It was the BEST OF TIMES, it was the worst of times”-- Charles Dicken’s description in A Tale of Two Cities perhaps best describes the scenario facing Indian Companies today. On the one hand, unprecedented growth in the Indian economy has led companies to post record revenue and profits. On the other hand, the spectre of a world recession threatens to play spoilsport.

At Earnst & Young, we have been studying corporate performance over many years. Our research tells us that while business goes through cycles of boom and bust, some companies are successful in riding the boom periods and defying the period of bust. These companies consistently outperform the market and deliver superior results on an ongoing basis. These successful companies cut across industries, have disparate backgrounds, some are mature and established, and others are newer and younger.

These companies are more successful because of the quality of their management processes. As we conducted a study of India’s best managed companies, our aim was to identify what is it that makes one company better managed than another and what are the leading practices that India’s best companies adopt to outperform industry and competitors.

Our survey revealed several common threads that run through India’s best managed companies. We summarized these as “10 mantras” of management success. Many companies focus on one or some of these mantras, but when practiced together, these mantras churn out a “best managed” company.

Mantra #1: Be audacious in your vision

Sam Walton once famously said, “Capital isn’t scarce: vision is.” However, looking at the best managed companies of this year, there seems to be no dearth of vision. In fact, these companies have displayed a boldness of vision that was quite unimaginable for Indian companies a decade ago. If one were to select the leading beacon for its vision, it would undoubtedly be Tata Motors. Who would have thought that a company, which started making passenger cars barely a decade ago, could even think of making the world’s least expensive car, and that too half the price of the cheapest car available in the market. But this should not come as a surprise. Over the past few years, Tata Motors has time and again set out to achieve targets that skeptics have proclaimed to be unattainable. But every time it has delivered on these promises—be it in Indica or the Ace.

ITC is another interesting case in point. A strong vision not only helped it recover from not-so-successful forays into finance, trading and real estate but also galvanized the company to brace for a new round of Growth. It sets itself an ambitious target to become India’s biggest FMCG Company and then went on to launch a product blitzkrieg, unleashing a new product in the Indian market every quarter. Today, after successful competing against the FMCG majors in the foods arena, ITC is entering the highly-competitive personal care market with a new-found confidence. This new approach of Indian industry is perhaps best summed up in Ratan Tata’s modest words: “We rescaled our thinking in term of growth and cajoled our business to make this happen.”

Mantra#2 : Focus on what you know Best

In a rapidly expanding economy like India’s, diversification into unrelated but high growth sectors becomes a tempting proposition for companies. However, if one looks at the best managed companies, they have largely achieved growth by leveraging their value chain inter-relationships or through geographical expansion. The classic example of growth through backward integration is Reliance Industries. Starting with textile in the late ‘70s, Reliance pursued a strategy of backward vertical integration in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production—to be fully integrated along the materials and energy value chain, while also emerging as a leader in each of the industries it entered.

On the other hand, a remarkable case of sharpening focus through divestiture is L&T. In 2003, L&T’s cement business accounted for more than a quarter of L&T’s turnover, but it was still proving to b a drain on resources that could otherwise have gone into growing the core businesses. As L&T’s top boss A.M.Naik says: “It was only because of cement that the company’s financial parameters were depressed. L&T could have grown much faster without the cement business.” Finally in 2004, L&T bit the bullet and divested its cement business and decided to focus on engineering. The success of the measure was evident in the financial results of that year when, despite the divestment, the company’s revenues saw a minor dip and the profits actually grew by 23%.

Mantra#3: Trim flab to achieve operational excellence

For the best managed companies, cost efficiency is more than a source of competitive advantage. This has pervaded the companies’ philosophy to become an ongoing exercise. Innovative solutions are helping the best managed companies reduce costs without compromising on quality. Though a blend of backward integration, competitive sourcing strategies and efficient systems, these companies have managed to significantly rein in costs.

The best managed company in the material sector, Grasim Industries, is the lowest cost producer of viscose staple fiber in the world. According to the management, the company is the most-integrated fiber producer, with the chain stretching right from forest to pulp to fiber to yarn. Almost all the intermediate inputs are captive. Besides, Grasim’s in-house engineering division enables the company to grow in the most cost-effective way. Other winning companies are also undertaking several initiatives to trim the flab.

