Foreign Direct Investment and Global Trends
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In the first section of this paper, an overview of the relation between FDI and development is presented. The paper notes that the ability to harvest the benefits of FDI in terms of economic development varies greatly across countries and that many factors are responsible for these variations. Therefore, in the second section, the paper works out various correlations of FDI with a number of determinants of growth like private and public investment, infrastructure development, human skills etc. during the decade immediately following reforms. The paper also determines and examines these correlations in respect of different states in the country in order to explain the state wise differences in growth and FDI inflows. Having identified the factors affecting FDI inflow and their correlations with growth indicators, the issues involved are highlighted and policy implications are put forth in the third and the last section of the paper.
From the Paper:"Last two decades have witnessed a growing consensus among the developing countries that the net results of Foreign Direct Investment (FDI) can be positive. Macroeconomic objectives were attained in most of the developing countries and progress was made in key institutional reforms. In mid 1990s the net capital flows to developing countries had reached a peak of 6% of their GDP but after a decline in 1999, it has started recovery & in 2004 it had reached up to 4.5% of GDP. The current account balances in most of the developing countries recovered in the later years of 1990s from 'deficit' to 'surplus', which was 2% of GDP in 2004. As a result, the foreign exchange reserves swelled, which instead of being invested in domestic markets, continued to finance a large share of the US current account deficit in 2004. The net equity flows have increased faster than net debt flows. They have been stable at 2.7% of GDP since 2002. On the contrary, the net debt flows to developing countries have shown wide fluctuations and in 2004, it was only 1.4% of GDP. These favorable external and internal factors reflected themselves in a record expansion in developing-world GDP growth in 2004 when it touched 6.6%, which is much higher than the global average during the same period i.e. 3.8% only. Simultaneously, as the Official Development Assistance (ODA) saw a dramatic decline in 1990s, FDI emerged as the main preferred alternative source of development finance. Within the Official flow also, the shift from loans to grants has accelerated. Figure 1 Therefore, FDI is considered better than the 'bank credit' because of high and variable interest rates and 'portfolio investment' because of risks of high volatility with it. Moreover, it has served as the principal channel for transfer of long-term private capital, technology, managerial expertise, access to major foreign markets of the world for better trade opportunities and for establishing a link between domestic economies and world market. As a result, it is seen as an opportunity for domestic capacity building for production, innovation, increasing share in the world-trade through backward and forward linkages. All these factors are responsible for faster growth of domestic economy and increase in per Capita GDP, a cherished goal of every country in increasing living standards of its people. Nevertheless, there are also potential drawbacks associated with the foreign capital. Potential drawbacks include a possible deterioration of the Balance of Payment as profits are repatriated, a lack of positive linkage with local communities, harmful environmental impacts on host countries, and effects on competition in the local markets as they may virtually attain a monopoly position harming the local industries etc. However, neither the in-flow of the FDI nor the gains from FDI are automatic. The First Section presents the overview of the role of FDI for Development. In the Second Section, we will examine the past trends in FDI inflow in India and its contribution to India's economic growth. We will also identify the factors influencing FDI inflow in India. In the third section, we will discuss and examine the issues emerging out of the analysis of the factors influencing FDI inflow in India and finally suggest policy measures required to be taken to increase in-flow of FDI and maximize its benefits and minimize costs."
Cite this Research Paper:
Foreign Direct Investment and Global Trends (2006, February 12) Retrieved December 06, 2022, from https://www.academon.com/research-paper/foreign-direct-investment-and-global-trends-63747/
"Foreign Direct Investment and Global Trends" 12 February 2006. Web. 06 December. 2022. <https://www.academon.com/research-paper/foreign-direct-investment-and-global-trends-63747/>