FDI vs ODA
Poor and low income countries of the world are highly dependent upon foreign capital for their developmental strategies. Without having foreign currency either in the form of FDI or ODA, no poor country can ever hope to improve upon its financial status. While both FDI and ODA play significant roles in the economy of a nation, there are differences in these two types of monetary inflow that will be highlighted in this article.
Official Development Assistance (ODA)
ODA is aid given by developed and industrialized nations on a governmental basis to help and support developmental strategies in socially and economically backward countries. It is not a humanitarian assistance which is what is given in cases of natural calamities to save and protect people who are in distress. It intends to alleviate poverty in poor countries on a long term basis by providing both money as well as technical assistance where it is needed.
When ODA was started 60 years ago, it was dominated by US. But Japan emerged as a leading assistance provider, and soon other developed nations caught up with US and Japan. Today, France, Germany, and UK provide ODA on a very high scale either bilaterally or through UN institutions to poor and developing nations. Assistance through ODA is available for all sorts of developmental projects and welfare of the society in poor and weak countries. Any assistance in the form of ODA is at a very low rate of interest and has to be repaid over a very long duration that makes it very attractive for poor countries.
Foreign Direct Investment (FDI)
FDI refers to inflow of foreign capital and in the form of investment that earns interest in enterprises where it is used. FDI is not charitable; it is the greed of foreign companies that makes them invest substantially in developing and emerging countries with an anticipation of profits larger than in their own home countries. FDI inflow increases with success stories. Investors are drawn to a particular country that is already growing, is politically stable and has a sizeable purchasing power or a burgeoning middle class.
FDI is both good and bad for an economy. As investors have a presence in a foreign economy to earn money, FDI investors are the first to jump the ship if there are any signs of unrest, political instability or declining fortunes. In this sense, it can be equated with portfolio management. Today, FDI has become a necessary evil without which no developing country can hope to climb the ladder of success. Some countries with a proven track record of handsome ROA and political stability become more attractive for investors than other countries and FDI inflow in these countries is far more than in other countries. Some examples of such countries are China, India, and Brazil.
What is the difference between FDI and ODA?
• ODA stands for Official Developmental Assistance while FDI refers to Foreign Direct Investment
• ODA is a type of aid which comes from rich countries to help and assist economically and socially backward countries on a long term basis whereas FDI is more of an investment from private enterprise in anticipation of higher rate of return
• ODA is cheaper than FDI as it carries very low rate of interest
• FDI may quickly move out of a country if there are signs of unrest, inflation, or political instability whereas ODA is not influenced by these factors.