Foreign Direct Investment
Foreign direct investment is investment made to
acquire lasting interests in enterprises operating outside of the economy of
the investor. Consists of a parent
enterprise and foreign affiliate which together form a MNC. Example: Hero Honda
Why FDI?
v No debt creation on
the part of the government.
v Triggers technology
transfer.
v Assists Human capital
formation.
v Contributes to
international integration by promoting exports.
v Increases
productivity and competitiveness.
v Improves efficiency
of resources.
v Promotes innovation.
Drawbacks of FDI
v Local firms may loose
business because of the oligopolistic power of foreign firms.
v The repatriation of profit may drain out the
capital of the host country.
v Local population may
be displaced out of their jobs if they are unable to cope with the
technologically advanced foreign firms.
Impact of FDI on host economy
v FDI may have a
negative impact on the growth of the developing countries (Singer,1950;
Griffin, 1970).
v Hanson (2001) argues
that evidence that FDI generates positive spillovers for host countries is
weak.
v FDI could have a
favorable short-term effect on growth as it expands the economic activity.
However, in the long run it reduces the growth rate due to dependency,
particularly due to “decapitalization” (Bornschier, 1980).
FDI in India
v Banga (2005) demonstrates
that FDI, trade and technological progress have differential impact on wages
and employment.
v Higher extent of FDI
in an industry leads to higher wage rate, it has no impact on its employment.
v Higher export
intensity of an industry increases employment in the industry but has no effect
on its wage rate.
v Import of technology
has unfavorably affected employment in India. The study by Sharma (2000)
concluded that FDI does not have a statistically significant role in the export
promotion in Indian Economy.
FDI policy in India:
v Currently FDI is
permitted:
a) Through financial
collaborations.
b) Through Joint
Ventures and technical collaborations.
c) Through capital
markets via Euro issues.
d) Through
preferential allotments.
v India had opened up
its economy and allowed MNCs in the core sectors such as Power and Fuels,
Electrical Equipments, Transport, Chemicals, Food Processing, Metallurgical, Drugs
and Pharmaceuticals, Textiles, and Industrial Machinery.
Currently FDI is also allowed in:
v Telecommunications,
Banking, Insurance, Hotel & Tourism, IT.
v Mining of titanium
keeping India's civilian nuclear ambitions in mind upto100%,a mineral which is
abundant in India.
v single Brand product
retailing where Foreign Investment up to 51% is permitted with prior Government
approval. Major debate going on about approving FDI in India’s Retail sector.