Page 137 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes costs of fDi to the Home country

Against these benefits there are apparent costs of FDI for the home (source) country. The most
important concerns center on the balance-of-payments and employment effects of outward FDI.
The home country’s balance of payments may suffer in three ways. First, the capital account of
the balance of the payments suffers from the initial capital outflow required to finance the FDI.
This effect, however, is usually more than offset by the subsequent inflow of foreign earnings.
Second, the current account of the balance of payments suffers if the purpose of the foreign
investment is to serve the home market from a low-cost production location. Third, the current
account of the balance of payments suffers if the FDI is a substitute for direct exports.

With regard to employment effects, the most serious concerns arise when FDI is seen as a
substitute for domestic production.

self assessment

Fill in the blanks:
7. The four main benefits of FDI to host country are .................., .................., .................. and
.................. .
8. FDI can make a positive contribution to a host economy by supplying .................., ..................,
and .................. .
7.5 trends in fDi

Indian has been attracting foreign direct investment for a long period. The sectors like
telecommunication, construction activities and computer software and hardware have been the
major sectors for FDI inflows in India.
According to AT Kearney report India sits in 3rd place on the FDI Confidence Index globally.
European and North American investors place it 3rd, while Asia-Pacific investors’ rank it 4th.
India is the top location for non-financial services investment, and also scores highly in heavy
industries, light industries and financial services. Even during economic crisis looming largely
on other economies, FDI inflows to India soared from US $ 25.1 billion in 2007 to US $ 41.6 billion
in 2008.
Multinationals are managing to counter FDI restrictions and supply chain challenges at the most
possible way showing path to others who are hesitant to enter into Indian market.

Example: Wal-Mart has taken steps to develop supply chains, procure 30-35 per cent
local produce, making changes to its stock policy by reducing inventories etc. Similarly, Auto
majors are pumping money in the sector. Ford planned to invest US $ 500 mn in its Chennai plant,
Nissan-Renault planning to manufacture ultra-low-cost car with its local partner Bajaj Auto,
French tyre maker Michelin’s to invest US $ 874 mn in its first Indian manufacturing facility. All
these developments are helping in getting FDI inflows into the country.
The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure
investors from every corner of the world. As a result FDI inflows during 1991–92 to March 2010
in India increased manifold as compared to during mid-1948 to March 1990. As per the fact sheet
on FDI, there was ` 6,303.36 billion FDI equity inflows between the period of August 1991 to
January 2011.
The FDI inflows in India during mid-1948 were ` 2.56 billion. It is almost double in March 1964
and increases further to ` 9.16 billion. India received a cumulative FDI inflow of ` 53.84 billion
during mid-1948 to March 1990 as compared to ` 1,418.64 billion during August 1991 to March
2010.

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