MODULE-2

CONSTITUENTS OF FISCAL POLICY, FDI, FOREIGN EXCHANGE MARKET

1. Fiscal Policy: meaning, objectives

2. Instruments of Fiscal Policy: types of tax, canons of taxation
3. Union Budget – Structure
4. Foreign Investments: FDI and FPI, their comparison, merits and demerits

i
of FDI

an
5. Foreign Exchange and Foreign Exchange Markets: – Fixed and Flexible
exchange rates – Managed Float exchange rate system

aj
FISCAL POLICY
R
Modern states are termed as welfare states. They perform a variety of functions to ensure a high level of
ta
socio economic welfare. Development of various sectors of the economy, improving the standard of
living of the people, maintaining higher levels of employment and income etc. are some of the prime
objectives of modern governments. In short, stabilising the economy at higher levels of output and
am

employment has become the most important concern of the governments at present. This is termed as
Economic Stabilisation. Government's intervention was advocated by J. M. Keynes to bring about a
revival in the economy.
Macro economic policy guides the governments in attaining economic stability.

The two important instruments of macroeconomic policy are

rM

(1) Monetary policy, and (2) Fiscal policy.

(1) MONETARY POLICY: Monetary policy is concerned with money supply, credit creation by banks and
D

rate of interest. It is formulated and implemented by the Central bank. In India, for eg. The Reserve Bank
of India is mainly responsible for implementing the monetary policy. Till the Great Depression of the
1930s, this policy was mainly used to ensure economic stability. By controlling money supply and credit
creation, stability was ensured in the economy. However, during the 1930s monetary policy was not
effective in bringing about a recovery. It lost its predominant position to fiscal policy. At present a
combination of fiscal and monetary policies is used to achieve the objectives of macro economic policy.

(2) FISCAL POLICY:

 i
an
aj
R
ta
am

Fiscal policy is a powerful instrument in the hands of the government to achieve a number of
socio-economic objectives. Through fiscal policy the government can influence production, distribution,
consumption and resource allocation. Fiscal policy is formulated and implemented by the government to
achieve certain predetermined objectives. Fiscal policy is concerned with public revenue, public
expenditure and public debt. The government mainly uses the budget policy to bring about desirable
rM

changes in the economy. Through taxation, the government mobilises resources to meet its ever
increasing expenditure. At the same time taxes reduce private spending. When the government incurs
public expenditure, it leads to more employment, higher level of output - and income. Along with
taxation and public expenditure, public debt also serves as a useful weapon to the government to
mobilise more resources and also to bring about economic stability.
D

OBJECTIVES OF FISCAL POLICY:

 i
an
aj
R
ta
am
rM
D

Fiscal policy is pursued by modern governments to achieve certain objectives as listed below. The
objectives differ from country to country depending upon their own economic condition

(1) Optimum utilisation of resources: To achieve rapid economic growth, enough resources have to be
mobilised and they have to be used rationally. The scarce resources need to be allocated to the essential
sectors to ensure supply of goods and services without disruption. Fiscal instruments are used by
governments to achieve this objective.

(2) Employment generations Employment is the source of income and demand. To maintain the level of
employment, industries are encouraged by the governments through tax concessions and subsidies.
During recession and depression times, public expenditure is increased to provide job opportunities to
people. Along with the private sector, public sector enterprises are also promoted to ensure a high level
of employment.

(3) Price stability: One of the important objectives of fiscal policy is stabilisation of prices. When rise in
price crosses the safe limit, inflation will have adverse effects on the economy. To control inflation, a

i
contractionary fiscal policy is used. Under this policy, taxes will be increased and public expenditure will

an
be reduced. During recession or depression times, an expansionary policy Le. reduction in taxes and
increase in public expenditure will be adopted.

aj
R
ta
am
rM
D

(4) Equality in the distribution of income and wealth: To achieve this objective, progressive taxation is
used, wherein the rich are taxed more and the poor lightly or exempted from taxation. Public
expenditure is incurred on a variety of social welfare programmes to uplift the poor and reduce the gap
between the haves and have nots.

(6) Development of infrastructure:Economic infrastructure like transport, communication, power

generation etc. and social infrastructure like education, health etc. require huge investments and involve
a long gestation period. The private sector is generally shy to invest in these sectors due to slow returns
and hence the public sector plays a key role here. Fiscal policy is used to mobilise resources and
channelise the same to these essential sectors.

