[Economics] Importance of FDI
Ranjith
FDI- Foreign Direct Investment
· The IMF defines FDI as when one individual or business owns 10% or more of a foreign company's capital.
· Foreign investment comes in several forms. Portfolio investment, foreign loans and foreign direct investment are the three important types. Of these foreign direct investments in industry and services are the most useful. Foreign loans are generally used for investment in infrastructure. This is important as a serious bottleneck for domestic as well as foreign investment is the poor state of infrastructure. However the development of infrastructure alone would not suffice.
· The significance of private FDI is that such investments are risk free to the country and bring with it the advantages of advanced technology, management practices and assured markets. In due course there is a technology transfer as the local workforce gains knowledge of the manufacturing processes and management practices. The value added in these industries is a contribution to GDP and foreign exchange earnings. Therefore FDI contributes to foreign exchange earnings, employment creation and increases in incomes, especially of skilled and semi-skilled workers in these industries.
Importance of FDI:
· Long term investment and not volatile like FII(short or medium term investment)
· It has been proven to be resilient during a financial crisis.
· Growth & employment Generation – due to the competitive field and higher productivity set by FDI.
· Brings technology & know how
· Access to new goods & services
· Fill the savings gap & compensates required fund for growth
Disadvantages of foreign direct investment in India
1) It affects small vendors.(Recent walmart issue)(Domestic market suffers)
2)Prices of goods likely to rise.(No guarantee of reasonable price)
3)long-run balance of payment position of the Indian economy is jeopardized when the investor manages to recover its initial outlay.
4)Lot of procedures and products may not be in tune with Indian preferences.(People think this as threat but i don't know much about it)
5)Inflation
6)Risk(because you don't understand the underlying intentions of the country or firm making the investment)
Conclusion:
· The design of Active Policies requires a long term strategic plan by the government in order to implement the different structural reforms and thus increase a country’s competitiveness and attract the desired FDI.
· Consistent macroeconomic policies, good governance, consistent market friendly policies, healthy economic indicators, guarantee of property rights and the rule of law are required to attract higher levels of FDI.
References:
http://www.sundaytimes.lk/110529/Columns/eco.html
http://useconomy.about.com/od/tradeterms/g/Foreign-Direct-Investment-FDI-Definition.htm
http://www.paclas.org.ph/PAPERS/Arango.pdf