Limitation of Foreign Direct Investments (FDI)

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Reading Time: 3 minutes| (Last Updated On: February 4, 2019)

Limitation of Foreign Direct Investments (FDI)

Foreign Direct Investment is a bundle of opportunities but does not come without flaws. Although there are tonnes of benefits attached but have a cost too. Let us discuss the various thorns Foreign Direct Investments comes up with: Limitation of Foreign Direct Investments

Limitation of Foreign Direct Investments

  • HINDRANCE TO DOMESTIC INVESTMENT: Foreign direct investment poses a great threat to small and marginal domestic investors of your country as they may be completely wiped out due to large and giant investments from other countries. This may lead to reluctance in the attitude of the domestic investors. They would prefer a more stable and safe investment free from a high degree of competition.
  • NEGATIVE INFLUENCE ON EXCHANGE RATES: Many a time it has been noticed that Foreign Direct Investments affect the exchange rates of your country. In case you are an exporter or an importer you are going to suffer badly due to such fluctuations in exchange rates.
  • INCREASED COSTS: Sometimes producing and exporting from a foreign country becomes a lot more expensive than exporting it from home country. The whole purpose of investing in a foreign country then becomes infeasible and undesirable.
  • ECONOMICALLY NONVIABLE: The Indian Government allows FDI mainly in areas which require comparatively high investments like air crafts, automobiles, construction etc. It sometimes becomes non-viable for us to invest in bigger projects in foreign countries even if we wish to because of such high capital investment.
  • UNNECESSARY GOVERNMENT CONTROL: as already mentioned, it is an initiative taken by the Govt. of India. The Indian govt. always seek to benefit its own economy only and thus would exercise control on the various Foreign Direct Investments. So get ready to be monitored by the Indian government.
  • COLONIZING DEVELOPING ECONOMIES: the foreign country may go for colonizing the domestic country by obtaining a vital position in the economy and exploiting the human capital. East India Company has already left a mark and now new companies could rule the trough. The domestic country gets vulnerable to colonialism and this way Foreign Direct Investment makes a country prone to colonization.
  • Expropriation: the government may exercise excessive control on the exogenous company and might even end up dictating the decisions of it. The political power may expand to even ownership of the assets of the company.
  • Continuous political changes: in a democracy like India, the political environment is very volatile. New rules are made every day and broken even before that. Thus the investors find the ground always shaking with changes and what they get is very risky one. Economic stability is very hard to achieve.
  • Threat to domestic investors: by providing ample of space to the foreign investors, the domestic investors’ freedom is restricted to certain spheres only. And a threat to domestic investors has posed a serious problem.
  • Drainage of country’s resources: continuous exports lead to drainage of country’s resources via cheap channels. Resources of the host country are drained out at very low prices leading to further stagnation of the host.
  • Vulnerability to global shocks: as more and more Foreign Direct Investors come into action, the host becomes vulnerable to most of the foreign shocks. Thus, depressions in any other country would severely affect the host country too.

Now you might be having a deep insight of the various risks attributed to the home country, the host country, general public, and the investor. Before investing you need to properly scan the economic environment in order to succeed otherwise loads threats are lingering your road.

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