Instruments of fiscal policy

i
an
aj
R
(1) Taxation: Apart from being the main source of revenue to the government, taxation is a powerful
fiscal weapon in the hands of the government. Through taxation the government can influence
production, consumption, distribution and allocation of resources. Governments impose both direct and
ta
indirect taxes. To ensure equity, generally a progressive system of taxation is followed. Under this system,
taxes are levied on the principle of ability to pay. Hence the rich are taxed more than the poor. By giving
suitable tax incentives, production of mass consumption goods is encouraged. Consumption of certain
am

goods is encouraged by reducing the tax rate while the consumption of harmful goods is discouraged by
hiking the tax rate in every budget.

(2) Public Expenditure: Some of the major items of expenditure of the government are administrative
expenses, defence expenditure, expenditure incurred for the development of agriculture, industry,
rM

transport, communication, subsidies to be provided to the various sectors, etc. If the public expenditure
is productive, it has favourable effects on the economy. In the case of advanced countries, public
expenditure is incurred during the depression to increase effective demand and thereby to bring about a
revival in the economy.
D

(3) Public Debt: When the expenditure of the government exceeds its revenue, it resorts to public debt.
It is also helpful to the government to finance a war or to meet unexpected expenditure due to natural
calamities etc. The government borrows from both internal and external sources. The funds thus
mobilised should be used for productive purposes like development of infrastructure, industrial sector,
agriculture etc.

(4) Deficit Financing . Deficit financing is resorted to by governments when their expenditure exceeds
their revenue. It refers to borrowing from the Central bank or by running down cash balances of the
Central government with the Central bank. In the case of advanced countries, during the depression
deficit financing is used to bring about a revival in the economy.

FISCAL POLICY DURING INFLATION AND DEFLATION:

To control inflation, generally the government adopts a surplus budget policy. To have a surplus budget,
either taxes are increased or expenditure of the government is reduced or both are done at the same
time. The policy adopted by the government during inflation is also termed as contractionary fiscal
policy.

i
During the period of inflation, the government uses the progressive system of taxation. Under this

an
system the rich people are taxed more, while the poor people are taxed lightly or exempted totally. It is
based on the principle of ability to pay. By increasing direct taxes like income tax, wealth tax etc. the
disposable income of the people can be reduced. This will lead to decline in demand for goods and
services and thereby prices can be stabilised.

aj
CONTRA CYCLICAL FISCAL POLICY AND DISCRETIONARY FISCAL POLICY:

Countercyclical Fiscal Policy:

R
The fiscal policy used to control trade cycles is known as countercyclical fiscal [Link] fiscal
ta
policy involves a rise in taxation and cut in public expenditure during inflation. Due to this, money supply
will be reduced which will result in reduction in demand for goods and services and lead to price
[Link] governments frame fiscal policies in such a way that they respond to the economic
am

fluctuations automatically. They do not need the intervention of the legislature. Such policies are called
'automatic stabilisers'. They involve an automatic expansion of public expenditure and reduction of taxes
during the depression and recession times and contraction of expenditure and rise in taxation during the
boom period.
rM

Discretionary Fiscal Policy: It refers to the fiscal policy deliberately adopted by the government to
control the adverse effects of trade cycles. During inflation, the government will reduce its expenditure
and rise the tax rates and vice versa during recession times. Public expenditure on various social welfare
programmes is also adjusted as per [Link] these changes in fiscal policy aim at price stability
D

and a higher level of economic growth and development.

SOURCES OF REVENUE

Modern governments undertake a variety of functions to accelerate economic growth and promote
social welfare. In order to incur expenditure, revenue has to be mobilised. There are various sources of
revenue to the government.

The major ones are:

(1) TAX REVENUE:

This is one of the main sources of public revenue. Tax is defined as a compulsory payment made by the
people of a country to the government to meet public expenditure without any direct quid pro quo.
Various taxes are levied by the government. They are classified as direct and indirect taxes. Direct taxes
are those taxes which are paid by the person on whom it is levied. The burden cannot be shifted. Eg
Income tax. Indirect taxes are those in which the burden can be shifted. E.g. Excise duty.

Direct Taxes: A direct tax is one in which the burden cannot be shifted. It is paid by the person on whom
it is levied. The impact and incidence are on the same person. In other words, the tax payer and the tax

i
bearer are one and the same. Examples of direct tax are income tax, wealth tax, corporate tax, gift tax

an
and capital gains tax.

