Determinants Of Foreign Direct Investment In India Finance Essay
In this thesis the author has selected the topic as “Role of Foreign Direct investment in India”. The author would find out the various factors which FDI plays in India. Also the author would find out the various determinant of FDI for a country. The research problem or question is to find out the role which FDI plays in a developing country. Many of the countries are not able to attract the amount of FDI needed and this research will help them to understand the requirement and role which FDI plays.
Why it is important
Foreign Direct Investment is the fueling element for any developing in terms of Investment and Finance. Every country for their growth would require funds and investment to flow into the country. FDI is becoming the hot tool for inflow of investment for a country. The importance of selecting this topic and objective is to get a clear idea about how FDI works and what are the factors and determinant for FDI to select a particular country. Also what are the roles which FDI plays in India?
What are some current approaches to this problem?
Most of the countries are working on attracting FDI. This is needed for the growth of the country with enough funds and investment flowing from External sources or from foreign investment.
Why is it worth solving?
To find out the role of FDI in India and the various determinants is important as it would help country’s to know how to attract FDI and what are the various factors which are needed for attracting FDI in a country.
What is original in our approach?
There has been various researches done on this topic and this topic is not very new. But this originality of this research would be the different roles which FDI has played over the years in India and how other developing countries could learn from this experience.
Foreign Direct investment which is also commonly known as FDI is a very essential form of investment for any developing country. A developing country always wants to attract investment from foreign investors and country and this Investment is needed for the growth factor of an economy of the country as well as for the people development. FDI forms a very essential element in a developing country for the decision of the macroeconomic factors. It is an essential element for countries to build long term relationship with the foreign investors at different levels ranging from government to regulatory bodies. It is always a challenging task for developing countries to arrange for financial flow in the country for the developmental goals for the reduction in poverty as set by UNO (Alfaro, L., 2004). Every developing country works on attracting foreign direct investment for strengthen their stand in the global market. The growth mechanism for any country primarily depends in the monetary and social status. The prime determinant is the country’s political factors but there are also other factors associated for the attraction of FDI and to maintain the economical stability. A country for development requires continuous development in infrastructure, industries and economy along with the social factors. Among all other funds and investment which flows in a country, FDI is one of the most important sources which cater to all these requirements. FDI takes place by investor where they currently do not have presence and see market potential. It gets into a deal with a local company of the local or invested country. Foreign companies or investor companies choose to invest through FDI for either finding new market for its product or for the development of a new product. Companies invest in foreign country for the expansion and development of their company. Some of the major reason which helps countries in attracting inflow of FDI is the Steady economic growth, deregulation, flexibility in operations and flexible investment policy (Alfaro, L., 2004). Good relationship always attracts more MNCs into the country for investment. FDI not only impacts the economy of the country but also impacts the culture of a country and impacts in cultural diversification (Barrell, R. 1999). Due to FDI a country oversees a change in culture, HRD & Liquidity state and also visualizes huge international footing. India is one of the major highlighted country or success story tellers in the 21st century with regards to attracting FDI.
In this research the author would work on finding the role & determinant of FDI in India.
The Research Objectives
The objective of the research is to find out various determinants of FDI and the role that FDI plays in India. In this research the following objectives would be looked at:
What Role does FDI in India?
What are the various determinants of FDI? What are the factors which a country should pay attention for attracting FDI?
Does foreign direct investment create opportunity in a developed country?
Does FDI impact the country’s economic growth in a positive or negative side?
Conceptual Framework for This Research Study
There has always being a clash on the subject of how and to what extend does FDI impact the growth and development of a country and to what extend does it impact the economy of the country. Through various researches it is well proven that Inflow and outflow of FDI does impact the economic condition of a country due to the various reason of capital inflow and transfer of technology to the invested country. It is also seen that due to FDI there is a growth in trade and industry due to the enhancement of technology and a transfer of knowledge through training and enhancement in the skill of labor due to this training (De Mello, 1999). The impact of inflow of FDI differs from country to country due to the various factors attached. This is proven through the recent growth model against the conventional counterpart. The conventional economic growth model confers growth more in an open economy then in a closed economy. The impact of FDI could be seen in both, long as well as short run. According to the neo classical, impact of FDI on economic growth for a country is for short run due to the nature of diminishing return to capital in a long run (De Mello, 1999). So with this it is very clear that FDI promotes economic growth in long run through constant and permanent knowledge and a transfer of technology (Bengoa and Sanchez-Robles, 2003). So FDI works as a growth determinant for a country in long run with respect to economy and development.
