Development Of Foreign Direct Investment

Published Date: 02 Nov 2017

Introduction

One of the most significant results of globalization in the world economy is the development of foreign direct investment among countries. Foreign direct investment guiding principle plays a vital role in the growth of economic, socio-cultural changes and development in countries around the world. International trade and foreign direct investment are relative concepts basically which enables the free movement of labor and capital across the world or between countries without much monitory transactions. This proposes for an indirect association between international trade and exchange production factors between two or more countries. The greater advantages of international trade and foreign direct investment is cost advantage in terms of production and business facilitation, which means the a country producing a particular good and availability of raw materials are comparatively less so in such situation they would take advantages of other countries recourses and factors of production become economical (Euro Journals, 2012 )

FDI plays a vital role in growth of economy because they tend to be more productive than the investment of local firms. It caused to bring changes in the production method and it has led to significant positive spread out effects on the labor productivity of domestic firms. Socio-economic and political factors are matters a lot in the inflow of foreign direct investment in a country, because the investment has some basic things to be satisfy like the stability in policy, steady government, legal aspects as such. So to attract foreign direct investment inflow with liberal polices Hs therefore becomes a key combat zone in the emerging markets. The foreign direct investment itself create a wider range for attract other investors to invest and to be invest. The vision of new growth opportunities and bulky profits encourage large investment flow across a range of industry and opportunity types. When the foreign direct investment take place a business which has already exist in the market of nation, the percentage of competition would increase rapidly only to survive in the market. And this led has led to competition among countries in formulating flexible policies that and providing encouragement to private investors to invest more. Basically t a country would accept the policies and procedures based on the recourses (Borensztein, E, 1998)

In 21st century Brazil, Russia, India and China have obtained significant role in the world economy as producer of goods and services and the upcoming world super powers. Now a day’s world looking into BRIC nations due to the high potential customers and large population basically it attract huge amount of capital. By 2050 BRIC nations will become dominant economy in the world because it has high economic potential. BRIC nations found a greater position in emerging markets and these countries have the fastest growing economies. The BRIC nations are listed as emerging economies but these countries as a whole do not have any trade or integrated economic union. Now a day’s a good percentages of foreign direct investment turn to Brazil, Russia, India and China, mainly Goldman Sachs investment bank to represent BRIC nations as an Economic Block. Global competition for FDI had given the bargaining power to Multi- National Corporation and their allies (Boros Torstila, 1990). Due to the inflow of foreign direct investment countries started to liberalize their policies basically on reduction in entry taxes, regulations, environmental clearances and requirement on working conditions for attracting FDIs. Gold man Sachs the representative of BRIC nations predicted that China and India are likely to emerge as dominant global suppliers of manufactured goods and services while Brazil and Russia to dominant in supply of Raw materials (Journal of Business Science, 2010).

The importance of ‘Developing country’ is increasing day by day. Africa and Latin American countries are the main rivalry for BRIC nations. The potential of Africa especially South Africa, the largest economy in the region is also plays a vital role in Global economic growth and development and it is challenge for BRIC nation’s development. If the right policy take place South Africa, they would obtain five percentage of growth in next decade, report show in the study of Goldman Sachs. Now the projected figure depicts that South Africa achieved the similar growth as BRIC nations have obtained. The significant role of FDI in the development of economy and living experience of BRIC economies paid attentions of rest of the world. Therefore the world market and investments are looking into it. On other hand this kind of FDI investment caused to create an unofficial relation between such and such countries. The important potential of this nations are in human resources and potential customers, who can afford the slandered of living. The main and for most important reason behind the growth of BRIC nations is the saving mentality of people, when the save resources for future it leads to keep a good reserve for nation. Once the reserves has got surplus which means the country has potential to invest and high capital ratio. In the recent days BRIC countries exhibited economical strength in the face of the US credit turmoil and growth decline. BRIC nations differentiate a cyclical component of strong domestic demand growth. The economic growth of a country is mention with the effect of several factors like changes in labor and capital inputs, total factor productivity as such. The total productivity captures technological progress and efficiency gains and residual remain unexplained due to changes in labor and capital inputs. However the BRIC countries are differ in terms of their growth prospects (Vijayakumar, Sridharan, Rao, 2010)

