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Published by Enhelion, 2019-12-28 03:06:31





FDI is defined as investment by a resident entity in one economy that reflects the objective of obtaining a
lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a
long-term relationship between the direct investor and the enterprise and a significant degree of influence by
the direct investor on the management of the enterprise. The ownership of at least 10% of the voting power,
representing the influence by the investor, is the basic criterion used.1 It is an accepted norm these days that
FDI plays a crucial role in industrial development of both developing and developed countries alike and it
helps in boosting economic growth globally. An example for this is total factor productivity growth.
Productivity growth is often popularly associated with the invention of new products, tools, and technical
processes that not only reduce the cost of extracting or producing raw materials and energy but also reduce
the cost of transforming those inputs into finished products.2 Moreover, quantities of inputs and outputs are
easier to measure in manufacturing than in complex service industries, such as health care. Researchers
therefore tend to concentrate on the production of good and on manufacturing, in particular in seeking
sources of productivity growth. Now a day’s FDI comprises sets of inter-connected operational based business
decisions by multinational enterprises in response to the ever changing global and regional competitive and
strategic factors and considerations. Therefore FDI policies have always been analytical and regulatory. It is
required to manage the landscape of MNE’s FDI operations to maximise positive externalities accruing to the
host countries as well as optimising efficiencies involved in FDI. According to UNIDO (2003), “the policy
framework for FDI is a crucial part of the overall national strategy for industrialization.” As the ratio of inward
FDI to GDP is, in general, relatively high for developing countries in comparison to industrialized countries, the
role of well-designed FDI Policies in economic development cannot be overestimated. 3

When one talks about the advantages and disadvantages of FDI Policies it is important to understand from a
policy perspective the pros and cons of the aforesaid policy and the considerations and opinions of those who
gain and lose from its implementations. This cannot be treated as a trivial issue and cannot be done only by
depending on demographic structure of employment distribution of labour force in the economy but also on
the changing nature of the relative balance of competitive advantage. FDI has its advantages in the long run
and in the short run. In the long haul open economic policies generate many benefits such as trade and
investment linkages with other countries increase competition in domestic industries; enhance the purchasing
power of consumers; provide exposure to new products, services, and ideas from abroad; and give domestic
firms wider markets in which to sell goods and services. In the short run, the interdependence among open
economies generally provides benefits open economies may rely on foreign borrowing or foreign demand for
domestically produced exports to cushion an economic downturn but may also create visible costs that
obscure these benefits, as when foreign investment shifts abruptly out of certain sectors or when foreign
demand for domestic exports falls. One has to understand that the negative effects from the openness to


OECD Fact book 2011-2012: Economic, Environmental and Social Statistics,

2 Frank L. Bartels Unit Chief, Strategic Research and Regional Analyses Unit UNIDO; FDI Policy Instruments:
Advantages and Disadvantages;
3 Ibid

trade and investment do not necessarily outweigh the enormous gains that
society has cultivated over decades from this openness.


The study and evolution of FDI connected to capital accumulation goes back to pre-classical views. The
mercantilists were in a way the first to reflect on attracting foreign capital and to set up investment plans.
They aimed to clarify the role of capital within the economy and in order to achieve that aim set up a
macroeconomic model based on external employment mechanism. This was to realise a surplus of exports
over the imports. As per Keynes’s General Theory: “For some two hundred years both economic theorists and
practical men did not doubt that there is a peculiar advantage to a country in a favourable balance of trade,
and grave danger in an unfavourable balance, particularly if it results in an efflux of the precious metals.” 4
“Mercantilists thought never supposed that there was a self-adjusting tendency by which the rate of interest
would be established at the appropriate level. On the contrary they were emphatic that an unduly high rate of
interest was the main obstacle to the growth of wealth; and they were even aware that the rate of interest
depended on liquidity preference and the quantity of money and several [mercantilist writers] made it clear
that their preoccupation with increasing the quantity of money was due to their desire to diminish the rate of
interest.”5 Moreover, “one must add that “in mercantilist times, the only possibility to increase the quantity of
money was an excess of exports over imports, unless, of course, a country possessed gold or silver mines.”6

“The mercantilists were aware of the fallacy of cheapness and the danger that excessive competition may
turn the terms of trade against a country.”7 Subsequently, “the squandering of a country’s products on foreign
markets at low prices has become known as immiserizing growth.”8“Mercantilists were the originals of 'the
fear of goods’ and the scarcity of money as causes of unemployment which the classical [and the neoclassical]
were to denounce two centuries later as an absurdity.”9

On the one hand the country was rid of an unwelcome surplus of goods, which it was believed to result in
unemployment, while on the other the total stock of money in the country was increased, with the resulting
advantages of a fall in the rate of interest. What mattered for the mercantilists was the primary and
secondary employment thus created. By inserting beggars and the unemployed into the process of
production, was a fundamental mercantilist preoccupation associated with the, “fear of goods.”

In reality the argument associated with direct output and employment have an effect on the export surplus
the monetary side associated with the rate of interest and its influence on investment. This leads to an
indirect link between export surplus and employment which is of a monetary nature: “The surplus of exports
over imports leads to an inflow of precious metals or an increase in the quantity of money. The rate of
interest declines as a consequence and, as a rule, the volume of investment increases which, again, means a
rise of primary or autonomous demand inducing a secondary or indirect demand for consumption goods. On

4 Keynes 1936, p. 333.
5 Keynes, 1936, p. 341.
6 Bortis 2003b, p. 64.
7 Keynes, 1936, p. 345.
8 Bortis 2003b, p. 65.
9 Keynes 1936, p. 346.

the whole, the mercantilists expected, as a rule, a cumulative process of
employment creation from an export surplus, leading to a cumulative increase of national wealth in the form
of a higher social product”.10

This implies that the mercantilist economies were at first interventionist economies. The aristocratic and
absolutist governments of the nascent European nation states intervened heavily in the economy since
Renaissance times. Specifically, the state deliberately attempted to promote employment and growth.

This links to the problem of foreign investment: “[The process of economic growth may be interrupted] by the
insufficiency of the inducements to new investment. [Such inducements] may be found in either in home
investment or in foreign investment (including in the latter the accumulation of precious metals), which,
between them, make up aggregate investment. In conditions in which the quantity of aggregate investment is
determined by the profit motive alone, the opportunities for home investment will be governed, in the long
run, by the domestic rate of interest; whilst the volume of foreign investment is necessarily determined by the
size of the favourable balance of trade.”11

It has been argued above that the inflow of precious metals resulting from an export surplus was largely
equivalent to the inflow of financial capital. A monetary and financial capital stock could be built up. The
former rendered easier current production and circulation, the latter was conducive to capital accumulation.
However, continental Europe, with the exception of Holland, entered a period of stagnation from broadly
1650 onwards12.

In a Keynesian vein, this may have been due to the fact that the profit-investment mechanism had resulted in
the building up of overcapacity. Moreover, as is well known, the inflow of precious metals from Central and
South America led to rise in prices and to more unequal distribution of income. This, in turn, resulted in
stagnating or, perhaps, even declining effective demand. Overcapacity and a lack of effective demand resulted
in stagnation.


The 1990’s have seen a marked increase in private capital flows to India, a trend that represents a clear break
from the two decades before that. In the 1970’s there was hardly any new foreign investment in India indeed,
some firms left the country. Inflows of private capital remained meagre in the 1980s they averaged less than
$0.2 billion per year from 1985 to 1990.13 In the 1990’s, as part of wide ranging liberalization of the economy,
fresh foreign investment was invited in a range of industries. Inflows to India rose steadily through the 1990s,
exceeding $6 billion in 1996-97. The fresh inflows were primarily as portfolio capital in the early years, but
increasingly, they have come as foreign direct investment. Though dampened by global financial crises after
1997, net direct investment flows to India remain positive. India was not unique as a recipient of increased
inflows in the 1990s. International flows of private capital to most developing countries rose sharply over this
period. The historically low interest rates in the US encouraged global investment funds to diversify their
portfolios by investing in the emerging markets. International flows of direct investment, which had averaged

10 Bortis 2003d, p. 65
11Keynes 1936, p. 335

12 Nef 1963, p. 148 for the case of France.
13 Private Foreign Investment in India, Suma Athreye, Manchester School of Management, England; Sandeep Kapur,
Birkbeck College, University of London, England,

$142 billion per year over 1985-90. In the financial year 2011-2012 the FDI equity
inflows increased to 36,504 million US $ as a post to 19,427 million US $ in the financial year 2010-2011. 14

To a large extent the nature of foreign direct investment (FDI) and its motivations encourage a vibrant free
economy. Some FDI is motivated by the high rates of return in a vibrant economy and aims to benefit from
better international organization of production and location. FDI can be referred to as growth- led and
efficiency-seeking. But even a stagnant economy may attract rent-seeking multinationals that have a
comparative advantage, over domestic firms in extracting monopoly rent in protected markets. 15

