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Impact of foreign direct investment on society


The previous decade has seen an explosion in Foreign Direct Investment (FDI) particularly in developing countries, where the returns on investment can be higher than in developed countries. Both developing and developed countries have liberalized their policies and introduced new policies to introduce Foreign Direct Investment inflows. This increase in Foreign Direct Investment has had major effects on the social raise of the citizens of developing host-countries. The purpose of this paper is to observe both the positive and negative impact of Foreign Direct Investment inflows to developing countries in areas of politics, society, technology, finance, environment and culture, to make a decision whether or not FDI contributes to the well-being of society. This paper also provides an overview of the existing trends in Foreign Direct Investment flows and the relationship between FDI, multinational corporations, and society.

FDI is mainly important instrument for the globalization of the international economy. Distinct, FDI is the investment of real assets in a foreign country; it is acquiring assets for example land and equipment in another, host country, other than operating the service from the home country. FDI is examination by many as assessment to appraisal the economies of both developed and underdeveloped countries. It has even been suggested that FDI will eventually replace official development assistance to underdeveloped countries. Developing countries have been hit the hardest by the decline in FDI as foreign investment is being redirected to more developed countries. In spite of the decline, it is expected that FDI will continue to be the most significant tool for globalization.

It is widely accepted that FDI inflows provide economic benefits like increased competition, wide spread of technology and innovations, and thus increased employment. Yet the impact of foreign investment extends far beyond economic growth. At times FDI can be a promoter for change to society as a whole, therefore one must think in terms of economic, political, social, technological, cultural, and environmental factors and examine all the effects of FDI in order to decipher the true long-term impact. With increase in foreign investment and globalization, developing countries that are desperately seeking to attract foreign investment can have undesirable outcomes. In this scenario FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation, and increased cultural tensions.

The outcomes of FDI on the global economy are complex and unpredictable; they can vary from country to country. This is due in part to the practices that are in place prior to receiving FDI inflows, such as deep-rooted social customs, political practices, laws and regulations. In more developed countries, such as Singapore, China and Ireland, the increase in foreign investment resulted in rapid economic growth and social development. Yet in unstable, underdeveloped countries, the results can be quite different. For the positive effects of FDI to be realized by undeveloped countries, major reforms in domestic policies must also take place.

This proposal examines the effects of FDI and determines the benefits of FDI outweigh the costs. Arguments from both sides of the debate are considered when assessing the true impact of FDI.


There is an abundance of literature regarding the impact of FDI on society. Most literature explains the relationships between FDI, multinational corporations, and governments. A majority of the literature analyzes one side or the other; however, in order to more accurately measure the situation, a more balanced assessment that examines both sides of the debate is necessary.

Both Kiss (2003) and Hippert (2002), analyse FDI from a social standpoint, provide a negative perspective on the impact of FDI in developing countries. Kiss (2003) analyzes the situation in Hungary when the Hungarian government introduced elements of a parliamentary democracy and market economy that eventually led to the social and political exclusion of Hungarian women. The author argues that governments must address gender issues as well as implement official measures and institutional changes to facilitate women's inclusion into production and social systems. Hippert (2002) examines the effect of FDI on women's health. The author asserts that FDI and Multinational Corporations (MNCs) hamper the economic integrity and sovereignty of the developing world and states that it is women who bear the brunt of human rights abuses because of their social positions in developing countries, especially in parts of Mexico and Asia. The author also discusses solutions to these problems that have failed because they have been primarily "top-down approaches," and proposes that the only solution is to hold corporations accountable for their employees.

Jones and McNally (1998) provide details of the environmental degradation that was caused by FDI. The authors consider both sides of the debate on the existence of "pollution havens" and provide reasons why MNCs do not contribute to environmental pollution. The authors also state that in industries that are involved in resource extraction, some evidence suggests that MNCs will relocate to countries where environmental regulations are non-existent. Again in 1998 McNalley, along with Mabey, authored a report on FDI and the environment for the World Wildlife Foundation. The report discusses the instances of environmental degradation that occurred mostly in extractive industries, along with proposals for reforms to current environmental standards.

In contrast to the negative view of FDI, Rondinelli (2002) explores the public role and economic power of MNCs and the positive ways in which MNCs can influence governments and provide the social welfare of host-country citizens. MNCs also provide foreign aid to developing countries, expand international trade and investment, and influence public policy. The author provides several instances in which an MNC stepped in and provided foreign aid to developing countries in order to fill the gap that was created when Official Development Assistance was decreased. Spar (1999), takes a neutral stance when discussing the complexity of the relationship between foreign direct investment and human rights and the ways in which FDI impacts society both negatively and positively.

Foreign Direct Investment in India

For the last 20 years the world has experienced a steady increase in foreign direct investment (FDI) cashflows [1]. According to UNCTAD, an intergovernmental forum for the integration of developing countries in the world economy, FDI inflows are the biggest component of net inflows to developing countries. Thus, FDI acts as a major driver for their development. Breaking these inflows down to their components according to economic activity, the service sector occupies the biggest share [2].

