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What is FDI
An investment in a foreign country where the investing party (corporation, firm) retains control over the investment. A direct investment typically takes the form of a foreign firm starting a subsidiary or taking control of an existing firm in the country in question. The International Monetary Fund defines FDI as when one individual or business owns 10% or more of a foreign companys capital, Every financial transaction afterwards is considered by the IMF as an additional direct investment. If an investor owns less than 10%, it is considered as nothing more than an addition to his/her stock portfolio.

With only a 10% ownership, the investor may or may not have the controlling interest in the foreign business. However, even with just 10%, the investor usually has significant influence on the company's management, operations and policies. For this reason, most governmental agencies want to keep tabs on who is investing in their country's businesses This distinguishes it from an ordinary foreign investment. The flow of capital from the foreign investor to the company invested in becomes an FDI inflow. FDI has three parts - equity capital investment, reinvested earnings and intra-company loans.

Portfolio and direct investments

The main distinction of direct investments is that the investor retains control over the invested capital. Direct investments and management go together. With portfolio investments, no such control is exercised. Here the investor lends his capital in order to get a return on it, but has no control over the use of capital.

Foreign investments played a large role in international economy in the period leading up to the First World War; the largest being portfolio investments Great Britain provided more than 50% of the total international capital outstanding in 1914 of which 90% were of a portfolio type

FDI inflows: Global and by Group of Economies, 1980 2007, (Billions of dollars)

Source: WIR, 2008

International Investment

Motives of FDI Flow

Market Seeking FDI Market size and per capita income Market growth Access to regional and global markets Country specific consumer preferences Structure of markets Resource / Asset Seeking FDI Raw materials Low cost unskilled labour Skilled labour Technological, innovatory and other created assets Physical infrastructure EfficiencySeeking FDI Cost of resources, assets and other inputs Membership of regional integration agreement conductive to the establishment of regional corporate networks

Policy Framework for FDI

Economic, political and social stability Rules regarding entry and operations Standards of treatment of foreign affiliates Policies on functioning and structure of markets International agreements on FDI Privatisation policy Trade policy (tariffs and NTBs) and coherence of FDI and trade policies Tax policy

Business Facilitation for FDI

Investment promotion Investment Incentives Hassle costs and social amenities After investment services

Benefits of FDI
Increases the investment level and income and employment in the host country May increase the tax revenue of the government May facilitate transfer of technology May kindle a managerial revolution in the recipient country May enable the country to increase its exports and reduce import requirements May stimulate domestic enterprise by forward and backward linkages Increases competition and helps to break domestic monopolies May improve quality and reduces cost of inputs, that would benefit the domestic industry

Demerits of FDI

FDI tends to flow to the high profit areas rather than to the priority sectors. The technologies brought in by the foreign investor may not be adapted to the consumption needs, size of the domestic market, resource availabilities, stage of development of the economy, etc. Through their power and flexibility, the MNC may evade or undermine national economic autonomy and control, and their activities may be inimical to the national interests of particular countries. Foreign investment sometimes has unfaourable effect on the BOP Foreign capital sometimes interferes in the national politics. Foreign investors sometimes engage in unfair and unethical trade practices. Foreign investment in some cases leads to the destruction or weakening of small and traditional enterprises. Some times foreign investment can result in the dangerous situation of minimizing / eliminating competition and the creation of monopolies or oligopolistic structures. FDI can also potentially displace domestic producers by preempting their investment opportunities.

Costs of Foreign Investment

The incentives (including tax concessions) services and facilities which the governments of the host countries offer to encourage foreign investment have opportunity cost and the opportunity cost tends to be very high in developing countries. Although foreign investment may have an income effect that will lead to a higher level of domestic savings, this effect may be offset, however, by a redistribution of income away from capital if the foreign investment reduces profits in domestic industries. Foreign investment might also affect the recipient country's commodity terms of trade through structural changes associated with the pattern of development that results from the capital inflow. The servicing of foreign debt capital, both public and private, can cause balance of payments problems. Gerald M Meier

Advantages of Foreign Direct Investment

In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation. Integration into global economy - A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market Technology advancement - FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear deal between India and the United States would lead to transfer of nuclear energy know-how between the two countries and allow India to upgrade its civilian nuclear facilities.

