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Chapter: 11th Commerce : International Finance

Advantages and Disadvantages of FDI (Foreign Direct Investment)

Achieving Higher Growth in National Income: Developing countries get much needed capital through FDI to achieve higher rate of growth in national income.

Advantages of FDI

1.        Achieving Higher Growth in National Income: Developing countries get much needed capital through FDI to achieve higher rate of growth in national income.

2.        Help in Addressing BOP Crisis: FDI provides inflow of foreign exchange resources into a country. This  helps  the country to solve adverse balance of payment position.

3.        Faster Economic Development: FDI brings technology, management and marketing skills along with it. These are crucial for achieving faster economic development of developing countries.

4.        Generating Employment Opportunities: FDI generates a lot of employment opportunities in developing countries, especially in high skill areas.

5.        Encouraging Competition in Host Countries: Entry of FDI into developing country promotes healthy competition therein.     This   leads   to   enterprise  in developing countries operating efficiently and effectively in the market. Consumers get a variety of products of good quality at market determined price which usually benefits the customers.

 

Disadvantages of FDI

1.        Exploiting Natural Resources: The FDI Companies deplete natural resources like water, forest, mines etc. As a result such resources are not available for the usage of common man in the host country.

2.        Heavy Outflow of capital: Foreign companies are said to take away huge funds in the form of dividend, royalty fees etc. This causes a huge outflow of capital from the host country.

3.        Not Transferring Technology: Some foreign enterprises do not transfer the technology to developing countries. They mostly transfer second hand technology to thehostcountry. Theykeepthefundamental aspects of technology with the parent company. In such case, the host country may not get the advantage of technology transfer and consequent economic development.

4.        Exploiting Cheap Labour: Foreign enterprises employ cheap labour force at a lower pay in developing countries. They  do not employ local people for higher posts in the management. Further they do not extend the privileges they usually give to the employees in their home country to the employees of the host country. Thus they are stated to exploit the labour in developing countries.

5.        Creating Monopolistic Environment: Multi National Companies (MNCs) which enter the host country through FDI route create monopolistic conditions in the host countries through their market power. They may not create competitive environment in the host country. Contrarily they may affect the competition altogether and establish supremacy.

 

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11th Commerce : International Finance : Advantages and Disadvantages of FDI (Foreign Direct Investment) |


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