The crucial factors which favorable for Brazil, Russia, India and China is the demographic trends, labor supply dynamics and urbanization ratios. Basically BRIC countries are well sounded in population. The concepts such urbanization, industrialization, mercerization and internationals helps China from a poverty stricken country to largest economy in the world. A low urbanization ratio of 40 per cent in China may help to counteract the projected decline in the working age of the urbanization by allowing the transfer of labor from the countryside into the more productive urban economy. But the case of Brazil is such different from the rest of team because urbanizations have already done in Brazil in a greater range. It is well structured developed country in the world. The figures are showing that 20 per cent increase in population of working age between the year 2005 and 2025. Due to the influence of urbanization Russia gets little help will come from surplus rural labor. From the South Asian demographic point of view, India facing most promising economic position with solid growth of population and lower degree of urbanization. Initial stage India was facing the challengers of urban development and infrastructure. But the recent trend of capital accumulation favor to China and India. Assuming the investment ratio does not change dramatically over the next years, China and India face much brighter prospect than Brazil, Russia. Currency domestic investment ratios are around 40 per cent and 30 per cent of GDP in China and India respectively, were as an investment ratio of Brazil, Russia account to 20 per cent of GDP. Due to large commodity boom Russia probably generated its investment ratio and savings. Brazil, having a more modest increase their domestic savings may drive a moderate up-tick and technology in investment ratio. It appears that India and Chinese capital accumulation will proceeds a much faster pace than Brazil and Russia (Vijayakumar, Sridharan, Rao, 2010).

The comparative and unconditional economic importance of BRIC is expected to continue to get higher for the predictable future. In terms of economic growth, China has been outstanding performance, the other four countries by a wide margin in last thirty years. It has showing a rapid and outperforming in history of China’s success. The significant of reality of the growth of GDP ratios in all this BRIC nations, the GDP growth average is 4.6 percentages in India and Russia, China is around 7 percentages and 3.3 per cent in Brazil over the past decades. So the BRIC may become the largest economies of the world in the coming years. In the last decades BRIC nations are one of the predominant beneficiaries of FDI in the world. However, FDI has made an incredible image in the appearance of world economy. It has introduced a well developed structure in whole economic position of Brazil, Russia, India and China. Initial stage of 1984 Brazil is one of main receipt of FDI inflows among BRIC nations later on China overtake by the beginning on 1985. Later on china become the world major recipient of FDI in the 1990 and it caused to boost the overall economic performance (Baniak and herczynski, 2002).

The main advantage of China is the factors of production is less especially the labor cost, due to this reason many Multinationals move to China only to take advantages. For an example; production of Apple, Apple is a company founded in United States of America but they have a production plant China. India has received only small per cent of world FDI during the last two decades. Foreign Direct Investment in India is bit difficult task on past years. FDI inflows are restricted due to public enterprises dominant in many key sectors. Equally, the low and constant inflow applies to the Russian Federation since 1990. It is also worth of pointing out that the type of FDI received by each country has been significantly different and that the type depends on policies of the recipient countries. Initially the FDI were involving IN BRIC nations by accruing the local firms. China and India have not liberalized the Capital account, where the FDI flows appear to be determined on ‘Green Field Investment’ in new production capacity (Vijayakumar, Sridharan, Rao, 2010).

The inflow of FDI has created a great path in the emergence of BRIC nations. China has positioned as a far leading market destination of FDI received US$147.79 billion by 2008 where as Russia, Brazil and India obtained US$75, US$45.05 and US$41.31 billion respectively. Now a day’s the most important economic driving forces in the world are India and China. Recent studies are showing that the China maintained its position as the most attractive FDI destinations globally. India is holding the second position grown up from fifteenth in 2002. The major changes were taken place on the period of 2004-2008. FDI flow to the Russian Federation is at around US$37.62 million on these years. Comparing to other countries FDI flow, in Russia is relatively low. However, it made a greater impact in Russian Economy between 2006 and 2007. After 2008, the world had been stuck in the turmoil of financial crisis. The BRIC are certainly not wholly resistant to the economic decline of US. But unlike the UD and many other developed countries, BRIC appear well positioned to weather the global economic decline. Later on the newly revised GDP growth depicts, IMF has anticipated a modest declaration of BRIC‘s amazing path of growth. IMF shows that 46% of global GDP growth occurred by BRIC nations in 2000 to 2008period but in the same time the G7 countries have contributed only 19 per cent. These differences raise interesting question for both academia and policymakers as to why the BRIC countries have performed differently in attracting inward FDI. What is the determining the FDI flow into the BRIC countries? Will BRIC continue an increasing trend of receiving FDI? These questions are concluding into a single format, Impact of Foreign Direct Investment in BRIC nations (Ranjan and Agrawal, 2011).

In this context, this study is intended to determine the major impact foreign direct investment of BRIC nations. Basically this is a product of globalizations. The aim is to provide a much more strong and generalized and conclusion by the dominants of superpower.

