Foreign direct investment or FDI is primarily an act of a corporate from a different country to invest directly into the market of a developing country. Now, we have seen a number of investments in the past. Primarily IT companies from the US have made their presence felt in the Indian markets. They have established their subsidiaries and have literally run their operations from these countries. In the context of Information technology, this is termed as Outsourcing. However, Outsourcing is slightly different, because here the major goal is to still serve US and European clients. FDI would directly deal withcustomers in the country of operation. Now the simple classic example of FDI is MacDonalds or KFC or Subway opening their chain of food outlets in India.
How does FDI really help?
We live in world ruled by currencies and every currency has a relative strength against other currencies. Stronger currency would mean more labour, power and infrastructure charges. With the growth in technology, companies have realised that they really need to enter into developing economies and capture their markets. Lower currency strength but skilled labour makes it a very valuable proposition. The markets in developing countries are quite huge. The revenue and profit margins of such companies are likely to improve significantly. FDIs provide immense job opportunities to local people and also assist in improving the economic situation. So the pros are definitely there for the workers.
Now there is amajor flipside related to FDI. Since these are foreign investors they can just shut shop whenever they wish to. This would mean people who are employed would lose their jobs. This can create panic in the economy. Home businesses would suffer tough competition due to FDI and won’t be able to thrive. Let’s assume you have food stall that is currently doing very well in a mall. A food outlet owned by a reputed foreign investor opens in the same mall. The owner is a multi-billionaire and has his presence across the globe. He can easily attract customers by offering mouth-watering deals but a small businessman whose margins are tight won’t be able to do that. The result is crystal clear. The local businessmen would suffer heavy loss and would need to shut their shop.
So there are a lot of pros and cons of FDI and we need tight policies to ensure the growth of local businesses as well. Any economy can’t be self-sufficient if it relies too much on FDI.