Pros and Cons of FDI - Indian Economy Notes

When a firm invests in a business entity in another nation, it is known as a foreign direct investment (FDI). The pros and cons of FDI are always debated in the economy. The advantages of foreign direct investment considerably outweigh the drawbacks, which are almost insignificant. It is a crucial topic in the Economy syllabus for the UPSC Examination. The article below briefs the Pros and Cons of FDI followed by detailed explanations.

What is FDI?

• Any investment made into a country by a person or company based in another country is known as foreign direct investment.
• When a foreign corporation acquires ownership or a controlling stake in a company's shares in another country or launches a business there, it is referred to as foreign direct investment (FDI).
• It's not the same as a foreign portfolio investment, in which a foreign entity buys a company's stock.
• In FDI, the foreign entity has a say in the day-to-day operations of the company.
• FDI includes inflows of technology, knowledge, skills, and expertise/know-how in addition to monetary inflows.

Pros of FDI

• Foreign direct investment can enhance the economy of the country where it is produced, encouraging local firms while also improving the investor's environment. Emerging economies benefit from foreign direct investment.
• Technology spillovers, human capital creation, and international trade integration are all aided by foreign direct investment.
• Foreign expertise can help a country improve its current technical processes, and technology and process developments can help a country increase its domestic competitiveness.
• It also aids the growth of small businesses and the establishment of a more competitive business climate.
• All of these factors contribute to increased economic growth, which is the most effective strategy for developing countries to reduce poverty.
• Favorable balance of payments due to the inflow of foreign currency into the economy.

Cons of FDI

• Foreign direct investment and exchange rate restrictions may be detrimental to the investing country.
• It can sometimes stifle local investment by diverting resources elsewhere.
• Exchange rates are adjusted from time to time as a result of foreign direct investment, to the profit of one country and the harm of the other.
• From the investor's perspective, the foreign direct investment might be capital-intensive, making it high-risk or economically viable at times.
• Risk of interference by a foreign government due to signing different investment agreements such as bilateral trade agreements covering bilateral investments. The recipient country might be dragged to international courts whenever there is an issue with the foreign investors.

Conclusion

The most obvious reason to celebrate foreign direct investment is the creation of jobs. The sum of all the advantages gained from foreign direct investment can result in overall improvements in the host country's standard of life, as well as increased access to and competitiveness in global markets.

FAQs

MCQs

Question: Which of the following would include Foreign Direct Investment in India? (UPSC Prelims - 2012)

1. Subsidiaries of companies in India
2. Majority of foreign equity holding in Indian companies
3. Companies exclusively financed by foreign companies
4. Portfolio investment

Which of the statement(s) given above is/are correct?

(a) 1, 2, 3 and 4

(b) 2 and 4 only

(c) 1 and 3 only

(d) 1, 2, and 3 only

Question: Which of the following is greatly benefitted by the Foreign Direct Investment?

(a) Technology Spillovers

(b) Human Capital Creation

(c) International Trade

(d) All of the above