquisitionstransfers of existing assets from local firms toforeign firms takes place; the primary type ofFDI. Cross-border mergers occur when the assetsand operation of firms from different countriesare combined to establish a new legal entity.Cross-border acquisitions occur when the controlof assets and operations is transferred from alocal to a foreign company, with the localcompany becoming an affiliate of the foreigncompany. Unlike greenfield investment, acquisi-tions provide no long term benefits to the localeconomy--even in most deals the owners of thelocal firm are paid in stock from the acquiringfirm, meaning that the money from the sale couldnever reach the local economy. Never-theless,


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mergers and acquisitions are a significant formof FDI and until around 1997, accounted fornearly 90% of the FDI flow into the United States.Mergers are the most common way formultinationals to do FDI

Brief History of FDI in India

The early nineties was a period when theIndian economy faced a severe Balance ofPayment crisis. Exports began to experienceserious difficulties. The crippling external debtswere putting pressure on the economy. In viewof all these developments there was a seriousthreat of the economy defaulting in respect ofexternal payments liability. It was in the light ofsuch adverse situations that the policy makersdecided to adopt a more liberal and globalapproach thereby, opening its door to FDI inflowsin order to restore the confidence of foreigninvestors. FDI provides a situation wherein boththe host and the home nations derive somebenefit. The home countries want to take theadvantage of the vast markets opened byindustrial growth. Whereas the host countriesget to acquire resources ranging from financial,capital, entrepreneurship, technological know-how and managerial skills which assist it insupplementing its domestic savings and foreignexchange.

The evolution of Indian FDI can broadly bedivided into three phases classified on thepremises of the initiatives taken to induce foreigninvestments into the Indian economy:

(a) The first phase, between 1969 and 1991,was marked by the coming into force of theMonopolies and Restrictive Trade PracticesCommission (MRTP) in 1969, which imposedrestrictions on the size of operations, pricingof products and services of foreigncompanies. The Foreign Exchange RegulationAct (FERA), enacted in 1973, limited theextent of foreign equity to 40%, though thislimit could be raised to 74% for technology-intensive, export-intensive, and core-sectorindustries. A selective licensing regime wasinstituted for technology transfer and royaltypayments and applicants were subjected toexport obligations.

(b) The second phase, between 1991 and 2000,witnessed the liberalisation of the FDI policy,

as part of the Government’s economicreforms programme. In 1991 as per the‘Statement on Industrial Policy’, FDI wasallowed on the automatic route, up to 51%,in 35 high priority industries. Foreigntechnical collaboration was also placed underthe automatic route, subject to specified limits.In 1996, the automatic approval route forFDI was expanded, from 35 to 111 industries,under four distinct categories (Part A–up to50%, Part B–up to 51%, Part C–up to 74%,and Part D-up to 100%). A ForeignInvestment Promotion Board (FIPB) wasconstituted to consider cases under thegovernment route.

(c) The third phase, between 2000 till date, hasreflected the increasing globalisation of theIndian economy. In the year 2000, aparadigm shift occurred, wherein, except fora negative list, all the remaining activitieswere placed under the automatic route. Capswere gradually raised in a number of sectors/activities. Some of the initiatives that weretaken during this period were: In theinsurance sector, it was decided to raise thesectoral FDI cap from 26 per cent to 49 percent under automatic route under whichcompanies investing do not require priorgovernment approval; allowed 49 per centFDI in single brand retail under the automaticroute and beyond through the ForeignInvestment Promotion Board (FIPB), etc.Sector-wise, moderation in outward FDI wasobserved in agriculture, hunting, forestry &fishing, financial insurance, real estate &business services, manufacturing andwholesale, retail trade, restaurants & hotels.Furthermore, sectors, viz. financial,insurance, real estate & business services andmanufacturing continued to account for morethan 50 per cent of total outward FDI during2011-12. Net FDI (inward FDI minusoutward FDI) at US$ 22.1 billion in 2011-12showed a significant increase of about 87.0per cent as against US$ 11.8 billion in 2010-11.

