Sanjeev Sharma
E-mail : sanjeev_sharma@mentor.com
MENTOR GRAPHICS https://www.mentor.com/
Abstract
Foreign Direct Investment is fund flow between the countries in the form of inflow or outflow by which one can able to gain some benefit from their investment whereas another can exploit the opportunity to enhance the productivity and find out better position through performance. The effectiveness and efficiency depends upon the investors perception, if investment with the purpose of long term then it is contributes positively towards economy on the other hand if it is for short term for the purpose of making profit then it may be less significant. The FDI may also affect due to the government trade barriers and policies for the foreign investments and leads to less or more effective towards contribution in economy also in GDP of the economy as well as information technology sector. This paper conducts an empirical analysis of India using time series data to see if there is empirical evidence that supports this assumption.
Objectives
The research paper covers the following objectives:
- To study the impact of FDI on IT.
- To study the pattern of flow of FDI.
- To assess the determinants of FDI inflows.
Introduction
A foreign direct investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country.
Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India. Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing business environment of India.
Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by the finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times. 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%.
The success of Indian software industry has captured the imagination of both Indian and the world. For a country, attracting an inflow of FDI strengthen the connection to world trade networks and finance its development path. Foreign investment plays a significant role in development of Indian economy. Foreign direct investment acts as a bridge to fulfill the gap between investment and saving. Many countries provide many incentives for attracting the foreign direct investment. A foreign direct investor may be classified in any sector of the economy and could be any one like an individual, a group of related individuals, a public company or a private company, a government body or any combination of these. IT can potentially be used in every sector of the economy. The true impact of IT on growth and productivity continues to be a matter of debate, even in the United States, which have been the leader and largest adopter of IT. There is no doubt that the IT sector has been a dynamic one in many developed countries, and in a developing country like India it has stood out in the guise of software exports, despite the country’s relatively low level of income and development.
Foreign Direct Investments in India
Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing business environment of India. Foreign companies invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. For a country where foreign investments are being made, it also means achieving technical know-how and generating employment.
FDI in India for Foreign Investors
Hotel & Tourism
Non-Banking Financial Companies
Insurance Sector
Telecommunication
Trading
Drugs & Pharmaceuticals
Small Scale Industries (SSI’s)
India is the world’s largest sourcing destination for the information technology (IT) industry, accounting for approximately 67 per cent of the US$ 124-130 billion market. The industry employs about 10 million workforces. More importantly, the industry has led the economic transformation of the country and altered the perception of India in the global economy. India’s cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its unique selling proposition (USP) in the global sourcing market. However, India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centers in India.
The IT industry has also created significant demand in the Indian education sector, especially for engineering and computer science. The Indian IT and ITeS industry is divided into four major segments – IT services, business process management (BPM), software products and engineering services, and hardware.
The IT-BPM sector in India grew at a Compound Annual Growth rate (CAGR) of 15 per cent over 2010-15, which is 3-4 times higher than the global IT-BPM spend, and is estimated to expand at a CAGR of 9.5 per cent to US$ 300 billion by 2020.
Indian IT’s core competencies and strengths have attracted significant investments from major countries. The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows worth US$ 18.17 billion between April 2000 and September 2015, according to data released by the Department of Industrial Policy and Promotion (DIPP). It is being discussed to deregulate FDI restriction further, policymaker in India as well as external observers attach high expectations to FDI. In the critical face of Indian economy the government of India with the help of World Bank and IMF introduced the macro-economic stabilization and structural adjustment program. As a result of these reforms India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign constituted (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment. The government relaxed FDI norms in several sectors including telecom, defense, PSU oil refineries, and power exchanges, among others.
Here are the few statistics that shows the growth of IT and BPM industry in FDI.
- IT-BPM revenues are expected to reach USD 146 Billion in 2015.
- Exports from the IT-BPM industry are expected to reach USD 98.5 Billion in 2015.
- IT Services exports are USD 55 Billion.
- The BPM industry exports are USD 20 Billion.
- The hardware industry exports are USD 0.4 Billion.
- The IT industry has more than 15,000 firms; of which 1000+ are large firms.
- The IT-BPM industry is the largest private sector employer – delivering 3.5 Million jobs.
- The sector accounts for 38% of India’s services exports.
- The sector includes 640 offshore development centers (ODCs) across around 78 countries.
- India is ranked as the 9th largest start-up hub in the world with over 3100 start-ups in the country.