FDI is a long term investment for a investor in a foreign land. An investor is a person or a company who invest funds in a foreign country. Foreign direct investment is known to be a direct investment as it directly impacts the economy of a country which is under consideration for the investment. The major aim behind any foreign direct investment for an investor is introduction of a new product or expand it visibility in global market for long term sustainability. The success factor behind the term sustainability for long term solely depends on the regulatory authority of the investing country where the agreement to invest has been planned and also the lawful aspect of the investing country (CHEUNG, K. and LIN, P., 2004).
Foreign direct investment impact a countries human, political, economical, financial and social aspect. Post World War 2, USA was the country which had dominated the world market with FDI. FDI had spread as a concept over the years and now has become a need for developing countries. FDI hold 20% of the global market fund. India & China have become the most favorable destinations for FDI for the past few decades (DE MOOIJ, 2003). India & China’s Growth have pushed the market leader to third position in rank in terms of FDI inflow. FDI is a kind of Investment for companies who want to expand their market from domestic market to international market or want to earn profit by investing in foreign territory. A mandatory requirement for any company to go investing in the form of FDI is to have a proper affiliation between the home business and the subsidiary business located in foreign territory (DEES, S., 1998). The base for any investment to be called a FDI is when the investing company holds at least 10% of the ordinary shares of the foreign company and holding voting power of the company (A.T.Kearney, 2000).
Integrated Overview of Research on this Topic
The most important and demanding information for a company would be to know the determinants of FDI in an emerging market. “FDI as a means of transferring tangible and intangible assets to organize international production” (ZHANG, K.H. (2001)). An organization which is operating in a foreign market would most face a problem of intercompany rivalry or a failure in the marketing or any strategy (Kaminsky G. and C. Reinhart C, 2000). The inter company rivalry was rising due to the fact of foreign players dominating to gain the home market share by creating oligopoly market structure. Many companies invest in foreign land when they see that the market condition of the home country is matured and they need to diversify their business to maintain the product life cycle. Many companies also used to enter new market when they find benefits and market potential for their product in the foreign country and also gain a advantageous resource position (Keynes, John Maynard (2004)).
According to the theory of Dunning Eclectic paradigm, companies always carry a unique or advantageous feature which they should exploit while entering any new market or country (Keynes, John Maynard (2004)). One of the other reasons which attract FDI in a country is the advantage of location. This is one of the basic reasons why transnational is preferred over third party hiring while getting into global market. These transnational also help in lowering the spillovers. The main motivation behind companies or investors to invest in foreign market is with respect to macroeconomic point of view where the investor would like to maximize profit for the company. “Vertical Vs Horizontal FDI theories always look for wither seeking efficiency or the global supply for value or rather adopt for the FDI route to enter the horizontal new market in a foreign country “(LIN, P., 2001). It is very important for developing countries to attract FDI into the country for enduring success. The foreign direct investments are more towards investment of dual operational existence and are known to be of linear in nature. Freedom to economy and development in infrastructure of a country could be seen due to inflow of FDI. Some of the other determinants of attracting FDI in a country are the stability of political policy, exchange rate and high labor productivity (FROOT, K.A. 2001).
There is a wide difference in developed and under developed countries and the major difference is due to the over dependency on agricultural and regional disparities. This difference leads to bandwagon effect. Countries in the competitive and global market should enforce an inflow of FDI into specific sectors or area of operation for the growth of the country (GOLDVERG, L.S. 1997).
Definition of Terms
FDI is majorly divided into 2 types which are Outward FDI & Inward FDI. These forms of FDI are basically due to the restriction and prerequisites imposed by them (DEVEREUX, M., 2004). Outward FDI are usually backed by the government of the parent country and are provided with various incentives and tax exemption. Foreign direct investment is most commonly known as direct investment in foreign countries. Inward FDI are not those where the parent countries supports and encourages but are due to the foreign countries economic factors which attract the investor like the interest rate, loans, tax breaks and grants & subsidies (DUMAS, B., 2005).some of the other kinds of FDIs are vertical FDIs, horizontal FDIs, market seeking FDIs, resource seeking FDIs & efficiency seeking FDIs.
