What are the Advantages and Disadvantages of FDI?


Advantages of FDI :
1. FDI inflows are long-term in nature and therefore do not lead to volatility either in
foreign exchange or capital markets.
2. Since the investments are in physical assets it is not easy to instantly withdraw such
investments therefore there is no panic withdrawal during periods of economic crises.
3. Very often foreign inflows by way of debt or loans get used to finance consumption
leading to debt repayment problems and increase in money supply. Such features
are not seen in the case of FDI because the funds translate into productive capacity.

4. FDI not only helps to achieve economic growth but also improves the technological

knowhow available to the country. This leads to sustainable development.
5. Access to international markets becomes easier and cost effective because the
target company can leverage the existing brand of the contributing foreign investor.
6. The single most important advantage of FDI is employment generation which
develops marketable skills in the local population and becomes the basis of
sustainable economic growth. It effectively helps to build human capital.

Disadvantages of FDI :
1. Repatriation, reinvestment and distribution of profits cannot be controlled by the host
2. Cultural differences between the foreign investor and the local management can lead
to friction as also have adverse social side effects therefore social regulations need
to be in place before permitting FDI.
3. Excessive dependence on the foreign entity may result in gradual loss of control over
the business entity.

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MT UVA- University, Vocational and Affiliated Education for BMS

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