For example, in India, between 1994-1995 and 2009-2010, foreign investment inflow has ranged between 6 to 15% of overall investment. 70-80% of investment is actually financed by household savings.
Foreign remittence's by Indian workers living abroad (typically fitters, plumbers and masons in the Middle East) has consistently matched foreign exchange revenue earned by exporters of software and software-enabled services.
1) Are these figures correct?
2) What do these numbers mean?
3) What influence these numbers inflict in the (a) International market? and (b) Indian market?
Question
Can foreign investments match the foreign exchange value in a country's economic market?
All Answers (11)
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There is a need to distinguish between FDI and remittances . The FDI on a long term basis lead to capital formation and income generation. Where as remittances are more likely to be deployed on the consumption and could contribute to capital formation only indirectly if at all. As seen from the example of the Economy of Kerala it creates a large service sector depended economy which may not sustain incase there is a cessation of the remittance by the expatriates. -
In country where I come from live around 3.9 million people, out of that number 1.2 are living abroad, mostly north of Europe, Germany, USA and Canada. They are sending for years paycheck to their family beck in Bosnia and Herzegovina and still without having any significant influence on local economy...still the total deposit of citizens are close to the total amount of foreign debts of all country, that is around 3 billions Euros. So investigating direction of remittances, at least in our case is definitely saving, with minimum impact on economy`s structure of country. -
Says:-
Thanks for your opinions. After reading all three of your comments, one more query strikes my mind. What impact foreign remittances can make to:
(1) Developed Nation
(2) Developing Nation. -
The impact of foreign remittances of the expats from developed countries need to be seen in the light of the objectives of investment. In all probability the remitances of expats from developed countries are more of an investment decision as such the differential interest may have an impact. Unlike in developing countries where the expat's remittance has a role to play in the sustanance of the family in developed world it may not be so.
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FDI is particularly important in countries which have a market organization of their society. This form of entry in a national economy through the financial sector is particularly important. Foreign banks have their corporate culture, know-how in customer service, new methods of risk management. Well developed financial infrastructure is very important to the process of rapidly catching up with industrialized countries. -
Tent to disagree with Elena, special in case of foreign banks in Western Balkan. Interest rates has a devastating influence on small and medium enterprise here, it goes even 15% with requirements for insurense far above even the minimum possible risks for banks. In this part of the world banks show very little sensitivity to the business sector, especially if one takes into account the low percentage of the loan that has not been repaid after all.
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Says:-
I got this UN report from a news paper. I hope it kindles the interest in all of you. Here is it, http://timesofindia.indiatimes.com/business/india-business/Firms-see-India-3rd-most-favoured-destination-UN-report/articleshow/14743344.cms -
India runs a large and persistent current account deficit (CAD) currently around 4.2% of GDP in 2011/12.
CAD = Trade (+/-) + Government Debt (+/-) + Balance of Payments (+/-)
The only way the CAD can be covered is through FDI, remittances, and by borrowing abroad whether by issuing bonds or taking foreign loans.
I would tend to agree that remittances from foreign workers are more reliable than FDI, which is more cyclical and depends on investor confidence in India. Except as in the case following the financial crisis in 2008/09 whereby foreign workers in places like UAE were laid-off or not paid.
I would also agree that remittances are more likely to support household consumption versus being the basis of longer term capital accumulation like FDI with one exception; due to financial repression and high inflation many foreign workers or their families use those remittances to invest in bricks and mortar, i.e. housing, as a store of value and to build wealth.
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