Question

Discus the major factors influencing the foreign investment flows into a country in 250 words.

Answer 1

Major factors are-
1. Stability of the Government:

A stable Government is an essential prerequisite for any investment. The investor will always look for a government which is supporting investment and which will not take any steps that are anti-investment. The investor should not have any fear of take over by the government. This will enable him to go for expansion.

2. Flexibility in the Government Policy:

Certain investments were not allowed in the hands of FDI but such a rigid policy will not help in the growth of industries. With WTO regulation, government has to adopt flexible policies, permitting FDIs in all areas including those in which they were prevented previously. For example, in India, power generation was not permitted to private sector. Now, in Maharashtra, Dabhol Power Company is allowed to do so.

3. Pro-active measures of the Government to promote investment (infrastructure):

The Government should also undertake pro-active measures such as expansion of ports, captive power, development of highways, atomic power etc. These measures will attract more foreign direct investment.

4. Exchange rate stability:

Commercial viability of any FDI is based on exchange rate stability. This means that the value of domestic currency should not drop abnormally by which while repatriating the funds, the foreign investor will lose heavily. Exchange rate should be more or less the same as prevailing at the time of investment.

5. Tar policies and concessions:

Government should adopt uniform tax policies as per international norms. A heavy excise duty or sales tax or customs duty will prevent foreign direct investment. A moderate tax policy should continue so that the FDIs will feel comfortable.

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