Analysis of Global Foreign Direct Investment
A Quantitative and Qualitative study of FDI Inflows in India
Masterarbeit 2014 108 Seiten
2. LITERATURE REVIEW
2.1. INTERNATIONAL MARKETING
2.2. DOMESTIC MARKETING V/S INTERNATIONAL MARKETING
2.3. FOREIGN DIRECT INVESTMENT (FDI)
2.4. GLOBAL FDI FLOWS ANALYSIS
2.5. KEY HIGHLIGHTS OF GLOBAL FDI
2.6. FOREIGN DIRECT INVESTMENT & INDIAN MARKET
2.7. FOREIGN DIRECT INVESTMENT-THEORIES & MODELS
2.7.1. THE INDUSTRIAL ORGANIZATION HYPOTHESIS
2.7.2. DIFFERENTIAL RATE OF RETURN
2.7.3. MUNDELL AND HECKSCHER-OHLIN MODEL
2.7.4. PRODUCT LIFE CYCLE THEORY
2.7.5. DUNNING’S OLI PARADIGM
2.7.6. OWNERSHIP (O) ADVANTAGES
2.7.8. LOCATION (L) ADVANTAGES
2.7.9. INTERNALIZATION (I) ADVANTAGES
CRITICAL ANALYSIS OF FDI THEORIES
3.1. RESEARCH STRATEGY
3.2. EXPLANATORY RESEARCH
3.3. QUANTITATIVE RESEARCH
3.4. QUALITATIVE RESEARCH
3.5. NON EXPERIMENTAL
3.6. DATA COLLECTION
3.6.1. PRIMARY DATA
3.6.3SURVEYS AND QUESTIONNAIRE
3.6.4. SECONDARY DATA
3.6.5. HISTORICAL ANALYSIS
3.7. PROBABILITY SAMPLING
4. FINDINGS AND ANALYSIS
4.1. INTERVIEWS FINDINGS
4.2. PARTICIPANTS INDUSTRY BACKGROUND
4.3. PARTICIPANT’S INTERESTS IN FOREIGN DIRECT INVESTMENTS AND FOLLOW-UPS
4.4. PARTICIPANTS KNOWLEDGE ABOUT FDI POLICIES OPERATING IN INDIA
4.5. INDIA-A HOT DESTINATION FOR FDI OR NOT
4.6. CURRENT FDI POLICIES-IS IT SUPPORTIVE FOR THE FOREIGN INVESTORS
4.7. FDI-A CATALYST OF CHANGE OR AGENT OF CHAOS
4.8. BEST DESTINATION FOR FDI-INDIA OR CHINA
4.9. FDI RETAIL POLICY IN INDIA-PROBLEM AREA
4.10. FDI IMPACTS ON DOMESTIC MARKET
4.11. MACRO-ENVIRONMENTAL INFLUENCES ON FDI IN INDIA
4.13. INDUSTRY BACKGROUND 51 Page 9 of
4.14. AWARENESS OF FDI POLICIES IN INDIA
4.15. FDI POLICY EFFECTIVENESS IN INDIA
4.16. WHY INDIA IS A BETTER DESTINATION OF FDI’S
4.17. ECONOMIC IMPACT DUE TO FDI
4.18. DEVELOPING OR DEVELOPED ECONOMIES FOR FDI
4.19. GOVERNMENT SUPPORT FOR FDI
4.20. FDI IMPACT ON DOMESTIC MARKETS
4.21. FDI POLICY IMPLICATIONS ON FOREIGN INVESTORS
4.22. GOVERNMENT AID FOR THE DOMESTIC SUPPLIERS
4.23. REASONS FOR DECLINING FDI FLOWS IN INDIA
4.3. PARTICIPANTS PERCEPTIONS ABOUT FDI
FDI IS TOOL OF DEVELOPMENT IN INDIA
4.4. FDI, A CHAOS FOR DOMESTIC SUPPLIERS AND CULTURE OF THE NATION
4.6. HISTORICAL ANALYSIS
5. RESULTS AND DISCUSSIONS
5.1. DEVELOPING ECONOMIES V/S DEVELOPED ECONOMIES
5.2. POLICY IMPLICATIONS
5.3. OLI PARADIGM IN PRACTICE-DEVELOPED V/S DEVELOPING ECONOMIES
5.3.1 OWNERSHIP (O) ADVANTAGES
5.3.2. LOCATION (L) ADVANTAGES
5.3.3. INTERNALIZATION (I) ADVANTAGES
5.4. COUNTRY ATTRACTIVENESS DUE TO RATES OF RETURN
INDIA AND CHINA- LAGGARDS AND INNOVATORS
5.5. DETERMINANTS OF FDI IN INDIA
5.6. MACRO-ENVIRONMENTAL FACTORS
5.7. LABOR ADVANTAGES
5.7. THE ECONOMIC FACTORS 80 INFLATION IN INDIA
5.8. FOREIGN DIRECT INVESTMENT- IMPACTS & INFLUENCES
5.9. FDI-CATALYST OF CHANGE
5.10. FARMERS AND RETAILERS
5.11. FDI AND INDIAN RETAIL INDUSTRY
6.1. FOREIGN DIRECT INVESTMENT- A TOOL FOR BUILDING ECONOMY
6.2. NEEDED POLICY CHANGES
6.3. INDIVIDUALS PERCEPTIONS
6.4. DEVELOPING ECONOMIES ARE MORE SUITABLE THAN DEVELOPED ECONOMIES 86 CURRENCY APPRECIATION AND INFLATION
7.1. THE LEARNING PROCESS-ACQUIRING OF SKILLS
7.2. CONCRETE EXPERIENCE
7.3. REFLECTIVE OBSERVATION
7.4. ABSTRACT CONCEPTUALIZATION
7.5. ACTIVE EXPERIMENTATION 93 Page 11 of
7.6. THE LEARNING STYLE-DIVERGING
List of Figures
FIGURE 1: .GLOBAL FDI FLOWS, UNCTAD, 2012/13 (P. 1213) ERROR! BOOKMARK NOT DEFINED
FIGURE 2. TOP 5 HOME AND HOST ECONOMIES SOUTH ASIA, UNCTAD, 2012/13 (P. 49)
FIGURE 3: VERNON 1966; JOHNSON, 2005. PRODUCT LIFE CYCLE THEORY, P.18
FIGURE 4: DUNNING'S ECLECTIC PARADIGM, JOHN DUNNING, 1993A
FIGURE 5: SOURCE, KOTHARI, 2006; KHAN 2008; KUMAR 2011 ET AL, XXX.R 2013. SELF PORTRAIT [RESEARCH STRATEGY]. LINCOLN
FIGURE 6: SOURCE OLSEN, 2011. XXX.R 2013. SELF PORTRAIT [INTERVIEW PROCESS]. LINCOLN
FIGURE 7: SOURCE, KOLB (1984), EXPERIENTIAL LEARNING: EXPERIENCE AS THE SOURCE OF LEARNING AND DEVELOPMENT
List of Tables
TABLE 1. FDI INFLOWS REGION WISE, UNCTAD, 2012/13 (P. 13)
TABLE 2. DEVAJIT. M (2012); IMPACT OF FDI ON INDIAN ECONOMY [FDI INFLOWS FROM 1948-2010]
TABLE 3: SELF-PORTRAIT (2014). XXX, R [QUESTIONNAIRE DESIGN AND PLAN] ERROR! BOOKMARK NOT DEFINED
TABLE 4: SOURCE, RESERVE BANK OF INDIA, ANNUAL REPORT (2013) [INVESTING COUNTRIES FOR INDIA]
TABLE 5: SOURCE WIR, 2012 [FDI EQUITY INFLOWS 1991-2013]
TABLE 6: RBI 2013 [TOP INVESTING SECTORS IN INDIA] 2008-2013
TABLE 7: FDI FLOWS IN INDIA, UNCTAD, 2013
TABLE 8: FDI FLOWS IN UNITED KINGDOM, UNCTAD, 2013
TABLE 9: FDI FLOWS IN CHINA, UNCTAD, 2013
List of Charts
CHART 1: PARTICIPANTS KNOWLEDGE ABOUT FDI POLICIES IN INDIA
CHART 2: PARTICIPANTS INDUSTRY BACKGROUND:
CHART 3: RATING OF FDI POLICIES IN INDIA
CHART 4: POLICY IMPLICATIONS ON FOREIGN RETAILERS
CHART 5: GOVERNMENT AID FOR DOMESTIC RETAILERS
CHART 6: REASON FOR DECLINING FDI
CHART 7: CHINA'S INFLATION RATE 2012-13
List of Graphs
GRAPH 1: PARTICIPANTS INDUSTRY BACKGROUND
GRAPH 2: INDIAN FDI POLICIES-ARE THEY IN FAVOR TO FOREIGN INVESTORS
GRAPH 3: BEST DESTINATION FOR FDI
GRAPH 4: IMPACT OF FDI ON DOMESTIC MARKETS
GRAPH 5: PARTICIPANTS AWARENESS ABOUT FDI POLICIES IN INDIA
GRAPH 6: DETERMINANTS OF FDI IN INDIA