Ways of receiving Foreign Direct Investmentby an Indian company:

1. Automatic route.

FDI up to 100 per cent is allowed under theautomatic route in all activities/sectors except

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where the provisions of the consolidated FDIPolicy, paragraph on ‘Entry routes forInvestment’ issued by the Government of Indiafrom time to time, are attracted. FDI in sectors /activities to the extent permitted under theautomatic route does not require any priorapproval either of the Government or the ReserveBank of India.

2. Government route.

FDI in activities not covered under theautomatic route requires prior approval of theGovernment which are considered by the ForeignInvestment Promotion Board (FIPB), Departmentof Economic Affairs, Ministry of Finance. Indiancompanies having foreign investment approvalthrough FIPB route do not require any furtherclearance from the Reserve Bank of India forreceiving inward remittance and for the issue ofshares to the non-resident investors

The Indian company having received FDIeither under the Automatic route or theGovernment route is required to comply withthe provisions of the FDI policy, includingreporting the FDI to the Reserve Bank.

FDI in RETAIL : An Analysis:

The term ‘retail’ has been defined as a salefor final consumption in contrast to a sale forfurther sale or processing (i.e. wholesale). Thus,retailing can be said to be the interface betweenthe producer and the individual consumer buyingfor personal consumption.

Retail industry in India is divided as:

1. Organized Retailing: Organized retailingrefers to trading activities undertaken bylicensed retailers, that is, those who areregistered for sales tax, income tax, etc. Theseinclude the corporate-backed hypermarketsand retail chains, and also the privatelyowned large retail businesses.

2. Unorganized Retailing: Unorganizedretailing, on the other hand, refers to thetraditional formats of low-cost retailing, forexample, the local kirana shops, ownermanned general stores, paan/beedi shops,convenience stores, hand cart and pavementvendors, etc.

Single Brand Retail and Multi Brand Retail:

DIPP guidelines for the companies comingunder the purview of single brand retail:

(a) Only single brand products would be sold(i.e., retail of goods of multi-brand even ifproduced by the same manufacturer wouldnot be allowed).

(b) Products should be sold under the same brandinternationally.

(c) Single-brand product retail would only coverproducts which are branded duringmanufacturing.

(d) Any addition to product categories to be soldunder “single-brand” would require freshapproval from the government.

Examples are Brands like Nike, Gucci, Lotto,Levis, etc.

Multibranding is basically the process ofmarketing of two or more widely similar andcompeting products by the same firm underdifferent brands. Multi-brand retail comes indifferent formats like supermarket, hypermarket,and the shopping malls. While these brands effecteach others' sales, multi-brand strategy does havesome advantages as a means of (1) obtaininggreater shelf space and leaving little forcompetitors' products, (2) saturating a marketby filling all price and quality gaps, (3) cateringto brand-switchers users who like to experimentwith different brands, and (4) keeping the firm'smanagers on their toes by generating internalcompetition.

Government policy related to FDI in Retail:

Single Brand Retail

Government had permitted FDI, up to 100%,in single brand product retail trading, subject tospecified conditions, including, interalia, theconditions that:

(a) Only one non-resident entity, whether ownerof the brand or otherwise, shall be permittedto undertake single brand product retailtrading in the country, for the specific brand,through a legally tenable agreement, withthe brand owner for undertaking single brandproduct retail trading in respect of thespecific brand for which approval is beingsought. The onus for ensuring compliancewith this condition shall rest with the Indianentity carrying out single-brand productretail trading in India. The investing entityshall provide evidence to this effect at the


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time of seeking approval, including a copyof the licensing/franchise/sub-licenceagreement, specifically indicating compliancewith the above condition.

(b) In respect of proposals involving FDI beyond51%, sourcing of 30%, of the value of goodspurchased, will be done from India,preferably from MSMEs, village and cottageindustries, artisans and craftsmen, in allsectors, where it is feasible.

