Essay On Fdi In India Pdf Converter


1. Introduction

2. Definitions
2.1 Developing Countries
2.2 Foreign Direct Investment

3. Impact of FDI on Developing Countries
3.1 Theory
3.1.1 The Benign-Model
3.1.2 The Malign-Model
3.2 Empirical Evidence

4 Policies regarding FDI in Developing Countries
4.1 National and International Policies
4.1.1 Maximising the Positive Effects Political Stability and Corruption Liberalisation Infrastructure Human Resources Development Export Production Diversification Banking System
4.1.2 Minimising the Negative Effects Environment International Institutions The North-South Equity Divide
4.2 International Investment Agreements

5 Conclusion

1. Introduction

Developing countries today have to deal with the question of how to increase economic growth. This phenomenon depends on a variety of factors: political, economic and social ones. Due to globalisation, foreign direct investment (FDI) has become an often discussed issue in literature and is seen as a key factor for economic growth by many developing countries by now. But the effects of FDI are not necessarily positive. In this written assignment, the author would like to introduce policies to be conducted in order to maximise the positive effects and to minimise the negative ones.

This paper will start with a definition of the terms developing country and foreign direct investment. In the second part, a short introduction in the controversial theories about the impact on economies of developing countries will be presented. In the following, several national and international policy considerations will be introduced. The paper will end with a conclusion.

2. Definitions

2.1. Developing Countries

Definitions of the term developing country vary in literature. Generally, it is tried to find criteria enabling the separation between poor and rich countries.[1] The usage of the following criteria for the classification of countries is common:[2]

- economical,
- ecological,
- demographic,
- health-related,
- socio-cultural,
- political features and
- scarcity of capital or other resources.

The World Trade Organization (WTO) does not define the term at all. Member countries can decide by themselves, whether they want to be grouped into one of the two relevant groups called developed countries and developing countries. Countries classified as developing ones, can, but not necessarily will, benefit from assistance by developed countries. The decision about the qualification for one or the other group can be challenged by other member states.[3]

The classification used by the World Bank reduces the criteria to one: the income per capita of a country. Still it separates between low income countries and middle income countries, as well as between severely indebted low income countries and severely indebted middle income countries.[4]

The United Nations Organization (UNO) uses the terms less developed countries and least developed countries. In order to qualify for one of these groups, countries are checked using not only financial economic data, but also by different indexes concerning the vulnerability of the economy and social aspects.[5]

Summing up, one can state, that the term developing country is not defined concordantly by international organisations. But while putting different emphasises on the topic, they agree, that a developing country does in some way have a disadvantage compared to other economies.

2.2. Foreign Direct Investment

The Organisation for Economic Co-operation and Development (OECD) published a benchmark definition of foreign direct investment. This benchmark has been revised several times and is currently being revised, too. The definition given in this paper is according to its third edition published in 1999.

“Foreign direct investment reflects the objective of obtaining a lasting interest of a resident entity in one economy (…) in an entity resident in an economy other than that of the investor (…). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.”[6]

3. Impact of FDI on Developing Countries

There are various theories, schools and researches dealing with the question of why FDI is undertaken. Due to the restriction of the extend of this paper, the author decided to limit the illustration of theories and evidence to the ones dealing with the impact of FDI on developing countries.

3.1 Theory

There are two main concepts regarding the contribution of FDI on the economic development of a country. In his book Foreign Direct Investment and Development, Theodore Moran calls them the Benign- and the Malign-Model.[7] In the following both conceptualisations will be introduced.

3.1.1 The Benign-Model

The Benign-Model expresses the beneficial character of FDI. Due to the poverty of the host country, there is low productivity and low wages. This leads to a lack in savings and investment and thus to underdevelopment. According to the model, FDI can break this circle by rising local savings as well as productivity (e.g. by submitting technology).[8]

The amount of the capital inflow as well as the local elasticity of the demand for capital define the potential gain in national income. Other inputs or spillovers can originate an improve of the production function of the host economy. The higher efficiency will cause a rise in output and thus create a higher economic growth.[9]

Regarding social aspects, the economical development can be the basis of a positive impact, too. Due to the higher supply the return on capital will decrease, while wages will rise due to the higher demand caused by the increased production. The advocates of this model claim the higher equalisation of income distribution to lead to better education and health in relevant societies.[10]

3.1.2 The Malign-Model

A long list of people is criticising FDI regarding multinational corporations. Most of them take offence at the possibility that these multinationals could influence the politics in the host countries, especially concerning health, safety, environment and minimum wages.[11]

The point of origin of the Malign-Model is another one: Being the alternative theory to the Benign-Model, it claims, that FDI can have negative effects on the economic growth of the host country. Advocates of this model argue, that foreign companies in imperfectly competitive international industries will harm the economic growth of a host country with an imperfectly competitive domestic market.[12]