GRAPH 7: FDI INFLUENCES ON ECONOMY OF INDIA
GRAPH 8: DEVELOPING OR DEVELOPED ECONOMIES
GRAPH 9: GOVERNMENT SUPPORT FOR FDI INFLOWS IN INDIA
GRAPH 10: IMPACT OF FDI ON DOMESTIC MARKETS
GRAPH 11: SOURCE, INDEXMUNDI, 2014-RUPEE DEPRECIATION
GRAPH 12: RATES OF RETURN IN ECONOMIES, UNCTAD, 2008
GRAPH 13: TOP 20 HOST ECONOMIES WITH HIGHEST INWARD RATES OF RETURN, UNCTAD 2013
GRAPH 14: INDIA'S INFLATION RATES
This research analysis is based on studying Foreign Direct Investment in India, and trends of FDI in Asian markets. The study procures with defining global foreign direct investment flows and India’s share in global FDI flows by contrasting with the other developed and developing economies. This par ticular research study is a true piece of work carried and developed by me only. This research report complies with the standard rules and guidelines. In addition, the study has been prepared according to the procedures and standards set by University of Xxxand its research board.
The analysis focused and listed out various traditional international marketing theories, standard definitions issued by government boards & organizations, conceptual models and frameworks presented by various authors. All these resources were highly helpful in constructing the research in more efficient manner.
Primary research and secondary researches was employed to gather relevant data for the study and the outcomes are presented in the discussions and analysis chapter. All the definitions, models, and frameworks used as a secondary source of data are referred in Harvard style of referencing as outlined by the University of Lincoln.
Furthermore, the findings of the study was analyzed using problem solving skills and are presented in a graphical format with the help of statistical and analytical techniques. This approach by the researcher helped in making a masterpiece work compiling with the codes and ethics of the research study.
I, Xxx Xxx therefore present this Dissertation to the University of Lincoln, Lincolnshire for the fulfillment of Master’s Degree in Business Administration and its objectives. I solemnly declare that this a true piece of work submitted by me to the University of Lincoln.
This report involved a great piece of work by me and would be ungrateful, if I did not thank the others who supported for me indirectly in completion of the study Firstly, I would like to thank my parents who gave me a wonderful opportunity of pursuing my Master’s in United Kingdom. Pursuing my Master’s Degree in abroad was my dream and I would like to thank my parents for helping me to achieve my dream. In return, I would like to present this report expressing my gratitude for their continuous support and trust vested within me.
I would like to express my heart-warming gratitude to my tutor Mr. David Floyd, Lecturer University of Lincoln, Lincolnshire for his continued support and guidance, which played a significant role in completion of this study. Without his support and guidance, this research would not have been successfully completed. I also would like to thank University of XxxLibrary for providing access to wide sources of information & Professors and Lecturers for their support. I would also like express my gratitude to the participants of the interviews and respondents of survey, who despite of their tight and busy schedule participated in the process and provided their valuable insights and responses, which made the research study more realistic and impeccable.
Finally, I owe my earnest to University of Lincoln, Lincolnshire for providing this fabulous opportunity to pursue my Master’s Degree in their esteem institution, which helped me in pursuing my dream. The skills that I obtained during the vigorous teaching, practical training is highly valuable, and I am confident that it would help in shaping my effective future career.
The research report is based on studying foreign direct investments and global FDI flows. The primary part of the study focuses on understanding Foreign Direct Investment and its global flows using reports and handouts issued by economic organizations and departments. The secondary part of the research focuses on studying FDI flows between developed and developing economies. The study attempts to determine the key drivers for the FDI and determinants of FDI, using traditional FDI models and frameworks presented by research scholars and authors. Laterally, the research focuses on exploring the relationship between the determinants of FDI and advantages offered by host developing economies. The final part of the study focuses on analyzing the FDI trends in India and its likely impact on the retail trade and country’s economy. The primary objectives of the study was to study the historical and present trends in FDI flows in India and contrast the outcomes with China and United Kingdome using Dunning’s OLI paradigm and Differential rates of return. Finally, the study concludes of analyzing the outputs gathered through primary data collection methods, surveys, interviews and historical analysis, presenting the readers about the FDI flows between developed and developing economies.
