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The pros and cons of FDI in 1 socialist, 1 capitalist and 1mixed economy

Definitions Capitalism , Socialism, Mixed Economy


Capitalism According to Dictionary .com, Capitalism is - It is an economic system, where investment and ownership of the means of production, distribution and exchange of wealth is made and maintained chiefly by Private individuals or corporations
Socialism - Government ownership and administration of the means of production and distribution of goods - a system of society or group living in which there is not private property - a system or condition of society in which the means of production are owned and controlled by the state Mixed Economy -An economy on which some industries are privately owned and others are publicly owned or nationalized - Many capitalist economies are mixed economies (some capitalism and some socialism)

What is FDI?

Foreign direct investment, or FDI, is a company's physical investment into building a plant in another country, acquisition of a foreign firm or investment in a joint venture or strategic alliance with a foreign company in its local market. Global foreign investment flows have exceeded $1 trillion in the 21st century -- from $14 billion in the 1970s -- according to the United Nations Conference on Trade and Development. These investments impact the host country and the home country of the investing business. Small businesses experience the effects of FDI by hosting foreign companies in their local markets or by investing internationally.

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company anywhere by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Different faces of FDI


Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. E.g. TCS, Ford motor company, Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. E.g. Pepsi Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. E.g. PUGEOUT,

The pros and cons of FDI in Socialist economy China

The Scenario of China


Ever since China reformed its economy, understood the immense importance of FDI and also urged for foreign capital participation in the economy-the country has received remarkable amount of FDI since 1979. It has become the second largest recipient of FDI just behind the US and definitely the largest among the developing countries The government of China established four SEZs in Guangdong and Fujian provinces and offered special incentive policies for FDI in these SEZs. Chinas overall economic reform process and Chinas commitment to the open door policy and market-oriented economic reform, proved to be a success in gaining the confidence of foreign investors in China (China Statistic, 2000). The establishment of new enterprises such as new foreign funded and joint venture companies has been the main mode of absorbing FDI into China (OECD, 1999). As mergers and acquisitions have become the popular mode of global business venture, China is getting the attention of investors all over the globe. As of today almost 190 countries and 450 out of 500 leading top companies investing in China and the value of FDI is worth of 105.7 billion.

5.2 Advantages of FDI in China 5.2.1 The Immense Size and Growth of the Chinese Economy and Very Bright Prospects

Foreign companies which are market oriented, sets-up business ventures in order to serve the local market. Their goal is always directed towards serving the unexploited market. The market sizes, growth opportunities, purchasing power, degree of development in the host country are always the key factors for deciding the FDI destinations.

China has a population of 1.2 billion, with a vast potential for consumption. That makes it as the most suitable place for investing in the industries like chemicals, drinks, household electrical appliances, automobiles, electronics, and pharmaceutical.
5.2.2 Resource Availability and Low Cost of Labor Force The degree of availability of different sources including the land, labour and natural resources is always the key to attract more and more investors. One of the major advantages of companys get while they invest in China is its availability of all kinds of resources. The most significant one is the human resources. Along with that another advantage the companies get is the labour force is also available at relatively lower cost and it are also less than in Europe and the US by a great margin. The country is also very rich in energy resources. It has oil reserve and it is the largest producer of coal in the world. As with coal, Chinas electric power supply is sufficient and uninterrupted.

5.2.3 Immense Development in Relevant Infrastructure It is always the fact that availability of physical infrastructure greatly influences the decision of investment particularly in a foreign land. It is a great advantage for a company to go for investment in a place and country. The more highways, railways and interior transport waterways are adjusted according to the size of host province, the more FDI inflows. 5.2.4 Openness to International Trade and Easy Access to International Markets China has adopted the export promotion development strategy which was proven to be a remarkable step in attracting more FDI in the country. Together with export promotion policy, China has implemented economic reforms and open door policies and made efforts to promote trade by concluding several bilateral trade arrangements and adopted unilateral actions. There has been substantial progress in reducing tariff barriers. 5.2.5 Development and Alteration of the Regulatory Framework In the process of attracting more FDI China adopted a more transparent and suitable business environment and regulatory framework. That provides the investor a great deal of advantages and makes them feel secure to put their money in China.

5.2.6 Investment Protection and Promotion The Joint Venture Law was amended to hinder nationalization. This portrays the scenario of investment protection in China. Investors are really feeling safe and foreign investors are getting immense mental as well as political advantages. Another significant addition of investment protection was the Contract Law of 1999. It ensures legal rights of investors. It provided the legal rights of all parties while allowing them to determine their own remedies for dispute resolution and breach of contract and to promote foreign investment. Investors are also getting quite significance advantages due to some investment promotion campaign by China. It includes unique tax incentives for the Special Economic Zones of Shenzhen, Shantou, Zhuhai, Xiamen and Hainan, 14 coastal cities, dozens of development zones and designated inland cities. The incentives are also available in the areas of significant reductions in national and local income taxes, land fees, import and export duties, and priority treatment in obtaining basic infrastructure services (World Bank, 2003).

Disadvantages of FDI in China

In spite of having huge advantage and also considered to be the one of the most perfect destination for foreign investors, China still has some areas of disadvantages for investors which are required to be addressed and certainly needed to be improved. China possesses a very low per capita income of people. The production capability is increasing but having a low per capita income makes periodical saturation in the country and makes life difficult for companies. Chinas disadvantages in terms of technology gaps and lack of labour qualification in some areas will also need to improve. Another major disadvantage in China is unequal investments in different sectors. There is saturation in traditional sectors but not a lot of investments in chemical and automobile sectors. China still in this 21ST century does not allow the foreign companies to owned 100% shares. There are still some barriers in the country in the areas of administrative enforcement and non-tariff measures. Even there are some changes are taking place, still works needed to be done improve the legal system which is appropriate for market economy. The existing legal basis, legislation procedure and operating mechanism have not yet fully shifted to the needs of market economy (Zhang & Felmingham; OECD, 2002).

The pros and cons of FDI in Capitalist economy USA

UK 17% Others 29%

Retail Others 3% 4% Services 4% Infotech 7%

Japan 11%

Banking 8%

Manufacturin g 41%

France 8%
Canada 8% German 9%

Dutch 10%

Wholesale Trade 15%

Switzerland 8%

Finance 18%

70% FDI investment thru 7 countries

95% investment in 8 industries

FDI in USA: Pros


GDP of $15 Trillion which is much larger than any other country in the world Flexible Educational system to to fashion training programs as per Employment market Access to 310 Million lucrative American Population Free trade agreements with 20 countries add 425 million more customers The United States is the worlds leader in protecting intellectual property rights (IPR) SelectUSA Business Solutions Program is designed to assist companies and facilitate investment decisions U.S. civilian labour force are diverse, flexible in the workplace, and mobile. 6 Million employed in US Affiliate firms US Affiliate firms pay up to 30% more wages Employment by US Affiliates not at risk of retrenchment Investors have access to Best educated workforce in the world

FDI in USA: Cons


Nations hold more US Liquid assets than Investing in US Private enterprises Acquisitions vs Greenfield investments ballooning U.S. deficit is beginning to drive its value down Environmental safeguards (Cap and trade legislation) which will increase initial costs of operation Strong position of the US Dollar

The pros and cons of FDI in mixed economy India

FDI in India: Pros


The quick and increasingly growing economy of India in most of its sectors, has made India one of the most well-known and accepted destinations in the whole world, for Foreign Direct Investment.

India has an expanding market trends and the immense development in technology and telecommunication, have further collectively made India, the apple of investors' eye, for most productive, profitable, and secure foreign investment.
India has noticeably emerged out as the second most popular and preferable destination in the entire world, after China, for highly profitable foreign direct investment. Be it sectors like infrastructure, technology, telecom or hospitality an array of foreign investors have made direct investment in India. Countries like US, UK, Mauritius, Singapore, and many others are eying for further investments.

FDI in India: Pros (Cont) It reduces the gap between farm prices and retail prices. Gives best management practices from all over the world. It makes market intelligent and also provides good understanding and practical knowledge to he domestic retailers . To achieve expected growth in India GDP: India is targeting for its GDP to grow by 8 to10 percent per year. This requires raising the rate of investment as well as generating demand for the increased goods and services produced. Provide an aid to Indian agriculture to become lowest cost source of farm produce. To bring trade balance and to increase liquidity by the way of foreign exch ange reserves The status of the human resources in a country is also instrumental in attracting direct investment from overseas. Countries like China that have taken an active interest in increasing the quality of their workers and have made compulsory for every Chinese citizen to receive at least nine ears of education. This has helped in enhancing the standards of the laborers in China. If a particular country has plenty of natural resources it always finds investors willing to put their money in them. A good example would be Saudi Arabia and other oil rich countries that have had overseas companies investing in them in order to tap the unlimited oil resources at their disposal. Infrastructure is very important for FDI. So if a country keens to have overseas investors they have to focus on infrastructure.

FDI in India: Cons The entrance of foreign retail chains has various impacts on India. Investors build supply chains and logistical capabilities, spurring significant improvements in the infrastructure needed to source, ship, store and deliver products. On the other hand their entry growth persuades domestic competitors to invest in infrastructure and logistics, as well as greatly speed up the emergence of product standards. The foreign retail chains will need to make very pricey real estate investments. They will have a very high variable cost of operation. Threats on organized and unorganized retail players. Replacement of established national brands by the brands of the retail gains. For e.g Wal-Mart is committed to buying the best goods at the cheapest prices to give its customers the best value for money. That is why it sources so heavily from China. 70% of merchandise in Wal-Mart contains components made in China. Even though Wal-mart may not continue heavy operations in china but would continue heavy sourcing from china market to

Conclusion: FDI has both positive and negative impact on India Economy. Government should promote FDI and in order to lower down its negative impact it should have redesigned framework for the local players. Government should encourage FDI on gradual basis depending on products from one area to other Product category wise clauses should be developed to allow FDI. India needs inflows to drive investment in infrastructure, a lack of which is often cited as restricting the countrys economic growth. Investment is also needed to expand capacity and technology in sectors such as autos and steel, as well as to offset a big current account deficit. In a nutshell, FDI should been couraged with strict feasible and mutually beneficial regulations. Better Investment Climate Need of the Hour.

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