Indefinite Definition of FDI

K, S Chalapati Rao and Dhar, Biswajit and KVK, Ranganathan (2013): Indefinite Definition of FDI.

Abstract

The issue of differentiating between FDI and FPI is related to the functional aspects of the investments. The internationally adopted definition which relies on a numerical benchmark of 10% is thus of limited practical utility for policy makers. However, because of its widespread adoption and ease of identification, there could be preference for the 10% criterion especially because it removes the arbitrariness in identifying control/influence. There is a large variety in even within FDI and FPI. Definitions and classifications should therefore follow behaviour rather than the other way round.

This note argues that while control/influence is a better indicator of the effectiveness of foreign association through investment in risk capital, since foreign investors’ objectives in exercising that control/influence could differ significantly between financial investors and others, a case-by-case approach is preferable in case of sectors where foreign control is seen to be inimical to national interests and sensitivities. Since control is unavoidable in many situations and if the policy makers are convinced that there is no alternative to have foreign investment, they will have to settle for some tolerable level of foreign control. The oft-used 49% foreign share in equity and majority in the board of directors by Indian partners do not guarantee local control.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI, portfolio investment, definition, India, Foreign Share, Control, Sensitive Sectors, National Security
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F52 - National Security ; Economic Nationalism; K - Law and Economics > K2 - Regulation and Business Law > K20 - General

References

Robert E. Lipsey, “Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data” Working Paper No. 8665

OECD, Benchmark Definition of Foreign Direct Investment, Fourth Edition 2008

OECD, Benchmark Definition of Foreign Direct Investment, Third Edition, 1996 (reprinted in 1999)

John H. Dunning, “Trade, Location of Economic Activity and the Multinational Enterprise: a Search for an Eclectic Approach”, in John Dunning (ed.), The Theory of Transnational Corporations, UN Library on Transnational Corporations, Volume I, Routledge, 199

Stephen Hymer, “On Multinational Corporations and Foreign Direct Investment” in John Dunning (ed.), The Theory of Transnational Corporations, UN Library on Transnational Corporations, Volume I, Routledge, 1993

James K. Jackson , “The Exon-Florio National Security Test for Foreign Investment”, Congressional Research Service, March 29, 2013

: K.S. Chalapati Rao and Biswajit Dhar, “Vaulting over India’s retail FDI Policy Wall”, Economic and Political Weekly, November 17, 2012, pp. 10-13

K.S. Chalapati Rao and Biswajit Dhar, “Foreign Direct Investment Caps in India and Corporate Control Mechanisms” ”, Economic and Political Weekly, April 02, 2011, pp. 66-70.