In the theoretical part of the research, the study attempts to explore the relationship between foreign direct investments and the motives for the firm’s to indulge in foreign direct investments. The literature part also focused defining recent trends in FDI inflows in India and its likely impact on the retail market. Different theories and models were contrasted to gain conceptual knowledge about the area of interest of the study.
In the analysis and findings part, the findings that were obtained using primary and secondary data were presented with the brief interpretation in a graphical format to communicate message in a quantifiable manner.
In addition, when findings of the study are related with literature review. The study emphasizes on the fact that foreign direct investment is an important source of capital for development of nation’s economy. In addition, there is an increased flow of FDI towards developing countries rather than developed countries, because the advantageous factors offered by the developing nations.
The research study also concludes stating, India is one among the top hot destinations for FDI and due to economic impact and currency inflations, there is a slight decrease in FDI inflows, which is not a major concern. The study suggests the policy makers to design flexible FDI policies to attract more investors into the nation with aim of redefining the definition of laggards to innovators in the FDI global market.
Title: “ A Study of Global Foreign Direct Investment and recent trends in Indian FDI Inflows ”
Researcher: Xxx Xxx
Institution: University of Lincoln, Lincolnshire Publish Date: Feb-03-2014
Foreign Direct Investments can be referred as the major source of huge capital (monetary and non-monetary) from one nation to another nation. Such flow of capital would lead to the development of many micro-&-macro factors of both parties. However, the question is that, how firms engage in FDI and using what methodologies they determine the effectiveness of the host country. Foreign Direct Investment is also an integral part of International Marketing: widely known and practiced modes of entry to foreign nationalities by MNE ’ s and TNC ’ s.
This research report aims at studying the foreign direct investment and its flows into India, as a host economy. The secondary part of the study also focuses on exploring the reasons behind the favorable factors for developing countries against developed economies.
With the help of historical analysis, the previous trends of FDI flows in India are analyzed and studied. By using interviews and survey methodologies, the major reasons for foreign direct investments in India and its varying trends are outlined in the study.
According to WIR 2013, FDI flows (inflows & outflows) during 2011-2012 accounted approximately $142 billion, which was considerably low when compared to previous years. According the UNCTAD (2013), FDI flows are likely to increases in 2013-2015 by pick gradual growth in capital transformation.
FDI is highly concentrated; about 80% has gone to only ten developing countries, while the smallest recipients have received only one per cent. Almost two- thirds of the FDI to developing countries went to Asia; only five per cent went to Africa ”
The research aims at studying the FDI Flows and its inflow trend in India using an explanatory research approach with aim of explaining the reasons behind the increased inflows to developing countries like India and China.
The primary data is collected using surveys and interviews of economists, business executives and managers, corporate employees, farmers, journalists and students. The secondary data is collected through studying previous researches, journals released by organizations and historical analysis. The data are analyzed using statistical and analytical tools and are presented in both quantitative and qualitative manner. The findings of the study are analyzed in the light of literature review and conclusions & recommendations are drawn for this study.
International Marketing is the performance of business activities designed to plan, price, promote, and direct the flow of company’s goods and services to consumers or more users in more than one nation for profit. The only and main difference between marketing and international marketing is that; marketing activities take place in one country while international marketing operates across boundaries of the nations. According to Czinkota (2012. p. 6), international marketing consists of activity, institutions, and processes across national borders that create, communicate, deliver, and exchange offerings that have value for stakeholders and society. International marketing has forms ranging from export-import trade to licensing, joint ventures, wholly owned subsidiaries, turnkey operations, and management contracts. Foreign Direct Investment is also an integral part of International Marketing: widely known and practiced modes of entry to foreign nationalities by MNE’s and TNC’s.
The study is aimed at analyzing global FDI flows and its trends in India. The study overviews on global FDI flows and trends. The Indian Retail Market is only a primary concern for purpose of preciseness, but the research encompasses on whole India as one economy to foreign direct investment. The FDI flows in China and United Kingdom will examined using Dunning’s OLI paradigm compare and contrast with Indian FDI flows as a small integral part of the research. More focus is kept on the determinants of FDI in host economies and with the help of FDI theories, the declining FDI inflows in India will be examined to offer effective suggestion with view of increasing inflows.
“ Foreign Direct Investment, an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy ( foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign affiliate) ” . (UNCTAD, 1999)
A simple definition for FDI would be “An investor based in one country acquires assets in another country with intent to manage those assets as defined by (OECD, 2000). Well the definition has and had undergone periodical changes with the effect of globalization which has the changed the traditional meaning and intent of FDI. Foreign Direct Investments plays a crucial role in the economy of both home and host countries by sourcing flow of capital funds, technology, assets and knowledge.
They also have crucial impact on the society and on the culture of the nation, which is not under the perspective of this particular research.
According to UNCTAD, 2013, India is one of the top host countries for FDI in South Asia. India is the second largest emerging market with a composition US $ 2.4 trillion (WIR, 2012). After privatization and liberalization changes in 1990, Indian was widely opened for the potential investors to invest in India. This act of consolidation of FDI policies changed the entire FDI scenario in India, as the nation experienced a significant gradual increase in the flows.
According to the FDI policy (RBI, 2013), an potential investor can invest in India without the prior approval from the Reserve Bank of India but the investor is likely to obtain a permission from the Government and Investment promotion Board. The recent changes in FDI Policies of India which took effect in April, 2013 with a view of increasing FDI inflows has also made a significant change in the mindsets of the investors; it allows the investors to transfer any source of capital instruments by taking a prior consent from RBI. However, foreign direct investment in India has been experiencing a slight decline. In 2012, India experienced 23 per cent decline in its FDI inflows when compared to 2010-11.
Previous researches have been carried on the FDI and its impact on the economy. A research by Sinha, 2007) “Can Laggards Learn from Leaders, a comparative analysis of FDI in China and India; outlined that competitiveness between India and China in securing top spot as host FDI nations. Nevertheless, India is one of the best destinations for investors; it is not close to China’s competitiveness in attracting FDI’s and India being laggard in opening its economy to FDI (Bajpai & Sachs, 2000; Sinha 2007). The existing literature suggests that FDI patterns have changed over a period time. The FDI inflows were once restricted to developed countries, but at a current scenario the FDI flows are elevated towards the developing countries mainly towards Southeast Asia. To contrary, these inflows are now or about to flow into Least Developed Countries (LDC) because of their low cost offerings. (Zhang, 2000; Lall, 1993). (UNCTAD, WIR, 2013). There is significant transformation in patterns of trade offering opportunities for developing, least developed nations to exploit and utilize such opportunities to their advantage, and nations are on urge to attract the majority of FDI’s in current scenario by any means of offerings for the investors.
