FDI recent trend in India Essay


“Globalization means the production and distribution of products and services of a homogeneous type and quality on a world wide basis”. Globalization also means globalizing the marketing, production, investment, technology and other activities. How do these happen? Globalization does not take place in singly instance. It takes place gradually through and evolutionary approach.

Operating and planning to expand business throughout the world. Erasing the differences between domestic market and foreign market. Buying and selling goods and services from/to any country in the world. Establishing manufacturing and distribution facilities in any part of the world based on the feasibility and viability rather than national consideration. Product planning and development are based on market consideration of the entire world. Sourcing of factors of production and inputs like raw materials, machinery, finance, technology, human resources, managerial skills from the entire globe. Global orientation in strategies, organizational structure, organizational culture and managerial expertise. Setting the mind and attitude to view the entire globe as a single market.

There should not be unnecessary government restrictions which come in the way of globalization, like import restriction restrictions on sourcing finance or other factors fro broad foreign investments etc. FACILITIES:

The extent to which an enterprise can develop globally from home country base dependson the facilities available like the infrastructural facilities GOVERNMENT SUPPORT:
Although unnecessary government interference is a hindrance to globalization, government support can encourage globalization. Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R and D support, financial market reforms and so on.

Resources are one of the important factors which often decides the ability of a firm to globalize. Resourceful companies may find it easier to thrust ahead in the global market. COMPETITIVENESS:

The competitive advantage of the company is a very important determinant of success in global business. A firm may derive competitive advantage from any one or more of the factors such as low costs and price, product quality product, product differentiation, technological superiority, after sales service, marketing strength etc. ORIENTATION:

A global orientation on the part of the business firms and suitable globalization strategies are essential for globalization.

Free Flow of Capital: Globalization helps for free the flow of capital from one country to the other. It helps the investors to get a fair interest rate or dividend and the global companies to acquire finance at lower cost of capital. Further Globalization increases capital flows from surplus countries to the needy countries, which in turn increases the global investment. Free flow of Technology: Globalization helps for the flow of technology from advanced countries to the developing countries. It helps the developing countries to implement new technology. Increase in Industrialization: Free flow of capital along with the technology enables the developing countries to boost-up industrialization in their countries Spread up Production facilities throughout the Globe: Globalization of production, leads to spread up manufacturing facilities in all the global countries depending upon the locational various favorable production factors. Balanced development of world economies: With the flow of capital, technology and locating manufacturing facilities in developing countries, the developing countries industrialize their economies. This in turn leads to the balanced development of all the countries. Increase in Production and Consumption: Increased industrialization in the globe leads increase in production and thus results in balanced industrial development along with increase in income which enhances the levels of consumption. Lower prices with high quality: Indian consumers have already been getting the products of high quality at lower prices. Increased industrialization spread up of technology, increased production and consumption level enable the companies to produce and sell the products of high quality t lower prices. Cultural exchange and demand for variety of products: Globalization reduces the physical distance among the countries and enables people of different countries to acquire the culture of other countries. The cultural exchange, in turn makes the people to demand for a variety of products which are being consumed in other countries. For example, demand for American Pizza in India and Masala dose and Hyderabad Biryani and Indian styled garments in USA and Europe. Increase in Employment and Income: Globalization results in shift of manufacturing facilities to the low wage developing countries. As such, it reduces job opportunities in advanced countries and alternatively creates job opportunities in developing countries. Higher Standards of Living: Further, globalization reduces prices and thereby enhances consumption and living standards of people in all the countries of the world. Balanced Human Development: Increase in industrialization on balanced lines in the globe, improves the skills of the people of developing countries. Further, the increased economic development of the country enables the government to provide welfare facilities like hospitals educational institutes etc. which in turn contributes for the balanced human development across the globe. DISADVANTAGES:

Globalization kills Domestic Business: The MNCs from advanced countries utilize the opportunities created by globalization, establish manufacturing and marketing facilities in developing countries. The domestic business of the developing countries fails to compete with the MNCs on the technology and quality front. Exploits Human Resources: The foreign companies which are located in developing countries invariably violate the labor and environmental laws in order to have the cost advantage. These companies employ child labor, pollute environment, and ignore workplace safety and health issues. However, it is viewed that, globalization enables the developing countries to become rich and enforce the labor and environmental regulations. Leads to Unemployment and Under employment: MNCs produce the
products in their home countries or in some other foreign countries and market in developing countries. Therefore, the domestic country’s operations are to be reduced. This in term leads to reduction in employment opportunities particularly in less developed countries. Decline in demand for domestic products: Selling of high quality foreign products at low prices by MNCs reduces the demand for the domestic products. Decline in Income: Unemployment and decline in demand for domestic products of both industrial agricultural goods leads to reduction in income of the people. Widening gap between rich and poor: Globalization not only results in decline in income but widens the gap between rich and poor. This is because, competent people, people with innovative skills, efficiency etc., get abnormal income, while other average people have to strive for even a minimum wage. This results in widening the gap between have and the have-nots, Transfer of natural resources: MNCs establish their manufacturing facilities in developing countries exploit their natural resources and sell the products in other DEFINITION OF INTERNATIONAL MARKETING:

Kotler defines marketing as ‘human activity directed at satisfying needs and wants through exchange process.’ International marketing can be defined as “marketing carried on across national boundaries”. International marketing has also been defined as ‘ the performance of business activities that direct the flow of goods and services to consumers or users in more than intone nation’. It is different from domestic marketing in as much as the exchange takes place beyond the frontiers, thereby involving different markets and consumers who might have different needs, wants and behavioural attributes. Scope of International Marketing:

Though international marketing is in essence export marketing, it has a broader connotation in marketing literature. It also means entry into international markets by: Opening a branch/ subsidiary abroad for processing, packaging, assembly or even complete manufacturing through direct investment. Negotiating licensing/ franching arrangements whereby foreign enterprises are granted the right to use the exporting company’s know-how’s, viz., patents, processes or trademarks with or without financial investment. Establishing joint ventures in foreign countries for
manufacturing and or marketing and Offering consultancy services and undertaking turnkey projects broad. Depending upon the degree of firm’s involvement, there may be several variations of these arrangements. FDI

Every country today is opening up its doors and borders to foreign investment, because all of them are beginning to realize the importance of being on the global map. Business opportunities have expanded to such a massive state, and it has become imperative for any venture to search for foreign investors in order to increase their capital budgets and their technical expertise, and enhance their management practices as well. In the midst of all this, several debates about the FDI (Foreign Direct Investment) have plagued various governments and economical thinkers.

What is FDI ?

FDI simply refers to the act of investing capital in a business enterprise that operates overseas and in a foreign country. The party making the investment could be an individual, a business corporation, or maybe even a group of companies, and the enterprise that receives the investment will definitely benefit from this. What this ultimately means though, is that the party making the investment has a long-lasting interest in the other party, and they also get a say in matters regarding the functioning of that enterprise.

The minimum voting rights, or shares of an enterprise, that a foreign investor is supposed to control is 10%. This holds relevant in cases where a foreign investor opens up a whole new business operation in another country after collaborating with a local player (Green-Field investment), or it simply merges with a local enterprise for the same purpose. In addition to this, FDI is also carried out either horizontally (with an enterprise in the same industry with market expansion as the sole purpose) or vertically (with the aim of sharing resources like capital and expertise).

In effect, this is like any regular enterprise that invites investments and then grants the donor of that investment a certain degree of control in the
enterprise, along with a share of profits as well, even though this depends on the policy of profit repatriation in that country. The only difference here is that the investor is actually a foreign party. As a result of this, different rules, policies and governing factors come into play in such a scenario. Both the parties involved derive many benefits from such an arrangement. On the other hand, both parties also suffer some disadvantages due to this process, so they have to take a decision after carrying out a balanced analysis.

The Advantages of Foreign Direct Investment

The party making the investment is usually known as the parent enterprise, and the party invested in can be referred to as the foreign affiliate. Together, these enterprises form what is known as a Transnational Corporation (TNC), and here are some of the advantages of such an arrangement.

Many countries still have several import tariffs in place, so reaching these countries through international trade is difficult. There are certain industries that require to be present in international markets in order to succeed, and they are the ones who then provide FDI to industries in such countries, so that they can increase their sales presence there. Many parent enterprises provide FDI because of the tax incentives that they get. Governments of certain countries invite FDI because they get additional expertise, technology and products. So to welcome these benefits they provide great tax incentives for foreign investors, which ultimately suits all parties. Foreign investment reduces the disparity that exists between costs and revenues, especially when they are calculated in different currencies. By controlling an enterprise in a foreign country, a company is ensuring that the costs of production are incurred in the same market where the goods will ultimately be sold. Different international markets have different tastes, different preferences and different requirements. By investing in a company in such a country, an enterprise ensures that its business practices and products match the needs of the market in that country specifically. Though this is not such a big factor, some markets
prefer locally produced goods due to a strong sense of patriotism and nationalism, making it very hard for international enterprises to penetrate such a market. FDI helps enterprises enter such markets and gain a foothold there. From the foreign affiliate’s point of view, FDI is beneficial because they get advanced resources and additional capital at their disposal. Something like this is always welcome, and it also helps strengthen the political relationships between various nations. disadvantage of FDI

While all these advantages are well and good, the fact is that there are certain cons that come along with them as well. Every industry, and every country, deals with these cons differently, and are also affected in varying degrees, so they are not meant to discourage foreign investors in any way. But every parent enterprise should be aware of these points.

Foreign investments are always risky because the political situation in some countries can change in an instant. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. In certain cases, political changes could lead to a situation of ‘Expropriation’. This refers to a scenario where the government can take control of a firm’s property and assets, if it feels that the enterprise is a threat to national security. Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to globalization as well. Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases. From the point of view of foreign affiliates, FDI is ill-advised because they lose their national identity. They have to deal with interference from a group of people who do not understand the history of the company. They have unreal expectations placed on them, and they have to handle several cultural clashes at the same time.

Enterprises go down this path after carefully studying the advantages and disadvantages of foreign direct investment, so they are always well prepared for the worst. When handled properly, FDI can prove to be beneficial to both the parties, and the economies of both the party’s countries as well. But if it goes wrong, then things can get very ugly for everyone involved as well. So this is a double-edged sword that needs to be handled with lots of caution.