Chapter 1 - Introduction
Introductory Background: Role of Foreign Direct Investment
Foreign direct investment is an investment made either by a Multi-National Corporation or by an individual in any organization or a sector of home country. The MNC or that individual earns private return from that organization by gaining some control over that organization. Foreign investments can either be direct or indirect. The direct investment, on one hand, is to make long term equity investment in foreign company and it gives investor the managerial control over that company. The indirect investment, on the other hand, is to acquire stocks of an organization, granting them medium and long term loans, portfolio investment and bonds and debentures. Although FDI is considered as equity investments in India, but some guidelines prescribes that it should also include reinvestments and venture capital. So, keeping those guidelines into mind Indian government redefined FDI inflows and now they also include venture capital and reinvestment.
The developing countries had released some restrictions on FDI inflows and operations of MNCs in the early 1980s. This trend became even more common during the 1990s, which brought a significant FDI inflow into the developing countries. In 1994-95 developing countries of the world received 40% FDI inflows, which was only 25% in the year 1980-84. The FDI inflows into developing countries of the world kept on increasing till 1999-00. But in the year 2000-01 FDI inflows into developing countries declined to 30%. Last three decades has seen a phenomenal increase in stock of FDI as % of total GDP. Stock of FDI as a % of GDP is 256%. But this figure is largely due to developing countries where stock of FDI as a % of GDP is 435%. On the other hand, it is only 210% in developed countries. For this period of last 3 decades, absolute FDI stock is Rs. 25,834,356.00 crores in the developed world whereas the same for the developing world is Rs 9,395,046.00 crores. Within the group of developing countries, the distribution of FDI flows varies significantly both across regional groupings and individual countries. China has been the largest recipient of FDI since 1992 and India is in the 7th spot for the year 2002. India allowed MNC’s to enter into its economy in the beginning of 1990’s as a part of reform process of localization, privatization and globalization. After opening its economy for MNC’s it has attracted big share of FDI inflows. And since then it has become an attractive location for foreign investors to invest in. The net FDI inflow was Rs. 174 Crores in 1990-91 and it came up to Rs. 10,686 Crores in 2000-0 1. It results in the annual average growth rate as high as 6 per cent.
Emphasizing on the role of FDI in the developing countries, Moran (1998) observes that FDI is a method of transmission of 'managerial resources' from one country to another country. The 'managerial resources' may include specialized and technological...