Academic journal article Review of Management

Should India Look at Outward FDI?

Academic journal article Review of Management

Should India Look at Outward FDI?

Article excerpt

"I do not want my doors closed and windows stuffed. I want the breezes of all lands to blow through my house. But I refuse to be blown off my feet by any of them." - Mahatma Gandhi

Ease of Doing Business

World Bank has come out with a report "Doing Business 2015" which compares business regulations for domestic firms in 189 economies. The rankings are given on the following parameters - Starting a business, dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Trading across Borders, Enforcing Contracts and Resolving Insolvency. The country rankings are mentioned in Exhibit 1. The ranking for India on the mentioned parameters is depicted in Exhibit 2. Out of the BRICS countries, India has the highest rank at 142nd. On all the parameters other than getting credit and protecting minority investors, India's rank is above 100th.

Introduction to FDI

Globalization has opened doors for Indian Corporate for non-discriminatory and unrestricted multilateral trade with other countries. Now countries can engage in trade across borders to boost their economies. Foreign Direct Investment (FDI) means a financial investment giving rise to significant and lasting degree of ownership and control on the management of the resident firm by an entity based in another country.

An economic theory known as "Eclectic Paradigm" and also as the OLI Model states that transactions (international) will take place when an enterprise has three advantages - the Ownership advantage, the Location advantage and the Internalization advantage. The Internationalization theory was propagated by Dunning in 1979 wherein he states that if organizations benefit (by exploitation of their own core competencies) they would prefer producing on their own rather than in association with someone else (a joint venture or through licensing).

The Foreign Direct Investment Confidence Index developed by A T Kearney, ranks India on 11th rank with a score of 1.79 out of 2.50 points. The top 10 countries are United States, China, United Kingdom, Canada, Germany, Brazil, Japan, France, Mexico and Australia. India has dropped below top 10 for the first time since 2002. India's "Make in India" initiative which was launched in September 2014 aims to improve the ease of doing business in India, and remove or relax foreign equity caps in several areas (AT Kearney). The liberalization and Globalization Policy started in 1991 led to investments from other countries to India and also from India to other countries. The objective of the Government of India is to attract Foreign Direct Investment in order to boost domestic business, technology and capital for accelerated economic growth.

Types of Foreign Investment

Foreign Investment can be in two forms, Foreign Direct Investment which a long term and lasting interest in the business of the resident affiliate and Portfolio Investment which is a passive short term financial investment in the securities (public stocks and bonds) of an entity based in another country to earn capital gains.

The investment can be Organic by expanding operations of an existing business in the other country or Inorganic by buying an existing enterprise. In the "Green Field Investment" option, the parent firm opens a new venture in a foreign country by incorporating facilities from ground zero. Not only new facilities are set up but new job opportunities are also created. As against the Green Field Investment option, the other is "Acquisition" where the parent firm acquires a foreign enterprise. Both the options have their advantages and disadvantages. The business goals, time horizon, size of investment, barriers to entry in a foreign country, financing options, availability of similar businesses in a foreign country are some of the factors that will decide whether companies will choose one option over other.

FDI - Stock and Flow

FDI can be tracked by taking into account Stock Positions and Flow Positions. …

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