Foreign Direct Investment in India

This assignment explores the multifaceted influence of Foreign Direct Investment (FDI) in India. It delves into FDI's contribution to economic growth, highlighting both positive and negative aspects. The analysis also examines the challenges associated with FDI, including inflation's impact on long-term growth and the need for balanced regional development. Further, it investigates the potential of FDI to drive infrastructure development and its implications for India's economic future.

Running head: INTERNATIONAL BUSINESS ACROSS BORDERS
International Business across borders
Name of the University
Name of the Student
Authors Note

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
General overview of country:.....................................................................................................2
Political, Economic, Socio-cultural and Technological influences:..........................................3
National resource and factor endowments that create competitive advantage:.........................6
Foreign currency and exchange influences:...............................................................................6
The countries existing trade policies, systems, barriers and incentives:....................................7
Existing levels of Foreign Direct Investment:...........................................................................8
Summary and recommendation:..............................................................................................10
References list:.........................................................................................................................11

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Introduction:
The report is about analyzing the potential of foreign direct investment in selected
country that is India. Discussion incorporates general overview of country and existence
technological, political, social and economic advantages that would help in facilitating FDI
opportunities. Furthermore, foreign exchange, trade policies, incentives, barriers and systems
along with factor endowments creating competitive advantages have also been explained.
Competitive advantages of India in relation to natural resources and factor endowment those
facilities foreign investments have been discussed. Existing trade policies accompanied with
barriers to foreign investment have been discussed in later part of report.
Discussion:
General overview of country:
India has the world largest democracy and one of the growing economic globalization
in the country is foreign direct investment. Country has been liberalizing its policies for
attracting foreign investments. Compared to other form of international capital inflow, FDI
has gained importance in India. Some of the factors that have attracted FDI are availability of
quality and cheap human resources, stable economic policies and opportunities for exploring
unexplored markets. In recent years, there has been a modest gain in flow of foreign direct
investment in India. It is recognized by most investors that size of Indian market has a
promising prospects of growth. India faces many issues in terms of poverty, heath problems,
global competition, technology obsolescence, research and development, education and
employment. Foreign capital inflow is favoured in light of acquisition of better technology,
acquisition of labour at cheaper cost, upgraded technology and generation of employment
(Vinayagathasan 2013).

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Political, Economic, Socio-cultural and Technological influences:
GDP and Industrial growth:
(Source: Anand et al. 2014)
India has become one of the fastest growing G-20 economies and since year 2014,
there has been recovery in economic growth with annual growth rate hovering around 7.5%.
Declining current account deficit and inflation has accompanied robust economic growth.
Lower pressure on inflation and current account deficit is attributed to the factor such as
declining prices of commodities (Chan 2016). For some years, downward trend has been
witnessed in investment to GDP ratio. However, the corporate investment has been damped
by corporations’ weak financial position and low capacity utilization
Export growth:

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(Source: Anand et al. 2014)
Appreciation of real exchange rate and weak external demand in the second half of
2014 and 2015 led to fall in export. Export of jewellery account for 15% of total merchandise
export was hurt due to hike in precious metals excise duties along with declining oil demand
from exporting countries (Rath and Samal 2015).
Investment growth:
(Source: Anand et al. 2014)
Weak business investment is reflected by falling merchandize exports. Some of the
macroeconomic parameters and consumption is impacted by demonetisation. In the first half
of year 2016, total investment has fallen despite sustainable public investment.
Inflation:

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(Source: Cheikh and Louhichi 2016)
It can be seen from above graph that there has been fall in inflation in the current year
resulting from active management of food stocks and lower increase in minimum support
price. The expectation of anchoring inflation would be attained from change in framework of
monetary policy and industrial sector low capacity utilization. Inflation is projected to
witness declining phase due to better condition of weather that has reduced pressure on food
inflation and strengthening credibility and effectiveness of monetary policies (Cheikh and
Louhichi 2016). Household borrowing is in increasing trend and there is a low exposure on
global trade and financial conditions. It is projected that growth would continue to remain
strong.
Social-Cultural influences:
One of the factors that help in attracting FDI in India is socio-cultural influence. A
value is encompassed in traditional culture of India that emphasizes getting detached from
material and limits the social mobility along the castes. However, cultural values are likely to
impact FDI flows in India.
Technological influences:
In country like India, there exist huge gap in technology and it is required by foreign
capital to update their traditional technology that would help in driving international
competitiveness. Increase in FDI inflows would bring marketing expertise, technology
transfer and generating new possibilities for technology transfer. Such investment would help
in induction of foreign technology as there are many sector in India that are deprived of
technology and collaboration of foreign technology through acquisition would help in
enhancing technological advancement. A country can accelerate the economic development
through foreign investment and foreign technology (Anand et al. 2014). FDI would have

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positive impact on India as it helps in supplementing technology of exiting companies as well
as domestic capital.
National resource and factor endowments that create competitive advantage:
Important sources of competitiveness of India are its factor conditions such as
physical resource, knowledge resources, human resources, and infrastructure and capital
resources. Human resource in India is one of the key factors for gaining competitive
advantage over other countries and existing of vast household market leading to economies of
scale helps in attracting foreign investors. Reverse development pattern is another Indian
characteristics and well developed financial market boasts plausibly innovative and
sophisticated business. Overall development of Indian economy is propelled by infrastructure
sector and infrastructural development is good for attracting investments (Schnabl 2017).
However, such development should be enhanced. Furthermore, India possesses great
advantage in terms of natural resources that is a significant factor when considering
investment decision by foreign firms.
Foreign currency and exchange influences:
A large share of eternal liabilities of India is denominated in foreign currency and
after attack on rupee in year 2013; there has been replenishment in foreign exchange reserves.

