- According to the Department of Industrial Policy and Promotion, foreign direct investment (FDI) into India reached highest point during the current fiscal year.
- India needs large investments—foreign as well as domestic—to meet its vast requirements.
- Is Foreign Direct Investment (FDI) a secure financing (short term gain)or a long term pain?
FDI is virtually a secure financing why?
- Foreign Direct Investment (FDI) mostly goes into setting up of plants,equipments and factories which eventually produce tradable goods that generate foreign exch resources.
- Thus over a time the current account balance of the country stabilizes.
Practically it could be different from theories:
- FDI inflows could go after the domestic market, instead of being export-oriented
- Concentrate in the relatively more profitable, non-tradable sector, leading to little or no transfer of technology.
- It may boost consumption and imports which eventually leads to trade deficits instead of surpluses
- FDI-associated income and principal payments could rise over time.
- If export earnings are not enough to prevent any, or a combination of these features
- current account imbalance could actually worsen instead of improving.
What is FDI?
- Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India.
- Foreign companies invest directly in fast growing private Indian businesses to take benefits of cheaper wages and changing business environment of India.
Positive impacts of FDI on home country:
- Improve both economic and political power of home country
- Increase profits thanks to the location advantages of the recipient country
- Enter new market, extend the product life cycle
- Overcome trade barriers and enjoy investment promotion
- Enhance diversification when the political situation at home is unstable
- Improve market structure and toward better international labor diversification
- Improve in the balance of payments as a result of the inward flow of foreign earnings ( repatriation or profits )
- FDI positively affects home-country export performance through direct effects on trade as well as indirect effects through various channels
- Positive employment effects when the foreign subsidiary creates demand for home-country exports
- Benefits from a reverse resource-transfer effect
- The outward FDI also leads to creation of new job market with great expertise and necessary skills
- The home country is exposed to create new market share and it is liable to create many in the future