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Contents

1 History 2 Types 3 Methods 4 Global Foreign Direct Investment 5 Foreign direct investment in the United States 6 Foreign direct investment in China 7 Foreign direct investment in India 8 Foreign direct investment and the developing world 9 References 10 External links

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Introduction

Foreign Direct Investment (FDI) from the viewpoint of the Balance of

Payments and the International Investment Position (IIP) share a same

conceptual framework given by the International Monetary Fund (IMF). The

Balance of Payments is a statistical statement that systematically summarises,

for a specific time span, the economic transactions of an economy with

the rest of the world (transactions between residents and non-residents) and

the IIP compiles for a specific date, such as the end of a year, the value of the

stock of each financial asset and liability as defined in the standardcomponents of the Balance of Payments.

We will not deal in this note with other relevant statistical concepts for

operations overseas, particularly for financial institutions, such as exposure

(foreign claims, international claims, etc.), which belong to the realm of the BIS

statistics.3

Sections 2, 3 and 4 give an overview of FDI definitions, concepts and

recommendations adopted by the IMFs Balance of Payments Manual (5th

Edition, 1993) and by the OECDs Benchmark Definition of Foreign Direct

Investment (3rd Edition, 1996). Both provide operational guidance and

detailed international standards for recording flows and stocks related to FDI.

Section 5 gives a quick overview of trends in FDI inward flows and stocks for

the period 1980-2001. Section 6 reports on onward FDI flows for Spain,

with particular attention to the financial sector. Finally a brief description of

the main available sources of FDI is found in an annex.

I. Introduction

i. Section 39 of the Federal Deposit Insurance Act1 (FDI Act) requires eachFederal banking agency (collectively, the agencies) to establish certainsafety and soundness standards by regulation or by guidelines for all insureddepository institutions. Under section 39, the agencies must establish threetypes of standards: (1) Operational and managerial standards; (2)

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compensation standards; and (3) such standards relating to asset quality,earnings, and stock valuation as they determine to be appropriate.

ii. Section 39(a) requires the agencies to establish operational andmanagerial standards relating to: (1) Internal controls, information systemsand internal audit systems, in accordance with section 36 of the FDI Act (12U.S.C. 1831m); (2) loan documentation; (3) credit underwriting; (4) interestrate exposure; (5) asset growth; and (6) compensation, fees, and benefits, inaccordance with subsection (c) of section 39. Section 39(b) requires theagencies to establish standards relating to asset quality, earnings, and stockvaluation that the agencies determine to be appropriate.

iii. Section 39(c) requires the agencies to establish standards prohibiting asan unsafe and unsound practice any compensatory arrangement that would

provide any executive officer, employee, director, or principal shareholderof the institution with excessive compensation, fees or benefits and anycompensatory arrangement that could lead to material financial loss to aninstitution. Section 39(c) also requires that the agencies establish standardsthat specify when compensation is excessive.

iv. If an agency determines that an institution fails to meet any standardestablished by guidelines under subsection (a) or (b) of section 39, theagency may require the institution to submit to the agency an acceptable

plan to achieve compliance with the standard. In the event that an institution

fails to submit an acceptable plan within the time allowed by the agency orfails in any material respect to implement an accepted plan, the agency must,

by order, require the institution to correct the deficiency. The agency may,and in some cases must, take other supervisory actions until the deficiencyhas been corrected.

v. The agencies have adopted amendments to their rules and regulations toestablish deadlines for submission and review of compliance plans.2

vi. The following Guidelines set out the safety and soundness standards thatthe agencies use to identify and address problems at insured depositoryinstitutions before capital becomes impaired. The agencies believe that thestandards adopted in these Guidelines serve this end without dictating howinstitutions must be managed and operated. These standards are designed toidentify potential safety and soundness concerns and ensure that action is

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taken to address those concerns before they pose a risk to the DepositInsurance Fund.

A. Preservation of Existing Authority

Neither section 39 nor these Guidelines in any way limits the authority ofthe agencies to address unsafe or unsound practices, violations of law,unsafe or unsound conditions, or other practices. Action under section 39and these Guidelines may be taken independently of, in conjunction with,or in addition to any other enforcement action available to the agencies.

Nothing in these Guidelines limits the authority of the FDIC pursuant tosection 38(i)(2)(F) of the FDI Act.

.

Definitions

1. In general. For purposes of these Guidelines, except as modified in theGuidelines or unless the context otherwise requires, the terms used have thesame meanings as set forth in sections 3 and 39 of the FDI Act (12 U.S.C.1813 and 1831p--1).

2. Board of directors, in the case of a state-licensed insured branch of aforeign bank and in the case of a federal branch of a foreign bank, means the

managing official in charge of the insured foreign branch.

3. Compensation means all direct and indirect payments or benefits, bothcash and non-cash, granted to or for the benefit of any executive officer,employee, director, or principal shareholder, including but not limited to

payments or benefits derived from an employment contract, compensation orbenefit agreement, fee arrangement, perquisite, stock option plan,postemployment benefit, or other compensatory arrangement.

4. Directorshall have the meaning described in 12 CFR 215.2(c).

5. Executive officershall have the meaning described in 12 CFR 215.2(d).

6.Principal shareholdershall have the meaning described in 12 CFR 215.2(l+2p).

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Operational and Managerial Standards

A.Internal controls and information systems.An institution should haveinternal controls and information systems that are appropriate to the size of

the institution and the nature, scope and risk of its activities and that providefor:

1. An organizational structure that establishes clear lines of authority andresponsibility for monitoring adherence to established policies;

2. Effective risk assessment;

3. Timely and accurate financial, operational and regulatory reports;

4. Adequate procedures to safeguard and manage assets; and

5. Compliance with applicable laws and regulations.

B.Internal audit system.An institution should have an internal auditsystem that is appropriate to the size of the institution and the nature andscope of its activities and that provides for:

1. Adequate monitoring of the system of internal controls through aninternal audit function. For an institution whose size, complexity or scope of

operations does not warrant a full scale internal audit function, a system ofindependent reviews of key internal controls may be used;

2. Independence and objectivity;

3. Qualified persons;

4. Adequate testing and review of information systems;

5. Adequate documentation of tests and findings and any corrective actions;

6. Verification and review of management actions to address materialweaknesses; and

7. Review by the institution's audit committee or board of directors of theeffectiveness of the internal audit systems.

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C. Loan documentation.An institution should establish and maintain loandocumentation practices that:

1. Enable the institution to make an informed lending decision and to assessrisk, as necessary, on an ongoing basis;

2. Identify the purpose of a loan and the source of repayment, and assess theability of the borrower to repay the indebtedness in a timely manner;

3. Ensure that any claim against a borrower is legally enforceable;

4. Demonstrate appropriate administration and monitoring of a loan; and

5. Take account of the size and complexity of a loan.

D. Credit underwriting.An institution should establish and maintainprudent credit underwriting practices that:

1. Are commensurate with the types of loans the institution will make andconsider the terms and conditions under which they will be made;

2. Consider the nature of the markets in which loans will be made;

3. Provide for consideration, prior to credit commitment, of the borrower'soverall financial condition and resources, the financial responsibility of anyguarantor, the nature and value of any underlying collateral, and the

borrower's character and willingness to repay as agreed;

4. Establish a system of independent, ongoing credit review and appropriatecommunication to management and to the board of directors;

5. Take adequate account of concentration of credit risk; and

6. Are appropriate to the size of the institution and the nature and scope ofits activities.

E. Interest rate exposure.An institution should:

1. Manage interest rate risk in a manner that is appropriate to the size of theinstitution and the complexity of its assets and liabilities; and

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2. Provide for periodic reporting to management and the board of directorsregarding interest rate risk with adequate information for management andthe board of directors to assess the level of risk.

F.Asset growth.An institution's asset growth should be prudent andconsider:

1. The source, volatility and use of the funds that support asset growth;

2. Any increase in credit risk or interest rate risk as a result of growth; and

3. The effect of growth on the institution's capital.

G. Asset quality.An insured depository institution should establish andmaintain a system that is commensurate with the institution's size and thenature and scope of its operations to identify problem assets and preventdeterioration in those assets. The institution should:

1. Conduct periodic asset quality reviews to identify problem assets;

2. Estimate the inherent losses in those assets and establish reserves that aresufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset concentrations; and

6. Provide periodic asset reports with adequate information for managementand the board of directors to assess the level of asset risk.

H. Earnings.An insured depository institution should establish andmaintain a system that is commensurate with the institution's size and thenature and scope of its operations to evaluate and monitor earnings andensure that earnings are sufficient to maintain adequate capital and reserves.The institution should:

1. Compare recent earnings trends relative to equity, assets, or othercommonly used benchmarks to the institution's historical results and those ofits peers;

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2. Evaluate the adequacy of earnings given the size, complexity, and riskprofile of the institution's assets and operations;

3. Assess the source, volatility, and sustainability of earnings, including theeffect of nonrecurring or extraordinary income or expense;

4. Take steps to ensure that earnings are sufficient to maintain adequatecapital and reserves after considering the institution's asset quality andgrowth rate; and

5. Provide periodic earnings reports with adequate information formanagement and the board of directors to assess earnings performance.

I. Compensation, fees and benefits.An institution should maintainsafeguards to prevent the payment of compensation, fees, and benefits thatare excessive or that could lead to material financial loss to the institution.

I. Sectors prohibited for FDI

i. Retail Trading (except single brand product retailing)ii. Atomic Energy

iii. Lottery Businessiv. Gambling and Bettingv. Business of chit fundvi. Nidhi Companyvii. Trading in Transferable Development Rights (TDRs).viii. Activity/sector not opened to private sector investment

II. Sector-specific policy for FDI:

In the following sectors/activities, FDI is allowed up-to the limit indicated below subjectto other conditions as indicated.

Sector/ActivityFDI Cap /EquityEntry

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RouteOther conditions

Foreign Direct Investment (FDI)

Foreign Direct Investment, or FDI, is a measure of

foreign ownership of domestic productive assets such

as factories, land and organizations. Foreign direct

investments have become the major economic driver of

globalization, accounting for over had of all cross-

border investments.

The most profound effect has been seen in developing countries, where

yearly foreign direct investment flows have increased from an average of less

than $10 billion in the 1970s to a yearly average of less than $20 billion the

1980s. From 1998 to 1999 itself, FDI grew from $179 billion to $208 billion and

now comprise a large portion of global FDI. According to UNCTAD, spurred on

by mergers and acquisitions and the internationalization of production in a range

of industries, inward FDI for developing countries rose from $481 billion in

1998 to $636 billion in 2006.

And China is at the forefront ofFDI growth, followed by Russia, Brazil and

Mexico.

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Image: The Economist

FDIs do not only provide an foreign capital and funds, but also provides domestic

countries with an exchange of skill sets, information and expertise, job

opportunities and improved productivity levels.

The "Asian Tiger" economies such as China, South Korea, Singapore and the

Philippines benefited tremendously and experienced high levels of economic

growth at the onset of foreign direct investment into their economies. Given the

high growth rates and changes to global investment patterns, the definition to FDI

has evolved to include foreign mergers and acquisitions, investments in joint

ventures or strategic alliances with local enterprises.

With the advent and growth of the internet, many traditional cases of

FDI which required huge amount of capital and physical investments are

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slowly becoming obsolete, especially for developed countries. The rise of

small internet startups that require less research and development

investment and the shift towards knowledge based economies, where the

emphasis is placed on human capital rather than manual labour, has altered

the playing field for FDIs.

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History :

FDI is a measure offoreign ownership of productive assets, such asfactories, mines and land. Increasing foreign investment can be usedas one measure of growing economic globalization. The figure belowshows net inflows of foreign direct investment in the United States.The largest flows of foreign investment occur between theindustrialized countries (North America, Western Europe and Japan).But flows to non-industrialized countries are increasing sharply.

US International Direct Investment Flows:

Period FDI Inflow FDI Outflow Net Inflow

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn

1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn

1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn

1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn

2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn

Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

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Types

A foreign direct investor may be classified in any sector of the economy andcould be any one of the following :

an individual;

a group of related individuals; an incorporated orunincorporated entity; a public company orprivate company; a group of related enterprises; a government body; an estate (law), trust or other social institution; or any combination of the above.

