FDI Development, Globalization (Business Paper)

One Striking feature of the world economy in recent decades has been the growth of foreign direct investment (FDI), or investment by transnational corporations or multinational enterprises in foreign countries in order to control assets and manage production activities in those countries.

What FDI acually is?

Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise.

“Direct investment excludes investment through purchase of shares.”

There are two types of FDI:
1. Inward foreign direct investment
2. Outward foreign direct investment
Foreign direct investment (FDI) provides a major source of capital which brings with it up-to-date technology. It would be difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad, since the transfer of technology to firms with no previous experience of using it is difficult, risky, and expensive. Foreign direct investment has grown at a phenomenal rate since the early 1980s, and the world market for it has become more competitive. Developing countries are becoming increasingly attractive investment destinations, in part because they can offer investors a range of “created” assets.

The Role of FDI in Developing Countries

Foreign direct investment in developing countries has a long history. It has fluctuated over time, as investors have responded to changes in the environment for investment, including government policies toward foreign direct investment and the broader economic policy framework. FDI in developing countries has flowed mainly into manufacturing and processing industries. It has traditionally been concentrated in a small group of countries, which partly reflects the size of their economies and partly their attractiveness as a location for FDI. In the past, attractiveness has been closely linked to possession of natural resources or a large domestic market. With the shift toward globalized production and trade, competitiveness as a location for investment and exporting has become the main determinant of attractiveness.
FDI has also reached the poorest countries. Although the actual amounts invested are generally low, reflecting the small size of their economies, FDI flows relative to GDP in poorer countries are as high as in richer countries.
For a long time, FDI came almost exclusively from the major industrial countries. Recently, the sources of FDI in developing countries have widened, and many developing countries have emerged as sources in their own right, particularly for their own regions.

“Regional links are also important for FDI from developed economies.”

Policies have also played a role in this increase. India is the next largest developing country after China (measured by population. Since both are populous, low-income countries, differences in population or income level do not explain this disparity. Prior to 1982, India had received more FDI in relation to GDP than China. What changed was China’s policy stance toward foreign investors.
Since 1992, however, India’s steps toward economic liberalization have also had a positive impact on FDI flows and are indicative of its future potential. FDI is not just attracted to the economic giants, with large domestic markets. Countries of all sizes at different stages of development from all over the world have attracted FDI worth more than 5 percent of GDP, including Czech Republic and Malaysia. What they had in common was an evolving policy framework that was attractive to foreign investors.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:
1. Avoiding foreign government pressure for local production.
2. Circumventing trade barriers, hidden and otherwise.
3. Making the move from domestic export sales to a locally-based national sales office.
4. Capability to increase total production capacity.
5. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;

Foreign direct investment in India

A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has – in a lot of ways – enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.

Conclusion

Recognizing that FDI can contribute to economic development, all governments want to attract it. Indeed, the world market for such investment is highly competitive, and developing countries, in particular, seek such investment to accelerate their development efforts. With liberal policy frameworks becoming commonplace and losing some of their traditional power to attract FDI, governments are paying more attention to measures that actively facilitate it. Still, the economic determinants remain key. What is likely to be more critical in the future is the distinctive combination of locational advantages and, especially, created assets that a country or region can offer potential investors.
Finally the recent boom of FDI not withstanding, capital formation continues to be a national phenomenon in the first place. Strongly positive growth effects of FDI cannot be taken for granted. FDI is superior to other types of capital inflows in some respects, particularly because of its risk-sharing properties, but not necessarily in all respects. The nexus between FDI and overall investment as well as economic growth in host countries is neither self-evident nor straightforward, but remains insufficiently explored territory