Sample Essay on Factors Affecting Foreign Investment in Indian Industries

Factors Affecting Foreign Investment in Indian Industries


The industrial sector in India has been growing tremendously over the past years due to the activities of foreign investors. However, there are several factors affecting foreign investment in Indian industries.  A survey conducted by Earnst & Young shows that India has always been a major destination for industrial investors. This has enabled India to emerge as a major manufacturing location for several foreign corporations.

Factors Affecting Foreign Investment

Financial and Economic Reforms

Among the factors that affect foreign investment in Indian industries are the financial and economic reforms made in 1991. These reforms were made after realizing the crucial role that foreign investors can play in growing the economy of a country. These reforms allowed foreign corporations to invest in the Indian industries such as the textile industry and this has boosted Indian industries over the years.

Currently, India is making similar reforms but this time with an aim of enhancing faster integration of its economy with the global economy. This has resulted in the creation of policies that make India more liberal. Subsequently, these policies encourage foreign direct investment as well.

Economic and political stability

Economic and political stability also affect foreign investment in India. Political stability of India has made it one of the most preferred investment destinations for foreign companies. This is because investors want to invest in business climates that are easy to predict. The economic stability of India is enhanced by policies and regulations that are friendly to foreign investments.

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Availability of cheap labor

Availability of cheap labor also affects foreign investment in the Indian industries. India is the second most-populated country in the world. This makes cheap labor readily available for industries. Foreign firms know that by investing in India they will save on their labor cost.

Polpulation Growth

The large population of this country also provides a large local market for industrial products. Thus, by investing in India foreign companies have large portions of their products absorbed locally. Additionally, India has a high per capita income as well as the consumers’ purchasing power which contributes towards the consumption of industrial products locally.

Most companies in India have balance sheets that show a strong position in the market. This attracts more lenders to companies that invest in India making capital easily available for investors. Liberalization of the foreign direct investment policy in 2005 by the Indian government in relation to housing, township, construction and built-up infrastructure has also attracted lenders and investors into the Indian industrial sector.

The overall facilities in India also affect foreign investment in the industries. Latest information and communication technology as well as the new transportation infrastructure makes it easier for companies to deliver goods and services faster. These facilities also make operations and spreading of international investments smooth and efficient.

Nevertheless, India is affected by the challenge of being unable to provide some of the technologies required by foreign investors to operate in its industrial sector. For this reason, India is required to provide complementary supplies, infrastructure, institutions and human capital needed to operate the technologies of foreign investors flexibly and efficiently.

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