`Small industries` would be defined asindustries which have a total investment in plant& machinery not exceeding US $ 1.00 million.This valuation refers to the value at the time ofinstallation, without providing for depreciation.Further, if at any point in time, this valuation isexceeded, the industry shall not qualify as a `smallindustry` for this purpose. The compliance ofthis condition will be ensured through self-certification by the company, which could besubsequently checked, by statutory auditors, fromthe duly certified accounts, which the investorswill be required to maintain.

Regarding the condition that 30% sourcingbe mandatorily done from Indian small industry,investors have pointed out that it would bedifficult to comply with this condition in the caseof very specialized/high technology items. Globalsingle brand retailers are often engaged in thebusiness of retailing specialty/high-tech products.Such products are niche products, wherein itmay not be viable for the foreign investors tobuild capacities wherever they engage inretailing, owing to the specialized requirementsof quality and precision which the local smallindustry may not be able to provide.

Investors are, therefore, of the view that thecondition of 30% mandatory sourcing fromIndian small industries/ village and cottageindustries, artisans and craftsmen, is acting as adeterrent to the desired foreign investment inthis activity.

The other category of products relate to theentire range from household appliances, utensils,furniture, crockery to furnishings, etc. Theseproducts are far more amenable to sourcing fromMSMEs, village and cottage industries, artisansand craftsmen.

Therefore, the proposed modification of thecondition is envisaged to take into account the

circumstances of both the specialized/hightechnology niche products, as well as the generalcategory, covering a wide range of items. Thefact that 30% domestic sourcing is beingmandated would imply that the single brandretailers would have to build productioncapacities in the country, either in existing units,or set up new ones, catering specifically to theirsourcing requirements. Hence, even the 30%domestic sourcing is expected to developproduction capacities in the country, with theattendant global best practices, relating to design,production and quality. Since single brandretailers are global players, Indian suppliers andvendors to these retailers would have anopportunity of becoming a part of their globalsupply chains. Thus, Indian products could findtheir way in the stores of these single brandretailers located in other countries, therebyaugmenting exports from India as well. "Thus,the amended condition relating to sourcing of30%, of the value of goods purchased, being donefrom India, preferably from MSMEs, village andcottage industries, artisans and craftsmen, in allsectors, where feasible, is expected to benefitIndian producers, including the Indianhandicrafts sector, which provides livelihood tomillions and is important from the point of lowcapital investment, high value-addition and highpotential for export, as also to meet the criticalneed to integrate Indian producers with thedomestic and global markets. Skill integrationwith craftsmen abroad is likely to help developsynergies with international brands and generatemore employment. The consequential benefits,arising from the integration of global bestpractices in management, along with globalstandards in quality, design, packaging andproduction, would help build capacities of localproducers, by making it worthwhile for them toscale-up their production, thereby creating amultiplier effect on employment and incomegeneration. This would also lead to upgradationof technology, which, in turn, would have afurther multiplier effect on the economy.

Multi Brand Retail

Government announced the decision to permitFDI, up to 51%, in multi-brand retail tradingsubject to the following conditions:

1. FDI in multi brand retail trading upto 51%shall be allowed through the Governmentapproval route.

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2. Minimum amount to be brought in, as FDI,by the foreign investor, would be US $ 100million.

3. At least 50% of total FDI brought in shall beinvested in 'backend infrastructure' withinthree years of the first tranche of FDI, where‘back-end infrastructure’ will include capitalexpenditure on all activities, excluding thaton front-end units; for instance, back-endinfrastructure will include investment madetowards processing, manufacturing,distribution, design improvement, qualitycontrol, packaging, logistics, storage, ware-house, agriculture market produceinfrastructure etc. Expenditure on land costand rentals, if any, will not be counted forpurposes of backend infrastructure.

4. At least 30% of the value of procurement ofmanufactured/processed productspurchased shall be sourced from Indian 'smallindustries' which have a total investment inplant & machinery not exceeding US $ 1.00million. This valuation refers to the value atthe time of installation, without providingfor depreciation. Further, if at any point intime, this valuation is exceeded, the industryshall not qualify as a 'small industry' for thispurpose. This procurement requirementwould have to be met, in the first instance,as an average of five years’ total value of themanufactured/ processed productspurchased, beginning 1st April of the yearduring which the first tranche of FDI isreceived. Thereafter, it would have to be meton an annual basis.

5. Self-certification by the company, to ensurecompliance of the conditions at serial nos.(2), (3) and (4) above, which could be cross-checked, as and when required. Accor-dingly,the investors shall maintain accounts, dulycertified by statutory auditors.

6. Retail sales outlets may be set up only incities with a population of more than 10 lakhas per 2011 Census and may also cover anarea of 10 kms around the municipal/urbanagglomeration limits of such cities; retaillocations will be restricted to conformingareas as per the Master/Zonal Plans of theconcerned cities and provision will be madefor requisite facilities such as transportconnectivity and parking. In States/ UnionTerritories not having cities with population

of more than 10 lakh as per 2011 Census,retail sales outlets may be set up in the citiesof their choice, preferably the largest city andmay also cover an area of 10 kms aroundthe municipal/urban agglomeration limits ofsuch cities. The locations of such outlets willbe restricted to conforming areas, as per theMaster/Zonal Plans of the concerned citiesand provision will be made for requisitefacilities such as transport connectivity andparking.

7. Government will have the first right toprocurement of agricultural products.

8. The above policy is an enabling policy onlyand the State Governments/Union Territorieswould be free to take their own decisions inregard to implementation of the policy. Therefore, retail sales outlets may be set upin those States/Union Territories which haveagreed, or agree in future, to allow FDI inMBRT under this policy. Such agreement, infuture, to permit establishment of retailoutlets under this policy, would be conveyedto the Government of India through theDepartment of Industrial Policy & Promotionand additions would be made to the annexedlist accordingly. The establishment of theretail sales outlets will be in compliance ofapplicable State/Union Territory laws/regulations, such as the Shops andEstablishments Act, etc.

9. Retail trading, in any form, by means of e-commerce, would not be permissible, forcompanies with FDI, engaged in the activityof multi-brand retail trading.

Advantages of opening up of Multi-BrandRetail:

1. With FDI in multi-brand retail trading, thefarmers will receive better remuneration fortheir produce. The farmers will also get betterprices from the heavy reduction in post-harvest losses. It will also result in thestrengthening of the backend infrastructureand lead to direct purchase by the retailers.Organsied retail would also drasticallyreduce the number of needless middlemen.

2. Large-scale investment in the retail sectorespecially in backend infrastructure willprovide substantive gainful employmentopportunities in the entire range of activities


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from the backend to the frontend retailbusiness. Also grant employment oppor-tunities for over 1 crore youth.

3. Improvement in product quality as a resultof strengthening of backend infrastructuredue to technological upgradation, efficientgrading, sorting and packaging; efficienttesting; quality control and productstandardization resulting in better qualityproducts not only for domestic consumersbut also for exports.

4. Lower prices and give more choice forconsumers.

5. The safeguard pertaining to a minimum of30% procurement from Indian smallindustries would provide the necessary scalesfor these entities to expand capacities inmanufacturing, thereby creating moreemployment and also strengthening themanufacturing base of the country.

6. Implementation of the policy will facilitategreater FDI inflows, additional and qualityemployment, global best practices and benefitconsumers and farmers in the long run, interms of quality, price, greater supply chainefficiencies in the agricultural sector anddevelopment of critical backendinfrastructure.

The drawbacks of FDI in retail are:

� It would lead to unfair competition andultimately result in large-scale exit ofdomestic retailers, especially the small familymanaged outlets, leading to enormousdisplacement of persons employed in theretail sector. Further, as the manufacturingsector has not been growing fast enough, thepersons displaced from the retail sectorwould not be absorbed there.

� The entry of large global retailers such asWal-Mart would eradicate local shops andmillions of jobs, since the unorganized retailsector employs an enormous percentage ofIndian population after the agriculture sector;

� The global retailers would conspire andexercise monopolistic power to raise pricesand monopolistic (big buying) power toreduce the prices received by the suppliers;

� It would lead to asymmetrical growth incities, causing discontent and social tensionelsewhere.