The introductory part of the research gave us the insights of Global FDI flows and competition between the developing economies to gain a lion share of the FDI flows. The Government and regulatory boards are working hard to design such a FDI policy with a flexible stipulation to attract the wealth maximizing investors to secure a hotspot in top host countries.
The theoretical fact brings this particular study to outline certain objectives that addresses the underlying key problems and to research for a solution:
1. What are the key determinants of FDI Flows?
2. Why is there an elevation of FDI flows from developing economies towards developed economies?
3. Why there is a decline of FDI flows in India?
4. What is the level of impact of FDI in India, How likely retail is going to improve?
5. Why China is a leader and India a laggard in top host FDI countries?
6. How business entrepreneurs and management professionals perceive the new FDI policy?
7. What strategies and policies can be designed to increase inward FDI?
2. Literature Review
The chapter starts with defining international marketing and its implications on the business strategy; outlining the theoretical aspects of international marketing. A brief description will be designed to give a conceptual clarity about Indian retail markets and its composition. The research offers more attention to foreign direct investment, which is major tool of entry mode strategy. The flow of FDI’s globally shall be analyzed and studied: using theoretical and practical reasoning using previous works on FDI by authors and researchers. The final part of the literature review briefs about the Indian retail market and FDI, impacts and attempt will be made to related FDI and India using FDI theories and methodologies.
2.1. International Marketing
International expansion is an especially important decision for the firms, which traditionally have a small financial base, a domestic focus and a limited geographic scope (Barringer & Greenig 1998). Globalization reflects a business orientation cantered on the belief that the world is getting more homogeneous and that distinctions between national markets, which are not only fading but also, for some products are being eventually disappear. As a result, ‘Companies need to globalize their international strategy by formulating it across markets to take advantage of underlying market, cost, environmental, and competitive factors’
(Michael.R and Ilkka.A, 2001).
According to Johny k. Johanson (2000), ‘Global marketing refers to marketing activities coordinated and integrated across multiple country markets’. Marketing is a societal process by which individuals and groups obtain what they need and want through creating, offering, and freely exchanging products and services of value with others’ (Philip Kotler, 2004). The Charted Institute of Marketing defines marketing as the ‘Management process responsible for identifying, Anticipating and satisfying customer requirements profitability’ (Isobel dolle and Robin Lowe, p-5, 2004). According to Fayerweather (1982), ‘The international marketing process is defined by the firm which has permanent operations in two or more countries with business that cross national borders’. But Frank Bradely (2005) describes international marketing has “Identifying needs and wants of customers in different markets and cultures, providing products, services, technologies and ideas to give the firm a competitive marketing advantage, communicating information about these products and services and distributing and exchanging them internationally through one or a combination of foreign entry modes”.
2.2. Domestic Marketing v/s International Marketing
There is no such far distinction between domestic marketing and international marketing. Domestic marketing is concerned with the practices within a marketer’s home country. From the perspective of domestic marketing, marketing methods used outside the home market are foreign marketing. In simpler word, marketing across the cross borders of nationalities, it can be exchanges of good/services, ideas, people, intellectual properties and many more.
A study becomes comparative marketing when its purpose is to contrast two or more marketing systems rather than examine a particular country’s marketing systems for its own sake. (Onkvisit & Shaw). Domestic marketing involves one set of uncontrollable aspects derived from domestic market. International marketing is much more complex because a marketer faces two or more sets of uncontrollable factors originating from various countries: where the marketer must cope up with legal, political and monetary systems of foreign country. The firm is subject to the risks of doing business internationally, including unexpected changes in regulatory requirements, fluctuations in foreign currencies and exchange rates, imposition of tariff’s and other barriers and restrictions and the burden of complying with various laws and general economic and geopolitical conditions including inflation and trade relationships. The International marketer’s task is more complicated than that of domestic marketer because the international marketer must deal with at least two levels of uncontrollable uncertainty instead of one. Uncertainty is created by the uncontrollable elements of all business environments, but each foreign country in which a company operates has its own unique set of uncontrollable factors. (Cateora; Graham, Salwan, 2008).
When an International firm decides to enter a foreign nationality, it has to know the foreign market accurately to avoid future problems; problems may arise from any source like changing customer tastes, legal and political implications, social and demographic impacts, economic state of the country etc. International marketing outline this external and internal environment during the internationalization and helps the firms with a varied of set of tools and methodologies which are practically implemented in the reality. In present era of global competition and market attractiveness, FDI has been one of the major modes of entering a foreign market.
The further study discusses about FDI, analysis of FDI inflows for the last decade and attempts to explore the relationship between the flow of FDI and theories & models of FDI and its economic impacts in retail India.
2.3. Foreign Direct Investment (FDI)
“Foreign Direct Investment is a form of international capital flows ” ( Razin & Sadka 2007, p.8). FDI is a form of capital that flows from one company to another company during the process of internationalization. It is one of the major form of entry modes for firms. The basis for FDI would likely to date back to 1990’s when there was a mass industrialization by nationalities and firms.
As (Moore & Lewis, 1999), stated once “ International Business activity is by no means a recent phenomenon. The lives of Phoenicians and Carthaginians, in ancient world, were deeply dependent on international business; where the economic activity included FDI, joint ventures and strategic alliances ” .
In relation, FDI was an economic activity, which was associated with international business during industrial revolution. Contradictorily, a research by (Hennart, 1969) argued that foreign direct investment was considered exclusively a form of international movement of capital. The author did not define FDI theoretically, but a motive for FDI linking international business was drawn during 1969.
In contrary, FDI evolution dates back to 1960’s as Stephen Hymer (1976) points out that, during post-war period, there was a dramatic increase in U.S. foreign investment, which was critically discussed by many economists. The author also outlined the fact that during the war period (1951-1964), more than 4/5th of net private long-term capital were received in form of investments from developed nations. (Dunning, 1970). From the perspective of dunning (1993a), FDI is a resource seeking activity and can be defined as market seeking investment (Dunning, 1993a:p.100; Jones1996: p.5)
“Foreign Direct Investment is a category of international investment where a resident in one economy (the direct investor) obtains a lasting interest in an enterprise resident in another economy (the direct investment enterprise ” . (IMF, 1993)
According to Hymer (1960) assumptions, firms invest in foreign nations to maximize their total profits, which was later argued by Kindleberger (1969). Kindleberger (1969) argued that multinational enterprises are logically inconsistent with pure competition, so that they require additional effects that are necessary to provide a convincing explanation of their existence.
