Motives for FDI range from resource-seeking and market-seeking to efficiency-seeking. The authors believe that the benefits (in terms of cost efficiencies, productivity and profitability) that a developing country reaps from FDI flows depend on the motives behind the FDI flows. They hypothesize that a country is likely to gain more from efficiency-seeking FDI flows than from market-seeking or resource-seeking FDI flows. The authors test this hypothesis with respect to India, using annual data and a distributed lag model. Five sectors have been selected for the purpose of testing the hypothesis. Findings reveal that in India, FDI flows have not contributed significantly to the three parameterscost reduction, improvement in productivity and profitabilityin most of the sectors. It is a significant finding that the computer industry has gained from FDI flows in terms of cost reduction. The authors also further find that the motives behind FDI flows to this sector have been `efficiency-seeking'.
Inconclusiveness
of results has dominated much of the literature available
on the role of Foreign Direct Investment (FDI) flows in
a developing country. While there is a strong theoretical
basis for believing that FDI could have a favorable impact
on a developing country, surprisingly, the empirical evidence
on this is difficult to come by. However, regardless of
empirical evidence on its benefits, FDI flows around the
world continue unabated and the developing countries, in
particular, are following an open-door policy with respect
to FDI flows.
Conceptually,
FDI can be viewed in two ways. One, as pure capital flow
from one country to another. Two, as a set of economic activities
carried out by a Multinational Enterprise (MNE) in a country.
The activities encompass production, employment, sales,
transfer of technology and carrying out of Research and
Development (R&D) in the country where it is operating.
The difference is critical because there is a difference
in implication for the host country depending on how one
looks at FDI. If viewed merely as capital flow, the implications
would be restricted to the impact of FDI on the country's
Balance of Payments (BOP) and its exchange rate. On the
other hand, if FDI is viewed as capital embodied with technological,
managerial and other expertise, its implication could be
very different. The implications range from an increase
in host country's productivity to a rise in the wage levels. |