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Foreign Direct investment classification, components and

sectorian breakdown

The classification of direct investment is based firstly on the direction of

investment both for assets or liabilities; secondly, on the investmentinstrument used (shares, loans, etc.); and thirdly on the sector breakdown.As for the direction, it can be looked at it from the home and the host

perspectives. From the home one, financing of any type extended by theresident parent company to its non- resident affiliated would be included asdirect investment abroad. By contrast, financing of any type extended bynon-resident subsidiaries, associates or branches to their resident parentcompany are classified as a decrease in direct investment abroad, rather thanas a foreign direct investment. From the host one, the financing extended bynon-resident parent companies to their resident subsidiaries, associates or

branches would be recorded, in the country of residence of the affiliatedcompanies, under foreign direct investment, and the financing extended byresident subsidiaries, associates and branches to their non-resident parentcompany would be classified as a decrease in foreign direct investmentrather than as a direct investment abroad. This directional principledoes not apply if the parent company and its subsidiaries, associates or

branches have cross-holdings in each others share capital of more than10%.

As for the instruments, direct investment capital comprises the capitalprovided (either directly or through other related enterprises) by a directinvestor to a direct investment enterprise and the capital received by a directinvestor from a direct investment enterprise.

Direct investment capital transactions are made up of three basic

components:

(i) Equity capital:

comprising equity in branches, all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and are included underother direct investment capital) and other capital contributions such as provisions ofmachinery, etc.

(ii) Reinvested earnings:

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consisting of the direct investors share (in proportion to direct equityparticipation) of earnings not distributed, as dividends by subsidiaries or associatesand earnings of branches not remitted to the direct investor. If such earnings are notidentified, all branches earnings are considered, by convention, to be distributed.

(iii) Other direct investment capital (or inter company debt transactions):covering the borrowing and lending of funds, including debt securities and trade credits,between direct investors and direct investment enterprises and between two directinvestment enterprises that share the same direct investor. As it has been mentionedbefore, deposits and loans between affiliated deposit institutions are recorded as otherinvestment rather than as direct investment.

Finally, there are several sector breakdowns of FDI flows and of IIP. The IMF haschosen a breakdown by four institutional sectors (see table 1 below), defined according

to the sector to which the resident party belongs.

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Methods

The foreign direct investor may acquire voting power of an enterprise in an economythrough any of the following methods:

by incorporating a wholly owned subsidiary orcompany by acquiring shares in an associated enterprise

through a mergeror an acquisition of an unrelated enterprise

participating in an equityjoint venturewith another investor or enterprise

Foreign direct investment incentives may take the following forms:

low corporate tax and income taxrates

tax holidays

other types of tax concessions

preferential tariffs

special economic zones

EPZ - Export Processing Zones

Bonded Warehouses

Maquiladoras

investment financial subsidies

soft loan or loan guarantees

free land or land subsidies

relocation & expatriation subsidies

job training & employment subsidies

infrastructure subsidies

R&D support

derogation from regulations (usually for very large projects)

Global Foreign Direct Investment :

UNCTAD said that there was no significant growth of Global FDI in2010. In 2010 was $1,122 billion and in 2009 was $1.114 billion. The

figures was 25 percent below the pre-crisis average between 2005 to

2007.[4]

http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/UNCTADhttp://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-3%23cite_note-3http://en.wikipedia.org/wiki/Subsidiaryhttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Mergerhttp://en.wikipedia.org/wiki/Takeoverhttp://en.wikipedia.org/wiki/Joint_venturehttp://en.wikipedia.org/wiki/Corporate_taxhttp://en.wikipedia.org/wiki/Income_taxhttp://en.wikipedia.org/wiki/Tax_holidayhttp://en.wikipedia.org/wiki/Tariffshttp://en.wikipedia.org/wiki/Special_economic_zonehttp://en.wikipedia.org/wiki/EPZhttp://en.wikipedia.org/wiki/Bonded_warehousehttp://en.wikipedia.org/wiki/Maquiladorahttp://en.wikipedia.org/wiki/Soft_loanhttp://en.wikipedia.org/wiki/Guaranteeshttp://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/UNCTADhttp://en.wikipedia.org/wiki/Foreign_direct_investment#cite_note-3%23cite_note-3

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Foreign direct investment in the United States

The United States is the worlds largest recipient of FDI. More than $325.3billion in FDI flowed into the United States in 2008, which is a 37 percentincrease from 2007. The $2.1 trillion stock of FDI in the United States at theend of 2008 is the equivalent of approximately 16 percent of U.S. grossdomestic product (GDP).55

Benefits of FDI in America: In the last 6 years, over 4000 new projects and630,000 new jobs have been created by foreign companies, resulting in closeto $314 billion in investment Unarguably, US affiliates of foreign companieshave a history of paying higher wages than US corporations Foreigncompanies have in the past supported an annual US payroll of $364 billionwith an average annual compensation of $68,000 per employee IncreasedUS exports through the use of multinational distribution networks. FDI hasresulted in 30% of jobs for Americans in the manufacturing sector, which

accounts for 12% of all manufacturing jobs in the US.

Affiliates offoreign corporations spent more than $34 billion on researchand development in 2006 and continue to support many national projects.Inward FDI has led to higher productivity through increased capital, whichin turn has led to high living standards.

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Foreign direct investment in China

Starting from abaseline of less than $19 billion just 20 years ago, FDI inChina has grown to over $300 billion in the first 10 years. China hascontinued its massive growth and is the leader among all developing nationsin terms of FDI Even though there was a slight dip in FDI in 2009 as a resultof the global slowdown, 2010 has again seen investments increase

Foreign direct investment in India

Starting from abaseline of less than USD 1 billion in 1990, a recentUNCTAD survey projected India as the second most important FDIdestination (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 andhardware. Mauritius, Singapore, the US and the UK were among the leadingsources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by five percent from USD 27.33 billion in the previous fiscal. Foreign directinvestment in August dipped by about 60 per cent to aprox. USD 34 billion,the lowest in 2010 fiscal, industry department data released showed. [6]In thefirst two months of 2010-11 fiscal,FDI inflow into India was at an all-timehigh of $ 7.78 billions up 77% from $ 4.4 billions during the corresponding

period in the previous year.

