Foreigndirect investment may be very advantageous to the host country that is the countrywhich receives the investment flows in terms of helping the country progresseconomically and financially. However, foreign direct investment can remainbeneficial only when the governments of the host countries put in neededregulations so as to prevent the country from being exploited and used as aprofit generating machine for such corporate giants. The past has given manyexamples of how foreign direct investment can also at times be detrimental tothe economy of a country, some examples of which are highlighted below: Political Lobbying: In the past, therehave been many instances in which MNCs have resorted to political lobbying inorder to get certain policies and laws implemented in their favor. At times,these MNCs are so large that their revenues even exceeded the Gross DomesticProduct (GDP) of some smaller nations and compel or threaten them to passjudgments and policies in their favor.Exploitation ofResources: Exploitationof natural resources of a host country is not an very uncommon phenomenon inthe case of FDI.
MNCs of other countries have been known to indiscriminatelyexploit the resources of hosts countries in order to get short run gains andprofits and have even chosen to ignore the sustainability factors associatedwith the local communities and local habitat, very much like what happened inthe 17th century colonialism.ThreatenSmall Scale Industries: MNCs have large economic and pricing powerdue to their large sizes. They do not have much problem with regards tofinancial capital and can hence resort to using advertising which is a costlyaffair. Also, these companies are global players who have their operationsspread across countries and have effective supply chains which enable them tohave economies of scale which smaller players in the domestic market of thehost country cannot compete with. All this results in the MNC having cheaperproducts and more visibility due to the higher amounts of advertising and havebeen known to push out smaller industries out of business.Technology: Although, the MNCshave access to new and cutting edge technology, they do not transfer the latesttechnology to the host country with a fear that their home country may looseits competitive advantage, hence the maximum potential of the host economycannot be achieved as a result of old technology transferred.
CHAPTER-7POLICY REFORMS ON FOREIGN DIRECT INVESTMENT IN INDIA FOREIGN DIRECT INVESTMENT IN INDIAInvestment in Indian market:-India, among the Europeaninvestors, is believed to be a good investment despite political uncertainty,bureaucratic hassles, shortages of power and infrastructuraldeficiencies .India presents a vast potential for overseas investment and isactively encouraging the entrance of foreign players into the market. Nocompany, of any size, aspiring to be a global player can, for long ignore thiscountry which is expected to become one of the top three emerging economies.India has in the recent years emerged as a favored destination forinvestment in various sectors like Power generation, Heavy Machinery,Infrastructure project, Telecom, Communication, Software etc. Various hurdles that existed in theeconomy earlier have been removed as a result of the winds ofliberalization sweeping the country. India has now opened its doors to foreigninvestment in a major way. Non-Resident Indians and Multinational Companies have tofollow certain rules and regulations prior to investment. PolicyFDIupto 100% is allowed under the automatic route in all activities/sectors exceptthe followingwhich will require approval of the Government: •Activities/items thatrequire an Industrial License; •Proposals in which theforeign collaborator has a previous/existing venture/ tie up in India in thesame or allied field, •All proposals relating to acquisition of sharesin an existing Indian company by a foreign/NRI investor.
•All proposals fallingoutside notified sectoral policy/caps or under sectors in which FDI is not permitted.FDIpolicy is reviewed on an ongoing basis and measures for its furtherliberalization are taken. Change in sectoral policy/ sectoral equity cap isnotified from time to time through Press Notes by the Secretariat forIndustrial Assistance (SIA) in the Department of Industrial Policy &Promotion. Policy announcement by SIA are subsequently notified by RBI under FEMA. 7.1 REFORMS MADE BY THE GOVERNMENT FOR FDI IN INDIA 1.
Procedure under automaticroute2. Procedure under GovernmentApproval3. Prohibited Sectors4. General permission of RBIunder FEMA5. Industrial Licensing6. Procedure for obtaining anindustrial license7. Small Scale Sector8.
Locational restrictions9. Environmental Clearances10. Foreign currency convertible Bonds11.
Eligibility12. Preferenceshares13. FDI IN EOUs/SEZs/Industrial Park /EHTP/ STP SpecialEconomic Zones (SEZs)14. Industrial Park 15. Strong Debt Markets:16. Strong Deal destination:17. Robust Insurance Sector: 18.
DTAA: India has among the mostliberal and transparent policies on FDI among the emerging economies. FDI up to100% is allowed under the automatic route in all activities/sectors except thefollowing, which require prior approval of the Government:-Sectors prohibited for FDI Activities/items that require an industrial license Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted) All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permittedMostof the sectors fall under the automatic route for FDI. In these sectors, investmentcould be made without approval of the central government. The sectors that arenot in the automatic route, investment requires prior approval of the CentralGovernment.
The approval in granted by Foreign Investment Promotion Board(FIPB). In few sectors, FDI is not allowed.