Fdi in India - Cim

 

MEDI-CAPS UNIVERSITY  INDORE

Contemporary Contempora ry Issues In Management: Report On

“A STUDY OF FOREIGN DIRECT INVESTMENTS

IN INDIA” Partial Fulfillment  Submitted as Partial Fulfillment for   Degree of Master of Business Business Administration to  Medi-Caps University, University, Indore 2020-22  MBA 1ST SEM SEC. “B” 

GUIDED BY –

SUBMITTED BY –

Dr. Sneha Raghuvanshi

Anjali Jha

 

Arpit Jain

 

Nandini Soni

 

Roopal Agrawal

 

Samiksha Bhawalker 

 

Vivek Rathod

 

Certificate

This is to certify that the project entitled “A Study of Foreign Direct Investments”  Submitted  by the student of MBA “B” have successfully completed the research on the project under  superv sup ervisi ision on of Dr. Sneha Sneha Raghuvan Raghuvanshi shi  from Departmen Departmentt Of Managem Management ent & Commer Commerce ce Medi-Caps, Medi-Ca ps, Indore during the year 2021 in partial fulfillment fulfillment for degree of Master of Business Administration conducted by MEDI-CAPS UNIVISITY, INDORE (M.P). 

`

Dr. Sneha Raghuvanshi Medicaps University Indore

 

Declaraton by he Suden

We the the memb member erss of “Grou “Group p 1” he hereb reby y decl declare are that that the resear research ch re repor portt entit entitled led.. “A Study of  Foreign Direct Investments” Submitted as partial fulfillment for degree of Master of Business Administration to MEDI-CAPS UNIVERSITY, INDORE for the award of the First Year of MBA for the evaluation in lieu of the First Semester examination to be held in 2021, is our own work and has been carried out under the guidance of Dr. Sneha  Raghuvanshi. The project work is original and has not violated any of plagiarism norms. We also declare that this Project has not been submitted to any University/ Institute for the award of  any Degree/Diploma.

MBA (B) Department of Management Medi-Caps University

 

Acknowledgement

Fi First rst & forem foremost ost we would would like to express express our sincer sinceree thanks thanks & grati gratitud tudee to MEDI-CAPS UNIVERSITY, INDORE for giving us the opportunity to undergo this research project. We are grateful to our Dean Dr. Harish Bapat Sir & Contemporary Issues in Management (CIM) faculty from Depar Departm tmen entt of Manag Managem emen entt & Comm Commerc ercee for provin proving g the the Dr. Sneha Sneha Raghu Raghuvan vanshi shi  from opportunity to do research Project which will surely be supportive to our career. Through this research project we have gained valuable work experience that will be helpful in future. We would also like to thank all the respondents without whose response the research would not have been successful. At last we pay our sincere gratitude to all those who have helped us in completion of the research directly or indirectly .

Thanking you Place: Indore

 

INDEX

S. no.

1.

2.

Particulars

Page no.

Certificate by the Supervisor Declaration by the Student Acknowledgement  

II

Introduction

6-17

1.1 1.2 1.3 1.4 1.5 1.6 1.7

6-7

Introduction What is Foreign Direct Investment What Historical Overview Types of FDI Advantages of Foreign Direct Investment Disadvantages of Foreign Direct Investment Objectives of Study

III IV

8-9 10 11 12-13 14 15

FDI in the India Context

16-27

2.1 India Companies Involved in Foreign Direct Investment

16 17 18 19-22 23-27

3.

2.2 India Govt. in FDI FDI 2.3 FDI Policy Policy of Government of India 2.4 Data and estimation strategy 2.5 Key Statistics Review of literature

4.

Research Methodology

31-35

5.

Analytical Framework  

36-39

36-37 38-39

6.

5.1 FDI and Capital Formation 5.2 State-wise FDI Decomposition Suggestions and Conclusion

40-41

7.

Learning’s form the study

42

8.

References

43-44

9.

Appendix

45-49

28-30

 

CHAPTER    1  INTRODUTION

1.1 Introduction

“Foreign Direct Investment (FDI) is crucial for economic development, modernisation, and empl em ploym oymen entt genera generati tion; on; it contr contribu ibute tess to techn technol ology ogy transf transfer er,, human human capit capital al for forma mati tion, on,

F

entrepreneurship, and efficiency of resource  management.1,2 Developing countries like India have therefore sought to attract greater FDI. The World Investment Report of 20193 found that FDI in developed countries countries have fluctuated over the period from 2007 to 2018: after a steep fall following followi ng the 2008 financial crisis, it recovered to pre-crisis levels in 2015, only to decline once again thereafter. Meanwhile, FDI in developing economies, including India, has remained stable. Indeed, estimates for 2018 suggest that FDI in developing economies was higher that year than in developed economies, accounting for 54 percent of global FDI inflow. Among  the developing

regions, Asia and Africa registered higher FDI inflows than Latin America and the Caribbean. Developing countries are more attractive to transnat Developing transnational ional corporations5 for various reasons, one of which is the presence of cheap, skilled and unskilled labour. In other words, there are opportunities opportuni ties that could help in cost reduction reduction in terms of labour—India’s labour—India’s huge inexpensive inexpensive labour force, comprised by the largest working age population in the world, is one of the reasons why foreign foreign investors investors find India India attractive.6 attractive.6 Moreover, Moreover, land and and other infrastructu infrastructure re are also cheaper; there is promise of emerging large markets; and there exist ‘created’ assets such as communi com municati cations ons infrast infrastruct ructure, ure, marketi marketing ng network networks, s, and innovati innovative ve technol technology ogy that that all help companies become more competitive.

Current patterns patterns in global production production are such that developing countries provide the platform for  activities in the lower segments in manufacturing and services, and the developed nations  provide expertise exp ertise in management, manag ement, technical know-how and skills upgrade. upgrad e. Large-scale migration of both skilled and unskilled labour has played an importa important nt role in moulding moulding the current global economic order. In the Gulf countries, for example, economic activities have been driven by migrant skilled labour from the western countries, and unskilled unskilled workers from the poorer Asian nations.

 

34 -28%

Figure 1: Global FDI Trends (in billion USD)

54% 706

2500

+2%

$1297 557 -13%

-27%

2000

1500

1000

500

0  

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: UNCTAD – World Investment Report 2020 

Data shows that Asia is one of the largest recipients of foreign investment in the world.  Among the top FDI destinations destination s in the region region are China, China, Hong Kong, Kong, Singa Singapore pore,, Indonesia Indones ia and India. Although Southeast Asia is the driver of FDI growth in the region, inflows to South Asia—in  particular, India— Ind ia—are are also signif sig nifica icant. nt. South Asia recorded a four-percent increase in FDI in 2018 to US$ 54 billion from US$ 52 billion in 2017, and by a further 10 percent in 2019 to US$ 60 billion.

 

1.2 What is Foreign Direct Investment FDI is the process whereby residents of one country (the home country) acquire ownership of  assets for the purpose of controlling the production, distribu distribution tion and other activities activities of a firm in another country (the host country).

IMF Definition

According Accordin g to the BPM5, BPM5, FDI is the categor category y of interna internation tional al investm investment ent that reflects reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise reside res ident nt in anothe anotherr econo economy my.. The The lasti lasting ng in inte teres restt impl implies ies the the exist existenc encee of a longlong-te term rm relationship between the direct investor and the enterprise and a significant degree of influence  by the investor on the management of the enterprise.

UNCTAD Definition

The WIR02 defines FDI as ‘an investment involving a long-term relationship and reflecting a lasting interest interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) enterpri se) in an enterprise resident in an economy other than that of the FDI enterprise, enterprise, affiliate enterpri ente rprise se or foreign foreign affilia affiliate. te. FDI implies implies that that the investor investor exerts a signifi significant cant degree of  influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transaction  between them among foreign affiliates, both incorporated and unincorporated. Individuals as well as business entities may undertake FDI. Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a foreign direct investor. FDI has three components, viz., equity capital, reinvested earnings and intra-company loans. Equity capital is the foreign direct investor’s purchase of share of an enterprise in a country other  than its own. Reinvest Reinv ested ed earni earnings ngs compri comprise se th thee di direc rectt in inves vesto tors rs share share (in (in pr propo oport rtion ion to direc directt equit equity y  participation) of earnings ear nings not distributed as dividends by affiliates, affiliates , or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested. Intra-company loans or intra-company debt transactions refer to short or long term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.

