BCom Foreign Investment and Collaborations in India Notes Study Material

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BCom Foreign Investment and Collaborations in India Notes Study Material

INTRODUCTION

Most countries of the world that embarked on the road to economic development had to depend on foreign capital to some extent. They have been making use of foreign capital and technology to accelerate the pace of their economic growth. If a backward and underdeveloped country is interested in rapid economic development, it will have to import machinery, technical know-how, spare parts, and raw materials also. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Foreign investment is generally treated as an instrument of international policy to boost growth prospects. Whereas, foreign collaboration refers to facilities provided by the foreign partner, such as technical services, licensing, franchises, trademarks, and patents. Growing demand for joint ventures with regard to foreign collaborations (financial as well as technical collaboration) has enlarged the scope of mutual cooperation between developed and developing nations. Recently, our financial institutions, flexible regulatory authorities, and vibrant corporate enterprises now offer foreign investors a transparent investment environment. Foreign capital helps them to build an institutional framework required for development. (BCom Foreign Investment and Collaborations in India Notes Study Material)

NEED FOR FOREIGN CAPITAL

The need for foreign capital for a developing country like India can arise account of the following reasons:

(i) Increase in Level of Capital: The rate of capital formation in India is quite low. We do not have adequate funds for Industrialization. Our domestic capital is inadequate for purpose of economic growth and it is necessary to invite foreign capital.

(ii) To Sustain a High Level of Investment: For industrialization, it is necessary to raise the level of their investment substantially. It requires a nig level of investment and savings. But in our country, the savings are often low. Hence there is a gap between investment and savings. This gap can be up through foreign capital. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(iii) To Fill the Technological Gap: In developing countries like India, the level of technological advancement is very low as compared to developed countries. Foreign investment from abroad in India helps to fulfill the technological gap in the following ways: (a) Provision of expert services, (b) Training Indian Personnel abroad, and (c) Provision of education and training facilities in the country.

(iv) Exploitation of Natural Resources: Foreign capital investment facilitates opportunities for easy exploitation of natural resources through technical know-how, business experience, and knowledge which are equally essential to economic development.

(v) To Develop Basic Economic Infrastructure: The economic infrastructure of a country includes the transport system, power generation, and distribution, communication system, and development of public utility services. In the case of underdeveloped countries, they are unable to build up an adequate economic infrastructure of the country on their own. Thus, they require the assistance of foreign capital to develop basic economic infrastructure. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(vi) To Improve the Balance of Payment Position: In the beginning stage of economic development, the developing or underdeveloped countries require more imports in the form of capital goods, machinery, raw materials, component parts, etc. as compared to their normal exports. As a result, the balance of payments gets adverse condition. Foreign capital provides a short-term solution to the problem in the form of foreign exchange and reserve. (BCom Foreign Investment and Collaborations in India Notes Study Material)

TYPES OF FOREIGN INVESTMENTS

Foreign investment may be categorized into the following categories:

Foreign Direct Investment (FDI)

India is the largest democracy and the fourth largest economy (in terms of purchasing power parity) in the world. India with its consistent growth performance and abundant high-skilled manpower provides enormous opportunities for investment, both domestic and foreign. Investment in India can be made both by non-resident as well as resident Indian entities. Any non-resident investing in an Indian company is Foreign Direct Investment (FDI). (BCom Foreign Investment and Collaborations in India Notes Study Material)

The term FDI is an abbreviation for “Foreign Direct Investment” and refers to the direct investment that any foreign company makes in another country, by the act of buying that company or by expanding some existing business in the country. The ways of making foreign investments include setting up an associate of the company in the foreign country, acquiring shares of the company, or via a merger, etc.

