Question

Why did policy makers reverse this stance and start welcoming FDI in the 80s and 90s? Provide an example of FDI in India by a foreign from that validates this policy reversal.

Answer 1

FDI -The major methods of FDI are horizontal and vertical FDI. The former refers to the firm expanding abroad based on the same production line as in the home country. For instance Samsung. They have expanded in multiple nations through horizontal FDI. Whereas the latter is predominately division of the firm that is different segments of the production process is done in different places abroad where it is cheaper to do so hence bringing down the cost of production. Horizontal FDI is induced when the market size is large and the trade costs are high whereas in the vertical the market size and trade barriers are low. Firms that want to lower the cost of production or increase their control over the supply chain use the vertical FDI route. Most developing nation expand through horizontal as believe that market access is more important than reduced production cost

FDI was welcomed after the 1980 and 90s as there was a policy shift towards liberalization, globalization, and privatization(LPG). Also, studies suggested that FDI helped with - 1. an inducement of physical assets, along with 2. technology transfer,3. increased innovation which is an asset to developing countries. 4. It's is a  long term investment and 5.has a direct impact on wages and employment.FDI has a very strong impact on the productivity of the economy due to the production of goods and services which helps the economy to grow and develop and eradicate poverty. In India FDI drastically increased after the 1991 reforms of the LPG.

General Motors began its operation in 1996 and today are the largest exporters of passenger vehicles. Ford collaborated with Mahindra and Mahindra in 1995 after the car market was liberalised . Samsung too entered at the end of 1995.