The advent of globalisation has brought about dramatic changes in the business world, in which FDI (foreign direct investment) has played a crucial role in the economy for any country in the world. In my perspectives FDI is the process by which the resident of one country acquire more than 10% ownership of assets for the purpose of taking managerial decision about manufacturing , selling and other productive activities of an organisation in another nations. This essay intend to analyse the classifications of FDI, pros and cons of FDI, and governmental regulatory policies for FDI in India in the forthcoming paragraphs.
To begin with the most preferable four different categories of FDI through which investors can invest: the first one is Horizontal FDI. In this type, investor expand their operation in another firm located in a different nations where goods produced by both companies are similar. For example, the giant Indian automobile manufacturer Tata Motor may invest in or purchase the British company Ford, which also produce automobile vehicles as TATA Motors does.
The second one is vertical FDI. This occurs when an investment is made through typical supply chain, which may or may not necessarily belong to the same firms. For instance, the Swiss coffee producer Nescafe may wish to invest in an Indian grocery brand.
The third one is conglomerate FDI. When investments are made in two different industries having completely unrelated goods. For instance, the Indian retailer Reliance Industries Limited may invest in Hyundai Motor the South Korean automobile manufacturer.
The fourth sorts of foreign direct investment is platform FDI. In this, business expands into a foreign nations, but the manufactured product are exported to another third country. To cite an example, the Chinese laptop brand HP (Hewlett-Packard) set up a manufacturing plant in India and export to another countries of the world.
Now, considering the advantages of FDI, foremost one is economic development stimulation. Every country requires a capital for its economic growth and fund can’t be raised alone from its internal sources. Therefore, FDI brings external capital for a developing country and also create a more conductive environment not only for investors but also for local industries.
Another benefit is to increase the employment ratio. An investors build new organisations in the targeted country and create new opportunities. This ultimately leads the income and enhances the buying power of local populations. A giant multinational company, for example, constructed in a small developing nation then investing industry typically have to create some local employment and use the raw materials and local equipment of that particular region. This will results in new jobs and eventually foreign money being pumped into the economy.
Furthermore, FDI surges tax revenues. With increasing an economic activities will results in additional tax earnings. Continuing from the last example; after a firm has been constructed using the fund provided by FDI not only tax will be applicable on the product manufacturers in the country, but also imposed on employees income and purchases. This significant tax revenues can be useful for improving better infrastructures such as building new roads, communication systems, Educational Institutes, and subsidising new domestic factories. Moreover, along with the foreign capital, FDI brings new technologies, managerial and entrepreneurial skills, marketing strategies, and promote competition by suppressing domestic monopolies for providing quality products to consumers.
However, FDI have few lurking drawbacks too. Considering the disadvantages, top most is destruction of small local entrepreneurs and cottage industries. Due to lack of appropriate technologies and lower budget, small business undertaker cannot be withstand or survive in tough competition with large multi-national companies. A good example would be, because of soft drinks provided by MNCs, small entrepreneurs in the field of juices and beverages had to suffer.
Second limitations of FDI is an inflation in the economy. As venture capitalist lucratively participates more and more in overseas, then the home country loses out domestic capitals. This will have an adverse effect on its GDP and employment that ultimately connected with the economy. During the year 1998, to cite an example, the south-east countries experience a big financial crisis only due to the presence of FDIs. With inflation contributed by them, exports have declined and resulting in major Pitfalls had been observed in the value of national currency. Contribution to the pollution, Political corruption and cultural erosion are another demerits of FDI.
Discussing the listing regulatory policies made by Indian government for FDI, NIP-1991 (New Industrial Policy-1991) is amongst them. This policy attempted to liberalise the financial wealth by removing bureaucratic hurdles in industrial growth, as well as entry of MNCs in the nation become easier. Moreover FEMA-1999 (Foreign Exchange Management Act) made for offence related to foreign exchange civil offences. In this at all the cases were investigated under the administrative control of Department of Revenue by enforcement directorate.
Nevertheless, in recent times many activities have been transferred to unrestricted zones. In that 100% FDI is permitted instead of foreign investment cap in specified industrial sectors. Foreign ownership are permitted in different fields such as up to 20% in banking sector, up to 26% in Broadcasting service, up to 49% in Defence Sector, up to 51% in multi-brand retail trading, and up to 74% in Civil Aviation field, where all entry routes have to take government’s permission.
To conclude, an increasingly globalised economy, FDI is an extremely financially rewarding concept to jump to a new level of success by investing into another country’s economy or buying into a foreign company as an expansion of businesses. By creating new foreign investment policies to raise the Industrial efficiency on international level may accelerate economy is the main purpose of the Government of any developing country. Paradoxically, demerits of FDI should not be overlook that can also be carry risks. So, it is highly important for investors to evaluate the economic climates of country before investing.
