Foreign Direct Investment

This article discusses 10 things about the foreign direct investment that every Indian should know is written by Rohit Upadhyaya, pursuing M.A. in business law from NUJS, Kolkata.

The following article contains a brief critical assessment of foreign direct investment in India and it covers major aspect and parameters of development dependent on the inflow of such finances from a foreign nation.

Introduction

The word foreign direct investment is very familiar to modern day economy as FDI. As clear with the word itself foreign direct investment is a procedure of investment into another foreign nation by an individual, association, or company by means of the setup of an association, company, or mergers in the foreign nation. The tool of foreign direct investment has been instrumental in creating economic harmony at world level as investment flows from one country to another country. Foreign direct investment is the major parameter for policy formulation of world economics and politics.

The world has seen a tremendous shift of military powers to economic power since 1950’s onwards. The corporations are bigger than GDP’s of so many smaller countries. Wal-Mart’s Revenue is equivalent to Norway’s GDP in 2010. With the sheer size of large corporations and their ability to influence politics and policy formulation, it has given immense opportunities for businesses to expand overseas for even bigger markets to capture. FDI is significant for developed countries to keep their factories running and their capital rich corporate houses to get more returns on their investments. On the other hand, it also provides business opportunities for developing countries to kick-start economic activities and tap the resources which they have in terms of natural, human, technology and geographic resources. The ideal situation for FDI is to reap benefits to both the investors and the ultimate consumers, though, the proportionality of the benefits can be a subject of debate to economist, politicians, and scholars.

FDI, in India, as largely been treated as an indicator of economic growth. Governments releases the FDI numbers advertises it as an achievement of the economic well-being of this country and propagates the Idea of FDI into a common man’s Mind. Economists from all spheres believe that there are numerous factors which must be taken into the account before governments consider it as an achievement. Need not to mention the debacle of 1984 Bhopal Gas tragedy happened because of the Weak and corrupt regulation, mismanagement and a deep hunger to see big numbers in the export accounts can lead to death of our poor countrymen. If FDI is managed properly then it can reap benefits such as IT Boom since 1990’s.

History in India

The Modern history of India (after 1947), and its economic history has always been dominated by the Nehruvian school of thought which primarily focused on self-reliance, self-sufficiency, through a socialist route. This school of thought was pretty much inspired and motivated from Soviets way of running the economy. Which is very much justified because the nation was in the “Hangover” of British rule. Any form of FDI, the Indirect investment would have created Havoc politically for the government, so is why India was not able to grow at the pace which other Asian countries were moving (South-Korea, Singapore). The principle of foreign direct investment was alien to Indian economy before the year 1991 and Indian economy was a closed economy with very low currency inflow from abroad and high expenditure on the allocations and resource management which resulted in the very high fiscal deficit between the inflow of foreign exchange and outbound currency.  Towards the end of 1980`s the Indian economy suffered a huge Balance of payment crisis on account of unsustainable borrowings from other nations and very high expenditures. This deepened the crater between current account deficit (values of import goods, services against the values of exports).

 

S.no Macro economics indicator 1989-1990 (fig. in crores) 1990-1991(fig. in crores)
1 Trade deficit 12,400 16,900
2 Current account deficit (CAD) 11,350 17,350
3 Current account deficit and Gross domestic production CAD/GDP ratio 2.3 3.1
4 Inflation rate   7.5% 10% (which later got to 13% in year 1992-1993 )
5 GDP growth rate 6.5% 5.5%
6 Industrial growth at different quarters 8% second half of 80`s 8.6% in 89-90.   8.2%
7 Foreign exchange reserves ( as on various dates) 31st December 1989 – 5,277 December 1990 –  2,152

May – June `91 – 2,500 -3,300

 

