Free Essay

Direct Impact of Fdi

In: Other Topics

Submitted By ankitaagrawallko
Words 299
Pages 2
FDls comprise inflow of productive resources, such as, capital and foreign exchange are accompanied by flow of entrepreneurial and managerial skills and technology.
FDIs complement the domestic savings in financing the capital formation in the host country.
FDIs contribute to the generation of output and employment.
The foreign exchange inflow augments the supply of foreign exchange, which is often scarce in the developing countries.
In most cases, however, the project being set up with FDI is dependent upon imported plant and machinery, and technology. The foreign exchange -inflow takes care of these import requirements, partially or fully.

The direct cost of FDI to the host country comprises remittances made on account of dividends on the equity held abroad, interest on loans or suppliers' credits extended by the foreign investors, royalties and technical fees, for transfer of technology and other services provided by the foreign partner.
Unlike foreign borrowings, servicing remittances, viz., dividends in the case of FDI begin after the project starts making profits.
However, the servicing burden of FDI builds up very fast, and consumes considerable foreign exchange resources of the host country.
Further, these remittances have the tendency to grow over time as the enterprise consolidates and prospers.
Thus, the direct impact of FDIs on the host country includes both positive and negative aspects.
The favourable impact is by way of generation of output and employment by complementing the domestic savings and bringing in the much-needed entrepreneurial skills and foreign exchange resources for the developing countries.
The adverse impact is on account of growing remittances of dividends, royalties and technical fees in the foreign exchange, which affect the balance of payments.
It has been contended, however, that the direct remittances represent only a minor part of the total cost of FDIs on the developing host countries…...

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