Foreign investment in India: Post liberalization

Abstract

Any investment that flows from one country into another is known as foreign investment Foreign Investments could be broadly categorized into FDI and FII. FDI is an investment in which companies get a lasting interest in some projects, may be in form of buying or constructing a factory in a foreign country or adding “improvements to such a facility, in the form of property, plants or equipment. Foreign Institutional Investment is a category of investment instruments that are more easily traded through various portfolios and may be less permanent. This does not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise, hedge funds, insurance companies, pension funds and mutual funds that does not necessarily represent a long-term interest. Foreign Direct Investments (FDI) stands as a major source of funding worldwide. The last two decades have seen continuous tapping of this source and as a result, the FDI level stands at approximately 35 percent of global FDI in emerging economies. Since 1991, Indian economy has made rapid strides towards integration with world economies via the liberalization, privatization and globalization (LPG) program. Broadly, theories on the determinants of FDI can be bifurcated into two separate sets of theories. The first analyse FDI in the context of portfolio allocation framework and second analyse FDI flow in the context of market imperfections. FII being volatile, changes in the investment conditions in a country or region can lead to dramatic swings in institutional investment. For a country on the rise, FII can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth. However, when a country’s economic situation takes a downturn the large flow of money into a country can turn are taken back causing major distress in economy as well as labour force. FDI and FII depend on several macroeconomic factors like growth rate, interest rate and inflation. They also depend on critical factors like political and environmental stability, cheap labour force, and availability of resources, market size and infrastructure of the host country. Emerging economies like China, Brazil and India have become favourable destinations for foreign investors in recent times. Although the conditions prevalent in these countries are different but foreign investment has helped in the economic growth of these countries.