Indirect taxes are those in which the burden can be shifted. The impact and incidence are on different
persons and tax payer and tax bearer are different. Examples of indirect taxes are Goods and Services Tax

aj
(GST), customs duty, etc. Indirect taxes are also called commodity taxes.

(2) NON-TAX REVENUE: R

ta
Apart from tax revenue the government gets revenue from other sources which are grouped under
non-tax revenue. It consists of fees, fines, special assessments, profits from public sector enterprises,
gifts and grants.
am

They can be briefly explained as follows:

(1) Fees: Fees are charged by the government for providing certain specific services to the people. It is
paid by those people who demand the service from the government. Examples of fees are driving license
rM

fee, license to open a liquor shop, fees paid to get a passport, etc. They have to be paid compulsorily by
those who are in need of the service.

(2) Fines: Fines are imposed to maintain law and order. The objective of levying fines is not to earn
revenue but to enforce discipline. It is not a major source of revenue for the government.
D

(3) Special Assessment: It is a special levy charged on the people by the government when they get
special benefits due to certain projects undertaken by the government." This implies that, due to the
construction of roads, drainage or better street lighting, the value of property in that area may increase.
The people in that area benefit due to the projects undertaken by the government when the
government levies a tax on the property it is called special assessment. Like tax it is compulsory. Unlike
tax it confers direct benefit to the people on whom it is levied It is also known as betterment levy.

(4) Profits from Public Sector Enterprises: The profit earned by them is an important source of revenue
to the governments. Many goods and services are sold by the government on a no-profit no-loss basis
e.g. Postal department. In certain cases the services provided by the public sector enterprises are
subsidised e.g. water supply, power supply etc. If the public sector enterprise is a monopoly, prices tend
to be high which lead to more profits.

(5) Gifts and Grants: Gifts are not a regular source of public revenue. During natural calamities, war etc.
people contribute to the government. Grants are provided by the Central Government to the State
Governments. Grants are also provided by the government of one country to the other and also by
international institutions like IMF and World Bank.

CANONS OF TAXATION:

i
All modern governments depend upon taxation to mobilise substantial revenue. While levying taxes, the

an
governments have to follow certain maxims or rules known as Canons of Taxation given by Adam Smith.
The four main Canons given by Adam Smith are as follows:

(1) Canon of equity: It is also termed as Canon of equality. This canon is based on the principle of ability

aj
to pay. According to this canon taxes should be imposed according to the abilities of the taxpayers.
Accordingly the richer people should pay more while the poor should pay less or be exempted totally. To
achieve this canon, progressive taxation should be adopted.

R
(2) Canon of certainty: This canon suggests that the tax which each individual has to pay should be
certain and not arbitrary. The taxpayer should know how much to pay, how to pay and when to pay. The
government should also know how much it is going to collect from different taxes.
ta
(3) Canon of convenience: Taxes should be levied in such a manner that it is for the taxpayers to pay. In
other words there should not be any hardship for the taxpayers for paying tax. In case of agriculture,
taxes should be levied after the harvest as it is convenient for the farmers to pay it.
am

(4) Canon of economy: This canon implies that the expenditure involved in collecting tax should be the
minimum. The tax revenue should be more than the cost of collecting tax. To ensure the economy, the
administration should be efficient and there should not be any scope for tax evasion. Moreover, it
rM

suggests that the adverse effects should be minimum.

(2) Canon of elasticity: This implies that the taxes should be flexible in nature. They should have built in
flexibility. It should be possible to adjust the tax rates according to the requirements. The canon also
suggests that the revenue from the tax should increase with an increase in national income.
D

(3) Canon of Simplicity: The tax system should be as simple as possible. The common man should be
able to easily understand the tax laws. This will ensure better compliance.

(4) Canon of diversity: The tax system should consist of a number of taxes rather than few taxes. There
should be a proper combination of both direct and indirect taxes. Taxes based on the above canons will
ensure equity, efficiency and productivity.

Direct and Indirect Taxes: A direct tax is one in which the burden cannot be shifted. It is paid by the
person on whom it is levied. The impact and incidence are on the same person. In other words, the tax
payer and the tax bearer are one and the same. Examples of direct tax are income tax, wealth tax,
corporate tax, gift tax and capital gains tax.

