Foreign direct investment

Foreign investment
 Foreign investment refers to investment by
foreign investors in in shares, debentures
bonds of other nations companies.This type
of investment is mainly in the form of equity
capital, which has no fixed interest burden. It
can be classified as under:
 Foreign Direct Investment
 Portfolio Investment

Foreign Investment
Foreign
Direct
Investment
Establishing
wholly
owned
companies
Acquisition
by
purchasing
shares
Foreign
collaboratio
n
Portfolio
Investment
Investmen
t by
foreign
institution
al
investors
Issue of
GDRs,ADRs,FC
CBs by Indian
companies in
foreign capital
markets

Foreign Direct Investment
 Foreign direct investment is made by foreign
companies in order to establish wholly owned
companies in another country and to manage
them or to purchase shares of companies in
another country for the purchase of
managing such companies. it also includes
foreign collaboration, which means setting up
of an enterprise, jointly by the foreign and
native entrepreneur.

Types of foreign collaboration
 Collaboration between domestic and foreign
private companies.
 Collaboration between government of host
nation and foreign private companies.
 Collaboration between government of host
nation and foreign government.

Objectives
of foreign direct investment
According to Murasoli maran, “Foreign direct
investment is not consider only as a stock of
capital but as something that provides
modern technology, managerial expertise,
employment opportunities and a new market
for product produce in India.
Foreign direct investment is needed due to
following reasons.

 To increase the level of investment by
supplementing the domestic investment.
 To develop basic industries.
 To develop infrastructure.
 To remove the shortage of foreign exchange.
 To improve managerial and entrepreneurial
ability.
 To exploit natural resources.
 To setup risky and capital intensive projects.
 To improve technology.
 To increase employment opportunities.

Impact of FDI
In host nation
Advantages of
FDI in host
nation
Disadvantages
of FDI in host
nation
In home nation
Advantages of
FDI in home
nation
Disadvantages
of FDI in home
nation

Availability of
capital
Availability of
modern
technology
Exploitation of
natural
resources
Availability
of risk capital
Increase in
Employment
Reduction in
inflation
Promotes
competition and
economic growth.
Benefits of FDI in Host nation

Host country benefits
 Availability of capital: Many nations suffers from lack of
capital. Since savings do not increase in the same ratio as
the income does, the gap is filled by foreign capital.
 Availability of modern technology: The use of modern
technology could become possible with foreign capital and
aid. Modern technology enhances the productivity of
economy.
 Exploitation of natural resources: Due to lack of capital
resources have not been properly exploited. Foreign capital
will help to make proper exploitation of natural resources.
 Availability of risk capital: FDI serves as venture capital
and thus makes up this deficiency. As a result of foreign
capital, development has taken place in basic industries and
risky ventures like iron and steel, coal, oil exploration etc.

 Increase in employment: Many industrial
units have been set up with foreign capital
and by foreign collaboration. Many MNCs
have also setup branches in host nations. All
this has created employment opportunity in
host nations.
 Reduction in inflation: foreign capital has
also made imports of essential goods possible
on a large scale. It increase total availability
of goods and reduces the rate of inflation.

 Promotes competition and economic growth :
FDI in the form of Greenfield investment
increases the level of competition in a market,
driving down prices and improving the welfare
of consumers
Increased competition can lead to increased
productivity growth, product and process
innovation, and greater economic growth

Challenges
of FDI in
host
nation
Bad effects
on domestic
industries
Increase in
foreign
dependence
Uncertainty
Harmful for
domestic
producers
Imbalanced
development

Challenges of FDI in host
nation
 Bad effects on Domestic industries:domestic
industries cannot face open competition with
these foreign companies who have
technological superiority, managerial
expertise, huge financial base, well reputed
global brands.
 Increase in foreign dependence: the
machines, raw material, technical know how
etc which are imported from abroad increase
the dependence on foreign company.

 Uncertainty: it leads to shortage of capital in
domestic economy, fall in stock prices, and also
leads to decline in external value of domestic
currency.
 Harmful for domestic producers: because of
increase in dependence of foreign industries,
their profits decline
 Imbalance development: as foreign capital has
been invested in high profit industries, thus basic
industry could not develop properly.

Benefits of
FDI in
home
nation
Inflow of
foreign
exchange
Reverse
knowledge
transfer
Increase in
export of
intermediate
goods
Increase in
export of
capital
goods

Benefits of FDI in Home
Nation
 Inflow of foreign exchange: When subsidiary unit is well
established, the parent company gets huge amount in form
of repatriation of profit, royalty, technical fees, interest on
capital etc. this repatriation results in inflow of foreign
exchange in parent nation.
 Increase in export of capital goods and intermediate
goods: The host nation has to import matching capital
goods and intermediate goods from the parent nations of
MNCs. It leads to increase in export of capital goods and
intermediate goods from parent nation.
 Reverse knowledge transfer: when an MNC set up its
subsidiary in host nation, its expatriates interact with
managers, technocrats of host nation and learn new
working styles from them.

Negative
effect on
balance of
payment
Negative
effect on
employment
generation
Challenges
of FDI in
Home
Nation

Challenges of FDI in Home
Nation
 Negative effects on balance of payment:
1. initial capital outflow from home nation to host
nation adversely affects the BPO position of home
nation.
2. if FDI by home nation has replaced the export mode,
it adversely effects the exports of home nation.
3. if MNC has setup its production base in the host
nation because of its cheaper labor cost and low input
cost.

 Negative effect on employment generation:
if FDI is replaced the trade mode, then the
goods which were earlier manufactured in
home nation are now manufactured in host
nation. So investment mode promotes
unemployment in home nation.

Foreign direct investment

More Related Content

What's hot (20)

Viewers also liked (6)

Similar to Foreign direct investment (20)

Recently uploaded (20)

Foreign direct investment