Hymer (1960), argument seems more realistic, as profit maximization are the key motive drivers for the multinational firms to invest abroad, whilst Kindleberger (1969) perspectives are more complicated, as competition can be tougher in foreign markets than in national markets.
According to Terpstra, Foley & Sarathy (2011. p.11), firms enter into foreign direct investment for many reasons. For some reason it may increase the control over marketing activities or to get closer to the customers: it could also enable distribution efficiency of warehouses and lowering costs of assembly. According to them. FDI is about lowering costs and enabling cost efficiency. The authors instead of defining FDI, they have attempted to expose the motives of FDI by firms.
According to, Czinkota (2012. p. 154) FDI “FDI is the capital funds flow from abroad company is held by non-citizens; foreign ownership is typically undertaken for longer-term participation in an economic activity ” . This is simplest definition given by an author that encompasses attention on two factors “Capital funds” & “Economic Activity. In simpler form, transfer of money from one country to another foreign country to participate in economic activity; this outlines the advantages of FDI, that a investing firm will exploit the foreign country resources where both the parties will benefit in terms monetary and non- monetary terms.
Unlike the FDI propaganda given by UNTCAD, IMF, OECD and other researchers and authors, there is no specific definition outlined for FDI. The attempt, which is more likely a successful attempt, was made to outline the nature of FDI. As (Moore & Lewis, 1999; Hennart, 1969), stated that FDI is movement of international capital, Dunning, 1993a argued that companies invest in FDI for seeking new markets and extend their business operations.
Nevertheless, FDI is a flow of capital from one nation to another, with view of exploiting the resources available to generate profits or to maximize the wealth of both home and host country. The major hope on the FDI is that it facilitates international trade and transfer of knowledge, skills and technology.
Henceforth FDI is described as source of economic development, modernization & employment generation contributing to international trade integration and exports facilitation. (Chatterjee, 2009).
2.4. Global FDI Flows Analysis
The Organization for Economic Co-operation and Development (OECD), organization that promote policies that will enable improving the economic and social well-being of people. The organization helps the governments of nations to work with the problems (social, economic and environmental) and solve them by identifying the key drivers. (OECD, 2010).
United Nations Conference on Trade and Development is another similar organization providing detailed analysis of FDI and MNE’s. UNCTAD is a forum where representatives of all countries can freely engage in dialogue and discuss ways to establish a better balance in the global economy.
World Trade Report (WIR) has been published since 1991, where the report covers the latest trends in FDI based on extensive data and conducting in depth analysis of FDI selected areas. The above organizations work closely with governments and consultants with a sole aim of improving one nation’s conditions, especially enabling the nation’s economy to endure sustainability.
According to WIR 2013, FDI flows (inflows & outflows) during 2011-2012 accounted approximately $1391 billion, which was considerably low when compared to previous years. According the UNCTAD (2013), FDI flows are likely to increases in 2013-2015 by pick gradual growth in capital transformation. In the last decade, the highest FDI flows were recorded during 2007-08 where the capital fund transformation accounted for more than $2000 billion.
According to WIR (2013), FDI inflows were gradually high in developing countries, which proved to be much more resilient than flows to developed economies
illustration not visible in this excerpt
From the above table, it can be noted that around $703 billion of investments were flown into developing nations in Asia during 2012, while developed economies have received around $561 billion.
The vital fact is that around 52 per cent of total FDI flows were invested in developing countries during 2011-2012, where Asia had exploited the major share FDI accounting $407 billion which is around 29 per cent of total FDI flows. In spite of attracting a major share of FDI flows, the developing economies FDI outflows reached around $426 billion i.e., 31 per cent of total FDI global outflows by demonstrating that the nation’s TNC’s continued development and expansions abroad.
“The BRICS countries (Brazil, the Russian Federation, India, China and South Africa) continued to be the leading sources of FDI among emerging investors. Flows from these five economies rose from $7 billion in 2000 $145 billion in 2012, accounting for 10 per cent of the world total ” . (UNCTAD, 2013. p.14)
2.5. Key Highlights of Global FDI
1. In the top 20 host economies ranking, United States ($168 billion) has the dominant position by placing itself in topmost place followed by China ($121 billion)
2. TNC’s in developing economies have gradually gained their potential to go abroad and are actively seeking investment opportunities in developing nations, especially African Tnc’s
3. During the last decade transition, FDI inflows to developed economies have gone plummet. There was an appalling decline of 32 per cent to $561 billion flows (North America, Europe & Australia).
4. There was a substantial increase Global FDI income during 2011, to $1.5 trillion, on a stock of $21 trillion, after it saw a pitfall during 2008-09 due to global financial crisis. 5. FDI in Africa rose for the second consecutive year, a rise from 5 per cent to $50 billion achieving a year-by-year growth.
6. Apparently, FDI inflows in Asia have seen decrease in flow of capital. During 2011, the FDI inflows accounted for $436 billion while in 2012 it decreased by 7per cent amounting $401 billion. The reason for such a decrease is because; the investors preferred Cambodia, Myanmar, the Philippine and Viet Nam for labor-intensive manufacturing as these nations demonstrated continual intraregional restructuring which attracted the investors.
7. The decline in FDI flows in developed nations (United Kingdom, Europe, Australia, New Zealand and United States) was due to the weaker growth prospects and uncertainty in policies.
8. However, Japan looked seemingly good by maintaining the balance in both inflows and outflows. As developed economies started divestments and continued to “wait & see attitude”, FDI outflows from Japan grew by 14 per cent.
