International Trade and FDI

Unit III

Unit CInternational trade and FDIUnit C Topic 1-Role of FDI in international tradeUnit C Topic 2-Norms of FDI and their justificationsUnit C Topic 3-Ways in which FDI can flow in an economy

Definition: FDIA form of investment that gives controlling

interest in a foreign company

The ambiguity:FDI is good yet dangerous

Home and host country influence on FDI

What MNEs have to offerInvestmentsHR Training and DevelopmentTechnologyTradeEnvironment

What MNEs have to offer

MNEsInvestments:Links to local

cos.Increased

productivityImproved efficiencyCapital

formation

HR: Training

EmploymentManagerial

Skills

Technology:R&D

Industrial upgrading

New capital equipment

Trade:Export

ExpansionLower cost

import

Environment:Access to clean

technologyCompany wide

standards

Stakeholders TradeoffCompanies must satisfy:

ShareholdersEmployeesCustomersSociety

But trade off existsThe philosophy, actions and goals of MNEs

are thus unique matching the situation it is in..

Balance of Payment Effect of MNEFDI brings both capital inflow and capital

outflowThus net balance-of-payment effect is

important

The greater the inflow the better for economy: WHY

The greater the outflow the better the trade relations… and the market

The net of inflow and outflow should be:…..

Growth and employment effectsFDI by a company for:

Fuller utilization of resourcesImmobility of capital and technology from one

industry to anotherMove operations to low wage country:

Horizontal and vertical FDI

Host country advantage:Inflow of capital and technology

Host country losses:...

MNE and ethical behaviorConcept :

Relativism: when in Rome do as Romans do..and Normativism.. There are universal standards

of behavior..

Cultural foundations:Walk in between fine lines of both of the aboveNegotiate between evilsRespect cultural identityOverpower corruptionSustainability

FDI impacts on economyDefenseRetailPower generationComputer/Telephone instruments: Hardware

AutomobilesServices: Construction etc

Sector Specific Conditions on FDI 6.1 Prohibited Sectors: 2014FDI is prohibited in: (a) Lottery Business including

Government/private lottery, online lotteries, etc.

(b) Gambling and Betting including casinos etc.

(c) Chit funds (d) Nidhi company

FDI not permitted…..contde) Trading in Transferable Development

Rights (TDRs) (f) Real Estate Business or Construction of

Farm Houses (g) Manufacturing of cigars, cheroots,

cigarillos and cigarettes, of tobacco or of tobacco substitutes

(h) Activities/sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

FDI not permitted…..contdForeign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities

FDI Permitted.. RouteAutomaticGovernment through FIPB (Foreign investment

promotion board of DEA)

‘Government route’ means that investment in the capital of resident entities by non-resident entities can be made only with the prior approval of Government

(FIPB, Department of Economic Affairs (DEA), Ministry of Finance or Department of Industrial Policy & Promotion, as the case may be).

The foreign investment (FI) shall includein addition to FDI, investment by Foreign

Institutional Investors (FIIs), Foreign Portfolio Investors (FPIs), Qualified Foreign Investors(QFIs), Non-Resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global

Depository Receipts (GDRs) and convertible preference shares held by foreign

entities.

August 2014 latest FDI Policy of GOIFDI cap in India:Page 49 onwards sector wise

FDI ban in India1 FDI ST_110412.pdfPg 9

Sector-wise distribution of FDI inflowsDuring August 2014, top 10 Sectors attracting

highest FDI inflowsWere: Services Sector (18 per cent), Construction development: Townships,

housing, built-up infrastructure(10per cent), Telecommunications (7 per cent), Computer Software & Hardware (6 per cent),

…FDI sectors contd…Drugs & Pharmaceuticals (5 per cent),Chemicals (other than Fertilizers) (4 per

cent), Power (4 per cent), Automobile Industry (4 per cent), Metallurgical Industries (4 per cent),

Country-wise distribution of FDI inflowsTop 10 investing countries during August 2012

were:Mauritius (36 per cent),Singapore (12 per cent),U.K (10 per cent),Japan (8 per cent),Netherlands (6 per cent), US (5 per cent),