Foreign investment can supplement domestic investible resources in a developing economy, enabling higher
rates of growth. As a source of foreign exchange, it can relax potential balance of payments constraints on

The role of investment, especially FDI, in driving economic growth and development has been a contested one
ever since the UN development decade of the 1960s. There have always been views for and against FDI. Some
argue that FDI leads to economic growth and productivity increases in the economy as a whole and hence
contributes to difference in economic growth and development performances across countries but on the
other hand some argue that the risk of FDI will destroy local capabilities and extracting natural resources
without adequately compensating the poor countries. 16

A recent change over the past couple of years has been that governments have become more favourable to
FDI and have liberalised their FDI regime accordingly, though at different times, speeds and depths in different
countries and regions. Over the past 15 years, countries have regarded FDI increasingly as contributing to
their development strategy for technology and capital it provides. They have even started to compete for FDI.
Investment policies have become more liberal at the national and regional level but there is no
comprehensive framework at the multilateral level. Some countries are even facilitating FDI into developing
countries using guarantee funds, matchmaking and other measures.17


The theory suggests that long term investment benefits from stability as it reduces the risks for the long term
investor. Politically unstable countries tend to receive small amounts of FDI. The main exception to this rule is
countries that are rich in natural resources which have managed to attract considerable amount of FDI despite
often unstable governments. 18

Developing countries are increasingly creating a market friendly environment for the private sector to
operate. Countries in developing country regions such as Latin America have privatized earlier, and more
broadly than countries in other regions. And have attracted significant flows of FDI.

With increased liberalization of trade and investment regimes and technological advances in areas such as
information and communication technologies, countries are increasingly concerned about the

15 Private Foreign Investment in India, Suma Athreye, Manchester School of Management, England; Sandeep Kapur,
Birkbeck College, University of London, England,
16 Foreign Direct Investment and Development :An historical perspective, Dirk Willem te Velde ,Overseas Development
Institute, 30 January 2006,
17 Foreign Direct Investment and Development-An historical perspective, Dirk Willem te Velde, 30th January 2006, 10th
June 2013,
18 Ibid

competitiveness of their economies. This involves paying more attention to
created assets such as skills and infrastructure. Much of the FDI potential in developing countries was not
realised 3-4 decades ago because many countries had severe restrictions on foreign ownership and many of
what are now regarded conducive factors (e.g. competitive environment etc) were not in place. This is now
changing. Now most countries are welcoming FDI policies. South- East Asian economies (in 1960s Hong Kong,
Singapore, Malaysia) were first, while other Asian countries (Republic of Korea, China and India began to
liberalise in the 1980s and 1990s). 19


Much has been written about the relationship between FDI and development. There are many areas through
which FDI affects development:

1) Employment and incomes,
2) Capital formation,
3) Market access,
4) Structure of markets,
5) Technology and skills,
6) Fiscal revenues, and
7) Political culture and social issues

FDI can raise economic growth by increasing the amounts of factors or production, in the traditional growth
accounting context, or by increasing the efficiency by which these factors are being used, FDI represents the
port through which new ideas are gained. Those countries whose local capabilities have been enhanced
because of FDI have also been able to benefit most from FDI in the long term. However, those countries that
attracted FDI in the apparel sector because of trade policies distortions (due to the multi fibre arrangements
quotas which governed world trade in textiles and clothing until 2005) without building up local capabilities or
linkages may have derived fewer long-term benefits from FDI.



The recent cabinet decision on FDI in retail has triggered protests by opposition and key allies of the ruling
United Progressive Alliance (UPA), who are demanding roll back of the policy. The meeting held at the
Parliament House was unable to resolve the logjam in the two houses as the opposition party led by BJP and
the Left stuck to their stand and demanded rollback of the cabinet decision to allow 51% in multi- brand retail.
Though only 53 cities with population not less than ten lakhs have been categorised as FDI, being the fourth
largest economy in the world in PPP terms India is a preferred destination for FDI.

It is the intent and objective of the Government of India to attract and promote foreign direct investment in
order to supplement domestic capital, technology and skills, for accelerated economic growth. Foreign Direct
Investment, as distinguished from portfolio investment, has the connotation of establishing a ‘lasting interest’
in an enterprise that is resident in an economy other than that of the investor. The Government has put in
place a policy framework on Foreign Direct Investment, which is transparent, predictable and easily
comprehensible. This framework is embodied in the Circular on Consolidated FDI Policy, which may be
updated every year, to capture and keep pace with the regulatory changes, effected in the interregnum. The

19 Ibid

Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce &
Industry, Government of India makes policy pronouncements on FDI through Press Notes/ Press Releases
which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management
(Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA
20/2000-RB dated May 3, 2000). These notifications take effect from the date of issue of Press Notes/ Press
Releases, unless specified otherwise therein. In case of any conflict, the relevant FEMA Notification will
prevail. The procedural instructions are issued by the Reserve Bank of India vide A.P. Dir. (series) Circulars. The
regulatory framework, over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases,
Clarifications, etc.20

The present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars
issued by DIPP, which were in force as on April 4, 201321 and reflects the FDI Policy as on April 5 2013. This
Circular accordingly has taken effect from April 5, 2013. Reference to any statute or legislation made in this
Circular shall include modifications, amendments or re-enactments thereof.

Notwithstanding the rescission of earlier Press Notes/Press Releases/Clarifications/Circulars, anything done or
any action taken or purported to have been done or taken under the rescinded Press Notes/Press
Releases/Clarifications/Circulars prior to April 5, 2013, shall, in so far as it is not inconsistent with those Press
Notes/Press Releases/Clarifications/Circulars, be deemed to have been done or taken under the
corresponding provisions of this circular and shall be valid and effective. 22

India is an attractive destination for foreign investors. Its huge market provides them with ample
opportunities for investment. The foreigners can invest in our country in two ways either through portfolio
investment or through direct investment. Portfolio investment – A portfolio investment is a passive
investment in securities, none of which entails active management or control of the securities' issuer by the
investor. Direct Investment - According to IMF, FDI (foreign direct investment) can be defined as “investment
that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor,
the investor’s purpose being to have effective voice in the management of the enterprise” The debt crisis and
the Asian financial crisis have showed that FDI was more stable in difficult periods than other forms of capital
inflows. The direct investment gives the investor ownership advantages. This can cause changes in the
dynamics of the market. Transnational corporations (TNCs) can either infuse competition or push the local
enterprises out of the market and establish market power. 23

FDI can have diverse impacts on an economy. We can categorize the impacts as

1) Microeconomic impacts
2) Macroeconomic impacts

20 CONSOLIDATED FDI POLICY, D/o IPP F. No. 5(1)/2013-FC.I Dated the 05.04.2013, Department of Industrial Policy
and Promotion, Ministry of Commerce and Industry, Government of India

22 Ibid

23 Nivedita, Foreign Direct Investment, Market Power of Transnational Corporations and Impact on Competition ,Madras
School of Economics

Micro impacts – it can cause structural changes in economic and industrial
organization. The market can become either more competitive or a monopolistic one in which the TNC can
exploit its market power to raise prices and make an adverse impact on the consumer.


Some of the major impacts on overall economy can be categorized as following:

a) Learning by doing / imitation

They enhance the productivity through introduction of new technology which in turn benefits the host
economy only. The developing economies which are capital starved can take advantage of the available
technological spill over to improve upon their competitiveness. The foreign capital can help us improve our
technological efficiency within a short period of time without which it would have taken years to reach that
level. According to the literature, these spill over could occur due to both the “competition effect” – when
national companies, facing competition from foreign corporations, have to modernize their production and
management activities – and the “demonstration effect” – when national companies emulate the more
advanced techniques of their foreign competitors. 24

b) Export base creation

They provide the host countries with the access to large foreign markets because they have an established
brand name and well developed distribution channel. This leads to creation of an export base for the
developing nations. They add to the foreign exchange and investment resources in a host economy. 25

c) Competition

Some of the TNCs engage in non-production functions like accounting, engineering, marketing, etc. these are
high valued activities that promote manufacturing competitiveness and local capabilities. They can either
boost competition tendencies or drive out local firms to gain market power. TNCs can help restructure and
upgrade competitive capabilities in import substituting activities as well.26

d) Efficient utilization of resources

TNCs contribute positively to the efficient and productive utilization of resources in the host economy. A
direct investment in the country gives ownership advantages to the TNC and reduces the transaction costs
which it would have incurred if it was located outside host economy.27

e) FDI, Market Power and Competition- Theoretical framework

There is voluminous amount of literature available on assessing the impact of FDI on competition inside
domestic market. Some theories talk about increased competition among firms with inflow of FDI while others
do not agree with the proposition. However there has been no convergence between the two lines of
thought. There is literature both in favor and against the proposition that FDI inflow will enhance competition
and finally correlate the results from empirical evidences with theory.