Unlike, indirect investments where the institutions abroad invest in the equities listed on a nation’s stock exchange, the direct investment allows entities a higher degree of control over the company wherein it invests. A larger amount of FDI is a characteristic of an open economy that has good prospects for growth. (BCom Foreign Investment and Collaborations in India Notes Study Material)

The Government embarked upon major economic reforms in mid-1991 with a view to integrate with the world economy and emerge as a significant player in the globalization process. Reforms undertaken include decontrol of industries from the stringent regulatory process; simplification of investment procedures, promotion of foreign direct investment (FDI), liberalization of exchanges control, rationalization of taxes, and public sector disinvestment. The FDI policy was liberalized progressively through a review of the policy on an ongoing basis and allowing FDI in more industries under the automatic route. (BCom Foreign Investment and Collaborations in India Notes Study Material)

The Government has decided to allow FDI up to 51 percent; with prior Government approval, in retail ‘single-brand products. This is inter-alia aimed at attracting investment in production and marketing, improving the availability of such goods for the consumers, encouraging increased sourcing of goods from India, and enhancing the competitiveness of Indian enterprises through access to global designs, technology, and management practices. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Foreign Direct Investment in India

Growth and Policies: The historical background of FDI in India can be traced back to the establishment of the East India Company of Britain. British capital came to India during the colonial era of Britain in India. After Second World War, Japanese companies entered the Indian market and enhanced their trade with India, yet U. K. remained the most dominant investor in India. Further, after independence issues relating to foreign capital, and operations of MNCs gained the attention of the policymakers.

Keeping in mind the national interests the policymakers designed the FDI policy which aims for FDI as a medium for acquiring advanced technology and mobilizing foreign exchange resources. With time and as per economic and political regimes there have been changes in the FDI policy too. The industrial policy of 1965, allowed MNCs to venture through technical collaboration in India. Therefore, the government adopted a liberal attitude by allowing more frequent equity. In the critical face of the Indian economy, the government of India with the help of the World Bank and IMF introduced the macro-economic stabilization and structural adjustment program.

As a result of those reforms, India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors. Further, under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment.

Starting from a baseline of less than USD 1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities, and computer software and hardware. Mauritius, Singapore, the US, and the UK were among the leading sources of FDI to the country. (BCom Foreign Investment and Collaborations in India Notes Study Material)

According to GYANPRATHA-ACCMAN (Journal of Management, Volume 5 Issue 1, 2013), FDI for 2009-10 at US $ 25.88 billion was lower by five percent from the US $ 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by about 60 percent to approx. The US $ 34 billion, the lowest in the 2010 Fiscal in the first two months of the 2010-11 fiscal. FDI inflow into India was at an all-time high of $ 7.78 billion up 77% from $ 4.4 billion during the corresponding period in the previous year.

In 2013, the government relaxed FDI norms in several sectors, including telecom, defense, PSU oil refineries, power exchanges, stock exchanges, and others. In retail, UK-based Tesco submitted its application to initially invest the US $ 110 million to start a supermarket chain in collaboration with Tata Group’s Trent. In civil aviation, Malaysia-based Air Asia and Singapore Airlines teamed up with Tata Group to launch two new airline services. Also, Abu Dhabi-based Etihad picked up a 24 percent stake in Jet Airways that was worth over 2,000 crores (the US $ 319.39 million). (BCom Foreign Investment and Collaborations in India Notes Study Material)

India has received a total foreign investment of US $ 306.88 billion since 2000 with 94 percent of the amount coming during the last nine years. In the period 1999-2004, India received the US $ 19.52 billion of foreign investment. In the period 2004-09, foreign investment in the country touched US $ 114.55 billion, further increasing to the US $ 172.82 billion between 2009-September, 2013. During FY 2012-13, India attracted FDI worth the US $ 22.42 billion. Tourism, pharmaceutical, services, chemicals, and construction were among the biggest beneficiaries. The January-November period in 2013 witnessed mergers and acquisitions deals worth the US $ 26.76 billion in India, according to a survey by tax advisory firm Grant Thornton. (BCom Foreign Investment and Collaborations in India Notes Study Material)

