How does FDI promote economic growth?

Economic Growth

Compiled by Vraj Dani

FDI (Foreign Direct Investment) is an investment made by a company or an individual in one country into business interests located in another country. It is a method of business expansion which involves mergers, acquisitions, and the development of new facilities outside countries. It is essential for both the host nation and investors nation as receive benefits as investors nation get tax benefits and relaxed regulation and host nation gets capital which helps in fueling growth. As per the Organisation for Economic Cooperation and Development (OECD), an investment that is 10 per cent or more from the overseas is considered as foreign direct investment. 

The investing country seeks a host country with natural resources, human resources, technology, and ease of establishment. 
Investments are openly welcome. Foreign direct investment aims to acquire a majority stake in a foreign company. According to the Organization for Economic Co-operation and Development (OECD), any foreign investor who owns 10% or more of a stake in a company located in another country is called a “perpetual interest.” Foreign direct investment is different from foreign portfolio investment (FPI) The first is the company’s contribution to foreign affairs – for expansion. The latter refers to the purchase of securities belonging to foreign companies. 

FDI India

India Today is the part of the top 100 clubs on ease of doing business (EoDB). Total FDI inflows in the country in the last 22 years (April 2000-March 2022) are $847 billion while the total FDI inflows received in the last 8 years (April 2014-March 2022) was $ 523 Billion which amounts to nearly 60% of Total FDI inflow in last 22 Years. 

FDI investment

As India is an evolving and flourishing economy, the economy has constantly been surging, and FDI has acted like a sanguine catalyst in the whole process. It fills the gap between investment and savings by working as a bridge. FDI Investment has also provided a major boost in employment as it creates a great range of jobs which is why developing countries tend to attract amore FDI. Higher employment leads to greater earnings, giving the populace more Purchasing power, which benefits the entire country’s economy. Foreign investors are willing to invest in India thanks to favorable policies, a thriving market, subsidized tariffs, preferential tariffs, and relatively low wages. 

There are also some other incremental benefits associated with FDI 

1. Backward Areas Development 

FDI provides opportunity to a country’s backward areas to be transformed into massive industrial outputs or hubs. As a result, the area’s social economy is revived. This technique is exemplified at the Hyundai plant in Sriperumbudur, Tamil Nadu, India. 

2. Introduction of new technologies 

Foreign investors are willing to invest in India thanks to favourable policies, a thriving market, subsidized tariffs, preferential tariffs, and relatively low wages. 

3. Increment in capital flow 

FDI also encourages increased capital influx, both in the form of money and materials. Thus, in many aspects, FDI India has improved people’s lives. 

4. Formation of a competitive market 

FDI also contributes to the formation of a competitive market as it breaks the domestic market monopoly. In addition, it benefits consumers by improving corporate performance and increasing efficiency. 

5. Offers detailed information 

Investors do not just invest money. They are also involved with the company and can be an advantage as they bring technical expertise, insight and knowledge that allows the company to advance tactics. Considering all the positive aspects of FDI in India, it is definitely beneficial for the Indian economy.