 

OECD Benchmark Definition of Foreign Direct Investment (Third Edition)

FDI reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise). The lasting interest implies the existence of a long term relationship  between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two two en enti titi ties es and and all subseq subsequen uentt capit capital al tr tran ansac sacti tions ons betw betwee een n them them and among among af affil filia iated ted enterprises, both incorporated and unincorporated. As is evident from the above definitions, there is a large degree of commonality between the IMF, UNCTAD and OECD definitions of FDI. The IMF definition is followed internationally.

 

1.3 Historical Overview Following independence, the Government of India issued the Industrial Policy Resolution, 1948; some years later, the Industrial Policy Resolution 1956   came out. Between those years, the government governm ent introduced introduced the Industries (Development (Developme nt andIn Regulation) Regulati on) Act, (IDRA)and to regulate and control the development of the private sector. 1969, MRTP Act 1951 (Monopolies Restrictive Trade Practices Act) was passed. Another piece of legislation that has influenced industrial policy was the Foreig Foreign n Exchange Regulation Act (FERA) of 1973. These meas These measure uress fail failed ed to push push the co coun untr try’ y’ss indust industri rial al de deve velo lopm pment ent;; rathe rather, r, they they creat created ed inefficiencies, distortions and rigidities in the system, and Indian industries performed poorly and experienced slow growth  during the period from 1950 to 1980. The policy regime aimed for  a strong public sector, sector, imposed controls controls over private investment, investment, and promoted promoted a highly protective protective trade policy and inflexible labour laws (especially after the mid-1970s). It also sought to promote the small- scale sector, as well as balanced regional development. Up to the mid-1960s, policy instruments were aimed at purposive diversification within the industrial sector, and increased  public investment. The period perio d after the mid-1960s mid-19 60s witnessed a marked deepening d eepening of the importsubstitution  regime and strengthening of domestic regulatory structures. The decade of the 1980s wi witne tnesse ssed d some some exper experim iment entat ation ion wi with th domest domestic ic deregu deregula lati tion on that that yield yielded ed divid dividend endss in  productivity gains and acceleration in growth gr owth to seven percent per annum. In line with the conditionalities set out by the Structural Adjustment Facility of the International Monetary Monetar y Fund Fund (IMF) in the 1990s, India carried out the most drasti drasticc liberalisation liberalisation measures measures as the New Industrial Policy 1991   was announced on 24 July 1991. The policy de-regulated de-regulated

the

industrial economy by abolishing industrial licensing,   dil dilutin uting g the role role of the public public secto sector, r, delimiting MRTP limits, and promoting foreign investment and technology . The period from 1991 to 1997 saw rapid and wide-ranging reforms in industrial and trade policies, and tax and other policies that influence the macroeconomic management. In 2001, 2001, India India regaine regained d moment momentum um towards improving improving the environment environment for private investment, investment, openin ope ning g th thee econ econom omy y to fo fore reig ign n compet competit itio ion n and infra infrast struc ructur turee deve develo lopm pmen ent. t. Tr Trad adee polic policy y reforms made a radical break with the past by discontinuing with the complex system of import licensing and making an open commitment to lowering the tariff rates on imports. India finally  began to remove the quantitative quantitative restrictions on consumer goods and agricultural products in 2001, especially after a ruling by the World Trade Organization dispute settlement panel on a complaint brought by the US. In addition, the Indian stock market was opened for investment in equity to Foreign Foreign Institutional Investors Investors (FIIs).

 

1.4 Types of FDI

 

Mergers and Acquisitions: Acquisiti ons: is the primary type of FDI. This occurs when a transfer of  existin exis ting g assets assets from local firms to foreign foreign firms takes takes place. place. These Cross Cross border border mergers mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Acquisitions provide no long term benefits to the local economy—even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy.  Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States.

 

Greenfield investment: direct investment in new facilities or the expansion of existing facilities. facilit ies. They create new production capacity and jobs, transfer technology and know-how, know-how,

and can lead to linkages to the global marketplace. So these are the primary target of a host nation’s promotional promotional efforts. Multinationals Multinationals are able to produce goods more cheaply because of advanced advanced technol technology ogy and efficie efficient nt processe processess and uses up resource resourcess labor, labor, interme intermediat diatee goods, good s, etc so, it someti sometimes mes crowds out local local industry industry.. One more downside downside of Greenfi Greenfield eld investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy.  

 

Horizontal Foreign Direct Investment: is investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: It can be of two types: 1) Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic  production process. process . 2) Forward vertical FDI: in which an industry abroad abroad sells the outputs of a firm's domestic domestic  production processes. process es.

 

1.5 Advantages of Foreign Direct Investment Foreign Direct Investment has the following potential benefits for less developed countries. 1) Raising the Level of Investment Investm ent: Foreign investment can fill the gap between desired

in inves vestm tmen entt an and d lo local cally ly mobil mobilis ised ed saving savings. s. Loca Locall capit capital al ma mark rkets ets are often often not well well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can be difficult. FDI solves both these problems at once as it is a direct source of  externall capital. It can fill the gap between desired foreign exchange requirement externa requirementss and those derived from net export earnings. 2) Upgradati Upgra dation on of Technolog Techn ology y: Foreign investment brings with it technological knowledge while transferring machinery and equipment to developing countries. Production units in de deve velo lopi ping ng co coun untr trie iess us usee ou outt-da date ted d equi equipm pmen entt an and d tech techni niqu ques es that that can can re redu duce ce the the  productivity of workers and lead to the production of goods of a lower standard. standar d. 3) Improvemen Impro vementt in Export Expo rt Competit Comp etitiven iveness ess : FDI can help the host country improve its export  performance. By raising the level of efficiency and the standards of product quality, FDI makes a positive impact on the host country’s export competitiveness. Further, because of the international linkages of MNCs, FDI provides to the host country better access to foreign markets. Enhanced export possibility contributes to the growth of the host economies by relaxing demand side constraints on growth. This is important for those countries which have a small domestic market and must increase exports vigorously to maintain their tempo of  economic growth. 4) Employmen Empl oymentt Generatio Gener ation: n: Foreign investment can create employment in the modern sectors of developing countries. Recipients of FDI gain training of employees in the course of 

operating new enterprises, which contributes to human capital formation in the host country. 5) Benefi Ben efits ts to Cosnum Cos numers ers : Consumers in developing countries stand to gain from FDI through new products, and improved quality of goods at competitive prices. 6) Resil Res ilie ience nce Factor Fac tor : FDI has proved to be resilient during financial crisis. For instance, in East Asian countries such investment was remarkably stable during the global financial crisis of  1997-98. In sharp contrast, other forms of private capital flows like portfolio equity and debt flows were subject to large reversals during the same crisis.Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95.

FDI is considered less prone to crises because direct investors typically have a longer-term  perspective when engaging engagin g in a host country. In addition to risk sharing properties of FDI, it is widely believed that FDI provides a stronger stimulus to economic growth in the host countries than other types of capital inflows. FDI is more than just capital, as it offers access to internationally available technologies and management know-how.

 

Revenue to Government : Profits generated by FDI contribute to corporate tax revenues in the host country.