Literature Review (start with new page)

This research is based on the impact and influences of Foreign Direct Investment which leads the socio-economic growth Brazil, India Russia and China. FDI can be viewed as a driving for the enhancement of the social, cultural and economical standards of these countries. It is key element in this rapidly evolving international economic integration, also referred to globalization. FDI hold a vital role in the economical development. Under the right policy environment, it can serve as an important vehicle for local enterprises development and it may also help to improve position of the recipient country and the investing company. In particular, FDI encourages the transfer of technology. FDI is an important source of capital for a range of host economies.

Foreign Direct Investment means a company or organization making a physical investment into building a factory in another country follows certain rules and regulation. Foreign Direct Investment plays an extra ordinary role in global business. It can deliver a firm with a new market and marketing guide, inexpensive production facilities, access to new technology, or a new foreign firm which receive investment and it leads to deliver a source of new technologies, capital, process, product, organizational technologies and management skills, moreover it leads to a strong accredit to economic development. The scope Foreign Direct Investment is based on the capacity of home country and it make changes in host country. Home country means the country from which the investment originates and Host country denoted that the destination of the investment. (Graham, R. Spaulding, 2005).

2 Foreign Direct Investment.

Foreign Direct Investment is mainly succeeding with two elements that recognized as inward and outward investment. Both investments are based on the capability of home country.

Inward investment

Inward investment is kind of investment, it is injection of capital, assets, funds into a country from outside. An investment involves an outside or foreign unit either investing in or purchasing goods of a local economy. A common type of inward investment is foreign direct investment. This occurs when one company purchase another business or establishing new operation for existing business in a country different than investing company’s origin (International-Inward/outward Investment, n.d.).

Outward investment

Outward investment is a type of investment made from inside one country to another. The increasing nation’s outward investment can be seen as a substitute that the nation’s economy is booming to the extant that sufficient risk capital is available for further venture. For example in the 1990’s foreign firms entered in China and gave a large entry of foreign capital into Chines economy. As a result of subsequent economy activity in the year to come, Chinese economy flourished to the point where Chinese companies now engaged in large scale outward direct investment. In fact, in 2005 Chinese companies spent over $6.9 billion in ODI (International-Inward/outward Investment, n.d.).

3 FDI in Developing Countries

In the developing countries, the private foreign capital is reaching by foreign direct investment. It’s became a grate reason for the economic development, modernization and employment generation. It also plays a vital role to secure the much needed industrial technology, managerial expertise, and marketing awareness across the world and it increasing dramatically. FDI encourage the growth process and long lasting view of benefits ascending out of FDI is based on perception, such inflow of capital acts an engine of growth in developing countries. The benefits from FDI investment in developing countries is based on the trade, investing policies and procedures. The competitive outward oriented foreign investment becomes a reason to bring additional effective technology and management. In addition that FDI has more helpful effect on ‘Balance of Payment’ of developing countries than debt finance (Shobhana, 2010).

Recently the emerging markets turning their focus on inward and outward equity. Considering the outward investment, it is possible with higher return at lower risk. Risk is an inevitable element in all business process but the diversification of risk is significant component as well. In domestic economies there are higher possibilities for diversification risks. Permitting inward investment can assist interest on additional resources and improve allocation of resource. FDI is also caused to make variation on ratio of capital inflows, stock exchange ratios, investment growth and GDP growth rates as well. In the past decades countries have experienced more unpredictable movements in the price through the interference foreign participation. Evidences are representing that foreign investor’s trade activity has threatening effect on host country; it reflects that the government providing the entire support for investors. International investors have more power to attract the capital market in domestic comparing to others (Shobhana, 2010).

Table 1: Global FDI Inward (US $ at current prices - billions)

Economy

mode

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

World

Flow

155.8

166.7

222.5

256.8

341

390.4

485.8

705.5

1089

1398

stock

2101.5

2160

2334

2571

2914.4

3245

3503

4151.8

4920.9

5786.8

Developing economies

Flow

39.8

53.1

76.6

103.7

116

147.1

190.8

190.8

228

257

stock

567.6

625.5

704.4

768.8

851.5

987.6

1122

1243.4

1582

1738

Economies in transition

Flow

0.204

1.664

3.169

2.05

4.113

5.885

10.35

8.026

8.49

7

stock

2.192

0.505

2.554

6.822

11.5

70.3

29.6

33.1

42.9

60.8

Developed economies

Flow

115.8

111.9

142.5

151.1

221

237.5

284.8

506.8

852

1135

Stock

1531.7

1534

1627

1795

2051

2240

2351

2875

3296

3988

2329

Source: status. Unctad.org

This table depicts that the variation are occurs from 1991 to 2000 on behave of foreign direct investment. It denoted the slight increase in overall view.

Investment Management

On behave of these points the author denoting that foreign direct investment guide to the developing of non-developed countries. Instead investing in local business, putting in a company functioning or incorporated in another country is foreign direct investor. Foreign direct investor can have influence in the management if companies invested in. investment management means; it is professionally handling the different securities like bonds, shares with certain investment objectives and satisfaction. The reason behind the sudden arrivals of investment is the existence of large number of complex financial terms, instability of financial markets, and need sudden alteration in the regularity issues. Investment managers demonstrations a vital role in investment management, they are well experienced and trained to advising and discriminating management works in private investment’s wealth management. Investment management is to be reason for making and forming decisions in the case of assets, element of financial statement analysis, and plan formulation for investment (Basics of investment and money management, n.d.).

Investment Strategy

Investment strategy is generally concentrating on the rules and regulations for both. Well planed investment strategies mark an excessive in the investment decision making which is reliant on the period and type investment. Risk is a part of investment. Every investment has its own rules and regulations to follow. The common type of investments are as follows, public provident fund, bank fixed deposit, gold investment, insurance policy, stock market, equity installment loans, gold deposit scheme, non residence ordinary fund, national saving certificate, real estate and lending payday loans (Basics of investment and money management, n.d.).

Motivational factors

Instead of investing in local business, putting in a company functioning or incorporated in another country is foreign direct investment. For the country attracting the investment, the investor is considered a foreign direct investor. Foreign direct investor can have influence in the management if companies invested in (Hari Sud, 2005).

6.1 Expansion in technology:-

FDI can introduce world level technology, technical experience and processor to non-developed countries. Foreign expertise can be a vital factor in upgrading the existing technical process in a host country. Through the interference of FDI in non-developed countries always leads to foothold in international business and development. Expansion of technology always shows a vital role for the development of countries and the influence of technology in FDI is undesirable (Hari Sud, 2005).

6.2 FDI manufacturing Economy:-

It transforms the local economy into an export capable economy. FDI also brings with expertise which is much important as the capital itself. Since, it is the multinationals which are at the important edge of words these export are free from quotas and restrictions. The increase of export is always leaded to popularity of brand name the consumer nation starts the quality and honesty of the supply (Hari Sud, 2005).

6.3 Integration into Global Economy;-

A development country, which invests FDI, can gain the grater foothold in the world economy by receiving access to wider market. In global economy, now a day the developing countries competing for foreign direct investment (Hari Sud, 2005).

6.4 Agriculture and manufacturing for fuller employment:-

Unemployment is the key cause of political unrest in third world war countries. There are two know ways to undertake it. First is to make agriculture profitability and more rewarding and the second is to industrialize quickly. Agriculture reforms have been largely successful in India (Hari Sud, 2005).

6.5 Increasing Competition:-

As FDI carries in advances in technology and process, it increases the competition in the domestic economy of developing country, which has attracted the FDI. Other companies will also have to improve their processes and product in order to stay competition in the market. Overall FDI improve the quality of product and process in a particular sector (Hari Sud, 2005).

7. Impact of Foreign Direct Investment in Different Perspective

In the middle of the 1980s, when world FDI happened to raise penetratingly. In this period, the world FDI has enlarged its importance by transferring technologies and establishing marketing and procuring networks for competent production and sales internationally (Athukorala, 2003). FDI enables much needed resources to developing countries such as capital, Technology, managerial skills, entrepreneurial ability, brands, and access to markets. These are fundamental for developing countries to industrialize, develop, and create jobs attacking the poverty situation in their countries. As a result, most developing countries recognize the potential value of FDI and have liberalized their investment regimes and engaged in investment sponsorship activities to create a center of attention various countries. Globalization and regional incorporation arrangements can modify the level and prototype of FDI and also it reduces the trade costs (Pournarakis and Nikos, 2004).

FDI have liberalized their investment regimes and engaged in investment sponsorship activities to create a center of attention various countries. Globalization and regional incorporation arrangements can modify the level and prototype of FDI and also it reduces the trade. FDI can complement local savings and by supplying more efficient management, marketing and technology to improve productivity. The achievement in national income depends on the size of capital inflow and the elasticity of the demand for the capital, still technological and managerial inputs, and transfers and spillovers to local firms may cause the national production function to shift outwards (Athukorala, 2003). The presence of FDI is projected to create competition that possibly improves the quality of the host countries’ stock of physical capital and the competence of investment in the countries, and thus the efficacy of domestic investment (Tran Trong Hung, 2001). This increases the ratio of investment to GDP and consequently the investment increases transform into the demand for goods and service of other sectors via multiplier and accelerator special effects. Thus, it prompts higher economic growth in the host countries.