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Foreign direct investment and the developing world

FDI provides an inflow of foreign capital and funds, in addition to anincrease in the transfer of skills, technology, and job opportunities Many ofthe Four Asian Tigers benefited from investment abroad A recent meta-analysis of the effects of foreign direct investment on local firms indeveloping and transition countries suggest that foreign investment robustly

increases local productivity growth. The Commitment to DevelopmentIndex ranks the "development-friendliness" of rich country investmentpolicies.

http://en.wikipedia.org/wiki/Four_Asian_Tigershttp://en.wikipedia.org/wiki/Meta-analysishttp://en.wikipedia.org/wiki/Meta-analysishttp://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttp://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttp://en.wikipedia.org/wiki/Four_Asian_Tigershttp://en.wikipedia.org/wiki/Meta-analysishttp://en.wikipedia.org/wiki/Meta-analysishttp://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttp://en.wikipedia.org/wiki/Commitment_to_Development_Index

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References:

Human body says global foreign direct investment inflows remain stagnant in 2010,

FDI Markets Newswire:Martin Bencher (Scandinavia) (Denmark) is investing in United States in the

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could follow the country's recent forays into democracy, which have included the release of campaigner

Aunt San SUV Key and the formation of a new constitution and parliament

http://www.fdiintelligence.com/fDi-Tools/fDi-Marketshttp://www.fdiintelligence.com/fDi-Tools/fDi-Marketshttp://www.fdiintelligence.com/fDi-Tools/fDi-Marketshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Political-chaos-fails-to-shake-Thailand-s-business-prospectshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/The-race-back-to-Myanmarhttp://www.fdiintelligence.com/Locations/The-race-back-to-Myanmarhttp://www.fdiintelligence.com/Locations/Political-chaos-fails-to-shake-Thailand-s-business-prospectshttp://www.fdiintelligence.com/fDi-Tools/fDi-Marketshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Political-chaos-fails-to-shake-Thailand-s-business-prospectshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/The-race-back-to-Myanmar

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FromLOCATIONS

Export-orientated Swaziland emerges

For years Swaziland has hung on the coat-tails of South Africa. Now the country is coming into its own,

thanks to a rise in the World Bank's Doing Business report, strong infrastructure and government support for

manufacturing. However, protests over jobs and democracy are increasing

Trend Tracker

FromSECTORS /AEROSPACE

US dominates aerospace FDI

US remains the top country for aerospace-related FDI projects, but in terms of regions, North America trails

Asia-Pacific and western Europe.

FromLOCATIONS/ EUROPE /IRELAND

FDI into Irelands financial services sector doubles

Despite the banking crisis, Ireland has seen a huge increase in FDI this year.

FromLOCATIONS/ EUROPE /ROMANIA

Romania sees FDI project numbers drop, but capex and jobsrise

Figures suggests that Romania has fewer, but larger investments this year.

Rankings

FromSPECIAL REPORTS

http://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Export-orientated-Swaziland-emergeshttp://www.fdiintelligence.com/Sectorshttp://www.fdiintelligence.com/Sectorshttp://www.fdiintelligence.com/Sectors/Aerospacehttp://www.fdiintelligence.com/Sectors/Aerospacehttp://www.fdiintelligence.com/Sectors/Aerospacehttp://www.fdiintelligence.com/Sectors/Aerospace/US-dominates-aerospace-FDIhttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Europehttp://www.fdiintelligence.com/Locations/Europe/Irelandhttp://www.fdiintelligence.com/Locations/Europe/Irelandhttp://www.fdiintelligence.com/Locations/Europe/Irelandhttp://www.fdiintelligence.com/Locations/Europe/Ireland/FDI-into-Ireland-s-financial-services-sector-doubleshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Europehttp://www.fdiintelligence.com/Locations/Europe/Romaniahttp://www.fdiintelligence.com/Locations/Europe/Romaniahttp://www.fdiintelligence.com/Locations/Europe/Romaniahttp://www.fdiintelligence.com/Locations/Europe/Romania/Romania-sees-FDI-project-numbers-drop-but-capex-and-jobs-risehttp://www.fdiintelligence.com/Locations/Europe/Romania/Romania-sees-FDI-project-numbers-drop-but-capex-and-jobs-risehttp://www.fdiintelligence.com/Special-Reportshttp://www.fdiintelligence.com/Special-Reportshttp://www.fdiintelligence.com/Special-Reportshttp://www.fdiintelligence.com/Special-Reports/Asia-Pacific-continues-to-top-global-FDI-destination-rankingshttp://www.fdiintelligence.com/Locations/Export-orientated-Swaziland-emergeshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Export-orientated-Swaziland-emergeshttp://www.fdiintelligence.com/Sectorshttp://www.fdiintelligence.com/Sectors/Aerospacehttp://www.fdiintelligence.com/Sectors/Aerospace/US-dominates-aerospace-FDIhttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Europehttp://www.fdiintelligence.com/Locations/Europe/Irelandhttp://www.fdiintelligence.com/Locations/Europe/Ireland/FDI-into-Ireland-s-financial-services-sector-doubleshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Europehttp://www.fdiintelligence.com/Locations/Europe/Romaniahttp://www.fdiintelligence.com/Locations/Europe/Romania/Romania-sees-FDI-project-numbers-drop-but-capex-and-jobs-risehttp://www.fdiintelligence.com/Locations/Europe/Romania/Romania-sees-FDI-project-numbers-drop-but-capex-and-jobs-risehttp://www.fdiintelligence.com/Special-Reports

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Asia-Pacific continues to top global FDI destination rankings

Asia-Pacific has retained its position as top FDI destination region, while the US remains the lead

destination country and Singapore stays at the helm of the city rankings

FromRANKINGS

Shanghai tops transport technology rankings

fDi Benchmark rankings show Shanghai is lead world city for transport technology projects, with US the top

country

FromLOCATIONS/ AMERICAS

American Cities of the Future 2011/12

In the first everfDi ranking of cities across the American continents, New York has been crowned the

leading American 'City of the Future' for 2011/12. Jacqueline Walls reports on the leading performers

across the region

Trends in Foreign Direct Investment (FDI)

Historically, FDI has been directed at developing nations as firms from advanced

economies invested in other markets, with the US capturing most of the FDI

inflows. While developed countries still account for the largest share ofFDI

inflows, data shows that the stock and flow ofFDI has increased and is moving

towards developing nations, especially in the emerging economies around

the world.

