Essay about FOREIGN DIRECT INVESTMENT

English_Master August 8, 2016 No Comments

FOREIGN DIRECT INVESTMENT

Definition

Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. The foreign direct investment generally encompasses the transfer of technology and expertise, and participation in the joint venture and management. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled work forces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

The foreign direct investment is profitable both to the country receiving investment (foreign capital and funds) and the investor. For the investor company, FDI offers an exclusive opportunity to enter into the international or global business, new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities. The host country receives foreign funds for development, transfer of new profitable technology, wealth of expertise and experience, and increased job opportunities.

An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.

Advantages of FDI

The free flow of capital across national borders has been favoured because it allows capital to seek out the highest rate of return. Unrestricted capital flows may also offer several other advantages. First, international flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. Second, the global integration of capital markets can contribute to the spread of best practices in corporate governance, accounting rules and legal traditions. Third, the global mobility of capital limits the ability of governments to pursue bad policies.

In addition to these advantages, which in principle apply to all kinds of private capital inflows, the following gains to host countries from FDI can take several other forms:

  • FDI allows the transfer of technology – particularly in the form of new varieties of capital inputs – that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.
  • Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.
  • Profits generated by FDI contribute to corporate tax revenues in the host country.

FDI in India

The steadily growing one of the major economies of the world, India has been enjoying huge and regular FDI from diverse investors of all around the world for the last few decades. According to a recent UNCTAD (United Nations Conference on Trade and Development) Survey, India has emerged out as the second most famous and popular destination in the world for FDI, after China. Majority of this foreign direct investment in India is made in the sectors of telecommunication, computer hardware and software, construction and services, by investor companies from USA, UK, Singapore, Mauritius, etc.

The foreign direct investment in India can be made in a variety of ways and in a rather wide range of economic sectors. Worldwide prominent Global Jurix has been helping individuals, associations, private and public companies/organizations, and institutions of diverse sectors for making their cherished FDI in India, through both the automatic and government routes, for a long time.

Conclusion

Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. But recent work also points to some potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country’s total capital inflows may reflect its institutions’ weakness rather than their strength. Though the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI. Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign.