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Development Economics. Development Economics. Foreign Investment and Economic Development. Foreign Direct Investment:.
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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: • 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. • 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 • 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. • 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. • 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 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. 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 Better use of resources of UDCs: the UDCs have an abundance of natural resources. Most of the natural resources are either under-utilized or unutilized. Therefore, when FDI come in these countries, the natural resources could be explored and better utilized. 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 • 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. • 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 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 import-substituting 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: • 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. • 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 • 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. • Influence on Government policies: Foreign Direct Investment (FDI) use their economic power to influence government policies which favour them. Mostly they enjoy monopolies. • 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 • 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 profit-motivated and not interested in economic development. • 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 • Outflow of Capital: Foreign Direct Investment leads to the outflow of capital from a country by the following ways: • The foreign investors repatriates their profits to their parent countries. • They import raw materials and technologies from other countries or their parent countries thus leads to the outflow of capital. • 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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