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MAR 15, 2012

[Economy] Currency Devaluation alone will not bring more FDI


as 1$ = 7 yuan and 1$ = 48 rupees it implies that our currency is devaluated thus should attract more FDI . I have read that china keeps its currency devaluated to gain more FDI but above data seems to be paradox to me. Please clear my confusion If your currency is devalued, your exports will increase because American dude can purchase (import) more mangoes for the given $ 1 note. But When you're talking about FDI: the Foreign investorwill also look at many factors apart from just currency devaluation e.g. Return on investment. Safety of his invested money (Telenor's 2G license cancelled by SC) Government policy on labor, civil laws, Foreign Exchange laws (Capital account convertibility). And Most importantly: Political stability and scenario.
For example, today Foreign investor Mr.X comes to India and Environment Minister demands five suitcases to clear his files, and it seems that current Government might collapse after a few months, and new Government's new minister would ask for another five suitcases-Mr.X is unlikely to invest in such volatile situation. In this context, Political stability in China is rock solid, judicial intervention in Administrative decision= minimal, unlike India. So they get more FDI. Chinese President Hu Jintao was ranked #1 in Forbes' world's most powerful person list. The Magazine said "Unlike Western counterparts, Hu can divert rivers, build cities, jail dissidents and censor Internet without meddling from pesky bureaucrats, or courts." You don't hear about Niyamgiri, Jaitapur, POSCO or Kundankulam in China. Their Administrative machinary takes action quickly. Either "Yes or NO". In India Decision Making is slow. Mohan won't say yes and he won't say no either. Files remain pending under consideration in GoM (Group of Ministers) for months. As it happened in Cairn Vedanta Deal You don't invest your money somewhere only because that country's currency is devalued. You look at all such factors. That's Currency Devaluation alone doesn't bring more FDI.

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juheeMar 15, 2012 11:43 PM I would like to add something to this foreign exchange related discussion- if 1$=7 yuan and 1$ = 48 it does not mean that indian currency is devaluated. it only implies that for the same item the amount of money that u should spend in different currencies .for eg for 1kg mangoes you need to spend rs48 in if buying in indian currency and 7yuan in chinese currency and 1$ for american currency. this is called purchaing power parity. -it also means that by exchanging 1$ you can 7yuan of 48 rs. now if a currency is devalued it means its value is manipulated. -that is , if chinese govt devaluates its currency then lets say that now you can buy 10yuan for 1$. -If your currency is devalued, your exports will increase bcoz: "because American dude can purchase (import) more mangoes for the given $ 1 note." ( as said above) and also bcoz usually international payments are settled in us$.so when an exporter selles his product and converts the $ in his home currency(which is devalued) he gets more money. -for the same reason imports become costly as you have to pay in us$ (usually) for which now you need to spend more (as now 1$=10yuan) -The Yuans devaluation reduced the cost of Chinese labor and other productive inputs relative to foreign production costs, and thereby reinforced Chinas comparative advantage in labor-intensive industries and strengthened its competitiveness in attracting FDI. Moreover, the devaluation decreased prices of domestic assets such as land, and encouraged foreign firms to acquire them.For a multinational enterprise, especially one engaged in global outsourcing, the wealth and production cost effects induced by the devaluation are simply too large to be ignored. Therefore, it is highly likely that the surge of direct foreign investment in China was partially fueled by the Yuans devaluation. Reply