PRINCIPLES OF

INVESTMENT
MANAGEMENT
INVESTMENT AVENUES

SUBMITTED BY:-
SIMRAN PREET SINGH(IMBA-37)
MANISHA SHARMA(IMBA-05)
SURBHI SHARMA(IMBA-20)
SHAYNA TANEJA(IMBA-08)
ARIHANT SETHIA(IMBA-46)
NIKHIL MUNJAL(D-18)
ANKIT BAJAJ(D-55)
AQUIB(D-42)
 FOREIGN DIRECT INVESTMENT
Introduction- Foreign direct investment (FDI) refers to long term
participation by country A into country B. Foreign Direct Investment is any form
of investment that earns interest in enterprises which function outside of the
domestic territory of the investor.

Foreign direct business relationships give rise to multinational corporations.

Types of Foreign Direct Investment-

FDIs can be broadly classified into two types: outward FDIs and inward FDIs.

Outward Foreign Direct Investment

An outward-bound FDI is backed by the government against all types of
associated risks. This form of FDI is subject to tax incentives as well as
disincentives of various forms. Risk coverage provided to the domestic industries
and subsidies granted to the local firms stand in the way of outward FDIs, which
are also known as 'direct investments abroad.'

Inward Foreign Direct Investment

Different economic factors encourage inward FDIs. These include interest loans,
tax breaks, grants, subsidies, and the removal of restrictions and limitations.
Factors detrimental to the growth of FDIs include necessities of differential
performance and limitations related with ownership patterns.
Other categorizations of FDI exist as well.

Vertical Foreign Direct Investment takes place when a multinational corporation

owns some shares of a foreign enterprise, which supplies input for it or uses the
output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company

carries out a similar business operation in different nations.

Foreign Direct Investment is guided by different motives. FDIs that are undertaken
to strengthen the existing market structure or explore the opportunities of new
markets can be called 'market-seeking FDIs.' '

Resource-seeking FDIs' are aimed at factors of production which have more

operational efficiency than those available in the home country of the investor.

Some foreign direct investments involve the transfer of strategic assets. FDI
activities may also be carried out to ensure optimization of available opportunities
and economies of scale. In this case, the foreign direct investment is termed as
'efficiency-seeking.'

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in
the economic development of the particular country where the investment is being
made.
This is especially applicable for the economically developing countries. During the
decade of the 90s foreign direct investment was one of the major external sources
of financing for most of the countries that were growing from an economic
perspective. It has also been observed that foreign direct investment has helped
several countries when they have faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It
was observed during the financial problems of 1997-98 that the amount of foreign
direct investment made in these countries was pretty steady. The other forms
of cash inflows in a country like debt flows and portfolio equity had suffered major
setbacks. Similar observations have been made in Latin America in the 1980s and
in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done
basically in the way of provision of capital inputs. The importance of this factor
lies in the fact that this transfer of technologies cannot be accomplished by way of
trading of goods and services as well as investment of financial resources. It also
assists in the promotion of the competition within the local input market of a
country.

The countries that get foreign direct investment from another country can also
develop the human capital resources by getting their employees to receive training
on the operations of a particular business. The profits that are generated by the
foreign direct investments that are made in that country can be used for the purpose
of making contributions to the revenues of corporate taxes of the recipient
country.

Foreign direct investment helps in the creation of new jobs in a particular country.
It also helps in increasing the salaries of the workers. This enables them to get
access to a better lifestyle and more facilities in life. It has normally been observed
that foreign direct investment allows for the development of the manufacturing
sector of the recipient country. Foreign direct investment can also bring in
advanced technology and skill set in a country. There is also some scope for new
research activities being undertaken.

Risk involved in foreign direct investment

1. The first factor is uncertainty in the global economic situation.

2. The second is the instability of the financial situation. Investment and

Enterprise Division of UNCTAD’s latest statistics show that after financial
crisis the first quarter of 2009, foreign direct investment in 2008 fell sharply
compared to 54%, the number of M & A of cross-border company compared
to last year is drastically reduced by 77%. The world’s largest multinational
corporations on a survey conducted by the international financial crisis has
on the short-term foreign direct investment had a tremendous negative
impact that the global growth downturn and the international financial crisis
on their investment made a negative impact on cross-border the respective
proportions of 85% company and 79% in the 2008 survey, only 40% of the
 companies considered by the international financial crisis. These two factors
have weakened the will of multinational investment

3. The third factor is protectionism lead to national investment policy regime

change. Economic stimulus plan may encourage protectionism, especially in
the crisis, the Government withdrew the leading industry for the rescue of
public investment, will enable a new round of rise of economic nationalism,
led the Government to come forward to protect the country’s leading
enterprises, to prevent their acquisition by foreign companies.

