Thursday , February 22 2018

INDIA: the top most destination for FDI, beats China and US

With the inflow of $31 billion from foreign investors during the first half of 2015, India have become world’s top FDI destination. We have overtaken US and China in this department. As China received $28 billion, while US received $27 billion during the same period.

Compared to last year, where $12 billion were invested in the first half, India has increased by 47%, which has broken all records this year. This new found confidence in India’s economy becomes more fascinating when 97 out of 154 ‘emerging economies’ received less FDI and less confidence from foreign investors!

What is FDI?

Foreign Direct Investment is an investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

 

Besides India, the report mentions that Indonesia and Vietnam has shown fast growth. This year, Indonesia is ranked #6, after they broke into top 10 ranking last year. They witnessed record growth of 62% in receiving FDI, as $14 billion was pumped into their economy during the first half of 2015. Whereas, Brazil witnessed massive decline of FDI, but still holds on to #9 spot.

 

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Moreover, the domestic currency, the rupee, has been reasonably stable compared with other emerging market currencies. The rupee appreciated the most among emerging market currencies last month as India remained insulated from China’s economic woes as it doesn’t have very large trade linkage with it.

The improved ranking will help attract both domestic and foreign investments. The advantages of increase in FDI come with both a long-term and a short-term relationship between two countries. When a country involves itself with the other country by transferring its technology, expertise, manufacturing methods etc, this can spur the growth of that country’s economy and give birth to multinational corporations.

FDI plays an extraordinary role in maintaining the growth of global business as it can provide new markets and cheaper production facilities. The country at the receiving end benefits from the following types of resources.

Transfer of Technology

The transfer of technology isn’t just restricted to actual technologies. It involves sharing skills, manufacturing methods and even entire facilities. Countries generally have a government organization that handles and identifies potential commercially viable technology. These types of organizations are also present in big companies and universities. The advantages of foreign direct investment and the transferring of technology for the receiving country is great, as those countries usually don’t have access to research facilities or the knowledge otherwise.

Development of Human Capital Resources

One of the biggest advantage is the development of human capital resources. Human capital is the knowledge and competence of those able to perform labor, also known as the workforce. The attributes gained by sharing experience and training increases the education and overall human capital of a country. The human capital resource is not a tangible asset that is own by a company, but rather something that is on loan. Therefore, countries with FDI benefit greatly by increasing the development of their human resources while maintaining ownership.

Creation of New Jobs

FDIs role in the creation of new jobs is appreciable. As investors build new companies in these countries they create new job openings and opportunities. This leads to an increment in income and the development of competition. New jobs offer more buying power to the population of that country which in turn leads to economic boosts.

Increment in Income

Another advantages of increase in FDI is the rise of the income. With higher wages and more jobs, the income of the entire country will also rise. Large corporations usually offer higher salaries than what you would normally find in that country; this leads to an increase in income.

Overall Economic Growth

All the above factors of FDI results in overall economic growth. This is the increase of real gross domestic product, (GDP). This growth is a percentage that changes from one year to the next. Economic growth can be negative, but a country with the advantages of increased FDI will generally have positive economic growth. Economic growth is heavily impacted by changes in technology and the introduction of new technology. A very good example of an economic-growth-boosting technology is the introduction of the Internet.

And the bottom line is that India has overtaken China on the FDI front. India is looking a lot more attractive destination in contrast to many other economies, which are facing grave economic troubles. It is expected that India would continue to remain an attractive destination.

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