Tata Motor’s landmark exercise conducted in the wake of a Rs 500 crore loss in 2001 helped it return to the “black” and gave it the confidence to produce the world’s cheapest car. Tata Steel has long maintained its position as one of the lowest-cost producers of steel in the world.ITC’s e-Choupal initiative has revolutionized the agricultural supply chain, creating value not only for the company but also for the farmers.

In an increasingly globalize playing field, operational excellence, as the best managed companies illustrates, has become a necessity. Cost efficiencies are instrumental in helping these companies defend their turfs from foreign players. More importantly, these companies are now taking the war abroad by effectively wielding the cost advantage to emerge as a serious threat to global incumbents.

Mantra#4: Good governance makes business sense

Corporate Governance has become a priority for a world recovering from the shocks of scandals such as those as Enron and WorldCom. In India itself, Clause 49 of the listing agreement, which contains the corporate governance requirements, has been revised at least four times in six years. Most Indian companies have been struggling to comply with the mandatory requirements of this clause. However, we noted that the winning companies go much beyond what is mandated by the law. All but one of these companies has a documented Corporate Governance Policy and a
Whistleblower policy. Most of these companies provide formal training to their Directors and have instituted mechanisms to track the performance of their Boards.

The Tata Group stands out as leading practitioner of good Governance. It claims that adherence to ethical business conduct is rooted in the vision of its founder, Jamsetji Tata, for whom the ‘end’ of entrepreneurial triumph was always secondary to the means’ by which it was achieved. It is this very reputation for honesty and integrity that has helped the Tata Group immensely in its bid to grow internationally. This was reflected at the time of the corus acquisition; when Jim Leng, the Chairman of Corus, went on to call Tata the right partner at the right time for Corus shareholders and employees alike.

Mantra#5: Develop leaders from within

A common feature across the best managed companies is that their leaders have grown from within. A.M.Naik started his career as a Junior Engineer with L&T in year 1965. Y.C. Deveshwar, the CEO of ITC, began his career as a management trainee in the company in 1968. K.M Sheth joined Great Eastern Shipping in 1952. B Muthuraman started off as a Graduate Trainee with Tata Steel. The list goes on. These companies have made a conscious effort towards creating talent pools within the organization and grooming employees for leadership positions.
L&T has launched a company-wide endeavor covering more than 4000 managers to enable them to hone their abilities in people management, and translate those skills into effective leadership and motivation. To ensure quality and depth of leadership, L&T has linked the leadership process with consistency of performance. Select employees are also sent to premier business schools and management institutes to gain experience and knowledge through their Advance Management Programs.Another best managed company, Grasim, believes in identifying and grooming management talents as also undertaking leadership development across levels through various initiatives such as ‘Competency Honing and Leadership Development’ programme at Gyanodaya, the company’s institute of Management and learning.

Henning Holck-Larsen, the co-founder of L&T, couldn’t have been more correct when he said: “ If you want to belong to a country that is becoming a nation, you have to keep the economy growing by creating jobs. And you can only do that by investing in tomorrow, and tomorrow is made by people.” Quality and commitment of workforce can make a significant contribution to the company’s success. India Inc. is becoming well aware of this and is making an effort to take care of people through initiatives that range from providing better facilities at offices, regular trainings and development programs as well as liberal leave policies. Findings from the survey
reinforce this trend: 67% of the best managed companies have specifically documented policies offering sabbaticals to employees and 78% of the best managed companies have institutionalized ‘Fast Track’ programs to recognize high performers. This year’s best of best winner, L&T, has been the recipient of number of awards for its innovative HR practices. One such initiative is the Hitori Yatai Seisan or the Single Workman Station, at L&T’s electrical engineering division. Employees are challenged to take complete responsibility for a product instead of letting them work on individual components. “Ever since we introduced the concept of the Single Workman
Station, our productivity has increased, as the employee has a sense of ownership for the final product. This is a great motivation,” said R.N. Mukhija, President (Operation), L&T. Best managed companies use a variety of approaches to reach out to their employees and go beyond the conventional offering of responsibility, security and salary. They create work environments in which their employees can flourish and dream the organization’s dream.

Mantra#6: Forge stronger partnerships with your supplier base

The top companies in India realize that their performance is inextricably linked with that of their partners. As one of the CEOs put it, “The strategic vision of the company must get absorbed and assimilated across the entire value chain.” To this end, companies are increasingly sharing their vision with partners and seeking active participation in realizing their growth objectives. Our study shows that the best managed companies in India view development of vendors as a key investment towards value creation. It was interesting to note that each of the best managed companies conducts quality audits at vendor sites and has structured systems for vendor performance appraisal. Indian companies are also actively partnering their suppliers in planning, procurement, research and development, quality assurance mechanisms and process improvement initiatives. Two-third of the best managed companies is actively investing in enhancing the technology of their vendors.

