Investment done by a foreign individual or company in productive capability of another country is what is meant by foreign investment. It is the movement of capital from the national border in such a way tat it grants the investor the total authority over the acquired asset. FDI generally transfers both physical capital and intangible assets such as technology among nations. As per standard growth theories, the major factors driving economic growth are capital accumulation and technological innovation. Foreign direct investment plays a major role in the economic development of the host nation. It acts as a launching pad to the economic, social, infrastructural, technological developments of many host countries. This is an age of globalised world economy and foreign direct investment is the major driving force behind the interdependence of national economies.
FDI has a major role in taking the economy of the host country far ahead. The economically developing as well as the underdeveloped countries are dependent on the economically developed countries for financial assistance which would help them to achieve some financial stability. For the last twenty years any form of foreign direct investment has gained in a lot of capital knowledge and technological resources into the economy of a country.
Foreign direct investment is an essential and unavoidable part of national developmental plans. There are many positive aspects for FDI for which it is welcomed by all nations globally. It has become an integral tool for triggering economic growth for nations all over. FDI is well versed in utilizing human resource in the most effective way as a result of which high productivity is obtained. Foreign direct investment has gained popularity worldwide.
Though most of the FDI flows is mainly based in the developed nations, it is very much crucial for developing countries as well (refer figure 1). As per the figure between 1990 -2000 the aggregate wealth of the developing nations nearly became four times and its total trade volume shot over five folds, FDI flowing into the developing countries grew to18 times. Because of private direct investments, the involvement of developing countries in the global production network increased considerably.
Foreign direct investment made drastic changes in the economy of the host country. The infrastructure of the host country increased considerably. Technological development was also made possible. The living standard of the common people of the host country also improved due to foreign direct investment. FDI turned as a boon to the host country as the growth and development made by it was splendid as it not only improved the economic conditions of the nation, it also could improve the social conditions. Again the health sector of the host country could also develop because of foreign direct investment.
Foreign direct investment can be classified into two types. They are Greenfield investment and Mergers and Acquisition.
Direct investment by a foreign company or individual in new venture or expanding by constructing new facilities in the existing territories in the host country is known as green field investment. This type of FDI is done in developing countries like India where multinational companies build new organizations. Foreign companies even hire employees from the host countries there by creating job opportunities. Developing nations gives captivating offers like tax-breaks, subsidies and incentives to the foreign companies in order to attract them. Losing corporate tax is negligible when compared to advantages to FDI.
Benefits of Greenfield investment are several. In sourcing is done there by increasing employment opportunities .Also employees are paid more than those working in domestic firms. Foreign countries invest in Research and development as a result of which the technology of the host country increases .Knowledge is imparted to the disadvantaged sections also. They go on expanding business by putting in more capital investments. Nations human capital gets utilized there by boosting up economy.
Mergers and Acquisition:
It is a primary type of foreign direct investment.
Mergers and Acquisitions take place when transfer of existing assets from a local firm to foreign firm is done. There are no long term benefits to the local economy. When control over assets and operations are transferred from host to foreign company, cross border acquisition takes place. When assets and operations from different nations are made to a single new legal entity, cross border merger takes place.
Foreign direct investment is not allowed in all sectors. In India it is restricted to certain areas such as Arms and ammunition, Atomic Energy, Railway Transport, Coal and lignite, mining of iron, manganese, chromium, gypsum, sulfur, gold, diamonds, copper, zinc etc. Certain other sectors may be restricted in other countries for FDI.
Several studies have been conducted regarding foreign direct investment and economic development. The results obtained from the studies were rather conflicting and not reliable. Some studies proved that the economic development in the host countries were only momentary. Certain studies show that there is no such effect. The linkage between the development and FBI is found confusing and the results differ for each country. Some studies find that there are benefits. As a consequence of foreign investment employees enjoyed greater salary that those working in the domestic field. Some did not study this benefit.
Policies which I would recommend a host country government to adopt towards foreign investors in order to promote economic development are as follows.
Foreign investments are really an integral part of economic development of a host nation, particularly economically developing and economically under developed nations. So a host government should attract foreign direct investors to the country if they believe the project would bring positive outputs. For that the host government has to give interesting incentives, subsidies, tax cuts etc. There is large competition among nations to bring foreign investors home so that their country could develop in all terms. The host government has to prove the foreign investors correct too in order to bring more investments in the particular field and also as a result of which they make their mind to invest in other sectors also. The host country authorities can give training to both workers and managers; technological training so that foreign investors get attracted as there is supply of human resources. By adopting these methods if that particular investor succeeds, that success will prompt another investor to the host country.
Spillover benefits do exist, but not globally. Mainly those benefits are enjoyed by economically developing and under developed host nations. Every host country differs in its economy, human resource, technological advancements, educational quality, competition and its policies towards foreign direct investment (FDI).
Source: ChinaStones - http://china-stones.info/free-essays/finance/foreign-direct-investment.php