FDI in India
FDI is the acronym to Foreign Direct Investments, a constituent of a country’s national financial accounts. FDI is the investment of foreign assets and capital into local infrastructure, equipment and possible organizations. Importantly FDI’s do not include investments into stock markets. Foreign direct investments are considered to be more beneficial then investments in the company’s equity as equity investment are considered to be risk capital and hot money which can leave at the first sign of menace, whereas FDI is resilient a commonly useful in spite of prevailing conditions.
Foreign direct investments has the ability to create employment opportunities, improve productivity, transferring of skills and technological expertise, augment exports and contribute to the long run economic development of most of the worlds developing countries. Mover over it is imperative to seek FDI at all levels of development. With advancements in economic globalization, FDI now plays an important role in the development of countries. In reality although FDI began centuries ago, the most substantial growth has been in recent years.
This change and growth has been due to many factors, mainly due to the more approachable stance of governments to investment inflows, the shift towards privatization, and the increasing rate of interdependence of the global economy. Foreign direct investment takes place when an organization directly to facilitate production or marketing of a product in an overseas country. Types of FDI In the broader perspective FDI takes two main forms, the first is green-field investments, which usually involves the establishment of an entirely new operation in the foreign country.
The second and most important is the merger or acquisition of/with an existing firm. Even further FDI is divided into two broader parameters; horizontal foreign direct investment (market-expansion investments) which is basically investments in the same industry as the abroad firm; and vertical foreign direct investments (resource-seeking investments) which in turn comprises of two forms firstly being backward vertical FDI, investing in a market sector that’s is a primary provider of inputs for a organizations local production processes.
And the second being vertical foreword FDI in which the foreign firm seeks the final product of a local firm’s production progression. In addition to foreign direct investments firms also attempt to expand in the foreign markets by ways of increased exporting and licensing (Ecoterms, nd) Advantages and Disadvantages of FDI to India There are many advantages associated with indulgence of FDI in India. Firstly, benefits of low transportation costs, for firms which many adopt horizontal FDI, transportation cost is linked to production costs.
When a firm is involved in low value to weight ratio production such as matches and butter, relative to exportation, FDI would only require a low transportation cost. But for commodities with high value to weight ratio, transportation costs prove to be a minor fragment of total cost, in this case obviously the advantage over exporting seems limited. Secondly an important advantage is the avoidance of trade restrictions. Many countries with trade restriction make it difficult for foreign firms to reach their potential markets through exporting alone.
The primary and most effective restrictor tends to be an embargo. Many governments have irrational tariffs on imported goods and limit international trade through quotas, which make the whole process unprofitable eventually. The other side f the coin, it results in an increase in profits of FDI. For new and entering countries that impose heavy tariffs but have potential of growth like China many international firms choose between FDI and licensing to expand in international markets. Thirdly tax exemptions or reductions act as an incentive.
In most developing countries need to place tariffs to protect local and infant industries but along with that they strive to create an environment which encourages FDI, which results in an inflow of capital, facilitates the transfer of technological advancements and new working, organizational and managerial methods and skills as well as a platform to international markets. It is for this reason some countries offer incentives in the form of tax reductions to attract foreign investments.
For all multinationals located in countries with high tax rates like US and UK, tend to invest in developing countries to take benefit of such tax incentives. Fourthly the avoidance of an inconsistent cost structure created by the international exchange. With exporting being the primary mode of expansion into a foreign market, a risk faced my floating exchange rates needs to be considered and its effect on the company’s profitability. Such deductions are obtained from various denominations, if for example the home currency strengths, income created by the host country would not essentially cover all costs.
On the contrary, FDI attempts to make sure all costs and revenues are obtained from the same currency. Thus eventually reducing the risk involved in international trade. Next would be the avoidance of consumer-imposed restrictions. Countries like South Korea prefer to buy locally produced goods even though expensive due to their patriotism. And the prime worry of replacement parts, which makes FDI a better option than exporting. Different countries tend to have variety of preferences and requirements to homogenous goods.
Multinationals therefore need to amend goods to suit local consumer standards. Exporting therefore becomes difficult and expensive. And lastly firms usually take pride in the competitive advantage derived from their technical; marketing and management know how, major part of who adopt licensing for expansion into international markets. The main advantage of licensing would be not bearing with the heavy costs and risks yet a good return for their know-how in terms of royalty fees. On the other hand utilizing licenses might present many risks.
(Hunter, 2007) The disadvantages of using FDI don’t usually outweigh the merits, but at times can prove to be costly for an economy like India. Firstly, FDI is way more expensive than exporting or licensing, as mentioned earlier FDI can be green field investment in a brand new facility or an acquisition or merger in prevailing firms in the industry. With conditions being stable firms would be required to spend large amounts of capital setting up production plants in a foreign country or purchase foreign ventures.
On the other hand when a firm exports its products, it can easily avoid the costs of FDI. When a firm licenses its expertise, it doesn’t need to pay any costs and in turn gain some from in the process. Secondly FDI proves to be a little more risky than exporting or selling out licenses, as far as a multination corporation is bothered, the only incentive to invest would be stable political conditions and an open free market. However often this factor is highly unpredictable, if a firm indulges in FDI, it is bound to face more political and financial risks than exporting or licensing.
The amount of risks incurred can be broken down in three categories (1) expropriation; the host country’s government can render ownership of the firm’s assets. (2) Currency unable to be converted. (3) Violence in the political arena. On the other hand a firm can make a sensible choice by deciding to invest in the foreign market, it may still e susceptible to risks of doing business in a new culture where the rules maybe a little different. An example of this is the huge cultural differences between the East and west of a country.
A firm lying on the east coast maybe be totally different to the other side, if cultural differences are ignored or misunderstood, it could result in a costly mistake and maybe even total failure. In opposition. Exporting and licensing tends to provide more security. Firms a waved from the trouble of deciphering environmental factors and cultural disparities. The use of local agents and vendors can be used to diminish the risks associated with international trade. FDI dimensions
Foreign Direct Investments have a few parameters; FDI is tolerable under the following braches of investment, through financial collaborations, through technological collaborations or joint ventures, the use of Euro issues capital markets can be tapped and through a substantial placement privately or allotted preferential. Strict regulation prevent the use of FDI in the following industrial territories; in the defense industry which includes arms and ammunition, the atomic energy field, transportation nd railways, the coal and lignite industries and the mining industries of minerals which include gold diamonds chrome zinc and copper.
Inward and Outward FDI in India from USA USA being one of the superpowers of the world has a multivariate relationship with India in the fields of commerce and economics and active politics. Indian-American economical relationship comes in the form if bilateral investments and trade represent important factors because US is one of the largest economy in the world whilst India is the fastest growing economy of the world. Economic reforms dawned in the early 90’s have helped India’s plodding amalgamation with the global economy. This directly resulted in trade and investment relation with USA.
USA is the largest investing country pertaining FDI approvals and portfolio investments. US has actually covered every sector in India, which provides opportunities for private participants. India’s investment is US in gradually increasing. USA is also to date India’s largest trading partner. Regarding foreign direct investments U. S. is the largest investors in India. The accumulation of foreign direct investment inflow has a mammoth increase from U. S. $11. 3milion in1991 to U. S. $4132. 8 as of august 2004, an increase of 58 percent per annum.Sample Essay of BuyEssay.org