FDI can be defined as a crossborder investment, where foreign assets are invested into the organizations ofthe domestic market excluding the investment in stock. It brings private fundsfrom overseas into products or services. The domestic company in which foreigncurrency is invested is usually being controlled by the investing foreigncompany. Eg. An American company taking major stake in a company in India. Their ROI is based on the performance of the project.
In the past decades, FDI wasconcerned only with highly industrialized countries. US was the worlds largestrecipient of FDI during 2006 with an investment of 184 million from OECD (Organizationfor Economic Co-operation and Development) countries. France, Greece, Iceland, Poland, Slovak Republic, Switzerland and Turkey also have a positive recordin FDI investments. Now, during the course of time, FDI has become a vital partin every country more particularly with the developing countries. This isbecause of the following reasons:
FDIin the Retail sector:
Retailing is one of the worldslargest private industry. Liberalizations in FDI have caused a massiverestructuring in retail industry. The benefit of FDI in retail industrysuperimposes its cost factors. Opening the retail industry to FDI will bringforth benefits in terms of advance employment, organized retail stores,availability of quality products at a better and cheaper price. It enables acountrys product or service to enter into the global market.
FDI will ensure better operationsin production cycle and distribution. Due to economies of operation, productionfacilities will be available at a cheaper rate thereby resulting inavailability of variety products to the ultimate consumers at a reasonable andlesser price.
FDI enables transfer of skills andtechnology from overseas and develops the infrastructure of the domestic country.Greater managerial talent inflow from other countries is made possible. Domesticconsumers will benefit getting great variety and quality products at all pricepoints.
FDI will provide necessarycapital for setting up organized retail chain stores. It is a long terminvestment because unlike equity capital, the physical capital invested in thedomestic company is not easily liquidated.
Lead driver for the countrys economic growth:
FDI would create a competition among the global investors, which would ultimately ensure better and lower prices thus benefiting people in all sections of the society. There would be an increase in the market growth and expansion. It will increase retail employment and suppress untrained manpower and lack of experience. It will ensure better managerial techniques and success. Higher wages will be paid by the international companies. Urban consumers will be exposed to international lifestyles.
FDI opens new doors for Franchising:
Restrictions on FDI are considered as trade barriers as they deny direct market access to foreign firms. Retail giants who are at their wings, seeking entry into foreign market look for other available alternatives. These restrictions on the global retailers regarding the inflow of Foreign Direct Investment, leads them towards acquiring the market entry through franchises. Thus, countries which offer promising market potentialities for retail growth offers substantial growth in the franchising sector as well.
FDI Success story China:
China is the worlds largest FDI recipient, and has used it deftly to increase its exports. It started off with an FDI investment of $19 billion in 1990, and reached $300 billion in 1999. 40 retailers now have a secured approval in the Chinese market. FDI has created an encouraging effect in both traditional as well as modern formats of retail business in China.
Carrefour from France, Tesco from England, Metro from Germany, and Wal-Mart from US have entered the Chinese retail sector and has uplifted the countrys economy. Initially during 1992, China allowed FDI only in a few selected cities and also restricted the ownership by 26 percent. Later on as the exports of the country progressively increased, by 2002, the Government increased the FDI cap to 49 percent. China continues to hit new records. More than 28 million people and approximately 10 percent of Chinas total population are working in companies funded with FDI.
With the advent of FDI, retail sector is likely to make massive strides, and catalyze the growth of the ountrys economy. As far as developing nations are concerned, it is the life blood of economy.
References:
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