Foreign Direct Investments (FDIs)

What is FDI?

The full form of 'FDI' is a 'Foreign Direct Investment'. It basically means that a foreign company from one country invests a sum of money in another company. That is basically it. What is in a name, you ask? Each tenet of the name amalgamates to define what it basically means: ‘foreign’, ‘direct’ and ‘investment’.

Basically, companies of foreign countries (like the UK) acquire assets in host countries (like India) in different sectors, such as retail, insurance, pension, industries, infrastructure and banking. Since it is relatively more durable than other investments, it is more useful to a home country.

Are they advantageous?

Yes, they are. From here on, let us consider India to be the host country and the UK to be the foreign one:

  1. They contribute to industrial and economic development: FDIs help modernize Indian industries and for growth of production activities in India, leading to growth in national income and exports. This is due to the injection of money. They’re also useful in the infrastructure sector for creating a proper base for rapid economic and industrial growth.
  2. They help generate employment: Since they are promoting economic activities, FDIs lead to massive employment opportunities.
  3. There is more money if there is more potential: India needs economic growth and so, the liberalization of India will lead to an increased inflow of foreign capital. It’s kind of a chicken-and-egg situation with the cause-and-effect. If there is more liberalization, there is probably more inflow of foreign capital. On the other hand, if there is more inflow of foreign capital, there is more incentive for liberalization. It’s the 21st century, so either of them could make the first move without hesitation.
  4. There is an import of foreign technology and professional skills: FDIs also render an inflow of updated technology and new professional skills from the UK to India. Due to technological advancement, Indian industries become globally competitive, improving the quality of Indian products and reducing costs and thus, improving export performance and balance of trade position.
  5. They promote exports: Through the development of export-oriented industries and technology upgrades, FDIs help Indian industries to capture foreign markets due to global competitiveness and hence, will lead to growth and diversification of exports. Those are a bunch of words that the finance gods decided to string together to make the whole thing sound cool. Basically, when foreign companies inject money into domestic companies, it helps the domestic companies to be better equipped to be competitive while playing the field by helping equate the start line, which helps them grow.
  6. They generate higher revenue: They help the government by giving them higher revenue through duties and taxes.

What is the downside?

All investments have risk and just because they are foreign, does not mean they are safe. Here is why FDIs can have some downside on both the domestic and foreign countries.

  1. There is a reduction in domestic investment: FDI is more lucrative to the host country, so the domestic country loses out in domestic capital. So, while this basically creates employment, it kind of creates a barrier to the circulation of money within a country. 
  2. There is uncertainty in government policy: Government policies are unpredictable and could negatively affect FDI. For example, it is believed that after Brexit, FDI inflow would reduce in the UK.
  3. Resources can get exploited: When the host country is developing or underdeveloped, the investors probably have the tendency to exploit the natural, as well as human resources without being affected by the long-term effects it could have on the country. For example, labour can be underpaid or industries can be set up by deforestation. While this is favourable for the investor, this poorly affects the host country. It is the downside of capitalism.
  4. There are barriers: Due to differences in culture and preferences of consumers, there may be many unknown risks, even if the investors are experienced at what they do.
  5. There may be political corruption: Since foreign investors are investing in a host country, there are possibilities of political corruption, because of FDI’s influence on the political setup for achieving personal gains. For example, the Lockheed Scandal in Japan cost $1.3 billion due to bribery of Japanese officials by US investors.

Why is FDI better than regular domestic investment?

The basic premise of FDI usually is that a developed country is investing resources into a developing country and to elevate its status by helping it grow economically. It also strengthens relations between the two countries, when such investments are made. India usually provides a red carpet treatment to foreign investors, as it speeds up India’s development process and agricultural development, as well as helps the country undertake large projects relating to transport, power generation and industrial growth. FDI inflow is important, as it is a common solution key to socio-economic problems.

There is, of course, a quid pro quo here. The company from a developed country gets to invest in a developing country and thus, gets to cut costs and maximize profits. The developing country gets to have increased employment rates, technological advancement and industrial development. India is considered a favoured destination for FDI because the government policy for FDI has been considered fair and liberal.

Under new provisions, the government has relaxed FDI norms in the defence, insurance and construction sectors to boost manufacturing and spur growth. In 2019, it was reported that Apple will be investing a billion dollars in India. That’s nice and seems to be working out well for both parties. Sometimes, in the end, it doesn’t always work out, and that is simply a reminder that no matter what, any investment is just that - an investment and will always bear a certain amount of risk and unpredictability.

One response to “Foreign Direct Investments (FDIs)”

  1. […] the years our own country has introduced various schemes to increase international trade and foreign direct investment. Plans such as made in India are one such example. Thus it becomes very important to understand why […]

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