The above circumstances forced the government to take few hard measures to survive such crisis and then governments have adopted the policy of liberalization, privatization and globalization. With the adoption of new economic policy Indian economy acquired a very liberal view for promotion of economic growth by establishment of new industries, by relaxing many laws and regulation for setting up of new industry and promotion of setup of industries all various levels. Privatisation in a narrow sense means induction of private players or capitalist to enter into the territory of government-dominated sectors. Mostly such sectors are the base roots of the welfare state. The concept of privatization had huge evolution during 1980`s and 1990. In Indian scenario, the economy adopted the concept of privatization in a unique manner. Prior to the adoption of policy of 1991 the Indian economy was a very conservative and regulated economy which was under direct supervision of state and all major resources were under state holding. But lack of dynamic approach and rigid compliance of industrial policies lead to a step downfall of major industries and resultantly economy saw a major low. When the policy of privatization as allowed in India Indian economy preferred disinvestment in few industries which can survive with participation of private individuals and their active participation but such a disinvestment was subjected to a condition that the maximum limit of disinvestment would be 49% i.e minimum of 51% of that undertaking would still be under the control of the state. Another step associated with the privatization policy was to sell loss-making units inviting private participation in indirect finance and strategic sale of industries. The third measure in this accordance was taken in form of globalization. As it was the first introductory measure of foreign investment into our economy. There are two ways to procure investment from foreign nation. First is FII, Foreign institutional investment is a mechanism used for investment in developing economies as the rate of return in such economies is relatively very high. The mode of induction of FII in an economy is sourced through investment into bonds, hedge funds, mutual funds, other securities. The Indian economy has a big share of investment received in form of FII. But now the government is emphasizing on raising the participation on FDI.

Foreign direct investment in India

The introduction of globalization into Indian economy has made path for foreign direct investment into India. Foreign direct investment has been a pioneer in growth of Indian economy according to various researches it was observed that Foreign direct investment has created one crore job opportunities in India.  As per financial time 2015 the Indian economy is the most preferred economy even over China and United States of America. Statistics provides that India has obtained investment of 31 Billion U.S $ as against 28 Billion U.S$ for china and 27 Billion U.S$ for United States of America. With the new policies of the current government the graph of foreign direct investment into economy is anticipated to reach a new height. With an increase of Foreign direct investment into economy from 26 to 49% in major sectors as insurance and 48% for Make in India initiative and many such schemes down the vault. The investment procured through foreign direct investment is substantially better then the foreign institutional investment because FDI is far more stable than FII’s. FDI Focuses on long-term gains through investments in physical assets whereas FII are mostly into Financial assets which can be sold within few hours of turbulence.

Critical assessment of foreign direct investment under various critical heads.

The concept of foreign direct investment has taken up Indian economy and Indian society at various levels. It has influenced all the social aspects of Indian society. The critical analysis of various social factors has been mentioned below.

Political

In today’s scenario, the complete management of the nation lies upon the political approach of that nation. The Indian economy is also no exception to this conduct after integration of liberalization, privatization and globalization the Indian culture, society and polity were also highly influenced. Political decision plays a vital role in adoption of such measures and a major part of the implementation of such schemes. As such policy building is dependent upon the political approach and willingness of the host nation. Indian polity has adopted foreign direct investment with open arms because of following reasons:

  1. Foreign direct investment brings mutual cooperation between the countries.
  2. Foreign direct investment creates a lot of job opportunities within the host nation.
  3. Foreign direct investment promotes sharing of governmental aids between the nations resultantly for peace political cooperation visa based regulations as it is in collective benefit of both the countries.
  4. Foreign direct investment in India has challenged and inspired much weaker and inefficient public sector undertaking to compete with such highly efficient foreign undertakings. Many of such are an integral part of Indian administration and politics   
  5. Foreign direct investment from a specific region or nation helps the government to form trade friendly relationship and would also help India to provide such countries with a privileged status.
  6. Foreign direct investment is also a leading factor for joint initiatives of nations to condemn terrorist activates.
  7. Foreign direct investment helps a government to fulfil the meaty needs of employment, better infrastructure, better standards of life to all the stratas of the society.
  8. Foreign direct investment also shares mutual liability of the government by performing its share in the form of Corporate Social Responsibility (CSR).
  9. Foreign direct investment also contributes in the determination of success of a government, as in developing nation like India there huge demands which are to be meet and regular resources available are in abundant to meet up the liability. So, success in procurement od such foreign direct investment ensures a sound political health and future prospects of a political party in India.

