Foreign direct investment (FDI) has far and wide become aperfect example or catchphrase for investment that is well-organized andefficient coupled with high wages, job creation, and technologicaltransmissions (Artige & Nicolini, 2006). The industrial and economicpolicies of most governments in the world have welcomed the process ofliberalization, globalization, and privatization, and at the same time endorsedliberal policies to attract FDI flows in their country. When a direct investorundertakes a task of capital operation or transaction in a foreign directinvestment enterprise to get hold of a long-lasting curiosity or inquisitivenessin this foreign firm it is called Foreign Direct Investment. It sets along-standing relationship between a host economy and a foreign investor who isinterested to invest in this host economy.
Balance of Payments (BOP) accounts broadly comprise thecurrent account and capital account. Former records imports and exports ofgoods and services together with unilateral transfers. On the other hand,latter records all such transactions between residents of a country and rest ofthe world which cause a change in the asset or liability status of theresidents of a country or its government (Jain & Ohri, 2010). There arethree forms of capital account: Foreign investment, loans, and banking accounttransactions. As far as foreign investment is concerned, it has twosub-components: Foreign Direct Investment (FDI) and Foreign PortfolioInvestment (FFI). FDI point out to purchasing an asset in the rest of the worldthereby allowing the control over that asset. On the other hand, ForeignPortfolio Investment is purchasing an asset in the rest of the world butwithout allowing the control over that asset.
Almost all developing economies of the world depend uponForeign Direct Investment directly or indirectly and therefore, it is a vitalsource of their existence and activeness. It is preferred to Foreign PortfolioInvestment, partly because returns from Foreign Direct Investment areaccompanied by or linked to the performance of the real economy and partly forthe reason that it is less volatile as compared to Foreign PortfolioInvestment. Foreign Direct Investment is considered a very important tool for thetransformation of the domestic process of production as it bridges thetechnological gap (Raghavan & Kumar, 2011). It can make up not only forshortages in the availability of savings and foreign exchange but also forfaults in a domestic entrepreneurial capacity. In developing economies whereinvestment activities are sluggish, the role of FDI is very important for ithas a role in directly stimulating investment activity in the country.Therefore, it is imperative upon these economies to strike a careful balanceamong the different components or determinants of FDI without crowding outdomestic entrepreneurship. But, this goal can be achieved if we succeeded instriking an equilibrium in the balance of payments. One of the biggestshortcomings of Foreign Portfolio Investment is that it is pro-cyclical innature thereby meaning that it is observed once the balance of payments (BOP)standing is robust and decays with every fleeting day of the balance ofpayments or when it deteriorates. Therefore, it put the accent on or bring outthe direction of movement of the balance of payments which can cause severemacroeconomic instability, especially in the aggregate income, output, andemployment.
Foreign exchange markets indicate the markets for domesticcurrencies of different countries in the world whose aim and objective isnothing but the facilitation of international trade and investment. In acountry like ours, where we have very poor foreign exchange markets, an openFPI system transfers the vulnerability of speculative movements, which can leadto serious disturbance in the economy by shaking the macroeconomic variables.
Conclusion
In a country like ours where FDI inflows continued to be byand large of the equity variety, comprehensive and spread across a range ofeconomic activities like financial services, manufacturing, banking services,information technology services, and construction, it is pertinent upon thegovernment and policy makers to highlight the role of FDI in the growth anddevelopment prospects and work on growing FDI substantially on both gross andnet terms.
There are some important issues that should be raised whenFDI is to be studied. One question is to know what attracts FDI. What are theperks that foreign firms look for when hunting for FDI? What are the determinants of FDI? Whether thehost economy benefits from capital import? What are the incentives and theprospects of FDI? Such questions may be addressed by carrying out holistictheoretical and empirical cum econometric analysis on FDI and its determinants.
Binish Qadri is ICSSRDoctoral Fellow, Department of Economics, Central University of Kashmir, GuestFaculty, NIFT, Srinagar;