Policy Initiatives
The information technology industry of India has been attracting considerable amount of foreign direct investment in the recent years. Investments are being made in the four principal sectors of the Indian information technology industry – online businesses, information technology services, information technology based services and software merchandise.
Newer investment opportunities are opening up every now and then in the Indian information technology scenario. The government of India has released a comprehensive FDI policy document effective from 2010. The government has allowed the Foreign Investment Promotion Board (FIPB), under the Ministry of Commerce and Industry, to clear FDI proposals of up to US$ 258.3 million. Earlier all project proposals that involved investment of above US$129.2 million were put up before the Cabinet Committee of Economic Affairs (CCEA) for approval.
Mauritius remains the top investing country for India during the period from August 1991 to March 2014. Investments from the country amounted to US $82,133 million during this period followed by Singapore and Japan. It shows that there has been a significant shift in the character of global capital flows to the India in recent years in that the predominance of private account capital transfer and especially portfolio investment increased considerably.
State wise FDI inflows show that Maharashtra, Delhi, Karnataka, Gujarat and Tamil Nadu together accounted more 75% of inflows during 2000-2015 because of the infrastructural facilities and favorable business environment provided by these states. Despite troubles in the world economy, India continued to attract FDI inflows mainly because Government of India open-up with flexible investment regimes and policies prove to be the horde for the foreign investors in finding the investment opportunities in the country.
As per Indian government recent FDI polices, up to 100% Foreign Direct Investment (FDI) is permitted under the automatic route in data processing, software development and computer consultancy services, software supply services, business and management consultancy services, market research services, technical testing and analysis services.In a big jump, India has moved up 16 positions to rank 55th on a global index of the world’s most competitive economies, where Switzerland remains on top.
EFFECT OF FDI ON IT SECTOR
The Indian Information Technology (IT) sector is expected to grow 11 per cent per annum and triple its current annual revenue to reach US$ 350 billion by FY 2025, as per National Association of Software and Services Companies (NASSCOM).India, the fourth largest base for new businesses in the world and home to over 3,100 tech start-ups, is set to increase its base to 11,500 tech start-ups by 2020, as per a report by NASSCOM and Zinnov Management Consulting Pvt Ltd.
India’s internet economy is expected to touch Rs 10 trillion (US$ 151.6 billion) by 2018, accounting for 5 per cent of the country’s gross domestic product (GDP), according to a report by the Boston Consulting Group (BCG) and Internet and Mobile Association of India (IAMAI). India’s internet user base reached over 350 million by June 2015, the third largest in the world, while the number of social media users grew to 143 million by April 2015 and smart phones grew to 160 million.
Public cloud services revenue in India is expected to reach US$ 838 million in 2015, growing by 33 per cent year-on-year (y-o-y), as per a report by Gartner Inc. In yet another Gartner report, the public cloud market alone in the country was estimated to treble to US$ 1.9 billion by 2018 from US$ 638 million in 2014. Increased penetration of internet (including in rural areas) and rapid emergence of e-commerce are the main drivers for continued growth of data centre co-location and hosting market in India.
BENEFITS OF FDI IN IT SECTOR
- Sector grew by 12% in FY2009 to reach US$ 71.76 billion in aggregate revenue
- Opportunities in Knowledge Process Outsourcing – India climbing the global value chain
- India able to add value to global KPO – valuation research, investment research, patent filing, insurance claims processing, online teaching, legal process outsourcing
- India projected to be the highest growth market in the APAC region with 11.4% growth in domestic IT spending in 2009
- Increased M&A driven by need for global service delivery capabilities
- IT sector emerged as the preferred space for venture capital investments in India
- India estimated to garner a share of $50 billion by 2020 for engineering services
Conclusion
One of the major advantages of this method is that the Indian information technology professionals are more viable from the economic point of view Since they are at par with the international standards as far as skills are concerned it is pretty easy to extract good work out of them. This has however helped in the expansion of the job market in India as an increasing number of people are landing jobs with the international information technology companies and are living better lives.Foreign direct investment in India’s information technology industry has also been contributed to by the remarkable growth of the industry in the recent years.
References
Ministry of Finance, Report of the economic survey, Government of India, New Delhi.
http://www.makeinindia.com/sector/it-and-bpm
www.google.com
http://www.ibef.org/industry/services.aspx
www.wikipedia.org
http://www.ibef.org/industry
NOTE:This paper is published in “Foreign Direct Investment and Socio-Economic Transformation in India” book by Shree Publishers and Distributors