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Development
Economics
Development Economics
Foreign Investment
and
Economic Development
Foreign Direct Investment:
The investment which is made by the foreign investors in a country, either
they are single investors or they are MNCs is given the name of Private
Foreign Investment (PFI).
If the investors directly invest in certain fields, industries and projects, it is
given the name of Foreign Direct Investment. In such case the investor has
to take the responsibility of profit or loss of the enterprise where he has
invested.
The FDI may be joint-venture where the foreigners along with the
collaboration of domestic producers produce the said goods.
Foreign Investment…. continued
• The private foreign investors invest in those regions where they hope to
get greater financial returns and find safety and security of their capital.
• The countries which suffer from debt problems, political and economic
instability, risk on capital are higher and the economic reforms are just in
their infancy, the flow of FDI remains obstructed.
• Such have especially been the considerations on the part of MNCs who
are least development motivated and their objective is to maximize their
return on capital.
• MNC are least interested in the removal of poverty, unemployment and
inequalities in income distribution.
Pros of Foreign Investment:
The traditional economic arguments in favour of FDI are given as:
1.
Filling Saving-Investment Gap: The inflow of foreign private
investment in the country helps in filling the resource gap between
the targeted investment and locally mobilized savings. The country is
thus able to achieve growth and development targets.
2.
Use of Modern Technologies: the UDCs are not capable enough to
spend fairly large amount on Research and Development. The foreign
investors will bring with them the superior technology and expertise.
The greater use of modern technologies will not only lead to increase
the productivity but the costs will be lowered and the goods would be
available to the world at a cheaper price.
Pros of Foreign Investment…. continued
3.
Raising govt. Revenue for development: the government can
mobilize financial resource for development projects by taxing the
projects operated with the help of private foreign investment.
4.
Gap in Management: The private foreign investment not only
provides capital for development but a package of managerial
technological skill, innovations in techniques of production etc to their
local counterpart by means of training programme and the process of
learning by doing.
5.
Encouragement to local enterprise: the inflow of private foreign
investment also encourages the local enterprise to invest more in the
development projects.
Pros of Foreign Investment…. continued
6.
Rise in Production and employment: Private foreign investment not
only helps in raising production of goods by bringing modern
machinery and techniques but also provides employment to the people
in the country.
7.
Increase in Wage Rate: whenever the foreign investment is induced,
industrialization takes place, the demand for labour increase
particularly the skilled labor. As a result, the wages of a labor working
in such industries will be higher than the wages of labor working in
local industry.
Pros of Foreign Investment…. continued
8.
Better use of resources of UDCs: the UDCs have an abundance of
natural resources. Most of the natural resources are either underutilized or unutilized. Therefore, when FDI come in these countries,
the natural resources could be explored and better utilized.
9.
Better use of Domestic Talent: in so many UDCs, there do exist good
engineers, technicians, chartered accountants, economists, businesses
executive etc. but these countries lack the environment where these
people could be properly utilized. Moreover, the business concerns and
public sector are unable to pay them reasonable wages which leads to
Brain Drain. Therefore, the FDI provide them the opportunities to
develop the capabilities and potentialities.
Pros of Foreign Investment…. continued
10. Social Returns: the FDI is not only beneficial from economic point of
view but it also leads to so many social returns.
• The foreign firms will create certain benefits for the local firms as
the MNCs do not produce each and everything themselves they
can also get them from local industries.
• The foreign firms and industries bring with them their own style of
life, culture and thinking which will have a positive effect on the
life style of host countries.
11. Source of World Peace: As the MNCs have made heavy investments
in the foreign countries. Accordingly, they would never wish to have
an atmosphere whereby the countries would indulge themselves in
geo-political tensions and war. Thus the MNCs have also helped to
maintain international peace and tranquility.
Pros of Foreign Investment…. continued
12. Helps in Improving BOP Situation: the FDI which is made in export
sector will become helpful in raising exports of a country while the
FDI which is made in import-substituting industries will become
helpful in saving the foreign exchange of a country.
It has also been observed that the FDI which was made in importsubstituting industries may also lead to export promotion – as the case
of FDI made by “Sony” and “National”, in the production of
electronics in Malaysia was basically IS but now Malaysia has been
capable enough to export them after having met the domestic needs.
thus the IS and EP effects of FDI will have greater effects on
improving the BOP situation of a country.
Cons of Foreign Investment:
There is no doubt that private foreign investment helps in filling the saving
investment and trade gaps, yet there are de-merits of private foreign
investment:
1.
Facilities and Concession: the recipient countries, in order to attract
PFI have to provide a lot of basic facilities like land, power and other
public utilities, concessions in the form of tax holidays, tax
exemptions and subsidized inputs etc. such all concessions and
facilities will be a big burden on the economy.
2.
Concentration of FDI in Urban Areas: The FDI is usually invested
in projects located in Urban areas. It thus worsen the imbalance
between rural and urban economic opportunities.
Cons of Foreign Investment…. continued
3.
Inappropriate Products & Technologies: the FDI comes through
Multi-national Corporations (MNCs). These corporations stimulate
inappropriate consumption patterns through advertising. They use
capital intensive technologies of production so they do not help much
in reducing unemployment.
4.
Influence on Government policies: Foreign Direct Investment (FDI)
use their economic power to influence government policies which
favour them. Mostly they enjoy monopolies.
5.
Suppressing domestic entrepreneurship: Foreign Direct Investors
using superior knowledge, techniques of production drive out local
competitors. It lead to a fall in the domestic investment.
Cons of Foreign Investment…. continued
6.
Exploitation: the countries where the MNCs invest have the labour
and natural resources in the excessive amount. The MNCs give poor
prices to the owners of raw materials and the labour. MNCs are profitmotivated and not interested in economic development.
7.
Least Contribution to Public Revenue: the FDI will have the effect
of raising the public revenue is an over-stated argument in favour of
PFI. As in the presence of liberal tax-holidays and subsidies provided
by the host countries, one can hardly find their contribution to nation
exchequer.
Cons of Foreign Investment…. continued
8.
Outflow of Capital: Foreign Direct Investment leads to the outflow of
capital from a country by the following ways:
a.
The foreign investors repatriates their profits to their parent
countries.
b.
They import raw materials and technologies from other countries
or their parent countries thus leads to the outflow of capital.
9.
Social Effects: when the MNCs invest in foreign countries they bring
with them the foreign culture and civilization. Not only the technicians
but the foreign customs and traditions are also imported. The dancing
clubs, bar rooms, wine etc are opened. All such will have negative
effects on the socio-cultural life of the host countries.
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