4. Economic Risk is the significant change in the economic structure or growth

rate that produces a major change in the expected return of an investment.
Risk arises from the potential for detrimental changes in fundamental
economic policy goals (fiscal, monetary, international, or wealth distribution
or creation) or a significant change in a country's comparative advantage
(e.g., resource depletion, industry decline, demographic shift, etc.).

Economic risk often overlaps with political risk in some measurement

systems since both deal with policy.

Economic risk measures include traditional measures of fiscal and monetary

policy, such as the size and composition of government expenditures, tax
policy, the government's debt situation, and monetary policy and financial
 maturity. For longer-term investments, measures focus on long-run growth
factors, the degree of openness of the economy, and institutional factors that
might affect wealth creation

International Popularity of Foreign Direct Investment

China’s popularity as a destination for foreign direct investment remained high last
year, even in the face of a worldwide financial crisis. Global flows of FDI
decreased by 44% from 2008 to 2009, according to Unctad. China’s FDI inflows
fell only 12% to $95 billion.

During the same period FDI inflows to the US, the world’s largest FDI destination,
fell by more than half from $316 billion to only $130 billion. Momentum in China
has picked up again this year, according to the country’s finance ministry, with
FDI up by more than 18% year-on-year in the first half of 2010.

China has moved into the limelight over the past decade. As skill levels and wages
in its more developed neighbors rose, China and its huge population soaked up
investment in low-end, labor-intensive manufacturing. In 2000, foreign direct
investment in China totaled just over $40 billion. By 2008, it had grown to $108
billion. This investment had a profound impact on the economy, with foreign-
invested companies accounting for almost 56% of the total value of the country’s
exports last year.

In current US dollar terms, China’s GDP more than quadrupled in the decade from
2000 to 2009. By some estimates, its economy has already overtaken Japan to
become the world’s second largest.
China has attracted substantial FDI since the passage of the Chinese-Foreign equity
joint venture law by the National People's Congress of China in 1979. FDI grew
from a modest amount of a few hundred million dollars annually in the late 1970s
and early 1980s to almost US$ 3.5 billion annually in the late 1980s.

Beginning with an over 25% growth in 1991, China has since attracted greatly
increased amounts of FDI. An approximately 152% increase for 1992 based on the
previous year, an almost 150% increase from 1992 o 1993, a further 20% growth
in 1994, over 10% growth for both 1995 and 1996, and an over 8% increase to
reach US$45.257 billion in 1997.

China recorded FDI inflow worth US$ 45.463 billion for 1998 (SSBPRC, 1999).
The country had been second only to USA as the major recipient of FDI from 1993
to 1997, and ranked in the third position in 1998 in the world (UN, 1996-1999).

During the period from 1992 to 1998, China had hosted almost 10% of total FDI
inflow in the world, and absorbed over 28% of the total FDI inflow to developing
countries and over 46% of total FDI inflow to Asian countries or regions. South
East Asian countries or regions attracted about US$480 billion FDI flows from
1992 to 1998, and about 50% of this went to China (UN, 1996-1999).

China had approved and signed 324,134 FDI agreements and contracts with
foreign investors from 1979 to 1998, and almost 20,000 projects for 1998
(SSBPRC 1999).

Large proportion of the FDI inflow received by China came from Hong Kong,
Taiwan, Singapore, South Korea and other developing countries/regions. During
the period of 1978~1998, over 70% of total FDI inflows to China were from
Asian/developing countries/regions including Hong Kong (53.89% of the total
ranked as 1st) Taiwan (4th), Singapore (5th), South Korea (6th), and Thailand
(11th). With the exception of Japan (8.03%, ranked as 2nd) and USA (7.91%,
ranked as 3rd), other industrialized countries played a minor role.

The popularity of FDI activities in China also applies to the pharmaceutical

industry. A significant number of Americans, European, Japanese and other Asian
pharmaceutical groups had been actively pursuing and evaluating avenues of
access to the Chinese pharmaceutical manufacturing industry and established over
1,500 pharmaceutical companies during the period from 1980 to 1998.