Bharti Airtel exemplifiers this mantra in that it has integrated the partnership approach in its business model. Deviating from the conventional model wherein telecom companies owned network equipment, Bharti strategically outsourced the entire network infrastructure to its vendors and incentivised the arrangement by offering 1% of the company’s revenues through SLAS. To allay vendor concerns regarding sustainability of the business, the company further outsourced network management to vendors.

The results that the partnership approach can yield are perhaps best visible in the case of Tata Motor’s breakthrough car, the Nano. Auto component suppliers played a key role in the development of the car and ensured that it met the cost target.

Mantra#7: Pursue quality with Zeal

Best managed companies use quality to do what they do best—create values. These companies devote significant efforts towards achieving the highest levels of quality. Our study confirms that quality is a concept that pervades all sectors and each business. Each of the best managed companies had process quality certifications and 78% of these companies had undertaken organization-wide six sigma exercises. Importantly, all of these companies’ strategic plans include targets for process improvements.

At ICICI Bank, increasing customer grievances and service lapses made the management set up an organizational excellence group (OEG) in 2002. Its aim was to engage in building, sustaining and institutionalizing quality in the bank by facilitating development of skill and capabilities in various quality frameworks. In the industrial products sector, L&T’s Heavy Engineering Division is focusing on improving manufacturing operations through automation, TPM, Six Sigma and ITenabled re-engineering.Tata Steel’s focus on quality led it to launch the ASPIRE program, incorporating best practices of different improvement initiatives such as TOC (Theory of Constraints),TQM(Total Quality Management) and technology. Unrelenting commitment to quality, which is a defining features of each of the best managed companies, creates that all important value among stakeholders—trust.

Mantra#8: Innovate to create value for customers

L&T’s definition of technology “as the springboard for the future and a bridge between aspiration and accomplishments” typifies the new-found attitude of business in India. The new mantra is to indigenize technology, which is evident from the increased R&D expenditure incurred in better managed companies. Companies are increasingly emphasizing on R&D for reducing costs and developing new products. A case in point is Tata Motors, whose new business strategy is focused around the development and production of technically advanced commercial vehicles and passenger cars of world-class quality. The recent launch of the first of its kind goods career, Ace, and its passengers-carrying variants, is the result of the company’s aggressive new product development programme. Innovation in products and services has helped ICICI address the needs of various customer segments. A recent example is the introduction of an end to end technology solution in rural geography that provides customers with biometric -enabled smart cards.

To sustain strong growth rates companies need to look for creating know-how in new areas by building in-house technological expertise and the best managed companies are constantly working towards this very goal.

Mantra#9 Give back to the Society

Corporate social responsibility (CSR) in India can probably be traced back to when the Tata Iron and Steel Company was floated in 1907. the Jamshedpur plant today can be described as a mammoth social out reach programme that covers 600 hundred villages in and around its manufacturing and raw materials operations through initiative in the areas of income generation, health care and education, a good example of linking business goal with a larger societal cause is ITC’s e-Choupal initiative, which has proven to be a digital revolution and has been reshaping the lives of farmers in remote Indian villages.

The Aditya Birla Group believes that CSR id textured into the group’s value systems. The group has created a whole parallel organization to focus on CSR under the stewardship of Rajshri Birla. Its vision is “to actively contribute to the social and economical communities in which we operate. In so doing build a better, sustainable way of life for the weaker section of society and raise the country’s human development index.”

L&T believes that the true and full major of growth, success in progress lies beyond balance sheet or conventional economic indices. It is best reflected in the difference that business and industry make to the lives of people. Today, it views itself as a company engaged in a higher cause of Nation building. In the case of Tata Motors, Singur was chosen by Ratan Tata as the location of the new plant because he believed that eastern India should not be deprived of the economic development enjoyed by the rest of the company. His decision may not have been an economically-prudent one, but it was backed by a strong commitment to the cause of social development. The CSR agenda of Indian companies, indeed, boarders on the extraordinary in vision. The leading Indian companies do not view CSR as an instrument of enhancing their reputation; instead they display an earnest desire to gives back to society and to contribute to the Nation’s progress.