Economical

Economical aspect of foreign direct investment is the key promotion element of this practice throughout the world. Foreign direct investment involves the active transfer of funds and finances from one country to another. Which establishes a bond of mutual financial assistance between both the nations. Such an investment from foreign countries promotes the business environment in India and helps the Indian business sentiment to meet up with the prevalent trends of international business.  Induction of principle of globalization in Indian economy has converted India into a global player and has also made India as one of the most preferred destination for investment even beating China and United States of America. The following are the major highlights of economic aspect of foreign direct investment into Indian economy:-

  1. Foreign direct investment has taken Indian gross domestic production to $ 2.30 trillion in 2016 which in the year 1990-91 was around $ 361billion.
  2. Foreign direct investment has provided roughly about one crore job opportunities in various private multinational companies. Which is also a great contributing factor for boom in the economy.
  3. The constant inflow of investment in form of Foreign direct investment has created huge confidence on Indian economy in the world scenario.
  4. DIPP department of industrial policy promotion presented a report in which the following investments are tabled or Indian economy for year 2016.
  5. Ford motor co. 1,300 Crores
  6. JW Marriott group plans to have 175-200 hotels in India.
  7. UAE based GAMA company declared investment of Rs. 3,000 crore in India which would roughly employ 2,000 Indian youth.
  8. Apple inc. has established its first development centre of out of USA  in Hyderabad.(TL)
  9. Beverage giant PepsiCo has invested Rs. 500 crore in Maharashtra or development o it range and to attract great market share of fruits and  pulps industry.       
  10. With induction of foreign direct investment into the economy the native nation of the investor company also loosens up its import and excise based rates which further helps to promote the export of business of the host nation.
  11. Integration of Foreign direct investment into an economy promotes the value and credibility of that economy which economically strengthens the economic viability at world scenario.
  12. Promotion of employment in structural employment in nation which leads to proper assessment of per capita income, and to determine actual economical status of the native subjects.

 

Social

The induction of foreign direct investment into our economy is also a major contributing factor for cultural induction and our society and social norms are highly influenced by this means. The Indian history is no exception to this observation. As down the lane Indian history clearly certifies that the Englishmen came to India as businessman and wanted to establish their own businesses in India. With permission to their investment into the country the Englishmen also started to settle down in our country and they equally shared their culture customs and beliefs with natives. Such mutual sharing of culture and values lead to abolition of social evil like sati pratha, child marriage, female feticide, and polygamy and many more.

In current scenario, the social benefits of foreign direct investment are equally important. The outcome of the investment and the produce is utilized by the host nation itself.

  • With Foreign direct investment industries have better resources to pay the employees and lower waged laborers. Such earning would help them live a socially independent lifestyle.
  • Foreign direct investment into education sector helps in establishment of international university. Which could ensure proper international level of education into the society.

 

Technical or technological

The sharing or transfer of a technology is the most beneficial aspect of foreign direct investment as the investment is always coupled with the adoption of new technology and related process. The integration of foreign aid into the Indian economy has resulted in following developments:

  • The foreign aid is induces into Indian economy with the plan of both technological and managerial transfer educated the host nation about new traits of development.
  • Information and technical assistance to the host nation.
  • Establishment of outsourcing organization to promote service industry at relatively cheap margins.
  • Automobile industry had a huge impact of FDI over it. Such investment resulted in high safety measure available at so much affordable prices.
  • With incorporation of foreign direct investment into the economy pharmaceutical company were promoted to have a huge research and development projects at affordable costs.
  • With the future view of the government to allow 100% in railway the technology of bullet train is also round the corner.    
  • Aviation industry is also seeing a lot of developments because of foreign direct investment as such an investment would allow cheap and affordable air travel to common people.
  • Because of foreign direct investment the chemical industry has been a tremendous growth and India’s prospective share in global chemical industry by 2023 would be 6-7 which currently (i.e. in year 2013) stood to 2.8%.   
  • Infrastructure is a major parameter for determination of economy. In Indian scenario the 10% of GDP is generated in the construction related practices.  In current financial plan i.e. from 2012-2017 Indian economy plans to invest more than 1 trillion US$ into the construction and 40% of this funds would be sourced by means of foreign direct investment.

