Research Proposal on Determinants for the inflow of FDI in India

Foreign Direct Investment or as generally known as FDI is defined by many authors and institutions. As defined by (UNCTAD, 1993), “FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor”, one of the most renowned and usually followed definition of FDI is that of IMF. (IMF, 2003) defines FDI as “A category of international investment that reflects the objective of the resident in one economy (known as direct investor) obtaining a lasting interest in an enterprise resident in another economy (known as the direct investment) where the investment is treated as direct investment when the direct investor has obtained 10 percent or more of the ordinary shares of that entity.

Understanding the importance of FDI in the global trade environment is very essential. The global FDI rose to $916 billion in 2005 an absolute 29 percent increase as compared to 2004 (World Investment Report, 2006). The top contributing TNC’s in the global FDI flows were General Electric, Vodafone and Ford motors as they had about $877 billion of foreign assets which was approximately 19% of the total foreign assets held by the top hundred TNC’s. In the developing world, Hutchison Whampoa (Hong Kong, China) kept the leading position with its foreign assets of $68 billion which accounted to around 17% of the total foreign assets held by the top 100 TNC’s from the developing world.

The existing literature shows that the FDI trends have significantly changed in the past few years and that this significant change is also having an impact on the developing and emerging markets from the developing countries.

Choice of Topic

This project proposes to analyze the performance of India- an emerging economy in the post liberalisation period and by finding and scrutinizing the key sectors and determinants for Foreign Direct Investment (FDI) in the Indian market.

Proposed Title

“FDI and Economic growth- India ‘1991-2008′ ”.

Aim of the Research

During the past few years, there has been a significant transformation in the policies and approaches towards Foreign Direct Investment (FDI) on most of the developing countries. For instance the BRIC (Brazil, Russia, India & China) are attracting many foreign multinationals to invest in their economy. According to Salvotore, D (2007), FDI usually is long term and is regarded to be stabilizing the host country. The developing economies have realized the importance and advantage of FDI in boosting the industrialization and encouraging economic growth. The highly regulated FDI regime was liberalised and newer reforms in FDI policies were introduced in 2003. The economy also started boosting after the post liberalisation period i.e. 1991. Paula (2008) states that the relaxations in the FDI regulations in 2003 by the government of India have been a significant factor in augmenting the inflow of FDI in the Indian economy. Since 2003, enormous amount of FDI has come in India through multinational and international firms and various other foreign investors which led to the growth of the country.

Therefore the proposed aim of my dissertation is to find out the determinants for the inflow of FDI in India and find out the key sectors which are most attractive for foreign investment in the Indian market.

Research Objectives

The main objective of this research is to examine and assess the pros and cons of FDI and the factors responsible to the growth of the Indian economy and this will be achieved through:

Analyzing economic performance of India from 1991 to 2008.

Identification of whether FDI, directly or indirectly contributes to the economic development of the emerging economy like India.

Examination of the determinants of FDI in India

Investigation of key sectors for FDI in Indian market.

Determination of appropriate mode of entry for FDI inflow in the Indian market with reference to the market conditions.

Rationale behind choice of subject for this research

Economics has been one of the beloved subjects of the author of this research. After completion of his graduation in Commerce with specialization in Tax, Auditing and Economics, the author has worked closely with a research analyst in a private firm called Bio-Tech Envirocare Private Ltd. in India. While working with this firm, he has gained many opportunities to keep a track of foreign direct investments in Indian economy with respect to the Pharmaceutical industry as the firm had its core business operations in that industry. But this has encouraged the author to take up this research on a broader aspect and take into consideration the Indian economy as whole and explore its core potential, capacity and capability. And due to this the author has been able to contact some professional research experts and get their precise views on the development of FDI in India.

Research Design

According to Bryman and Bell (2007), research design is a methodical plan which directs the proposed research. It’s a blueprint of an entire research.

My Research plan includes:

Collection of Data

Analysis of Data

Interpretation

Findings and Conclusion

Literature Review

I.A Moosa (2002) describes Foreign Direct Investment as the process where residents of one country (known as the source country) acquires ownership of assets for the purpose of controlling production, distribution and other activities of a firm in another country (known as the host country). FDI recently has been one of the major elements contributing in the global economy. Sinha (2008) states that some of the main reasons for FDI in developing economies is shortage of domestic capital due to limitation on internal savings, insufficiency of public funds and technology gap between the developing and developed countries. All this creates demand for huge external capital for undertaking huge projects and indirectly promoting growth. The importance of FDI in developing countries is a post 1991 scenario where the importance of BRIC economies was discovered. Indian economy being one from the BRIC economies and also amongst the world’s fastest growing economies is expected to play a key role in the future world economy. The October 2003 edition of the Global Economic Paper of Goldman Sachs has an article “Dreaming with the BRICs- The Path to 2050” which clearly states the importance of India as compared to Brazil, China and Russia. India’s trade and investment complete picture was basically divided into the pre-1991 period and the post-1991 period. The pre-1991 period in the Indian Economy showed immense restrictions in the policies for foreign investment. The involvement of foreign entities was categorized into financial participation and technical participation and this was heavily monitored as to what is the intention of the company who wanted to invest in a local firm. Sectors were specially specified as to which are open for technical participation and which for financial participation or both. Technical collaborations were given more importance as this involved introduction of new technology and know-how by the foreign firms and at the same time restricted the foreign control over the local firms. The Foreign Exchange Regulation Act, 1973 (FERA) had been introduced which gave very high preference to the Indian companies and many foreign multinationals like Coca Cola had no other way than to close down their operations in India as foreign firms were asked to reduce their equity holdings in Indian companies to less than forty percent. During the period of 1959 to 1979 the total of the foreign investment approved by the government was dropped down to $70 million which resulted in negative net inflow (Kumar 1994). The pre-1991 period laid a platform for the FDI as the industrialization policies, economic atmosphere and immense human capital attracted more FDI towards India. And then came the post-1991 period. The post-1991 period saw many relaxations in the FDI policies and licensing act was also positively amended with many relaxations. Many sectors of the economy were opened to automatic approval of more stakes in the company. Many recent positive steps have been taken by the Indian government to facilitate the increase in the FDI in many sectors. FDI in India is controlled and regulated under the Foreign Exchange management Act, 1999 by the Reserve Bank of India. The entry mode for FDI in India is predefined through joint ventures and collaborations and investments in a local company by a foreign entity. FDI involvement was automatically approved for equity up to hundred percent was legitimate for sectors like distribution, communication and electricity for the investments which didn’t exceed Rs.15 billion. After 2002, greater importance for FDI was given as a new sub-section was created in the Indian industry which specially looked after the FDI needs and its improvement. In 2004, a new committee was formed which headed by Rattan Tata, where this committee made frequent visits to the industrial places in India where there was a absolute need of investment and held meetings with large overseas companies to bring those places in light.

Methodology

To achieve the stated research objectives,

The author will mostly be relying on secondary data which includes text books by various authors, online journals and published articles, featured articles on the Financial Institutional websites, articles from database websites like Science Direct and Emerald and also with help of Google search engine. Most of the statistical data will be accessed from the official websites like Reserve Bank of India, OECD and International Monetary Fund (IMF), The World Bank and past UN annual reports.

The basic strategy used in the research will be methodological triangulation which involves both qualitative and quantitative methods of analysis. The author of this research is also partly relying on the primary sources as he will be interviewing several research analysts from India, United Kingdom and the European Union by sending them a questionnaire with 9-10 questions and on receiving their answers qualitative analysis will be done so as to get a actual trend of the determinants of FDI and its effects. Also video conferencing will be involved with a research analyst from India with the help of Skype.

So as to the design of the research is concerned, the type of research selected by the author is Retrospective study i.e. trend studies which looks back in time for the happening of past events and find a particular trend in it. Probability and Non-Probability sampling method will be used to give a proper approach to each and every step taken in this research. All the data will be categorized in these two categories and then a trend will be extracted from them.

Contribution of the Study

This is an extended research on many previous researches in the same context but this research specifically covers the whole Indian economy on a broader view rather than concentrating on a single sector only as this does not give an actual trend of the country’s performance, attractiveness for FDI and further potential for sustainability.

The existing literature shows that there are limited studies that have actually concentrated and researched from India’s point of view. And hence the author of this research has chosen to have an extended research on this topic.

Hence this study will fill the gap in the literature by analyzing with a broader view of FDI in India as compared to the narrow approach of FDI in India as this research will cover the Indian Economy on a whole and not a specific sector only.

Time Schedule

A time schedule is very important in a project so as to properly align the responsibilities and to impose restrictions on the author of this project for the timely completion of this project. The time scale for this research is set as follows:

June - July (2010)

Selection of topic

Literature Review

Approval from Tutor

July - August (2010)

Collection of Data

First draft of proposal

Break

August - September (2010)

Proposal approval from tutor

Changes in the proposal (if any)

Re-approval from tutor (if necessary)

September - October (2010)

First draft of actual dissertation

Approval from tutor

Changes in the first draft (if any)

Re-approval from tutor (if necessary)

Final draft of dissertation

Final approval from tutor

Submission of Project

A detailed Gantt chart will be prepared for the whole of the project with the inclusion of all the minor details.