Mantra#10 The Indian Edge

Management thinkers have often talked about the differences in management philosophy and practices as developed in the US, Europe, Japan and even China. Of late, there have been calls to identify what can be termed as the “Indian Approach to Management.” While we can not venture to define the Indian approach to management here, we noted one key difference that distinguishes the approach Indian companies from those of others. This difference lies in their inclusive nature and manifests itself in the way Indian Companies deal with their stakeholders. Today, as companies the world over struggle to show their more humane face and find the balance between profitability and social responsibility, Indian companies are comfortably partnering with their stakeholders to create value for society. Our companies often allude to their business partners as part of the larger corporate family. Employees are treated with respect and hardly any Indian company hands out pink slips in times of diffic ulty. Indian companies often engage in societal upliftment and nation-building projects, not due to any regulatory pressures but from a natural sense of duty. It is this attitude of inclusiveness that is giving Indian companies a strategic advantage in areas where other companies failed. Indian companies are far more successful in reaching out toward sly different customer segments-reach and poor, urban and rural. So they endeavor to globalize, they gain easier acceptance across diverse countries. The support they get from the extended organization multiplies their capabilities. Their strong talent pools par them to successfully compete with the best companies in the world. The mutually-beneficial relationship that the companies have with the community preempts conflicts and ensures smooth conduct of their businesses.

We believe that the inherent trait of inclusiveness that Indian companies posses, in addition to the “10 Mantras”, could well be the defining factor of their tremendous success in the years to come.

Business environment is changing drastically in today’s corporate world. In early years of current management era manager were suppose to work exclusively with equipments, data and systems; performing traditional tasks. But scenario of management responsibilities has been changed significantly and today’s manger faces issues like cross training, personnel management , interdepartmental communication and widening job scope. Globalization is shaping and re-shaping business environment, resulting in increase of competitors, demand of new sourcing strategies and facing new markets with new demands.

Irregular flow of information often subject to quantitatively strong fluctuations, controlling the flow of information is necessary otherwise these fluctuations can become detrimental. Information controlling is the analysis, evaluation and importance attached to the data that collected and provided with the data under various criteria. Because day by day managerial job is becoming more and more hectic manager needs to continuously look for new ways to improve speed and quality along with reduction in rising cost.

Rising costs is another problem for the managers. Rising in the cost of services and wages is becoming more and more troublesome for managers. In current environment there is no guarantee of the employee’s being loyal to company, then in that case, to get more money employees ask for higher wages. Also there is requirement to keep the cost of services, provided by company under constant watch. If company starts loosing because of rising service cost then mangers put attention to solve this issue.

As complexity of electronic data processing increases, security often decreases. Not only does this pose problems in the form of breaches, it also has legal ramifications with regard to license. This problem especially faced in IT industries. IT companies buy very expensive software and after some months or years new version comes up, then again managers need to change their strategy along with change in technology. Customers may want to change or upgrade to new technology, then managers has to negotiate for the money and services, this may lead to unsatisfactory customer service.

Mainly following are the main challenges faced by today’s managers

Responding to Globalization: Various forces of globalization are reshaping the business environment generating new competitors and demanding new sourcing strategies and market. In dynamic market situations it’s very hard for managers to predict any concrete goal and strategy for the business development. Short term strategy may work very well but for long term, goal setting is the problem. Again dynamic market conditions of global economy make the profit prediction shaky. No one is able to predict the variations in the profit and losses, business can make. Responding to globalization is becoming more and more important; this result in redefining business model. Today change is happening at a rate that does not afford organizations the luxury of managing one major change at a time. Today managers are facing two questions because of globalization, how does relentless change redefine the nature of management and the structure of an enterprise? And what role should management play in re-shaping the enterprise?

Managing work force diversity: Because of globalization and open market system for business, management has to face diversity in work force. Now a day’s businesses are spread over different cities in various countries. Thus many times not only gender and age diversity, but cultural diversity becomes essential to manage work force. Basically heterogeneity of people becomes challenge for the managers because of variations in the ethics, motives and working culture.

Improving quality and Productivity: Main problem for the management is to decide, what is to produce, how much is to produce and where is to be produce. Management has to decide either to produce different products or to emphasis on one product. Once deciding this, managers have to make sure that the quality of the product is good. It takes long time for the organization to create a market about the product; but if there is any lacuna in quality and productivity then because of high competition it’s become hard for the product to sustain in market.

