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Merits and Demerits of FDI

Merits and Demerits of FDI

Merits of FDI

Foreign Direct Investment brings a large number of benefits to the recipient country as follows: ‑

  • It brings precious foreign exchange.
  • It is a long term and stable flow
  • It bridges saving -investment gap in a developing country which generally has shortage of investible resources.
  • It brings in state-of-the-art technology.
  • It brings about expansion of markets as a foreign company has its brand name all over the world.
  • It bridges trade gap i.e. it promotes exports.
  • It generates competition between foreign & domestic investors to improve quality and reduce cost.
  • It generates employment opportunities.
  • It enhances productive capacity of a nation.
  • It fosters backward and forward linkage effects.                Merits and Demerits of FDI
  • It integrates the domestic economy with the rest of the world.

Demerits of FDI

However, FDI can also bring with it a large number of problems and potential dangers for the recipient country as follows:‑

  • Threat to economic and political sovereignty (the typical example of East India Company).
  • Indulging in cut-throat competition to eliminate competitors.
  • Escalation of land and property prices.
  • Suppression of domestic entrepreneurs through their financial muscle by the MNCs.
  • Focus on short-term personal gains rather than long term benefits for the economy.
  • Transfer pricing practices.                      Merits and Demerits of FDI

The FDI policy has to be carefully adopted to get the best out of foreign investment as foreign investment is like a match stick – a nation can light up its economy or burn its economy depending upon the use to which it puts in FDI.

FDI influences growth by increasing total factor productivity and, more generally, the efficiency of resource use in the recipient economy.                  Merits and Demerits of FDI

Technology transfers through FDI generate positive externalities in the host country, like human capital formation, competitiveness, enterprise development, etc.

During the year 2013, sectors like services, hotels and tourism, metallurgical industries, automobile industry, construction, drugs and pharmaceuticals, industrial machinery were the sectors that attracted maximum FDI inflows

 

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Indian Economy

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