http://www.fdiintelligence.com/Special-Reports/Asia-Pacific-continues-to-top-global-FDI-destination-rankingshttp://www.fdiintelligence.com/Rankings2http://www.fdiintelligence.com/Rankings2http://www.fdiintelligence.com/Rankings2/Shanghai-tops-transport-technology-rankingshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Americashttp://www.fdiintelligence.com/Locations/Americas/American-Cities-of-the-Future-2011-12http://www.economywatch.com/foreign-direct-investment/#%23http://www.economywatch.com/foreign-direct-investment/#%23http://www.fdiintelligence.com/Locations/Americas/American-Cities-of-the-Future-2011-12http://www.fdiintelligence.com/Rankings2/Shanghai-tops-transport-technology-rankingshttp://www.fdiintelligence.com/Special-Reports/Asia-Pacific-continues-to-top-global-FDI-destination-rankingshttp://www.fdiintelligence.com/Rankings2http://www.fdiintelligence.com/Rankings2/Shanghai-tops-transport-technology-rankingshttp://www.fdiintelligence.com/Locationshttp://www.fdiintelligence.com/Locations/Americashttp://www.fdiintelligence.com/Locations/Americas/American-Cities-of-the-Future-2011-12http://www.economywatch.com/foreign-direct-investment/#%23http://www.economywatch.com/foreign-direct-investment/#%23

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Aside from using FDIs as investment channel and a method to reduce operating

costs, many companies and organizations are now looking at FDI was a way

to internationalize. FDIs allow companies to avoid governmental pressure on

local production and cope with protectionist measures by circumventing tradebarriers. The move into local markets also ensures that companies are closer to

their consumer market, especially if companies set up locally-based (national)

sales offices.

Foreign Direct InvestmentLast Updated: May 2011

India has been ranked at the second place in global foreign direct investments in2010 and will continue to remain among the top five attractive destinations forinternational investors during 2010-12 , according to United Nations Conferenceon Trade and Development (UNCTAD) in a report on world investment prospectstitled, 'World Investment Prospects Survey 2009-2012'.

The 2010 survey of the Japan Bank for International Cooperation released inDecember 2010, conducted among Japanese investors, continues to rank Indiaas the second most promising country for overseas business operations.

A report released in February 2010 by Leeds University Business School,commissioned by UK Trade & Investment (UKTI), ranks India among the topthree countries where British companies can do better business during 2012-14.

India is ranked as the 4th most attractive foreign direct investment (FDI)destination in 2010, according to Ernst and Young's 2010 European

Attractiveness Survey. However, it is ranked the 2nd most attractive destinationfollowing China in the next three years.

Moreover, according to the Asian Investment Intentions survey released by theAsia Pacific Foundation in Canada, more and more Canadian firms are now

focusing on India as an investment destination. From 8 per cent in 2005, thepercentage of Canadian companies showing interest in India has gone up to 13.4per cent in 2010.

India attracted FDI equity inflows of US$ 1,274 million in February 2011. Thecumulative amount of FDI equity inflows from April 2000 to February 2011 stoodat US$ 128.642 billion, according to the data released by the Department of

http://www.economywatch.com/foreign-direct-investment/#%23http://www.economywatch.com/foreign-direct-investment/#%23http://www.economywatch.com/foreign-direct-investment/#%23http://www.economywatch.com/foreign-direct-investment/#%23

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Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21per cent of the total FDI equity inflow into India, with FDI worth US$ 3,274 million

during April-February 2010-11, while telecommunications including radio paging,cellular mobile and basic telephone services attracted second largest amount ofFDI worth US$ 1,410 million during the same period. Housing and Real Estateindustry was the third highest sector attracting FDI worth US$ 1,109 millionfollowed by power sector which garnered US$ 1,237 million during April-December 2010-11. The Automobile sector received FDI worth US$ 1,320million.

During April-February 2010-11, Mauritius has led investors into India with US$6,637 million worth of FDI comprising 42 per cent of the total FDI equity inflowsinto the country. The FDI equity inflows from Mauritius is followed by Singapore

at US$ 1,641 million and the US with US$ 1,120 million, according to datareleased by DIPP.

Investment Scenario

The Government has approved 14 FDI proposals amounting to US$ 288.05million, based on the recommendations of Foreign Investment Promotion Board(FIPB) in its meeting held on March 11, 2011. These include:

Kolkata based Dhunseri Investments got approval for FDI worth US$159.62 million

Mauritius based Ghir Investments got the approval of the Board forinduction of foreign equity in an investing company. The company hadproposed to get FDI worth US$ 118.36 million.

Unihorn India Pvt Ltd got approval for issue and allotment of partly paid upRights Equity shares to carry out the business of technical andengineering consultants, advisors, planners, engineering for constructionof roads, airports and bridges.

PCRD Services Pte Limited, Singapore, got approval to increase theforeign equity percentage in an investing company

G+J International Magazines GmbH, Germany, got clearance for inductionof foreign equity to carry out the business of publication and sale of

specialty and life style magazines in India. Kyuden International Corporation, Japan got approval for setting up a joint

venture (JV) company that will make downstream investments in thebusiness of developing and establishing renewable power projects.

The total merger and acquisitions (M&A) and private equity (PE) (includingqualified institutional placement (QIP)) deals in the month of February 2011werevalued at US$ 8.27 billion (76 Deals) as compared to US$ 1.95 billion (84 Deals)

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in the corresponding month of 2010, according to the monthly deals datareleased by Grant Thornton India.

FOREIGN DIRECT INVESTMENT

1) Foreign Direct Investment (FDI) is now recognized as an important driver of

growth in the country.

2) Government is , therefore, making all efforts to attract and facilitate FDI and

investment from Non Resident (NRIs) including Overseas Corporate Bodies

(OCBs), that are predominantly owned by them, to complement and supplement

domestic investment. To make the investment in India

3) attractive, investment and returns on them are freely repatriable, except where

the approval is

APPENDIX - A

GUIDELINES FOR FOREIGN DIRECT INVESTMENT (FDI) IN THE

BANKING SECTOR

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1. Limit for FDI under automatic route in private sector banks

a. In terms of the Press Note no. 4 (2001 series) dated May 21, 2001 issued by

Ministry of Commerce & Industry, Government of India, FDI up to 49% from all

sources will be permitted in private sector banks on the automatic route, subject

to conformiwith the guidelines issued by RBI from time to time.

Subject to licensing by the Insurance Regulatory & Development

Authority

b. For the purpose of determining the above-mentioned ceiling of 49% FDI

under the automatic route in respect of private sector banks, following

categories of shares will be included.

