Political Economy and Foreign Direct Investment - Essay Example

Political Economy and Foreign Direct Investment Country – India Executive Summary The liberalization and globalization of foreign direct investment in India commenced during the year 1991 and the easing of restrictions on foreign companies interested in doing business in this country have acted as a catalyst to promote the country’s attractiveness. Government’s consolidated FDI policy and their rule changes related to foreign investment issues has changed the country’s economic structure. In India, FDI is permitted through financial collaborations, joint ventures or through private placements. The government has also taken the principle of updating the FDI policy on a half yearly basis and changing the guidelines accordingly. But still, administrative mismanagement and oppression by different company results in political anomalies. The Flow of foreign money in the country’s economy results in making it the tenth largest economy in the world in terms of the nominal GDP and third largest by purchasing power parity. There is a definite regulatory framework for the foreign investors with a consolidated FDI policy. Still there is an absence of strict intellectual property rights that’s need to be addressed by the foreign investors as well as the Indian Government to promote further FDI development. Contents Executive Summary 2 Introduction 4 Political Economy Analysis 5 Recommendations 10 Conclusion 11 References 12 Singh, L. 2010. LEGAL ISSUES ON FOREIGN INVESTMENTS IN INDIA. [Online]. Available at: http://www.lawyersclubindia.com/articles/LEGAL-ISSUES-ON-FOREIGN-INVESTMENTS-IN-INDIA-2697.asp#.UxhQ3z-SyX9. [Accessed on March 06, 2014]. 12 Introduction India, a country once referred to as a place where restriction on business is everything has now undergone several changes. This is due to the number policy initiatives that were taken to boost the country’s economy. The liberalization and globalization of foreign direct investment in India commenced during the year 1991 and the easing of restrictions on foreign companies interested in doing business in this country have acted as a catalyst to promote the country’s attractiveness. India’s liberalization process in the early 1990s has acted as a strong motivational force for the Indian firms to expand their business in other markets as well as foreign firms to do their business in India. According to Mr. P. Chidambaram, the then finance minister of India, “FDI worked wonders in China and can do so in India” (Indian Express, November 11, 2005). Government’s consolidated FDI policy and their rule changes related to foreign investment issues has changed the country’s economic structure. Inflow of foreign money in the country resulted in growth of country’s economy. The more the economy is growing, the more it becomes attractive for the foreign investors. Government of India has introduced a regulatory framework to ease up the entry process of foreign investors. The investors gladly accepted this opportunity and invested their funds in developing business in India as the country has the potential for growth and diversification of business (ET Bureau, 2012). This report is concerned with formulating the reasons for which India is now become a centre for Foreign Direct Investment and whether the political economy of the country is feasible enough to initiate further foreign investment. Political Economy Analysis Political economy is commonly known as the interdisciplinary analysis of political, economic and legal factors of a country to know the extent to which political institutions; legal constraints and economic system influence each other (Weingast, and Wittman, 2008). It is considered as a rational way of studying the attractiveness of the country. There can be large number of economic, political and legal mismanagement existing in the country which serve as the possible risk factors and often considered as threats (Hill, 2011, p.76-79). The Political structure of India is federal republic in nature with a parliamentary system of government. The government is relatively centralized in nature and it controls most of the essential government function such as defense, foreign policy, taxation etc. State governments are empowered with the power to enforce law and order within the states but they depend on the government’s sourcing of funds. In India, FDI is permitted through financial collaborations, joint ventures or through private placements. The government has also taken the principle of updating the FDI policy on a half yearly basis and changing the guidelines accordingly (gop.it, 2010). Infrastructure has always been considered as one of the major bottleneck in FDI development because these activities are controlled by state government and lack of support from the central government in funding issues has been an issue for many years. In most key cases, related to infrastructural activities, the central government remains as the administrative head and controlling figure over the state governments and these results in reducing the power of decision making authority in the state level. The political anomalies faced by the government have the consequence of administrative mismanagement and oppression by different company and as a result, affect the image of the country (Sanyal et.al, 2011, p. 5). Indian economy experienced an exponential growth after the liberalization policy and public private partnership policies taken during 1991 globalization initiatives. The Flow of foreign money in the country’s economy results in making it the tenth