Implications of Global Financial and Economic Crisis on FDI Flows: The Indian Perspective (Report‪)‬

Abstract The unusual magnitude of the ongoing global financial and economic crisis is raising major concerns for the movements in international investments. The crisis has affected in the decline of FDI flows both domestic and international level is the result of two major factors: first, the capability of firms to invest has been reduced by a fall in access to financial resources, both internally--due to a decline in corporate profits and externally--due to the lower availability and higher cost of finance. Second, the propensity to invest has been affected negatively by economic prospects, especially in developed countries that are hit by the most severe recession of the post-war era. The impact of both factors is compounded by the fact that, as of early 2009, a very high level of risk perception is leading companies to extensively curtail their costs and investment programmes in order to become more resilient to any further deterioration of their business environment (UNCTAD 2009). In fact, all of the market-seeking, efficiency-seeking and resources-seeking Foreign Direct Inflows (FDI) flows impacted by these factors, although with different magnitudes and consequences on location patterns. Despite the global slowdown, India has managed to display resilience and attract good investments. The improved sentiment for the country's economic outlook backed by strong political mandate and fiscal reforms helping India to enhance its overall share in capital flows marked for emerging markets. Despite these, the global financial crisis poses new challenges for the foreign investment policies of developing countries and also created the fear of investment protectionism and potentially negative indirect impact of bailout and rescue packages on FDI flows on the developing economies. The risk in investment policies of government, which may become more inward-oriented with negative consequences for outward investment and an open investment environment also, has certain policy implications in the development context. Thus, a major concern of developing countries is how to retain existing investment and attract new FDI in times of global recession. In this context economic stimulus programmes can be an incentive for foreign investment, but many developing countries do not have the financial resources to successfully compete with the investment promotion packages of developed countries. Further, incentives based competition for foreign investment may risk lowering social and environmental standards which would be detrimental for sustainable development of the many developing economies including India. The crisis, on the other hand, also provides a chance to develop and implement policies aimed at enhancing the stability of the financial system and stimulating economic growth. In this context, various voices advocate the necessity of going beyond the mere short-term management of the ongoing crisis and of setting up the bases of sounder economic regulations, especially in banking, with more control and restriction on the activities of commercial banks, hedge funds and other financial institutions (UNCTAD, 2008c; Stiglitz JE, 2008). This requires coordinated action at the international level to rebuild financial multilateralism, foster the stability and equity of the global financial system promote stronger transparency or disclosure standards and create guarantee funds to help emerging and developing countries secure the debt of their corporations and reassert the importance of public policies and regulations. The current institutional reform of the global financial system suggests that governments should pay more attention to the interaction and coherence between the global financial system and international investment agreements, since the latter cover both long-term and short-term capital movements. Thus, in essence, for effectively dealing with the crisis, it is important that policymakers have to maintain a favourable business and inves