 

1.6 Disadvantages of Foreign Direct Investment FDI is not an unmixed blessing. Governments in developing countries have to be very careful while deciding the magnitude, pattern and conditions of private foreign investment. Possible adverse implications of foreign investment are the following: 1) When When forei foreign gn in inves vestm tmen entt is co comp mpet etiti itive ve wi with th home home invest investme ment nt,, profi profits ts in domest domestic ic industries fall, leading to fall in domestic savings. 2) Contribution Contribution of foreign foreign firms firms to public public revenue through through corporate corporate taxes taxes is comparativel comparatively y less because of liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided by the host government. 3) Fore Foreig ign n fi firm rmss rein reinfo forc rcee du dual alis isti ticc so soci cioo-ec econ onom omic ic stru struct ctur uree an and d incr increa ease se inco income me inequalities. They create a small number of highly paid modern sector executives. They divert resources away from priority sectors to the manufacture of sophisticated products for the consumption of the local elite. As they are located in urban areas, they create imbalances between rural and urban opportunities, accelerating flow of rural population to urban areas. 4) Foreign firms firms stimulate stimulate inappropria inappropriate te consumption consumption patterns patterns through excessive excessive advertisi advertising ng and monopolistic market power. The products made by multinationals for the domestic market are not necessarily necessarily low in price and high in quality. Their technology is generally capital-intensive which does not suit the needs of a labour-surplus economy. 5) Foreign firms firms able able to extract extract sizeable economic economic and political political concessions concessions from competi competing ng governments of developing countries. Consequently, private profits of these companies may exceed social benefits. 6) Conti Continu nual al outfl outflow ow of profit profitss is too large large in many many cases cases,, putti putting ng pressu pressure re on forei foreign gn exchan exc hange ge reser reserves ves.. Forei Foreign gn in inves vestor torss are are very very parti particul cular ar ab about out profit profit re repat patri riati ation on facilities. 7) Foreign firms may may influence influence political political decisions decisions in developing developing countries. countries. In view view of their  their  large size and power, national sovereignty and control over economic policies may be  jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure undue favours. Similarly, they may contribute to friendly political parties and subvert the political process of the host country Key question, therefore, is how countries can minimize possible negative effects and maximize  positive effects of FDI through throu gh appropriate policies. polic ies.

 

1.7 Objective Of The Study

This project “Foreign Direct Investments” was conducted so as to understand the concept of  Investm Inve stment ent Market Market with special special reference reference to Spot Trading Trading and its usage as an investm investment ent avenue. The study was undertaken at FDI maker research pvt ltd .

Objectives:



To get a better understanding to the financial market. To know about investment in FDI.



 To Gain proper knowledge about the FDI market & how to operate in practical life.



 

CHAPTER 2 FDI IN THE INDIA CONTEXT

2.1 India Companies Involved In Foreign Direct Investment India is a major monetary source for economic  developm development ent in India. Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing  business environment of India. Economic liberalization started in India in wake of  the 1991 economic economic crisis and since then FDI has steadily increased in India, which subsequently generated more than one crore (10 million) jobs. According to the Financial Times, in 2015 India overtook China and the United States as the top destination for the Foreign Direct Investment. In first half of the 2015, India attracted investment of $31 billion compared to $28 billion and $27  billion of China and the US respectively. respe ctively. Securing funding when they need it most is a challenge for many small & big business owners in India. Getting that money through a traditional bank loan is increasingly difficult and if some how you managed to get that also, you get it on a very heavy interest rate with mortgaging all yourr as you asset sets. s. That That's 's why why Fore Foreign ign Di Dire rect ct Invest Investme ment nt has becom becomee a savin saving g gr grace ace fo forr these these  businesses and FDI India will be your y our guide to show you the p path. ath. FDI India was born with a single objective, of enabling financial strength for our clients through quality and conflict free Foreign Investments. The use of technology is our cornerstone in ensuring that we can reach across demographics and geographies, provide a convenient, low cost - high quality, process driven, goal oriented, investment led Foreign Direct Investment. We are experts at what we do and for us our success lies only in making our clients meet their financial goals and objectives. We love the fact that we are known and respected by our clients and the industry for our unique business model and our conflict free advice. We guide Indian business opportunities looking for international funds through the intricate  process of FDI guidelines set by the governing body. Additionally, we also assist foreign investors to take the right route to invest in India. With extensive experience working with foreign investors across the globe, we have successfully guided them to fund projects in different sectors sectors some of them are as follows: Education Sector, Manufact Manu facturin uring g Sector, Sector, Solar Solar and Hydro Hydro Plants, Plants, Construc Constructio tion n Sector Sector and Hospita Hospitality lity Sector, Sector, Pharmaceutical Pharmac euticals, s, Food Processing Processing Sectors and even projects in the Mining and Metal Sector the list will go on. Indian companies in need of funds come to us seeking foreign investors after  which we thoroughly research their business model and sector and deduce the foreign direct investment availability. We then map entry routes and any complications the project may face in the future

 

2.2 Indian Govt. in FDI Accordin Accor ding g to Orga Organiz nizati ation on for Econo Economi micc Co-op Co-oper erati ation on and Deve Develop lopme ment nt (OEC (OECD) D),, an investment of 10% or above from overseas is considered as FDI. In India, foreign direct investment policy is regulated investment regulated under the Foreign Exchange Management Management Act, 2000 governed by the Reserve Bank of India.One can invest in India - either under Automatic Route which does not require approval from RBI or under Government Route, Route, which requires prior approval from the concerned Ministries/Departments via a sin. One can invest in India - either under Automatic Route which does not require approval from RBII or un RB unde derr Gove Govern rnme ment nt Rout Route, e, whic which h requ requir ires es pr prio iorr ap appr prov oval al fr from om the the co conc ncer erne ned d Ministries/Departments via a single window - Foreign Investment Facilitation Portal (FIFB) admini adm inist stere ered d by the Depar Departm tment ent of In Indus dustr tria iall Poli Policy cy & Pr Prom omoti otion on (DIP (DIPP) P),, Mini Ministr stry y of  Commerce and Industry,Government of India.

For effective handling of cases, monthly reviews by the concerned Ministries/Authorities and quarter quar terly ly review review meetin meetings, gs, co-chair co-chaired ed by Secret Secretary, ary, Departm Department ent of Econom Economic ic Affairs Affairs and Secretary, DIPP are also proposed to be undertaken to discuss pendency of proposals with the Government. Various categor Various categories ies of foreign foreign investor investorss - Foreign Foreign Portfol Portfolio io Investor Investors, s, Foreign Foreign Institu Institution tional al Investors, Foreign Venture Capital Investor, Non-Resident Indians can hold stakes in Indian  business entitiesCApital Investor, Non-Resident Indians can hold stakes in Indian business entitie enti tiess (company (company,, partner partnership ship fir firms, ms, proprie proprietary tary concerns concerns,, LLPs) LLPs) subject subject to conditi conditions ons and sectoral caps on ownerships. FDI is a capital account transaction transaction and any violation violation of its regulations regulations attracts penal provisions under FEMA. RBI administers FEMA and Directorate of Enforcement, Ministry of Finance Government of India has the authority to investigate in case of any violation of its rules.

 

2.3 FDI Poli Policy cy of Government of India Government of India has taken various effective steps to simplify Government simplify the Foreign Direct investment investment  policy. The Foreign Direct Investment Policy (FDI Policy) of the Government of India  prescribes the foreign fo reign investment cap in specified industrial sectors. But in the recent times many activities activit ies have been transferred to unrestricted unrestricted sectors in which 100% Foreign Direct investment is permitted. Broadly, the industrial sectors are categorized as: Restricted Prohibited Unrestricted Sectors (Up to 100% foreign ownership) All the sectors other than those mentioned below subject to terms and conditions in the FDI  policy come under unrestricted sectors for example:Mining (except Mining and mineral sepa separa rati tion on of tita titani nium um be bear arin ing g mine minera rals ls an and d or ores es,, its its va valu luee addi additi tion on and and inte integr grat ated ed activities)Manufacturing related commercial activities Information Technology Information Technology related activitiesE-commer activitiesE-commerce ce (permitted (permitted in marketplace marketplace model and not the inventorybased model. Also, it applies only to Business-to-Business e-commerce and not  business to consumer consu mer e-commerce).

