Ans. Advantages of FDI
FDI helps in the development of the host
countries. In specific term, the major advantages are discussed as follow:
FDI as Capital Supplier : Foreign
Direct Investment is expected to bring needed capital to developing countries.
The developing countries need higher investment to achieve increased targets of
growth in national income. Since they cannot normally have adequate savings,
there is need to supplement savings of these countries from foreign savings.
This can be done either through external borrowings or through permiting and
encouraging Foreign, Direct Investment, Foreign Direct Investment is an
effective source of this additional capital and comes with its own risks.
FDI as a Remover of Balance of Payments
Constraint : FDI provides inflow of foreign exchange resource and removes the
constraints on balance of payment. It can be seen that a large number of
developing countries suffer from balance of payments deficit? for their demand
on foreign exchange is normally far in excess of their ability to earn. FDI
inflows by providing foreign exchange resources remove the constraint of
developing countries seeking higher growth rates. FDI has a distinct advantage
over the external borrowings considered from the balance of payments point of
view. Loans create fixed liability. The governments or corporations have to
repay, the resulting international debt of the government and the corporation
parts a fixed liability on balance of payments. This means that they have to
repay loans along with interest over a specific period. In the context of FDI
this fixed liability is not there. The foreign investor is expected to generate
adequate resources to finance outflows on account of the activity generated by
the FDI. The foreign investor will also bear the risk.
FDI as a Vehicles of Technology Transfer : FDI brings
along with it assets which are crucially either missing or scarce in developing
countries. These assets art: technology and management and marketing skills
without which development cannot take place. This is the most important
advantage of FDI. This advantage is more important than bringing capital which
perhaps can be had from the international capital markets and the governments.
FDI as a Promoter of Exports of Host
Developing country : Foreign
direct investment promotes exports.' Foreign enterprises with their global
network of marketing, possessing marketing information are in a unique position
to exploit these strengths to promote the exports of developing countries.
FDI as a Provider of Increased Employment: Foreign
enterprises by employing the nationals of developing countries provide
employment. In the absence of this investment these employment opportunities
would not have been available to a tot of developing countries, Further these
employment opportunities are expected to be in relatively higher skills areas. FDI
not only creates direct employment opportunities but also through backward and
forward linkages, it is able generate indirect employment opportunities as
well.
FDI Result in higher Wages : Foreign
Direct Investment has also promoted higher wages. Relatively higher skilled
jobs would receive higher wages.
Generates Competitive Environment in Host Country : Entry of
foreign enterprises in domestic market creates a competitive environment compelling
national enterprises to compete with the foreign enterprises operating in the
domestic market. This leads to higher efficiency and better products and
services. The Consumer may have a wider Choice.
Limitations
of FDI
Besides, these favourable impact of FDI,
there are some limitations which have been discussed as follows.
Foreign Enterprises Depend on Domestic
Capital : Very often foreign enterprise brings very limited capital. It
takes recourse to borrowing from domestic capital markets and banks. It has
been the experience of a number of developing countries where foreign
enterprises have depended to a large extent on domestic capital markets and
have heavily borrowed from the national financial institutions. Thus, they
compete effectively with the national firms for scarce capital available
domestically. Very often they deprive national firms of the needed capital.
Thus, the argument that they bring sufficient capital is spurious.
Need not Necessarily Remove Balance of
Payments Constraint in the Long Run : While FDI may remove balance of
payments constraint in the initial stages, the outflows generated in the form
of dividend, royalty and technical management fees may be far in excess of
equity inflows in the early stages. Further, many foreign enterprises take
recourse to loan finance rather than equity finance. This obviously is a fixed
liability on the enterprise as well as fixed commitment for the balance of
payments.
Over and above this, when enterprises want to
move their capital out of the country, the repatriation may create balance of
payments crisis.
Does Not Transfer Technology Effectively : Foreign
enterprise very often keeps control of technology. Therefore, effective
transfer of technology and management skill does not take place. What it does
is to transfer Technology relating to adaptation to local conditions otherwise
one has to deal with trouble shooting technologies. Fundamental aspects of
technology are strictly kept with the parent company. Thus the host economy,
specially the developing countries, may not have effective transfer of
technology arising out of FDI.
FDI is not a Provider of Additional
Employment : It is argued that this will arise when FDI does not substitute
national investment. When FDI Substitutes national investment, what exactly
happens is that it replaces employment opportunities that could have been
created by the national enterprise. Thus the net employment opportunities
generated will be insignificant. Further, there are no effective backward
linkages for the Transnational Corporations. The operations of TNCs would
depend on imports for getting their supplies rather than depending on domestic
sources of supply of host countries.
Does Not Create Higher Wages : Most often
FDI indulge in exploiting the wages in host, developing countries. Hence the
argument that they generate higher wages is not correct. Further, the employment
of local personnel in high paid jobs is less for it is very often taken by
foreign nationals.
Does Not Create Additional Exports : Most often
FDI comes to exploit the domestic market. Barring a few export processing
zones, the foreign enterprises most often exploit the domestic market.
Does Not Create Competitive Environment : The TNCs
through their market power always create oligopolistic or monopolistic market
conditions. Three or four TNCs control the market.
The present consensus has been that despite
this debate, the FDI has a net positive impact on the development of developing
countries. It may, however, be noted here that for growth and development of an
economy it is not necessary for the economy to depend an FDI flows.
There are a number of cases of countries
which have developed without large inflows of FDI. Notable examples are Japan
and South Korea
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