Legal

For a very beneficial and successful establishment of foreign direct investment there should be a propel channel and proper compliance of legal procedure. The investment which is resourced to a host nation should not be done on contracts which have adversely affects the interest of the host nation so few of such regulations which Indian legislation to ensure the qualified and assured inflow of economy.

  • Foreign Exchange Management Act, 1999 (FEMA) and Regulations norms.
  • Companies Act, 1956 amendment act of 2013.
  • Foreign Trade (Development and Regulation) Act, 1992. (legislation)
  • Foreign direct investment (Policy) competition act 1992.
  • Securities and Exchange Board of India Act, 1992 and Regulations norms.

 

Advantages of Foreign direct investment in legal sphere are as follows

  • Establishment of legal process outsourcing (LPO).
  • Global Arbitration has also been promoted to reduce industrial conflicts.
  • Development of mining laws
  • Labour laws are also influenced by foreign direct investment and such international labour welfare related schemes.  

Environmental

Environment was never been taken very seriously because the environmental issues were largely against the interest of corporations and developing countries thirst for economic freedom.If we observe the stats of industries which has majorly shifted from developed countries to developing ones, a shocking revelation happens. It shows the most polluting sectors such as chemicals, textiles, manufacturing, etc. were the leaders which shifted their manufacturing units and factories to developing countries. That manufacturing unit always tends to ignore international norms on pollutions check and polluted the Rivers, air, and land. China is one such example where the pollution levels are extremely high in industrial areas, and foreign companies are to be solely blamed for the negligence. FDI always reaps economic benefits but it also shows the other side of what these production units leave behind for the environment. But now with active measures by the current government the environment based laws and regulations are astringent for better compliance and to preserve the nature of environment.

There are few flip sides also to the induction foreign direct economy into economy few of major points are mentioned below:-

Impact on local industry

The impact of foreign direct investment is upon the local market. Higher intake of the foreign direct aid impacts the local industry and leads to the disappearance of local small and cottage scale industry which generates a lot of unemployment and moreover it forced the small traders to work at very low margins and at times such small business man are forced to work under their employment which kills the promoter and business skill with in them.

Political corruption

The nature and extent of human greed is familiar to whole world. There is no limitation to the extent of human expectations and when such a human emotion is coupled with high hands and highly influential position turns into a very lethal combination for the nation. With a view to enter into such potential market all the investors are in a plan to enter into the market by all possible means. Indian economy has also been scared by the same observation in past. a recent event in this list is arm  forced defence deal in name  of Augusta Westland owned by Italian giant Finmeccanica is sufficed. Finmeccanica also had a major plan to enter into Indian economy through filters of FDI. As the investigation is under it‘s course of investigation any comment would be premature.

Flow of currency abroad

The foreign direct investment takes away the economic profit out of the company as no company is established to promote welfare of other nations. The investor takes the big chunk of investment into their kitty and just perform their value based responsibility imposed . Evenwhile performing their investment based duty there is just performance of duty or sake and nothing else.

Inflation

The higher cost of living is a common phenomenon associated with foreign direct investment as now the produce would be received at premium cost.

Foreign direct investment has a great impact on our economy and such investment process has a great future prospectus on long term standing with our economy but as excess of everything is bad. If this tool is properly utilized it would lead to a great welfare state otherwise it may be end up as weapon of mass destruction.

Bibliography

  • Problems and Perspectives in Management, Volume 12, Issue 1, 2014
  • Wikipedia
  • Investopedia forum

 

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