FDI in India Advantages and Disadvantages

Overview

First of all, FDI means Foreign Direct Investment which is mainly dealings with monetary matters and using this way they acquires standalone position in the Indian economy. Their policy is very simple to remove rivals. In beginning days they sell products at low price so other competitor shut down in few months. And then companies like Wall-Mart will increase prices than actual product price.
They are focusing on national and international economic concerns. There are four main working pillars of FDI. They are financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments.
There are two types of FDI, one is inward FDI and second is outward FDI. Ongoing news suggests that largest retailer Wal-Mart has demanded for 51% of international dealings in FDI in Indian markets which had called nationwide strike. From positive and negative aspects FDI has its own advantages and disadvantages.

Must watch: http://www.youtube.com/watch?v=1SqahldWGvk

Advantages

  • Increase economic growth by dealing with different international products
  • 1 million (10 lakh) employment will be created in three years - UPA Government
  • Billions of dollars will be invested in Indian market
  • Spread of import and export business will happen with different countries
  • Agriculture related people will get good price of their goods

Disadvantages

  • Will affect 50 million merchants in India
  • Profit distribution, investment ratios are not fixed
  • An economically backward class person suffers from price raise
  • Retailer faces loss in business
  • Market places are situated too far which increases traveling expenses
  • Workers safety and policies are not mentioned clearly
  • Inflation may be increased
  • Again Indians become like slaves because of FDI in retail sector as the policies will be dictated by the foreign company 
---------
In detail:

Definition

Foreign direct investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased. TheOrganization of Economic Cooperation and Development (OECD) defines control as owning 10% or more of the business. Businesses that make foreign direct investments are often called multinational corporations (MNCs) ormultinational enterprises (MNEs). A MNE may make a direct investment by creating a new foreign enterprise, which is called a greenfield investment, or by the acquisition of a foreign firm, either called an acquisition or brownfield investment.

Advantages and Disadvantages: A Matter of Perspective

In the context of foreign direct investment, advantages and disadvantages are often a matter of perspective. An FDI may provide some great advantages for the MNE but not for the foreign country where the investment is made. On the other hand, sometimes the deal can work out better for the foreign country depending upon how the investment pans out. Ideally, there should be numerous advantages for both the MNE and the foreign country, which is often a developing country. We'll examine the advantages and disadvantages from both perspectives.

Advantages for MNEs

  • Access to markets. FDI can be an effective way for you to enter into a foreign market. Some countries may extremely limit foreign company access to their domestic markets. Acquiring or starting a business in the market is a means for you to gain access.
  • Access to resources. FDI is also an effective way for you to acquire important natural resources, such as precious metals and fossil fuels. Oil companies, for example, often make tremendous FDIs to develop oil fields.
  • Reduces cost of production. FDI is a means for you to reduce your cost of production if the labor market is cheaper and the regulations are less restrictive in the target foreign market. For example, it's a well-known fact that the shoe and clothing industries have been able to drastically reduce their costs of production by moving operations to developing countries.

Advantages to Foreign Countries

  • Source of external capital and increased revenue. FDI can be a tremendous source of external capital for a developing country, which can lead to economic development.
For example, if a large factory is constructed in a small developing country, the country will typically have to utilize at least some local labor, equipment and materials to construct it. This will result in new jobs and foreign money being pumped into the economy. Once the factory is constructed, the factory will have to hire local employees and will probably utilize a least some local materials and services. This will create further jobs and maybe even some new businesses. These new jobs mean that locals have more money to spend, thereby creating even more jobs.
Additionally, tax revenue is generated from the products and activities of the factory, taxes imposed on factory employee income and purchases, and taxes on the income and purchases now possible because of the added economic activity created by the factory. Developing governments can use this capital infusion and revenue from economic growth to create and improve its physical and economic infrastructure such as building roads, communication systems, educational institutions and subsidizing the creation of new domestic industries.
  • Development of new industries. Remember that a MNE doesn't necessary own all of the foreign entity. Sometimes a local firm can develop a strategic alliance with a foreign investor to help develop a new industry in the developing country. The developing country gets to establish a new industry and market, and the MNE gets access to a new market through its partnership with the local firm.
  • Learning. This is more of an indirect advantage. FDI exposes national and local governments, local businesses and citizens to new business practices, management techniques, economic concepts, and technology that will help them develop local businesses and industries.

Disadvantages to MNEs

  • Unstable economic conditions. Much of FDI takes place in the developing world, which is just developing its economic systems. The market conditions in the developing world can be quite unstable and unpredictable.
  • Unstable political and legal system. A bigger problem may be unstable or underdeveloped political and legal systems. A company may have to deal with a corrupt or unstable political system. Additionally, the legal system may be underdeveloped. Contracts and property rights may not be easily enforced, for example.

Disadvantages to the Foreign Countries

  • Race to the bottom. Some have argued that developing nations are forced into a race to the bottom regarding labor and regulations in order to attract foreign investors who seek cheap labor and non-existent or lackadaisical regulation to maximize its profit potential. Such a race could result in severe environmental damage to the foreign country, the stripping of natural resources and abusive labor practices that are not acceptable in the developed world.
  • Crowd out local development. Foreign investment may also crush the local competition, resulting in problems in long-term economic development.
  • Undue political influence. MNEs can theoretically exert a huge amount of power in a developing country because of the capital it brings into the country. This influence may be compounded if a corrupt government is in place willing to acquiesce to deals that may not be in the best interests of its citizens
Ref

Comments