Advantages of Foreign Direct Investment

Increased competition - As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector Improved human resources - Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills upgradation can enhance the value of the human resources of the host country

Advantages of Foreign Direct Investment

Many countries still have several import tariffs in place, so reaching these countries through international trade is difficult. There are certain industries that require to be present in international markets in order to succeed, and they are the ones who then provide FDI to industries in such countries, so that they can increase their sales presence there Many parent enterprises provide FDI because of the tax incentives that they get. Governments of certain countries invite FDI because they get additional expertise, technology and products. So to welcome these benefits they provide great tax incentives for foreign investors, which ultimately suits all parties

Advantages of Foreign Direct Investment

Foreign investment reduces the disparity that exists between costs and revenues, especially when they are calculated in different currencies. By controlling an enterprise in a foreign country, a company is ensuring that the costs of production are incurred in the same market where the goods will ultimately be sold Different international markets have different tastes, different preferences and different requirements. By investing in a company in such a country, an enterprise ensures that its business practices and products match the needs of the market in that country specifically

Advantages of Foreign Direct Investment

Though this is not such a big factor, some markets prefer locally produced goods due to a strong sense of patriotism and nationalism, making it very hard for international enterprises to penetrate such a market. FDI helps enterprises enter such markets and gain a foothold there. From the foreign affiliate's point of view, FDI is beneficial because they get advanced resources and additional capital at their disposal. Something like this is always welcome, and it also helps strengthen the political relationships between various nations

The Disadvantages of Foreign Direct Investment

Foreign investments are always risky because the political situation in some countries can change in an instant. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. In certain cases, political changes could lead to a situation of 'Expropriation'. This refers to a scenario where the government can take control of a firm's property and assets, if it feels that the enterprise is a threat to national security.

The Disadvantages of Foreign Direct Investment

Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to globalization as well.

Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases.
From the point of view of foreign affiliates, FDI is ill-advised because they lose their national identity. They have to deal with interference from a group of people who do not understand the history of the company. They have unreal expectations placed on them, and they have to handle several cultural clashes at the same time.

Three Advantages of FDI in Retail More investments in the end to end supply chain - For the Foreign Multi Brand retailers, entering India later would be a significant disadvantage and they would try and introduce a lot of innovations hitherto not introduced. For one, they would invest heavily into end-to-end supply chains including world class cold storage facilities Low spillage and wastage - In India, the supply chain is considered highly inneffient due to the huge wastage during the transportation. The global world class retailers would introduce quality standards that are second to none and would lead to more farm produce reaching the end consumer in a consumable condition. This would improve productivity of the entire system.

Three Advantages of FDI in Retail More options for the consumer - The consumer would get compelling options for doing their shopping which would lead to a fulfilling consumer experience

Three disadvantages of FDI in Retail

Existence of Indian biggies- Already multiple Indian corporates are well entrenched into the Indian Market with their organised multi brand retail offerings. Under this situation is an FDI influx truly required? That is one of the biggest questions that is being asked. Little incremental value - The critics of the move say that India as a country requires different fundamentals to survive and deliver value to the consumer. The last mile delivery of a lot of goods happen to the consumer's home - the retailer goes to the consumer in India and not the other way round, thus far in a lot of cases. Hence, the critics claim that there is little incremental value by implementing FDI in retail rules.

3. Will Prices reduce for consumers - Not at all - Will there be a net gain for consumers in terms of Price savings? Not at all. Not even the biggest supporters of FDI in retail claim that the consumer will spend less from his/her pocket due to this FDI in retail influx.