Repatriation of the profits can be stressful on the balance of payments; the high growth of wages in foreign corporations can influence a similar growth in the domestic corporations which are not able to cover this growth with the growth of productivity. The result is the decreasing competitiveness of domestic companies. With the exception of the force on the environments of developing countries and on financial markets, much of the evidence regarding the effects on human resources, the political atmosphere, and enriching relationships is hypothetical and sketchy at best with only a few instances to authenticate arguments. Moreover, many of the negative effects are short-term and the standard of living for many developing countries would be worse off without FDI flows. The inflows of FDI in a country are originated to have a significant and positive result on the economic growth. The economic expansion at the area level is found to have a encouraging and significant impact on the reduction of poverty. The inflows of FDI have a directly and strongly constructive and considerable impact on the poverty reduction in a province. The evidence is consistent with the assumption of the direct and indirect effects of FDI on poverty reduction (Tran Trong Hung, 2001).

To assist developing countries in building the infrastructure necessary to reap the benefits of FDI, to continually provide financial assistance in the form of long-term productive capital, and to reinvest profits inward rather than repatriate them. Historically, FDI has been aimed at developing nation as firms from complex economies invested in other markets. Aside from using as investment mediums and a method to reduce operating costs, many companies and organizations are now looking at FDI was a means to internationalize.FDI allows companies to stay away from governmental pressure on local production and with protectionist procedures by circumventing trade barriers. The move into local markets also ensures that companies are closer to their consumer market, especially if companies set up national sales offices (Albuquerque, 2000).

However, studying the effects of foreign direct investment on countries with a emergent economy, more than anything else relates to the study of economic progress in general and to the economic development of social classes in particular; certainly the process of development may make winners and losers. In this view, we are studying the special effects of "foreign direct investments" on quantitative and qualitative aspects of factors such as employment and distribution of income.

7.1 Correlation between FDI and IFM

The moving of number of countries towards liberalization and globalization. Many global corporates are showing great interests in investment in communication, services, marketing and entertainment networks and infracture,etc.the flows of capital between country and other are recorded in the capital account. Free flow of capital is necessary for the welfare of the society. The International flows of capital have become every day fact of life in international economy and because of their enormous size, are important capital flows can affect lots of factors like exchange rates , interest rate, and economic policies as well. The level of human capital, political stability and depth of financial markets define a country’s ability to attract foreign capital. Majority of the capital inflows are in the form of foreign direct investment in different countries.Well prospered financial markets agree to gain something from FDI,and it helps to take advantages from direct investments from abroad,magnifying the productivity efforts of FDI.

7.2 FDI is a positive thing for the development

FDI is the outlay of real assets in a foreign country; it is acquiring resources such as land and equipment in another, host country, but operating the facility from the home country. FDI is viewed by many as essential to motivate the economies of both developed and underdeveloped countries. Foreign Direct Investment plays a decisive role in order to supplement national savings by capital inflows and prop up economic development. It is considered less prone to crisis because direct investors, typically have a longer term perception when engaging with a host country, in addition to the risk sharing properties of FDI.it is widely believed that FDI provides a stronger ,stimulus economic growth in host countries than other type of capital inflows. Foreign Direct Investment is a crucial component of wide and effective economic system and a major substance for development. It is the obvious and helpful, enabling policy environment for investment and to build the human and institutional capacities to implement them. Foreign Direct Investment can provide a set of environment in non developed countries with new markets and marketing channels, poor production facilities, adaptation of latest technologies, manual skills, and capital strength.FDI is often mentioned as the most important source of technology transfer to local firms in developing countries. This has been clearly evident during in the 1960 and 1970s in the so called recently industrializing countries (NICs) in the south East Asia such as South Korea, Taiwan, Hong Kong and Singapore (Kim Niosi and saggi 2002).

The interlinkages of trade and foreign direct investment influence the profitable growth and safety of countries in a global atmosphere, which undergoes incessant changes. In this sense, FDI inflows are as a assess of the point to which a country or a region is integrating into the world economy. Integration in the global economy is proxied by two alternative variables, exports and international trade as a percentage of GDP.Countries that have become more incorporated in the global economy-the level of their annual exports is advanced- are anticipated to draw more FDI than countries with a lower degree of integration. Thus the following hypothesis is posited:

7.3 Global perspective

Across the world FDI has been increasing dramatically since early nineties.FDI is stimulating the growth process and the long-term view of benefits arising out of FDI is based on the perception that such inflows of capital acts as engine of economic growth in developing countries.the benefit to a developing country from FDI depend largely on its trade and investment policies. Countries with more open trade regimes are more likely to attract competitive outward oriented foreign investment which brings more efficient technology and management. There is a view that FDI has a more salutary effect on balance of payments of developing countries than debt finance. A large number of markets have opened up their economies for inward and outward equity. Out ward investments lead to diversification of investment at lower risk and higher return. The global FDI flows in respect of both the modes of entry presented a rising trend with wide fluctuations during certain periods. Between FDI and FDI stock , there is a greater consistency in the movement of FDI stock.

