For emerging economies, investment from foreign powers has long been a contentious topic. In fact, as recently as last year protestors lined the streets of India’s major cities against a series of reforms designed to open the country’s retail sector to foreign direct investment (FDI). The laws would allow companies like Wal-Mart and Tesco to buy up to 51% stakes in local businesses. The proposed reforms inflamed the fears of many Indians who felt that the economy would become too influenced by outside powers.
There are a few reasons why people could be wary of FDI. The injection of foreign cash can cause exchange rates to fluctuate while local markets face increased competition. But these negative outcomes are ultimately outweighed by a number of undeniable benefits. For one, overseas investors bring new technologies and management techniques that allow companies to become innovative. FDI also increases the standard of living for both international and domestic residents. What’s more, the Third World debt crisis of 1982 stands as a sinister testament to countries who remain too insular. In the 1970s many developing nations that had banned multinational corporations from setting up shop nevertheless began borrowing heavily from foreign lenders. The idea was that these countries would expand their economies while simultaneously keeping overseas companies out.
But the plan backfired. The world economy soon entered a recession and many expanding nations defaulted on their loans. By the early 1980s developing nations were selling stakes in their domestic companies to foreign buyers. This influence eventually went on to rejuvenate countries like India and Brazil, setting them on a path to become industrial powerhouses. Still, both of those nations need more infrastructural improvement if they are to realize their full potential. Luckily for India, its parliament approved FDI for local retail companies, a measure that will hopefully lead to more innovation in the increasingly prosperous nation.
Questions:
- Is the United States a popular target of foreign direct investment?
- Why is foreign direct investment very good for infrastructure development?
Source: Peter Blair Henry, “A Prescription for Growth,” Fortune, March 21, 2013. Photo by Elliott Scott.