Vertical FDI means as an investment mode where the investor holds some share of the foreign company and would be liable for supply of input. Horizontal FDI is the mode of investment where the foreign company is holding similar product in the investors country (OECD, 2000). So with this it is clear that FDIs could be in any form and characteristics with a basic notion of development. Though the objective of the investing company is broad but the development is incorporated deep into for the invested country.
The Research Question
The research question decided for this research is as follows.
What are the Roles and advantage of FDI in India?
What are the determinants which a foreign investor looks forward before investing into a country?
What are the opportunities which FDI creates into a country?
Economic growth for a country is impacted due to the inflow of FDI?
Research Philosophy and Approach
A Research philosophy had various method described by different authors which makes it very difficult for the researcher to decide on an approach. The researcher needs to adopt on the best approach which suits the research objectives. All these approach are considered to be a mix of various things but have various similarities among the various approaches. Researcher Onion Model is the research philosophy which researcher had decided on after analyzing various options available. The researcher has decided on this approach as he found it to be very simple and easy to understand.
Figure 3.1: Research Process Onion Model (Source: Saunders et al. 2006)
There are many research philosophies which a researcher can select and adopt for the research objective. Easterby-Smith, M., Thorpe, R. and Lowe, A., (1991) describes this issue as, Philosophy and approaches have different roles and responsibility and so the researcher needs to work close to identify the research design and select the best suit to minimize the complexity arising in the research process. According to Saunders et al (2000) the purpose of a research philosophy is to help the researcher to select the area related to research and the process in which the research would progress. According to Wright, L.W., ((1995) social research is a guide to knowledge and belief which helps the researcher in collection of data and their interpretation. According to Gronhaug, K., & Graham, J.L., (1987) a research philosophy works on the ground of epistemological choices and ontological stances. Epistemological choices are divided into Positivism & Interpretivism.
Positivism is one of the sections of epistemological choice where the method depicts that application of natural science as a study of social reality (Bryman and Bell (2007)). Thou the method stretches way beyond the principals as the elements of constitution various from author to author. Following are some of the positivism which entails the principals behind the choice.
The principal of Phenomenalism: Knowledge supported with sense and phenomena can generally warranty for knowledge.
The principal of Deductivism: the purpose of any research is to generate hypothesis and test the hypothesis which is at end which explains the research conclusion. This is known as law to be assessed.
The principal of inductivism: knowledge can be arrived at by collecting the right data to provide the basis of laws.
Science must be conducted in such a way so the objectives are in the form of value free results.
There is a difference between the scientific statement and the normative statement and the true domain lies with the former statement.
The first and the last principal implies to each other as normative statement cannot be confirmed just by sense.
Interpretivism is an alternate principal to positivism. The basic of Interpretivism is with a view that a strategy is needed to distinguish between people and object of natural science. This in turn requires social science to gather subjective meaning for social action. “So the intellectual heritage includes; Weber’s notion of verstehen the hermeneutic-phenomenological tradition and symbolic interaction” (Bryman and Bell, 2007)
According to Saunders et al (2000) a research philosophy majorly depends on the way you think in developing the knowledge about the research. So this states that an element of intuition is needed as a part of research philosophy. This is thoughtful and give thought to the research objective. So the way the researcher thinks about the development affects the process of the research.
Research approach is the method in which the data is collected and the research question is answered (Saunders et al, 2000). The research approach also deals with the research theories and which may or may not explicit the research design. But at the end the result and the findings are concluded in a more explicit manner. A clear definition about the theory in the start of the research would lay down a important question for the design of the research. This definition would help in deciding whether to use the deductive method where a theory would be developed and the hypothesis and design of the research strategy would result from the data analysis or the inductive method where the data would be analyzed on a set theory or model.