24 Ibid
25 Ibid
26 Ibid
27 Ibid

Another line of thought throws light on the positive aspects of FDI on
competition. According to a recent report by ICRIER on Indian retail sector, the inflow of FDI will enhance the
competition between organized and unorganized retail and benefit the consumers. This report basically
focuses on the need for introducing foreign investment in the retail sector in India where unorganized sector
constitutes more than 90% of business. However this report narrowly focuses on retail sector. So drawing any
generalized conclusion can be fallacious.

In an article by Paul Deng, he analyses how the entry of foreign firms could potentially alter the growth of
domestic firms. The firms with advanced technology in the domestic market compete neck to neck with the
foreign competitors and the inefficient firms are driven out of the market. He has termed this driving out of
the technologically obsolete firms as “discouragement effect”. He says that the interactions within the foreign
firms and local firms create a much needed dynamism within economy. This dynamism promotes the
tendency to innovate and compete within market.28

Another argument is appreciating the technological contribution of TNCs. Developing countries tend to lag in
the use of technology. Many of the technologies deployed even in mature industries are often outdated.
More importantly the efficiency with which they use technology is relatively low even if part of their
productivity gap is compensated by lower wages; technical inefficiency and obsolescence affect the quality of
products. TNCs bring in new technology and raise the efficiency with which it is used. They can stimulate
technical efficiency in local firms, both suppliers and competitors acting as role models and intensifying

Another group of studies by Helpman, Melitz, and Yeaple (2003) and Nocke and Yeaple (2005) reveal that the
love of variety prevents any firm from absorbing the entire market share no matter how superior its
technology or how low its price be even if it is far more efficient than its average rival. This means even if TNCs
are technologically more efficient than local firms, the consumer would always like to consume diversified
products and this prevents any firm from capturing entire market. Therefore, FDI coming into domestic
markets cannot allow any firm to gain substantial market power. Many theories suggest that technology plays
a very important role in promoting competition among firms. The incentive to keep innovating comes from
competition among firms to survive in the market. Innovation requires continuous up gradation of
technological base. With TNC coming into the market, they aggravate the tendency of the local firms to
compete and gain their share of market and thus promoting the competition in domestic firms from local as
well as foreign firms.29


In India the FDI policy has been liberalized in the past decade. Services sector has received the greater
proportion of FDI, the leading industries attracting FDI being telecommunications, automobiles and
Information & technology. According to a report by ASSOCHAM 2012 on India’s experience with FDI: role of a
game changer, following sectors showed increased competition effects when opened to FDI
Telecommunications – “The liberalization process that took place and the subsequent policy initiatives has
paved the way for influx of private players. The regulatory body overseeing the functioning of the sector is The
Telecom Regulatory Authority of India (TRAI) and its main objective is to ensure a level playing field that
encourages greater but fair competition so as to provide the consumers a better ambit of services at an

28 Ibid
29 Ibid

affordable price. The Indian government has relaxed the limits on FDI into the
sector considerably which has led to an increase of foreign capital into the sector. FDI helps in attracting large
amount of funds, advanced technology and market competition which results in better services for the
customer” Automobiles – in 2002 the equity caps for foreign investment was lifted and since then the
automobile industry has witnessed a healthy growth in inflow of investments. With rising competition to
attract customers the companies now design their products suitable to consumer’s requirements. Better and
diversified products due to competition effects add to consumer welfare.

IT/ITES – this sector has been opened to 100% FDI. This has become one of the sunshine sectors in India due
to evolving better quality products as a result of competition. No evidences of a TNC accumulating market
power have been found. The introduction of FDI in our country in few of the sectors has proved to be a
success. The foreign investment in other sectors which are still untouched can repeat the story given we do
not compromise on the regulation.30


It has been experienced that in developing economies, weak bargaining and regulatory capabilities can result
in unequal distribution of benefits and an abuse of market power by TNCs. The developing countries can face
serious consequences unless competition law is enforced strictly. The way TRAI in telecommunications has
kept a watch on anti-competitive tendencies, the same way we need strong institutions. The developing
nations have weak institutions and structural market imperfections. The promotion of competition in markets
under such circumstances becomes even more challenging. Another issue that has been observed is that even
the multinationals who do not possess market power can easily become dominant players by indulging in
quashing the competition in market. This is possible because these firms have large revenues and deep
pockets as compared to domestic investors. Many types of complaints have been made in developing
countries in this respect. These include, for example, local dairy and farm products suppliers to large
multinational retail chains, such as Carrefour and Tesco that were accused of abusing their dominant power to
impose excessively restrictive conditions on local suppliers. Since the ultimate interests of the transnational’s
and the economic interests of an economy differ, therefore we do require policy intervention. In India,
competition commission of India plays a major role in restricting anticompetitive tendencies in the market.
The commission is empowered to take legal actions against such moves and can even impose heavy penalties.


Manohar Lal Sharma vs. Union of India & Anr. on 1 May, 201332

The Supreme Court of India on 1st May, 2013 upheld the government’s proposal to allow DSI in multi-brand
retail trade (MBRT) stating that the said proposal did not suffer from any unconstitutionality, illegality,
arbitrariness or irrationality.

A three-judge bench of the Supreme Court of India said “consumer is king and if that is the philosophy working
behind the policy then what is wrong in it.” The Bench referred to the Centre’s counter and said the decision
to allow FDI in retail has a legal basis on the Foreign Exchange Management Act 2000. The court welcomed
what it called the focus on benefiting the consumer by “enlarging the choice of purchase at more affordable
prices and by eradicating the traditional trade intermediaries/middlemen to facilitate better access to the
market [ultimate retailer] for the producer of goods.”

30 Ibid
32 Writ Petition (C) NO. 417 OF 2012

The Bench also said that the new policy aims to throw out middlemen, “who are a
curse to Indian economy and who are sucking it.” Farmers will benefit significantly from the option of direct
sales to organised retailers. The bench said: “This court does not interfere in the policy matter unless the
policy is unconstitutional, contrary to statutory provisions or arbitrary or irrational or there is total abuse of
power. The impugned policy cannot be said to suffer from any of the vires.”

The Bench also noted that the policy to allow FDI, up to 51 per cent in retail trade was only an enabling policy.
“The State governments/Union Territories are free to take their own decisions in regard to implementation of
the policy in keeping with local conditions.” It said the Department of Industrial Policy and Promotion (DIPP)
was empowered to make policy pronouncements and there was no merit in the contention that the
Government of India had no authority to formulate the FDI policy.

As per the petitioners case the notification was issued without any source of law and parliamentary approval
and soon after the Union Cabinets decision the notification was issued through an executive order.

This decision by the Supreme Court has had mixed reviews. On one hand, this verdict was welcomed by
financial experts, while on the other; it was criticized by small and medium scaled industries. This ruling by the
Supreme Court was actually in response to a Public Interest Litigation (PIL). The essence of the PIL was to
challenge the Centre’s policy, saying that retail trading is prohibited under the Foreign Exchange Management
Act (FEMA). A two bench judgment suggested that the FEMA regulations should have been amended by the
RBI before the Centre issued a notification of the FDI policy.

The court had given two weeks to the Centre to get the Foreign Exchange Management Regulations amended
by the RBI, before the policy is implemented. In the meantime, the Foreign Investment Promotion Board
(FIPB) held a discussion over the investment proposals for single-brand retailers, such as Pavers England (a UK-
based footwear brand) and Brooks Brothers (a big clothing retailer in the United States), keen on investing in
India. The FIPB is the nodal body that sanctions FDI proposals.


