India is among the world's top three preferred investment destination, but equity caps limit the size of potential inflows, according to a Columbia University report.
The report cited liberalisation in FDI policy and several economic sectors, a globally competitive workforce, and rapid GDP and market growth as the main drivers of foreign investment in India.
Yet, it said equity caps limit the size of potential new inflows and national security concerns might prompt more oversight of FDI approval processes.
According to the 15-page report 'Inward FDI in India and its policy context' India is also the 13th largest in terms of foreign investment inflows, which have risen 15-fold since 2000.
The report said while investors initially concentrated on manufacturing, power and telecommunications, they now focus on services.
Among other visible trends, firms in developed countries dominated investment in the 1990s, but in the past decade developing country investors have also become significant, it said.
A third of the post-2000 inflow is invested around Mumbai, a manufacturing hub, and one-fifth around Delhi, a services hub.
Ahmedabad, Bangalore, Chennai, and Hyderabad are other key destinations, the report said.
Although the global crisis slowed the rate of FDI growth in India in 2009, it also helped reinforce India's position among global investors, it said.
Since most global firms found that their Indian and Chinese operations considerably outperformed their developed market investments, they now accord even greater strategic value to these two destinations, the report pointed out.
Noting that India's attractive GDP growth rate and superior market performance are likely to attract growing FDI inflows, the report said CEOs consistently rank India as one of the world's top 3-5 preferred investment destinations in recent global surveys.
"Despite the crisis, a number of leading global firms – including Volkswagen, Telenor, LG, Cairn, and a number of IT companies - have announced large-scale investments in various sectors.
In contrast to the favourable development of economic drivers of inward FDI, the security-induced tightening of approval procedures and oversight policies might limit the potential inflow of FDI, as might the difficulty in obtaining operational clearances," it said.