Foreign invested pharmaceutical companies were distributed in almost every part

of China (CCPIE, 1995). This paper was to explore why foreign pharmaceutical
firms' made their FDI in China, and further to compare FDI decision patterns
between eastern and western pharmaceutical firms. Most of current FDI theories
revealed from the research studies that were conducted mainly based on western
firms' FDI activities. A comparison of the FDI decision patterns between eastern
and western pharmaceutical firms would be expedient and meaningful, and
contribute to a better understanding of FDI theories in general.
Foreign direct investment in the United States

“Invest in America" is an initiative of the US Department of Commerce and aimed

to promote the arrival of foreign investors to the country.

The “Invest in America” policy is focused on:

• Facilitating investor queries.

• Carrying out maneuvers to aid foreign investors.

• Provide support both at local and state levels.

• Address concerns related to the business environment by helping as an

ombudsman in Washington DC for the international venture community.

• Offering policy guidelines and helping getting access to the legal system.

The United States is the world’s largest recipient of FDI. More than $325.3 billion
in FDI flowed into the United States in 2008, which is a 37 percent increase from
2007. The $2.1 trillion stock of FDI in the United States at the end of 2008 is the
equivalent of approximately 16 percent of U.S. gross domestic product (GDP).

Benefits of FDI in America: In the last 6 years, over 4000 new projects and
630,000 new jobs have been created by foreign companies, resulting in close to
$314 billion in investment.[citation needed] Unarguably, US affiliates of foreign
companies have a history of paying higher wages than US corporations.[citation
needed] Foreign companies have in the past supported an annual US payroll of
$364 billion with an average annual compensation of $68,000 per employee.
Increased US exports through the use of multinational distribution networks. FDI
has resulted in 30% of jobs for Americans in the manufacturing sector, which
accounts for 12% of all manufacturing jobs in the US.

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

Foreign direct investment and the developing world

Foreign investment can be a significant driver of development in poor nations. It
provides an inflow of foreign capital and funds, in addition to an increase in the
transfer of skills, technology, and job opportunities. Many of the East Asian tigers
such as China, South Korea, Malaysia, and Singapore benefited from investment
abroad. The Commitment to Development Index ranks the "development-
friendliness" of rich country investment policies

Foreign Direct Investment Facts and Myths

Foreign direct investment in China has grown gradually each year since the
Chinese Government adopted policies that would attract foreign investors in the
late 1970s. Direct foreign investment is somehow a type of financing different
sectors in a country's economy by investment companies that are located outside
the specific country's territory.

Investment companies can becomes foreign direct investors if they acquire at least
10% of the voting power of an enterprise. Direct foreign investment can take
several forms. In some countries foreign investment is made by incorporating
subsidiaries or other wholly owned companies, by acquiring shares in an
associated enterprise or by merging or acquisition of a completely different
company. Another popular form of foreign direct investment is the joint ventures
with other investors or companies.

Theoretically, the foreign direct investment has the purpose to stimulate the
economy and to promote sustainable development. In reality, the effects of this
type investment can be destructive for a specific country's economy. And there we
have India's exemple. When it came to the foreign direct investment India adopted
restrictive policies in some sectors such as retail.

The Indian Government considered that an excessive foreign investment in the

retail sector would lead to a severe destabilization of the overall economy of the
country by reducing the number of employees in the specific sector which is also
the second largest employment area in India. This would have also lead to the
depression of the income of those working in the largest employment sector of the
country, agriculture.

But the foreign investment can indeed have great benefits for a country such as
China. Since Deng Xiaoping has adopted open policies for foreign investors in the
late 1970s, the foreign direct investment inflow has constantly grown with few
exceptions when the country was politically destabilized by the Beijing Massacre.
However, China reached a record in 2008 in what concerns the foreign investment
inflow when it was able to absorb more than $90 billion from foreign investors.

But still, foreign investment has its advantages and disadvantages. A country with
many stakeholders is a country that proved to be politically and economically
stable enough to attract foreign investors and these countries usually look good in
the eyes of the international community. On the other hand, it seems that many
investment companies prefer investing in rich countries through mergers and
acquisitions mainly due to the decreased risks. However, those that invest in
developing countries are facing greater risks but also in case the project proves to
be a success the profit will be much bigger. Thus, most of the investment
companies are first considering the risks when deciding to invest in a country.

The success of foreign direct investment depends in great part on the Government
economical and financial policies but not exclusively. Every economy is different
and the approach must be according to each economy. Even if foreign direct
investment in China brought the country's economy great benefits, this does not
have to happen in all the countries that bring foreign investors which were proved
by India and its restrictive policies in the retail sector.

