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Indefinite Definition of FDI

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

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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.

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