Foreign Direct Investment and Institutional
Investors
Foreign Direct Investment occurs when
an investor based on one’s native country (the home country) acquires an
asset or a company in another country (in host country) with the intention
to manage the asset or the company. The investing
company exercises control over decision- making in an enterprise located in a
foreign country according to the level of equity shares held by it.
The foreign direct investments take the
following forms
1.
Establishment of a new enterprise in a
foreign country.
2.
Expansion of existing branch or
subsidiary in a foreign country.
3.
Acquisition of enterprise located in a
foreign country.
Prior to 1999, FDI was permitted
selectively on a case to case basis with a normal ceiling of 40% of total
equity capital. However a higher percentage of equity was permitted in the case
of high-tech import areas and export oriented units. After the Economic
liberalisation, the ceiling was removed and 100% of foreign equities are
permitted only in selected sectors.
Foreign direct investment (FDI) is an
investment made by a company or an individual in one country with business
interests in another country, in the
form of either establishing business operations or acquiring business
assets in the other country, such as ownership or controlling interest in a
foreign company.
1.
Achieving
Higher Growth in National Income: Developing countries
get much needed capital through FDI to achieve higher rate of growth in
national income.
2.
Help
in Addressing BOP Crisis: FDI provides inflow of foreign
exchange resources into a country. This
helps the country to solve
adverse balance of payment position.
3.
Faster
Economic Development: FDI brings technology, management
and marketing skills along with it. These are crucial for achieving faster
economic development of developing countries.
4.
Generating
Employment Opportunities: FDI generates a lot of employment
opportunities in developing countries, especially in high skill areas.
5.
Encouraging
Competition in Host Countries: Entry of FDI into
developing country promotes healthy competition therein. This
leads to enterprise
in developing countries operating efficiently and effectively in the
market. Consumers get a variety of products of good quality at market
determined price which usually benefits the customers.
1.
Exploiting
Natural Resources: The FDI Companies deplete natural
resources like water, forest, mines etc. As a result such resources are not
available for the usage of common man in the host country.
2.
Heavy
Outflow of capital: Foreign companies are said to take away
huge funds in the form of dividend, royalty fees etc. This causes a huge
outflow of capital from the host country.
3.
Not
Transferring Technology: Some foreign enterprises do not
transfer the technology to developing countries. They mostly transfer second
hand technology to thehostcountry. Theykeepthefundamental aspects of technology
with the parent company. In such case, the host country may not get the
advantage of technology transfer and consequent economic development.
4.
Exploiting
Cheap Labour: Foreign enterprises employ cheap labour
force at a lower pay in developing countries. They do not employ local people for higher posts
in the management. Further they do not extend the privileges they usually give to
the employees in their home country to the employees of the host country. Thus
they are stated to exploit the labour in developing countries.
5.
Creating
Monopolistic Environment: Multi National Companies (MNCs)
which enter the host country through FDI route create monopolistic conditions
in the host countries through their market power. They may not create
competitive environment in the host country. Contrarily they may affect the
competition altogether and establish supremacy.
The FII can be defined as an investment
made bya Non-resident in equity of domestic company without intention of
acquiring management control.
FIIs are the investments made by an
individual investor or an investment fund, into the financial markets of
another nation. Organisations like hedge funds, insurance companies, pension
funds and mutual funds can be called as institutional investors.
Foreign Institutional Investors play a
very important role in Indian economy. From 1992, Foreign Institutional Investors (FIIs)
have been allowed to invest in all
securities traded on the primary and secondary markets,
including shares, debentures and warrants issued by companies. Over 1450 foreign
institutional investors have registered
their names with the Securities and Exchange Board of India (SEBI), the
regulator for the securities market in India.
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