India presents a vast potential for foreign investment and is actively encouraging the entrance of foreign players into the market. Foreign investors cannot discount India, as it is predicted that India will become one of the emerging economies. Presently, India is in the fifth position in the list of largest economies in the world and has the third largest GDP in Asia. India also offers high prospects for growth and earning potential in practically all areas of business. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Yet, despite the practically unlimited possibilities in India for foreign dealings, it has failed to acquire the kind of enthusiastic attention generated by other emerging economies such as China. The Indian Government has permitted access to FDI through an automatic route, except for a small negative list. (BCom Foreign Investment and Collaborations in India Notes Study Material)

From time to time there has been a revision in the liberalization of the FDI. Recently the Government of India has liberalized its policies in certain sectors, like increased FDI limits for “Air Transport Services (Domestic Airlines)” up to 49 percent through automatic routes and up to 100 percent by Non-Resident Indian (NRIs) through automatic routes. (No direct or indirect equity participation by foreign airlines is allowed). (BCom Foreign Investment and Collaborations in India Notes Study Material)

Prior approval of the Government would be required only in cases where the foreign investor has an existing joint venture for technology transfer/trademark agreement in the ‘same’ field. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Even for all the cases mentioned so far, Government approval is not required in respect of the following:

(a) Investment to be made by venture capital funds registered with SEBI; or

(b) Where the existing joint venture investments by either of the parties are less than 3 percent; or

(c) Where the existing venture/collaboration is defunct or sick,

Foreign investment in the banking sector has been further liberalized by raising the FDI limit in private sector banks to 74 percent under the automatic route including investment by FIIs. The aggregate foreign investment in a private bank from all sources will be a maximum of 74 percent of the paid-up capital of the bank and a minimum of 26 percent of it held by residents except in regard to a wholly owned subsidiary of a private bank. The overseas banks will be permitted to either have branches or holdings and not both.

A banking supervisory authority in the home country that regulates overseas banks and meets Reserve Bank’s license criteria will be allowed to hold 100 percent paid-up capital to enable them to set up a wholly-owned subsidiary in India. Maximum FDI in the telecom sector in certain services (such as basic, public mobile radio trunked services (PMRTS), global mobile personal communication service (GMPCS), and other value-added services), has been increased from 49 percent to 74 percent, in February 2005.

The total composite foreign holding including but not limited to investment by FCCB, FIIS, ADRs, NRI/OCB, GDRs, and proportionate foreign investment will not exceed 74 percent. In 2004, the guidelines on FDI equity cap, including NRIs and OCBs investment by were revised as FDI up to 100 percent is permitted in printing scientific and technical journals, periodicals subject to acquiescence with the legal framework and with the prior approval of the Government. (BCom Foreign Investment and Collaborations in India Notes Study Material)

FDI up to 100 percent is permitted through an automatic route for petroleum product marketing, subject to existing sectorial policy and regulatory framework FDI up to 100 percent is permitted through an automatic route in oil exploration in both small and medium-sized fields subject to and under the policy of the Government or private participation in the exploration of oil fields and the discovered field of national oil companies. (BCom Foreign Investment and Collaborations in India Notes Study Material)

FDI up to 100 percent is permitted through automatic route for petroleum products pipelines subject to and under the Government policy and regulations thereof FDI up to 100 percent is permitted for Natural Gas/LNG pipelines with prior Government approval.

Types of FDI: FDI can be of the following three types: (i) Establishment of wholly-owned companies. (ii) Acquisition of shares of existing companies. (iii) Foreign collaboration. (BCom Foreign Investment and Collaborations in India Notes Study Material)

In recent years there has been joint participation of foreign and domestic capital. India has been encouraging this form of import of foreign capital. There are three types of foreign collaborations-joint participation between private parties, between foreign firms and the Indian government, and between a foreign government and the Indian government.