Indirect taxes are those in which the burden can be shifted. The impact and incidence are on different
persons and tax payer and tax bearer are different. Examples of indirect taxes are Goods and Services Tax
(GST), customs duty, etc. Indirect taxes are also called commodity taxes.

Union Budget: Structure

i
an
The estimates of budget are made under two main divisions,

1. Revenue Budget (all direct and indirect taxes, non-tax receipts and interest on loans

aj
and advances received and revenue expenditure); and Capital Budget (internal debt,
external debt and repayment of loans and advances, expenditure on creation of assets
and other capital expenditure).

R
Revenue Budget: The revenue budget has revenue receipts and the expenditures on the
revenue account of the Government.
ta
Revenue Receipts: All the Government receipts of recurring nature may be termed as
am

revenue receipts. These receipts are classified under 2 heads: (i) tax revenues, and (ii)
non-tax revenues. Tax revenues include earnings of taxes and duties imposed by the
Union under Union Budget and by the States under State Budget.
rM

Non-tax revenue of the Governments mostly comprises interest and dividends on

investments made by the Govt., and fee and other receipts for services offered by it.
D
 i
an
Revenue Expenditures: Expenditure incurred on functioning of Government
departments and for provisioning of various social services, interest charges and any

aj
other expenditure incurred by the Government, and grants given to State Governments
and other Departmental and Commercial Undertakings. In general all Government

R
expenditures if not resulting in the creation of physical or financial assets may be treated
as revenue expenditures.
ta
Capital budget: Capital budget also has two components comprising capital receipts and
capital expenditures of the Government. If capital receipts fall short of capital
am

requirements, the deficit will occur that may be financed through the short term
borrowing from RBI or market and/or drawing down of cash balances. Higher the
amount of capital raised by public authorities, less resources are available for the private
sector due to crowding out effect as the total resources at a point of time are given.
Table 2: Components of Capital Budget of the Central Government
rM
D
Capital Receipts: Capital receipts of the Government create liability (loans) or reduce
financial assets (disinvestment). To finance capital requirements major sources are
market borrowing from the domestic markets, loans from RBI, small savings, recoveries
of loans and advances, External Assistance and external borrowings, other loans and
disinvestments of equity holding in public enterprises and other receipts5 (Table-2).

Capital Expenditure: Government’s expenditures that create physical or financial assets

or reduction in recurring financial liabilities are called capital expenditure. For example

i
expenditures made for attainment of assets like land, buildings, machinery, equipment.

an
FRBM Act and the Budget.

aj
In India, the Fiscal Responsibility and Budget Management Act (FRBM Act) was passed

government.
R
by the parliament in 2003. The aim of this act was to remove the revenue deficit of the

It binds the government to fix fiscal and revenue deficit targets for itself. The
ta
implementation of Fiscal Responsibility and Budget Management (FRBM) Act during the
period 2005-10 had helped the Centre and State govts to reduce their fiscal deficits to a
considerable extent.
am

However, during the global slowdown years (2008-09 and 2009-10) expansionary fiscal
policy resulted in fiscal deficit moving up significantly. The 13th Finance Commission had
proposed a target of attaining a 3% fiscal deficit (of GDP) for central govt by 2013-14 and
for State Govts in stages, and in a manner that all states would attain 3 % fiscal deficit (of
rM

their GSDP) by 2014-15.

The 14th Finance Commission recommended the Centre to maintain its fiscal deficit at
3.6% of the GDP for 2015-16 from 4.1% in 2014-15 and then maintain it at 3% for the
following four years. Fiscal deficit will be 3.9% of GDP in 2015-16, 3.5% in 2016-17 and
D

3% by 2017-18.

Types of Budget deficit

Budget deficit concept admits several variations and yields divergent types of budget
deficit. Each type has analytical and policy relevance. According to the World Bank, the
choice of the “correct” measure depends upon the purpose of analysis.
There can be different types of deficit in a budget depending upon the types of receipts
and expenditure taken into consideration. Accordingly, there are various concepts of
budget deficit, namely:

(i) Overall Budget deficit (ii) Revenue deficit (iii)Fiscal deficit (iv)Primary deficit (v)

i
Monetized deficit

an
Overall Budget Deficit :The conventional measure of budget deficit or overall budget
deficit which is the difference between the total expenditure (revenue and capital) and

aj
total receipts (revenue and capital).