Hence, both the consumers and the supplierswould lose, while the profit margins of such retailchains would go up.

Liberalization of FDI norms

Foreign Direct Investment (FDI) is preferredto the foreign portfolio investments primarilybecause FDI is expected to bring moderntechnology, managerial practices and its longterm in nature investment. The Government hasliberalized FDI norms overtime. As a result, onlya handful of sensitive sectors now fall in theprohibited zone and FDI is allowed fully orpartially in the rest of the sectors.

FDI in important sectors are as follows:

� In the insurance sector, it was decided toraise the sectoral FDI cap from 26 per centto 49 per cent under automatic route underwhich companies investing do not requireprior government approval.

� Allowed 49 per cent FDI in single brand retailunder the automatic route and beyondthrough the Foreign Investment PromotionBoard (FIPB).

� FDI cap in defence sector is at 26 per centbut higher limits of foreign investments in'state-of-the-art' technology manufacturingwill be considered by the Cabinet Committeeon Security.

� In case of PSU oil refineries, commoditybourses, power exchanges, stock exchangesand clearing corporations, FDI will beallowed up to 49 per cent under automaticroute as against current routing of theinvestment through FIPB.

� In basic and cellular services, FDI was raisedto 100 per cent from current 74 per cent. Ofthis, up to 49 per cent will be allowed underautomatic route and the remaining throughFIPB approval.

� FDI of up to 100 per cent was allowed incourier services under automatic route.

� In credit information firms 74 per cent FDIunder automatic route are allowed.

Despite successive moves to liberalize the FDIregime, India is ranked fourth on the basis ofFDI Restrictiveness Index (FRI)compiled byOECD. FRI gauges the restrictiveness of acountry's FDI rules by looking at the four main

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types of restrictions viz. foreign equity limitations;screening or approval mechanism; restrictions onthe employment of foreigners as keypersonnel; and operational restrictions. Ascore of 1 indicates a closed economy and 0indicates openness. FRI for India in 2012 was0.273 (it was 0.450 in 2006 and 0.297 in 2010)as against OECD average of 0.081. China is themost restrictive country as it is ranked numberone with the score of 0.407 in 2012 indicatingthat it has more restrictions than India.

FDI and Public Private Partnership

The Public-Private Partnership (PPP) Projectmeans a project based on contract or concessionagreement between a Government or statutoryentity on the one side and a private sector companyon the other side, for delivering an infrastructureservice on payment of user charges.

The link of FDI and PPP is analyzed sector-wise as follows:

a) Infrastructure sector

It is being increasingly recognised in Indiathat lack of good quality infrastructure is abottleneck that must be removed in order tomaintain the growth rate. To meet this challenge,the Government of India is committed to raisinginvestment in infrastructure from its existing levelof below 5% of GDP to almost 9%. This suggeststhat more than $450bn will be required to fundinfrastructural development in India over thenext five years. However, the scope for makingimprovements on this scale is fundamentallyconstrained by the state of public finances. Thecombined deficit of the central and stategovernments is roughly 10% of GDP andgovernment borrowing is capped through theFiscal Responsibility and Budget ManagementAct. This necessarily limits the capacity of theState to finance as much infrastructuraldevelopment as is required.

Thus responding to this challenge, theGovernment of India is actively promoting theexpansion of Public Private Partnership (PPP)activities across all key infrastructure sectors,including highways, ports, power and telecoms.

Highways are a critically importantinfrastructure for an emerging nation. And thedesign of appropriate contracts is the criticalinstrument for meeting the challenge ofhighways. What are these challenges? To put it

in one sentence, the challenge is to maximize thedifference between:

(a) The additional welfare that our citizens getfrom having more and better roads and,

(b) The present value of the cost of building(building should be taken to mean buildingor renovating) those roads.