Foreign collaboration is invited in all those industries which are open to the private sector but there is also a list of the fields “in which foreign capital is ordinarily not needed”, viz. banking, insurance, trading and commerce, and plantations. In cotton textiles or sugar, by implication, in that case, foreign collaboration should be ordinarily needed.

Advantages of FDI:

(i) Increase in foreign as well as home-based investment and thereby profit and employment;

(ii) Promotes technology sharing and transfer;

(iii) Increases tax and excise revenue of government;

(iv) Inspires managerial revolution through professional management;

(v) Increases exports and minimizes import requirements;

(vi) Increases competition and breaks inland monopolies;

(vii) Improves product quality and minimizes the cost of inputs.

Limitations of FDI:

(i) Private foreign capital tends to flow to high-profit areas rather than the priority sector of the economy;

(ii) International firms can control economic autonomy and this may hamper national politics;

(iii) It may inculcate invalid and unethical trading that leads to minimizing/eliminating competition.

(iv) Foreign investment, sometimes has an unfavorable effect on the balance of payment of a country because the draining of foreign exchange by way of royalty, dividends, etc. is greater than the investment by the foreign comers.

(v) Sometimes India has not been able to resist the pressure of these donor countries who have been exerting on the economic policies of India. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Portfolio Investment

Under the situation of portfolio investment investor only subscribes to the shares, bonds, debentures, or other securities abroad. In this investment, the investor gets a return on his investment but he has no control over the use of the capital. In India mainly there are routes for such investments:

(i) Foreign Institutional Investors (FIIS) like mutual funds.

(ii) Global Depository Receipts (GDRS).

(iii) Foreign Currency Convertible Bonds (FCCBs).

GDRs and FCCBs are instruments issued by Indian companies in the European markets for mobilizing foreign capital by facilitating portfolio investment by foreigners in Indian securities. (BCom Foreign Investment and Collaborations in India Notes Study Material)

FOREIGN COLLABORATION

Foreign collaboration is such an alliance of domestic (native) and abroad (non-native) entities like individuals, firms, companies, organizations, governments, etc., that come together with an intention to finalize a contract on some tasks or jobs, or projects.

In general, the definition of foreign collaboration can be stated as follows:

“Foreign collaboration is an alliance incorporated to carry on the agreed task collectively with the participation (role) of resident and non-resident entities.”

In finance, the definition of foreign collaboration can be specified as follows:

“Foreign collaboration includes ongoing business activities of sharing information related to financing, technology, engineering, management consultancy, logistics, marketing, etc., which are generally, offered by a non-resident (foreign) entity to a resident (domestic or native) entity in exchange of cheap skilled and semi-skilled labor, inexpensive high-quality raw-materials, low-cost hi-tech infrastructure facilities, strategic (favorable) geographic location, and so on, with an approval (permission) from a governmental authority like the ministry of finance of a resident country.”

The following important points convey the meaning of foreign collaboration:

(i) Foreign collaboration is mutual cooperation between one or more resident and non-resident entities. In other words, for example, an alliance (a union or an association) between an abroad-based company and a domestic company forms a foreign collaboration.

(ii) It is a strategic alliance between one or more resident and non-resident entities.

(iii) Only two or more resident (native) entities cannot make a foreign collaboration possible. For its formation and as per the above definitions, it is mandatory that one or more non-resident (foreign) entities must always collaborate with one or more resident (domestic) entities. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(iv) Before starting a foreign collaboration, both entities, for example, a resident and non-resident company must always seek approval (permission) from the governmental authority of the domestic country.

(v) During an ongoing process of seeking permission, the collaborating entities prepare a preliminary agreement.

(vi) According to this preliminary agreement, for example, the non-resident company agrees to provide finance, technology, machinery, know-how, management consultancy, technical experts, and so on. On the other hand, the resident company promises to supply cheap labor, low-cost and quality raw materials, ample land for setting up factories, etc.

