“AN ANALYTICAL STUDY OF

FOREIGN DIRECT INVESTMENT IN

INDIA
Foreign Direct Investment
Meaning:
These three letters stand for foreign direct investment. The simplest explanation of FDI would be
a direct investment by a corporation in a commercial venture in another country. A key to
separating this action from involvement in other ventures in a foreign country is that the business
enterprise operates completely outside the economy of the corporation’s home country. The
investing corporation must control 10 percent or more of the voting power of the new venture.
According to history the United States was the leader in the FDI activity dating back as far as
the end of World War II. Businesses from other nations have taken up the flag of FDI, including
many who were not in a financial position to do so just a few years ago.
The practice has grown significantly in the last couple of decades, to the point that FDI has
generated quite a bit of opposition from groups such as labor unions. These organizations have
expressed concern that investing at such a level in another country eliminates jobs. Legislation
was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But
members of the Nixon administration, Congress and business interests rallied to make sure that
this attack on their expansion plans was not successful. One key to understanding FDI is to get a
mental picture of the global scale of corporations able to make such investment. A carefully
planned FDI can provide a huge new market for the company, perhaps introducing products and
services to an area where they have never been available. Not only that, but such an investment
may also be more profitable if construction costs and labor costs are less in the host country.
• Foreign Direct Investment – when a firm invests directly in
production or other facilities, over which it has effective control,
in a foreign country.
• Manufacturing FDI requires the establishment of production
facilities.
• Service FDI requires building service facilities or an investment
foothold via capital contributions or building office facilities.
• Foreign subsidiaries – overseas units or entities.
• Host country – the country in which a foreign subsidiary
operates.
• Flow of FDI – the amount of FDI undertaken over a given time.
• Stock of FDI – total accumulated value of foreign-owned assets.
• Outflows/Inflows of FDI – the flow of FDI out of or into a
country.
• Foreign Portfolio Investment – the investment by individuals,
firms, or public bodies in foreign financial instruments.
• Stocks, bonds, other forms of debt.
3 Statement of the Problem
To analyse FDI across different sectors from different countries in India and which
sector we can get more foreign currency in terms of investment in India.
 
 Scope of the study:

To know the reason for investment in India.

Influence of FII on movement of Indian stock exchange.
To understand the FII & FDI policy in India.
The study attempts to analyze the important dimensions of FDI in India. The study works out the
trends and patterns, investment flows to India.
The study also examines the role of FDI on economic growth in India for the period 1991-2012.
The period under study is important for a variety of reasons. First of all, it was during July 1991
India opened its doors to private sector and liberalized its economy.
India’s experience with its first generation economic reforms and the country’s economic growth
performance were considered safe havens for FDI which led to second generation of economic
reforms in India in first decade of this century.
There is a considerable change in the attitude of both the developing and developed countries
towards FDI. They both consider FDI as the most suitable form of external finance.
Increase in competition for FDI inflows particularly among the developing nations. The shift of
the power center from the western countries to the Asia sub –continent is yet another reason to
take up this study.
 
The study is important from the view point of the macroeconomic variables included in the study
as no other study has included the explanatory variables which are included in this study. The
study is appropriate in understanding inflows.
 Objectives of the study:
 
Primary objective
 
To know in which sector we can get more foreign currency in terms of investment
in India.
To know the flow of investment in India
To know how can India Grow by Investment.
To Examine the trends and patterns in the FDI across different sectors and from
different countries in India
 
Secondary objectives
 
To know the reason for investment in India
Influence of FII on movement of Indian stock exchange
To understand the FII & FDI policy in India.
Research methodology
Data collection
This study is based on secondary data. The required data have been collected from
various sources i.e. World Investment Reports, Asian Development Bank’s Reports,
various Bulletins of Reserve Bank of India, publications from Ministry of Commerce,
Govt. of India, Economic and Social Survey of Asia and the Pacific, United Nations,
Asian Development Outlook, Country Reports on Economic Policy and Trade Practice-
Bureau of Economic and Business Affairs, U.S. Department of State and from websites
of World Bank, IMF, WTO, RBI, UNCTAD, EXIM Bank etc.. It is a time series data and
the relevant data have been collected for the period 1991 to 2012.
Data collection:
Secondary Data:
Internet, Books, newspapers, journals and books, other reports and projects, literatures
Tools and techniques of analyzing data-
FII:
Correlation: We have used the Correlation tool to determine whether two ranges of
data move together — that is, how the Sensex, Bankex, IT, Power and Capital Goods are
related to the FII which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock
indices returns. FII is taken as independent variable. Stock indices are taken as
dependent variable
 
 Limitations of the study
 
All the economic / scientific studies are faced with various limitations and this
study is no exception to the phenomena. The various limitations of the study are:
The analysis was purely based on the secondary data. So, any error in the secondary
data might also affect the study undertaken.
Research is done during college hence no exclusive time dedicated for this research.
At various stages, the basic objective of the study is suffered due to inadequacy of
time series data from related agencies. There has also been a problem of sufficient
homogenous data from different sources. For example, the time series used for
different variables, the averages are used at certain occasions. Therefore, the trends,
growth rates and estimated regression coefficients may deviate from the true ones.
The assumption that FDI was the only cause for development of Indian economy in
the post liberalized period is debatable. No proper methods were available to
segregate the effect of FDI to support the validity of this assumption.
Above all, since it is a MBA project and the research was faced with the problem of
various resources like time and money.
Foreign Investment Promotion Board
The FIPB (Foreign Investment Promotion Board) is a government body that offers
a single window clearance for proposals on foreign direct investment in the country
that are not allowed access through the automatic route. Consisting of Senior
Secretaries drawn from different ministries with Secretary ,Economic Affairs in the
chair, this high powered body discusses and examines proposals for foreign
investment in the country for restricted sectors ( as laid out in the Press notes and
extant foreign investment policy) on a regular basis. Currently proposals for
investment beyond 600 crores require the concurrence of the CCEA (Cabinet
Committee on Economic Affairs). The threshold limit is likely to be raised to 1200
crore soon. The Board thus plays an important role in the administration and
implementation of the Government’s FDI policy. In circumstances where there is
ambiguity or a conflict of interpretation, the FIPB has stepped in to provide
solutions. Through its fast track working it has established its reputation as a body
that does not unreasonably delay and is objective in its decision making. It
therefore has a strong record of actively encouraging the flow of FDI into the
country. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e-
filing facility is an important initiative of the Secretariat to further the cause of
enhanced accessibility and transparency.
Government Approvals for Foreign Companies Doing Business in India
Government Approvals for Foreign Companies Doing Business in India or Investment Routes for
Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been
formulated with a view to invite and encourage FDI in India.  The Reserve Bank of India has
prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up
business operations in India has the following options:
Investment under automatic route; and
Investment through prior approval of Government.
4.1.1 Procedure under automatic route
FDI in sectors/activities to the extent permitted under automatic route does not require any prior
approval either by the Government or RBI. The investors are only required to notify the Regional
office concerned of RBI within 30 days of receipt of inward remittances and file the required
documents with that office within 30 days of issue of shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not available, include
the following:
Banking
NBFC's Activities in Financial Services Sector
Civil Aviation
Petroleum Including Exploration/Refinery/Marketing
Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs.
Venture Capital Fund and Venture Capital Company