1. 1Introduction In the world of increased competition and rapid technological changes, globalization has played a complimentary role over the past years. Globalization has encouraged more and more multinationals to adopt FDI. According to Charles W. L. Hill (1998) “FDI occurs when a firm invests directly in facilities to produce and market a product in a foreign country”. The growth of FDI is more than the growth of world trade and world output so role played by FDI in world economics is very vital. Patterson, N. and Montanjees, M.
(2004) say that FDI is the most favoured form of external finance for the reason that it is non-debt creating, non- volatile and the outcome depends upon the projects performance initiated by investors. FDI is advantageous because it facilitates international trade and transfer of technology, knowledge and skills. The purpose of this study is to investigate factors that attract FDI. De Mello (1999) asserts that scope for business in a country, opportunities for expansion, market size etc are some of the factors that attract FDI.
Growth rate of a company or an industry leads to magnetism of more and more investment as investors know that their investment is safe enough. According to Dunning, J. (1981) Availability of valuable and unique resources in an industry such as cheap production capacity, cheap skilled labour and advanced technology which are necessary for running a business successfully provides the basis for selecting particular sector or organisation by investors to invest in.
By investing in a well established industry or organisation, foreign companies get competitive advantage against the brand image of existing domestic companies with whom they enter the sector and this also protect the company from the risk of takeover. This research will also consider the significance of presence of FDI in an industry or organization. Lloyd, P. (1996) suggests that FDI provides capital to form strong infrastructure in terms of expansion of business, distribution network etc. FDI facilitates the organisation to use advanced technology to provide quality service to customer.
FDI has helped the country by reducing the level of unemployment as investment made in an industry creates new jobs for educated population of the country. Borensztein et al, (1998) says that FDI enables domestic company to adopt foreign company’s management expertise which results in cost savings and best promotion of the company. Competitor companies also get inspired by great expertise of foreign companies and hence results in improvement in performance of competitor companies as well. Research will also emphasize on the risks of FDI that can’t be overlooked by the company.
Control over the company is the most obvious concern of foreign players. Getting approval on various issues by foreign players makes the decision making process complex and time consuming. Another thing related to FDI is its uncertain nature which contributes to the drawbacks of having FDI in a company. According to Sloman, J. and Hinde, K. (2007) joint ventures and mergers among foreign and domestic companies can give rise to one more drawback which is difference in the corporate cultures of the companies.
As companies belong to different countries the viewpoint of management of both companies differs that sometimes creates misunderstanding. Insurance sector of India has been chosen as an industry for the research purpose. India has become the second most preferred destination for investors around the globe after China. In general, India is a much liberalized in terms of FDI policies, as FDI has been recognised as one of the important drivers of economic growth of India (http://planningcommission. nic. in). Indian insurance sector has witnessed great potential for growth.
FDI limit is 26% in Indian insurance company but government is considering increasing this limit to 49% which can be beneficial for creating strong infrastructure of insurance sector. This increase will lead to greater share of foreign players in Indian insurance industry; this is another issue of high concern for domestic companies because their market share will be get affected due to this rise in the limit. Thus, research will present arguments in favour as well as against the consideration which deals with the question of increasing the limit. 1. 2 Background FDI has a long history in India.
The presence of FDI can be noticed in the Indian economy even prior to 1947. India’s mining, trade, plantation, manufacturing sectors were mostly dominated by foreign firms mostly British. Further, foreign investment played inevitable role in the early post-independence years and India had an optimistic attitude towards FDI because it could provide new technology and capital which was necessary for development. In 1960’s Indian government realised that FDI was contributing to the problem of foreign exchange crisis through imports of inputs and repatriation of profits.
Then the FERA ACT (Foreign Exchange Regulation Act) of 1973 was introduced that marked the tightening of the regulatory regime regarding the management of FDI. (Mattoo,A. and Stern, R. M. , 2003) In beginning of 1990s India was suffering from financial crises. The balance of payment position deteriorated, further devaluation of rupee had a negative affect on India’s credit rating. Then steps like permission to invest in various new sectors that had been excluded in the past were taken.
