Fdi in Real Estate of India and China

FDI Defined

FDI refers to the investment made by a foreign individual or company in productive capacity of another country for example, the purchase or construction of a factory. FDI also refers to the purchase of a controlling interest in existing operations and businesses (known as mergers and acquisitions). Multinational firms seeking to tap natural resources, access lucrative or emerging markets, and keep production costs down by accessing low-wage labour pools in developing countries are FDI investors.

Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control. Firms which source FDI are known as Ð''multinational enterprises' (MNEs). In this case control is defined as owning 10% or greater of the ordinary shares of an incorporated firm, having 10% or more of the voting power for an unincorporated firm or development of a greenfield branch plant that is a permanent establishment of the originating firm.

Types of FDI:

Greenfield investment: direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation's promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. Greenfield investments are the principal mode of investing in developing countries.

Mergers and Acquisitions: occur when a transfer of existing assets from local firms to foreign firms takes place. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Mergers and acquisitions are the principal mode of investing in developed countries.

The pros and cons of FDI as a source of development

Attraction of FDI is becoming increasingly important for developing countries. However

this is often based on the implicit assumption that greater inflows of FDI will bring certain

benefits to the country's economy. FDI, like ODA or any other flow of capital, is simply

that, a source of capital. However the impact of FDI is dependent

on what form it takes.

This includes the type of FDI, sector, scale, duration and location of business and secondary effects. A refocusing of

perspective, from merely enhancing the availability of FDI, to the better application of FDI for sustainable objectives

is crucial to push the debate forward. Various international fora and discussion have outlined a range of positive and

negative aspects of FDI as a source of development for developing countries, some of which are discussed below.

1. Stimulation of national economy

FDI is thought to bring certain benefits to national economies. It can contribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation (total investment in a host economy) and balance of payments. There have been empirical studies indicating a positive link between higher GDP and FDI inflows (OECD a.), however the link does not hold for all regions, e.g. over the last ten years FDI has increased in Central Europe whilst GDP has dropped. FDI can also contribute toward debt servicing repayments, stimulate export markets and produce foreign exchange revenue.

Subsidiaries of Trans-National Corporations (TNCs), which bring the vast portion of FDI, are estimated to produce around a third of total global exports. However, levels of FDI do not necessarily give any indication of the domestic gain (UNCTAD 1999). Corporate strategies e.g. protective tariffs and transfer pricing can reduce the level of corporate tax received by host governments. Also, importation of intermediate goods, management fees, royalties, profit repatriation, capital flight and interest repayments on loans can limit the economic gain to host economy.

Therefore the impact of FDI will largely depend on the conditions of the host economy, e.g. the level of domestic investment/ savings, the mode of entry (merger & acquisitions or Greenfield (new) investments) and the sector involved, as well as a country's ability to regulate foreign investment (UNCTAD 1999).

2. Stability of FDI

FDI inflows can be less affected by change in national exchange rates as compared to other private sources (portfolio investments or loans). This is partly because currency devaluation means a drop in the relative cost of production and assets (capital, goods and services) for foreign companies and thereby increases the relative attraction of a "host" country. FDI can stimulate product diversification through investments into new businesses, so reducing market reliance

on a limited number of sectors/products (UNCTAD 1999). However, if international flows of trade and investment fall globally and for lengthy periods, then stability is less certain. New inflows of FDI are especially affected by these global trends, because it is harder for a foreign company to de-invest or reverse from foreign affiliates as compared to portfolio investment. Companies are therefore more likely to be careful to ensure they will accrue benefits before making any new investments. Examples of regional stability are mixed, whilst FDI growth continued in some Asian countries e.g. Korea and Thailand, during the 1996/97 crisis, it fell in others e.g. Indonesia. During Latin America's financial crisis in the 80's many Latin American countries experienced a sharp fall in FDI (UNGA 1999), suggesting that investment sensitivity varies according to a country's particular circumstances.

3. Social development

FDI, where it generates and expands businesses, can help stimulate employment, raise wages and replace declining market sectors. However, the benefits may only be felt by small portion of the population, e.g. where employment and training is given to more educated, typically wealthy elites or there is an urban emphasis, wage differentials (or dual economies)