GROUP NO: 2 Merits & demerits of FDI on developing economies

Anurag BisenHitesh Jain

Abhishek KarRohit Mahind

Foreign Direct Investment

An investment made by a company or entity based in one country, into a company or entity based in another country.

Forms of FDIs• Greenfield investment• Brownfield investment• Mergers & acquisitions• Joint ventures

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Why FDI?

• Industrial competitiveness

• Transportation cost is high

• Location specific advantages for resources

• Market imperfection

• Product life cycle for imported products

• Trade barriers

• Need to protect Technological know how

Effects of FDI

At the early stage FDI Positive• Structural changes

acceleratesNegative • No immediate growth

generation• Foreign trade gap may

widen• Restructuring fosters

unemployment

At the Mature stage

Positive• Higher rate economic

growth • More export and

Improving trade balance Negative • Profit return increases• Lower tax collection as a

result of tax

Merits of FDI on developing economies

• No debt creation on the part of the government.

• Assists Human capital formation.

• Increases productivity and competitiveness.

• Exports promotion

• Domestic capital is inadequate

• Foreign capital brings rare elements like technical

know-how, business expertise & knowledge.

Merits of FDI on developing economies

• Farmers get a better price

• Influx of capital & rise in tax revenue

• Increases employment

• In case of India

Demerits of FDI on developing economies

• Sword on small retailers, shopkeepers.• Monopoly creation• Colonialism • Adverse effect on capital A/C due to outflow of

capital• FDI in retail: hits to unorganized retailers • Low income group may not afford the increased

price • Inflation may rise

- TESCO in India with TRENT of Tata

Jet – Etihad deal

Tata – SIA deal