The involvement of private sector will bring3Es to the system: Efficiency, Economy andEffectiveness; thus in present scenario where fastpace economic development is transiting from adeveloping world to emerging world; slow paceof transport sector can act as obstacle. So PPPmodel is the need of the hour.

Different forms of PPP model in India are:

While there are a number of forms of PublicPrivate Partnership, the common forms that arepopular in India and have been used fordevelopment of National Highways are:

� Build Operate and Transfer (BOT) Tollbasis: The concessionaire (private sector) isrequired to meet the upfront cost and theexpenditure on annual maintenance. Theconcessionaire recovers the entire upfrontcost along with the interest and a return oninvestment out of the future toll collection.

� Build Operate and Transfer (BOT) Annuitybasis: In BOT (Annuity) Model, theConcessionaire (private sector) is required tomeet the entire upfront/construction cost (nogrant is paid by the client) and theexpenditure on annual maintenance. TheConcessionaire recovers the entire investmentand a pre-determined cost of return out ofthe annuities payable by the client every year.The selection is made based on the leastannuity quoted by the bidders (theconcession period being fixed).The client(Government/NHAI) retains the risk withrespect to traffic (toll), since the client collectsthe toll.

� Design-Build: It is a traditional public sectorprocurement model for infrastructurefacilities. Generally, a private contractor isselected through a bidding process. Theprivate contractor designs and builds afacility for a fixed fee, rate or total cost, whichis one of the key criteria in selecting thewinning bid. The contractor assumes risksinvolved in the design and construction


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phases. The scale of investment by the privatesector is generally low and for a short-term.Typically, in this type of arrangement thereis no strong incentive for early completion ofa project. This type of private sectorparticipation is also known as turnkey.

Advantages of PPP model in infrastructuresector

Implementation of projects under PublicPrivate Partnership (PPP) has the followingadvantages-

(a) Better quality since the concessionaire (privatesector) is to maintain the road for the periodof concession.

(b) Early completion of the project, since theconcessionaire could save interest and earnearly toll (in the case of BOT project) /additional annuity installments (in the caseof Annuity project).

(c) No costs overrun (price escalation).

(d) The Client (Government/NHAI) does nothave the burden of maintaining the highways.

(e) Involving the private sector leads to greaterefficiency.

(f) The private sector has more flexibleprocurement and decision-makingprocedures and therefore, it can speed upimplementation efforts.

As seen availability of good quality physicaland social infrastructure is one of the keydeterminants of economic growth and it alsohelps in attracting foreign direct investment (FDI)in a country like India which is standing on thethreshold of becoming an economic power inthe world. The President of Asian DevelopmentBank has rightly observed that “Infrastructuredevelopment offers the foundation on which acountry can seize and capitalize on theopportunities ushered in by globalization andregional integration. Experiences across the regionshow that FDI and new technologies are mostlikely to bypass countries with inadequate andpoor infrastructure investment climate”. In lightof the above, it is a clear fact that despite India'ssignificant achievements in industrial develop-ment and economic growth, there is a wide gapbetween the potential demand for infrastructurefor high growth and the available supply.

Currently International developers play aninsignificant role in the development ofinfrastructure in India. The exceptions are a fewinstances of investment by internationaldevelopers like Dubai Ports mainly in the portssector. However, an increased role for suchplayers will help, as these players will be able totap project equity from their global operations.International developers look for various comfortfactors in a market before entering and investingin it. These comfort factors generally include thefollowing:

� Legal and Regulatory framework i.e. the BOTLegislation, Road Fund Governance, NHAIautonomy and authority, Regulation ofTraffic, etc. In India while a lot of thelegislation exists there is still ambiguity interms of Road Fund Governance and NHAI’sautonomy and authority.

� Currency risk, Local Financial markets andTaxation issues: i.e. infrastructure projectswill have Rupee revenues which are veryvolatile and Bond market which is not welldeveloped in India.

� Size of the projects: In India NHDP hasindividual project sizes that are generally toosmall to attract international investors.

