ABSTRACT
Foreign Direct Investment (FDI) is a vital concept among every industry, government bodies & authorities, and also has numerous motives for economic development in developing nations. The indoctrination of new economic policy in 1991 with other reforms such as liberalization resulted in the considerably remarkable rise of FDI in India during this period. Moreover, the dismissal of limiting and standardized methods or practices leads to a positive influence on FDI flow. The essay consists of an introduction and background about FDI, a review of the literature, an FDI scenario with different common types, determinants of FDI followed by its merits and demerits, and finally ended up with the conclusion. Moreover, FDI as a financial vehicle contributes towards the economic development in the host country and benefits the home county too. The synergist impact of FDI adds up to industrial development and the economic gaps. Thus, the authorities play a crucial role in the decision-making practices of acknowledging the FDI inflows and outflows in a country.
INTRODUCTION
Foreign Direct Investment is an essential driver in the development of economic growth of the host as well as the home country. In India, FDI is a significant and primary “non-debt” financial resource for economic development by creating and procuring skill enrichment, spillovers, employment opportunities, technology upgradation, etc. Numerous MNEs invest in India as their strategic move or entry stage for internationalization to expressly take the benefits of location-specific advantages such as cheap labor resources, factor endowments, and gains from government policies, etc. The multidimensional aspect also suggests that FDI helps to create employment, boost output, technological integration, and the formation of industrial clusters in the host nation.
Furthermore, in the post-reform or post-liberalization period, the significance of FDI in India drifts dramatically because of relaxing norms for most of the sectors of the Indian economy. In the current synopsis, FDI assists in accessing the global upgraded technology, forming a globally competitive industrial hub, large exposure & diffusion of merchandise, providing more personalized services, creation of employment opportunities.
WHAT IS FOREIGN DIRECT INVESTMENT (FDI)
Foreign Direct Investment is a long-term investment including lasting interest and administration by investor personnel in an organization situated in an economy other than that of the investor host country. In other words, FDI is an investment from a market player in one nation into a business in another nation with a significant degree of influence on the management. Thus, lasting interest differentiates FDI from FPI.
Usually, FDI exists when an investor operates their business pursuits in the foreign market space or procure assets in the foreign markets, including ownership or regulating affairs. FDI includes the initial cash outlays as well as all subsequent transactions that take place among domestic players and foreign affiliates. It is a pattern that addresses the possession of prolific assets – factors of production, etc., in the foreign marketplace. It ordinarily entails cooperation in the organization management, joint-venture pursuits, or in the alteration of technology and expertise. It is a broad example of the shift of international factors.
Presently, among the developing nations, India has the most liberal mechanism of FDI that promotes the domestic players while putting certain limitations on foreign players. Consequently, it limits the proportion of ownership an MNE can possess in Indian corporations. Moreover, FDI is an eminent dimension for inducing economic growth by becoming a global integral part of national development strategies.
FDI is an essential component of a nation’s financial accounts. It is more valuable for a country regarding FPI due to the occurrence of “Capital Flight” in case of depression or other economic crisis. However, FDI is more durable and significantly useful in inadequate economic conditions. Also, it is a source of income generation in the form of interest or gain in the host country.
Generally, the FDI flows take place in two ways: The Outward Flows and The Inward Flows. These flows potentially increase the interdependency and integration of national economies.
The Outward Flows reflect financial events derived from the difference of the increase in the investment that investors show in organizations in a foreign marketplace (ex- reinvestment of earnings) and the decrease in the investment that investors show in organizations in a foreign marketplace (ex- sales of equity).
The Inward Flows reflect financial events derived from the difference of the increase in the capital investment that foreign investors show in organizations in a domestic marketplace and the decrease in the investment that foreign investors show in organizations in a domestic marketplace.
REVIEW OF PREVIOUS STUDIES
The range of studies and literature sources reflects the rise in interest in the approaches related to FDI, the integral role of investments in the economy, and the correlation of economic growth with FDI in India. Moreover, the interdependency of India on the external sources of finance leads to the low grade of capital formation within the nation and, the domestic resources are not able to fulfill the present needs.
India is now lying at the leading stage concerning the FDI inflows and can attract as much as a possible capital injection in the numerous manufacturing sector by liberalizing the policies and other norms. Moreover, India would need to overcome both domestic as well as external economic challenges to take advantage of these opportunities.
DETERMINANTS
FDI in a country is majorly being influenced by Socioeconomic, Political, and Human factors. The economic factors consist of economic stability, prospects of market growth, economic overheads, and policies related to investment, trade, wages, financial markets, the grade of government expenditure and industrial regulations, etc. FDI flows in a country are also determined by tax and non-tax incentives such as tax holidays, duty-free import of capital equipment, intermediates, and raw materials, relaxation in income tax, capital gain tax, and exemption from withholding taxes, ownership rights, patent protection, and easy investment approvals.
The quality of human capital formation is also an important determinant of FDI flows. It relies on the cost of production depending on the objective as to resource seeking, market seeking, and efficiency-seeking benefits of FDI flows.
Furthermore, the location and culture, efficiency, and profits also influence FDI flows. The drivers of FDI flows are innovation-driven in Hong Kong and Taiwan, investment-driven in Singapore and Malaysia, and factor-driven in Thailand, Indonesia, and the Philippines.
MERITS OF FDI
Some of the significant merits of the FDI in India are as follows:-
- Access to a larger marketplace.
- Tax relaxations on different lands of law.
- Availability of cheap skilled as well as unskilled labor.
- A rapid rise in employment and business opportunities.
- Economic development and integration.
DEMERITS OF FDI
Some of the significant demerits of the FDI in India are as follows:-
- A threat to domestic corporations.
- Exchange rate fluctuations and risk.
- Leads to cultural differences.
- Dynamic political environment.
- Increase in Inflation.
CONCLUSION
The essay has reflected that for the sake of sustained economic growth and development, India needs FDI as a strategic move for investment. FDI is necessary for the creation of jobs, expansion of existing manufacturing industries, and the development of new ones. It is also required in numerous long term projects.Although India is not the most preferred destination of global FDI, there has been a generous flow of FDI in India since 1991. It has become the 2nd fastest growing economy in the world. India has signed several bilateral and multilateral trade agreements with developed and developing nations.
On the whole, it can be concluded that the FDI inflows have the potential to give a boost to the Indian economy, but the flow of FDI should be high enough for a large economy like India. Given that India has a huge domestic market that is fast-growing, there is every reason to believe that continued reforms resulting in improvement of institutions and economic policies. It requires a sophisticated and sustained decision on the policymakers to lure more foreign firms into India for positive effects on the Indian economy in the future.
By ADARSH AGRAWAL, Haridwar