largest economy in the world in terms of the nominal GDP and third largest by purchasing power parity (imf.org, 2013). Government of India accepts the key impact of Foreign Direct Investment in economic development not only as a source of domestic capital but also as an important source of technology and global ‘best-practices’. Although the perceived sound nature of government has certain drawbacks like high tariff rates, high corporate tax rates and continuously fluctuating exchange rates, India has not lost its attractiveness. Legal part of the political economy is concerned with the legal frameworks and legislations that foreign investors must adhere to. Government has formed several regulatory bodies like Foreign Investment and Promotion Board (FIPB), which is responsible for formulating the foreign investment policy and the Reserve Bank of India, with the responsibility of implementing and enforcing these regulations and policies. Indian law promotes the freedom of parties in an international contract to choose both the governing law, the bodies of arbitration (courts) and the jurisdiction for settling disputes. The policies governed by FIPB through government laws helped the foreign investors to get substantial benefits in the long run (Singh, 2010). From the above discussion, we can analyze the political economy of the country in terms of benefits, risks and costs associated with it in the following manner: Political Economy Analysis Table Benefits Risks Costs Political System 1. Government support to domestic firms as well as to the foreign firms to develop their business. 2. Continuous updating of government policies for better foreign investments. 1. Confiscation, expropriation, currency inconvertibility and contract repudiation. 2. Constant battle between the country’s central government and the provincial and local governments over applicable law. 3. Lack of decision making authority in state level 4. Political instability and government’s indecisive behavior. Costs of establishing business is high even though there is definite regulations by the government for promoting the business because there is a need to pay off the politically powerful to be allowed by the government to do business. Economic System 1. Economic growth 2. Government Support 1. Sustainability of the country’s GDP. 2. Dominance of the state owned enterprises. 3. Low income economy & Inflation. 4. High tariff rates by international standards. 5. Fluctuation in exchange rates. 6. Limited scale of export processing zones. Low operating Cost of doing business due to cheap labour. Legal System 1. Definite regulatory framework for the investors. 2. Consolidated FDI policy. 3. Dispute regulation system. 1. Absence of strict IPR. 2. Stringent labor laws. 3. Lack of transparency in sectoral FDI policies. Costly to do business because: 1. Strict local laws and with regard to product safety, safety in the workplace, environmental pollution, 2. Absence of Strict Intellectual Property rights can result in ‘theft’ of business. Recommendations Based on the analysis, certain recommendations for doing business in china have been made. These are: India is subjected to huge population and a variety of cultures, therefore a polycentric approach must be taken to approach the market. Good relation with Government officials is mandatory to do the business. The government officials must ensure that the business is operating within the legal jurisdictions. To protect intellectual property, due diligence method same as the home country needs to be used. Thinking about a more market based approach to approach the customers. There is need to build a good communal relationship and to build a good team with local personnel. Adequate financial resources to cover the costs associated with the political economy. Conclusion Thus, it can be concluded that investing in India needs adequate financial and human resources to guide throughout the whole process of establishment, operation and marketing of the product/service. Changing Government rules and friendly approach to FDI has changed the political economy of the country by making it more attractive, though there are certain points need to be addressed. Cheap labor cost is the prime advantage of doing any contract manufacturing business. To invest in a large scale, the companies must take a customer centric approach with additional focus of political, economical and legal constraints. References ET Bureau, 2012. FDI inflows show India attractive: Ernst & Young. [Online]. Available at: http://articles.economictimes.indiatimes.com/2012-01-30/news/31005696_1_fdi-inflows-total-fdi-attractiveness-survey. [Accessed on March 06, 2014]. gop.it, 2010. Recent Developments in the Indian Legal System. [Online]. Available at: http://www.gop.it/doc_pubblicazioni/36_fdjo4de34a_ita.pdf. [Accessed on March 06, 2014]. Hill, C. 2011. International Business: Competing in the Global Marketplace 8/e. New York: McGraw-Hill Irwin. imf.org. 2013. International Monetary Fund. [Online]. Available at: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata. [Accessed on March 06, 2014]. Sanyal et.al, 2011. “An Updates of Issues, Challenges and Opportunities in FDI in India”. International Conference on Operations and Quantitative Management. Singh, L. 2010. LEGAL ISSUES ON FOREIGN INVESTMENTS IN INDIA. [Online]. Available at: http://www.lawyersclubindia.com/articles/LEGAL-ISSUES-ON-FOREIGN-INVESTMENTS-IN-INDIA-2697.asp#.UxhQ3z-SyX9. [Accessed on March 06, 2014]. Weingast, B.R., and Wittman, D, 2008. The Oxford Handbook of Political Economy. Oxford University Press. Read More