Page 14 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 1: Financial Management in Global Context

2. Foreign Portfolio Investments are purchases of foreign financial assets for a purpose other Notes
than control.
FDI is one of the most important sources of capital market and links the host economy with the
global markets and fosters economic growth. The potential of FDI is determined by seven
factors – access to resource, low production costs, access to export markets, cultural
cum-geographic proximity, competitor presence and a host of government incentives.
The economic benefits of FDI are many from a global perspective. FDI is an important means of
promoting and encouraging capital to flow where it is most valuable, FDI facilitates the
production of goods and services in locations that have a comparative advantage for such
production.

FDI is also imperative to economic development of a country. It generates increased employment
opportunities and also enhances labour productivity which in turn leads to higher wage rates,
lower inflation rates and an improved overall productivity. In fact, attracting foreign capital is
one way a national government can improve the living standards of its people.
In addition, FDI also brings with it new technology and management techniques that pave the
way to judiciously utilise the resource and improve the efficiency of the national economy. It
also helps in raising the level of competition in the national economy to the benefit of consumers,
providing new or improved quality products at lower prices thereby increasing productivity.
In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated economic
growth of the country, Government of India initiated a slew of economic and financial reforms
in 1991.
India has now ushered in the second generation reforms aimed at further and faster integration
of Indian economy with the global economy. As a result of the various policy initiatives taken,
India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged
in almost all the economic activities under the automatic route.

Did u know? Over the years, FDI inflow in the country is increasing. However, India has
tremendous potential for absorbing greater flow of FDI in the coming years. Serious
efforts are being made to attract greater inflow of FDI in the country by taking several
actions both on policy and implementation front.
Foreign Direct Investment in India is permitted under the following forms of investments
through:
Financial collaborations.
Joint ventures and technical collaborations.

Capital markets via Euro issues.
Private placements or preferential allotments.
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.

Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

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