fdi in india and its growth linkages - Department Of Industrial Policy ...

Chapter 2: FDI Scenario in India:
Trends and Policies
2.1 Introduction
Foreign direct investment (FDI) refers to cross-border investment made by a resident in one economy (the direct
investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is
resident in a country other than that of the direct investor (OECD 2008). The motivation of the direct investor is
strategic “lasting interest” in the management of the direct investment enterprise with at least 10 per cent voting power
in decision making.
The host country aspires to receive FDI inflows because of the potential benefits, the most established benefit being that
FDI supplements the domestic savings of a nation. Other payoffs include access to superior international technologies,
exposure to better management and accounting practices, and improved corporate governance. FDI is likely to expand
and/or diversify the production capacity of the recipient country which, in turn, is expected to enhance trade. 1 On the
other side, foreign investors are motivated by profits and access to natural resources. Therefore, large and growing
domestic markets are likely to receive more FDI. Countries with abundant natural resources such as mines, oil reserves
and manpower appear prominently on the investment maps of foreign investors.
While the objectives of FDI can be different from the home and the host country’s perspectives, one of the major aims
of attracting FDI is overall development of the recipient country keeping some specific strategy in view. This can be
done by achieving higher FDI inflows (China, Malaysia and Singapore), maximising technology spill-over into the
domestic economy (South Korea and Taiwan), or imposing local content requirements (East and South-East Asia).
The year 2007 posted 30 per cent growth in global FDI inflows, which touched $1,833 billion, i.e., about $400 billion
above the previous record in the year 2000 (Figure 2.1). About two-third of the inflows ($1,248 billion) was received
by developed economies, while developing economies received about $500 billion FDI inflows – a 21 per cent increase
over the year 2006. $500 billion FDI inflows into developing countries included about $13 billion for the least
developed countries (LDCs). The transition economies of South-East Europe and the Commonwealth of
Independent States (CIS) received about $86 billion worth of FDI. India received $23 billion of FDI inflows in 2007,
up from $20 billion in 2006.
India has inward FDI stock worth $76.2 billion (compared with $327.1 billion in China) and outward FDI stock of
$29.4 billion (compared with $95.8 billion of China). The FDI inflows received by India accounted for 3 per cent of
gross fixed capital formation (GFCF) in 2005, 6.6 per cent in 2006 and 5.8 per cent in 2007. The corresponding figures
for China are 7.7, 6.4 and 5.9 per cent, respectively. Thus, the share of FDI in GFCF for India in 2007 was almost the
same as that of China. The share of inward FDI stock of India was 0.5 per cent of GDP in 1990, 3.7 per cent in 2000
and 6.7 per cent in 2007. The corresponding figures are much higher for China, viz., 5.1, 16.2 and 10.1 per cent,
respectively. The sales of India’s mergers and acquisitions (M&A) reached $5,580 million in 2007 and stood at $2,254
million in January–June 2008. Similarly, India’s purchases of M&As reached $30,414 million 2007 and stood at $8556
million in January–June 2008.
1. Exports are expected to increase if FDI occurs in an industry with high export potential, while imports would increase if the foreign investor imports
inputs for domestic production of goods.
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