Importance Of Foreign Direct Investment

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Foreign direct investment (FDI) plays an important role in the growth and development of an economy. It is more important where domestic savings is not sufficient to generate funds for capital investment. Developing countries in Asia, Africa and Latin America have come increasingly to see foreign direct investment (FDI) as a source of economic development, modernization, income growth, employment, and so poverty reduction. This is apparently reflected by their currently pursued economic policies, which is explicitly intended to improve conditions to attract FDI and to maximize the benefits of the presence of FDI in their domestic economy. FDI is an important source of development financing and contributes to productivity gains by producing…show more content…
It has different effects on different countries based on the host country policies, investment climate and other domestic micro and macroeconomic conditions. In many economies it also promotes competition among domestic firms to improve the level of technology adoption. With increased investment as supplement to domestic capital, it also generates more employment opportunities. With keen interest in the investee firms through FDI, the foreign firm improves managerial skills in the country through competition and dissemination of the new ideas and…show more content…
British capital came to India during the colonial era of Britain in India. After Second World War, Japanese companies entered Indian market and enhanced their trade with India, yet U.K. remained the most dominant investor in India. Further, after Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. With time and as per economic and political regimes there have been changes in the FDI policy too. The industrial policy of 1965, allowed MNCs to venture through technical collaboration in India. Therefore, the government adopted a liberal attitude by allowing more frequent equity participation to foreign enterprises, and to accept equity capital in technical collaborations. But due to Significant outflow of foreign reserves in the form of remittances of dividends, profits, royalties etc. and the government has to adopt stringent foreign policy in 1970s. During this period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. Government setup Foreign Investment Board and enacted Foreign Exchange Regulation Act in order to
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