� Return expectations of internationaldevelopers vary with risk perceptions of acountry. Risk perception of Foreign Investorsincreases as they venture out of familiarmarkets and increases exponen-tially in caseof emerging markets like India because ofgreater uncertainty. Despite some uncertaintyabout certain factors for India, lot ofinternational developers (including UK andSpanish developers) have shown interest ininvesting in India. NHAI is also looking to bringout larger projects and this is likely toencourage international investors to investin Roads sector.

The Government of India has recognized theimperative need for the infrastructure sector andhas taken several initiatives like sector specificpolicies, providing incentives and tax holidays toattract private investments, permission of 100%FDI in the infrastructure sector, special provisionof Viability Gap Funding (VGF) and PublicPrivate Partnership (PPP) approach.

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b) Healthcare Sector

With the rapid growth of the Indian economyin recent times and the changing demographicsand socio-economic mix of the Indianpopulation,there has been an immense changein the healthcare requirements of the country.Over the years, the public and private sectorshave helped in addressing the health needs ofthe country and made good India’s progress onkey health indicators like life expectancy andinfant mortality. Today,the healthcare system inIndia faces a challenge in raising the servicequality and ensuring equitable access to peoplewhile simultaneously gearing up its capabilitiesto tackle the changing disease incidence profiles.This challenge needs to be addressed through aconcerted effort of both public and private sectorsby their agreeing on suitable public policyinitiatives which incentivize financing andprovision of healthcare, and thereby increasehealthcare access to the people. Alongwith PPP,Foreign investors can play significant role in thedevelopment of the hospital sector. This is evidentfrom the fact that private equity funds haveinvested over $ 2 billion in healthcare and lifescience sector over the past five years. Further,India has received USD 1, 32,837 million asaggregate FDI from April 2000 to April, 2011and specifically hospital and diagnostic centreshave received FDI of USD 1030.05 million fromApril 2000 up to April 2011 constituting 0.78%of the total FDI into India.

The areas where PPP+FDI contribution can provevery beneficial are:

� Infrastructure Development: Developmentand strengthening of healthcare infrastruc-ture that is evenly distributed geographi-callyand at all levels of care.

� Management and Operations: Managementand operation of healthcare facilities fortechnical efficiency, operational economy andquality.

� Capacity Building and Training: Capacitybuilding for formal, informal and continuingeducation of professional, para-professionaland ancillary staff engaged in the delivery ofhealthcare.

� Financing Mechanism: Creation ofvoluntary as well as mandated third-partyfinancing mechanisms.

� IT Infrastructure: Establishment of nationaland regional IT backbones and health datarepositories for ready access to clinicalinformation.

� Materials Management: Development of amaintenance and supply chain for readyavailability of serviceable equipment andappliances, and medical supplies andsundries at the point of care.

Foreign Direct Investment in IndianHealthcare industry can deliver affordablehealthcare to India’s billion of population. Theinvestors can ensure the availability of healthcareinfra-structure in India through foreign directinvestment. FDI can present enormousopportunities for the medical community andother service providers. Multinational players canfocus on the Indian healthcare market landscapeand try to enlarge their presence throughpartnerships and investments. The cost of themedical treatments are much lower in India thanin other developed countries. So, the Indianpeople can get better treatment facilities at lowcost without going abroad. Finally, there is agreat economic impact of Foreign DirectInvestment in Indian healthcare sector whichleads to the Indian economic development

Whereas on the negative side PPP+FDI maylead to:

� Corporatization of Healthcare sector: PPPmodel could make the healthcare industry asimple profit and loss one which could leaveout the most vulnerable sections of society –those who can’t afford it.

� Corruption: Corruption is one of the biggestproblems like NRHM scam in UP.

� Government could completely get out ofthe healthcare sector: This would mean thatthe government would over a period of timeconfine itself to providing small packageservices and would be primarily just apurchaser of virtually all clinical servicesfrom the corporatized private sector. Thegovernment would, thus, finance (withpublic money), strengthen and bolster analready resurgent corporate sector providingmedical services,

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