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Understanding the Causes and Effects of Foreign Direct Investment in Developing Countries

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Title: Understanding the Causes and Effects of Foreign Direct Investment in Developing Countries


1
Understanding the Causes and Effects of Foreign
Direct Investment in Developing Countries
  • Justin Bird

2
What is Foreign Direct Investment (FDI)?
  • A source of capital and investment involving
    foreign control of production
  • A source of exploitation?
  • A channel of technology transfer and industrial
    development?

3
The Importance of FDI to Developing Countries As
a Means of Finance
4
Exploitative?
  • Does foreign direct investment seek out countries
    with lax environmental standards?
  • Does foreign direct investment exploit cheap
    labor in less developed countries?

5
Is There a Mutually Beneficial Relationship?
  • Do domestic firms benefit from the entrance of
    foreign multinational corporations? Are there
    spillovers?
  • Do foreign firms tend to crowd-out domestic
    entrepreneurship?
  • Absorptive capacity

6
Foreign Direct Investment in India From an
International Perspective
7
Indias Development Strategy The License Raj
Period
  • 1947 Indias independence.
  • 1956 second Five-Year Plan focuses on government
    led industrializationstrict foreign exchange and
    import controls enacted.
  • 1969 all domestically owned banks nationalized.
  • 1972 all insurance companies nationalized.
  • 1973 all foreign investment placed under
    governmental control limited foreign holdings to
    under 40.

8
The Initiation of Reform
  • 1985 Seventh Five-Year Plan initiated. Set 5 GDP
    growth goal achieved through profligate
    government spending.
  • 1991 severe balance-of-payments crisis.
  • 1992 Eighth Five-Year Plan focuses on increasing
    private initiative (reform by stealth).
  • 2001 all quantitative restrictions on imports
    eliminated. Telecommunications and insurance
    industry liberalization.

9
Foreign Direct Investment in India
10
1995 to Today The Stagnation of Reform
  • India uses more anti-dumping protection
    stipulations than any other country other than
    the United States.
  • Indias weighted mean tariff rate has fallen
    dramatically over time but remains significantly
    higher than in competing nations.
  • Implementation of the VAT (Value Added Tax)
    system continues to be delayed.
  • The privatization or closure of inefficient
    publicly owned producers has been limited.

11
The Legacy of Fiscal Irresponsibility
  • Estimates put the Indian fiscal deficit very near
    the 1991 crisis level of 10 of gross domestic
    product.
  • Especially at the state level, the fiscal deficit
    results from large subsidies for electricity,
    irrigation water, transport, education, and
    health services.
  • In some states as much as 70 of tax revenue goes
    to wages.
  • Overall, debt service accounts for 35 of state
    level tax revenue.
  • The support of inefficient public and private
    businesses also weighs on fiscal resources.

12
India Lacking in Infrastructure
  • A survey of international businessmen ranked
    India 55th of 59 in terms of infrastructure
    development and 50th regarding the importance the
    government places on infrastructure development.
  • Estimates suggests between 5 and 6 billion is
    lost annually by producers in India because of
    poor transportation infrastructure.
  • The World Bank estimates the cost to importers
    and exporters evolving from port inefficiency to
    be 250 million annually.

13
Policy Implications for India
  • Implementation of the VAT (value added tax)
    should be forced through the central and state
    governments.
  • Fiscal responsibility needs to be addressed at
    both the state and central government levels.
  • Infrastructure development needs to be quickened.
  • Corruption and bureaucratic inefficiency can be
    reduced.
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