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Which of the following statement is/are correct about FDI?
1. It helps capitals to flow to the priority sectors.
2. It helps to increase competition and break domestic monopolies.
Which of the statements given above is/are incorrect?Exp)
Statement 1 is incorrect. Private foreign capital tends to flow to the high profit areas rather than to the priority sectors.
Statement 2 is correct. Foreign investment may also help increase competition and break domestic monopolies.
FDI means an investment in a foreign country that involves some degree of control and participation in management.
FDI corresponds to the investment made by a multinational enterprise in a foreign country. It is different from portfolio investment, which is primarily motivated by short term profit and it does not seek management control. FDI has the following objectives:
1.Sales Expansion
2.Acquisition of resources
3.Diversification
4.Minimization of competitive risk.
Advantages of FDI:
1.FDI may help to increase the investment level and thereby the income and employment in the host country.
2.Direct foreign investment may facilitate transfer of technology to the recipient country.
3.FDI may also bring revenue to the government of host country when it taxes profits of foreign firms or gets royalties from concession agreements.
4.A part of profit from direct foreign investment may be ploughed back into the expansion, modernization or development of related industries.
5.It may kindle a managerial revolution in the recipient country through professional management and sophisticated management techniques.
6.Foreign capital may enable the country to increase its exports and reduce import requirements. And thereby ease BoP disequilibrium.
7.Foreign investment may also help increase competition and break domestic monopolies.
8.If FDI adds more value to output in the recipient country than the return on capital from foreign investment, then the social returns are greater than the private returns on foreign investment.
9.By bringing capital and foreign exchange FDI may help in filling the savings gap and the foreign exchange gap in order to achieve the goal of national economic development.
10.Foreign investments may stimulate domestic enterprise to invest in ancillary industries in collaboration with foreign enterprises.
11.Lastly, FDI flowing into a developing country may also encourage its entrepreneurs to invest in the other LDCs. Firms in India have started investing in Nepal, Uganda, Ethiopia and Kenya and other LDCs while they are still borrowing from abroad. Larger FDI to India comes from a small country (Mauritius).
Disadvantages of FDI:
1.Private foreign capital tends to flow to the high profit areas rather than to the priority sectors.
2.The technologies brought in by the foreign investor may not be appropriate to the consumption needs, size of the domestic market, resource availabilities, stage of development of the economy, etc.
3.Foreign investment, sometimes, have unfavorable effect on the Balance of Payments of a country because when the drain of foreign exchange by way of royalty, dividend , etc. is more than the investment made by the foreign concerns.
4.Foreign capital sometimes interferes in the national politics.
5.Foreign investors sometimes engage in unfair and unethical trade practices.
6.Foreign investment in some cases leads to the destruction or weakening of small and medium enterprises.
7.Sometimes foreign investment can result in the dangerous situation of minimizing / eliminating competition and the creation of monopolies or oligopolistic structures.
8.Often, there are several costs associated with encouraging foreign investment.Exp)
Statement 1 is incorrect. Private foreign capital tends to flow to the high profit areas rather than to the priority sectors.
Statement 2 is correct. Foreign investment may also help increase competition and break domestic monopolies.
FDI means an investment in a foreign country that involves some degree of control and participation in management.
FDI corresponds to the investment made by a multinational enterprise in a foreign country. It is different from portfolio investment, which is primarily motivated by short term profit and it does not seek management control. FDI has the following objectives:
1.Sales Expansion
2.Acquisition of resources
3.Diversification
4.Minimization of competitive risk.
Advantages of FDI:
1.FDI may help to increase the investment level and thereby the income and employment in the host country.
2.Direct foreign investment may facilitate transfer of technology to the recipient country.
3.FDI may also bring revenue to the government of host country when it taxes profits of foreign firms or gets royalties from concession agreements.
4.A part of profit from direct foreign investment may be ploughed back into the expansion, modernization or development of related industries.
5.It may kindle a managerial revolution in the recipient country through professional management and sophisticated management techniques.
6.Foreign capital may enable the country to increase its exports and reduce import requirements. And thereby ease BoP disequilibrium.
7.Foreign investment may also help increase competition and break domestic monopolies.
8.If FDI adds more value to output in the recipient country than the return on capital from foreign investment, then the social returns are greater than the private returns on foreign investment.
9.By bringing capital and foreign exchange FDI may help in filling the savings gap and the foreign exchange gap in order to achieve the goal of national economic development.
10.Foreign investments may stimulate domestic enterprise to invest in ancillary industries in collaboration with foreign enterprises.
11.Lastly, FDI flowing into a developing country may also encourage its entrepreneurs to invest in the other LDCs. Firms in India have started investing in Nepal, Uganda, Ethiopia and Kenya and other LDCs while they are still borrowing from abroad. Larger FDI to India comes from a small country (Mauritius).
Disadvantages of FDI:
1.Private foreign capital tends to flow to the high profit areas rather than to the priority sectors.
2.The technologies brought in by the foreign investor may not be appropriate to the consumption needs, size of the domestic market, resource availabilities, stage of development of the economy, etc.
3.Foreign investment, sometimes, have unfavorable effect on the Balance of Payments of a country because when the drain of foreign exchange by way of royalty, dividend , etc. is more than the investment made by the foreign concerns.
4.Foreign capital sometimes interferes in the national politics.
5.Foreign investors sometimes engage in unfair and unethical trade practices.
6.Foreign investment in some cases leads to the destruction or weakening of small and medium enterprises.
7.Sometimes foreign investment can result in the dangerous situation of minimizing / eliminating competition and the creation of monopolies or oligopolistic structures.
8.Often, there are several costs associated with encouraging foreign investment.MUST READ
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