Foreign direct investment (FDI), as the name says is an venture into a company by a financier from an abroad country for which the foreign financier has control over the company acquired. As per the Organization of Economic Cooperation and Development (OECD), control means being the owner of more than ten percent of the total shareholding of the company. Those companies that make FDIs are named as Multinational companies (MNCs). An MNC can either invest directly by formation of a new company in itself in another country which is termed as Greenfield investment or through the purchasing of another firm which is situated abroad, termed as brownfield investment (Amadeo, 2017).
The importance of FDIs cannot be under-estimated as they play a crucial role in the development of developing as well as emerging economies. These countries are of the view that in order to develop their home companies, they are in dire need of high end investors who would invest money as well as their experience would help them to inflate their sales across the borders as well. Although the developed economies also feel the need for FDIs, yet the low income countries stand to gain more since there economies lack expertise which these developed economies already posses. In this essay, there would be a description of the advantages and disadvantages of foreign direct investment, with specific focus upon India being a low income country and how the country has benefitted as well as loss due to such an investment.
India falls within the category of a developing economy and hence has gained a lot due to the FDI that has happened. FDI not only is advantageous for the world economy but also for the people who are investing their money and the country who is receiving the money as well. The developing countries such as India which welcome the FDI can easily trade in the global market. Developing and low income economies generally have to face a lot of limitations when it comes to entering the foreign market, but such investments help them to deal with those restrictions easily.
The situation for drawing volumes of FDI within India needs an examination of the determinants and implication of FDI in the Indian framework. The country has been able to develop its infrastructural facilities post the FDI entered the country. Due to the same the production of the capital goods have increased tremendously. Further to this, India is a country which lacks behind technology, until the FDI entered. It helped bring in newer technologies. India is mainly termed as an agricultural country and hence during the reign of Prime Minister Manmohan Singh,, FDI helped to formulate a new revenue model for the farmers. The technology which was being introduced would have helped the marketing of the agricultural produce. Due to the same, the retail chain led by Wal Mart was allowed to set up stores in India which would have benefitted the farmers as well (Chaturvedi, 2012).
FDI also ensures that there is a steady flow of capital within the country, more importantly in the key and core segments. The country faces a limitation with regards capital both in monetary terms as well as in terms of raw materials. The said space is expected to met up with the help of FDI which would in turn ensu-re development of the economy as well. Post the economic reforms in the year 1991, the FDI surroundings in India has witnessed a dramatic change. There has been adequate stability and effective formation of various financial institutions specifically the money and government securities market. There has been a sudden surge in the incoming of the foreign banks within the countries, setting up there branches all around the country and also the domestic banks are seen trying their luck in the foreign waters (Anitha, 2012). The country’s political system has welcomed the FDI with open arms so much that they offer various investment schemes which are attractive along with policies which are acceptable by them. To the surprise, the country seems to offer one of the most moderate FDI establishment in Asia.
The next advantage which a FDI offers to a country such as India which is low income category is the employment opportunities. India is a country which has one of the highest levels of poverty due to increased population and lack of work. However, with the introduction of FDI, the service sector has faced a boost which has provided a wide scope for the employment to many. The unemployed work force comprising of the educated lot has to some extent due to FDI has decreased since they were able to provide employment to some of the Indian workers (Wei & Balasubramanyam, 2004).
Another very important role FDI had to play for India was the exchange rate. The Reserve Bank of India has been successfully ensuring stability in the exchange rate with the help of exchange control measures. However the same is possible if the supply of foreign investment is continuous. The country has been able to achieve the same and presently RBI is sitting in a very comfortable position wherein the foreign exchange reserve is that of more than one billion dollar (Dalal, 2011).
Last but not the least, the FDI has been beneficial in the upliftment of the backward parts of the country. These FDIs have been able to nurture such areas by setting up manufacturing units due to which these areas are now termed as industrial units. The most striking example of the same is that of Hyundai, a South-Korean Multinational has set up its car unit in Sriperumbadur in India (Sekar, 2015). Further to this, India is one such country in Asia which has a large number of natural resources which was being wasted all these while till the FDI stepped in and used it for the good such as the Saint Gobain glass company and the manufacturing of paper and newsprint (Business Maps of India., 2012).
