Role of government policies in attracting and regulating FDIs in emerging markets (focus on Indian market)

Abstract

As defined by the Organisation for Economic Co-operation and Development (OECD), a Foreign Direct Investment (FDI) is a cross-border investment made by a resident of one country in an enterprise in another country with the objective of establishing a lasting interest.

Foreign Direct Investment (FDI) has been a subject of prolonged debate. The UN development decade of the 1960s witnessed contested perspectives on FDI's role in economic growth and development. Over time, proponents have argued for FDI's positive impact on overall economic growth and productivity, while detractors emphasize its potential to erode local capabilities and exploit resources in poorer nations (Feldstein, 2000).

However, as economies became more intertwined, FDI experienced significant expansion, with its trajectory characterized by distinct phases and changing patterns. It grew by over 10,000% between 1970 and 2000 as newly independent countries opened their economies and companies increasingly internationalized their operations. For example, the practice of outsourcing gained significant prominence in the USA as companies sought to cut costs by hiring labor from other countries and engaged in resource-seeking FDI activities. This practice has been criticized by many, who claim that these overseas investments hinder job growth within and impede the nation's advancements in high-tech sectors (Klein, 1994).

However, this status quo continued for several years and was only reversed in 2019, when the United States became the primary FDI recipient, a position it maintained in 2020, fueled by substantial investments from Japan, Germany, and the Netherlands (World Bank Data).

General trends in FDI shifted substantially between 2000 and 2016, as it grew more integrated into global economic structures. FDI stocks, which constituted 22% of the world's Gross Domestic Product (GDP) at the start of the millennium, expanded substantially to encompass 35% by 2016; this period underscored the growing role of FDI as a vehicle for international economic interactions.