A foreign direct investment (FDI) is a kind of investment in which the business or the company of some other country agrees to expand their business in other country and it is different from the foreign portfolio investment by a notion of direct control.
Foreign Direct Investment not only brings the investment or the money in one country but also comes with the knowledge, skills, and technologies of the other country in their own country. It helps a country to become more powerful and advanced in terms of technology that they use and also helps to expand the knowledge of the people and to enhance the skills of the people. As per the general point of view, the foreign direct investment flows from rich and developed countries to the poor and underdeveloped or developing countries.
The performance of the foreign direct investment is dependent on many factors and those factors are free to invest in the cross-border country and earn from another country, ease to start a new business, access to industrial land and other facilities in another country etc.
“Economic fundamentals point to a potential increase in FDI flows by around 10 percent in 2017. However, significant uncertainties about the shape of future economic policy developments could hamper FDI in the short-term.” (UNCTAD)
The benefits of the Foreign Direct Investment on the host country are:
- Effects on resources-Foreign direct Investment can add a great economy by providing cash and capital, innovation, skills, and knowledge to the economy where the country does not have all these innovative technologies and resources and this type of source transport can contribute to the expansion of the developing or underdeveloped economy.
- Effects on the Balance of payment of the host country- Balance of payment is the difference between the payments and receipts from the other country and FDI can help the country to change the position of its balance of payments in the following ways:-
- Initial Capital Inflow – When a company invests in some other country rather than their home country then the amount they invest is not borrowed and gathers their own money and invest.
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- Substitute for Imports- Foreign Direct Investment acts as a reason to reduce the imports of a country as when the company from outside itself invests in the country it comes up with the technology and knowledge of the other country leads to reduce the value of imports of the technology and machinery.
- Increase in exports – If the company coming with foreign direct investment in a country also exports the products produced in that country it helps the host country to increase the value of their export at an increasing rate.
The costs of the Foreign Direct Investment on the host country are:
- Increase in competition – When a foreign company starts doing the business in some other country it generally increases the level of competition in the host country and sometimes also dominates the domestic players and results in closure of many small businesses.
- Adverse effect on balance of payments- As after coming the Foreign Direct Investment the balance of payment of the home country improves but on a long term scale it leads to leaving an adverse impact on the balance of payment of the home country as the money earned from the export of the product of company investing in foreign direct investment do not stay in the home country forever and when the money is transferred to the foreign country it leaves an adverse impact on the economic condition of the home country.
- Harms the industry of home country- Foreign direct investment gives a tough competition to the domestic players and hence sometimes lead the market and make the industry a monopoly market which gives a harmful impact of the industry and the trade practices of the home country as it increase competition and provide better product with the help of technological advancements and the skills and knowledge that they have which leads to huge losses to the traders and the companies of the home country.
The difference between MNC and TNC: -
- A Multinational Corporation is the one who has a headquarter in one country and different branches in different another country. The country where the headquarters is located is called the home country and the countries where the branches are situated are called as the host country (International Labor Organisation).
- Transnational companies are the enterprises which own or control production or service facilities outside the home country(United nation Commission).
- Multinational companies have branches in other countries whereas the Transnational companies have subsidiaries in other countries.
- Multinational companies do investments in the other countries but do not sell the products as per the needs of the customers of the other countries rather than they focus only on selling their own product in the markets of other countries, on the other hand, the Transnational companies invest in foreign operations and give the powers of decision making and doing research and development as per the need of each different foreign market.
Analysis of Foreign Direct Investment in India
Foreign direct investment in India has a tremendous increase in the year 2018 by the US 2657 million dollars. The average foreign direct investment in India from the year 1995 and until 2018 is USD 1333.66 million and has reached on its all-time high in the month of August 2017 that is 8579 million US dollars and has recorded at a low of -1336 million US dollars.
Now India has become the most favorable and attractive country for the global partners as a country in which they can invest safely as per the information given by Emerging Market Private Equity Association (EMPEA). As the Indian market is diverse and it has a huge population which helps the foreign companies to grow and expand their own businesses as well that is the reason India is one of the favored nations when it comes to Foreign Direct Investment.
As per the recent reports were given by UBS, India is expected to increase its annual FDI flow in the country by US$75 billion in the upcoming five years. The aim of the government of India is to achieve the fundings of at least US$ 100 billion in the upcoming 2 years. As per the reports were given by the World Bank, India is expected to grow by 8.8 percent in the financial year 2018-19 to overtake the growth of private consumption by 7.4 percent and will help in the growth of the gross domestic product (GDP) in the financial year 2018-19 (Bureau).
Bureau, P. I. (n.d.). Media Reports. Press Trust of India.
International Labor Organisation. (n.d.).
United nation Commission. (n.d.).
United Nation Corporations. (n.d.).