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Does FDI Promote Sustainable Economic Growth?

Posted in Finance Articles, Total Reads: 2616 , Published on November 21, 2014

Theory of de-capitalization of local economies discernibly warns the host nation against the capital investment by MNC’s as the former will not benefit from those investments. Astonishingly, each developing country still looks out for the investors from abroad promoting the buzzword ‘FDI’. The discussion over the buzzword has risen again in the last decade due to the Uruguay round and some other factors like breaking of USSR, etc. And how can India remain unaffected from the epidemic and hence, there has been an arena of advocacy over this issue in the world: Is it helpful for host nations?


FDI customarily incorporates an investment made for a long-term by a body that is not a dweller of the host country. The primary intention is to leverage the advantages of the host country via cheap resources, consumer markets exploitation and many more. Owing to the lack of information about the term, it has been a hot topic for debate. These foreign entities raise the pressure on the domestic market players to compete with them in terms of quality and price. However, it gives incomparable scope of development of the society in terms of technology, new developments and recognition at global level along with many others benefits. However, are these developments worth the sacrifice of resources made by the host government? Wouldn’t it be better if the host country carried out the same activities on own? The answer lies in the crystal clear fact that the host nation greeted the FDI because they were incapable of carrying out the required activities without FDI.


The silver-lining

According to the World Bank $233 billion in FDI was received by the high-income countries while developing nations got a share up to $165 billion. This was a dramatic increase for the latter one as the proportion of total flows received by them surged from 12.7% to 41.5% between 1990 and 1997.


FDI cuddles three aspects of development. These three facets comprise economy, environment and social development. Let's browse through each facet and see if the world is ready for it and how it can prepare in a better way to touch upon the silver-lining of Sustainable development


1 Economic

Open markets ensure adequate usage of resources expanding the economic growth. Additionally it unfastens the barriers for new technology, better lifestyle and serves the opportunity to tap world markets.


Markusen and Venables (1999) say that FDI has a positive reaction on the domestic firms’ productivity. This claim is substantiated from the fact that GDP (Gross Domestic product) per capita PPP in India has increased from 1795.44 USD in 1991 to an all-time high of 5238.02 USD in 2013. Analyzing the factors behind this accomplishment, one can examine that increased competition correlated with the entry of new foreign firms has boosted the country’s efficiency and product quality.


2. Environment

These foreign funds and investments have a noteworthy impact on the environment around us. Due to FDI, pollution-intensive industries have an enormous opportunity to shift from one part of the world with strict environmental norms to another part with little regulations. This has made some of the developing countries like India, a “sanctuary”, an “asylum” of the pollution. The report given by the World Health Organization in September 2011 showed that Delhi has exceeded standard PM10 limit (measure of quality of the air) by almost ten times. The theory of transfer of such industries has been termed as the “Pollution haven hypothesis”. Taking on a death spiral path, the developing nations also relax their environment policies so as to entice the industries that could drive the economy via manufacturing and industrial growth. Increase in pollution due to industries is alarming.


FDI has impacts on the environment that can be seen as positive. It can aid in dwindling the pollution by spreading advanced technologies across borders. Financial constraints can be lifted which stop developing countries to invest in environment protection activities.


3. Society

Beyond the frontiers of economy and environment, FDI extends its wings to have repercussions on the society as a whole. As liberalization and globalization upsurge, there can be dual impacts in the society.


One can find prosperity and curtailment in poverty due to money inflow by FDI. The share of people living below $1.25 a day has reduced to mere 17% from 43% in 1990. FDI cultivates relations and co-operations among borders as shown by India and China.


Education has resurrected in many countries like India. Foreign influence brings international teachers and developments. Student exchange programs give marvelous opportunity to gain international exposure early in life. Brain-Drain has been curbed to some extent. India’s healthcare infrastructure was revamped with the help of foreign currency and technology. New diagnostic instruments and technology has mitigated the health problem in India up to a great extent.


FDI has potential to affect all the fundamental pillars that govern sustainable development of the country viz. economy, environment and society. It is upon us that how well we can utilize this opportunity. Can we capitalize on the opportunity in front of us (FDI), or we need to prepare more in order to gain maximum from this opportunity. World is not perfect, but the recent actions take from government, NGO and people suggests that we are on the right track – on the track of improving the life lives of today’s generation and that of posterity to bridge the gap between FDI benefits, drawbacks and sustainable development.


This article has been authored by Mayank Jain from IIM Udaipur


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