1. Understanding the Causes and Effects of Foreign Direct Investment in Developing Countries Justin Bird

2. What is Foreign Direct Investment (FDI)? A source of capital and investment involving foreign control of production A source of exploitation? A channel of technology transfer and industrial development?

3. The Importance of FDI to Developing Countries As a Means of Finance

4. Exploitative? Does foreign direct investment seek out countries with lax environmental standards? Does foreign direct investment exploit cheap labor in less developed countries?

5. Is There a Mutually Beneficial Relationship? Do domestic firms benefit from the entrance of foreign multinational corporations? Are there spillovers? Do foreign firms tend to crowd-out domestic entrepreneurship? Absorptive capacity

6. Foreign Direct Investment in India From an International Perspective

7. India’s Development Strategy: The License Raj Period 1947 India’s independence. 1956 second Five-Year Plan focuses on government led industrialization—strict foreign exchange and import controls enacted. 1969 all domestically owned banks nationalized. 1972 all insurance companies nationalized. 1973 all foreign investment placed under governmental control; limited foreign holdings to under 40%.

8. The Initiation of Reform 1985 Seventh Five-Year Plan initiated. Set 5% GDP growth goal; achieved through profligate government spending. 1991 severe balance-of-payments crisis. 1992 Eighth Five-Year Plan focuses on increasing private initiative (“reform by stealth”). 2001 all quantitative restrictions on imports eliminated. Telecommunications and insurance industry liberalization.

9. Foreign Direct Investment in India

10. 1995 to Today The Stagnation of Reform India uses more anti-dumping protection stipulations than any other country other than the United States. India’s weighted mean tariff rate has fallen dramatically over time but remains significantly higher than in competing nations. Implementation of the VAT (Value Added Tax) system continues to be delayed. The privatization or closure of inefficient publicly owned producers has been limited.

11. The Legacy of Fiscal Irresponsibility Estimates put the Indian fiscal deficit very near the 1991 crisis level of 10% of gross domestic product. Especially at the state level, the fiscal deficit results from large subsidies for electricity, irrigation water, transport, education, and health services. In some states as much as 70% of tax revenue goes to wages. Overall, debt service accounts for 35% of state level tax revenue. The support of inefficient public and private businesses also weighs on fiscal resources.

12. India Lacking in Infrastructure A survey of international businessmen ranked India 55 th of 59 in terms of infrastructure development and 50 th regarding the importance the government places on infrastructure development. Estimates suggests between $5 and $6 billion is lost annually by producers in India because of poor transportation infrastructure. The World Bank estimates the cost to importers and exporters evolving from port inefficiency to be $250 million annually.

13. Policy Implications for India Implementation of the VAT (value added tax) should be forced through the central and state governments. Fiscal responsibility needs to be addressed at both the state and central government levels. Infrastructure development needs to be quickened. Corruption and bureaucratic inefficiency can be reduced.