Page 1 of 11

European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 02

February 2019

Available online: https://ejbss.org/ P a g e | 361

Foreign Direct Investment – Issues and Challenges

Richa Rani

M.com, NET

Abstract

In today's competitive global business environment investment are required for growth and

development .FDI as an investment tool is an integral part of open and effective international

economic system which acts as a catalyst in the development of a country. In this paper we have

attempted to identify issues and challenges associated with FDI in India. India is offering a large

domestic market, low labor cost, a well working democracy, pool of natural resources and most

importantly positive attitude of government. In spite of all these FDI flows has been far from

satisfactory. A restrictive FDI regime, high import tariffs, exit barriers for firms, stringent labor

laws, unskilled labor, poor infrastructure, centralized decision making processes, political

instability, inefficient capital market and a very limited scale export processing zones make India

an unattractive investment location. Creating a better investment climate is a big challenge

related to FDI. The study also found that the inflow of FDI in India is a welcome measure for its

economic development but it needs selectively and government should watch and guard it.

Keywords : Foreign Direct Investment, India, Foreign Capital

Introduction

Foreign Direct Investment (FDI) is controlling ownership in a business enterprise in one country

by an entity based in another country. According to international monetary fund, “foreign direct

investment, commonly known as FDI, refers to an investment made to acquire lasting or long- term interest in enterprise operating outside of the economy of the investor." the investment is

direct because the investor, which could be a foreign person, company or group of entities, is

seeking to control, manage, or have significant influence over the foreign enterprise. Almost

every developed country of the world in its Initial stages of development had made use of foreign

capital to make up the deficiency of domestic saving. Even USA, the richest of the world had

Page 2 of 11

European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 02

February 2019

Available online: https://ejbss.org/ P a g e | 362

borrowed heavily in the 19th century and now in the 21st century USA has become the biggest

leader country of the world foreign capital is vital tool for promoting economic development to

make balance of payment favorable .foreign capital refers to the investment of capital by a

foreign government, institution private individual and international organization in a country.

Foreign capital includes.

1. Foreign aid is in the form of Grants and concessional loans from the foreign government

and international institutions (IMF World Bank) for the project and non project work.

2. Commercial borrowing are in the form of NRI Bank deposits on which interest rate is

fixed by RBI and loans from foreign bank at market rate of interest .

3. Foreign Investment: Foreign investment refers to investment by foreign investors in

shares, debentures, bonds etc. it is categorized into two parts ;

Portfolio Investment: Under this type of investment foreign companies, foreign institutional

investors (FII), buy share, debentures and control remains rested with native company

themselves.

Foreign Direct Investment : FDI is an investment made by a company or entity based in one

country, into a company or entity based in another country .FDI native companies are managed

by foreign companies or new companies are set up by foreign companies foreign direct

investment differ substantially from indirect investment such as portfolio flows , wherein

overseas institutions invest in equities listed on a nation’s stock exchange .entities making direct

investment typically have a significant degree of influence and control over the company into

which the investment is made .open economic with skilled workforces and good growth

prospects tend to attract lager amounts of foreign direct investment then closed ,highly regulated

economic .

Objectives

India possesses several advantages like superior IT technology, well developed industries base,

large consumer market, and abundant supply of skilled and educated workers who can fluently

Page 3 of 11

European Journal of Business &

Social Sciences

Available at https://ejbss.org/

ISSN: 2235-767X

Volume 07 Issue 02

February 2019

Available online: https://ejbss.org/ P a g e | 363

speak English at relatively low wage rates. Still, India attracts lesser inflows of FDI in

comparison to the other nations. In this context, this study has following objectives:

 To study the various provisions of FDI.

 To identify the issues and challenges related to FDI.

 To analyze the trends of FDI in India.

Research Methodology

The study is exploratory in nature and secondary data has been collected from various sources.

Importance of FDI

Foreign investment comes in several forms. Portfolio investment, foreign loans and foreign

direct investment are the three important types. of these foreign direct investments in industry

and services are the most useful. foreign loans which incur comparatively high cost are generally

used for investments are risk free to the country and bring with it the advantages of advanced

technology, management practices and assured markets. in due course there is a technology

transfer as the local workforce gains knowledge of the manufacturing processes and management

practices. The value added in these industries. is contribution to GDP and foreign exchange

earnings. Therefore FDI contributes to foreign exchange earnings, employment creation and

increases in incomes, especially of skilled and semi-skilled workers in these industries. There is a

strong relationship between foreign investment and economic growth. larger inflows of foreign

investment are needed for the country to achieve a sustainable high trajectory of economic

growth. Following are several irrefutable reasons for this.

1. Filling The Saving Investment Gap : In developing countries, there is a large gap

between investment needs and savings. this is called "saving investment gap''. The saving

investment gap leads to vicious circles of poverty. The FDI fills the gap between saving

and investment. Supplements the domestic investment and there by raises the level of

capital formation. For the economy to grow by 7 to 8 per cent a year there is a need to

invest around 35 to 45 per cent of GDP. National savings fall far short of this by nearly