Page 223 - DMGT401Business Environment

Business Environment

Notes as well as for the global capitalist economy. The answer of these questions depends directly or
indirectly upon the way in which the firm internationalizes, that is, the way the firm was
transformed into an MNC. One paper in this volume focuses squarely on the first concern,
whilst the rest of the papers deal more with the second issue, though, in many of them, attention
is also paid to firm internationalization strategy. In this sense, directly or indirectly, these two
main issues regarding MNCs receive substantial consideration and analysis in this collection.

10.1 Foreign Investment

Foreign Direct Investment (FDI) is defined as an investment made by an investor of one country
to acquire an asset in another country with the intent to manage that asset (IMF, 1993). The IMF
definition of FDI includes as many as following elements: equity, capital, reinvested earning of
foreign companies, inter-company debt transactions including short-term and long term loans,
overseas commercial borrowings, non-cash acquisition of equity, investment made by foreign
venture capital investors, earnings data of indirectly-held FDI enterprises, control premium,
non-competition fee and so on.

Foreign investment and technology play an important role in the economic development of a
nation and have been exploited by a number of developing countries.

Example: The economic health of transition countries in Eastern Europe, Russia, and
Central Asia is smoother due to FDI.
Even communist countries like China have welcomed foreign investment to improve their
economies.

Governments of developing nations are attracting FDI along with the technology and
management skills that accompany it. To attract multinational companies, governments are
offering tax holidays, import duty exemption, subsidised land and power and many other
incentives. FDI are supposed to bring many benefits to the economy. They contribute to GDP,
capital formation, balance of payment and generate employment.
10.1.1 India's FDI Policy

Multinational companies are a part of the Indian economy since the British period either as a
wholly owned subsidiary or as a joint venture. They played a critical role in the development of
the automobile industry, two wheeler industry, mining, petroleum, FMCG, etc. But after
independence, because of government policies some like Coca Cola, IBM, etc., left the country.
Flow of substantial foreign investment began in India in the 1980s. At that time Suzuki entered
India with a joint venture with the Indian Government. The then Prime Minister Rajiv Gandhi
initiated the reforms and allowed FDI in certain cases and because of these liberal policies Pepsi
was able to entered India.
It was in 1991, following liberalisation, that does for FDI were opened in the true sense. India
welcomed direct foreign investment in virtually every sector of the economy except strategic
concern such as defense, railway transport and atomic energy. Of this, automatic approval for
foreign equity participation up to 51% is granted in high priority sector. Use of foreign brand
names/trade marks for sale of goods in India is permitted. Foreign equity up to 100% is
particularly encouraged in export-oriented units, power sector, electronics, and software
technology parks.
Foreign direct investment is freely allowed in all sectors (except railways and atomic energy)
including the services sector, except a few sectors where the existing and notified sectoral policy

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