 

2.4 Data and estimation strategy We invest investig igate ate the cros crosss border border dimens dimension ion of FDI FDI an and d its its impac impactt on econo economi micc gr growt owth, h, controlling controll ing for other potential determinants determinants of growth. The dependent variable variable in our empirical empirical analysis is economic growth, defined as real GDP per capita growth. Foreign direct investment (FDI) is the explanatory variable of interest. These are the key variables generally employed in the literature. FDI was sourced from the United Nations Conference on Trade and Development (UNCTAD) database and complemented with World Bank’s World Development Indicators (WDI) database to ensure the widest possible coverage in a consistent manner1. The OECD defines foreign direct investment as a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long-term relationship with the direct investment enterprise to ensure a significant degree of influence by the direct investor  in the management of the direct investment enterprise. The “lasting interest” is evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise. The objectives of direct investment are different from those of portfolio investment whereby investors do not generally expect to influence the management of the enterprise (OECD, 2008). Specifically, we employ FDI net inflows as a percentage of GDP. UNCTAD defines it as the value of inward direct investment made by non-resident investors in the reporting economy. Fi Final nally ly yet impor importa tantl ntly, y, we make make use use of commo commonl nly y emplo employed yed co contr ntrol ol varia variable bless such such as infla inf lati tion, on, physic physical al capit capital al accum accumula ulati tion on (gross (gross fixed fixed capit capital al for forma mati tion) on),, human human capit capital, al, government size, political rights and trade openness.

Figure 2: FDI and GDP growth per capita – country averages 1980-2014

 

Figure 1 depicts the cross-country correlation of average growth per capita outcomes and average FDI as percentage of GDP. The country’s averages are computed between 1980 and 2014. Average FDI ranged between between a minimum minimum close to zero and a maximum maximum close to 14% of  GDP. At the same time, average annual GDP growth per capita hovered in slight negative territory territor y for few countries and above 5% for another similar group of countries, countries, whilst it set in  between the two boundaries for the vast majority of countries. The preliminary unconditional correlation between GDP perper capita growth andThis FDItentatively shows a positive link   between FDI and real GDP capita growth. suggestscontemporaneous that on average FDI may have exercised a positive impact on growth outcomes. Nevertheless, this should be taken only as an initial possible evidence of a positive nexus between FDI and growth outcomes. It does not account for many elements including controls for time and country dimensions, as well we ll as other other potent potentia iall ob obser servab vable le expla explanat natory ory varia variable bles. s. It ha hass the caveat caveat of being being a contempo cont emporane raneous ous relatio relationshi nship. p. Finall Finally y yet importa importantly ntly,, it does not adjust adjust for endogene endogeneity ity concerns. These are all issues that will be tackled in our empirical analysis.

Figure 3: FDI as % of GDP – average across all countries and by country income group

Source : Note :

Authors’caclulations on UNCTAD and WDI data

the denition of income groups is based on World Bank clustering. For this  representation the low-middle and high-

middle income groups have been merged into the middle income group

 

Figure 2 plots the average FDI to GDP ratio across countries in each year between 1980 and 2014. The average FDI as percentage of GDP increased over time, thus following global trends of financial account liberalization and policies favouring economic openness. As a result, the average global level of FDI oscillated between 5% and 10% of GDP after the 2000s whilst it has  been well below 5% of GDP in the 1980s 198 0s and 1990s. The average averag e global glob al picture pictur e hides hid es different diffe rent  patterns across acros s country income groups. The clustering of countries into low-, middle- 2 and highincome countries follows the World Bank (WB) classification. This indicator is very useful for  our empirical analysis because it is time variant and guarantees enough variance across and within countries over time. Specifically, the three groups of countries showed a similar pattern until the second half of the 1990s. To the contrary, high-income high-income countries recorded higher levels of FDI than the other groups starting from late 1990s. Also, FDI in high income countries recorded on average more pronounced swings during crisis periods – e.g. the early 2000s dotcom bubble, the 2008 global financial crisis and the following Great recession. All in all the

2

In this representation we have bundled bu ndled together low middle- and high middle-income countries.

level of FDI as a percentage of GDP has increased steadily also in low income countries, reaching levels comparable to other country groupings at the end of the sample.  To perform the empirical investigation investigation we compiled compiled a comprehensive comprehensive database covering a wide geographical perimeter with a global coverage. The main sources for all the variables included in our analysis are: United Nations Conference on Trade and Development (UNCTAD); World Bank’s World Development Indicators (WDI) and Worldwide Governance Indicators (WGI); Freedom House; International International Monetary Monetary Fund’s World Economic Outlook (WEO); Penn World Tables (PWT). (PWT). A detailed description of variables used and their sources can be found in Annex The resulting database runs for the years 1980-2014 with annual frequency and includes 111 countries.

Figure 4: Institutional quality across country income groups – average across all countries

 

 

Source : Authors’caclulations

on WDI data and Doing Business Indicators

Note :

The original Doing Business Indicators range between a minimum -2.5 and a maximum  of 2.5 – moving from weak to strong instotutional quality. The indicators in this chart have been transfore transforemed med setting the mini minimum mum to zero and the theoretic theoretical al maximum to 5. The averages refer to the period 2001-2014

We also also employ employed ed instit instituti utiona onall quality quality variab variables les,, specif specifica ically lly governm government ent effect effective ivenes ness, s, regulatory quality, rule of law, and control of corruption. We have chosen these variables  because they may affect directly FDI and the absorption capacity of the targeted countries. These variables are taken from the World Bank Doing Business Indicators and the time horizon starts from early 2000s. The original World Bank data on the quality  of institutions range between a theoretical minimum of -2.5 and maximum of 2.5 – moving from low to high institutional quality. For our analysis, we have transformed the indicators setting the minimum to zero and the theoretical maximum to five. Figure 3 shows the average institutional quality over time and across countries within each income group. The average institutional quality increases moving from low- to high-income countries. Nevertheless, differences in the scale and, therefore in institutional quality, exists between indicators within each single income group.

 

2.5 Key Statistics As India opened up in the 1990s, the economy was rekindled   with a spirit of entrepreneurship and co comp mpet etit itiv iven enes ess. s. The same same spiri spiritt seeped seeped into into the fede federa rall struct structure ure of the ec econ onom omy. y. The The Constitut Const itution ion of India provid provides es the federal federal states states a sufficien sufficientt degree degree of autono autonomy my over various various matters, matt ers, including foreign investment. investment. Although Although there are certain critical sectors that require require prior  governm gove rnment ent approva approvall for foreig foreign n invest investmen mentt such as Defence Defence and Broadcas Broadcastin ting g Conten Contentt services, most others are open to foreign competition under the automatic route. FDI inflow inflow in India has witnessed a positive positive trend since the  launch of the ‘Make in India’ campaign. Between March 2014 and a nd April 2019, India recorded FDI worth US$ 286 billion, which was 46 percent of the overall FDI from April 2000 to April 2019 (US$592 billion). 15 In FY2017-18, India crossed the US$60-billion mark for the first time. However, the net FDI inflow for April-May 2019 decreased to US$ 6.8 billion, from the US$7.9 billion in April-May 2018. A significant  proportion of the FDI in India is in the manufacturing, communication and financial services sectors.16,17 (See Figure 2) Together the six sectors highlighted in Figure 2 account for 

  more than 50 percent of all FDI in India between April 2000 to June 2019

Figure 5: Composition of FDI in the top sectors in India (April 2000 to June 2019)

10% AUTOMOBILE INDUSTRY

12%

34%

TRADING

SERVICES SECTOR

9% CONSTRUCTION DEVELOPMENT

17% TELEC OMMU OMMUNICAT NICATIONS IONS

18% COMPUTER SOFTWARE & HARDWARE

Source: Department for Promoon of Industry and Internal Trade (DPIIT)

8

 

The sector sectorss where where FDI is comple completel tely y prohib prohibite ited19 d19 includ includee lotter lottery, y, gambli gambling ng and bettin betting g (including casinos); chit funds;b Nidhi companies;c trading trading in transferable development rights; real estate; and manufacturing of cigarettes, or tobacco or tobacco substitutes. At the same time,

the number of industries reserved for the public sectorhas also been reduced. Since 2014, for  example, private investment in Rail Infrastructure has been permitted. At present, only two industrial sectors are reserved for public sector: Atomic Energy and Railway Operations. Table 1 shows the sectoral FDI thresholds under the automatic and government routes.

 b

  Chit fund is defined as per the Section 2(b) of the Chit Fund Act, 1982. A chit fund is a type of  rotating savings and agreement among different persons to subscribe a certain sum of money for a specified period of time. After the specified period of time, the money is returned to the subscriber with interest. c

 Nidhi company is recognised under section 406 of the Companies Act, 2013. It is a business structure which comes under 20A of the Companies Act, 1956 and ruled by the Ministry of Corporative Affairs (MCA). It performs the functions functions of lending lending and borro borrowing wing of money within its members where it works through its membe members rs only. Nidhi Company is also called as a mutual benef benefit it company. Nidhi Company promotes the art of saving and utilisation utilisation of funds within within its member community.