(i) IPOs,

(ii) Private placements,

(iii) ADRs/GDRs, and

(iv) Acquisition of shares from existing shareholders [subject to (d) below]

c. It may be clarified that as per Government of India guidelines, issue of fresh

shares under automatic route is not available to those foreign investors who have

a technical collaboration in the same or allied field. This category of investors

require

d. Under the Insurance Act, the maximum foreign investment in an insurance

company has been fixed at 26%. Application for foreign investment in banks,

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which have joint venture/subsidiary in insurance sector, should be made to RBI.

Such applications will

RBI in consultation with Insurance Regulatory and Development

Authority (IRDA).

1. Foreign banks having branch presence in India are eligible for FDI in the

private sector banks subject to the overall cap of 49% mentioned above with the

approval of RBI.

2. Limit for FDI in public sector banks FDI and portfolio investment in nationalised

banks are subject to overall statutory limits of 20% as provided under Section 3

(2D) of the Banking Companies (Acquisition and Transfer of Undertakings) Acts,

1970/80. The same ceiling would also apply in respect of such

3. investments in State Bank of India and its associate banks.

4. Voting rights of foreign investors In terms of the statutory provisions under the

various banking acts, the voting rights, when exercised, which are stipulated as

under:

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5. Private sector banks [Section 12 (2) of Banking Regulation Act, 1949]No

person holding shares, in respect of any share held by him, shall exercise voting

rights on poll in excess of ten per cent of the total voting rights of all the share

holders

6. Nationalised Banks [Section 3(2E) of Banking Companies (Acquisition and

Transfer of Undertakings) Acts, 1970/80] No shareholder, other than the Central

Government, shall be entitled to exercise voting

7. rights in respect of any shares held by him in excess of one per cent of the

total voting rights of all the share holders of the nationalised banks

8. State Bank of India (SBI) (Section 11 of State Bank of India Act, 1955) No

shareholder, other than RBI, shall be entitled to exercise voting rights in excess

often per cent of the issued capital (Government, in consultation with RBI can

raise the above voting rate to more than ten per cent).

9. SBI Associates [Section 19(1)&(2) of SBI (Subsidiary Bank) Act, 1959] No

person shall be registered as a shareholder in respect of any shares held by him

in excess of two hundred shares.

10. For FDI of 5 per cent and more of the paidup capital, the private sector

banking

stage reporting to the ECD as follows:

a. In the first stage, the Indian company has to submit a report within 30 days of

the date of receipt of amount of consideration indicating the name and address of

foreign investors, date of receipt of funds and their rupee equivalent, name of

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bank through whom funds were received and details of Government approval, if

any.

b. In the second stage, the Indian banking company is required to file within 30

days from the date of issue of shares, a report in form FC-GPR together with a

certificate from the Company Secretary of the concerned company certifying that

various regulations have been complied with. The report will also be

accompanies by a certificate from a Chartered Accountant indicating the manner

of arriving at the price of the shares issued.

APPENDIX-B

GUIDELINES FOR LICENSING PRODUCTION OF ARMS &

AMMUNITIONS OF FDI

1) In pursuance of the Government decision to allow private sector participation

up to 100% in the defense industry sector with foreign direct investment (FDI)

permissible up to 26%, both subject to licensing as notified vide Press Note No. 4

(2001 series), the following guidelines for licensing

STEPS FOR ISSUING LICENCE OF FDI

1. Licence applications will be considered and licences given by the Department of

Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with

Ministry of defence.

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2. Cases involving FDI will be considered by the FIPB and licences given by the

Department of Industrial Policy & Promotion in consultation with Ministry of Defence.

3. The applicant should be an Indian company / partnership firm.

4. The management of the applicant company / partnership should be in Indian hands

with majority representation on the Board as well as the Chief Executive of the

company / partnership firm being resident Indians.

5. Full particulars of the Directors and the Chief Executives should be furnished along

with the applications.

6. The Government reserves the right to verify the antecedents of the foreign

collaborators and domestic promoters including their financial standing and credentials in

the world market. Preference would be given to original equipment manufacturers or

design establishments, and companies having a good track record of past supplies to

Armed Forces, Space and Atomic energy sectors and having an established R & D base.

7. There would be no minimum capitalization for the FDI. A proper assessment,

however, needs to be done by the management of the applicant company depending upon

the product and the technology. The licensing authority would satisfy itself about the

adequacy of the net worth of the foreign investor taking into account the category of

weapons and equipment that are proposed to be manufactured.

8. There would be a three-year lock-in period for transfer of equity from one foreign

investor to another foreign investor (including NRIs & OCBs with 60% or more NRI

stake) and such transfer would be subject to prior approval of the FIPB and the

Government.

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9. The Ministry of Defence is not in a position to give purchase guarantee for products to

be manufactured. However, the planned acquisition programme for such equipment and

overall requirements would be made available to the extent possible.

10. The capacity norms for production will be provided in the licence based on the

application as well as the recommendations of the Ministry of Defence, which will look

into existing capacities of similar and allied products.

Foreign Direct Investment (FDI):a methodological note

The main purpose of this note is to deal with methodological aspects

related to Foreign Direct Investment (FDI) from the viewpoint of the Balance of

Payments and the International Investment Position (IIP). Special attention is

paid to the financial system both as a sector investing directly abroad (home

perspective) and receiving investment (host perspective). The note clarifies

concepts such as direct investor, direct investment enterprise (subsidiary,

associate and branch) and describes the different sector breakdowns

available and what they imply for financial sector FDI.

The main statistical sources for FDI are reviewed and the discrepancies are

shown for total inward FDI flows and stocks both for emerging and

industrial countries. Discrepancies appear much larger for stocks particularly

for emerging countries. Some very general trends can be found from this data:

First, even if FDI flows to emerging countries have grown, the bulk of them

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continue to be directed to industrial countries. Second, the large reduction in

FDI flows to emerging countries in 2001 in the UNCTAD statistics is much

milder in the IMF statistics and is not perceived in the stock data. Total

stocks, as well as the stock of FDI received by industrial countries, seem to

have reached a plateau in IMF statistics but not in the UNCTAD ones.

As for the sector breakdown, and in particular financial sector FDI, noreadably comparable

and reliable enough - data is available on an international basis. Even in

national statistics the sector breakdown might not correctly reflect the

total amount of foreign direct investment outflows from the financial system,

particularly if the investment is carried out by holding companies. In the case

of Spain, the re-estimation of outward FDI flows of the financial sector

including the transactions carried out by resident holding companies, implies

an increase of over 50% for the period 1997-2001.

