Introduction of fdi

Foreign investment refers to investments made by the residents of a country in the financial assets and
production processes of another country. The effect of foreign investment, however, varies from
country to country. It can affect the factor productivity of the recipient country and can also affect the
balance of payments. Foreign investment provides a channel through which countries can gain access to
foreign capital. It can come in two forms: FDI and foreign institutional investment (FII). Foreign direct
investment involves in direct production activities and is also of a medium- to long-term nature. But
foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its
short-term nature, can have bidirectional causation with the returns of other domestic financial markets
such as money markets, stock markets, and foreign exchange markets. Hence, understanding the
determinants of FII is very important for any emerging economy as FII exerts a larger impact on the
domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce
country, has taken many measures to attract foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion people. As a
developing country, India’s economy is characterized by wage rates that are significantly lower than
those in most developed countries. These two traits combine to make India a natural destination for FDI
and foreign institutional investment (FII). Until recently, however, India has attracted only a small share
of global FDI and FII primarily due to government restrictions on foreign involvement in the economy.
But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment
regulations and actively encouraged new foreign investment, a sharp reversal from decades of
discouraging economic integration with the global economy.

The world is increasingly becoming interdependent. Goods and services followed by the financial
transaction are moving across the borders. In fact, the world has become a borderless world. With the
globalization of the various markets, international financial flows have so far been in excess for the
goods and services among the trading countries of the world. Of the different types of financial inflows,
the FDI and foreign institutional investment (FII)) has played an important role in the process of
development of many economies. Further many developing countries consider FDI and FII as an
important element in their development strategy among the various forms of foreign assistance.
The FDI and FII flows are usually preferred over the other form of external finance, because they are not
debt creating, nonvolatile in nature and their returns depend upon the projects financed by the investor.
The FDI and FII would also facilitate international trade and transfer of knowledge, skills and technology.

The FDI and FII is the process by which the resident of one country (the source country) acquire the
ownership of assets for the purpose of controlling the production, distribution and other productive
activities of a firm in another country(the host country).

According to the international monetary fund (IMF), FDI and FII is defined as “an investment that is
made to acquire a lasting interest in an enterprise operating in an economy other than that of investor”.

The government of India (GOI) has also recognized the key role of the FDI and FII in its process of
economic development, not only as an addition to its own domestic capital but also as an important
source of technology and other global trade practices. In order to attract the required amount of FDI and
FII it has bought about a number of changes in its economic policies and has put in its practice a liberal
and more transparent FDI and FII policy with a view to attract more FDI and FII inflows into its economy.
These changes have heralded the liberalization era of the FDI and FII policy regime into India and have
brought about a structural breakthrough in the volume of FDI and FII inflows in the economy. In this
context, this report is going to analyze the trends and patterns of FDI and FII flows into India during the
post liberalization period that is 2006 to 2009 year.
METHODOLOGY
In order to accomplish this project successfully we will take following steps

Data collection

Secondary Data: Internet, newspapers, journals and books, other reports and projects,

literatures

FDI:

The study is limited to a sample of top 10 investing countries e.g. Mauritius, Singapore, USA etc. and top
10 sectors e.g. service sector, computer hardware and software, telecommunications etc. which had
attracted larger inflow of FDI from different countries.

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

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have

significant impact on the Indian capital market. This will help the investors to decide on their
investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is
accepted, then FIIs will have no significant impact on the Indian bourses.
.

FDI

In this section we are going to discuss or describe the main business of the report i.e. analysis of
secondary data. It includes data in an organized form, discussion on its significance and analyzing the
results. For this we had divided this section in further two subsections i.e. the first subsection fulfill the
requirement of first objective which is pertaining to FDI. The

objective for FDI is to examine the trends and patterns in the FDI across different sectors and

from different countries in India during 2000 to 2009

Objective 1: Examine the trends and patterns in the FDI across different sectors and

from different countries in India during 2000 to 2009

I. About foreign direct investment.

Is the process whereby residents of one country (the source country) acquire ownership of assets for the
purpose of controlling the production, distribution, and other activities of a firm in another country (the
host country). The international monetary fund’s balance of payment manual defines FDI as an
investment that is made to acquire a lasting interest in an enterprise operating in an economy other
than that of the investor. The investors’ purpose being to have an effective voice in the management of
the enterprise’. The united nations 1999 world investment report defines FDI as ‘an investment
involving a long term relationship and reflecting a lasting interest and control of a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other
than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

II. Foreign direct investment: Indian scenario

FDI is permitted as under the following forms of investments –

· Through financial collaborations.

· Through joint ventures and technical collaborations.

· Through capital markets via Euro issues.

· Through private placements or preferential allotment

 FII
Objective 2: Influence of FII on movement of Indian stock exchange during

the post liberalization period that is September 2006 to September 2009.

I. Introduction to FI

Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view
of bringing about rapid and substantial economic growth and move towards globalization of the
economy. As a part of the reforms process, the Government under its New Industrial Policy revamped
its foreign investment policy recognizing the growing importance of foreign direct investment as an
instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the
Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments
from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be
a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While
recommending their entry, the Committee, however did not elaborate on the objectives of the
suggested policy. The committee only suggested that the capital market should be gradually opened up
to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities
traded on the primary and secondary markets, including shares, debentures and warrants issued by
companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the
Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow
reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.