Segments of Financial Markets

Money market is a market one of the forms of financial markets, for short term loans or financial assets. According to Gordon and Natarajan (2011), "It helps to lend and borrow money in short funds. In the real meaning, it doesn’t deal in the form of cash or money. But it actually deals with near substitutes for money or near money like trade bills, promissory notes and Government papers drawn for a short period not exceeding one year." This type of market is the centre for dealing mainly in the short term money assets. It meets the requirements of borrowers and provides cash to lenders.

The Money Market has featured by so many things. It deals with the financial assets having a maturity period up to one year only, but the assets can be converted into cash readily without loss and with minimum transaction cost. In this case, broker and such practices doesn’t involves. And its not a an identical market but, it includes several submarkets which is specializing in different type of financing like call money market, acceptance market, Bill market and so on.(Gordon and Nataraj 2011)Commercial market is the dominant of money market. It can seen in the services of this markets.

One of the pillars of the financial system is developed money market. The importance of market is playing a vital role in the short term funds to make them adequately and quickly to trade and industry. is an integral part of country’s economy. Therefore, a developed money market is essential for the smooth functioning of the financial system by trade and industry, capital market, effective central bank control, formulation of suitable monetary policy.

Limitations of the co-works

2.1 Potential Risks.

Both economic theory and empirical evidence suggest that FDI has a beneficial impact on developing host countries.But,it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country’s total capital inflows may reflect its institutions’ weakness rather than their strength. through the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuance view of the likely effects of FDI.Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign (Albuquerque, 2000).

2.2 Government decisive role

A major alternation over the past three decades has been that governments have become more favorable towards FDI, and have liberalized their FDI system accordingly, though at different times, speeds and pits in different countries and regions. Over the past fifteen years, countries have regarded FDI ever more as contributing to their development strategies for the technology and capital it provides. They have even have started to try to win for FDI. Investment policies have become more open-minded at the national and regional level, but there is no complete framework at the mutual level. Some home countries are also progressively facilitating FDI into developing countries with guarantee funds, matchmaking and other measures.

2.3 Upcoming Trend

Some argue that FDI leads to economic growth and efficiency increases in the economy as a entire and hence contributes to differences in economic growth and development performances across countries, but others pressure the risk of FDI destroying local capabilities and extracting natural resources without adequately compensating deprived countries. This paper examines trends in the relationship between FDI and Development in an historical context. FDI is now seen as advantageous and nearly all countries try to supply a friendly climate for venture. Countries increasingly identify that they can affect the attraction of FDI using both general economic policies and appropriate specific FDI policies (Journal, 2001)

3. Achievements through the FDI

3.1 Alternation of developing and semi developed countries

Foreign aid continuously increased and lending of commercial to countries with developing economies rose sharply. the graph represents the information about the impacts of FDI in developing countries and semi developed countries(almost near to developed)

Figure.1: FDI in Developing and semi developed countries

3.2Encouraging effects

The necessity of external finance for business becomes evident from the relationship between the ranking of countries and out flow of capital. It is helpful to improve the total performance of region. The conditions are rigid for the calculation of outflows and inflows of an economic environment(8). The tables shows that the ranking of countries on the basis of these standards (rigid calculations), concentrating on the percentage of out flows by FDI.

Ranking

country

% of outflow by FDI

82

Kenya

0.01

81

Sri Lanka

0.02

80

Iran

0.02

79

Kuwait

0.03

78

Cuba

0.04

77

El Salvador

0.04

76

Bangladesh

0.05

75

Bahrain

0.06

74

Costa Rica

0.07

73

Venezuela

0.07

72

Slovenia

0.07

71

Latvia

0.07

70

Lithuania

0.08

69

Cyprus

0.08

68

Estonia

0.09

Table 1; Ranking of countries on the basis of % of outflow

FDI Destinations

A developed country, FDI has been helpful in the economic growth. This has encouraged the developing countries like India and China to improvement their economic policies to attract FDI. The entities of foreign direct investment are capable only through the affordable conditions in economy. The popular FDI destinations are follows:-

Table: 2 Foreign Direct Investment Destinations

Country

2007-08

China

1

India

2

USA

3

Russia

4

Brazil

5

Vietnam

6

UK

7

Mexico

8

Poland

9

Source: UNCTAD’s ranking as per World Investment Prospects Survey 2007-09.

China is holding the first position for foreign direct investment. In the period of 2007 to 2008 India has emerged as a stronger world wide host country and it overtake United States, India become the second most alternative destination for foreign direct investment (Kalmalaveni,2010).

