Foreign direct investment in the Indian telecommunications sector

The physical infrastructure of a country is very important in attracting foreign
investment. The physical infrastructure includes the accessibility and level of
telecommunications, transportation networks, electricity, water, sanitation and other related
public goods. Countries lacking sufficient infrastructure may be unable to attract FDI and this
may also impact the ability of the host country to act as an exporter of goods.⁷

A stable tax regime lowers the risk of investment to foreign firm. The new entrant may
also be able to avoid tariffs by establishing a local subsidiary. There has been a substantial
amount of literature examining the impact of taxation and exchange rates on the amount of FDI
inflows to countries. The literature is mixed and indicates that the level of taxation in a country
may encourage or discourage FDI.⁸ Similarly, exchange rates may play a role in the decision to
initiate foreign direct investment in a country. Tax and other investment incentives may not have
a significant impact on the decision to invest.⁹

Methods of Foreign Investment in India

There are several methods that a company can employ to enter an approved Indian sector.
The options that are used the most include incorporating as an Indian company (a wholly owned
subsidiary or joint venture with a local Indian company) or as a foreign company (e.g.,

case of economies in transition. Transnational Corporations, Vol.13, Iss. 2 (2004): 77.

⁷ Foreign Direct Investment in Emerging Market Countries - Report of the Working Group of the Capital Markets
Consultative Group

⁸ NBER Working Paper 11299 April 2005, Bruce Blonigen pg 15

⁹ Foreign Direct Investment in Emerging Market Countries - Report of the Working Group of the Capital Markets
Consultative Group. NBER Working Paper 9489 - “The Economics of Foreign Direct Investment Incentives” by
Magnus Blomstrom and Ari Kokko

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