A developing country wants to become more global, hoping to increase the pace of its economic growth and improve the quality of life for its people. It wants to achieve this by attracting foreign...

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A developing country wants to become more global, hoping to increase the pace of its economic growth and improve the quality of life for its people. It wants to achieve this by attracting foreign direct investment.

  • Choose a developing country, and discuss the pattern of foreign direct investment in that region and why it occurs.
  • How should the government intervene to ensure that the foreign direct investment is the best interest of its country?
  • What policy instruments should the government use to promote foreign direct investment?
  • Is it already part of regional integration? If not, should the country consider it? What would be the benefits and disadvantages?
Answered Same DayDec 20, 2021

Solution

David answered on Dec 20 2021
3 Votes
What is FDI?
Foreign direct investments or FDI can be defined as the investments made by a corporate entity in a
country into an entity located in another country. This investments made can be either in the form of
setting up a subsidiary or associate company in the target country or by entering into a corporate
transaction such as a joint venture or merger. For example: Wal-Mart, world’s leading retailer has
entered into a joint venture with Bharti Enterprises of India to setup wholesale cash-and-ca
y stores
in India. This joint venture entity is called Bharti Wal-Mart Private Limited, where both Bharti and Wal-
Mart hold 50 percent stakes each.
Why FDI?
According to various economists, FDI or flow of capital across the national borders is beneficial to
oth the parties as it allows the capital to generate the highest possible returns. Following are the
enefits of FDI or cross border investments:
 Diversification: Cross border investments allow the owners of capital to reduce their risk by
diversification of their investment portfolio
 Gaining expertise and increased market reach: While the investor gains from doing business
in an entirely new market, the bo
ower or the beneficiary of FDIs generally tend to benefit
from the experience of the investor in that particular sector.
 Flow of global investments can help in
inging the best practices in corporate governance,
accounting policies and legal practices
 Tends to increase employment opportunities in the target country, while contributing to
corporate tax revenues
 Benefits as described above can induce the government to adapt best practices and policies
FDI in India – An emerging economy
Evolution of FDI in India can be
oadly classified into four phases as below:
 Phase 1 (1969 and 1991): This period was marked by the restrictive trade policies such as
the MRTP act of 1969 – that restricted the size of operations and pricing of foreign
companies, the FERA act of 1973 which capped the foreign...
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