Foreign direct investment can have both benefits and drawbacks for developing economies. At early stages, FDI can accelerate structural changes but may not immediately generate growth and can widen foreign trade gaps. However, at mature stages FDI promotes higher economic growth, more exports, and an improved trade balance. The benefits of FDI for developing economies include creating no debt for governments, assisting human capital formation, increasing productivity and competitiveness, promoting exports, and bringing technical know-how, business expertise, and knowledge since domestic capital may be inadequate. However, the drawbacks include harming small retailers and shopkeepers by creating monopolies, having adverse effects on capital accounts, and potentially raising prices in a way that low income groups cannot afford.

1. GROUP NO: 2
Merits & demerits of FDI on developing
economies
Anurag Bisen
Hitesh Jain
Abhishek Kar
Rohit Mahind

2. Foreign Direct Investment
An investment made by a company or
entity based in one country, into a company
or entity based in another country.

3. •
•
•
•
Greenfield investment
Brownfield investment
Mergers & acquisitions
Joint ventures
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Forms of FDIs
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4. Why FDI?
• Industrial competitiveness
• Transportation cost is high
• Location specific advantages for resources
• Market imperfection
• Product life cycle for imported products
• Trade barriers
• Need to protect Technological know how

5. At the early
stage FDI
Positive
• Structural changes
accelerates
Negative
• No immediate growth
generation
• Foreign trade gap may
widen
• Restructuring fosters
unemployment
At the Mature
stage
Positive
• Higher rate economic
growth
• More export and
Improving trade balance
Negative
• Profit return increases
• Lower tax collection as a
result of tax

6. Merits of FDI on developing
economies
• No debt creation on the part of the government.
• Assists Human capital formation.
• Increases productivity and competitiveness.
• Exports promotion
• Domestic capital is inadequate
• Foreign capital brings rare elements like technical
know-how, business expertise & knowledge.

7. Merits of FDI on developing
economies
• Farmers get a better price
• Influx of capital & rise in tax revenue
• Increases employment
• In case of India

8. Demerits of FDI on developing
economies
•
•
•
•
Sword on small retailers, shopkeepers.
Monopoly creation
Colonialism
Adverse effect on capital A/C due to outflow of
capital
• FDI in retail: hits to unorganized retailers
• Low income group may not afford the increased
price
• Inflation may rise

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