Ever heard of the term FDI? Foreign Direct Investment, abbreviated as FDI, is an investment made by a firm or individual from one country, into business interests located in another country. Introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by the then finance minister Dr. Manmohan Singh, India has been attracting FDI for a long time now. The sectors like telecommunication, construction activities, and computer software and hardware have been the major sectors for FDI inflows in India.
FDI in India involves companies overseas setting up manufacturing facilities here, providing services and goods that earn them revenues, creating local job opportunities and ultimately providing tax inflow to the government.
India is currently classified as a lower-middle-income country along with nations like Armenia, El Salvador, Ghana, Guatemala, and Honduras. As inward FDI leads to improvement of income distribution in countries like these, it is prudent for India to encourage more inward FDI because it can lead to increased employment opportunities.
The presence of FDI greatly assist economic development by spurring domestic competition, and thereby leading to higher productivity, lower prices, and more efficient resource allocation. The situation is something like this: when you are good at something, to be better at it, you will need external competition to fire up your progress. For only certain amount of headway can be reached by competing with yourself. By facilitating the entry of foreign organizations into the domestic marketplace, we are aiding in the creation of a competitive environment, alongside breaking domestic monopolies.
Benefits of FDI are overt. The main trade-related beneficial outcome for developing countries lies in its long-term contribution to integrating the host country’s economy more closely into the world economy. In other words, trade and investment are increasingly recognized as mutually benefitting channels for cross-border activities.
Technology transfer is another important benefit. Recipient businesses get access to the latest financing tools, technologies, and operational practices from across the world. MNEs (multinational enterprises) are the developed world's most important source of R&D activity, and they generally possess a higher level of technology than is available in developing countries, so they have the potential to generate a considerable technology spill over the host country. Over time, the introduction of enhanced technologies and processes results in their diffusion into the local economy, resulting in boosted efficiency in the industry as well as in the access to technology across different socio-economic classes.
Having said that, not all goods produced through FDI are meant for domestic consumption. Many of these products have global markets. The creation of 100% Export Oriented Units and Economic Zones have further assisted FDI investors in boosting their exports to other countries. The Sri City SEZ (special economic zone) located on NH16 in Andhra Pradesh is one such example.
How does FDI actually benefit the common man though? When factories are constructed, at least some local labour, materials, and equipment are utilized. Once the construction is complete, the factory will employ some local employees and further use local materials and services. These factories will also generate additional tax revenue for the Government, which can be infused into creating and improving physical and financial infrastructure, thereby stimulating economic growth. Furthermore, the host country's human capital may be enhanced through training and on-the-job learning. This is advantageous as human capital enhancement is an unarguably salient feature of a nation's growth.
The constant foreign cash flow 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, consequently ensuring stable exchange rates.
The development of backward areas is one of the most crucial benefits of FDI, for a developing country. FDI enables the transformation of backward areas in a country into industrial centres. This is achieved by ensuring that corporate social responsibility is carried out. It can be accomplished through suitable partnerships with State Governments, professional consultancy organizations, or by joining the ongoing programs of these agencies. The Hyundai unit at Sriperumbudur in Tamil Nadu exemplifies this process.
For an MNC, FDI in India is a means to access new purchaser and producer demography, and thereby expand its influence and business operations. It can gain access not only to limited resources such as fossil fuels and precious metals, but also skilled and unskilled labour, management expertise and technologies.
The main conclusion that can be drawn is that the benefits of FDI are real, but they do not accrue automatically. To reap the maximum benefits from the foreign corporate presence, a healthy enabling environment for business is paramount, which encourages domestic as well as foreign investments, provides incentives for innovation and improvements of skills, and contributes to a competitive corporate climate.