Benefits of BPO to the Target Countries
In previous articles we have seen how the BPO phenomenon benefits the Western countries (US, Europe etc) by slashing the costs of the firms who outsource their back office work. In this article, we look at how the BPO phenomenon is transforming the economies of the countries that are the recipients of the outsourcing phenomenon. […]
Inventory Costs – Ordering Cost, Carrying Cost and Stock Out Cost
Inventory procurement, storage and management is associated with huge costs associated with each these functions. Inventory costs are basically categorized into three headings: Ordering Cost Carrying Cost Shortage or stock out Cost & Cost of Replenishment Cost of Loss, pilferage, shrinkage and obsolescence etc. Cost of Logistics Sales Discounts, Volume discounts and other related costs. […]
How Governments, Businesses, and Individuals Can Survive the Age of Automation
The Age of Automation has Arrived Let’s face it! The Age of Automation is arriving if not already arrived and this has huge implications for governments, businesses, and individuals. Indeed, in a manner similar to the Industrial Revolution in the Nineteenth and the Twentieth century’s, the Twenty-First Century is already witnessing massive disruption due to […]
An Introduction to Process Documentation
Multinational companies are facing the problem of knowledge management. Industries like software and ITES hire extremely skilled employees to work for them. However, they face several problems. This is because the skill lies in the “employee’s minds” and not in the system. As a result, if the employee goes on long leave or quits the […]
What are Trade Wars and How Do They Affect Economies, Businesses, and Individuals?
In recent months, there has been much coverage in the business press as well as the general press about Trade Wars between the United States and China as well as between the United States and the European Union and Canada and Mexico. The immediate trigger or the event for these trade wars has been the […]
FDI or Foreign Direct Investment is the practice of international businesses investing in countries other than their home country. In recent months, there has been much debate over whether opening up of economies to foreign direct investment is good for developing countries.
Further, foreign direct investment is seen by many old timers as surrendering the sovereignty of the country though the younger generation views it as a blessing for the economy.
Whatever be the stance, it cannot be denied that with the global economy being integrated so tightly, developing countries have no choice but to allow foreign direct investment. However, they can have some restrictions on which sector to invest and how much profit can be repatriated.
Many developing countries do not have the necessary resources at their disposal to develop some sectors and hence, they permit foreign capital to invest in these sectors. Of course, they also ensure that sectors like defense and other sectors that have national security implications are kept off the list of sectors in which foreign direct investment is allowed.
For many countries, opening up of their economies results in benefits since they need the dollars as well as because they might not have the expertise to commence productive activities in these sectors.
Finally, foreign direct investment can be used to pay for expensive imports and encourage exports as well. After all, every developing country (except those with large oil reserves) needs to pay for its oil imports in dollars and hence foreign direct investment helps to earn precious dollars.
There are many downsides to allowing Foreign Direct Investment into the developing countries. However, the developing countries benefit because of inflow of dollars and much needed capital, which is not available domestically, there is scope for outflow of dollars as well since the foreign companies typically repatriate a part or whole of their profits back to their home countries. This is the reason why developing countries must think twice before allowing blanket foreign direct investment. To circumvent this, many developing countries typically restrict foreign direct investment into sectors that badly need capital and where the developing country does not have expertise.
Further, the fact that many developing countries have capital controls on the capital account (which is to restrict wholesale repatriation of both profits and investment) and relax the current count where only profits and that too a percentage of it is repatriated.
The key point here is that no country can be isolated from the global economy in this day and age. Hence, it is in the interest of developing countries to allow foreign direct investment though some safeguards can be put in place as discussed above. Of course, the best path would be to not have a blanket ban on foreign investment nor to allow 100% foreign investment.
In this respect, countries like India and China have showed the way on how to attract investment and at the same time not fall prey to the phenomenon of capital flight that happened to East Asian economies in 1998.
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Cross Border Mergers and Acquisitions and Some Recent Trends in this Field
February 12, 2025
