International Production and Governance - Essay Example

?International Production and governance Introduction With the growing demand of the consumers for variety of products the scopes of foreign direct investment in different emerging sectors are also increasing at an alarming rate. One such sector that is gaining huge importance and growing at a good pace is the retail sector. A lead firm governs the chain of the subsidiaries with the enforcement of certain standards but without the aspiration of taking the overall control over the suppliers. This new form of business is becoming the most dominant form of the organizations of industries more recently. Food retailing is a subcategory of the retail industries. The business sector of food retailing is experiencing a dramatic change over these few years. The main driving forces of the retailing industry specifically the food industry are the consumers. They are creating the demand for the products that is increasing the scope for the expansion of this sector of the retail industry. The population growth of the developing countries and the increasing wealth in the hands of the consumers are influencing the rapid growth of these retail industries thus they are attracting more and more investments. (Retail, 2011) However these foreign investments in the food retailing sectors of other countries have certain influence on the economy of the country in which the investment is ultimately being made. The influence may to a certain extent impose a positive driven force for the country’s economy however it may have some adverse consequences. This is the scope of study of this paper. Impact of foreign direct investment on food retailing on receiver country’s economy The retail sectors of the modern economy had its base in the traditional retail supermarkets. Then with its emergence in the period of the last eight decades, it spreads slowly in the western region of the European continent and in the United States of America. During the period of their expansion in the Western Europe and United States there was hardly any foreign direct investment made in retails sectors of the economy. The spread of the retail sectors in the developing countries of the world were over five times faster than that in the developed countries in the past. The main reason behind this sudden significant transformation from traditional shops to retail was the huge amount of the foreign direct investment that the retail sector of these developing countries could attract. The expansion of retailing that had been achieved in the United States over the last eight decades had been achieved by the developing economy of Brazil within a period of just two decades only because of the huge rate of foreign investment that were made in the expanding sectors of the emerging economy. Moreover the sub sector of the food supply in the total retailing took more time of adjustments in the retail transformation in the developed economies. However this was an advantage for the sector as food retailing became much better equipped with capital and the support they received from the public sectors of the economies. The scenario of food sector in the developing economies of the world was a bit different. Small firms constitute majority of the food suppliers in the developing countries, which have a relatively low capital base, and lack of support from the public sectors of the countries. The growth of this sub sector of retailing in the developing economies of the world had been mainly due to the increased Foreign Direct Investments in these sectors. The Foreign Direct Investments possess the potential of improving the performance of the food retailing in the developing economies. The international expansion of the food retail sector had been substantially due to the investments made in the new emerging markets from the period of the nineties. (Reardon & Hopkins, 2006, p 522-524: McKinsey & Company, n.d, p. 7) The overall impact of the Foreign Direct investment in the food retail sector of the countries especially the developing ones are considered to be positive. The governments of the developing countries had been mainly encouraging investment in the food retails in order to enhance the benefits that the producers of the countries receive along with the reduction in the agricultural wastes. Moreover improving the operational efficiency of the infrastructure and benefiting the consumers through increased competition were also the motives behind the encouragement of such investments on the part of the governments. (Food Industry India, 2011) Firstly Foreign Direct Investment in this sector contributes to the productivity growth of this sector. The productivity of the sector is mainly contributed by the increase in the labor productivity. The minimum capital base required for the expansion of this sector in the developing economies of the world is contributed by FDI. This facilitates the industries in the use of processes and technologies that are the best. Data of Brazil for the period of 1995-2001 revealed that the total sales of the food retail sector of the country experienced 2.5 percent growth on an average for over the years. The Gross Domestic Product of the developing countries also experienced a growth as an impact of the expansion of food retailing in the countries. Moreover the government of the receiver nation also benefited from the investments made. The informal retailers acquired by the foreign companies with foreign investments contributed to the increased tax revenues of the government of the receiver countries. According to the Food Processing Minister of India high growth in clustered farming will result from foreign investment in food retail sector of the economy through the introduction of ‘demand-driven farming’. This will have a positive impact on the control over the ever-increasing food prices of the country (Roy Chowdhury, 2011). The overall effect of the investments on the employment rate of the countries has also been positive. The food retail sector has always been a major source of employment for both the