FDI inflows in India – Opportunities and Potential

India has been a major recipient of FDI Inflows in the majority of sectors. There
has been an unnerving upsurge in the economic developments of the country. In
the post Direct Investment Inflows in India- Opportunities and Benefits
Liberalization era, India is known to have attracted a quantum amount of Foreign
Direct Investment, especially after the liberalization. The huge market for compute
Hardware in India, coupled with the availability of skilled workforce in this sector
has boosted the inflow of FDI. High growth prospects, in terms of increased
consumption in the India as well as increasing demand for exports are expected to
lead to more Foreign Direct Investments in this sector.

FDI opportunities in the telecommunication sector in India exist in the areas of

Ecommerce, Manufacturing of equipments and components, Tele-education, Tele
banking, Exports of telecom equipment and services, Tele-medicine, Setting up a
national long distance bandwidth capacity in the country
Construction projects which have received the maximum FDI include, housing,
commercial premises, hotels, resorts, hospitals, educational institutions,
recreational
facilities, city and regional level infrastructure. FDI Inflows in the construction
industry in India are permissible under automatic route to ensure flexibility in
construction activities which will boost the Indian economy. In the real estate
sector ,the foreign investors are not allowed to sell undeveloped land, such as,
lands which do not have proper facilities of roads, water, electricity, drainage and
all other basic requirements for inhabitation.
The huge size of the market in the power sector in India and high returns on
Investment are important factors in boosting FDI inflows to power. There are huge
Opportunities of FDI in power sector in India.

Opportunities of Foreign Direct

Investment (FDI) in the Power Sector in India exist in Hydro Projects, Captive
Power, Ultra Mega Power Projects, Nuclear Power, National Grid Program, Rural
Electrification, Trading, Renewables etc
Important factors which are conductive to FDI Inflows to Electronics are the
availability of low-cost, efficient, and technically skilled workforce, opportunities
for the manufacturing of consumer electronic goods and mobile handsets are high
given the growing demand in the domestic electronics market, electronics
hardware is growing leaps and bounds globally, large-scale manufacturing units of
electronics hardware will be set up in the special economic zones with a total
exemption of duties and taxes, India has high chances to acquire a size USD 11
billion in terms of contract manufacturing out of USD 500 billion by 2010,
Designing of electronics will touch USD 7 billion by 2010, component exports will
touch USD 5 billion by 2010, Nokia and Elcoteq Network are planning to set up
manufacturing operations in India.

Potential of the Indian Market for Foreign Investment is huge due to the fact that
the country's economy is on the rise. The high Potential of the Indian Market for
Foreign Investment has helped to attract huge amounts of foreign direct investment
into the country.

Indian economy:
The economy of India is the fifth largest in the whole world. The Indian economy
is also the second largest among all the developing nations in terms of
consumption power. The Indian market is such that it offers very high prospects
for earning and growth in almost all the sectors of business.

The huge market potential in India, with prospects of high profitability, was aptly
complemented by regulatory measures by the Indian government in the early
1990s. The incentives to Foreign Investment in India were increased significantly
over the years.

Factors attracting foreign direct investment in India:

Various factors that are attracting foreign direct investment in India include, large
and growing middle class population in the country, majority of the workers are
educated and can speak good English, and the wages are also low. A potentially
huge market capable of yielding much higher returns than in other countries has
been a major attraction for foreign investors. All these factors have helped to
increase the Potential of the Indian Market for Foreign Investment.

FDI Scenario in India

The aggregate cost of 32 domestic mergers and acquisition (M&A) agreements in
India in January 2010 stood at US$ 2,167 million against 8 deals amounting to
US$ 1,324 million and 28 deals amounting to US$ 223 million in 2009 and 2008,
respectively.

In the fiscal year 2009, developing economies gained a massive share of 51.6%
FDI, more than what the developed nations gained, as per the survey by Ernst &
Young on globalization. This was chiefly because of major decline in FDI into
industrial markets, that was 50% less than FDI in 2008. From 4% of 2004 to 8% of
2005, the nation's endowments in infrastructure industry doubled, as per the report
by Planning Commission of India.
India proudly features in the third slot of global direct investment destinations,
despite of the recession and as per the latest report by United Nations Conference
on Trade and Development (UNCTAD), it will retain its slot in the next two years.

India drew FDI influx of US$ 1.74 billion during November 2009 which is 60%
more than US$ 1.08 billion procured in the previous fiscal. As per the information
produced by Department of Industrial Policy and Promotion (DIPP), the collective
amount of FDI influx 1991 to 2009 stood at US$ 127.46 billion