Advantages and Disadvantages of Foreign Direct Investment

 Q. Describe in detail the advantages and disadvantages of Foreign Direct Investment.

Ans. In simple words, it is the investment other than the domestic investment. It is made by foreigners. In Foreign Direct Investment, the control of the company is in foreign hands. For example, if a company in USA directly invests money in an Indian company and keeps the control in its own hands in form of majority stake, this is said to be Foreign Direct Investment. Foreign Direct Investment means injection of the funds into an enterprise by a company having its origin and operation in a different country. Therefore, as a result of Foreign Direct Investment, the investors invests funds in the company directly and as a result of this ownership, the owner is granted management rights. Also the investor gets voting rights. Generally, Foreign Direct Investment refers to the Investment of foreign assets into domestic goods and services.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT: Following are the major advantages of Foreign Direct Investment in the host country:

1. Inflow of funds: Foreign Direct Investment causes inflow of the funds into the host country. These funds are generally in form of foreign exchange. Therefore FDI helps in bringing foreign exchange to the host country. Due to this reason vious countries are opening up their economies and relaxing FDI norms.

2. High technology: Foreign Direct Investment helps in bringing latest technology to the host country. The companies that establish their operations in different countries are usually very big in size and therefore are very high tech.

3. New markets and marketing channels: Foreign Direct Investment brings in dual benefits of exploring new markets to the parent company and also gives new markets and the marketing channels to the host country company

4. Employment generation: As a result of Foreign Direct Investment, a lot of employment is generated in the host country. The companies usually employ a lot of skilled as well as unskilled labours,

5 Capital formation: As the company bringing in Foreign Direct Investment invests its money in the assets, goods and services of the host.country, a lot of capital is generated and therefore the process of capital formation is accelerated.

6. Increased tax revenues: The government of the host country is also benefitted because the company establishing its business operations in the host country pays taxes on the income earned in such country to the government of that country. Therefore these companies are a source of government revenues.

7. High quality products: Generally as a result of Foreign Direct Investment there is an increase in the competition in the host country. As a result of this increased competition, the high quality products are ensured.

8. Cheap prices: Due to the use of latest technology and the economies of scale, the goods are offered at cheap prices to the customers. Therefore, the customers are benefitted.

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT: Following are the major disadvantages of Foreign Direct Investment:

1. Foreign Control: As a result of Foreign Direct Investment, the control and the management are vested in the foreign hands. As a result of this the domestic company becomes a puppet in the hands of the foreign country. 

2. Harmful to domestic industry: The foreign countries bring in the latest technology in the host country. Also due to large scale operations, the big companies enjoy economies of scale and hence sell goods at cheap prices. The domestic industry cannot fight the tough competition that these big companies give to them.

3. Outside management and control: As a result of Foreign Direct Investment, the management and the control are vested in foreign hands. Therefore, all the decisions are taken by the foreigners. There is a dilution of control of the host country. 

4. Repatriation of profits: The company that establishes its business in the hist country repatriate a part of its profit to the host country. As a result, there is an outflow of funds from the host country. 

5. Dilution of Control: Foreign Direct Investment results in dilution of control. As a result of FDI, the control of the companies goes from host country to the foreigners.

Describe in detail the advantages and disadvantages of Foreign Direct Investment.