How Beneficial is Foreign Direct Investment for Developing

Countries?

The resilience of foreign direct investment (FDI) during financial crises may

lead many developing countries to regard it as the private capital inflow of

choice. While there is substantial evidence that FDI benefits host countries,

they should assess its potential impact carefully and realistically.

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Foreign direct investment (FDI) has proven to be resilient during financial

crises. For instance, FDI in East Asian countries was remarkably stable

during the global financial crises of 1997-98. In sharp contrast, other forms

of private capital flows--portfolio equity and debt flows, and particularly

short-term flows--were subject to large reversals during the same period (see

Dadush, Dasgupta, and Ratha, 2000, and Lipsey, 2001). The resilience of

FDI during financial crises was also evident during the Mexican crisis of

1994-95 and the Latin American debt crisis of the 1980s.

This experience could lead many developing countries to favor FDI

over other forms of capital flows, furthering a trend that has been in

evidence for many years (see Chart 1). Is the preference for FDI over other

forms of private capital inflows justified? This article sheds some light on

this issue by reviewing recent theoretical and empirical work on the impact

of FDI on developing countries investment and growth.

Free capital flows: the case in theory

Economists tend to favor the free flow of capital across nations because it

allows capital to seek out the highest rate of return. Unrestricted capital

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flows may also offer several other advantages, as noted by Feldstein (2000).

First, international flows of capital reduce the risk faced by owners of capital

by allowing them to diversify their lending and investment. Second, the

global integration of capital markets can contribute to the spread of best

practices of corporate governance, accounting rules, and legal traditions.

Third, the global mobility of capital limits the ability of governments to

pursue bad policies.

In addition to these advantages, which in principle apply to all kinds

of private capital inflows, Feldstein (2000) and Razin and Sadka

(forthcoming) note that the gains to host countries from FDI can take several

other forms:

FDI allows the transfer of technology--particularly in the form of

new varieties of capital inputs--that cannot be achieved through financial

investments or trade in goods and services. FDI can also promote

competition in the domestic input market.

Recipients of FDI often gain employee training in the course of

operating the new businesses, which contributes to human capital

development in the host country.

Profits generated by FDI contribute to corporate tax revenues in the

host country.

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(Of course, countries often choose to forgo some of this revenue when theycut corporate tax rates in an attempt to attract FDI from other locations. Forinstance, the sharp decline in corporate tax revenue in some of the membercountries of the Organization for Economic Cooperation and Development(OECD) may be the result of such competition. For a discussion, see FDIand Corporate Tax Revenues in the OECD and European Union: Tax

Harmonization or Competition? by Kristina Kostial and Reint Gropp

in this issue ofFinance and Development.)

In principle, therefore, FDI should contribute to investment and growth

in host countries through these various channels.

FDI versus other flows

Despite the strong theoretical case for the advantages of free capital flows,

the conventional wisdom now seems to be that many private capital flows

pose countervailing risks. Hausmann and Fernndez-Arias (2000) suggest

why many host countries, even when they are in favor of capital inflows,

view international debt flows, especially of the short-term variety, as bad

cholesterol:

It is driven by speculative considerations based on interest rate

differentials and exchange rate expectations, not on long-term

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considerations. Its movement is often the result of moral hazard

distortions such as implicit exchange rate guarantees or the

willingness of governments to bailout the banking system. It is the

first to run for the exits in times of trouble and is responsible for the

boom-bust cycles of the 1990s.

In contrast, FDI is viewed as good cholesterol for it can confer the benefitsenumerated earlier. An additional benefit is that FDI is thought to be bolted

down and cannot leave so easily at the first sign of trouble. FDI is notimmobile because it is bolted down in the formof machines that are firm-specific, but rather because it is immediately

repriced in the event of the crisis, unlike short-term debt.

Recent evidence

To what extent is there empirical support for such claims of the beneficial

impact of FDI?

A comprehensive study by Bosworth and Collins (1999) provides evidence

on the effect of capital inflows on domestic investment for 58 developing

countries during 1978-95. The sample covers nearly all of Latin America

and Asia, as well as many countries in Africa. They distinguish among three

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types of inflows: FDI, portfolio investment, and other financial flows

(primarily bank loans).

Bosworth and Collins find that an increase of a dollar in capital

inflows is associated with an increase in domestic investment of about 50

cents. (Both capital inflows and domestic investment are expressed as

percentages of GDP.) This result, however, masks significant differences

among types of inflow. FDI is associated with a one-for-one increase in

domestic investment; portfolio inflows have virtually no association with

investment; and the impact of loans falls between those of the other two.

These results hold both for the 58-country sample and for a subset of 18

emerging markets. (See Chart 2.) Bosworth and Collins conclude: Are

these benefits of financial inflows sufficient to offset the evident risks of

allowing markets to freely allocate capital across capital across the borders

of developing countries? The answer would appear to be a strong yes for

FDI.

The World Banks latest Global Development Finance (2001) report

summarizes the findings of several other studies on the relationships

between private capital flows and growth, and also provides new evidence

on these relationships. (For a summary, see Private Capital Flows and

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Growth by Ashoka Mody, Deepak Mishra, and Antu Panini Murshid in this

issue ofFinance and Development.)

Reasons for caution?

Despite the evidence presented in recent studies, recent work cautious

against taking too uncritical an attitude toward the benefits of FDI.

Is a high FDI share a sign of weakness? Hausmann and Fernndez-

Arias (2000) and Albuquerque (2000) point to reasons why a high share of

FDI in total capital inflows may be a sign of a host countrys weakness

rather than its strength.

One striking feature of FDI flows is that the share of FDI in total

inflows is higher in riskier countries, as measured either by countries credit

ratings for sovereign (government) debt or other indicators of country risk

(see Chart 3). There is also some evidence that the FDI share is higher in

countries where the quality of institutions is lower. What can explain these

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seemingly paradoxical findings? One explanation is that FDI is more likely,

compared with other forms of capital flows, to take place in countries with

missing or inefficient markets. In such settings, foreign investors will prefer

to operate directly instead of relying on local financial markets, suppliers, or

legal arrangements. The policy implications of this view, according to

Albuquerque (2000, page 30), are that countries trying to expand their

access to international capital markets should concentrate on developing

credible enforcement mechanisms instead of trying to get more FDI.

