Foreign Direct Investment (FDI) and Financial Integration

Foreign investment, an important source of non-debt finance, is a subject of topical interest. Countries of the world, particularly developing economies, are vying with each other to attract foreign capital to boost their domestic rates of investment and also to acquire new technology and managerial skills. Intense competition is taking place among the fund-starved less developed countries to lure foreign investors by offering repatriation facilities, tax concessions and other incentives. The beginning of the 21st century has already marked a tremendous growth of international investments, trade and financial transactions along with the integration and openness of international markets. Investment in a country by individuals and organisations from other countries may take the form of direct investment (creation of productive facilities) or portfolio investment (acquisition of securities). Foreign direct investment (FDI) is the outcome of the mutual interests of multinational firms and host countries. The essence of FDI is the transmission to the host country of a package of capital, managerial skills and technical knowledge. FDI is generally a form of long-term international capital movement, made for the purpose of productive activity and accompanied by the intention of managerial control or participation in the management of a foreign firm. FDI is usually contrasted with portfolio investment which does not seek management control, but is motivated by profit. Portfolio investment occurs when individual investors invest, mostly through stockbrokers, in stocks of foreign companies in foreign land in search of profit opportunities. FDI is widely considered superior over other forms of capital inflows for achieving sustainable development. Developing countries are strongly advised to rely primarily on FDI, in order to supplement national savings by capital inflows and promote economic development. FDI is not an unmixed blessing. When foreign investment is competitive with home investment, profits of domestic industries fall, leading to shrinkage of domestic savings. Foreign firms stimulate inappropriate consumption patterns through excessive advertising and monopolistic/oligopolistic market power. Similarly, foreign firms are able to extract sizeable economic and political concessions from competing governments of developing countries. Consequently, private profits of these companies may exceed social benefits. Thus, governments in developing countries have to be very careful while deciding the magnitude, pattern and conditions of private foreign investment. The key question is how host countries can minimise possible negative effects and maximise positive effects of FDI through appropriate policies. This book attempts to explain and statistically examine the various dimensions of FDI with reference to India. It also includes chapters on portfolio investment, financial integration, international investment position (IIP) of South Asian countries and international financial integration of high income European Union (EU) countries.