ADVANTAGES AND DISADVANTAGES OF FDI FOR INDIA Advantages of Foreign Direct Investment Fo reign Direct Inv estmen t has

the fo llo wing po tential b en e fits fo r less developed countries. 1.Raising the Level of Investment Foreign investment can fill the gap between desired investment and locally mobilised savings. Local capitalmarkets are often not well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can b e d ifficult. FDI solv es both these problems at on ce as it is a d irectsou rce of extern al capital. It can fill th e g ap b etween d esired fo reign exchange requirements and those derived from net export earnings. 2.Upgradation of Technology F o r e i g n i n v e s t m e n t b r i n g s w i t h i t technological knowledge while transferring machinery and equipment todeveloping countries. Production units in developing countries use out d ated equ ip men t and tech niqu es th at can reduce th e p rodu c tiv ity of workers and lead to the production of goods of a lower standard 3. Improvement in Export Competitiveness : FDI can help the hostc o u n t r y i mp r o v e i t s e x p o r t p e r f o r ma n c e . B y r a i s i n g t h e l e v e l o f efficiency and the standards of product quality, FDI makes a positiveimpact on the host countrys export competitiveness. Further, because of the international linkages of MNCs, FDI provides to the host country better access to foreign markets. Enhanced export possibility contributesto the growth of the host economies by relaxing demand side constraintson g ro wth . This

is i mp o rtan t for th ose co untries which h av e a small domestic market and must increase exports vigorously to maintain their tempo of economic growth. 4. Emplo y ment Genera tion : F o r e i g n i n v e s t m e n t c a n c r e a t e employment in the modern sectors of developing countries. Recipients of F D I g a i n t r a i n i n g o f e m p l o y e e s i n t h e c o u r s e o f o p e r a t i n g n e w enterprises, which contributes to human capital formation in the hostcountry. 5. Benefits to Consumers : Consumers in developing countries stand togain from FDI through new products, and improved quality of goods atcompetitive prices. 6. Resilience Factor: FDI has proved to be resilient during financialc r i s i s . F o r i n s t a n c e , i n E a s t A s i a n c o u n t r i e s s u c h i n v e s t m e n t w a s remarkably stable during the global financial crisis of 1997-98. In sharpcontrast, other forms of private capital flows like portfolio equity and Disadvantages of Foreign Direct Investment FDI is not an unmixed blessing. Governments in developing countries haveto be very careful while deciding the magnitude, pattern and conditions of p r i v a t e f o r e i g n i n v e s t m e n t . P o s s i b l e a d v e r s e i m p l i c a t i o n s o f f o r e i g n investment are the following: 1.When foreign investment is competitive with home i n v e s t m e n t , profits in domestic industries fall, leading to fall in domestic savings.

2 .Contribu tio n of fo reign f irms to pub lic revenu e through co rpo rate taxes is comparatively less because of liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided bythe host government. 3.Foreign firms reinforce dualistic socioe c o n o m i c s t r u c t u r e a n d increase income inequalities. They create a small number of highly paidmod ern sect or ex ecuti ves. They divert resources away f rom pri orit ysectors to the manufacture of sophisticated products for the consumptiono f t h e l o c a l e l i t e . A s t h e y a r e l o c a t e d i n u r b a n a r e a s , t h e y c r e a t e imbalances between rural and urban opportunities, accelerating flow of rural population to urban areas. 4. Foreign f i rms st i mul at e i na ppropriate con sumpti on patt erns throug hexcessi ve advertising and monopol ist ic marke t power. The produ ct s made by multinationals for the domestic market are not necessarily lowi n p r i c e a n d h i g h i n q u a l i t y . T h e i r t e c h n o l o g y i s g e n e r a l l y c a p i t a l - intensive which does not suit the needs of a laboursurplus economy. 5.Foreign firms able to extract sizeable econo m i c a n d p o l i t i c a l con cessions f rom competi ng govern ments of developi ng count ri es. Consequentl y, pri vat e profi t s of t hese compan ies may ex ceed soci al benefits.

6.Continual outflow of profits is too large in man y c a s e s , p u t t i n g pressure on foreign exchange reser v e s . F o r e i g n i n v e s t o r s a r e v e r y particular about profit repatriation facilities 7.Foreign firms may influence political decisions i n d e v e l o p i n g countries. In view of their large size and power, national sovereignty andcontrol over economic policies may be jeopardized. In extreme cases,foreign firms may bribe public officials at the highest levels to secureundue favours. Similarly, they may contribute to friendly political partiesand subvert the political process of the host country.

Key question, therefore, is how countries can minimize possible negativeeffects and maximize positive effects of FDI through appropriate policies.