Lesson 9: Motives for Foreign Direct Investment

FDI

Its definition also encompasses the international movement of elements that are complementary to capital - such as skills, processes, management, technology etc.

FDI

It is not restricted only to international movement of capital

FPI

It means only equity infusion, and does not imply the establishment of a lasting interest.

FPI

The investor purchases equity of foreign companies.

Greenfield investments

organisation creates a subsidiary concern in another country and builds its business operations there from the ground up

Greenfield investments

provide the highest degree of control to the organisation. It can construct the production plant as per its specifications, employ and train human resources as per company standards, as well as design and monitor its operational processes.

brownfield investments

wherein an organisation expands by way of cross-border mergers, acquisitions and joint ventures - by either leasing or purchasing existing facilities for its production.

United Nations Conference on Trade and Development

UNCTAD

1. Increased Employment and Economic Growth

2. Human Resource Development

3. Development of Backward Areas

4. Provision of Finance & Technology

5. Increase in Exports

6. Exchange Rate Stability

7. Stimulation of Economic Development

8. Improved Capital Flow

9. Creation of Competitive Market

There are many ways in which FDI benefits the recipient nation:

Increased Employment and Economic Growth

Creation of jobs is the most obvious advantage of FDI. It is also one of the most important reasons why a nation, especially a developing one, looks to attract FDI. Increased FDI boosts the manufacturing as well as the services sector. This in turn creates jobs, and helps reduce unemployment among the educated youth - as well as skilled and unskilled labour - in the country. Increased employment translates to increased incomes, and equips the population with enhanced buying power. This boosts the economy of the country.

Human Resource Development

This is one of the less obvious advantages of FDI. Hence, it is often understated. Human Capital refers to the knowledge and competence of the workforce. Skills gained and enhanced through training and experience boost the education and human capital quotient of the country. Once developed, human capital is mobile. It can train human resources in other companies, thereby creating a ripple effect.

Development of Backward Areas

This is one of the most crucial benefits of FDI for a developing country. This in turn provides a boost to the social economy of the area.

Provision of Finance & Technology

Recipient businesses get access to latest financing tools, technologies and operational practices from across the world. Over time, the introduction of newer, enhanced technologies and processes results in their diffusion into the local economy, resulting in enhanced efficiency and effectiveness of the industry.

Increase in Exports

Not all goods produced through FDI are meant for domestic consumption. Many of these products have global markets.

Exchange Rate Stability

The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign exchange.

Stimulation of Economic Development

This is another very important advantage of FDI. FDI is a source of external capital and higher revenues for a country. When factories are constructed, at least some local labour, materials and equipment are utilised. Once the construction is complete, the factory will employ some local employees and further use local materials and services. These factories will also create additional tax revenue for the Government, that can be infused into creating and improving physical and financial infrastructure.

Improved Capital Flow

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.

Creation of a Competitive Market

By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.