R
Overall Budget Deficit= Total expenditure-Total revenue

Monetized Deficit
ta
Monetized deficit is that part of the government deficit which is solely financed by the
RBI. It indicates the quantum of additional money created as a result of credit extended
to RBI. When the government has a significant amount of outstanding debt, it can
am

purchase its own debt with new printed money and thus monetized part of its debt. This
is financed by borrowings both short and long term from the RBI
Revenue Deficit Revenue deficit is excess of total revenue expenditure of the
government over its total revenue receipts. Revenue deficit signifies that the
rM

government's own revenue is insufficient to meet normal functioning of govt

departments and provision of services.
Revenue deficit = Total Revenue expenditure – Total Revenue receipts
D

The deficit is to be met from capital receipts, i.e., through borrowing and sale of its
assets (disinvestment). Increased borrowing would lead to increase in interest payments
which in turn necessitate larger borrowings. The economy would move in a vicious cycle.
The borrowed funds from the capital account are used to meet generally consumption
expenditure of the government leading to inflationary situations in the economy. A high
revenue deficit warrants that the govt either to curtail its expenditure and avoid
unnecessary or unproductive expenditure or increase its tax and non-tax receipts
Fiscal deficit is defined as the difference between the total expenditure including loans
net of repayment and the revenue receipts plus non-debt capital receipts. It indicates
the total borrowing requirements of the government from all sources that include
domestic sources like public and commercial banks or from World Bank, IMF or from RBI.
Fiscal deficit = Total expenditure – Total receipts excluding borrowings = net borrowings
of the government
Borrowings of the government create a problem of not only increase in interest

i
payments but also of liability to repay loans. The interest payment increases revenue

an
expenditure creating a higher revenue deficit. The govt would be compelled to borrow
more leading to emergence of debt trap

aj
Primary Deficit: Primary deficit is defined as fiscal deficit of the current year minus
interest payments on previous borrowings.

R
Primary deficit = Fiscal deficit-Interest payments.
ta
In other words primary deficit indicates borrowing requirement exclusive of interest
payment (i.e. amount of loan).
am

It shows how much government borrowing is going to meet expenses other than
Interest payments.
Thus, zero primary deficits means that the government has to resort to borrowing only
to make interest payments.
rM

According to the government, the budget is of three types:

Balanced budget.
D

Surplus budget.
Deficit budget.

1. Balance budget – A government budget is said to be balanced when it is estimated

revenues and anticipated expenditure are equal. i.e. government receipts and
government expenditure.
However , modern economists believe that the policy of balanced budget may not
always be suitable for the economy . for instance during the period of depression , when
economic activities are at low level , resulting in unemployment.

2. Surplus budget – when estimated government receipts are more than the estimated

government expenditure it is termed as surplus budget. When the government spends

less than the receipts the budget becomes surplus that is.

i
an
Estimated government receipts > anticipated government expenditure .

A surplus budget may prove useful during the period of inflation .In periods of inflation ,

aj
although there is greater employment there is also a tendency for prices to rise rapidly.

R
The surplus budget should not be used in a situation other than the inflationary gap as it

may lead to unemployment and low levels of output as an economy.

ta
3. Deficit budget – When estimated government receipts are less than the government

expenditure. In modern economies, most of the budgets are of this nature .

am

estimate government receipts < anticipated government expenditure.A deficit budget

increases the liability of the government or decreases its reserves.A deficit budget may
rM

prove useful during the period of depression .

D

FOREIGN EXCHANGE MARKET :

Meaning of Exchange Rate:

Foreign currencies and claims on them in the form of bank deposits, cheques,

[Link] in those currencies is known as foreign [Link] exchange refers to

Foreign currencies. Example- US Dollars, British Pound,Euro of European Union,

Japanese Yen etc. are foreign currency for [Link] between nations can take place,

only if it is possible to change the currency of one country for that of another

Foreign exchange market is the market where foreign currency is traded

Exchange Rate refers to the rate at which the currencies of different countries are traded

or exchanged

i
an
Exchange rate is the price of one currency, expressed in terms of another

[Link] authorised dealers (banks and other approved foreign exchange

aj
dealers)approved by the central bank, you may get Indian Rupees converted to the

required foreign currency. Example- If to get one American Dollar, you have to pay ₹ 64,

R
then the rate of exchange between the two currencies is 1$= ₹ 64.

