✯✯✯ Advantages Of Fdi

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Advantages Of Fdi

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Benefits of FDI

Another form of classifying FDI is in terms of their objectives i. Greenfield investments can be described as FDI received for increment in existing production facilities or for creating new production capacities in the host countries. The negative aspect of such investment is the reduced role for domestic promoters and lesser control over utilization of profits. This may lead to loss of capital for the host country. Multi-National Companies MNCs who represent the largest participants in such monetary transfers prefer expansion of operations through Mergers and Acquisitions. In such cases all existing resources and capacities pass into the control of the new investor or get transferred into a new entity in which the existing promoter has a limited role.

Such investments do not necessarily increase productive capacity and therefore may or may not translate into economic growth. Host countries benefit more through Greenfield investments rather than through Mergers and Acquisitions. Characteristics of FDI Foreign Direct Investment In all such transactions there is a basic intention- to participate in the management of the target company. In most cases it involves a long term commitment, that is, there is no intention to seek quick capital gains.

Generally all such investments are accompanied by technology transfers and access to newer markets therefore the partnership involves access to raw materials for the foreign entity and access to technology for the target company. Such investments involve creation of physical assets which generally increase the productive capacity of the target company. This generates employment and consequently economic growth in the host country.

Investment by the foreign entity may involve fresh issue of capital or sale of shares held by promoters in the target company. Therefore such transactions are essentially primary market operations. In most cases there would be an effect on the balance sheet of the company. Since the investments are in physical assets it is not easy to instantly withdraw such investments therefore there is no panic withdrawal during periods of economic crises. Very often foreign inflows by way of debt or loans get used to finance consumption leading to debt repayment problems and increase in money supply.

Such features are not seen in the case of FDI because the funds translate into productive capacity. The factors propelling the growth of inward FDI include tax breaks, low-interest rates, and grants. In the context of foreign direct investment, advantages and disadvantages are often a matter of perspective. On the other hand, sometimes the deal can work out better for the foreign country depending upon how the investment pans out. Ideally, there should be numerous advantages for both the MNE and the foreign country, which is often a developing country.

FDI also offers some advantages for foreign countries. For starters, FDI offers a source of external capital and increased revenue. It can be a tremendous source of external capital for a developing country, which can lead to economic development. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity patents, technology, machinery etc.

The previous criticisms, along with assuming market imperfections, led Hymer to propose the three main determinants of foreign direct investment:. The foreign direct investor may acquire the voting power of an enterprise in an economy through any of the following methods:.

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