Figure 6:

 

Table 1: Selected Sectors with specific thresholds for FDI Sector

FDI Limit

Entry Route & Remarks

Mining Mining and Exploration of metal and non-metal ores including diamond,

100%

Automatic

100%

Automatic

gold, silver and precious ores but excluding titanium bearing minerals and its ores

Mining (Coal & Lignite)

Mining

 

Mining and mineral separation of titanium bearing minerals and ores, its

100%

Government

100%

Automatic

49%

Automatic

value addition and integrated activities

Petroleum & Natural Gas Exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, marketing of natural gas and petroleum products etc.

Petroleum & Natural Gas Petroleum refining by the Public Sector Undertakings (PSU), without any disinvestment or dilution of domestic equity in the existing PSUs. Automatic up to 49% Above 49% under Government

Defence Manufacturing

 

100%

route in cases resulting in access to modern technology in the country

Broadcasting •

Teleports Telepor ts (setting (setting up of of up-link up-linking ing HUBs/ HUBs/Telepor Teleports) ts)

•

Dire Di rect ct to to Hom Home e (DT (DTH) H)

•

Cable Networks (Multi System operators (MSOs) operating at National

100%

Automatic

100%

Automatic

49%

Government

100%

Automatic

26%

Government

100%

Government

100%

Government

or State or District level and undertaking upgradation of networks towards digitalization and addressability •

Mobile TV

•

Head Hea d end-in-th end-in-the e Sky Broadcas Broadcasting ting Servic Service(H e(HITS) ITS)

Broadcasting Cable Networks (Other MSOs not undertaking up gradation of networks towards digitalization and addressability and Local Cable Operators (LCOs))

Broadcasting Content Services •

Terres Ter restri trial al Broad Broadcas castin ting g FM (FM (FM Radio) Radio)

•

Up-lin Uplinkin king g of ‘News ‘News & Current Current Affair Affairs’ s’ TV Channels Channels

Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of  TV Channels

Print Media •

Publishing of newspaper and periodicals dealing with news and current affairs

•

Publication of Publication of Indian edition editionss of foreign foreign magazines magazines dealing dealing with with news and current affairs

Publishing/printing of scientific and t echnical magazines/specialty magazines/specialty journals/ periodicals, subject to compliance with the legal framework as applicable and guidelines issued in this regard from time to time by Ministry of Information and Broadcasting. Publication of facsimile edition of foreign newspapers

 

 

FDI FD I Lim Limit it

 Sector  Civil Aviation

–

Air Transport Services

Entr En try y Rou Route te & Rem Remar arks ks Automatic up to 49%

•

Scheduled Schedul ed Air Transp Transport ort Service/ Service/ Domesti Domestic c Scheduled Scheduled Passenger Passenger Airline Airline

•

Region Reg ional al Air Tra Transp nsport ort Ser Servic vice e

route

(Foreign Airlines are barred from Investing in Air India)

100% Automatic for NRIs

Construction Development: Townships, Housing, Built-up Infrastructure Industrial Parks (new & existing)

 

Satellites- establishment and operation, subject to the sectoral guidelines of

100%

 

Above 49% under Government

100%

Automatic

100%

Automatic

100%

Government

Department of Space/ISRO

Automatic up to 49%

Private Security Agencies

 

74%

Above 49% & up to 74% under Government route Automatic up to 49%

Telecom Services

 

100%

Above 49% under Government route

E-commerce activities (e-commerce entities would engage only in Business to Business (B2B) e-commerce and not in Business to

100%

Automatic

Consumer (B2C) e-commerce.)

Single Brand retail trading Local sourcing norms will be relaxed up to three years and a relaxed

Automatic up to 49% 100%

sourcing regime for another five years for entities undertaking Single Brand

Above 49% under Government route

Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.

Multi Brand Retail Trading

 

Asset Reconstruction Companies

 

51%

Government

100%

Automatic Automatic up to 49%

Banking- Private Sector

 

74%

Above 49% & up to 74% under Government route

Banking- Public Sector

 

Infrastructure Infrastruc ture Company in the Securities Market

 

20%

Government

49%

Automatic

49%

Automatic

49%

Automatic

49%

Automatic Automatic

Insurance •

Insu In sura ranc nce e Com Compa pany ny

•

Insu In sura ranc nce e Bro Broke kers rs

•

Third Thi rd Part Party y Admin Adminis istr trat ator orss

•

Survey Sur veyors ors and Los Losss Asse Assesso ssors rs

•

Other Oth er Ins Insura urance nce Inte Interme rmedia diarie riess

Pension Sector Power Exchanges

   

Pharmaceuticals (Green Field)

 

100%

Pharmaceuticals Pharmaceu ticals (Brown Field)

 

100%

Automatic up to 74% Above 74% under Government route Automatic up to 74%

Healthcare (Brownfield)

 

100%

Above 74% under Government route

Food products manufactured or produced in India 100%

Trading, including through e-commerce, in respect of food

Government

products manufactured or produced in India.

 

Investment through the automatic route has emerged as the most dominant channel of FDI inflows into the country.22 As Figure 2 shows, a majority of foreign investments (around 51  percent) has been in sectors that allow automatic inflow of FDI.

Over the past year, various changes have been made in the country’s FDI policy to make India an attractive investment destination: for instance, 100-percent FDI under the automatic route in the coall mining coa mining sector was belate belatedly dly allowe allowed d only only for captive captive consum consumpti ption, on, but in 2019 2019 was extende ext ended d to compani companies es aiming aiming to commer commercia cially lly sell sell the commod commodity ity.. Furthe Further, r, invest investmen mentt in contract manufacturing was allowed up to 100 percent under the automatic route, along with easing the local sourcing norms for foreign investors in Single Brand Retail Trading (SBRT)  business.

Figure 7:

 

CHAPTER   -3  REVIEW OF LITERATURE In early 1990s FDI started increasing steadily. This has prompted a surge in the economic literature studying FDI and its effects growth. Under neoclassical growth models, FDI can serve as an exogenous factor contributing to growth through increases in investment volumes or its effici eff icienci encies es (Sala(Sala-i-M i-Mart artin, in, 1996; 1996; Solow Solow 1956). 1956). Under Under the endogen endogenous ous growth growth framew framework ork,, sustained economic expansions are an outcome of technological transfers, diffusion and spillover  effects (Romer, 1986; Lucas, 1988; Barro and Sala-I-Martin, 1995). Therefore, FDI can play a  paramount role in lifting long-run growth. Despite the fundamental difference in assumptions, the empirical equations for both approaches are often similar in the literature (Dowrick S. and Rogers M., 2002). Largely, macro-empirical evidence on the direct impact of FDI on growth, employing either  country specific or cross-country datasets, is rather mixed. At the same time, several studies show positive mediated effects. Country perimeters and methodological approaches vary widely acrosss studies. acros studies. For example, example, some studies employ employ cross-sect cross-sectional ional estimation estimation techniques, techniques, while others rely on dynamic panel analysis to examine the FDI contribution to growth. Moreover, the treatment of endogeneity sometimes is absent and other times differs in the literature. A number  of empirical studies suggested a positive contribution of FDI to growth (e.g. Li and Liu, 2005),

while some point to weak or no influence (e.g Carkovic and Levine, 2005). Country-specific evidence is also mixed (Ericsson and Manuchehr, 2001; Chowdhury and George Mavrotas, 2005). A growing number of studies identified recipient countries’ absorption capacities to relate to FDI  productivity (Crespo and Fontoura, 2007). Such factors included human capital development (Borenstein et al., 1998); quality of economic, political and social environment (Li and Liu, 2005; Choe, 2003); financial system penetration and development (Hermes and Lensink, 2003; Durham,, 2004; Alfaro et al., 2006). There is some firm-leve Durham firm-levell evidence that absorptive absorptive capacity influences FDI spillovers (Farole and Winkler, 2012). Some other studies examined the FDI impact on growth for subgroups in institutional quality terms (e.g. top 20-30 percent most regula reg ulated ted countri countries es thresh threshold old)an )and/o d/orr for disaggr disaggrega egated ted sub-in sub-indic dicato ators rs (e. (e.g. g. market market entry entry regulations, rule of law) (Busse and Groizard, 2008; Prüfer and Tondl, 2008). Overall, depending on the countries sample and time window, studies show a significant degree of positive (and/or at times negative) relationship with human capital, financial markets, openness, quality of political and institutional environment and income levels. Li and Liu (2005) find a connection between FDI and economic growth both directly and through interaction with local human capital and technology gaps. The positive direct impact is

 

evidenced both for developed and developing countries. Nair-Reichert and Weinhold (2001) examined a causal relationship between FDI and economic growth in a dynamic panel of 24 developing countries, while controlling for domestic investment, inflation, degree of openness, and human capital. On average, there is evidence of positive impact from FDI on growth and a higher degree of openness intensifies positive aspects of FDI. Nevertheless, the relationship is heterogeneous across the panel. Makki and Somwaru (2004) based on a panel of 66 developing countries conclude that FDI contribute significantly to advancing economic growth, while controlling for macroeconomic and institutional factors. However, the direct effect from FDI to growth not always proves to be significant, while FDI and trade interaction delivers a stable positive contribution to growth. On the other hand, FDI intermediated effect with human capital and domestic investment did not alwa always ys have have a si sign gnif ific icant ant im impa pact ct.. Fu Furt rther hermo more re,, they they poin pointt to the the evide evidence nce of posi positi tive ve contribution from FDI to domestic investments, thus supporting the “crowd in” argument. Carkovic and Levine (2005) find no robust positive impact of FDI on growth either directly or  mediating via human capital levels. The study relied on dynamic panel estimation technique (GMM) employing a sample of 72 countries. Borensztein, De Gregorio, and Lee (1998) conclude con clude that FDIs are an important vehicle to spur the technological transfer and support growth based on cross-country study of 69 developing economies. However, the productivity enhancing effects of  FDI holds only when a sufficient absorptive capability for advanced technologies is available in the host economy. Unless a given threshold is reached, the FDI in itself has no significant  positive impact on growth. Mello (1999) finds positive impact of FDI on long-run growth via te techn chnol ologi ogica call upgra upgradi ding ng and and knowl knowled edge ge sp spil illo love vers rs,, both both for for deve develo lope ped d an and d deve develo lopi ping ng economies. However, the extent to which FDI accelerates growth depends on the degree of  complementarity and substitution between FDI and domestic investment. On a pool of developed

and developing countries, Choe (2003) also shows a positive impact from FDI to growth. However, this relationship is sensitive to outliers, thus making it rather weak. Some studies highlight that local financial markets development – including depth, financial intermediation effectiveness and financial sector regulation soundness - are relevant in generating positive ef effe fect ctss fr from om FDI to grow growth th (Alf (Alfar aro, o, 2004, 2004, Herm Hermes es and Le Lens nsin ink, k, 2003 2003;; Durh Durham am,, 2004) 2004).. Moreover, there is some limited evidence pointing at possible differentials in FDI impact on growth depending on the host country income level. For example, higher income developing countr cou ntries ies may benefi benefitt from from FDI spill spillover overss thanks thanks to better better cap capabi abilit lities ies to learn learn by doing doing (Blomstrom et al, 1992). Moreover, Meyer and Sinani (2009) conducts a meta-analysis across many country specific studies primarily focused on developing economies. They propose the idea of a curvilinear relationship between FDI productivity spillovers and the recipient countries’ institutional framework development as measured by transparency and economic freedom.

 

Institutional quality is likely to affect the absorptive capacity of the host economy (Busse and Groizard, Groiz ard, 2008; Blomstrom Blomstrom and Kokko, 2003; Lipsey and Sjioholm, 2005), thus mediating mediating the impact of FDI on economic growth. A positive FDI-growth nexus requires a functioning legal and institutional framework and political stability (Prüfer and Tondl, 2008). In line with this argument, a stable and business-friendly environment may support spillovers from FDI because it affects the business operating conditions and it can potentially determine how efficiently FDI resources are employed. Some studies suggest productivity-related positive spillovers from FDI conditional condit ional on host economies’ economies’ instituti institutional onal environment environment (Meyer and Sinani, Sinani, 2009; Prüfer and Tondl, 2008). Nonetheless Nonetheless there is limited limited research research dealing with institutions institutions in explaining explaining FDI impact on growth (Busse and Groizard, 2008; Prüfer and Tondl, 2008). Busse and Groizard, (2008) pointed to some evidence that a high regulatory burden can limit the effectiveness of FDI. Particularly, more regulated economies are less able to reap the benefits of FDI inflows and even more so for relatively restrictive regulations: top 20 percent most regulated economies seem to  be mostly restricted from taking advantage of FDIs. Prüfer and Tondl (2008) (2008 ) demonstrated that well-developed legal framework and low political risks enhance FDI-growth nexus through  positive impact on o n productivity growth for 16 Latin American for 1990-2003. Furthermore, they suggest that a stable legal environment upholds the FDI-growth relationship. Alguacil et al. (2011) contributes to the discussion on the roleplayed by the absorptive capacities within host economies in their ability to grow and to exploit FDI efficiently. They suggest that host country governments should develop a set of policies that are not only focused on inward FDI promotion  but also on the improvement of their own political and economic framework.

 

CHAPTER   -4  RESEARCH METHODOLOGY The study of conducting research is Research Methodology. Research: The word research is composed of two syllables “Re” and “Search”.

“Re” is the prefix meaning ‘Again or over again or a new’ and “Search” is the latter  meaning ‘to examine closely and carefully’ or ‘to test and try’. Together they form, a careful, systemac, paent study and invesgaon in some eld of  knowledge undertaken to establish principles / policies.

Research Resea rch can also al so be defined defi ned as

1 2

Se Sear arch ch for for kno knowl wled edge ge Sys System temati aticc and scient scientifi ificc search search for getting getting releva relevant nt answers answers on any taken taken up specif specific ic

3 4 5

topic. Sc Scie ient ntif ific ic enqu enquir iry y into into a sub subje ject ct.. Res Resear earch ch is a moveme movement nt from from the the unkno unknown wn to the the known known.. It is the the voy voyag agee of disc discov over ery y

 Acc to Bulmer, Research is primarily committed to establishing systematic, reliable and valid knowledge about the social world. Acc. To Clifford Woody, Research comprises of    

Defining and redefining problems. Formulating hypothesis (basic idea) Collecting Organizing



Evaluating datas Making decisions



Suggesting solutions



Reaching conclusions





Finally, carefully testing the conclusions

To determine whether they fit the formulated Hypothesis. Research Methods: May be understood as all those methods or techniques that are used by a researcher for conducting a Research depending upon the methods. 

Library Libra ry Research: Resear ch: analysis of historical records and documents.

 

Statistical compilation, references, abstracts, guides manipulation (handle with skill) 

Observation ation,, questionnai questionnaires, res, personal, personal, Group or tele telephonic phonic interviews interviews,, case Field Research: Resea rch: Observ study. Laboratory Labora tory Resear R esearch: ch: Group (team) study, use of audio visual tools. Research Methodology: is the way do systematically solve the research problem. In it we study the various steps that are generally adopted by a researcher in studying his research problem logically. When we talk of Research Methodology, Methodology, we not only talk of research methods but also consider the logic behind the methods we use in the context of our research study and explain why we are using a particular method or we are not using a particular method or technique so that research results are capable of being evaluated either by the researcher or o others. thers. Steps:

1 Why a particular research study has been undertaken? 2 How the Research Research problem has been defined? 3 What way and why the hypothesis (basic (basic idea) has been formulated? 4 Why a particular technique of analyzing data is used? (or) How tthe he data were collected? 5 How the collected collected data were interpreted? 6 What deletion deletion was made? 7 What was the conclusion? conclusion? Finally what was the solution for the Research problem? p roblem? Importance of knowing the subject – research Methodology:

1)) A student preparing himself for a career of carrying ca rrying out research as his profession –  -

Will be trained better to do research Will help him develop disciplined thinking Will help him observe the field objectively. Will enable thoroughly to understand the logic behind the research problem. Will increase the ability to evaluate the results. Face the evaluated results with confidence. Useful in various fields such as Govt. Business, administration, community development & social work.