In India, which stands in the focus of this study, FDI in the service sector does not only aim at "business process outsourcing" (BPO), such as call centers or telemarketing, but also at much more specific activities such as research and development (R&D) (in combination with other high-end services generally known as "knowledge process outsourcing" or KPO) [3]. Actually, such is the importance of India in this field that the leading business magazine The Economist claims that no big international company can do without an India strategy today [4]. Companies like General Electric, BASF, Microsoft, Oracle, SAP and IBM to name but a few are all pursuing R&D in India, which simply confirms the above statement [5].

Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has – in many ways – enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the different problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a various number of reforms designed to encourage FDI and present a favourable scenario for investors.

FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.

A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.

Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.

By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. The major question at this stage is - Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?

Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is obstinately a legal obstruction for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.

Investment Scenario

In February 2010, the government approved twelve FDI proposals worth US$ 226.8 million. These include FDI worth US$ 114.8 million for Delhi-based Max India Ltd and US$ 78.1 million for Hyderabad-based Soma Highways Projects.

Further, in May 2010, the government cleared 24 foreign investment proposals, worth US$ 304.7 million. These include:

Asianet's proposal worth US$ 91.7 million to undertake the business of broadcasting non-news and current affairs television channels.

Global media magnate Rupert Murdoch-controlled Star India holdings’ investment of US$ 70 million to acquire shares of direct-to-home (DTH) provider Tata Sky.

AIP Power will set up power plants either directly or indirectly by promotion of joint ventures at an investment of US$ 24.4 million.

Spanish automotive metal component maker ‘Gestamp Automocion’ has invested US$ 100.3 million, in its greenfield plant at Chakan near Pune.

Sembcorp Utilities, a company based in Singapore, has picked up 49 per cent stake in the 1,320-MW coal-fired plant of Thermal Powertech Corporation India Ltd, a special purpose vehicle and subsidiary of Gayatri Projects Ltd, for US$ 232.4 million.

Cinepolis, a Mexico-based multiplex operator, is looking at expanding its footprint in India. The company which started operations in India last year plans to invest US$ 350 million in the next five years to operate 500 screens in 40 cities.

The YCH Group, the Singapore-based logistics and supply chain management company, plans to invest US$ 219.4 million in the next five years to set up 10-12 YCH ‘DistriParks’ across India to provide logistics and distribution support to manufacturing companies.

Improved global sentiment and strong industrial output numbers in India are increasingly attracting foreign investors in the country. Other factors being attributed to the revival in foreign direct investment (FDI) in recent times include increasing consumer confidence.

India has been ranked at the third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD) in a new report on world investment prospects titled, ‘World Investment Prospects Survey 2009-2011' released in July 2009.

The 2009 survey of the Japan Bank for International Cooperation released in November 2009, conducted among Japanese investors continues to rank India as the second most promising country for overseas business operations, after China.

A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment (UKTI), ranks India among the top three countries where British companies can do better business during 2012-14.

According to Ernst and Young’s 2010 European Attractiveness Survey, India is ranked as the fourth most attractive foreign direct investment destination in 2010. However, it is ranked the second most attractive destination following China in the next three years.

Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more Canadian firms are now eyeing India as an investment destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010.

India attracted FDI equity inflows of US$ 1.2 billion during March 2010. The cumulative amount of FDI equity inflows from August 1991 to March 2010 stood at US$ 132.4 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP).

FDI equity inflows during financial year 2009-10 were US$ 26 billion. The services sector comprising financial and non-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDI worth US$ 4.4 billion during April-March 2009-10, while construction activities including roadways and highways attracted second largest amount of FDI worth US$ 2.9 billion during the same period. Housing and real estate was the third highest sector attracting FDI worth US$ 2.8 billion followed by telecommunications, which garnered US$ 2.6 billion during financial year 2009-10. The automobile industry received FDI worth US$ 1.2 billion while power attracted FDI worth US$ 1.4 billion and computer software and hardware sector garnered FDI to the tune of US$ 919 million during April-March 2009-10.

During the financial year 2009-10, Mauritius has led investors into India with US$ 10.4 billion worth of FDI comprising 43 per cent of the total FDI equity inflows into the country. Mauritius is followed by Singapore with US$ 2.4 billion and the US with US$ 2 billion, according to latest data released by DIPP.

Proposed Methodology

In order to gather the necessary information to meet the objectives, it is proposed to split the research process into two sections:

Desk research in order to obtain general (preliminary) information about the status quo of FDI in R&D in India, policies employed, industries preferred etc. To do so, the following means are proposed:

Internet sites of the Indian government, e.g. Ministry of Commerce and Industry.

Information and statistics provided by Indian institutions such as India Brand Equity Foundation, The Council of Scientific & Industrial Research, National Association of Software and Service Companies (NASSCOM), Federation of Indian Chambers of Commerce and Industry (FICCI), etc.

Information and statistics provided by international organizations, e.g. World Trade Organisation; World Bank; United Nations Conference on Trade and Development etc.

Other institutions mostly from Universities specializing in studying India, e.g. IndiaKnowledge@Wharton; Indian Institutes of Technology; Center for the Advanced Study of India etc.

Relevant academic articles and Books about India.

Once the preliminary results from the desk research are obtained, direct contact to the closely related parties, such as ministries, organizations, firms etc, for further information and answers to specific questions is proposed.

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