Discuss the current issues in Foreign Direct Investment

Introduction

According to the IMF and OECD definitions, foreign direct investment is defined as a cross

border investment made by an entity resident in one economy in an enterprise resident in another

economy with the aim of acquiring a lasting interest and control. FDI has been associated with

improved economic growth and development in the host countries which has led to the

emergence of global competition to attract FDI. Many countries are now offering a range of

incentives to the foreign investor like tariff concessions, tax holidays, R&D support,

infrastructure improvements, financial subsidies, low tax rates etc.

Foreign Direct Investment

Foreign direct investment is when an individual or business owns 10 percent or more of a foreign

company. If an investor owns less than 10 percent, the International Monetary Fund defines it as

part of his or her stock portfolio.

A 10 percent ownership doesn't give the investor a controlling interest. It does allow influence

over the company's management, operations, and policies. For this reason, governments track

who invests in their country's businesses.

Foreign direct investments (FDI) represent an essential part of the economic globalization

process not only in emerging and developing countries, but also in the industrialized world. If

multinational enterprises open up new markets through cross-border investments or establish

international production networks as part of their aspiration to become more competitive, target

countries also experience positive economic effects.

At the same time, FDI also offers opportunities for recipient countries. In addition to capital and

expertise, production plants are brought into countries resulting in employment. An increasing

number of academic articles illustrate that FDI leads to more economic growth in the medium

and long term. In fact, it can be stated that FDI flows have developed very positively in recent

decades, with annual growth rates that were higher than 10 percent until a sudden stop emerged

after the latest financial crises.

Governments, particularly in the western world, are attempting to improve investment conditions

for national enterprises that are active in cross-border investments. In the light of these difficult

investment conditions, new regional trade and investment agreements are increasingly being

negotiated. These new accords are very likely to have a strong impact on the international

investment behavior of enterprises.

Attracting Larger FDI Inflows in India- Problems and Challenges

Ease of doing business in India. This is probably one of the biggest stumbling blocks India faces

in attracting FDI. The bureaucracy, corruption, labour and land acquisition laws are frighteningly

complicated and slows down the entire process of setting up a business. A country which is

anxious to attract business should look to see how other countries are managing these issues and

what steps they have taken to make it attractive for the foreign companies to set up their shops.

Taxation that is applicable to the corporate profits. The global tax landscape has seen

considerable changes in the recent past and this will continue to be the same in the near term. In

the context of India, the total amount of revenues collected thru the various taxes and duties falls
extremely short of the requirements. Each country uses a particular tax rate which depends upon

a number of factors including the historical baggage it carries. In the current state of the

economy large amounts of money is required for socio-economic development and subsidies,

etc.

Both India and China are competing to get a larger share in world trade and investment.

Although China continues to be India’s major competitor, many new economies like Indonesia,

Vietnam and Philippines have emerged as strong competitors. India’s main competitive

advantage lies in its lower labor costs and remunerative domestic markets. FDI away from

known growth engines towards these new emerging economies. No doubt Indian government has

implemented several reform measures in order to attract greater FDI but there are several studies

which have highlighted India’s weak spots. These indicators reflect the quality of the investment

climate in a country and better performance on these indicators is frequently associated with

greater inflows of FDI.

Discuss the current issues in Foreign Direct Investment

a. Weak infrastructure: Infrastructural bottlenecks continue to be a major cause of

concern in India. When it comes to competition, India doesn’t stand against other

emerging markets in terms of ports, roads, skills sets, education etc.

b. Complicated tax structure: Stability and transparency in tax regime along with clarity

in tax laws can have far reaching impact on investments in any country. The taxation

policies in India remain inherently complex despite the fact that government has taken

several steps to simplify and redesign it.

 c. Restrictive labor laws: India is known worldwide for its stringent and rigid labor laws

and over- regulated labor market. Over the years, Indian government has enacted a large

number of legislations to protect the interests of labor covering different aspects namely

fixation and revision of wages, worker’s health and safety, mode of payment of wages,

payment of compensation in the event of industrial accident, provision of social security

such as provident fund, gratuity, insurance and so on.

d. Bureaucracy, regulations and corruption: Yet another handicap that India suffers from

is bureaucracy, red tapism and corruption. Uncertain government policies and frequent

changes in them, inefficient administrative, overlapping jurisdictions, excessive

governance increases the transaction costs for companies making India a less preferred

destination.

There is no denying the fact that India is receiving FDI inflows far below her potential. Indian

government has taken several steps to make the FDI policies simplified and transparent, have

increased the FDI limits in different sectors, opened many new sectors for FDI, and have placed

many sectors on the automatic approval route. In spite of all this, India receives much lesser FDI

as compared to developing economies of China and Brazil. India stands the chance of losing its

comparative advantage in lower labor costs and large domestic markets to the newly emerging

low-cost economies of Indonesia, Vietnam and Philippines. If some reform measures are not

implemented quickly, chances will soon take the shape of reality. Therefore, it is high time that

India learns some lessons from other countries and launch second generation of reforms.

Reforms in labor laws; liberalizing FDI policies in sectors like retail, insurance, airports and

media; introduction of Goods Sales Tax to avoid the levy of multiple taxes; reduction in
corporate tax rates; cutting down the bureaucratic hurdles; and simplification of regulatory

procedures and development of world class infrastructure is the need of the hour. Only by

implementing these reforms, can India expect to attract larger flows of FDI in the years to come.

Conclusion

FDI represent a major component of global economic integration and are particularly important

to developing countries. A revitalization of FDI flows, therefore, is crucial for a broad range of

stakeholders. In the light of a politically riskier world and the sluggish outlook for global

economic growth, it is important to create better frameworks for investors to stimulate FDI

flows.