Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)

Capital is a vital ingredient for economic growth, but since most nations cannot meet their total capital
requirements from internal resources alone, they turn to foreign investors to supply capital. Foreign
direct investment (FDI) and Foreign Portfolio Investment (FPI) are two of the most common routes for
overseas investors to invest in an economy. FDI implies investment by foreign investors directly in the
productive assets of another nation. FPI means investing by investors in financial assets such as stocks
and bonds of entities located in another country. FDI and FPI are similar in some respects but very
different in others. As retail investors increasingly invest overseas, they should be clearly aware of the
differences between FDI and FPI, since nations with a high level of FPI can encounter heightened
market volatility and currency turmoil during times of uncertainty.
Examples of FDI and FPI
Imagine that you are a multi-millionaire based in the U.S. and are looking for your next investment
opportunity. You are trying to decide between (a) acquiring a company that makes industrial machinery,
and (b) buying a large stake in a company or companies that makes such machinery. The former is an
example of direct investment, while the latter is an example of portfolio investment.

Benefits of FDI:
Countries receiving inward investment gain in a number of ways, including:

1. An increase in GDP, initially through the FDI itself, but this will be followed by a
positive multiplier effect on the receiving economy so that the final increase in national income
is greater than the initial injection of FDI.

2. The creation of jobs.

3. An increase in productive capacity, which can be illustrated by a shift to the right in

the Aggregate Supply (AS).

4. Producers have access to the latest technology from abroad.

5. Less need to import because goods are produced in the domestic economy.

6. The positive effect on the country’s capital account - FDI represents an inflow (credit) on the
capital account.

7. FDI is a way of compensating for the lack of domestic investment, and can help 'kick-start' the
process of economic development.

Negative effects of FDI:

1. Exploitation: Careless labour laws combined with unemployment in the developing countries
leads to exploitation of workers by multinational corporations in the form of FDIs.
 2. Draining of money: In spite of foreign direct investment coming into the country by the
company is basically deployed to earn profits from the native customers. Therefore, the net
amount earned is transferred to the parent nation.

3. Loss of business for local companies: International corporations bringing in FDI are much
stronger than domestic companies. This may result in winding up of domestic companies (poor
competitors) as they do not possess the required financial muscle power resulting a net loss for
local companies.

Technology Transfer:

Technology transfer is the process of transferring scientific findings from one organization to another for
the purpose of further development and commercialization. This is an attempt to boost developing
economies by developed economies. The process typically includes:

 Identifying new technologies

 Protecting technologies through patents and copyrights

 Forming development and commercialization strategies such as marketing and licensing to

existing private sector companies or creating new startup companies based on the technology.

Benefits of Technology Transfer

Innovation is the prime source of technological advancement, which in turn drives economic
growth for developing economies. The Hard Technologies (industrial processes, equipment and
plant) or Soft Technologies (technical know-how, management ideas, marketing skills etc)
contributed by Multi-national Enterprises (MNEs) are considered the main source of economic
development and growth.

When a multinational firm vertically integrates with the developing country firms, host firms are
forced to abide by the MNE's strict guidance and standards to ensure quality goods or services
in the form of raw materials or upstream services. The foreign firms would guide and assist,
both managerially and technically which would lead to improvement both in quality and
quantity of service by the local affiliates. Also domestic rival firms enhance their offerings to
keep in pace with the foreign affiliated firms in the market thus enhancing the host country
firms' productivity.

Methods of Technology Transfer:

Licensing
Licensing is an agreement under which the owner of a patent, trademark or other intellectual
property gives permission to another company to use the technology developed by him (her), in
a certain area during a certain period of time.
Support Contract
According to this agreement, the technology owner participates in the technology
implementation, providing at each stage of the transfer technical support, as well as personnel
training.
Joint Venture
A joint venture is an agreement concluded between two or more companies in order to execute
a particular business. The joint venture implies mutual assets, management, risks, profit
sharing, co-production, services and marketing.
Franchising
Franchising is an agreement where one company grants to another the right to use its
trademark and business model. The buyer of the franchise starts manufacturing and selling the
goods according to the seller’s specification. Normally, the company owner of a trademark also
shares its experience in operating and managing the franchised product/technology.
Strategic Alliance
A strategic alliance agreement is usually concluded between two or more big companies in
order to use specific skills of each of them in the development of new innovative technologies.
Strategic alliance could be in form of joint laboratories, research programs, production and
promotion of a new product.
Turnkey Agreement
In case of a turnkey agreement, the general contractor is responsible for all the procedures
related to technology transfer, such as technology design, financing, equipment supply,
construction and commissioning.
Equipment Acquisition
Equipment Acquisition is a simple and, therefore, one of the most common methods of
technology transfer. The main disadvantage of this method is the fact that the company limits
itself to mere technical knowledge incorporated in the equipment and does not get any new
competences in the management and production. Moreover, equipment available on the
market does not give unique privilege to the buyer, as this equipment may be purchased by any
other competitor.
Management Contract
Technology can be transferred through a competent expert, who could be “entice” from
another company.
Foreign Company Acquisition
A company may acquire a foreign startup which is developing a new technology. As a result, the
company will not only get the technology, but also a team capable to develop it in the future.
Moreover, the acquisition of a foreign firm automatically places the company on the new
international market.
Direct Foreign Investments
Direct foreign investments are one of the main methods of technology transfer at the state
level. Generally, a foreign company invests in developing countries in order to create a new
market, remove export barriers and get an access to cheap labor.
Buy-Back Contract
A buy-back contract is a form of agreement between developing countries and large foreign
companies. Under this agreement, a foreign company supplies industrial equipment in
exchange for profits derived from the sale of raw materials or goods produced on this
equipment. This kind of technology transfer is often used in the construction of new plants in
the developing countries. In that case the state becomes a shareholder in the created
enterprise.
Original equipment manufacturer (OEM)
OEM can be considered as a form of subcontracting, where a local firm starts manufacturing
according to the foreign company specifications.

Types of Technology Transfer

Scientific Knowledge Transfer, Direct Technology Transfer, Spin-Off Technology Transfer
Informal Technology Transfer & Formal Technology Transfer
Internal Technology Transfer and External Technology Transfer

Types of Technology
An Emerging Technology is an innovative technology that currently is undergoing bench-scale
testing, in which a small version of the technology is tested in a laboratory.

An Innovative Technology is a technology that has been field-tested and applied to a hazardous
waste problem at a site, but lacks a long history of full-scale use. Information about its cost and
how well it works may be insufficient to support prediction of its performance under a wide
variety of operating conditions.

An Established Technology is a technology for which cost and performance information is

readily available. Only after a technology has been used at many different sites and the results
fully documented is that technology considered established.

Issues related to Technology Transfer in Developing countries:

There are many problems with transfer of technology in developing countries:

1. Lack of pool of scientists and researchers in specific domains: Developing countries in many
occasions fail to generate the pool of scientists and research scholars who may actually be
developing new ideas and technology due to infrastructural facilities.
2. Brain drain: In many occasions developed countries used to hire scientists and researchers
from developing countries resulting the technology or innovations they develop are benefiting
those developed countries and not the developing ones.
3. Small market size: In developing countries the customer base to purchase the newly invented
products is relatively smaller than that of the developed ones.
4. Bureaucratic climate: Political and bureaucratic interference play a vital role while transferring
technology from developed countries. In many occasions, bureaucratic interference opposed
the transfer on technology to developing countries.
5. Inability to make public investments in appropriate research and infrastructure.
Many new technologies generally are capital intensive and many of these countries may not
have those resources. Generally the first adopters get the benefits which favour the developed
countries because of their resources.