(vii) After obtaining the necessary permission, individual representatives of a resident and non-resident entity sign this preliminary agreement. A signature acts as a written acceptance of each other’s expectations, terms, and conditions. After signatures are exchanged, a contract is executed, and foreign collaboration gets established. The contract is a legally enforceable agreement. All contracts are agreements, but all agreements need not necessarily be a contract. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(viii) After, establishing foreign collaboration, the resident and non-resident entity start a business together in the domestic country.

(ix) Collaborating entities share their profits as per the profit-sharing ratio mentioned in their executed contract.

(x) The tenure (term) of the foreign collaboration is specified in the written contract.

Examples of Foreign Collaboration: Some prominent examples of foreign collaboration are depicted below:

The examples of foreign collaboration between an Indian and abroad entities are:

(i) ICICI Lombard GIC (General Insurance Company) Limited is a financial foreign collaboration between ICICI Bank Ltd., India, and Fairfax Financial Holdings Ltd., Canada. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(ii) ING Vysya Bank Ltd. is a financial foreign collaboration formed between ING Group from Netherlands and Vysya Bank from India.

(iii) Tata DOCOMO is a technical foreign collaboration between Tata Teleservices from India and NTT Docomo, Inc. from Japan.

(iv) Sikkim Manipal University (SMU) from India runs some academic programs through an educational foreign collaboration with abroad universities like Liverpool School of Tropical Medicine from the UK, Loma Linda, and Louisiana State Universities from the USA, Kuopio University from Finland, and the University of Adelaide from Australia.

Features of Foreign Collaboration

The major features of foreign collaboration for the growth of the business are as follows:

1. Agreement: Foreign collaboration is an agreement or contract between two or more companies from different countries for mutual benefit. The collaborating agreement can be between:

(a) Domestic and foreign private firm.

(b) Domestic and foreign public firms.

(c) Domestic public and foreign private firms.

(d) Domestic government and a foreign government.

2. Government Consent: Foreign collaboration is now recognized as an important driver of growth in the country. Foreign collaboration requires Government approval, as the collaboration involves a partnership between two countries. Some legal formalities are to be fulfilled to enter into a contract. That requires government permission. (BCom Foreign Investment and Collaborations in India Notes Study Material)
3. World Integration: Globalization means the integration of the world economy, where the world becomes a single market. Foreign collaboration allows different countries to enter into partnerships and reap the benefit. It helps both developed and developing countries to come together to achieve common objectives and maintain international peace.
4. Growth of the Industrial Sector: Foreign collaboration leads to the growth of industries of the countries coming into contact. Foreign collaboration develops industries and increases employment opportunities, thereby improving the working conditions of the masses. Foreign collaboration encourages domestic and international entrepreneurs to invest in business activities and accelerates industrial growth.
5. Gives Legal Identity: Foreign collaboration is a legal entity between two or more parties for a particular purpose or venture.
6. Helps to Meet our Requirements: As no country in the world is self-sufficient in itself. All countries need to be dependent on each other to meet the requirements. Interdependence among countries is a common phenomenon these days. Foreign collaboration is very useful in meeting the deficiencies resources and in getting advanced technology at a competitive price.

Objectives of Foreign Collaboration

The objectives of the foreign collaboration are listed in the following chart:

1. Improve the financial growth of the collaborating entities.
2. Occupy a major market share for the collaborating entities.
3. Reduce the higher operating cost of a non-resident entity.
4. Make optimum and effective use of resources in the resident entity’s country.
5. Generate employment in the resident entity’s country.

Types of Foreign Collaboration

As no country is self-sufficient in itself all countries are dependent on each other to meet the requirements. Interdependence among countries is a common phenomenon these days. Foreign collaboration is very useful in meeting the deficiencies of resources and in getting advanced technology at a competitive price. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Foreign collaboration in the Indian market is increasing at a great speed due to the effects of liberalization; privatization and globalization. Indian companies are interested in foreign counterparts because of gaining technical and market skills from the foreign market.