Openness to trade and investment has boosted U.S. economic growth. Openness can also reduce the impact
of shocks and increase the resilience of the U.S. economy. The number of U.S. FTAs has increased greatly
during this Administration, and these agreements have contributed to the growth in U.S. exports. Portfolio
and direct investment into the United States reached historic levels over the past decade, in part due to the
depth, diversity, and openness of U.S. financial markets and the competitiveness of U.S. firms. The United
States has maintained an open investment policy, facilitating FDI flows between the United States and the
world while addressing legitimate national security concerns. U.S. development and trade initiatives, as well
as U.S. engagement in multilateral institutions such as the World Trade Organization and the World Bank have
helped increase growth and foster political and economic stability in developing countries throughout the
world. Continued commitment to open economic policies throughout the world will help ensure continued
economic gains for the United States and the rest of the world. In the first half of 2008, the United States
exported goods and services equivalent to 13.0 percent of Gross Domestic Product (GDP), and imported
goods and services equal to 18.1 percent of GDP. These figures are the highest on record, considerably above
figures from 2000, when exports were equal to 10.9 percent, and imports 14.8 percent, of GDP. The current
account, which measures the net value of the flow of current international transactions, is chiefly composed
of the difference between exports and imports. The U.S. current account deficit widened over this period
from 4.1 percent of GDP in the first quarter of 2000 to a peak of 6.6 percent of GDP in the final quarter of
2005. The current account deficit then narrowed to 4.8 percent of GDP at the end of 2007 before expanding
slightly over the first half of 2008.33

33Economic Report of the President (2009) Administration of Barack H. Obama Online through the Government Printing

If the latest statistics is taken into consideration then one will notice that the United States is more closely
linked with other nations through trade, investment, and financial flows than ever before. For example, “total
trade in goods and services as a share of gross domestic product (GDP) was approximately 31 percent in 2012,
compared with 26 percent in 2000 and 11 percent in 1970.”34

International linkages are also reaching more deeply than ever before into the organization of industries and
firms. U.S. companies are increasingly part of global supply chains, in which firms buy inputs from
subcontractors located in many countries. These linkages bring both challenges and opportunities for the U.S.
economy and for government policy. Macroeconomic shocks and policies halfway around the world have
direct effects on growth, employment, and national balance sheets here at home, just as shocks and policies
in the United States affect economies across the globe. Significant opportunities are available for U.S. firms to
expand exports and create jobs, for resources to be allocated to their most productive uses, for innovation to
flourish, and for consumers to enjoy higher incomes, lower prices, and expanded choice. These opportunities,
however, have been accompanied by job displacement, downward wage pressures, and other adjustment
costs. Government policy plays an important role in providing infrastructure and incentives that reduce these
adjustment costs, promote the creation of middle-class jobs, and foster innovative ecosystems in the private
sector. Administration policies in both trade and competitiveness seek to create a fair, firm foundation for the
long-term prosperity of the United States and its trading partners.

Scholars and academics have studied the motivation for firms to extend production to international markets
and engage in foreign direct investment (FDI) since the mid-1900s. Interest in the subject intensified with the
burst of foreign investment in the 1970s, and remains a subject of close scrutiny as the volume of FDI
continues to increase. Corresponding with the liberalization of many economies, since 1987, the volume of
FDI has grown over 20% annually. “U.S owned assets abroad increased $3,258.7 billion in 2006 to $17,640.0
billion in 2007 (BEA, 2008).” The IMF defines foreign direct investment as “the acquisition of at least ten
percent of the ordinary shares or voting power in a public or private enterprise by non-resident investors.
Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of
profits.” Anything less than ten percent ownership is considered portfolio investment. The pioneering study
on FDI can be attributed to Stephen Hymer (1960), in which he described FDI as asset transfer by the
formation of subsidiaries or affiliates abroad, without loss of control. 35

Because the US is the world's largest economy, it is a target for foreign investment and a large investor.
America's companies invest in companies and projects all over the world. Even though the US economy has
been in recession, the US is still a relatively safe haven for investment. Enterprises from other countries
invested $260.4 billion dollars in the US in 2008 according to the Department of Commerce. However, the US
is not immune to global economic trends; FDI for the first quarter of 2009 was 42% lower than the same
period in 2008. A firm becomes an MNE when it services foreign markets, but possesses ownership-
advantages for example some intangible asset such as knowledge, technology, or managerial know-how that
serve as a barrier to entry to other firms.36

By definition, the primary objective of the multinational enterprise (MNE) is the optimum allocation of the
firm’s resources on a worldwide basis, which will generate the highest return on investment or maximize the

34 Economic Report of the President (2013),Administration of Barack H. Obama Online,

35 Factors Driving U.S. Foreign Direct Investment, Laura Meier, Centre For Research in Economics & Strategy,
36 Barry Kolodkin,

managerial power of the firm .37“For the multinational enterprise, entry by trade
and investment is becoming essential to effective market access, as corporations seek to capture economies
of scale and scope, customize products to satisfy consumer tastes, generate sophisticated high-quality inter-
and intra- corporate networks and strive to gain access to knowledge, both technology and tacit which may be
accessible only on-site.”38

A review of the literature on FDI emphasizes three main questions raised by the myriad of researchers: the
“how,” “why,” and “where” of foreign direct investment. Generally, the answer to “how” have firms been able
to maximize profits by investing abroad, rather than competing in their home countries, is in the MNE strategy
of integration. An increasingly beneficial strategy is that of regional integration which entails encompassing
countries with differential labour markets. By locating labour-intensive stages of production in countries with
cheaper labour, firms can take advantage of significant reductions in cost.

There are several studies that focus on the “why” question. It is the firm’s decision to engage in FDI instead of
exporting or licensing. The choice made by the firms on a greater level depends on the influence the firm has
over the demand of its product by being present in the foreign market. Firms often test out a foreign location
through exportation and then, if satisfied with the conditions of that arrangement, they switch to foreign

Though FDI is a riskier strategy than licensing and exporting it still allows the firm to maintain control which in
case of the later two is lost to other firms. The costs are high when it comes to direct investment as it is
inherently of riskier nature. Some of the risks for example are rate fluctuations, excessive inflation, increasing
oil prices, unstable and corrupt governments, difficulties with trade unions, unfavourable government
regulations, and poor enforcement of property rights protection. There must be certain incentives or benefits
that are enticing enough and profitable enough to motivate firms to invest in these uncertain environments.

The effects of the Great recession and the political gridlock in Washington had left the country floundering
which made the U.S reassess the role of FDI in the U.S as a way to re-ignite the growth of the country both
domestically and globally.FDI has helped U.S to become a job creating economy. Foreign owned firms pay
more, are more productive and efficient that their local counter parts. A Congressional Research Service
report dated Feb 1, 2011 stated: “Foreign owned firms paid wages on average that were 14% higher than all
US manufacturing firms, had 40% higher productivity per worker, and 50% greater output per worker than the
average of comparable U.S. owned manufacturing plants.”40

On must think that in that case US must welcome FDI deals in order to do away with its unemployment
problems among other positives of FDI. But if one examines the history of US FDI, the purchases of US assets
by foreign investors have run into controversy and opposition. Such large purchases have millions of dollars in
associated costs that lie outside of the purchase prices. Attorney and accounting fees alone can run into the
hundreds of thousands if not millions of dollars. These costs, along with management consulting and
investment banking commissions, are sunk costs that cannot be recouped, even when a deal is called off. An
historical example of the same is Japanese in particular, which is known as the Rockefeller Effect.

37 Robinson,1972.
38 Ostry, 1998.”
39 Hirsch, 1976; Hisey and Caves, 1985
40 Jonathan Gardner, CEO Asia Pacific &Global COO Penn, Schoen and Berland Associates A WPP Group Company

The Rockefeller Effect 41: there was a wave of negative publicity towards foreign
investors of the U.s assets. In the 1980’s investments made by Japan in the U.S was met with significant
hostility. A Japanese electronics company Fujitsu made an effort to acquire Fairchild Semiconductor
Corporation which in turn led for United States to enact its national security laws that govern acquisitions in
order to stop the deal. After which in 1989 a Japanese real estate company Mitsubishi Estate Co. bought the
Rockefeller Centre, a U.S. National Historic Landmark, for $846 million. This was a “trophy purchase” for the
emboldened Japanese investors at that time. This high-profile purchase alarmed the public that the Japanese
were out to dominate the American economy. After an exclusive polling conducted at the time of purchase
the evidence offered that the ultimate fate of the Japanese investment which triggered an anti-Japanese
sentiment which kept rising amongst an American public, which deemed the purchase to be insensitive. The
ongoing inability to offer a more positive portrayal of the deal to a sceptical general population, alongside the
economic downturn of the early 1990s, forced Mitsubishi to walk away from a $2 billion investment in 1995,
with the property languishing in bankruptcy.

Another consequence similar to the Japanese one was during the 2000s where Middle Eastern sovereign
wealth funds set the stage for another high profile instance of the “Rockefeller Effect.”

Some of the other instances are:

In February 2006, the stockholders of Peninsular and Oriental Steam Navigation Company (P&O), a British
firm, agreed to the sale of that company to Dubai Ports World (DPW), a holding company owned by the
Government of Dubai. As part of the sale, DPW would assume the leases of P&O to manage major U.S. port
facilities in New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami, as well as operations in
16 other ports. The defeat of the DPW transaction was the result of a groundswell of American popular
opinion that completely overwhelmed whatever sound commercial logic may have underpinned the original

Chinese investment funds, however, remain flush with cash and continue to boast the world’s largest foreign
exchange reserves. It is vitally important for these funds to consider the powerful role they now play in
providing FDI in the U.S., while also addressing the “Rockefeller Effect”, which history shows has been a
powerful determinant of successful FDI in the U.S.A recent study, commissioned by the Asia Society in New
York and the Woodrow Wilson International Centre for Scholars in Washington, forecasts that over the next
decade, China could invest as much as $2 trillion in overseas companies, plants or property, money that could
help reinvigorate growth in the U.S. and Europe. However, the report also warns that the U.S. risks missing
out on a large share of the Chinese investment boom because of politics, a growing rivalry between the two
nations and deep-seated perceptions that Chinese investments are unwelcome in America. 42

One of the major problems that China faces is that Chinese companies are not always welcomed overseas,
and this is not specific to China wielding enormous economic clout but also because state-owned giants are
believed to be subsidized by the state and possibly working in the interest of the Chinese Government.

One of the statements of Senator Jack Reed, Democrat of Rhode Island, encapsulated much of the bipartisan
concerns in Congress about Chinese FDI in the U.S. when he recently told Reuters, “Many of these companies

41 Penn Schoen Berland,2012,
42 Jonathan Gardner, CEO Asia Pacific &Global COO Penn, Schoen and Berland Associates A WPP Group Company

are so closely intertwined with the government of China that it is hard to see
where the company stops and the country begins, and vice versa.”43

In 2010, the Anshan Iron and Steel Group, a Chinese company seeking to build a steel factory in Mississippi,
had to fight fierce political opposition in that state, including fears the project would result in job losses and
threaten national security. Gao Xiqing, the president of China Investment Corporation (CIC), China’s sovereign
wealth fund, has repeatedly spoken of his frustration that CIC’s attempts at investing in the U.S. have run into
political opposition. In 2008, he said, “Fortunately, there are more than 200 countries in the world. And
fortunately, there are many countries that are happy with us.”

The U.S. has advanced technologies and a highly skilled workforce, many of whom have been suffering from
non-existent domestic job growth, and China has the capital American businesses so desperately seek to
sustain and grow. Sovereignty issues seem to take on greater importance during stressed economic times
such as these, which makes it even more important for potential investors to prepare the ground prior to any
significant FDI attempts. In order to avoid falling foul to the “Rockefeller Effect” in future, it is essential for any
foreign investors looking to allocate capital in the U.S. to consider the powerful impact of public opinion on
the ultimate success of every venture.


a) Creation of new jobs:

U.S. affiliates of majority owned foreign companies employ over 5 million U.S. workers, or 4.5 percent of
private industry employment. Between 2003 and 2007, more than 3,300 new projects were announced or
opened by foreign companies, yielding $184 billion in investment and about 447,000 new jobs.44

b) Boosts wages:

U.S. affiliates of foreign companies tend to pay higher wages than other U.S. companies. Internationally
owned companies support an annual U.S. payroll of $335.9 billion, with average annual compensation per
employee of more than $66,000. On average, U.S. subsidiaries of foreign firms pay 25 percent higher wages
and salaries than the rest of the private sector.45

c) Increases U.S. exports:

Approximately 19 percent of all U.S. exports ($169.2 billion) come from U.S. subsidiaries of foreign
companies46U.S. companies use multinationals’ distribution networks and knowledge about foreign tastes to
export into new markets.

d) Strengthens U.S. manufacturing and services:

Of the jobs supported by U.S. affiliates of foreign companies, 39 percent are in the manufacturing sector. Th
at sector accounts for 12 percent of overall private sector employment.47 Furthermore, approximately 60

44 OCO Monitor, Accessed on March 6, 2008
45 Bureau of Economic Analysis, U.S. Department of Commerce, “Operations of Multinational Companies,”; “National Economic Accounts,”
46 Thomas Anderson, “U.S. Affiliates of Foreign Companies: Operations in 2005,” Bureau of Economic Analysis, August
2007. pdf/2007/08%20August/0807_foreign.pdf
47 U.S. Department of the Treasury, “Fact Sheet: An Open Economy is Vital to U.S. Prosperity,” May 2007

percent of all foreign investment in the United States is in the services sector,
which improves the global competitiveness of this critical segment of the U.S. economy.48

Brings in new research, technology, and Skills:

In 2005, U.S. affiliates of majority-owned foreign companies spent nearly $32 billion on research and
development and $121 billion on plants and equipment.

e) Contributes to rising U.S. productivity:

Inward investment leads to higher productivity growth through an increased availability of capital and
resulting competition. Productivity increases U.S. competitiveness abroad and raises living standards at home.


12.1 U.S. TRENDS

Most international investment in the United States originates from OECD countries. In 2006, approximately 80
percent of FDI inflows (measured by dollar value) came from Europe and Japan. The United Kingdom held the
largest FDI position in the United States at $303 billion. The United Kingdom accounted for 17 percent of all
foreign investment in the United States, followed by Japan (12 percent), Germany (11 percent), Netherlands
(11 percent), Canada (9 percent) and France (9 percent).49

Although OECD countries continue to dominate foreign investment in the United States, it is important to
recognize the growing role of several emerging markets. Between 2002 and 2006, India’s FDI position grew by
a compound annual growth rate of 72 percent. Other countries followed India, including Russia (64 percent),
Chile (54 percent), South Korea (31 percent), and Brazil (23 percent).50Foreign direct investment in the United
States is focused in manufacturing and services. In 2006, services accounted for 59 percent of the total FDI
position in the United States. Within that sector, a large proportion is in finance, wholesale trade, and banks.
Manufacturing accounted for 33 percent of the total FDI position, followed by mining (3 percent), utilities (2
percent), and agriculture (1 percent).51


Although the United States continues to be the largest recipient of FDI inflows, it has lost significant position
in the global race for FDI. The United States continues to attract large FDI inflows, but the share has declined
from 31 percent of global FDI in 1980, to 13 percent in 2006.52China and the United Kingdom each attracted
more FDI in 2003 and 2005, although the United States regained its lead position in 2006. The 2007 Economic
Report of the President analyzes the U.S. position in the context of global trends: “First, while the U.S. affiliate
share of U.S. output has grown over the past two decades, it has stagnated and even declined in recent years.
Second, the U.S. affiliate share of employment has declined, from 5.1 percent in 2000 to 4.7 percent in 2004.
Third, the share of inward FDI in the U.S. capital account - that is, FDI in the United States as a share of all the
assets owned by foreign interests - has declined since 1999. It is not yet clear whether these are benign and

48 Analysis of BEA Data, U.S. Department of Commerce, “Operations of Multinational Companies,”
49 Analysis of BEA Data, U.S. Department of Commerce, “Operations of Multinational Companies,”
50 Ibid
51 Ibid
52 United Nations Conference on Trade and Development, FDI Database.

temporary trends or whether this development is symptomatic of deeper issues
with respect to the attractiveness of the United States as a country in which to make direct investment.”53

Sovereign wealth funds, while not a new phenomenon, are also beginning to play an increasingly important
role in international capital flows. Due to substantial trade surpluses, some governments have accumulated
significant savings and are now searching for opportunities to earn a higher rate of return. This may present
an opportunity for the United States to strategically access sovereign wealth funds as another source of
foreign investment. As of April 2008, the United Arab Emirates (Abu Dhabi) is believed to have the largest
sovereign fund in the world, which is estimated at between $500 and $875 billion.16 This is followed by
Norway ($375 billion), Singapore ($200 to $330 billion), Saudi Arabia ($270 billion), Kuwait ($213 billion),
China ($200 billion) and Russia ($128 billion).54


There are several theories on the factors and advantages that motivate firms to invest abroad. For the
purpose of this study, John Dunning’s eclectic paradigm which proposes that multinational enterprises’
(MNEs) investment decisions are determined by the OLI triad: ownership, location, and internalization. The
“O” stands for the firm’s ownership advantage that it maintains through its possession of some asset that host
country firms do not possess. The “L” signifies the location advantages the characteristics of a host country
which the firm utilizes in its production processes or attributes that create favourable conditions for the
production of the firm’s product. Internalization advantages, represented by the “I,” come from oligopolistic
control of this asset or multiple assets in foreign locations. 55The ideal environment for the MNE is a market
with host country location advantages complementary to the MNE’s ownership and internalization
advantages.56 Different industries have different ownership and internalization advantages which lead them
to seek different location-specific attributes to facilitate these advantages. Therefore, firms seeking different
qualities will make different types of investments. Dunning classifies these investments as efficiency-seeking,
market-seeking, resource-seeking, or strategic asset-seeking investments. There are specific location
characteristics ideal to each method of investment. 57


Once the firm has established that it possess ownership and internalization advantages, it must determine
which country has the most suitable location-advantages. This leads into the examination of the “where”
question concerning the location that a firm chooses to accommodate its ownership and internalization
advantages. There are a myriad of factors that are either accommodating or detrimental towards a firm’s
ownership and internalization advantages and the degree to which each country holds a combination of these
factors will determine whether or not a firm chooses to invest there.58

American firms (which are largely non-unionized) are not accustomed to hindrances in adjusting the size of
their labour force, so some may prefer to invest in countries with lower union density. The amount of union

53 Economic Report of the President, 2007.
54 Ibid
55 Dunning, 1980, 1998
56 Caves, 1971; Li and Resnick 2003
57 (Dunning 1973, 1980, 1998).


penetration in a country is negatively correlated with U.S. FDI. Restrictive
government legislation determining layoffs and extension of collective bargaining agreements has strong
negative correlation with FDI.