9. FDI flows to LDC (least developed countries) grew by 20 per cent by achieving record of $26 billion.
As the developed economies attired a wait and see attitude, developing economies bagged the investors and exploited the capital for potential purposes. Developed economies designed and implemented rigid FDI policies and regulations, tightened screening and monitoring procedures across the cross borders, which made investors dispassionate of investing in developed economies. (UNCTAD, 2013. p. 10-22)
2.6. Foreign Direct Investment & Indian Market
FDI is dominated by transnational corporations. With Tnc ’ s boosting their investment, FDI in developing countries has increased dramatically in recent years. However, FDI is highly concentrated; about 80% has gone to only ten developing countries, while the smallest recipients have received only one per cent. Almost two- thirds of the FDI to developing countries went to Asia; only five per cent went to Africa ” (Dossier, 2003). FDI in India is undertaken in accordance with the FDI policy formulated and announced by government of India and is governed by provisions of Foreign Exchange Management Act, 1999. India has liberalized its single brand retail industry to permit 100% foreign investment, with regulatory issues and legal structures pertinent to establish operations in this new dynamic market. India’s retail industry is estimated to be worth approx. US $411.28 billion and is still growing, expected to reach US $ 804.6 billion by 2015. Government of India and the provision of the Foreign Exchange Management Act 1999 govern foreign Direct Investment in India (FEMA). The FDI policies are notified through press notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP, 2012) (Pawar. & Veer, 2013)
FDI in multi brand retail: Status: Under planning 51%
- 30 per cent procurement of manufactured products must be from SMEs Minimum investment cap is USD100 million
- Minimum 50 per cent of total FDI must be invested in back-end infrastructure
- 50 per cent of the jobs in the retail outlet could be reserved for rural youth and a certain amount of farm produce could be required to be procured from farmers
- To ensure the Public Distribution System (PDS) and Food Security System (FSS), government reserves the right to procure a certain amount of food grains
FDI in single brand retail: Status: Policy passed 100%
- Products to be sold under the same brand internationally
- Sale of multi brand goods is not allowed, even if produced by the same manufacturer
- For FDI above 51 per cent, 30 per cent sourcing must be from SMEs
- Consumerism of the retail market, any additional product categories to be sold under single brand retail must first receive additional government approval.
As is quite apparent, the FDI policy is formulated with the objective of bringing in large funds, which are to be invested in improving the supply chain and back-end of the retail sector. Especially for the food and groceries segment, and to ensure that the manufacturing sector also gains from large multi-brand retailers being “forced” to source 30% of their products (by value) from Indian Small and Medium Enterprises. “FDI has been a major catalyst to market growth and supplement capital in developing countries like India and China.
FDI as a principal conduit of technology upgrade, know-how transfer and managing skills exchange, heralds the globalization of host economies” (UNCTAD 2006). According to Devajit (2012, p. 2), there was a huge investment that flowed into India during 2010. During 1991, the FDI inflows into India was 270 million, while in 2012 it rose up to over 24.8 billion which was more than FDI flows that was invested in China.
According to OECD, 2011, p.1/3, “ India has shown a significant progress in building a successful policy environment to encourage investment and the resulting acceleration in FDI flows and economic growth ”
During 1991-92, which was the initial advent of privatization and liberalization; India had secured a very low amount FDI accounting to $133 million, but later FDI policies in India were further made flexible to attract more investors. According to (Biswatosh, 2002) and OECD,2011/12, India had secured a massive amount of FDI accounting $2339 million in 2011 proving that the nation is one of the hotspot for potential investors. According to the research by Chari and Raghavann, (2011), FDI inflows liberalized the barriers of retail market in India. A steady increase in FDI in retail sector led to a single brand standing up to $195 million. Foreign Direct Investment has been an important catalyst of change for Indian economy.
Table 2. Devajit. M (2012); Impact of FDI on Indian Economy [FDI inflows from 1948-2010]
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The above table shows the information of annual FDI flows to India since the independence until 2010. In an advent of sixty years, the nation has achieved increasing growth by attracting the investors. As it can be noted during 1948 the FDI inflows accounted for Rs.256 crores, while in 2010 the FDI inflows was Rs.123378 crores and it 2011 it had an massive net inflow of capital $456 million.
Devajit (2012) empirical research on impact of FDI on India economy outlined that it is because of the large domestic market and low labor costs India favors many investors.
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Figure 2. Top 5 Home and Host Economies South Asia, UNCTAD, 2012/13 (p. 49)
During April 2010, Mauritius invested $568 million and Singapore invested $434 million in India, making the nation to bag a lion share of global FDI. Such a rapid development was due to the intervention of the government and efficient policy makers, because until 2006 FDI in retail sector was restricted. In 2006, the government eased the policies to encourage potential investors around the globe, allowing up to 51 per cent FDI through single brand retail route, which lead to the gradual development of retail sectors in India (Chari and Raghavan, 2011).
Such an initiative from the government and policy designers attracted massive capital flows into the nation and India was in the top spot of top five home and host economies in South Asia. According to the newspaper Indo-Asian News Service Washington (Dec 2011), United States stated, “We respect India for opening retail stores. The United States has said that FDI in retail trade would be beneficial to both India and United States and the United States is happy for getting the opportunity of retail business in India, World ’ s second largest market ” .
2.7. Foreign Direct Investment-Theories & Models
As globalization removed certain trade barriers, Business Corporation decided to travel abroad with their activities to derive value for their capital. The options available to a firm include exporting, franchising, strategic alliances, joint ventures, sole ventures and foreign direct investments.
These strategic options of modes of entry were influenced by several factors, to address the factors management professionals and researchers had to develop models and theories to give insights for the business entrepreneurs.
2.7.1. The Industrial Organization Hypothesis
In the field international trade and development, Stephen Hymers (1960) work is seemingly important, as his dissertation on the theory of foreign direct investment provided the new phase in developed international trader. Hymer’s hypothesis provided an escape route from the stage of neo-classical type trade and financial theory and move towards the analysis of MNE be based upon industrial organization theory. Hymer’s work was clearly on the industrial organization tradition and his research focus was with the organization of production rather than trade flows, which was inspired by Bain (1956) theory of barriers to entry in domestic industries. Hymer’s dissertation was further extended by Kindleberger, henceforth it is known as Hymer-Kindleberger hypothesis.
According to the hypothesis, when a home country firm establishes its subsidiary in other country, it will or has to face certain disadvantages that arises from different means (language, culture or legal systems) which is termed as inter-country differences.
Despite of facing these disadvantages, if the firm advances or decides for FDI, it must have certain advantages arising from the intangible assets (brand name, technology, labor, managerial skills and other firm specific skills. The comparative advantages arriving should be able to transfer to foreign subsidiaries, which should have an ability to overcome any other disadvantages.
Hymer (1960) viewed FDI from the perspective of transferring tangible and intangible assets to organize production in foreign countries, while Kindleberger (1969) further carried Hymer’s work discussing firm-specific advantages, which was not emphasized by Hymer (1960). The major reason for FDI is to protect the intangible assets in the home country, Lall & Streeten (1977) argued that intangible assets could not be sold to other firms because they are difficult to define and they are deeply inherent in the organization. These intangible assets are firm specific advantages, which explains how a foreign firm can successfully compete in the host economies (Graham and Krugman 1991). Whilst, Hymer’s contribution to the field of MNE and international trade is highly valued and appreciated by world-renowned researchers and authors as his hypothesis on trade theories were future oriented towards early 2000’s, but at the same Hymer neglected few concept of MNE, which were important to define FDI.