These included the infrastructure sectors like generation of power, construction sector (highway and port) and by the end of 1990s service sectors like telecommunication, insurance which were previously controlled and dominated by government was liberalised and policies to invite FDI were formulated. Thus new rays of light were experienced and the economy stared experiencing the initial growth with the funds coming in the country and development taking place. (http://www. ems. bbk. ac. uk) Since independence it took almost six decades to make the Indian economy grow towards a developing direction.
The European investors consider India as a preferable destination to invest despite of its on going obstacles of political uncertainties, infrastructural deficiencies and bureaucratic hassles. With the presence of abundant resources and vast business potential, a company of any size, any origin which is aspiring to become a global player can achieve success. It is well known globally that India holds a potential to be one of the top three emerging economies in the world, so every other nation can make the maximum being a part of Indian prospects.
(http://finmin. nic. in) Indian insurance sector has experienced different phases from being an open competitive market to nationalization and back to a liberalized market again. The milestone of insurance in India was laid in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. History of the Insurance Sector Year 1912: The Indian Life Insurance Companies Act came into existence to regulate polices and procedures and to control insurance business in country.
Year 1928: With the help of Indian Insurance Companies Act, government of India was successful to collect and analyse statistical data regarding the life and non- life insurance businesses. Year 1938: The Indian Insurance Companies Act was amended with the objective of protecting the interests of the insuring public. Year 1956: The insurance sector was running as it is after independence as it was before independence but in 1956 the central government of India acquired 245 Indian and foreign insurers and provident societies.
The government formed the Life Insurance Corporation of India (LIC) by passing the LIC Act 1956 in the parliament and contributed Rs. 5 crore as capital. Year 1972: The General Insurance Business (Nationalization) Act, 1972 was passed to nationalize the general insurance business in India. Thus 107 insurers merged and government made four public insurance organisations: National Insurance Company Ltd. , The New India Assurance Company Ltd. , The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. (http://business. mapsofindia. com) 1. 3 Market Structure and FDI.
Every industry posses a different and unique market structure and it is considered that the relationship between openness to foreign investment and market structure is complex. Caves, R E (1996) states that there are empirical evidences which show the positive relationship between the extent of foreign investment and the degree of market concentration. It could be said that foreign investment is being attracted by industries with high concentration and high profitability. The short-run effect of foreign entry is to increase the number of firms and reduce concentration.
On the other hand, the degree of competition among entrants and current firms decide the long run effects of foreign entry. If current firms are moderately competent then there would be an honourable cycles of technological competition and if inefficient then they would lose market share to foreign firms. There is evidence that industrial concentration and foreign presence was positively correlated across industrial sectors and that is because of industrial policy and its attendant control of production capacities.
So it can be said that industry with high scope and opportunities attracts more FDI than other industries that can be the reason of uneven distribution of FDI among various industries of a country. Service sector like Insurance sector of India couldn’t attract large flow of FDI because of government policies. Before 1999 government policies were framed in order to protect Indian insurance industry from foreign and private player, so government intended to maintain monopoly in the sector. As a result monopoly power caused supply scarcity, poor product-quality, and technological obsolescence.
Therefore it can be said that due to absence of competition whether it is foreign or domestic has contributed to poor performance. Thus it is not necessary that monopoly leads to better development of the sector, but in order to maintain control the government can take necessary steps by keeping track of the latest changing trends and performing as per desired objectives in order to restrict he concentration of industries. Then it could be said that great openness to liberalization may not a substitute for an active competition policy.
With the reforms of 1999 insurance sector was first time opened for foreign and private player but still the FDI limit kept restricted to 26%. (http://www. ems. bbk. ac. uk) 1. 4 Aims and Objectives To investigate the factors that attracts Foreign Direct Investment to Insurance Industry of India. To analyze the significance of Foreign Direct Investment for Indian Insurance Industry. To analyze the possible risks of having Foreign Direct Investment in Indian Insurance Industry. To evaluate the consideration to increase FDI in Insurance Industry of India from 26% to 49%.