12.5 FDI IN EC

Accurately calculating the effect of EU integration on FDI is complicated for a number of reasons, and
literature on this is limited. Reliable data, in particular over long periods, is hard to come by, and what data
exists is mostly on the aggregate level and often does not show the extent to which integration has impacted
on different sectors. Moreover, the long and gradual process of integration makes it hard to accurately
determine a specific ‘EU effect’, complicated further by the coincidence of FDI growth in the EU with other
factors which have boosted flows, in particular the global surge in FDI over the period of EU integration, the
removal of capital restrictions, the rapid development of EU and other capital intensive technologies, and
wider liberalisation measures. Disentangling these effects is fraught with problems. The literature does not
give unambiguous evidence of an EU investment effect at Member State level.

Blomström and Kokko cite studies that found no investment effects for the UK, while other studies found that
Ireland had benefited significantly – this disparity was attributed to the UK’s relative openness to FDI prior to
accession during the 1950’s and 1960’s. However, a study by Barrell and Pain59(1998) found that entry into
the EU had a significant effect on the stock of US FDI in the UK, Ireland, Spain and Sweden. The UK has been
able to attract relatively more FDI than some other European economies as a result of market integration. As
a proportion of GDP the UK also attracts more FDI than the US.

Since 1999, the EU has been the UK’s most important FDI relationship, for both inward and outward FDI. At
the end of 2003, the total stock at book value of direct investment into the UK stood at £341.2 billion. Europe
accounted for 46% of this (with the Netherlands and France alone responsible for 13% and 11% respectively –
or over 8% of nominal GDP). In comparison the US accounted for 39% of total stock. The following chart
shows the increasing importance of the EU as a source of investment over the years despite a reduction in the
UK’s share of FDI since the launch of the Euro, the UK remains a major beneficiary of global FDI flows, and is
likely to remain so whether in or out of the Euro zone.60

The UK is among the countries expected to have a net increase in the outward FDI position, but this should
also bring benefits to the economy. Bitzer and Görg looked at the productivity impacts of inward and outward
FDI for 17 OECD countries and 11 industries over 1973-2000. They found that, on average, inward FDI was
associated with increased productivity at the domestic industry level, while outward FDI could have a negative
impact. However, for France, Sweden, Poland, the USA, and, significantly, the UK, outward FDI was found to
have significantly positive productivity increase.61

The number of FDI projects in Europe declined by 3% in 2011, with a mixed performance across countries. The
UK experienced solid growth in FDI, reinforcing its position as the leading FDI location in Europe. As well as a
13% increase in recorded FDI project numbers, capital investment in the UK increased by 48% and FDI job
creation by 33%. However, in terms of total job creation, FDI in Russia generated the highest number of new
jobs, with 89,047 jobs created in 2011 compared to 66,817 in the UK. This was despite a decline in FDI in

59 Barrell, R & Pain, N: Real Exchange Rates, Agglomerations, and Irreversibility’s: Macroeconomic
Policy and FDI in EMU; Oxford Review of Economic Policy, 1998
60 EU Membership and FDI,

61 Ibid

Russia in 2011. A selection of small and medium-sized economies in Europe
performed strongly. Ireland, the Netherlands, Serbia and Romania all achieved a significant growth in inward
FDI. While the Netherlands was the best performer, with 29% growth in FDI projects in 2011, estimated job
creation from FDI in the Netherlands actually fell by 13% as the average project size declined. In contrast, job
creation in Ireland grew by 13% and capital investment by 78%. Positioned outside the top 10, Belgium was
among the countries that experienced a contrast, with a 43% decline in the number of recorded FDI projects
in 2011.62

Foreign Investment Rules: There is no specific law that governs or restricts foreign investment. In UK the
foreigners or foreign held companies are given the same treatment as UK- owned businesses and they can
engage in most forms of economic growth and activity in the UK. But there are exceptions to this rule where
some industries that are government owned or are controlled by government agencies such as transport and
energy do not come within the scope of the general principle. Foreign investors like British investors must
comply with monopoly and merger rules and specific approval must be sought form the government in case of
a takeover by a foreign entity of any large or economically significant UK enterprise. No sectors of the
economy are restricted to UK nationals nor is there a requirement as such that the major equity holdings or a
specified holding by UK nationals. However when it comes to defence there are some restrictions on both UK
and foreign nationals.


1) Patents Act of 1949 as amended 1977; amended by Copyright, Designs and Patents Act of 15
November 1988; and by Patent Act of 1997.
Amendment: approved on 22 July 2004.

2) Registered Designs Act of 16 December 1949; amended by the Copyright, Designs and Patents Act of
15 November 1988, further amended on 9 Dec 2001.

3) Copyright Act of 5 November 1956; the Copyright, Designs and Patents Act chap. 48 of 15 November

4) Copyright (Application to other countries) Order No. 988 of 13 June 1989, S.I. 1989.
5) Copyright (International Conventions) Order No. 1715 of 19 December 1979 amended by Order

No.157 of 7 February 1989, S.I. 1989.

6) Design Right (Semiconductor Topographies) Regulations No. I I of 29 June 1989.

7) Trade Marks Act of 1994. Trade Marks Rules No. 135 of 23 January 2000.

8) Petroleum Act of 1998.

9) Science and Technology Act chap. 4 of 23 March 1965.

10) Competition Act of November 1998.

11) Monopolies and Mergers Act chap. 50 of 5 August 1965.

12) Restrictive Trade Practices Act chap. 19 of 30 June 1977.

62 Ibid

13) Income and Corporation Taxes Act chap. 1 of 9 February 1988.

14) Financial Services Act chap. 60 of 1986.

15) Finance Act of 2000.

16) Companies Act chap. 6 of 1985; amended by Act chap. 40 of 1989.

17) Industrial Training Act chap. 15 of 20 May 1986.

18) Industries Development Act chap. 52 of 5 March 1987.

19) Coal Industry Act chap. 3 of 5 March 1987.

20) The Finance Act of 2004.


Facts: Standard Chartered Bank is a multinational financial services company headquartered in London,
United Kingdom, with operations in more than seventy countries. It operates a network of over 1,700
branches and outlets (including subsidiaries, associates and joint ventures) and employs around 80,000
employees worldwide. It is a universal bank and has operations in consumer, corporate and institutional
banking as well as treasury services. Despite of being a British bank, around 90% of its profits come from
Africa, Asia and the Middle East. Standard Chartered bank was one of the first foreign banks that developed in
China, and it has been continuously expanding since 1858. After the forming of PR China in 1949, Shanghai
branch has permitted to stay and assist the new government to provide financial services. During 1950s, the
bank focused on providing loans on chemical plant and steel industry at beginning. With the Chinese
openness policy, the bank has rebuilt its network and now became one of the largest foreign banks in China.
The Chinese headquarter of Standard Chartered Bank is located in Shanghai, where is considered as financial
centre in China, since joining the World Trade Organization (WTO) on 1 January 2002, China had its so called
“5-year transition” period, none of the foreign banks are entitled to enter into the Chinese market during this
period. Obviously Standard Chartered Bank could not wait long to let domestic banks and other foreign banks
to share this big golden cake once the transition period is ended. What Standard Chartered Bank did was to
set more branches in Hong Kong and Taiwan, because those two regions reveal many characteristics in
common with Chinese market. Then, after this“warming up” strategy, Standard Chartered Bank simply moved
some of its employees and operations to the mainland, the already enriched experiences from Hong Kong and
Taiwan, made the bank started ahead of other foreign major competitors Standard Chartered Bank has
shifted its target toward Small to Medium Enterprises (SME), according to the statistics, currently the bank
provided financial services to SMEs is overweighed 50% of its total services, Standard Chartered Bank
managed SME loans by the principles of the “five Cs” of credit, which are:



63 January, 2012Analysis of European Union Foreign Direct Investment (FDI) in China




Standard Chartered Bank has designed a unique rating system that can qualitatively evaluate clients’ cash flow
and balance sheet based on its experiences on 56 countries around global, hence to target Chinese market
more effectively, also, the bank has established market research team, product development team and trade
transaction consulting team to undertake one to one mode in order to specialize to meet different client’s
requirement and to follow the rapid changing Chinese financial industry.


FDI involves the transfer of financial capital, technology and other skills. This process gives rise to costs and
benefits for the countries that are coming to contact due to FDI i.e. the investing country and the host
country. The basic disagreement is on what constitutes the costs and benefits of FDI from the perspective of
the two countries. Though it is not clear what costs are borne by the involved countries and what benefits
would be enjoyed by them, the disagreement is indicated by the gap between the holding pro-globalization
free market views and those with anti- globalization and anti-market views. This division of welfare gains does
not depend on only market prises but also on the combined strength of the two countries bargaining
capabilities over the terms of the agreement governing the particular FDI project. One must comprehend that
if one country loses out does not necessarily mean the other country would gain from it. Both countries must
believe that the benefits that may come out of the FDI must be greater that the costs borne by them because
an agreement would not be reached and the project would not be initiated.