Thus the FDI, has been very advantageous for the country and has helped in the upliftment of the country from a low income to a decent position although a lot more is yet to be contributed by the FDI which would help India be termed as developed and not emerging.
Even though the advantages FDI has to offer for the development of the economy of India is undoubtedly appreciable, yet it has some disadvantages as well due to which may oppose the entering of FDI. First and very prominent loss that a country faces is the loss of the domestic industries. Some of the goods which were produce by the local markets and other domestic small scale industries had to liquidate their businesses due to the ambush of the goods supplied and introduced by the FDIs, such as the multinational soft drinks companies like PepsiCo (Ramesh & Packialakshmi, 2014). Thus in short, FDI leads to disappearance of small companies.
Another very striking disadvantage of FDI, which is not paid heed by all is the fact that they prefer to shift their pollution led industries in India simply to set their own country pollution free. The main sufferer is the automobile industry where the pollution level is the highest. Further to this, even though FDIs ensure stability in the exchange rate, yet there are times when the foreign direct investment only become the main culprit for the crisis related to exchange. The year 2000, the Southeast Asian Countries had to face exchange crisis due to FDIs. They had been the main reason behind the inflationary index in India in the year 2000 followed by a dip in the export which led to a fall in the domestic currency. Hence too much of reliance on FDI can also be critical for the health of an economy of a country like India specially which is low income country (Singh & Giri, 2016).
India is a land of cultures but the advent of foreign direct investment, the country had to face a cultural shock. The localised crowd found it difficult to adapt the new culture bought in by the alien country. India is a country where culture plays a pivotal role and people have always preferred to live in joint families and maintaining their traditions during the festivals etc. However, FDI has had a very devastating implication on the Indian culture where the people have changed their styles of dressing wearing clothes of the foreign culture and ignoring ones own culture and traditions. The joint family concept is broken and the concept of nuclear families have crept in due to the increased FDIs thereby hitting the concept of togetherness and unity which used to be the base of the country at some point of time.
Not only this, the biggest disadvantage that FDI has caused to India is the political corruption which was not at this stature pre the entrance of the foreign direct investment. They have ended up bribing the high officials in the political hierarchy simply to fulfil their investment motives. India had never been a hub for drugs but for the FDIs who have bought in such scandalous things too(Malhotra, 2014).
Apart from the above, inflation one of the major determinants of the economic growth of a country, the FDIs have also made a contribution in the increase of inflation, although the same is minimal. It stated that the relationship between FDI and inflation in India keeps on changing such as during the period 2008-2012, the relationship was negative but the same subsequently improvised and now there is a one percent increase in inflation due to which there is an increment of 0.20 percent in the FDI (Singh & Giri, 2016).
Lastly, India stands in a disadvantaged position with regards introduction of the Trade Related Intellectual Property Rights and Trade Related Investment Measures which has limited the production of many goods in some countries where FDIs are present. Such as India is barred from manufacturing some medicines till they pay royalty to the country to the originating country. The same concept is applicable to seeds as well needed for agriculture. Thereby the developing nations are forced to import the goods or manufacture them via the FDIs at a higher price (Accountlearning.com., 2017).
Thus on a concluding note, it can be easily understood that although FDIs are one such way to invite money within a country which would help the country develop industrially as well as economically, yet it has various disadvantages too to offer. Destruction of the domestic industry is not something which is in favour of the economic development, destruction of the age old culture, contribution in the trade deficits all these should be crucially be dealt by the political administration. Although they are also corrupted but the corruption should be kept at a pace which would ensure to reap out the advantages that FDI has to offer in a country’s economic development such as the backward areas are given an opportunity to develop, the employment opportunities are created and there is stability in the foreign currency as well.
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