-

To qualify a Research or study:

To be a Good or perfect one, The Research adapted should process certain characteristics,

 

It must as far as possible be:1) Controlled 2) Rigorous 3) Systematic 4) Valid 5) Verifiable 6) Empirical 7) Critical 1. Controlled: The research problem should not be affected or influenced by external factors (i.e. variables other than the participating facts).

Thee proc procedu edure ress foll followe owed d to find find answ answer erss to quest questio ions ns sh shoul ould d be rele relevan vant, t, 2. Rigorous: Th approp app ropria riate te & justi justifie fied. d. But the degree degree of rigiou rigiourr may vary vary from from one proble problem m to another  another   problem. 3. Systematic: The investigation should follow a certain logical sequence (Not in a haphazard manner) 4. Valid & Verifiable: The findings should be valid & can be verified by you or others at any time. 5. Empirical: The conclusions drawn should be based on hard evidence, gathered from real life experiences or observations. 6. Critical: Critical:  The process of investigation must be foolproof and free from drawbacks. The  process adapted and the procedures used must be able to withstand any critical scrutiny. Types of Research:-

Research can be classified from the view point po int or perspectives as, From the view point Application

objective

Inquiry mode

1) Pure Research

1) Descriptive 1) Quantitative Research

2) Applied Research

2) Correlative 2) 2) Qual ualitative Research 3) Exploratory 4) Explanatory

1) Pure Research:(Basic or Fundamental Research) Gathering, knowledge is termed as ‘pure’ or ‘basic’ research. Just to gather knowledge in order to formulate or generalize theories or policies. Eg) Research on mathematics. This types of research adds knowledge to the already existing organized body. Applied Research:To find an immediate solution for a pressing p ressing practical problem.

 

Eg: Social, economical and political trends prevailing in a country. Applied Vs Fundamental Based on the objectives of Research: 1) Descript Descriptive ive Resear Research: ch: 





Survey or fact finding enquires of different kinds. It describes the actual prevailing state of affairs, existing at present. Otherwise known as ex post facts means existing position of facts / issues. Here the variable influencing the research has no control or the researcher has no control over the variables.

Eg: Frequency of shopping, customer preference etc. 2) Correlat Correlative ive Resear Research ch: 

 

Goes on to discover the existing relationship or interdependence between two or more aspects / variables. Otherwise known as comparative study. Investigates association between variables.

Eg: Sum of humour and job satisfaction, (related variable) Research problem is workers turnover  Analytical Research:

The researcher has to use facts / information already existing and analyze these data to make a critical evaluation. Eg: document study / historical evidence. Descriptive Vs Analytical Research: Explanatory Research:

Attempts to clarify or explain why and how, any particular research problem arises and can be solved. 4. Exploratory Research:

Study undertake to explore a new area or an unknown destination.

III. Based on the Inquiry Mode: Quantitative Research:   

Relates to aspects that can be quantified and expressed in terms of quantity. Otherwise known as structured Research. In th this is type type of Rese Resear arch, ch, th thee obje object ctiv ives es,, desig design, n, sa samp mple le and and all all the the othe otherr fact factor orss influencing the research is pre determined.

The research problem and its solution will be expressed in terms of quantity and hence statistical and economic analysis is adapted in this type of Research. Quantitative Research:

 

 

Otherwise known as unstructured research. The aspects related to quality / kind or texture.

Eg: Behaviour science Apart from the above, other types of Research are , Conceptual Research: Research related to some abstract idea or theory 

Used by philosophers or thinkers for developing new n ew concepts.

Empirical research

(based on experiments or experience)  

Otherwise known as experimental type of Research. The result obtained by adapting Empirical Research is considered to be most powerful (evidence enclosed)

Based on the time time consumed to complete a particular research, a) one time Research:- Restricted to a single time period.  b) Longitudinal Research:- Conducted over several time period.

 

CHAPTER-5 ANALYTICAL ANALYTIC AL FRAMEWORK

5.1 FDI and Capital Formation

According to National Income theory, total savings is identical to the total investment in an economy. econom y. When When this this identi identity ty is extend extended ed to open open econom economy y macroe macroecono conomic micss with with capita capitall account transactions, it reveals the relationship between domestic private savings, government savings, and foreign savings with domestic investment. The following equations explain the relationship. Y  C + I + (G ― T) + CA (= X ― M). ..... ..(1 ..(1)) (S ― I) + (T ― G)  CA......................................(2)

where, CA=  Δ NFA......................................................... ...( ...(3) 3)

Therefore,  I..................................... ....( S + (T ― G) ― CA  I..................................... ....(4) 4)

Here, S represents private savings which is equivalent to the difference between national income (Y) and domestic private consumption (C). (T ― G) represents Taxes and Government Expenditure (or government savings). ΔNFA is the aggregate net acquisition of foreign assets which is also defined as the sum of acquisition of foreign assets by domestic citizens (capital accounts) and acquisition of foreign assets by the central bank (also called accommodating capital account transactions). ΔNFA is equal in magnitude to the Current Account (CA). In other words, a CA deficit (surplus) is accompanied by a net inflow (outflow) of foreign assets. Inflow of foreign assets is a proxy for foreign savings. Therefore, equation (7) represents the link between private domestic savings, government savings, foreign savings, and domestic investment.117 FDI inflows are recorded as part of the capital account in the Balance of  Payments and is reflected in the aggregate net acquisition of foreign assets component in equation (7). FDI inflows are thus expected to increase domestic investment (I). To be sure sure,, th ther eree are are in inst stan ance cess wher wheree FDI FDI in infl flow owss ca can n lead lead to a decr decreas easee in dome domest stic ic investment inves tments, s, or crowding-out effects. effects. Crowding-in Crowding-in can happen if FDI stimulates stimulates backward backward or  forward production linkages in the host country especially through demand for intermediate inputs, and positive spillovers of FDI such as technology transfer.118 A study of the FDI inflows infl ows into five South Asian Asian countries countries during the period 1965-1996, 1965-1996, found complementa complementarity rity

 

 between FDI and domestic investment.119 A similar pattern was seen in an examination of FDI inflows into Malaysia from 1960 to 2003.120 However, the impact of FDI can be different in develo dev elopin ping g countr countries ies and less less develo developed ped ones, ones, and over over time time as well. well. An explan explanati ation, on, especially for developing regions such as Asia and Africa, rests on the experience that FDI inflow inf lowss enhance enhance domest domestic ic invest investmen mentt through through benefi beneficia ciary ry effect effects, s, i.e i.e., ., more more advance advanced d  production technology, improved organisational and managerial skills, marketing know-how, and market access. The consequent improvement in competition, technology, and institutions, encourage domestic entrepreneurship.

A multi-country analysis of the impacts of FDI on domestic investments between 1970 and 2004 suggests that the impacts of FDI in India and several other less developed and developing nations is either the crowding-out of domestic investment, or have no impact at all. On the other hand, a lagged effect of FDI is to increase domestic investment, especially in the LDCs and developing nations. This is primarily because domestic firms are unable to compete with the foreign firms immediately, resulting in crowding out. Over time, as different types of   production linkages are generated, domestic investments increase in upstream and downstream industries. As MNCs hire and train local workers, domestic labour productivity increases, encouraging more domestic firms to enter the market.121 Thus, it can be assumed that FDI inflows this year is likely to boost domestic investment in the next year. This increase in domestic investment is captured by Gross Capital Formation of the next year. As FDI inflows positively influence domestic investment in subsequent years, yea rs, this analysis uses the ratios of Gross Fixed Capital Formation (GFCF) to disaggregate the data on FDI in India at the regional office level. It is assumed that when FDI flows into a particular regional office, the nature in which it flows into its constituent states can be estimated from the GFCF in those states during the following year. A more more specif specific ic study study of FDI inflow inflowss into into India India during during the period period 1996-2 1996-2009 009 examin examined ed whether there is any long-run cointegrated relationship between FDI, Gross Fixed Capital Formation, and GDP in the Indian context, in particular, by considering the possible presence of multiple structural breaks. It also analysed the direction of causality between the three data series—FDI and economic growth, GFCF and economic growth, and FDI and GFCF (in both directions), which is instrumental for bringing out the present growth trajectory and future  policy implications. The empirical analysis suggests that there is a unidirectional causality from India’s domestic GDP to FDI at 10 percent level and from FDI to domestic investment, measured by GFCF at 5 percent. In other words, India’s GDP have a far greater impact in attracting FDI inflows, which in turn gives a boost to domestic investment. Stated alternatively, FDI in India plays a complementary role in the country’s domestic investment scenario.122 Anothe Anot herr study study of a heter heterog ogen enous ous panel panel of 30 count countri ries es adopt adopted ed panel panel inte integr grat atio ion n and cointe coi ntegra gratio tion n method methodss to examin examinee the long-r long-run un rel relati ations onship hip betwee between n FDI and domest domestic ic investment across America, Europe, Africa and Asia. For all variables and for all countries,