The effects of FDI on the host country can be divided into three facets namely:

1) Economic
2) Social
3) Political

FDI raises income and social welfare in the host country unless the optimum conditions are distorted by
protection, monopoly and externalities. Multi-national corporations operate is a way to maximize profits and
in that process the shift resources to areas where return is high and buy inputs where their prises is low. The
reason why MNC’s exist and operate is primarily because of market imperfections which thereby cast a doubt
on the validity that FDI leads to increase in welfare. For the sake of an argument, if it is assumed that the
markets are perfect and that there are constant returns to scale and if capital is allowed to move in freely it
would flow from a low return country to a high return country. This causes the rate of return on capital to fall
in the high return country and rise in the low return country. The social issues are likely to arise when there
are significant economic, social and cultural differences between the investing and the host country. For
example, the social and cultural impact of Australian FDI in New Zealand will be less than Australian FDI in
Malaysia or American FDI in Saudi Arabia.64

The FDI can be classified into macro effects and micro effects. If there is unemployment and capital shortage
this sort of borrowing leads to rise in output and income in the host country.

64 Foreign Direct Investment, Theory, Evidence and Practice, Imad A Moosa,,%20UP/Master/Mbi%20Investimet%20e%20Jashtme%20Dir

As per some economists the world GDP growth in 2013 is expected to be lower
than in 2012, with economic meltdown in Europe and expected slower growth in the US and many other
emerging markets. This will have a negative impact on FDI decisions as will the continued debt crisis in Europe
and the uncertainty over budgets in the United States. There is an expected 20% decline in Greenfield FDI in
2013 with it affecting the economy in a global scale. Most regions will struggle to maintain their 2012 levels of
FDI. Although in the previous year’s there were growth industries such as creative or renewable energy
helping to keep up the overall FDI volumes, in 2013 no industry seems to be offering a strong growth
prospective with the exception of oil and gas and heavy industry. A sustained growth in FDI will require a
resolution of the debt crisis in Europe, policy certainty in the US and greater political stability in Middle East
and African countries. Therefore a positive FDI growth in terms of productivity and profit seems to only take
place early in 2014.


The Government in power in India has the following take on retail:

a) FDI in retail will create 80 lakhs jobs.
b) Prices of products will reduce.
c) It will bring in growth and innovation.
d) It will discipline the inflationary pressure in the economy.

Globally FDI in retail has improved the productivity of the economy at large. It has brought in innovation and
technology which is accessible on a wider scale. This positive impact of organised retailing could be seen in
USA, UK, Japan, China and also Mexico. In the United States alone retailing is one of the largest employment
generators. Retail is the second largest industry in the United States.

Many countries have approved FDI in multi brand retail and have benefitted immensely from it. These
countries include Argentina, China, Brazil, Chile, Indonesia, Malaysia, Russia, Singapore and Thailand. Also
small retailers co-exist. The quality of the services has increased.

Since 1992, when China opened FDI in retail, it saw huge investment flowing into the sector. The fear that
small or domestic retail chains have in India, which is to lose their business to big foreign retailers is
unnecessary because as per the statistics of China small or domestic retail chains have increased since 2004
from 1.9 million to over 2.5 million. In Indonesia, for example 90% of the retail business still remains at the
hands of small traders.

In India, the farmers get only 10% -12% of the price that a consumer pays for the agro products. Therefore
organised retailing will benefit farmers in a big way as these big retailers sell their products at a very
competitive price. To meet this competition they source the products directly from the farmers thereby
ending the middle man in this format of retailing. This not only works out in the favour of farmers but also
helps in keeping a check on food inflation. Also the storage facilities in India to store food grains and
vegetables are inadequate. Since the investment will flow into back end infrastructure the supply chain will
get strengthened. About 20 -25 % of the agro products get wasted due to improper storage.

Nevertheless much said about good things that FDI in retail will bring but argument will not be justified if we
do not take into account the grey areas. Some of the grey areas are:


a) Predatory pricing could eliminate the domestic retailers leaving them with

b) Multinationals are known to use their big sizes to kill competition and get rid of their competitors.
c) Because of competition they would want to bring down the prices to attract customers. The prices can

be brought down by squeezing the margins of their suppliers, so as it is claimed by 1000’s that
suppliers would benefit, is still doubted.

Therefore before these big retailers prowls into the Indian Territory, India needs to have a strong regulator
for the sector and at the same time strengthen the Competition Commission of India.


The second biggest decline in FDI since the start of the world recession put a halt to the slow recovery to the
Greenfield FDI in 2012. Globally all regions experienced a decline in FDI. The main exceptions to this melt
down were Chile, Spain, Indonesia, Poland and Oman, all of which experienced strong growth in inward FDI.


In 2012, the number of FDI projects into North America declined by 9.48%, attracting only 1671 FDI projects
during the year. Their capital investment decreased by 12.61% and job creation declined by 2.36% in 2012
when compared to 2011. Even after this decline North America was the best in performance in 2012 since the
decline in FDI was much sharper across the world.67

California was the leading state in the region, attracting 205 projects, more than one-tenth of FDI into North
America. The top five states for FDI into North America remained unchanged from 2011 and in total
accounted for 39.26% of the market in 2012. California accounted for 12.27% followed by New York at 8.74%,
Ontario at 7.36%, Texas at 6.94% and Florida at 3.95%. Even with the effects of hurricane Sandy New York
experienced a 5.04% increase in projects when compared with 2011. New Jersey suffered a 41.46 % decrease
in projects. 68

The top state in terms of capital investment was Texas, which recorded an estimated $18bn in FDI, a doubling
of investment compared with 2011 and attracting 26.59% of capital investment into North America in 2012.
As far as job creation is concerned, Florida recorded an estimate of 11,468 FDI jobs which is more than double
the number recorded in 2011, accounting for 8.58% of FDI job creation in North America. 69

FDI projects out of North America declined by 15.71% in project numbers in 2012, with 3150 projects
recorded. There was a 34.51% decline in estimated capital investment and a 32.84% decline in estimated jobs
created overseas by North American enterprises. California recorded 513 projects on outward FDI. California
accounted for 16.29%, followed by New York at 14.67% and Ontario at 5.78%. The top state in terms of capital
investment overseas was California, which invested an estimated $16.7bn overseas, a 35.74% decrease
compared with 2011. New York was the top state for job creation overseas, with an estimated 43,842 jobs
created which was a 23.74% decrease from 2011. 70

66 The FDI Report 2013 Global Greenfield investment trends
67 Ibid
68 Ibid
69 Ibid
70 Ibid

In 2012, ICT with 359 projects and business and financial services with 325
projects were the top two sectors for FDI projects into North America. These two sectors accounted for
40.93% (collectively) of FDI into North America in 2012, showing the dominance of services as the main source
of Greenfield FDI projects into the region. Japanese automotive companies in particular ramped up their
North American investment in 2012 pulled by the growth in the local automotive market and pushed by
natural disasters and strength of the Yen at home. Of the top 10 sectors, the transportation, warehousing and
storage sector increased FDI projects in North America by 16.36%, transport equipment by 7.32% and the
food, beverages and tobacco sector by 6.35%. The transport equipment sector was the only sector in the top
five for 2012 to experience growth. As far as ICT and transport equipment is concerned the increase in market
share was amounting to 21.48% and 10.53%, respectively in the year 2012.71

Some of the upcoming major projects in Europe are:

a) Hankook Tire America, the US based subsidiary of South Korea based tyre manufacturer Hankook Tire
Worldwide, is planning its first tyre plant in the US, with production due to start before the end of
2015. The company will invest about $1bn. The first phase will cost about $700m and create 1500 jobs.

b) Airbus, a subsidiary of Netherlands-based EADS, will open its first US-based production facility in
Mobile, Alabama. Aircraft assembly of the A320 aircraft will begin in 2015 and the facility will create
1000 jobs.

c) Automaker Mercedes-Benz, a subsidiary of Germany-based Daimler, will add 1000 new production
jobs to its facility in Vance, Alabama. The facility will be producing the new C-class model.

d) Samsung Austin Semiconductor, a subsidiary of South Korea-based Samsung, will invest $4bn to
expand the capacity for cutting-edge logic production at its plant in Austin, Texas, US. The project is
scheduled to initiate mass production in the second half of 2013 and will help capitalise on the
demand for Smartphone’s.72


