Foreign direct investment UPSC
Foreign Direct Investment (FDI) means an investment in another nation that involves some degree of control and participation in management. It corresponds to the investment made by an investor from one country to a foreign country.
It is not the same as portfolio investment, which is basically short-term and it does not require management control. Foreign trade and FDI closely belong to each other.
In developing countries like India, Foreign Direct Investment is vital in the natural resource sector, such as plantations, etc. Foreign production by Foreign Direct Investment is useful to replace foreign trade.
FDI is also determined by the income generated from the trade and regional integration programmes.
Foreign Direct investment is useful for the acceleration of economic growth. The essential imports are required to carry out the development activities, like capital goods, technical knowledge, raw materials, and even scarce consumer goods.
When the export earnings of a country are less than the import earnings, FDI is required to fill the trade gap.
Factors such as a shortage of Foreign exchanges, employment creation, and fastening the pace of economic development FDI are required.
Aim of Foreign Direct Investment
- Expansion of Sales.
- Resource Acquisition
- Competitive risk minimization
Fdi advantages and disadvantages
Foreign direct investment advantages and disadvantages are as follows
Advantages of FDI
- An increase in Foreign investment levels increases the income and employment of the receiving country.
- It helps in the transfer of technology.
- Brings revenue to receiving country in the form taxes, royalties, etc.
- Expansion, advancement in technology can be made using FDI.
- Professional management techniques received by the host countries.
- Foreign investments help to increase exports.
- Increases the competition and minimizes domestic monopolies.
- It helps in achieving national economic development by bringing capital and foreign exchange.
- It helps local companies to collaborate with international companies.
- Encourages Companies from Developing countries to invest in Low Developed Countries.
Disadvantages of FDI
- Foreign investors invest in areas where they more profit rather than the priority sectors.
- Unfavorable effect on Balance of Payment (BoP), there will drain foreign exchange via royalty, dividend, etc.
- Interferes with national politics.
- Unfair and Unethical trade practiced by foreign investors.
- It creates a weakening of local enterprises or companies.
- Creation of monopolies.
Major sector Benefitted from FDI
- Financial sectors such as Non-Banking and Banking.
- Insurance Sectors.
Sector Where FDI is Prohibited
- Nuclear Power
- Mining of copper, gold, diamond, gypsum, chrome, manganese, iron, etc
By Early 2017, the Government of India liberalized sectors that are prohibited earlier.
Some of the liberalized sectors for Foreign Direct Investments are:
- 49 % FDI permitted in Pension Funds(26% under automatic routes) and Insurance and defence.
- Railways, white label ATM, Medical devices manufacture, 100% FDI allowed.
- 100% FDI allowed in the marketing of food products produced and manufactured in India.