Hymer (1960) underestimated factors such as transaction costs and confused location and ownership advantages (Yamin, 1991). In current era of globalization, the most debated topics are trade planning between government and corporations, which were not addressed during Hymer’s period. Hymer even misses the distinction between the structural and transaction cost (cognitive) market imperfections made (Dunning 1981. p.29).
Another imperfection of the dissertation was the study does not deal with policies, social and cultural issues that may arise in developing nations and does not attempt to calculate the cost and benefits of FDI (Dunning and Rugman, 1985, p. 230-232). However, Hymer (1960) is an undisputable figure in theory of the MNE and critics to his work are in latter after the issue of flexible FDI policies, which were not present at the time of Hymer. The authors perspectives of FDI and MNE’s has led to the further development of International trade theories.
2.7.2. Differential Rate of Return
Differential Rate of Return theory is one of the oldest theories of FDI. According to the theory foreign direct investments flows from low to high rate of return economies i.e. capital flows from countries that have low rates of return to countries that offers high rates of return to their investments. This was likely true when American Corporations in 1950 has enjoyed high rates of return from European countries rather than in the home country (Mundel, 1960). This was one of the oldest and traditional theories of FDI, which had certain misconceptions of the capital flows.
The theory assumed that the risk and uncertainty is neutral and considered the rate of return is the only variable acting upon the capital transfers. The empirical evidences failed and did not support the hypothesis (Gedam (1996); Azam & Lukman, (2010). Weintraub (1976) initiated a research to test the hypothesis by taking relative rates of returns of the host countries and the allocation of FDI among them. The outcomes of the study failed to provide the empirical evidences as documented by Agarwal (1980). Hymer (1960) was the first identify the loophole of this theory by arguing that the differential rate of return hypothesis was not consistent with several noted characteristics of international investment.
This theory postulates that, firms engage in FDI for profits and wealth maximization, there might be other firms who engage in FDI not only for profit; the option might be seeking operational advantage which is not completely monetary.
2.7.3. Mundell and Heckscher-Ohlin model
Hecksher (1919) and Ohlin (1933) laid the groundwork for the development of international trade theories by focusing on the relationships between the composition of countries factor endowments and commodity trade patterns and the consequences of free trade for the functional distribution of income within countries. (Anon, p. 1). According to Heckscher and Ohlin, comparative advantage comes from the differences in relative factor endowments. According to the assumptions of the model, international trade occurs due to the differences in labor, labor skills, physical capital, capital or other factors of production across nationalities.
The abundant factors of home country and the abundant factors in other (host country) would initiate international trade between the two nations. The model emphasizes on four basic theorems:
-Factor Price Equalization Theorem
-Heckscher-Ohlin Trade Theorem
HO Model= 2*2*2 model (2 countries, 2 models, 2 factors)
For an instance, imagine two countries Spain and Poland, each country is endowed with two common factors (labor and Capital) and produces two commodities.
Under certain conditions in two countries, two-factor model, trade and capital flows are impeccable substitutes; commodity trade is enough to ensure FPE (Factor Price Equalization) and FPE is sufficient to ensure commodity price equalization. The model claims that the ability to engage in commodity trade will or can eliminate the need for capital to flow from capital abundant countries to labor abundant countries. (Anon, 2010, p. 1-3). Mundel (1957) conceives the HO model in a different perspective.
If the two endowment factors (labor and capital) are internationally mobile and trade impediments are absent, home country can export the capital-intensive products and foreign can the labor extensive products in the absence barriers along FPE in place. If a scenario occurs where the foreign impose trade traffic on capital goods, which causes relative price to raise, factors will move out of the labor-intensive sector to capital-intensive sector.
At a constant situation of prices, shift in production creates an excess supply of demand for capital and labor: resulting the marginal product of capital to rise (Mundell 1957, p.331). The underlying disadvantage of the model is that it can only be applied to simple trade transactions. HO model cannot be applied to industries where factor endowments are very important (agriculture, manufacturing). Another drawback of the model is that capital mobility in the static two country, two factor, and two country is confined to the allocation of capital resources across countries for a fixed level of world capital and the HO model only allows for trade mobility. (Anon, 2010, p.4).
2.7.4. Product Life Cycle Theory
During 1960’s researchers focused more explicitly on, MNE and trade activities to define FDI theories. Vernon (1966) applied the concept of product cycle to define international trade and FDI, henceforth it is known as Product Life Cycle Theory. The product life cycle comprise four stages, introduction, growth, maturity and decline. According to Vernon (1966), the firm indulge in FDI at one particular stage of the product life cycle.
From the below figure.4, it can be stated that from the perspective of Vernon (1966) firms indulge in FDI at a growth stage which is when the innovated products starts to capitalize the market share. As the product moves through the life cycle, the initial characteristics of the product changes with respect to the growth which implies for an requirement of optimal location for production and forces the firm to move out for other economies or developing economies with a aim of reducing costs. The entry timing decision of the firms depends on the age level of the product (Griffin and Pustay, 1998).
Figure 3: Vernon 1966; Johnson, 2005 Product Life Cycle Theory, p.18
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This verdict of Vernon (1966) explained some of the major FDI by United States during 1950’s and 1960’s. There was a many empirical evidences to support Vernon (1966)’ s theory on FDI; (Gruber et al;1967 Agarwal 1980) found a strong association between the susceptibility to invent new products, export performance, FDI and the ratio of local production. To contrary, the model failed later as it lacked clarity in answering questions regarding FDI. The theory does not take relative importance of exporting or licensing and fails to explain which is better than FDI. The theory is an outdated model at the present scenario and cannot present a clear information about today’s inflows. There are large FDI flows from developed economies to developing economies and even from developing economies to developed economies, such FDI flows cannot be explained by product life cycle theory.
2.7.5. Dunning’s OLI Paradigm
Dunning’s (1977, 1980, and 1988) OLI Paradigm is the most appreciated model of testing the worthiness of foreign direct investments. Dunning (1980) proposed a comprehensive framework that stipulated the choice of an entry mode in decided target market. The failures and criticisms of the theory of Internationalization and the Hymer-Kindleberger approach led to the development of the “The Eclectic Paradigm” (Dunning, 1979:p. 274) as those theories were only the partial explanations of the international production.
From the perspective of Dunning (1975), the firm should engage in foreign direct investment, if three conditions are satisfied:
1. If it possess the net ownership, (O) advantages vis-à-vis firms from other countries.
2. If it has beneficial to internalization (I) advantages rather than to use the market to pass them to foreign firms
3. If it has location, (L) advantages in a foreign location rather than at home.
Figure 4: Dunning's eclectic paradigm, John Dunning, 1993a
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2.7.6. Ownership (O) Advantages
According to Dunning (1993), the firm should possess ownership advantages in the foreign country. The greater the firm perceives its O advantages to be, the greater its incentive to internationalize their use: as because the firm that has ownership advantages can choose to sell or sell the right of the product.
