The Growing Role Of Foreign Investment

THE GROWING ROLE OF FOREIGN INVESTMENT These days, cross-border capital flows have a massive influence on economies worldwide. Experts say investment versus trade will drive international growth. Exchange rates, taxes and legal rules are becoming more pivotal than wages or tariffs alone. There are two main types of foreign money coming in - direct investment and portfolio investment. Direct investment involves controlling ownership in a foreign operation like a new factory. Portfolio flows are more short-term, simply buying shares or bonds for returns. Forms of Foreign Investments in India Since reforms began in 1991, foreign direct investment and portfolio flows into India have surged tremendously. Portfolio money comes through avenues like foreign institutional investors in stocks or instruments issued by Indian companies abroad like GDRs and FCCBs. Foreign capital gets classified based on origin - private versus official sources. Private flows take the direct investment form most often through subsidiaries, acquisitions or joint ventures. Official flows involve government or development bank assistance. Benefits of Foreign Investment Foreign money can accelerate growth through several channels if deployed properly. It eases import bills for development by financing vital machinery, inputs and even consumer goods locally unavailable. New investments may boost exports while reducing import needs too if located in export sectors. EmploymentCreation, tax revenues, external economy spillovers through infrastructure and demonstrations effects on domestic businesses are some other payoffs. Capital flows have played a significant role in powering countries like China to very high GDP rates. Private Foreign Advantages Investment Direct private flows help raise investment, incomes and jobs. They transfer useful technologies and managerial skills. Foreign companies may stimulate local suppliers and industries they serve. Competition and replaced monopolies can increase efficiency overall. Input costs and prices may drop for all. Limitations and Criticisms Of course, not all foreign capital is well-utilized due to absorptive constraints like infrastructural weaknesses, skills shortages or project feasibility problems. Official assistance also comes with donor agendas or policy strings sometimes. Private flows prone to seek quick profits over national priorities. Imposed technologies may poorly suit local needs. Large firms threaten economic control and national interests. Royalty drains offset investment gains for balance of payments. Interference in domestic politics has occurred too. Unfair practices and new monopolies are other concerns. So while cooperation and openness through reforms optimized business environments, constant assessments and safeguards ensuring mutually beneficial outcomes respecting local priorities remain important.