FDI- In easy languages

FDI

Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. There are two types of FDI: inward foreign direct investment and outward foreign direct investment.India, Bangladesh, Ethiopia, Congo and Myanmar are the only five countries in the world’s 25 largest countries by population, which still do not permit foreign direct investment (FDI) in (multi-brand) retail trade.In the top 25 nations by GDP (PPP), India is the only one. Does India really want to be in this “elite” group? Even Ethiopia is negotiating with Wal-Mart and Tesco to allow them to open stores in the country. Our “friendly” neighbour Pakistan permits foreign investment in retail trade.Local Pakistani retailers have been largely welcoming of foreign investment in the country’s retail sector, seeing foreign retailers as helping improve the quality of the overall market. The foreign chains have influenced Pakistani consumer behaviour and the principal beneficiary appears to be local retail chains.The recent noises from the corridors of power in New Delhi seem to suggest that Prime Minister Manmohan Singh wants multi-brand foreign retailers to come in state by state, as the UPA government is not able to get a majority consensus on this issue, with allies such as Mamta Bannerjee still opposing the move.This is not too different from the way China opened up its retail sector. Initially, China also only allowed foreign retailers to open in select metropolises such as Beijing, Shanghai and Shenzhen, and, moreover, only in certain districts within those cities. Through these “invisible barriers”, China succeeded in giving local retailers protection, while, at the same time, the local Chinese learnt from the more efficient business models of foreign companies.Even though the world’s largest retailer Wal-Mart has opened some 340 stores in China since it entered the country 16 years ago, it still remains smaller in revenue terms, when compared with local retailers such as Suning, Shanghai Bailian Group, Gome and Dashang.Allowing foreign retailers to set up shops does not guarantee their success. The exits of Best Buy from China, Wal-Mart from Germany and Carrefour from Korea demonstrate the incapability of multi-national retailers to fight local competition due to lack of understanding of local consumer tastes, preferences and culture. Freeing up of markets and increased competition leads to a reduction in prices and not an increase in inflation.
Advantages- causes a flow of money into the economy which stimulates economic activity- employment will increase - Lower prices for consumers- Quality Product- More Variety- Skills and Technology- Improved Customer Services-Agriculture related people will get good price of their goods- Organised Retail Sector- Better Infrastructure-Billion dollars will be invested in Indian market-Spread import and export business in different countries- The Relation of both countries grow
Disadvantages-Will affect 50 million merchants in India-Profit distribution, investment ratios are not fixed-An economically backward class person suffers from price raise-Retailer faces loss in business-Market places are situated too far which increases traveling expenses-Workers safety and policies are not mentioned clearly-Inflation may be increased