 

 both panel bivariate and multivariate cointegration tests provide evidence of the existence of  cointegration between the involved series. Though the results are mixed, countries in Asia and Africa are observed to experience crowding in impacts due to FDI inflows. This implies that FDI inflows boost domestic investment.123 These findings are consistent with the complementarity hypothesis between FDI and domestic investment.124,125,126 However, the contrasting evidence of FDI resulting in the crowding out of domestic investment, especially among the developed countries in North America and Europe, are due to the entry of FDI in sectors where domestic firms already exist, resulting in strong mergers and acquisitions.127,128 This trend was also observed in a study analysing FDI flows in Canada by Hezaji and Pauly (2003) over the period 1970-1998.129 The objective of the study was to test the prior notion

that outward FDI reduces domestic GCF while inward FDI increases GCF. While the latter  holds true, they have shown that the results are more heterogenous when it comes to outward FDI and depends to a large extent upon the investment partner. Such positive spillovers of FDI into Gross Fixed Capital Formation have been found in various other economic literature as well.130,131 Following the patterns observed across several empirical studies, this present analysis uses the GFCF in these states as an estimate of the share of FDI flowing into these states.132

 5.2 State-wise FDI Decomposition  Since the data for FDI at the state level has been made available only recently (for the period October 2019 to March 2020),133 the focus of this paper is on decomposing the data at the regional office level to its constituent states between 2005-06 to 2018-19. Regional data on FDI inflows can be disaggregated into individual states by estimating the share in which FDI is expected to flow. For example, the Kolkata office of the RBI caters to West Bengal, Sikkim and the Andaman Andaman and Nicobar Nicobar Islands Islands,, while while the Guwahati Guwahati office office in Assam Assam covers covers the northeastern states. A key outcome of FDI inflows is domestic investment. Despite the fact that FDI is a relatively small share of Gross Fixed Capital Formation in India, Gross Fixed Capital Formation (GFCF) is the best available metric of estimating state-wise FDI in India. Higher GCF in a particular period can be an outcome of higher FDI inflows in the previous  period into the corresponding state. Intuitively, FDI at regional office ‘j’ in time period ‘t’ can  be decomposed into the FDI flowing to the states under the jurisdiction of ‘j’ by using the GFCF of the states in the following year ‘t+1’. We decompose FDI based on the following formula.

 

 FDI it = wit . FDI  (1)  RO j................  j............................... ............................... ............................... ....................... .............. ......  And  ,

t+1 wit = GCF i

GCF

………………………………………………………………………(2 )

t+1  RO j

Where,

•

GCF  GC F it+ is the Gross Capital Formation Formation of state ‘i’ in year ‘t+1’; and

is the sum of the gross capital formation of  t+1 GCF   RO all states that are included in regional office ‘j’ ( RO j) for year ‘t+1’. 1

•

wit is the weight aached to a parcular state based on its GCF in comparison to the total GCF of all states falling under the

 jurisdicon of the same Regional oce. oce.

•

 FDI   RO is the total FDI registered in regional oce ‘j’ in me period ‘t.’  j

‘t’,, i.e., i.e. , FDI it . The Following this methodology, we decompose FDI in  RO j for year ‘t’ into FDI of state ‘i’ for year ‘t’ weights weig hts in which the aggr aggregate egate figures are decomposed is defined by (2) ( 2) (see Appendi

 

CHAPTER-5 CONCLUSION This study contributes to the literate analyzing FDI as a factor driving economic growth. Our  investigation focused on the impact of FDI inflows on growth and their effect mediated by income levels and the quality of the institutional environment. We focus on the role of income levels lev els.. This This was not thorou thoroughl ghly y analyse analysed d in earlie earlierr studie studies. s. Specifi Specifical cally, ly, we consid consider er the interaction between country income levels and FDI over a long time horizon and across a multitude of developing and developed countries. Moreover, we also introduce an element of  novelty analysing the effect of institutional quality mediated by the income level status. To do so, we deploy a new perspective to look into the FDI effects on growth mediated by institutional quality, whereby we make use of country income levels as the key elements to peer-reference countries. We find that FDI have a positive impact on growth. However, the nexus without any other form

of mediat mediation ion is weak. weak. We detect detect a statis statistic ticall ally y signif significa icant nt invert inverted ed U-shap U-shaped ed relati relations onship hip  between countries’ income levels and the size of FDI impact on growth. Moving from low- to mi midd ddle le-i -inc ncom omee count countri ries es th thee effe effect ct gets gets larg larger er.. On the the othe otherr hand, hand, it dimi dimini nish shes es again again transition trans itioning ing to high-income countries. countries. FDI does not only provide needed financing financing for capital capital accumulation, but also supports the import of positive externalities in terms of new inputs and foreign technologies in the production function. Therefore, FDI are more beneficial – or have a higher impact on growth – for developing economies that have higher demand for investment and larger needs for advanced technologies technologies compared compared to developed countries. countries. Firms in middleincome countries are likely to have stronger capability to use their absorptive capacity to attract and utilize knowledge spillovers than low-income countries. This is in line with Blomstrom et al. (1992), Wu and Hsu (2008) and Alguacil et al. (2011). Finally, we find that institutional factors have a mediating effect on FDI within country income groups. This is also aligned to the findings of other studies deploying different technologies and smaller country perimeters (e.g. Prüfer and Tondl, 2008; Busse and Groizard, 2008). Countries with better institutions – i.e. higher control of corruption, more robust rule of law, better-developed regulatory frameworks and more efficient government frameworks - register a positive impact of FDI on growth. The effects appear to be statistically significant for countries scoring at least above the bottom 20% within each income group. These findings lead to a set of policy implications. FDI seem to be a useful tool to help middle income countries sustain and support growth. The contribution of FDI on growth seems to be  paramount after the 2009 crisis whereby average growth is lower. An improvement in the quality of the institutional frameworks help increasing the likelihood of FDI influencing positively

 

growth. Specifically we find that FDI – irrespectively of their level – do not impact positively growth only for the bottom 20% (in institutional quality terms) of countries. This suggests that even small but significant improvements shifting the country outside of the bottom 20% - within its own income group - should in principle be conducive to positive spillovers of FDI on growth outcomes. Ultimately, a commitment to a genuine reform agenda is not only conducive to a more sustained growth performance in the medium term, but it also enhances the abortion capacity of  FDI, thus reaping the benefits of financial and trade liberalization.

 

LEARNING’S FROM THE STUDY

These first semester was a good experience for us. We are learnt foreign exchange among countries. From this organization “M-Asia trade” I got the opportunity oppo rtunity to expand my skills and to gain knowledge about the FOREX market.

 

I learnt to maintain discipline. How to communicate with your customer.

 

Professionalism.

 

 

 

 

 

 

How can you predict the invest rate of next five years I got the knowledge of FDI market Learned how to use the resources effectively with the help of internet Learned about cross currency Gain more knowledge about particular product which majorly Foreign Direct Investment for India

Learned about the documentation and procedure which involve Foreign Investment of the  product I learnt from this report about US India trade policies  

 

Learnt about exchange rate fluctuation of USD INR  How can India increase their investments with USA