A PROJECT REPORT ON FOREIGN DIRECT INVESTMENT AND FOREIGN INSTITUTIONAL INVESTMENT

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INTRODUCTION TO - FOREIGN DIRECT
INVESTMENT AND FOREIGN
INSTITUTIONAL INVESTMENT

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Report

Foreign Direct Investment Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities,

access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.

Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary.

Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, in the past decade, FDI has come to play a major role in the internationalization of

business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most significant catalyst for FDI’s expanded role.

Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). Opponents of FDI note that multinational conglomerates are able

to wield great power over smaller and weaker economies and can drive out much local

competition. The truth lies somewhere in the middle.

The scenario of FDI (Foreign direct investment) was totally different in 1970's. At that time, the developing countries were out of the picture. But the picture has totally changed in 1990s. It was because the countries followed the method of privatization. More than 71% of the total foreign direct investment in 1997 which was forwarded towards the developing countries was shared by nine countries. China alone received 30% from the above mentioned FDI. The main countries or continent, which are highly benefited by the FDI in the recent years are:

Africa

Asia

Latin America

North America

Parts of Europe

Many countries became independent in the post-war period and these countries were not ready to accept any type of foreign investment any more. For the reason, the concept of nationalization dominated the period. But gradually these countries understood that the obligations on the respective governments were becoming too much. So, the privatization concept was again adopted by these countries and this initiative allowed the FDI boom. This boom has not only caused the economic development in those countries, but also helped in technological advancement and employment.