A report on the Factors of Foreign Direct Investment in India

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Natural and imposed locational characteristics of a country can have a major influence on a firm’s decision to invest in the country. A countrys attractiveness factor can vary from one company to another based on organizational context. Each firm may decide on a country’s attractiveness as a possible investment site according to criteria specific to the firm.

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Location characteristics of a country can have a major influence on a firm’s decision to invest in the country. Major factors that may influence FDI attractiveness of a country are – Economic/Financial Factors: The country’s GDP growth rate; Conditions for FDI resulting from the country’s economic policies; Infrastructure facilities; Economic incentives for FDI; Stability of its currency; Expected returns on investment. Political/Legal Factors: Political stability; Integrity of its legal system; Ease of protecting intellectual property rights in the country. Cultural Factors – Cultural similarity of the country to a firm’s home country. Market Factors: Current market size; Expected market growth rate; Proximity to other countries to facilitate exports from the FDI venture. Resource Factors: Availability of skilled workers; Lower labor costs (after including the effect of labor productivity); Availability of competent management staff; Availability of raw materials. Factors relating to IJV Formation: Ease in finding suitable IJV partners; Trustworthiness of IJV partners in maintaining long-term relationship.

Different Types of FDI by direction

Inward: Inward foreign direct investment is a particular form of inward investment when foreign capital is invested in local resources. Inward FDI is encouraged by: Tax breaks, subsidies, low interest loans, grants, lifting of certain restrict ions. The thought is that the long term gain is worth more than the short term loss of income. Inward FDI is primarily restricted by ownership restraints Outward: Outward foreign direct investment, sometimes called “direct investment abroad”, is when local capital is invested in foreign resources. Outward FDI is encouraged by: Government-backed insurance to cover risk. Outward FDI is restricted by: Tax incentives or disincentives on firms that invest outside of the home country or on repatriated profits

Why has Foreign Investment increased manifold in India

International investment levels have exploded in recent decades. These increases in the flows of foreign investment have themselves marked a new and distinct phenomenon in the era of globalization. Several factors like Technology, the thirst for high profits by capitalists, end of the cold war and Financial liberalization have played critical role in increasing the foreign investment in the past decade.

SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial year):

Amount Rupees in crores (US$ in million) Ranks

Country

2008-09

(April-

March)

2009-10

(April-

March)

2010-11

( April-

May)

Cumulative

Inflows

(April ’00 –

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