Choosing the right research approach is very important for the success of the research. According to Creswell (1994), a research approach can best be discussed and finalized by looking at the different criteria like the topic of the research and the nature of the research. The researcher in this thesis has selected the deductive method for this research and the major reason for it is the time limitation and major reason to be as stated by Creswell “the topic and nature of topic”. Deductive method is easily and quicker to complete.
Research design is the process in which a framework is discussed for the free flow of data collection and the analysis of the collected data. A decision for the research design is important to reflect the priority given to the different dimensions of the research process. This would include decision like an expression for connection of variable between each other. A selection of sample from the large population, understanding of behavior and meaning of those behavior and management of time management for social phenomena and interconnectivity (Bryman and Bell, 2007)
There are majorly 5 different types of research design which are the case study design, experimental design, comparative design, cross sectional design and the longitudinal design. Researcher has selected the case study design for this research after looking at various criteria and factors needed for the research objective.
According to Gronhaug, K., & Graham, J.L., (1987), a case study method is a development of detailed knowledge about the research objective with the help of a single case study or many related case studies. According to Wright, L.W., ((1995), a case study would be of interest to researcher when the objective of the research needs understanding of particular topic or case and needs a research process to be enacted. This research needs a detail and intensive analysis and according to Stake (1995) case study research requires more complexity and requires a particular question in case. Some of the case study research design could be states as follows:
On a single company
On a single location
On a event
Company and location are the two most commonly associates term for case study or even workplace. So the researcher selected the case study method as the research design method for proceeding for this research.
A research work is basically divided into two forms of Data which are quantitative and qualitative. Qualitative data deals with the quality and numbers for its analysis. Quantitative data deals with numbers (Easterby-Smith, M., Thorpe, R. and Lowe, A., (1991)). There are two methods through which a data collection could be followed which are Quantitative analysis and qualitative analysis. According to Ghauri, P, (1995), qualitative data is best when the research is based on natural settings and the research is based on everyday happening. On the other hand quantitative data is based on numerical data which can be used for analysis of data and test the significance and the end result is presented in the form of graphs and tables. Quantitative data is best used when research needs comparison. So with this it is clear that quantitative method is the best suit for the research topic which we need to work on (Patton, 1980).
In this research the quantitative analysis would be the ideal way for achievement of set objective and as per the nature of the research topic.
Quantitative analysis is generally associated with numbers and statistics for presenting the observations and finding in the research process. The finding of the research in this method of analysis could be directly compared and a comparison between quantities can be obtained for achieving the set objectives. Quantitative analysis helps the researcher in building relationship between different variables and attributed associated to the research for arriving at the set objectives. Thou the findings from the data analysis are less detailed then that arrived from the qualitative analysis. So the quantitative analysis is ideal in cases of data and side line occurrences. In other word quantitative analysis can be defined as a tool which seeks envision on behavior by using complex mathematical models. Measurement and research in quantitative analysis can be defined by allocating numbers and values to the findings.
Secondary research is based on data collected through second hand data which have already being published in the form of journals or articles or past researchers. The data collected is in the same field of research and which has been work on previously. It is always justified that secondary data is more reliable, effective and appropriate then primary research to research to an end result. According to Saunders et al (2003), secondary data is best suit when a comparison between national or international is required. There have been in depth studies done on the selection criteria for secondary research. Secondary research can defines as the information gathering tool through literature from past researches, publications, broadcasting media or non human sources (Saunders et al, (2003)). Secondary research data is usually collected in the past for some reason or research. These data collected could be used to either use in the current form or even can be worked by comparing with the new data for understanding and reaching to end result for better analysis. Secondary research is easy to access and conduct as compared to primary research (Easterby-Smith, M., Thorpe, R. and Lowe, A., (1991)).
Primary research is the information gathered or collected from first hand sources or directly from the sample population. This is the method which is used for collecting data when the information is not present or needs current information.
For the research, the researcher has selected to proceed with secondary data source. The research topic is based on descriptive in nature so a questionnaire method would not help or be appropriate. So the author has selected to use secondary research and the tool for analysis is Case study method.
In this research the data collection tool is Secondary method and the tool selected is Case study method. So the data analysis tool which the researcher has selected is Microsoft excel for analysis and presentation would be in the form of graph and tables.
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