The most important types of collaboration available for the growth of Indian Companies are as follow:

1. Technical Collaboration: Technical collaboration is a contract whereby the developed country agrees to provide technical know-how, sophisticated machinery, and any kind of technical assistance to the developing country, Technical collaboration enables to undertake of research and development activities and innovation. (BCom Foreign Investment and Collaborations in India Notes Study Material)
2. Marketing Collaboration: Marketing collaboration is the agreement where the foreign collaborator agrees to market the products of the domestic company in the international market. Marketing collaboration creates value for customers and builds strong customer relationships. Marketing collaboration promotes export. (BCom Foreign Investment and Collaborations in India Notes Study Material)
3. Financial Collaboration: When the foreign contribution is in the form of capital participation, that contract is known as foreign collaboration. When the foreign company agrees to provide capital or financial assistance to the domestic company that collaboration is known as financial collaboration. (BCom Foreign Investment and Collaborations in India Notes Study Material)
4. Consultancy Collaboration: A Consultant is a professional who provides advice in a particular area of expertise such as management, accountancy, human resource, marketing, finance, etc. Consultancy collaboration is the agreement between the foreign and the domestic company where the company agrees to provide managerial skills and expertise to the domestic company. This type of collaboration bridges the information gap. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(a) Joint Venture: Joint venture is a legal entity formed between two or more parties to undertake an economic activity together. In a joint venture, companies agree to share capital, technology, human resources, risks, and rewards in a formation of a new entity under shared control. (BCom Foreign Investment and Collaborations in India Notes Study Material)

A joint venture takes place when two parties come together to undertake e project. It is a temporary partnership between the two organizations for achieving common goals. Once the goal is achieved, the joint venture comes to an end.

(b) Amalgamation: Amalgamation means bringing two or more businesses into a single entity. In other words, amalgamation means blending together two or more undertakings into one undertaking. In this type of growth strategy two or more companies come together to form a new company. In amalgamation, companies lose their individual identity.

For example, one company called ABC. Another company is called BCD. Now, ABC is running a loss, and BCD also running a loss, so these two companies agreed to Amalgamate and a new company ABCD is formed.

(c) Merger: A merger is a combination of two companies into one company where one company loses its identity. It is an arrangement whereby the assets of two companies become vested under the control of one company.

A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. The process of mergers and acquisitions has gained substantial importance in today’s corporate world. For example, Tata Steel acquired Corus Group (BCom Foreign Investment and Collaborations in India Notes Study Material)

(d) Takeover/Acquisition: Acquisition is a growth strategy in which a strong company acquires all the assets and liabilities of another company. When one company takes over another company and clearly established itself as the new owner, the purchase is called an acquisition. (BCom Foreign Investment and Collaborations in India Notes Study Material)

A takeover is a form of acquisition. There are two types of acquisitions: Friendly acquisitions and Hostile acquisitions. In a friendly acquisition, the target company is formally informed about the acquisition and there is an agreement on corporate management and finance control. In a hostile acquisition, the owner loses their ownership and control of the company against their wishes.

FOREIGN COLLABORATION AND FOREIGN INVESTMENT IN INDIA

During the early phase of the planning period, our national policy did not recognize the need for foreign capital but decided to permit it to a dominant position. Consequently, foreign collaborations had to keep their equity within the ceiling of 49% and allow the Indian counterpart a majority stake. Moreover, foreign collaborations were to be permitted in priority areas, more especially those in which we had not developed our capabilities. But in an overall sense, our policy towards foreign collaboration remained restrictive and selective.

In January 1983, The Technology Policy Statement (TPS) has announced and the government relaxed its policy toward foreign collaborations. The objective of the policy was to acquire imported technology and ensure that it was of the latest type appropriate to the requirements and resources of the country. Under this policy, a number of policy measures were announced towards liberalizing the licensing provisions:

(i) All but 26 industries were exempted from licensing in the case of non-MRTP and non-FERA companies.

