Foreign Direct Investments- Historical Perspective [RACHIT SHARMA].pptx

FDI

1. FOREIGN DIRECT INVESTMENTS: HISTORICAL PERSPECTIVE RACHIT SHARMA LLM(ADR) ENROLLMENT NO.: 03417707020 SUBJECT: Foreign Investment and International Investment Arbitration

2. CONCEPT Of FOREIGN INVESTMENT In present times, domestic capital is not sufficient for the development of countries that will ensure competitiveness in global markets.  Throughout the history, states, especially developing countries, needed foreign investment to strengthen their economies and continue their development; thus the need of foreign investors to meet their various needs such as technological infrastructure, capital and expertise which they do not have arose. A F oreign Investment can be defined as a long-term investment made by a firm or an individual in one country, into business interests located in another country, with all risks and profit opportunities. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Foreign investments can be classified in two ways: 1. Foreign direct investments- FDIs are the physical investments and purchases made by a company in a foreign country, typically by opening plants and buying buildings, machines, factories, and other equipment in the foreign country. 2. Foreign portfolio investments- These involve corporations, financial institutions, and private investors buying stakes or positions in foreign companies that trade on a foreign stock exchange.

3. Historical Development of Foreign Direct Investments The great accumulation of capital in money centers of the world, that is far in excess of the opportunities for home investments, has led to international investment extending over the entire surface of the earth. Indeed, the establishment of foreign investments was one of the chief motivations behind the expansion of European empires to the four corners of the world in early pre-modern period. It is known that the history of foreign investment in Europe goes back to ancient times and these investments are made in Asia, Middle East, Africa and other parts of the world. One of the earliest examples of the foreign investment in its purest form is that of the Phoenicians , a civilization that flourished from 1500 BC in what is known as Israel and Palestine. Phoenicians traded by ships with the Greeks and established outposts around the Eastern Mediterranean from which they can sell goods such as wood and textile from their homeland.

4. Historical Development of Foreign Direct Investments (Contd.) A few centuries after Phoenicians, the Silk Road trading routes were established between Europe (Roman Empire), the Middle East and the Pacific Ocean, extending over 6000 km through the deserts, plains and mountains of Asia. The Silk Road remained a key link between Europe and Asia until the middle ages when sea transport to dominate international investment, as well as international trade. Beginning of the fifteenth century there was extensive economic relation between Europe and China, as well as India. During the early fifteenth century and onwards Western European states began to establish permanent colonies in the locations they had previously visited because of the trade missions. The Dutch East India Company was formed in 1602 in order to chase commercial activities in Indonesia can be described as the world's first multinational corporation. Also, the Portuguese begin establishing colonies in India and Africa, likewise the British and French. The latter two states also set up colonies in North America where fur trapping was a profitable enterprise. Portugal and Spain had also begun settling Central and South America by to mid-seventeenth century, driven by the pursuit of gold

5. Historical Development of Foreign Direct Investments (Contd.) In eighteenth to nineteenth centuries, investment was largely made in the context of colonial expansion. In this period, investments are unilateral from the imperialist states to the colonial states and they generally tended to natural resources. The practice of colonialism by the European powers was rooted in the economic objective of exploiting abundant resources and cheap labor available in lesser developed countries. It was done through military and administrative presence. Early in the twentieth century, large part of world's infrastructure was developed through FDIs; these include electric power in Brazil, telecommunications in Spain. Likewise, German chemical companies were expanding outside Germany Before WWI like U.S. auto manufacturers. Also, British firms invested in consumer goods manufacturing abroad from an early date.

6. Development of Foreign Direct Investments in 20 th Century By 1914 the world stock of FDI was estimated at $15 billion; United Kingdom was the largest source of the investment, followed by the United States and Germany. Most of the investment had been made in Latin America and Asia with the significant part in agriculture and mining. While foreign investments to developing countries in the beginning of the twentieth century were mainly motivated by exploiting natural resources and building railways, these investments later increased in textiles, clothing in East Asia and automobile industry in Asia and Latin America in 1960s. Technological advancement activities were also done in Singapore and Malaysia during that time. Moreover, the major shift was seen in textile industries as it shifted to developing countries such as Mauritius that had unused quotas for export to industrial country markets. In 1970s commodity prices started escalating and FDI in extractive sector, started escalating particularly oil and gas sectors but, FDI in other sectors gradually started dropping as a number of countries tightened policy restrictions on FDI.

