Simply opening up it’s door to foreign investments won’t help a country in obtaining good amount of Foreign Direct Investment (FDI). Even if the country has good business environment, there may still be information gap or wrong perceptions. So, it is important that potential host country undertake foreign investment promotion policies. There are various promotion methods or measures, that are used by Governments around the world to attract inward FDI. These methods can be grouped into three categories: investment promotion, incentives and policy intervention.
Measures to attract FDI:
- Investment promotion: FDI inflow to a country can be attracted through national investment policies, improved infrastructure, conducive business environment and protection of rights of the foreign investors. The policy tools for promotion of FDI may include liberal FDI Policy, enforcing Bilateral Investment Treaties, and tax beni?t through Double Taxation Avoidance Agreement (DTAA). India has DTAA with Mauritius and several other countries.
- Incentives: Simply policies are not enough to attract good FDI inflow. That’s why governments announce and promote several economic and industrial incentives. Incentives do affect business decisions, specially those related to locations. Example of incentives: reduced corporate income taxes, tax holidays; indirect tax exemptions; special economic zones (SEZ), infrastructure subsidies etc.
- Intervention: In order to protect national interest, Governments of all countries usually follows some intervention methods to restrict FDIs. For example: ownership restrictions, performance demand, sanctions etc. But rigid intervention methods may slow down FDI. That’s why the intervention methods should involve general steps to enhance overall human capital and technical capabilities of the economy. Governments may reduce rigidities in labour market, remove the barriers in entry/exit, promote intellectual property rights and strengthen governance.
Successful FDI promotion requires a solid investment policy, efficient investment promotion agency, clear strategic direction and effective marketing technique. Decisions regarding investment promotion can be affected by objectives of attracting FDI, national priorities, size of the country, and several other factors.
FDI inflow problems in India:
India is already following liberal FDI policies and promoting bilateral investment treaties with many countries. Still, there are some problems which affects the performance of FDI in India. Some of those problems are:
- Poor infrastructure: Inadequate infrastructure is one of the major hurdles for FDI in India. Though connectivity is improving, India is still facing the shortage of power.
- Corruption: Corruption and misuse of public office continues to paralyze development of India. It is shielded by legal loopholes, bureaucracy and politics. All these helps in chasing away many prospective foreign investors.
- Labour laws: Flexible labour laws help in attracting more FDI. India’s labour laws protect the workers but creates problems when it comes to layoffs or restructuring a company.
- Geographical disparities: Only selected regions of India are promoted for FDI. There are many regions with rich natural resources. But due to disparities in government policies or politics, they failed to attract FDI.