(ii) Private sector was allowed to participate in the manufacture of telecommunication equipment.

(iii) A number of electronic items were exempted from MRTP Act.

(iv) Foreign companies are allowed to set up industries in backward areas.

(v) A number of new items were added to the list of industries allowed to be set up by FERA and MRTP units.

(vi) Broad banding of license for a number of industries was allowed; and these technical collaborations were allowed on financial criteria i.e., royalty of lumpsum payment or a combination of both. (BCom Foreign Investment and Collaborations in India Notes Study Material)

These relaxations resulted in a larger inflow of FDI and consequently, the number of approvals during the decade (1981-90) reached a record figure of 7,436 involving a total investment of 3 1,274 crores. (BCom Foreign Investment and Collaborations in India Notes Study Material)

Since the announcement of the New Industrial Policy (1991), there has been an acceleration in the flow of foreign capital in India. As per data provided by the Government of India, during 1991-92 to 2012-13, total foreign investment flows were of the order of $ 456.9 billion, out of which about $ 270.2 billion (59.1 percent) were in the form of FDI and the remainings $ 186.7 billion (40.9 percent) were the form of portfolio investment. This clearly shows that the preference of foreign firms was more in favor of portfolio investment.

Moreover, out of the total direct foreign investment of the order of $ 270.2 billion, nearly 45 percent ($ 120.7 billion) was contributed by non-resident Indians. Thus, the net contribution of foreign firms in direct investment was about 55 percent of total foreign investment flows.

THE IMPACT OF FOREIGN INVESTMENT ON INDIA’S ECONOMIC DEVELOPMENT

Foreign investment contributes to the productive capacity of the country through additional supplies of foreign exchange and technology transfer. It helps to release domestic resources for capital formation and creates growth potential. There are some points which are to be discussed as the significance of foreign investment in India as below:

(i) Helps to Raise Level of Investment: Foreign investment helps to raise the level of investment. With this increase in the rate of investment, the foreign exchange outlay had also correspondingly increased which was beyond the resources of the country. In 2008-09 (January) foreign exchange reserve stood at 293 billion. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(ii) Stability in Food Prices and Import Raw Materials: Of the total aid utilized, a significant proportion represented aid in kind of commodity, the bulk of which has been utilized to import food grains which played a significant role in stabilizing foodgrains prices. A part of the aid has been used to import raw materials and spare parts for production activities in the country.

(iii) Enlargement of Irrigation and Power Potential: External assistance has contributed to the productive capacity of agriculture in a big way by expanding the irrigation potential of the country. It has helped to modernize the technique of production in the field of dairy and fishery, power generation, poultry farming, harvesting of water, etc.

(iv) Improved Transport Facility: It facilitates improved transport and communication facility through renovation and modernization of transport means like Railways, Roadways, etc. (BCom Foreign Investment and Collaborations in India Notes Study Material)

(v) Helps to Build up Steel and Heavy Industries: Foreign investment has played an important role to establish a basic line of production industries such as steel, heavy machinery, etc. The necessary aid was received from West Germany, U.S.S.R, and the U.K.

(vi) Helps to Develop Petrochemicals and Electronics Industry: India has tried to develop a modernized industrial structure for petrochemicals and electronic industries. But this cannot be accomplished without the help of foreign aid and the Government is now making all-out efforts to modernize the industrial structure by entering into foreign collaborations.

(vii) Aid Used to Enlarge Technical Resources: External assistance has also helped to enlarge technical resources through the provision of expert services, training facilities for Indian personnel, the establishment of educational research and training institutions in the country, etc. In this tune, India has developed its technical power considerably and it is possible to export technical manpower to other nations in the world. (BCom Foreign Investment and Collaborations in India Notes Study Material)

BCom Foreign Investment and Collaborations in India Notes Study Material

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