11-02-2013, 04:21 PM
Understanding the Causes and Effects of Foreign Direct Investment in Developing Countries
Understanding the Causes.ppt (Size: 47.5 KB / Downloads: 26)
Is There a Mutually Beneficial Relationship?
Do domestic firms benefit from the entrance of foreign multinational corporations? Are there spillovers?
Do foreign firms tend to crowd-out domestic entrepreneurship?
Absorptive capacity
India’s Development Strategy: The License Raj Period
1947 India’s independence.
1956 second Five-Year Plan focuses on government led industrialization—strict foreign exchange and import controls enacted.
1969 all domestically owned banks nationalized.
1972 all insurance companies nationalized.
1973 all foreign investment placed under governmental control; limited foreign holdings to under 40%.
The Initiation of Reform
1985 Seventh Five-Year Plan initiated. Set 5% GDP growth goal; achieved through profligate government spending.
1991 severe balance-of-payments crisis.
1992 Eighth Five-Year Plan focuses on increasing private initiative (“reform by stealth”).
2001 all quantitative restrictions on imports eliminated. Telecommunications and insurance industry liberalization.
The Legacy of Fiscal Irresponsibility
Estimates put the Indian fiscal deficit very near the 1991 crisis level of 10% of gross domestic product.
Especially at the state level, the fiscal deficit results from large subsidies for electricity, irrigation water, transport, education, and health services.
In some states as much as 70% of tax revenue goes to wages.
Overall, debt service accounts for 35% of state level tax revenue.
The support of inefficient public and private businesses also weighs on fiscal resources.