Exchange Rate can be 1$= ₹ 64 i.e. number of units of domestic currency that exchanges
ta
for one unit of foreign currency. **
am

And
rM

₹ 1 = $ 0.015 i.e. number of units of foreign currency that exchanges for one unit of

domestic currency

**This is the normal way of expression of the exchange rate in India

D

Exchange Rate System- Fixed and Flexible Exchange Rate

Fixed Exchange Rate System:

The rate of exchange is officially fixed by the central bank of the country by official

[Link] does not vary with the changes in demand and supply of foreign currency

.Central Bank of the country intervenes in the form of buying and selling of foreign

exchange to hold the foreign exchange rate to a preannounced level. For this purpose

the central bank has to hold adequate level of foreign exchange [Link] there is

excess supply of foreign currency the central bank buys foreign currency at the fixed

i
an
exchange rate and when there is excess demand for foreign currency the central bank

sells foreign currency at the fixed exchange rate

aj
Fixed Exchange Rate does not imply that the exchange rate remains absolutely fixed. It

implies that the exchange rate is revised by the central bank as a policy decision from

R
time to time, depending upon the state of the economy , balance of payments [Link]

India, the exchange rate was fixed till the 1990s, but under globalization policy, India
ta
switched over to Flexible Exchange Rate System
am

[Link] Exchange Rate System: (Floating Exchange Rate)

The Exchange Rate is left free to be determined in the foreign exchange market by the

forces of demand and [Link] central bank allows the exchange rate to adjust to
rM

equate the demand and supply of foreign exchange Flexible Exchange Rate is also known

as Floating Exchange Rate

D

[Link] or dirty floating: In this system, the central bank intervenes to buy and sell

foreign currencies, to influence the exchange rate, when the rate of exchange becomes

rather high or low. Most countries including India has the Managed Floating Exchange

Rate System at present.

Foreign direct investment (FDI) involves establishing a direct business interest in a

foreign country, such as buying or establishing a manufacturing business,

Foreign portfolio investment (FPI) refers to investing in financial assets such as stocks or

bonds in a foreign country.

Foreign Direct Investment

i
an
Foreign Direct Investment (FDI) tends to involve establishing more of a substantial,

long-term interest in the economy of a foreign country. Due to the significantly higher

aj
level of investment required, FDI is usually undertaken by multinational companies or

venture capital firms.

R
At the same time, the nature of FDI, such as creating or acquiring a manufacturing

facility,makes it much more difficult to liquidate or pull out of the investment. For this
ta
reason, FDI is usually undertaken with essentially the same attitude as establishing a
am

business in one's owncountry—with the intention of making the business profitable and

continuing its

operation indefinitely. FDI includes having control over the business invested in and
rM

being able to manage it directly.

Foreign Portfolio Investment

D

FPI typically has a shorter time frame for investment return than FDI. As with

any equity investment, FPI investors usually expect to quickly realize a profit on their

investments. But unlike FDI, FPI doesn't offer control over the business entity in which

the investment is made.

As securities are easily traded, the liquidity of FPIs makes them much easier to sell than

FDIs. FPIs are more accessible for the average investor than FDIs because they require

much less investment capital.

Foreign direct investment is the direct investment into a business or sector by a

company or individual from another country, differing from portfolio investment, which

i
is a more indirect investment into another country’s economy by means of financial

an
instruments such as stocks and bonds.

Advantages of foreign direct investment

aj
● It can stimulate the economic development of the country in which the

R
investment is made, creating both benefits for local industry and a more

conducive environment for the investor.

ta
● It will usually create jobs and increase employment in the target country.

● It will enable resource transfer, and other exchanges of knowledge whereby

am

different

● countries are given access to new skills and technologies.

● The equipment and facilities provided by the investor can increase the
rM

productivity of the workforce in the target country.

Disadvantages of foreign direct investment

D

● Foreign direct investment can sometimes hinder domestic investment, as it

focuses resources elsewhere.

● Occasionally as a result of foreign direct investment exchange rates will be

affected, to the advantage of one country and the detriment of the other.
● Foreign direct investment may be capital-intensive from the investor’s point of

view, and therefore sometimes high-risk or economically non-viable.

● The rules governing foreign direct investment and exchange rates may negatively

affect the investing country.

● Investment in certain areas is banned in foreign markets, meaning that an inviting

opportunity may be impossible to pursue.

i
an
aj
R
ta
am
rM
D