Foreign Direct Investment

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.