In a similar vein, Hausmann and Fernndez-Arias (2000, page 5) suggest

that

. . . a high share of FDI in capital inflows is not a sign of good

health, as evidenced by the industrial countries where it is barely 12

percent. Consequently policies directed at expanding that share are

unwarranted. Instead, countries should concentrate on improving the

environment for investment and the functioning of markets. They are

likely to be rewarded with increasingly efficient overall investment

as well as with more capital inflows.

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While it is very likely that FDI is higher as a share of capital inflows

where domestic policies and institutions are weak, this cannot be

regarded as a criticism of FDI per se. Indeed, without the FDI, the

countries could well be much poorer.

Fire sales, adverse selection, and leverage. FDI is not only a transfer of

ownership from domestic to foreign residents but also a mechanism that

makes it possible for foreign investors to exercise management and control

over host country firmsthat is, it is a corporate governance mechanism.

The transfer of control may not always benefit the host country because of

the circumstances under which it occurs, problems of adverse selection, or

excessive leverage.

Krugman (1998) notes that sometimes the transfer of control occurs in

the midst of a crisis and asks:

Is the transfer of control that is associated with foreign ownership

appropriate under these circumstances? That is, loosely speaking, are

foreign corporations taking over control of domestic enterprises

because they have special competence, and can run them better, or

simply because they have cash and the locals do not? . . . Does the

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firesale of domestic firms and their assets represent a burden to the

afflicted countries, over and above the cost of the crisis itself?

Even outside of such fire-sale situations, FDI may not necessarily benefit the

host country, as demonstrated by Razin, Sadka, and Yuen (1999) and Razin

and Sadka (forthcoming). Through FDI, foreign investors gain crucial inside

information about the productivity of the firms under their control. This

gives them an informational advantage over uninformed domestic savers,

whose buying of shares in domestic firms does not entail control. Taking

advantage of this superior information, foreign direct investors will tend to

retain high-productivity firms under their ownership and control and sell

low-productivity firms to the uninformed savers. As with other so-called

adverse-selection problems of this kind, this process may lead to

overinvestment by foreign direct investors.

Excessive leverage can also limit the benefits of FDI. Typically, the

domestic investment undertaken by FDI establishments is heavily leveraged

owing to borrowing in domestic credit market. As a result, the fraction of

domestic investment actually financed by foreign savings through FDI flows

may not be as large as it seems, since the FDI investor can repatriate the

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borrowing, and the size of the gains from FDI may be limited by the sizeable

quantity of domestic borrowing relative to the quantity of capital inflows

FDI reversals?

The evidence on the stability of FDI has also been cast in a new light

in recent work. Though it is true that the machines are bolted down and,

hence, difficult to move out of the host country on short notice, financial

transactions can sometimes accomplish a reversal of FDI. For instance, the

foreign subsidiary can borrow against its collateral domestically and then

lend the money back to the parent company. Likewise, because a significant

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portion of FDI is intercompany debt, the parent company can recall it on

short notice.

Other considerations: There are some other cases in which FDI might

not be beneficial to the recipient country. This can occur, for instance, when

FDI is geared toward serving domestic markets that are protected by high

tariff or non-tariff barriers. FDI under these circumstances may become a

political-economy lobbying facility to perpetuate the misallocation of

resources. There could also be a loss of domestic competition that can arise

when foreign acquisitions lead to a consolidation in the number of domestic

producers, either through takeovers or corporate failures.

Conclusion

Both economic theory and recent empirical evidence suggest a beneficial

impact of FDI on developing host countries. But recent work also points to

some sources of potential risks: FDI can be reversed through financial

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transactions; there can be excessive FDI owing to adverse selection and fire

sales; the benefits of FDI can be limited by leverage; and a high share of FDI

in a countrys total capital inflows may reflect its institutions weakness

rather than their strength. Though the empirical relevance of some of these

sources remains to be demonstrated, they do appear to make a case for

taking a nuanced view of the likely effects of FDI. Policy recommendations

for developing countries should focus on improving the investment climate

for all kinds of capital, domestic as well as foreign.

Chart 1

The composition of capital inflows has shifted away from bank loans toward FDI and portfolio investment

Source: Based on Bosworth and Collins (1999).

1978-81

FDI

11%Portfolio

9%

Loans

80%

FDI Portfolio Loans

1982-89

FDI

16%

Portfolio

29%

Loans

55%

FDI Portfolio Loans

1990-95

FDI

20%

Portfolio

44%

Loans

36%

FDI Portfolio Loans

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Chart 2

FDI has a s tronger impact on domestic inves tment than do loans or portfolio inves tment

Source: Based on Bosworth and Collins (1999). The height of the bar represents the estimated impact ofthe indicated capital flow on domestic inves tment.

Developing countries(58 countries )

0

0.2

0.4

0.6

0.8

1

FDI Portfolio Loans

Emerging markets sub-sample(18 countrie s)

0

0.2

0.4

0.6

0.8

1

FDI Portfolio Loans

Chart 3

FDI's share in total inflows is higher in countries with weaker credit ratings

Source: Albuquerque (2000).

0

0.05

0.1

0.15

0.2

0.25

Aaa Aa A Baa Ba B

Moody's Credit Ratings

Sh

areofFDIintotalinflow

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Ground Handling Services

74%- FDI

100%- for NRIs investment

Where there is a prescribed cap for foreign investment, only the direct investment will beconsidered for the prescribed cap and foreign investment in an investing company willnot be set off against this cap provided the foreign direct investment in such investingcompany does not exceed 49% and the management of the investing company is with theIndian owners.

Investing companies in infrastructure / services sector (except telecom

sector) 100%

a) Merchant

b) Banking

c) Underwriting

d) Portfolio

e) Management

f) Services

g) Investment

h) Advisory

i) Services

j) Financial

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k) Consultancy

l) Stock Broking

m) Asset

n) Management

o) Venture Capital

p) Custodial

q) Services

r) Factoring

s) Credit Rating

t) Agencies

u) Leasing & Finance

v) Finance

w) Housing

x) Finance

y) Forex Broking

z) Credit card

Business Money

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CONCLUSION

The government of India has taken several initiativesto attract foreign investments in India. Not only

foreign establishments but also entrepreneurs fromIndia can reap the benefits of the growing IndianMarket.

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