Improving customer service: Improving customer service is sometimes managers think they will get around to in time. But that time rarely comes. Changes in the requirements or changes in the taste of customers become hurdle in the improvement of customer service. To solve this issue many times managers try to set up scenarios that challenge employees and cover the full range of customer requests. At times management also keep two scenarios running parallel and asks employee to maintain balance.

Along with above problems managing labor force is again a challenge for managers. Now days there is no unwritten contract of being loyal to an organization, because of this many employees seems to be fired from the organization or they leave the organization for getting good salary job. In the absence of contract between employee and organization, employee may decide to leave an organization in the middle of project work. This is very challenging situations for managers to deal with.

To overcome these challenges managers have to modify the working culture. Managers need to be aware of the skills of their subordinates and people under them. Empowering of employees is the best way to get maximum output from them. People get bore because of routine work, then to get more output managers can make changes or innovations in the working style. Along with the challenges discussed above, managers have to make efforts to understand their employees. If managers are able to gel with their employees then only employee will be happy to work with the manager, and he/she will be ready to face or tackle the challenges faced by managers. By knowing employee managers will be in a position to understand the working capacity of employees and allocate the work accordingly. This will also help for the performance appraisal and to know liking of an employee about the job and the work allocated to him/her.

Conclusion: Considering many changes in the working environment and globalization today’s managers are facing many new challenges comparing to previous years. Today’s managers are coming up with new ideas and theories about the challenges faced by them. Inflation and changing rates of foreign exchanges are also creating challenges to managements, to handle this managers have to come up with new innovative ideas.

The basic measure for evaluating the performance of capital investments is the return on investment (ROI), which always is expressed as a percent. To calculate ROI, the amount of return is divided by the amount of capital invested:

ROI% = return/capital invested

ROI is always for a given period of time—one year unless clearly stated otherwise. Return is a generic term and means different things for different investments. For investments in marketable securities, return includes cash income received during the period and the increase or decrease in market value during the period. The ROI on an investment in marketable securities is negative if the decrease in market value is more than the cash income received during the period.

The money market is a market in which the cash requirements of market participants who are long cash are met along with the requirements of those that are short cash. This is identical to any financial market; the distinguishing factor of the money market is that it provides for only short-term cash requirements. The market will always, without fail, be required because the needs of long cash and short cash market participants are never completely synchronized. The participants in the market are many and varied, and large numbers of them are both borrowers and lenders at the same time. They include:

• the sovereign authority, including the central government (“Treasury”),as well as government agencies and the central bank or reserve bank;

• financial institutions such as the large integrated investment banks,commercial banks, mortgage institutions, insurance companies, and finance companies;

• corporations of all types;

• individual private investors, such as high net-worth individuals and small savers;

• intermediaries such as money brokers, banking institutions, etc.;

• infrastructure of the marketplace, such as derivatives exchanges.

Certificates issued by a U.S. depositary bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. "Unsponsored" ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American depositary shares(ADSs) are a similar form of certification.

Economic thinking is often divided into two categories—positive and normative.

Positive economics is that branch of economic inquiry that is concerned with the world as it is rather than as it should be. It deals only with the consequences of changes in economic conditions or policies. A positive economist suspends questions of values when dealing with issues suck as crime or minimum wage laws. The object is to predict the effect of changes in the criminal code or the minimum wage rate—not to evaluate the fairness of such changes.

Normative economics is that branch of economic inquiry that deals with value judgments—with what prices, production levels, incomes, and government policies ought to be. A normative economist does not shrink from the question of what the minimum wage rate ought to be. To arrive at an answer, the economist weighs the results of various minimum wage rates on the groups affected by them—the unemployed, employers, taxpayers, and so on. Then, on the basis of value judgments of the relative need or merit of each group, the normative economist recommends a specific minimum wage rate. Of course, values differ from one person to the next. In the analytical jump from recognizing the alternatives to prescribing a solution, scientific thinking gives way to ethical judgment.

Original Link :- "Business management Theory"

A Business Management Theory is akin to the general concept of management which refers to directing and controlling a group of people for the achievement of a collective objective which is beyond the scope of individual effort. A Business Management Theory is a study of the principles and practices of a business to attain its desired organizational goals conducting effective management. Business Management Theory is a range of approaches including the principles of accounting, public relations, operations, labor relations, time management, investment and corporate governance to improve the performance of a business in some measurable or otherwise provable manner. Business management theory encompasses the deployment and manipulation of human, financial, technological and natural resources and their effective allocation for the optimum level of output for the business.

Business management theory is closely related with the concept of business management strategy and it deals with the steps that are taken by the collective decision of the managerial authority of the business as well as the workers for the attainment of the desired objective. It should be noted in this context that decision-making plays a key role in the process of management which rests on the principles of planning, organizing, directing and controlling in the business. While planning and organizing deals with strategically formulating the long term goals the business seeks to attain which is generally taken by the top level management of the company, the operational business processes involving the day-to-day activities of the business is also a part of business management theory. Controlling refers to the evaluation of the performance towards the desired objective; directing, being a part of the business management theory refers to the supervision such that the workers work towards the accomplishment of organizational goals.
Business management theories undergo testing in the real world circumstances and the theories are continuously evaluated and evolutes after every 5-10 years. One of the major cornerstones of the modern business management theory is the theory of games, otherwise considered to be branch of economic analysis.

In the last twenty five years game theory has addressed some of the key issues related to antitrust analysis and monetary policy, the design of auction institutions to patent wars to dispute resolutions between warring business firms. Game Theory is now being incorporated into business management theory which gives a meaningful insight into the way business decisions can be modeled and analyzed. Business management theories covering the issues of finance, accounting, strategies and organizational design can be dealt with in detail by applying the principles of game theory or industrial organization. The specific application areas of the theories of business management including market competition, bargaining, competitive bidding to auctions involving the situation where a number of economic agents in pursuit of their respective self interests take actions is a fundamental area of concentration of game theory.

Game theory proves to be a compelling guide for any business strategy even in the case of imperfect markets where cooperative and non-cooperative game theoretic approaches can be used. The “balance of power” between the firm, its buyers and suppliers is what makes it a basic tool for understanding business management theory and strategy which are basically the all inclusive steps that the businesses should follow to attain its long-term objectives so as to achieve the highest rates of growth and profits in the long run. As already mentioned, business strategy based on the industrial organization approach is based on economic theory and deals with issues such as competitive rivalry, resource allocation and the economies of scale. Strategy formulations mainly include self evaluation and competitor analysis which determines the objectives and the planning strategies are devised according to them.

Deflation is reduction in the level of national income and output, usually accompanied by a fall in the general price level.

Deflation is opposite of inflation.A decrease in the personal investment and spending of the government can also lead to deflation. As a result of deflation, the economy can witness increased unemployment as the demand for goods and services in the economy falls.

Causes of Deflation

• Decrease in Money supply
• Increase in goods supply
• Fall in Demand

Nature of Deflation: Deflation is viewed as a continuous process of decrease in some of the normally-followed collective indicator of price movements, like the GDP deflator or the Consumer Price Index (CPI). In general cases, a one-time reduction in the price levels does not necessarily hints at the initiation of Deflation. In fact, for Deflation to affect an economy, there must be a persistent fall in the prices for more than a year's time.

Effects of Deflation: Under Deflation, when the price fall persists, it normally creates a spiral of negative attributes comprising accelerative defaults on loan, reduction in incomes and increase in unemployments, downturn of profits and closing down of factories and manufacturing units.

What is FDI? / what is Foreign Direct Investment?
Foreign direct investment is the investment in which the invester invest in a company, which is in a different nation distinct from the investor's country of origin
FDI relationship has two sides, one is the bussiness enterprise and other is its foreidn affiliate. Bussiness enterprise and foreign affiliate together comprise an MNC. Investor enterprise through its foreign direct investment efforts seek to exercise substantial control over the foreign affiliate company.
Ownership share of the investor is categorized as FDI only if investor holds 10% or more shares or access to voting rights, otherwise the investment is termed as portfolio investment

Classification of Foreign Direct Investment
FDI can be classified as Inward or Outward. Inward FDI is the investment of foreign capital in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants. The idea behind this is that, the long run gains from such a funding far outweighs the disadvantage of the income loss incurred in the short run. Flow of inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard.

Foreign direct investment, which is outward, is also referred to as “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country. Outward FDI flourishes under government backed insurance at risk coverage.

Outward FDI faces following restrictions

• Tax incentives or the lack of it for firms, which invest outside their country of origin or on profits, which are repatriated.

• Industries related to defense are often set outside the purview of outward FDI to retain government's control over the defense related industrial complex.

• Subsidy scheme targeted at local businesses.

• Lobby groups with vested interests possessing support from either inward FDI sector or state investment funding bodies.

• Government policies, which lend support to the phenomenon of industry nationalization.