FDI flow in India

Foreign Direct Investment is holding a vital position of Indian economy. Recently Indian governments initiate the more affordable steps to attract the foreign direct investment. The government took necessary ladder to integration the economy into world level. Recently India implemented New Economic Policy (NEP). After implementation of this policy, Indian economy witnessed for the marvelous development in economy (Kalmalaveni, 2010). FDI have some positive effect in economy. It targets the long term plans, stranded of living and grater integration in global economy. It also has some influences in retail industry as well. Day by day the influence of foreign direct investment in retail sector is increasing dramatically. The followers of FDI in retail section are converse that hoe ultimately the consumer is benefited by both price reductions and enhanced selection and technology improvement so it caused to raise the quality of retail section as well. (Guruswamy, Sharma, Mohanty, Korah, n.d.).

8.1 Major Foreign Direct Investors in India and Its Growth:-

The major investment flow in Indian economy was started on the period of 2005-2006. The main investment countries are Mauritius, Singapore, USA, UK, Netherlands, Japan, Cyprus, Germany, France, and UAE.

Rank

Country

06-07

07-08

08-09

% share

1

2

3

4

5

6

7

8

9

10

Mauritius

Singapore

USA

UK

Nether lands

Japan

Cyprus

Germany

France

UAE

28759

2662

3861

8389

2905

382

266

540

528

1174

44483

12319

4377

4690

2780

3336

3385

2075

583

1039

50794

15727

8002

3840

3922

1889

5983

2750

2098

1133

44

9

8

6

4

3

3

3

1

1

Table: 3 Source: www.rbi.org. Foreign Direct Investment in India

India had heavy inflows of foreign investment from these countries. Mauritius is holding the first position for the biggest investment, it investment 44 percent of the total flows in India. The main reason behind the massive investment is only because of the policy of double taxation. Mauritius being a tax haven is a conduit for investor from other developed countries. Singapore, USA, and UK are the other larger business entities of India contributing 9 percent, 8 percent and 6 percent respectively to the FDI inflows. The investment from these top most countries is leaded to development in various ways like economic, socio-cultural, political and technological as well. Through the investment technological development has got a great improvement in global level. As far the investment from USA is concerned, the revolution in information technology in India and leads to transfer the information technology from United States (Kamalaveni, 2010)

Cause of Delay of FDI in Indian Economy

Considering Indian investment, the flow of investment is truly occurring from 2000 itself. The preparation for foreign direct investment was started from independence itself, because huge factors it was not on time. India is large democracy with second large population in the world and highly qualified public, India must have been considered as a safe haven for foreign investment. But yet India seems to distress various problems like self imposed restrictions and problems regarding opening new markets. The major phases of poor performance of Indian foreign direct investment are political instability, poor infrastructure, irregular tax policies, business law and government regulation, corruption and government rules and regulation (Yallapragada, Paruchuri, n.d.).

9.1 Political Instability:-

The legal and political instabilities or implication are always leads to make complications on foreign direct investment. Kapur and Ramamuti emphasize that "Indian politics is cacophonous and fractious, playing itself out in one of the most socially heterogeneous societies in the world with sharp social inequities, a corrupt and inefficient bureaucracy, and poor accountability of politicians". To avoid these kind of problem the central governments was took some basic measures and it was not that much success in Indian politics. The policy multiplicity of central government was one of the essential things. As a result, there were general election and six prime minister during the last decades. This kind of alteration from the central government was leads to make more comfortable for foreign direct investment. The Indian policies and following procedures were made more complication for the foreign direct investment. Economic sectors and growing fluctuation in stock exchanges were kept a better position from the foreign direct investment (Yallapragada, Paruchuri, n.d.).

9.2 Deprived Infrastructure

Before launching foreign direct investment the position of infrastructure and information technology was worst. The state controlled physical infrastructure is the weakest link in economy. Absence of efficient infrastructure is cause to major issues for the inflow of foreign direct investment. Other reasons for making the investments delay in India, the government promised to bring infrastructure up to dates, but the power cuts makes another burden, and the transportation of goods made delays. This kind of drawbacks leads to make depression to foreign direct investors to invest their money in India. However, it leads to make the government more discourage and disappoint to consider the Indian economy and they are compelled to implement the opportunities in Indian market. The major problem facing in Indian economy is power shortages. The state governments took initial measures for development like creating new roads, electrification in rural areas, and power generation transmissions, etc (Yallapragada, Paruchuri, n.d.).