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FDI and exchange rate in India:
(Source: Singh and Paul 2014)
The exchange rate and flow of FDI in India is positively correlated as increase or
appreciation in exchange rate leads to increased foreign investment. For the developing
country like India, it is essential to have continuous inflow of foreign capital and stable
exchange rate helps in increasing inflow of FDI to India. Depreciation in Indian rupee
weakens the inflow of foreign capital and there is a gradual tapering in portfolios of both
equity and debt. Depreciation of rupee in India would weigh on import bill which would
widen current account deficit and importing oil will be costlier. Possibility of increased FDI
inflow would be compromised if the interest rate arbitrage becomes less attractive. Foreign
investment tumbled from $ 171.4% million in May in current year as compared to $ 27.22
million in June (Kremer et al. 2013).
The countries existing trade policies, systems, barriers and incentives:
In year 1991, India has liberalised its FDI and trade regime. There are varieties of
intermediaries on which India has loosened its tariff, even though the tariff rate is as high as
35%. Abolishment of industrial licensing system has been done to facilitate foreign
investment and the objection of holding majority of equity participants by foreign
organization has also been removed. This has assisted in streamlining the approval process of
foreign investment in India. Despite of all these measures, there is still lower volume of FDI
inflows in India. Nonetheless, the traditional image of antagonism of India towards FDI and
private enterprise is yet to be removed. Inefficacy in pronouncements of trade policies exist
in light of opposition from powerful lobbies, elite and opinion makers combined with the
reluctance for implementation of agreed policies by bureaucracy (Buckley et al. 2014). This
can be illustrated in the context of state of Maharashtra where Enron power project is facing

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much publicized problems. The factors or barriers that has resulted in attracting low level of
FD investment in India has been mainly attributed to burdensome process for approving
projects of foreign investments, stringent labour laws, political exigencies where entrenched
interest groups are catered by party in power and notwithstanding protestations.
Another barrier to foreign investment that exists in India is the effort of piece meal
liberalization. Factor that is of little attraction to foreign investment in India is liberalization
of foreign trade regime resulting from reform packages and it does not impact the distortions
of factor market (Pattanaik and Nadhanael 2013). In such situation, foreign investors would
intend to service the market from their home base through exports rather than FDI.
India can get most out of its federalism and external vulnerability of country can be
mitigated by robust inflow of FDI. Competitiveness and investment over the medium-term
will be supported by the implementation of Goods and Service tax from financial year 2017-
2018. This is likely to raise the growth of GDP by 0.5% to 2% and this might adversely
impact consumption and inflation for shorter duration.
Existing levels of Foreign Direct Investment:
India is amongst the top reformers in FDI as revealed from the FDI regulatory
restrictiveness index. Reforms of FDI have mainly focussed on agriculture, civil aviation,
defence, railway, construction, air transport, insurance and pension funds in the context of
initiative that was launched in year 2014. The flow of foreign direct investment in India as
revealed by Reserve bank in financial year 2015-2016 has increased to USD 45 Billion as
against USD 31 billion in financial year 2013-2014. Compared to other OECD and BRICS
countries, in India there were stringent restriction of on flow of FDI.

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FDI net flows to India:
(Source: Nayak and Choudhury 2014)
Promotion of FDI is done by introducing several measures. Administrative burden
relating to the route of government approval for investment has been avoided by bringing
more sectors under the automatic route and there has been rise in FDI caps. Moreover,
measures have been taken by Indian government to improve the ease of doing business in the
country. FDI inflows are supported by particular buoyancy in services and construction along
with FDI deregulation. FDI restrictions have been comparatively higher in financial, media
and business services (Mohaddes and Raissi 2014).
It is emphasized by investors that India has significant potential to become an
attractive FDI (Foreign Direct Investment) destination. Sentiment of investors would be
undermined by the bureaucracy, red tape and poor infrastructure. Lack of adequate
infrastructure is regarded as one of the significant deterrent to FDI in the country and it is
ascertained than investing in India is comparatively more difficult than other countries. There
exists impartially in the legal system of country and expensive and ling process of dispute
resolution makes it difficult to make investment an attractive option in the country (Malhotra
2014).

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Summary and recommendation:
From the above analysis of various aspects to FDI in India, it can be said that there
has been gradual liberalisation of policies intending to make investment market investor
friendly. International bodies have ranked India among the top three global investment
destinations. There are several positive impacts of FDI inflow on Indian economy and India
has remarkable potential for attracting foreign investment. The development of economic
growth of country would be facilitated by development of technological skills and
enhancement of domestic capital by way of FDI. However, there are some challenges that are
faced by country and it is required to make improvement in some areas. Challenges are faced
in terms of resources, policies along with political and federal factors.
 It is required by India to put continuous effort in reducing barriers to FDI and trade
mainly in network and services sectors.
 A common ground needs to be created between foreign countries investing in country
and parliament. Investing enterprise in another country requires political support
 Business environment in India should be improved by introduction of modern
bankruptcy law along with reduction of administrative burden and simplification of
regulations on foreign firms. It is recommended that labour laws should be made more
flexible that does not provide the opportunity for creating distinction between the size
of firms and thereby reducing barriers to formal employment.
 It is essential to foster balance economic growth and at the same time social equality
for achieving balance growth. There has been inadequate exploitation of poor sections
compared to tapping of urban areas. A balance is required to be created between
regional developments for creating a seamless investment expansion.

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References list:
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investment and economic growth in India: An empirical analysis. Asian Journal of Research
in Banking and Finance, 7(6), pp.179-196.
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Asia. International Monetary Fund.
Buckley, P.J., Cross, A.R. and Horn, S.A., 2014. Japanese foreign direct investment in India:
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