Effect Of Fdi On Indian Insurance Sector

1828 words - 8 pages

“The effects of FDI on the Indian Insurance Industry”

1.1 Introduction

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 ...view middle of the document...

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...

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