Sunday, September 15, 2013

Myth of FDI

In India, the need for Foreign Direct Investment (FDI) has been highlighted from time to time. It has been said that FDI is 'all-good' for a developing country like India. It leads to transfer of technology, managerial skills, leads to employment and while supplementing domestic capital promotes economic growth. Foreign Direct Investment includes all investments made by companies, firms and individuals in various sectors of the Indian economy.

The Government has been liberalizing the rules and regulations for the inflow of FDI in the country from time to time.

Even though the above claims highlighting the positive effects of FDI are correct to some extent, there are several myths that need to be broken right away so that a clear picture of its positive and negative impacts comes to the fore.

Myth 1: FDI supplements domestic capital - This is only partially correct. Our indigenous industries that are unable to compete with the global MNCs are gradually shutting down leading to loss of jobs and production. Generally, the industries that shut down are small and medium industries which employ a lot of people. In effect, FDI has led to the destruction of domestic industries leading to unemployment.

Myth 2: FDI leads to transfer of technology - This happens only in a few cases in which the FDI limit is high. In other cases, it has not led to a significant transfer of technology and India continues to be one of the major importers of technology in the world.

Myth 3: FDI will lead to the development of the entire economy - In India, the distribution of FDI has been very uneven, both in terms of its flow to different sectors and its flow to different regions of the country. FDI flows to only a few sectors which many other sectors have remained neglected despite being opened to FDI long ago. Besides, FDI flows to already developed regions which have good infrastructure. For instance, the north-eastern region of the country has been able to attract only a small percent of the total FDI inflow. This has led to growth in regional and sectoral inequalities.

Myth 4: FDI does not create Balance of Payment (BoP) problems - This is also wrong to assume, as over time, the investing companies start transferring their profits and when they eventually quit the country, huge amount of funds have to be repatriated.

To conclude, FDI needs to be used very cautiously.

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