9.3 Irregular Tax Polices

Indian tax policies and provisions are complicated chapters for foreign direct investors. They are implementing changes frequently with issuing any notifications and it makes a regular burden for investors to plan their investment sector. 1990s, India was initially opened their market to foreign investment. Initial investors from Mauritius, the reason behind this fact is Mauritius does not dividends or capital gain. However, Mauritius has considered as residence cooperative country with India. Recently, Mauritian investments are holding a vital position in Indian investment jurisdiction. The huge investments from Mauritius are caused to increase the investment from other foreigners as well (Yallapragada, Paruchuri, n.d.).

9.4 Business Law and Government Regulations

The initial business laws were introduced and implemented by East India Company before independence. After occupation of the position freedom the government of India started to implement the laws and regulation which introduced by East India Company and the significant changes were made in 1990s. The implemented law in 1990 was more helpful for investment in India. However, the indirect amendment of law with the new concept of Ministry of Industry is leads to reduce the investment from international investment. In that time India was witnessed for n number of joint venture, several joint ventures between Indian companies and foreign firms have threadbare, it gradually leads to make some complication and indicates to close the partnership with Indian companies. The government of take into consideration of these critical situations and it caused to create new laws which favorable for foreign investment in India as well. According to new laws, acquire the approval to obtain from both past and present joint venture partner, technology, trade marks and franchisees in order for foreign companies to do anything for India. So initially the business laws was more complicated for foreign direct investment but after few decades the rules and regulation were completely got changed and it more comfortable for foreign investment (Yallapragada, Paruchuri, n.d.).

9.5 Corruption

Corruption is one of the basic and crucial problems faced by both people and government of India as well. If corruption occurs in any departments, social services are leads to get off or abolish the meaning or intention of that particular field for ever. Indians are fully aware about corruption and its consequences, in India corruption is the norms, not an expectation. It manly occurs in public sector and service sectors. The preference of corruption in various sectors which reason to make more confusion in foreign investors as well. The humongous bureaucratic structure has more comfortable to create a ground for corruption and illegal activates in high rates. Transparency International recently mentioned that India closed to the bottom list of corrupted countries. So in this factor which denoting that corruption is always indicates to un- comfort ability and reason to get back of foreigners from more investment (Yallapragada, Paruchuri, n.d.).

According to Ramkishen S. Rajan (2005), "FDI strategy is an art not a science. If administrative capabilities are not appropriate to the skill, information, negotiations and implementation, abilities needed, it may be best to minimize interventions with the market: to simply reduce obstacles in the way of FDI, minimize business costs and leave resources allocation to the market. There is no ideal universal strategy on FDI. Strategy has to suit the particular condition of the country at the particular times, and evolve as its needs change and its competitive position in the world alters" "whilst richer countries with more financial resource and local capabilities can afford a risky and costly proactive stance towards FDI. And can use FDI. Strategically, many poorer countries are left behind with relativity fewer local capabilities. This is attracting FDI and enhancing positive spillovers associated with FDI"

Foreign Direct Investment Inflows:-

Foreign Direct investment was initially discussed about some measures to follow to maximize the growth benefit of it. The current global environment is more affordable for the foreign investment. FDI helps to maintain a stable situation in both host and home country because the benefits are sharing with both countries so it ensures the economic stability and it leads to the further improvements and developments. It leads to improve the efficiency and fluctuation of markets and also leads to attract the investors. The vital effect of foreign direct investment is always leads to make foothold in outward investment. Outward investment means Outward investment means the investment made from inside one country two another, and the strength of outward investment is based on influences and success of inward investment in home country. At the common level, openness to international trade and access to international markets, provide stability, a translucent and expectable macroeconomic and regulatory environment, and less transaction cost of doing business are recognizable but not always easily implement measures needed to attract FDI (Rajan, 2005).

10.1 Promotions in Investment Policies:-

The general step were took by host country is always leads to get an unlimited attraction from foreigners to make more investment in flexible countries. Considering India, the government is always expecting the appearance of foreign direct investment because it leads to make foothold in global international economy and indicates to variety more significant measure for handling new business in all over the world market. The interference of foreign investment is leads to variant and innovate the modernization in stock and flow markets. Recently the Indian business magnets are started to think about the outward investment in others, because the strength of inward investment are increasing day by day. The investment flows are leads to exchange the technology and infrastructure so it always leads to improve them self and their self. Foreign direct investment is make innovative position in international business entity (Rajan, 2005).

10.2 Fiscal and Financial incentives:-

The influences of FDI in developing and developed countries are recognizable and holding as an essential element. The host countries are constructing novel plans and measures to attract foreign direct investment and offering numbers of incentives as well. As World Bank notes, "policies that are designed to reduce the tax burden of a firm, (including loss write-offs and accelerated depreciation)". Most of the developing countries would prefer to choose the financial incentives. The concept about tax incentive and fiscal incentives are more favorable for developing countries (Rajan, 2005).

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