Friday, 20 December 2019

Unit 6: Foreign Direct Investment


Unit 6: Foreign Direct Investment

Foreign direct investment occurs when a firm invests directly in facilities to produce a product in a foreign country.

It also occurs when a firm buys an existing enterprise in a foreign country.

Liberalization is not the sole reason to attract FDI.
There are many other determinant of FDI, India may lagging there like demand conditions, factor conditions, supporting industries and firm strategy.

The benefits of FDI to a host country arise from resource-transfer effects, employment effects, balance of payments effects, and its ability to promote competition.

The costs of FDI to a host country include adverse effects on competition and balance of payments and a perceived loss of national sovereignty.

The benefits of FDI to the home (source) country include improvement in the balance of payments as a result of the inward flow of foreign earnings, positive employment effects when the foreign subsidiary creates demand for home country exports and benefits from a reverse resource-transfer effect.

A reverse resource-transfer effect arises when the foreign subsidiary learns valuable skills abroad that can be transferred back to the home country.

The costs of FDI to the home country include adverse balance-of-payments effects that arise from the initial capital outflow and from the export substitution effects of FDI.
Costs also arise when FDI exports jobs abroad.

Governments of developing nations are attracting FDI along with the technology and management skills that accompany it.

To attract multinational companies, governments are offering tax holidays, import duty exemption, subsidised land and power and many other incentives.

Multinational companies are a part of the Indian economy since the British period either Notes as a wholly owned subsidiary or as a joint venture.

They played a critical role in the development of the automobile industry, two wheeler industry, mining, petroleum, FMCG, etc.

The automatic route for FDI and/or technology collaboration is not available to those who have or had any previous joint venture or technology transfer/trademark agreement in the same or allied field in India.

Balance of payments: The difference between the payments made to foreign nations and the receipts from foreign nations in a given period.

Current account deficit: It is when a country’s government, businesses and individuals imports more goods, services and capital than it exports.

Flow of FDI: It refers to the amount of FDI undertaken over a given time period (normally a year).

FDI: Investment made by an investor of one country to acquire an asset in another country.

GDP: The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis.

Liberalisation: The removal of or reduction in the trade practices that thwart free flow of goods and services from one nation to another.

Portfolio investment: The purchasing of assets in the stock market of another country.

Stock of FDI: It refers to the total accumulation of foreign owned assets at a given time.

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