Massive increase in foreign direct investment globally is one of the derivatives of today’s globalization trend. It is inevitable for almost any country in this world. Therefore making appropriate FDI policies is a very important assignment for the Republic of Rubecli. The FDI policy must reflect the wiliness of the country to attract FDI and at the same time restrict some undesirable FDI to protect its local industries.
Generally, countries can be attractive to potential investors on account of the size and growth of their domestic markets, their geographic proximity and access to key potential markets, this includes large regional markets and the natural and other resources they host, and the extent to which they effectively strive to attract foreign investors. All the same, the existence of created assets is of mounting significance as a magnet for FDI inflows. However, beyond a basic regime in place in countries that welcomes FDI, those economic factors such as the existence of created assets and FDI policies have become more significant. In this report, I will be discussing the FDI policies for Russia and India as two models of FDI policy frameworks and compare their common features as well as the differences.
Overview of FDI Policies in Russia
FDI is playing a greater role in the Russian economy, but it is in general still low in FDI comparing to the international standards. Its FDI policy is more preservative than countries such as India. One of the major obstacles to doing business in Russia is administration. In terms of regulatory procedures, cost of importing foreign equipment, and bureaucratic red tape. And the expenses on importing foreign equipment are extremely high, and raise the costs of products by 30-40%.
The certification authorities have a similar function as the automatic route in India, who approves FDI proposals and give certifications to approved FDI activities. However, the procedures are very time-consuming and expensive in Russia. All these administrative burdens, the number of procedures and days required to start a business are rather high. Some industries are more restricted by certification authorities, especially in the chemical industry. And also to get the approval from the Inspectors and licensing authorities is difficult comparing to India. The reason behind its ineffective FDI screening system is major due to Russian’s bureaucracy political system.
The tax system in Russia is rather complex as well. According to OECD, it has a negative impact on investment, and discourages companies to start a business in the country. The complexity consists of the different taxes levied and the way of system implementation. An excessive tax burden on oil and gas production, for example, is imposing a negative impact on investment in the energy sector. Ineffectiveness of the tax system is caused by the lack of facilities, computers, and properly trained specialists.
Some judges that hear cases on taxation lack knowledge in this field (OECD, 2002). However, recently a new tax reform has been implemented. It is expected to facilitate the rules of tax levy, improve the methods of calculation of taxes, and provide for efficient allocation of budgetary revenues and expenditures. The profit tax decreased from 35% to 24%, and social contributions decreased from the maximum of 35.6% of salary to 2% (EBC, 2002).
Infrastructures and Promotion Agent
Support infrastructure in Russia is composed of a federal investment promotion agency- Trade and Investment Development Agency of Russia that has headquarters in Moscow and departments in all 89 Russian regions, and of regional investments promotion agencies, established by region administration.
One promotion agent is the Khabarovsk Foreign Investment Promotion Agency – FIPA. They provide a series incentives in promoting the FDI, such as:
* During the first two years of functioning, small enterprises do not pay the profits tax provided that they are involved in manufacture and processing of agricultural products; manufacture of foodstuffs, consumer goods, building materials; medical engineering; manufacture of medicines and products for medical purpose; construction of housing, industrial, social and ecological objects (including repair works) – provided that sale proceeds from the above kinds of activities exceed 70% of total proceeds received from realization of products (works, services).
* Tax is not levied on the property of enterprises involved in manufacturing, processing and storage of agricultural products; fish and seafood cultivation; fishing and processing of seafood provided that sale proceeds from the above kinds of activities exceed 70% of total proceeds received from realization of products (works, services).
* There is a list of reductions of the regional budget share of federal and regional taxes and levies.
* Benefits on land rent.
* The agency initiates providing facilitation support, provided the investment meets the regions strategic investment targets.
Overview of FDI policies in India
In general India is a very liberalized in terms of FDI policies, as foreign direct investment (FDI) has been recognized as one of the important drivers of the economic growth of India. The India government, therefore, has been making all efforts to invite and facilitate FDI and investment from Non Resident (NRIs- which also includes PIOs) including Overseas Corporate Bodies (OCBs- an OCB means a company or other entity owned directly or indirectly to the extent of at least 60% by NRIs) to complement and supplement domestic investment, to make India globally competitive destination for FDI.
The Automatic Route
One of the most important policy instruments in India FDI policy system is the automatic route. Under this system foreign direct investment is freely allowed in all sectors including the services sector, except a few exceptions. Normally, most FDI is permitted under automatic route and requires only notification to the Reserve Bank of India, and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).This system is a screening and approval system, it makes FDI a convenient tunnel but also restricts some undesirable FDIs. It is a strong FDI incentive instrument in that it provides investors a simple and fast screening system, which saves time for the government on those small or similar investments. Otherwise, it will add a huge amount of work to government agencies and on the other hand can largely reduce the attractiveness of FDI.
The Promotion Agencies
Apart from having a convenient auto approval system for FDI, the Indian government also uses promotion agencies to attract more foreign direct investment into the country. One is called the Foreign Investment Promotion Council (FIPC). It comprises professionals from Industry and Commerce. It has been set up to have a more target oriented approach toward Foreign Direct Investment promotion. The basic function of the Council is to identify specific sectors/projects within the country that require Foreign Direct Investment and target specific regions/countries of the world for its mobilisation. This is an important tunnel for the Indian government to look for “good” foreign direct investments instead of waiting the opportunities to come. Beside FIPC there are also some other FDI promotion agencies such as the IP & ID (which means Investment Promotion And Infrastructure Development Cell), this to facilitate and monitor investments and to coordinate with the infrastructural requirements for industry.
Exports Tariff Concession
To encourage FDI, the Indian government approves that 100% Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs)/Special Economic Zones (SEZs), can have the benefit of enjoying a package of incentives and facilities, which include duty free imports of all types of capital goods, raw material, and consumables in addition to tax holidays against exports.
Comparing India and Russia FDI Policies
The two countries are persuading two distinctively different political systems and this fundamental difference between the two has formed two very different FDI policy frame-works.
India as an open economy system persuading a free market economy, this is reflected from its FDI policies. The freedom of entering India market for foreign investors is much more than Russia. Along with India’s convenient FDI screening system that it is easy to start a business. However, in Russia, there are a few obstacles in entering its market, such as the complex FDI screening and approval system.
In terms of FDI promoting policies these two countries both have a package of incentive instruments including tax concession and some other government concessions.
After all, a good inward FDI policy must be able to attract desirable FDI and filter out those undesirable ones. The aim of policies for attracting FDI must necessarily be to provide investors with an environment in which they can conduct their business profitably and without incurring unnecessary risk. In general, for countries to attract FDI, they need to provide:
* A predictable and non-discriminatory regulatory environment and an absence of undue administrative impediments to business more generally.
* A stable macroeconomic environment, including access to engaging in international trade.
* Sufficient and accessible resources, including the presence of relevant infrastructure and human capital.
However, the usage of tax incentives, financial subsidies and regulatory exemptions directed at attracting foreign investors is no substitute for pursuing the appropriate general policy measures. In some circumstances, incentives may serve either as a supplement to an already attractive enabling environment for investment or as a compensation for proven market imperfections that cannot be otherwise addressed.