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Advantages And Disadvantages Of Foreign Direct Investment

Advantages And Disadvantages Of Foreign Direct Investment

Foreign direct investment or FDI is an investment made by a foreign entity (individual or company) into a business based outside. FDI is characterized by the notion of direct control. It is not merely the transfer of monetary funds; it comes with a lasting interest. This lasting interest is established when the investor gets at least 10 per cent voting power in the business.

Foreign direct investment is, without doubt, a critical driver of economic growth. Although it has more obvious benefits, FDI still comes with its share of disadvantages. Let us outline the boon and bane of foreign direct investment in India.

Advantages of foreign direct investment

FDI offers benefits to both the host country receiving FDI equity inflows and the foreign investors.

The main advantages for businesses are:

  • Preferential tariffs
  • Relatively lower labor costs
  • Subsidized rates
  • Various tax incentives
  • Market diversification

The Indian government, since the opening up of the economy in 1991 has regularly reformed overseas direct investment rules and regulations in order to encourage more investors to invest in the country. Below outlines are some benefits for the host country:

  • More job opportunities leading to an increase in employment
  • An inflow of managerial expertise, skills, knowledge, and technology
  • Development of human capital
  • Economic stimulation

Disadvantages of foreign direct investment

Despite many advantages, foreign direct investment has some disadvantages that are outlined below:

  • Entry of large giants may lead to the displacement of local businesses.
  • Repatriation of profits if the firms do not reinvest profits back into the host country. This will lead to large capital outflows from the host country.

It is common knowledge that India is one of the fastest growing economies of the world with plenty of development opportunities. Recognizing the tremendous growth potential of the country, the government of India recently amended the FDI policy in order to increase FDI equity inflows.  To make India more investor-friendly, the government has undertaken reforms and simplified investing conditions to encourage foreign investment in different sectors such as digital media, contract manufacturing, coal mining, and single brand retail trade.

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