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This article provides information about the consequences of FDI and globalisation of financial market in Indian economy:
Foreign Direct Investment (FDI) is money invested in production by a foreign party rewarded with part-ownership of production. Of the three important aspects of liberalisation – finance, trade and investment – financial liberalisation has been the most pronounced.
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During this globalisation era there has been progressive and extensive liberalisation of controls on financial flows and markets leading to economic globalisation. Economic globalisation and financial liberalisation centres on the movement of capital of which FDI was a major form.
From the beginning of the 1980s, FDI flows have grown much faster than the world output or trade or domestic fixed investment. The growth of FDI in the 1990s was enormous. The initial burst of FDI in the late 1980s was almost entirely in developed countries (over 80% of the total) and predominantly from five leading developed countries (over two thirds). In the 1990s developing countries began to attract substantial FDI and there has been genuine geographical broadening of FDI. Since early 1990s, FDI flows to the developing countries have raised relatively averaging 32% of the total in 1991-1995 compared to the 17% in 1981-1990.
This was due to the liberalisation of foreign investment policies in most of the developing countries during the 1990s. Private capital flows for direct investment and portfolio investment for developing countries have grown from $ 25 billion in 1990 to $150 billion in 1997. Also, during this period there have been qualitative and quantitative changes in the world of international integration of global markets through the medium of FDI.
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The FDI explosion of the 1980s characterised by the investment inflows within the triad of EU, Japan and North America shifted in the 1990s to the non-OECD (Organisation of Economic Co-operation and Development) countries as well. The flows were accounted by Asian countries (China, Singapore, Malaysia, Thailand, and Indonesia), Latin American countries (especially Mexico, Chile, Argentina and Brazil) and Eastern European countries. There had also been a growth of major corporate alliances at global level during this period. FDI remained mainly market driven and they dominated service sector.
However, the flow of FDI even among developing nations was not uniform. Much of this FDI has centred on only a few developing countries. Least developed countries in particular were receiving only very small FDI despite having liberalised their policies. There were some negative impacts of these private capital flows. There was a general and increasing concern about the fragility and vulnerability of the system due to the interconnectedness of financial markets and systems and the vast amounts of financial flows.
These were the risk of a breakdown in some critical parts or in the general system itself, as a fault developing in one part of the world or in the system can have widespread repercussions. These concerns were heightened by the East Asian financial crisis that began in the second half of 1997 and spread to Russia, Brazil and other countries, causing the worst financial turmoil and economic recession in the post-World War II period. Nonetheless in the 1990s a consensus gradually emerged around the globe that foreign capital, if utilised properly, can contribute significantly to economic development.
The same was true with India. The largest proportion of FDI approvals in India has been in the infrastructure and core sectors such as power, telecommunications, energy exploration, and chemical and metallurgical industries. India followed a case-by-case approach in approving FDI. FDI in India depends on the assessment of India relative to other countries on several fronts.
The main considerations are the political stability and credibility of reforms, the state of the infrastructure, especially power, transport and communication, national policy regime, speed and transparency in implementation of government policies, labour market conditions and the intellectual property rights issue.
FDI in India is permitted under the following forms of investments:
i. Through financial collaboration;
ii. Through joint ventures and technical collaboration;
iii. Through the capital market via Euro issues;
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Through private placements or preferential allotment.
FDI is not a one-way process. In the open market system Indian companies are also going global through joint ventures abroad. India’s export in the year 2001 -02 was to the extent of 32,572 million. Many Indian companies have started becoming respectable players in the international scene. Agricultural products, marine products, cereals, oilseeds, tea, and coffee are some prominent products that India has been exporting.