These foreign companies benefit from the market concentration as their field of operation bears high entry barriers. Having a preferred access to the local capital market, they are able to evacuate capital, that otherwise would have been open to local economy. This function can become even worse, if these companies are in the position to pull-off rents.[13]

Companies acting this way are actively decreasing domestic savings and investment and deepening the vicious circle of underdevelopment. They can oust local companies of the economy and displace their products by imports. The preferred position in economy will even expand, if the company reinvests in the same industry within the economy of the host country. Finally money can be taken out of the economy of the host country by the affiliation of profits.[14]

In this scenario, the beneficial effects explained in the Benign-Model are not existent. The only group, benefiting from the FDI is the partners and suppliers of the company. As the activity of companies acting this way are mostly very technology-intensive, they produce a small management elite, while other workers will become or stay unemployed or underemployed. As a result, income distribution and social development will even degrade due to the FDI.[15]


[1] cp. Wezel, T., p.5

[2] cp. ibid

[3] cp. WTO: Development: Definition, online publication:

[4] cp. Moran, T.: Beyond Sweatshops, p.15

[5] cp. ibid, p.16 / UN: FDI in Least Developed Countries, p.iii

[6] OECD, p.7

[7] cp. Moran, T.: FDI and Development, p.19

[8] cp. Moran, T.: FDI and Development, p.20

[9] cp. ibid

[10] cp. ibid

[11] cp. ibid

[12] cp. Moran, T.: FDI and Development, p.20

[13] cp. Ibid, p.21

[14] cp. Ibid

[15] cp. Ibid

The Process of Liberalization in India:
Foreign Direct Investment and the Indian Auto Industry

India, the second most populous country in the world, and the largest democracy, evokes images of teeming populations, widespread poverty and, more recently, of software technology and call centers. It has often been claimed that everything that can be said about India is true. India is a vast country with rampant problems of poverty, inequality, illiteracy and poor health care, ranking very low on the Human Development Index Scale (see Fig. [Country Profile India]). At the same time, Indian industry has picked up in the last decade to make India the third largest economy (Footnote: expected ranking 2005-06 in the world, in GDP (Purchasing Power Parity) terms, after the U.S.A. and China). Today the Indian economy is a fourth of the US economy, and half of China´s. But current GDP growth rates, one of the highest in the world for India, suggest an upward trend.

<Graphics file: country profile india, population, economic, health, source UN.bmp>

<Country Profile India>Country Profile India Source: UNO

This increase in GDP has been contributed mainly by the industrial and service sectors, with the service sector playing an increasingly important role. India´s almost stagnant agricultural sector, even today one of the most underdeveloped in the world, still constitutes around a quarter of national GDP, much above the world average (see Fig. [Country Profile India]). It is widely believed that the current strength of industry in India has followed liberalization reforms that took place in the early 1990´s (see Section [sec:Economic-Reforms:-An]). Since then, India´s trade has boomed and there has been sustained investment into industry by foreign players, bringing in not only foreign capital, but also international technology and know-how. There have also been indirect consequences of development, employment, efficiency and rising per capita incomes.

The economic reforms of the the 1990's have changed the face of the Indian economy. They have made available to Indian consumers, at increasingly affordable prices, offerings that were never before available. While making India more attractive for foreign investors, the reforms have also helped integrate the Indian economy with the global economy, enabling Indian companies and labor to seek avenues abroad.

An increasing level of foreign investment reflects international confidence in the Indian market, leads to better infrastructure, creates jobs, increases the level of sophistication of the local demand, and strengthens Indian companies by exposing them to international competition. Foreign investment and GDP growth can often have a bi-directional causal relationship[key-18]. Foreign investment in a sustainable way can thus lead to a better standard of living for a developing country like India.

The role of the government in the process of economic reforms cannot be overemphasized. Since the reform process is in the end driven by the government, though it is certainly initiated, accelarated or slowed down by various groups, it would be possible to conjecture the role that the government has played in improving overall industry and public welfare through market reforms. It may also be possible to guess possible new roles of the government in the post-reform era (Footnote: I hardly suggest that the era of reforms is over, or that the reforms so far are sufficient. But only that the process has made a beginning, to allow the Indian economy to achieve greater heights.)

As the direct and indirect effects of liberalization in general, and FDI in particular can be seen, certain social tasks that need to be tackled also present themselves. The most important of these tasks are the decrease in the level of poverty, and to reduce the gap between "the two Indias": the rich, affluent, and upwardly mobile urban India, and the rural India, which still dwells in poverty levels of a century before. Reforming the agricultural sector should be, and is, one of the foremost priorities of policy makers, the sector affecting directly the plight of rural India.


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