Why is FDI Needed
Why is FDI Needed, FDI plays a major role in developing countries like India? It acts as a long term source of capital as well as a source of advanced and developed technologies. In addition to that, investors also bring along the best global practices of management. An as a large amount of capital comes in through these investments more and more industries are set up, which aids employment. FDI is a non-debt, non-volatile investment, and returns received on these are generally spent on the host country itself thereby helping the host country develop better.
The need for FDI exists because India is at a stage where it needs not only investments but also technology and management policies to sustain and enhance its economic growth. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. Why is FDI Needed FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that needed a boost and economic attention and has addressed various problems that continue to challenge the country.
Foreign investment comes in several forms. Portfolio investment, foreign loans and foreign direct investment are the three important types. Of these foreign direct investments in industry and services are the most useful. Foreign loans are generally used for investment in infrastructure. This is important as a serious bottleneck for domestic as well as foreign investment is the poor state of infrastructure.
The significance of Why is FDI Needed FDI is that the inflows generated from the foreign investments are risk-free to the country and bring with it the advantages of advanced technology, management practices and assured markets. In due course, there is also a technology transfer as the local workforce gains knowledge of the manufacturing processes and management practices. The value-added in these industries is a contribution to GDP and foreign exchange earnings.
Therefore FDI contributes to foreign exchange earnings, employment creation and increased incomes, especially of the skilled and semi-skilled workers in these industries.
Some of the sectors that attract high FDI inflows in India are the hotel and tourism industry, insurance sector, telecommunication, real estate, retail, power, drugs, financial services, infrastructure and pollution control etc.
An investor has to take a decision regarding the following aspects while investing:
- Exchange Rate – The stronger the foreign currency is in comparison to that of the host country, lesser will be the amount of investment required. In other words, depreciation of the currency in the host country will lead to more investments.
- Market Size – This refers to GDP growth. Developing and emerging countries are more likely to attract investments.
- Infrastructure – Investors will invest in a country if they think that the country has a suitable infrastructure to support the business.
- Tax regime – MNCs are subject to tax in both the parent as well as the host country. The host country which attempts to reduce this double taxation of MNCs will attract more FDI.
- Labour market conditions – The educational levels of the labour, as well as the wage rates, also play a major role in determining the flow of FDI.
- Financial and economic stability – Financial & Economic stability is paramount for economic growth, as most transactions in the real economy are made through the financial system. It is essential for maintaining confidence in the economy
- Political stability – If the political situation of a country is stable, the market follows, therefore it would be very easy for the investors to predict the market flow.
FDI brings money, technology and infrastructure to a country. FDI is a panacea for the economic ills of any country and helps the country achieve a certain degree of financial stability, growth and development.