The net competitive advantages, which firms of one nationality possess over those of another nationality in supplying any particular market or set of markets; these advantages might arise from the firm’s privileged ownership or right to access to income-generating assets (Dunning 2001, p.176). Agarwal and Ramaswami (1991) stated from the perspective of internationalization theory, firms to compete in host economies should need a unique skills and resources in their own markets; possessing superior assets play an important role in gaining this advantage. “Firms are collection of assets and these assets can be applied to produce at different locations without reducing the effectiveness ” (Helpman, 1984). Firms need asset power to engage in international expansion and successfully compete with the host country firms. [Hood and Young 1979]
2.7.8. Location (L) Advantages
When firms decide to invest, foreign countries are expected to select and use a selective strategy and favor entry into more attractive markets. Firms can build their competitive advantage over competitors upon countries specific location advantages. Location advantages have superior impact on FDI inflows, as nearness to resources, target customer groups, , transportation & infrastructure, markets in adjacent territories, government support on FDI’s, cheap and guaranteed supply of natural resources justified much of FDI’s in 1800’s & 1900’s (Japan & Europe) (Dunning, 1993a) and it likely to be a reason for FDI flows in 1990’s. (India and China FDI inflows). The size and growth of the market are also the key determinants of FDI (Forsyth 1972; Weinstein 1977; Khoury 1979; Choi, Tschogel and Yu 1986; Terpstra and Yu 1988).
2.7.9. Internalization (I) Advantages
The internalization factor explains the firms’ tendency to internalize cross border structural in the intermediate goods market (Dunning & Lundan, 2008). If the investing firms has an operational control and enjoys relief from trade barriers and tariffs, then it is most likely to have I-advantages. It is the perceived hierarchical control of the value added services to overcome market imperfections. For instance, smooth transition of resources from home to host countries and vis-à-vis.
Critical Analysis of FDI Theories
The above literature gave theoretical and practical description of FDI and its determinants. The brief analysis of various models and hypothesis explained the foreign direct investment, but the critical reflection on the theories have showed there are certain flaws and disadvantages within them that accounts for the failure of impeccably defining international trade and FDI characteristics.
Vernon (1966) product life cycle have major criticisms and cannot be applied to todays’ large FDI flows and also it cannot be concluded that firms’ engage in FDI with a sole reason of improving production. The traditional Differential rate of returns also falls into the same line of product life cycle theory. Firms are not only interested in maximizing profits and wealth and it is not only the motive to go global or decide upon foreign direct investment.
The HO Model of Hecksher 1919 and Ohlin, `1933; Mundell 1957 is far more complicated and cannot address all the FDI flows in terms industry. The endowment factors vary with respect to the industry it is operating in and even policies keeps changing in time.
However, these theories postulate the generic meaning foreign direct investment and TNC’s. Nevertheless, Hymer’s (1960) work of international trade has showed a bright line in development of the theories. However, Hymer’s theory was clearly on industry organization and not trade flows: which creates further more complication as the author failed to address certain variables like transaction costs and inter-country differences, but Hymer’s explanation on intangible assets exposed the major determinants of FDI, which is more important and relevant to the research.
Dunning’s (1977) OLI paradigm development was designed to fulfill the partial explanations of the previous studies on FDI and trade theories. Eventually, the OLI paradigm has went further more changes (Dunning 1980, 1988) which states that the theory needs constant updating. The theory suggests that country specific factors are important when deciding FDI but it may be invalid to generalize one country’s experience to another.
Dunning claims that the OLI theory can explain all forms of international production, which is practically not acceptable, that single theory would explain all international trade and production. The major drawback of Dunning’s theory is the ignorance of macroeconomics and the theory fails to address macro-economic issues.
(Buckley and Casson 1976) argued that if ownership advantages play a vital role in determining the firms’ investment, internalization explains why firms exist in the absence of such advantages.
Foreign Direct Investment flows are highly influenced by the reliability of political rules and regulations in both home and host economies. Foreign firms who have their expansion plans likely to prefer stable political environment for their smooth survival of business. For instance, if the government has an negative attitude towards the MNE’s, then they are likely to provide exemptions and allowance for these firms; issues may arise in currency conversions, fund transfers, level of bureaucracy and also other national issues like war, corruption and international relationships between countries. However, there are theoretical reasons outlined that political factors of the countries has an impact on FDI (Asiedu, 2002; Gedam, 1996).
In determining economic stability of the country, inflation has a considerable impact of FDI’s. Low inflation of a country represents the economic stability of the nation, while high inflation rates indicates the countries instable economic conditions. It exposes the inability and the failure of the government of nation to maintain the balance between the budget and spending of the country.
A small change in inflation rate in both host and home economies would affect the MNE’s at higher rate, an increased inflation rate is likely to decrease the returns on the capital invested on host economies.
A decreased value of or a fall in domestic currency, which is due to the demand for foreign currency exceeding its supply in the market. This simply offers a definition for depreciation of currency, which refers to one, has to pay more than before to get units in foreign currency. This depreciation of domestic currency has a considerable impact on the forex market and on the returns on investments made by the investors The above literature review outlined the major FDI theories and models encompassing on the determinants on Foreign Direct Investment. A critical review on theories and models is performed to present with the effectiveness of models. The literature review also presented the brief analysis of FDI inflows in India and its trends. The review also encompassed on the major macro-environmental factors of India that has a considerable influence on the foreign direct investment.
The chapter explains the profound methods of data collection and the research plan employed for the study. A Research strategy helps in achieving the oriented targets of the study. The chapter also outlines the problems faced during data collection. The chapter also emphasizes on the data collection sources & methods, research approaches and methods.
3.1. Research Strategy
The planning of the study to attend the intended aims and purposes of the research is referred as research strategy. The below pictorial representation presents the framework of work planned.
Figure 5: Source, Kothari, 2006; Khan 2008; Kumar 2011 et al, Xxx.R 2013. Self Portrait [Research Strategy]. Lincoln
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The research is focused on determining the factors responsible for the FDI flows between developed and developing economies. As the topic has undergone certain researches, there were no theoretical reasoning given by previous researches using models and theories. For the purpose of this study both Qualitative and Quantitative, methods are employed.
3.2. Explanatory Research: The research study uses explanatory approach to answer the questions of the research. This particular approach focuses on why questions and attempts to explore and explain why scenarios. The study aims at comparing FDI flows in India and contrasting the flows and determinants with the other nations.
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