7. Development of Foreign Direct Investments in 20 th Century(Contd.) Economic stagnation continued in the first half of eighties. Commodity prices started falling and industrial countries faced recession which triggered a debt crisis. Many countries started reorienting their economies toward private sector and reduce tariffs, liberalize business environment, deregulated FDI. In response to these changes, FDI flows to developing countries began to increase in second part of 1980s. Governments continued to open up more areas to private sector in 1990s; especially infrastructure became increasingly open to private sector and FDI in infrastructure grew rapidly. In 1990s, privatization also played an important role in attracting FDI. Countries like Argentina, Chile and Columbia, where the privatization was open to foreign investors, they attracted the most foreign investors to their countries.

8. Current Developments in FDI Renewed confidence in the positive benefits of FDI has led many countries that were restricting FDI in the 1960s, 1970s and 1980s to be more open towards FDIs now. Today, foreign direct investments and foreign investors are increasing their importance and share in the international arena. In 2015, international direct investments increased by 38% to $ 1.7 trillion. Starting from 2015 FDIs have a downward trend, the decline had third consecutive year fall in FDI. Global FDI flows also continued their slide in 2018, falling by 13 per cent to $1.3 trillion from a revised $1.5 trillion in 2017. In the first half of 2019, global FDI flows also decreased by 20% compared to the last half of 2018, to USD 572 billion. FDI flows dropped by 5% to USD 361 billion in Q1 2019 and by 42% to USD 210 billion in Q2 2019. Despite this decline, direct investments are still one of the most important actors in the global economy both for developed and developing economies. Developing countries are now increasingly creating a market friendly environment for the private sector to operate. Countries that have done this consistently over time have also attracted more FDI.

9. FDI Development in India Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Dr. Manmohan Singh. As Dr. Manmohan Singh subsequently became the prime minister, India disallowed overseas corporate bodies (OCB) to invest in India. India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.[39][40] Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. In 2015, India emerged as top FDI destination surpassing China and the US. India attracted FDI of $31 billion compared to $28 billion and $27 billion of China and the US respectively.[43][44] India received $63 billion in FDI in 2015.[45] India also allowed 100% FDI in many sectors during 2016. FDI to India accounts for 70 to 80% in the South Asia region and rose by 6% in 2018. the top three industries for FDI were: manufacturing, communication and financial services

10. Conclusion Nowadays, when the world is trying to cope with the covid-19 pandemic, the economies of the countries have been hit hard. This extraordinary situation and rapid spread of the virus are being felt worldwide and impacting all business sectors as well as Foreign Direct Investment. It is a crisis like no other as factories, schools, borders have all been closed and half of the humanity has been put under some form of lockdown. It has led to a strong drop in the cash-flow of companies and to a threat of mass insolvencies. Unfortunately, it's not over, with cases continuing to mount worldwide and economies continue to suffer losses. Developed and developing states have allocated large budgets to combat this disease and a recession has already begun. It can be estimated that the impact of this crisis situation on economies will be long-term. Countries will need to take some measures to overcome this problem in the economy as soon as possible; but it is difficult for these measures taken within the country to be sufficient for the economy to recover. At this point, foreign investments and foreign investors increase their importance. Foreign investments will be of great importance in providing the resources needed by countries for reorganizing their economies.

11. REFERENCES 1. Sornarajah , M. (2010). The International Law on Foreign Investment. Cambridge: Cambridge University Press, page- 4, 5 and 9 2. World Investment Report, 2019 by United Nations Conference on Trade and Development, Page- X and 44 3. Foreign Direct Investment and Development An historical perspective 30 January 2006 by Overseas Development Institute. Page- 9, 10 4. FOREIGN INVESTMENT, Report of the Steering Group on Foreign Direct Investment by Planning Commission of India, New Delhi, August 2002 5. Historical Development Of Foreign Direct Investments: Will Direct Investments Continue To Influence Countries' Economies? by Emre Koluman (Published on 02-11-2020) https://www.mondaq.com/turkey/inward-foreign-investment/1000696/historical-development-of-foreign-direct-investments-will-direct-investments-continue-to-influence-countries39-economies 6. Foreign Investment, by James Chen https://www.investopedia.com/terms/f/foreign-investment.asp (Updated on 26-10-2020)