In 2012, Europe saw a decline in the number of FDI projects into Europe. A 20.82% decrease in comparison
with 2011 statistics was faced. A total of 3891 projects were recorded. The top 10 countries accounted
72.19% of FDI projects into Europe. The performance of United Kingdom was slightly better than the rest of
Europe, increasing its market share of FDI into the region to 20.87% the highest of any European country.
Spain and Poland were the only top countries to experience a growth in FDI, following declines in previous
years. Poland increased project numbers by 4.87%, and its market share of capital investment grew to 6.54%.
The country also increased its share of jobs created in Europe to 12.7%, indicating the attractiveness of Poland
for large-scale projects in both manufacturing and services.73

FDI projects out of Europe also saw a decline in 2012. A total of 5468 projects overseas were recorded, a
17.54% drop compared with 2011. In 2012, the top 10 source countries accounted for 82.64% of FDI projects,
with each country holding onto its ranking from 2011. The United Kingdom alone invested in 1245 FDI projects
ranking it the top source country for FDI from Europe and increasing its market share by 1.9%. In 2012, ICT
was the largest sector for FDI into Europe by project numbers, up from second place in 2011, and accounted
for nearly a quarter of FDI into Europe in 2012. Business and financial services slipped to second place,
reflecting the weakness of the financial sector in Europe, but still accounting for about one-fifth of FDI

71 Ibid
72 Ibid
73 Ibid

projects in the region. Transportation, warehousing and storage sector moved
from fifth to third position. While the top five sectors all experienced a decline in project numbers, the coal oil
and natural gas sector maintained its project numbers, while renewable energy recorded a higher number of

Some of the upcoming major projects in Europe are:

a) Hong Kong-based sportswear specialist Higson Group plans to open a €4m factory in Zitoradja, Serbia,
and relocate 10% to 15% of its production from Asia. The factory will employ about 500 workers in the
first year of operations and a further 1000 to 1500 workers by 2014.

b) Germany-based automotive electronics major Draexlmaier plans to invest €30m to establish a factory
in Kavadarci, Macedonia. The new facility will employ 4000 people and will manufacture automotive
components for Mercedes.

c) Building and construction company Itaco Precast, a subsidiary of Italy-based Tecnofin, plans to open a
factory in the Rostov region of Russia to manufacture precast concrete structures. The project will see
Rbs4bn (€99m) invested and 1200 jobs created.

d) Jaguar land Rover, a subsidiary of India-based Tata Group, has announced it is creating 1000 jobs at it
is Merseyside plant in Halewood, UK. The company is also considering doubling the size of its plant by
developing the surrounding land with an investment of £100m (€117m).75


In 2012, Asia- pacific remained the leading destination for FDI with around 3740 projects, thereby increasing
its global share to 31.72%. The only country to achieve growth in project numbers was Australia with its FDI
rising by 4.24%. as far as political stability and FDI is concerned Myanmar acts as a good example, because
after the recent introduction of democracy the south-east Asian country saw a dramatic increase in inward
FDI, with project numbers rising from 10 to 54 in 2012, a fivefold increase. The country also experienced
significant growth in capital investment and job creation in 2012. Countries like Indonesia, the Philippines and
Bangladesh also all achieved project growth of 7.64%, 11.27% and 66.67%, respectively. The remarkable
performance of Bangladesh makes a positive indication of the global shift taking place with a re-allocation of
efficiency-seeking FDI away from China and other emerging markets and towards frontier markets such as
Bangladesh with their vast untapped labour pools, low costs and market opportunities. Even though there
was a decline of 14.96% in the number of projects in Asia-Pacific in 2012 it was still leading in the world
region. In 2011, China, India and Singapore were leading in inward FDI attracting at least more than half of all
projects in Asia-pacific, despite China and India falling sharply by 27.05% and 20% respectively. 76

In 2012, Japan was still the dominant investor from Asia-Pacific although the number of outward projects
from Japan fell. Even after this decline in outward projects its market share of FDI from Asia-Pacific increased
from 34.57% in 2011 to 37.37% in 2012.77

Some of the upcoming projects in Asia- Pacific are:

a) Germany-based automotive giant Volkswagen will invest an estimated $1.13bn to establish a gearbox
plant in Tianjin, China, which will initially employ 1500 people.

74 Ibid
76 Ibid
77 Ibid

b) Hong Kong-based apparel manufacturer Esquel Group will invest $25m to
establish a garment factory at the Luong Son Industrial Zone in the Hoabinh region of Vietnam,
creating 3000 jobs in the first phase.

c) Germany-based leoni, which produces wires, cables and wiring systems, will invest between $19m and
$29m to build a plant in Hanoi, Vietnam, employing between 2000 and 3000 people.

d) US-based Knowles Electronic has broken ground on a $15.41m manufacturing facility in Cebu, the
Philippines. The plant, which will manufacture speakers and receivers for mobile phones, will
eventually employ 4000 people.

e) Japan-based Toyota Motor plans to invest an estimated $504m to expand its diesel engine
manufacturing facility in Chonburi, Thailand. The expansion will see 450 jobs created.78


Brazil, Russia, India and China have all become major players in global FDI. The BRIC countries attracted
22.29% of global FDI projects from the year 2003 to 2012. BRIC countries have attracted 26,027 projects since
the year 2003 with an estimated capital investment of $ 2230bn thereby creating about 8 million jobs directly.
China has alone attracted more than one tenth of global FDI projects ever since 2003. The highest inflow of
FDI in BRIC countries can be traced back to 2008 with the total number of projects panning out at a total of
3205. China, India and Brazil in the year 2012 finished in the top five countries for FDI globally. Collectively,
they attracted 17.64% of global FDI projects.79

Brazil saw the largest increase in market share of the BRIC countries in 2012, attracting 18.42% of FDI projects
into the BRICs. Russia attracted 11.3% of FDI projects into the BRICs in 2012 and ranked second in capital
investment in Europe in 2012. India attracted 30.02% of FDI projects into the BRICs in 2012. The country also
performed well from a regional and global perspective in 2012, ranking second in Asia-Pacific and fourth
globally by project numbers. China accounted for 40.26% of FDI projects into the BRICs in 2012 and captured
8.01% of global FDI projects.80


FDI has proved to stimulate economic growth and development in many of the countries. It not only promotes
capital formation but also improves the quality of capital stock. In order to promote competitive markets
developing nations must reduce restrictions on FDI. We need to learn from the experiences of successful
countries. The ultimate motive should be to minimize the “bad” and maximize the “benefits”. The benefits
from FDI tend to be maximized when foreign investors operate on an even and competitive playing field. This
means they need to be treated just like domestic companies (“national treatment”). In addition, competition,
free entry, customer choice and free exit, should determine who gains and who loses. A competitive and even
playing field creates incentives to upgrade productivity throughout the economy; countries also need
domestic actors capable of responding to these incentives. This implies that the domestic labour force must
be capable enough of taking advantage of the skills upon which these firms have an edge. The global
investment landscape is evolving and therefore has implications for investment policy making. With the
ongoing fallout from the economic and financial crisis and the desire of countries to mainstream sustainable
development into investment policy has led economies to revisit their stance on investment policy both in a
national medium and an international scenario. Investment policy making is a transition from an era of

78 Ibid
79 Ibid
80 Ibid

liberalization to an era of more regulation. This has manifested itself to a
continuing state of review, alteration and amendments of the already existing national and international
regime. One the one side there is an ongoing dichotomy between investment liberalization and promotion
and investment restrictions and regulations on the other. Many countries have started to liberalise and
promote FDI but this is done keeping a close eye on the regulatory and restrictive policy measures. For the last
couple of years more than 95% of investment policy was related in improving the entry and treatment of
foreign investor’s i.e. more liberalization, promotion and facilitation of Foreign Direct investment. However
the new change that can be seen is the national policy measures are now directed to more investment
regulations and the restrictions have also increased significantly. This trend is characterized by more FDI entry
restrictions, more State influence in sensitive industries such as extractive industries, financial services and
agriculture and a more critical approach towards outward FDI. The trend reflects an increasing recognition
that proper regulatory and institutional frameworks must balance liberalization policies in order to ensure
more sustainable outcomes.
The signs of global recovery from FDI came to an end in 2012. The number of FDI projects decreased by more
than 16% which was very much in sync with the decline in the official FDI capital flows of 18% in 2012 which
was announced by the United Nations Conference on Trade and Development. 81 The foreign investors
remained guarded and cautious about the recovery in the world economy. They were particularly cautious
about the debt crisis in Europe and the slowdown in growth in Brazil and China. The major sector for FDI
projects globally was business and financial services in 2012. United States remained the major recipient of
FDI projects and the leading outward investor. In Europe, FDI projects fell by more than 20%, with the biggest
decline in Germany. Spain and Poland were the only two major countries to experience a rise in investment,
although project numbers are far below their pre-recession peak. Asia-Pacific remained the leading region,
attracting more than 31% of global FDI projects in 2012, despite a decline in FDI projects to Asia-Pacific of
almost 15%.


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