developed and the developing countries. The increased efficiency of the food retailing through investments in the developing countries have cascading effects on the activities of the marginalized workers of the rural areas, hence increasing the overall employment rate of the countries to a certain extent. (McKinsey & Company, n.d, p32) However despite of the positive influences of investment in the food retail sector on the economy of the host country, the increased investments and hence expansion of the sub sector of retailing also possess certain disadvantages for the receiver countries especially the developing or the emerging ones. Unemployment has been a serious and continuous problem for the developing economies. The agriculture sectors of the economies are almost overcrowded as a major part of the population of these countries still depends on agriculture for their livelihood. The manufacturing sectors are or less stagnant for these economies. Thus the workers of the countries are forced to seek employment in the service sector; hence the sector is often regarded as the primary form of underemployment or disguised unemployment. Data reveals Sector Employment rate experienced a decrease over the period of 1995-2001 for Brazil at a rate of 0.7 % per year due to food retail expansion in the country. Moreover due to the expansion of the food retailing in the countries the traditional retail sectors or the formal as well as the informal food suppliers of the country are experiencing destruction. In the economy of the developing countries like India with a significant rate of unemployment, foreign investment in the retail sector especially food retailing is more likely to disturb the balance of the economy by rendering unemployment to the small retailers of the country who cannot compete with the large producing house and hence forced out of the market. This will more or less exert a monopoly power to the retailers and hence they will sell the products at higher prices by buying at a low cost. Thus the producers of the country and the traders that operate at the lowest level of the chain will not be in a position of finding a place in the economy. These adverse effects of increased investment on the food retailing on the economy of the receiver country forced the countries of China, Thailand and Malaysia to enforce law for controlling the rapid expansion of the retail food chains in the country. Though the arrival of foreign firms in the country increases modernization in the economy but the impact of it in the remuneration of the local workers and that of the performance of the local firms are negative. The same consequence had been noted in the case of Wal-Mart in Mexico. (Durand, 2007, p. 393) In a study made by the Times of India for the food market of India reveals that the retail prices of the food products in India are much higher than the Wholesale food prices. (Roy, 2010) The process of the expansion of the transnational corporations are leading to a ‘shake out’ of the base of the supply of the countries and only the large suppliers those who are well capitalized are being favored because of these expansions. (Coe & Hess, 2005, p449) Though the interest of the consumers of the country are being fulfilled as they are being able to buy better commodities at a lower price however their responsibility towards the society in protecting the security of the millions of the population of these countries override their interests. (McKinsey & Company, n.d, p. 32: Guruswamy, Sharma, Mohanty & Korah, n.d, p. 12-13) Factors determining the success and the failure of the food retailing firms The environment of the country of origination of the food retail transnational corporations as well as the market environment of the host country of the retail and investment determine the success and the failure of the process of investment. Since the structures of the markets of different countries differ among themselves the same strategic consideration that had proved successful for one economy cannot always be fruitful in the other. For example the theoretical framework of Wal-Mart with its reliance on the network dominant resources and independent actions contributed to the success of the industry in the United States of America. However the same framework became the reason for the company’s failure in the retailing sector of Germany and thus their retail has been compelled to leave the nation. (Christopherson, 2007, p 451) Possession of intense knowledge of the local market of the country in which the food retail is expanding along with the global capability of the firm that can be achieved through technology transfer and exposure of the firm to best practices are required for a food retail industry to achieve success in a country. If the retail firms planned towards expanding in foreign countries through the policy of Acquisition then there is the requirement of a leading retailer of the domestic market of the country. The availability of a ‘leading domestic retailer’ in Mexico resulted in the success of Wal-Mart as the first international player in the country. However the company could not repeat this experience in Brazil because of the absence of the leading retailer for acquisition. (McKinsey & Company, n.d, pp. 18, 22) Moreover the demand pattern of the country, the demographic pattern of the country’s population along with the monetary regulations of the country and the extent of the country’s international exposure are all responsible factors that determines the success and failures of the food retailing investments in different countries. The availability of various professional practices along with the proliferation on the part of the media of the country also add to the factors that determine the level of the success and failures of food retail investments in a particular country. (Indian retail industry, 2008) Thus to conclude it can be said that there exists both positive as well as negative impacts of foreign investments in food retailing sectors on the economy of the receiver country. If the investments are able to overcome the adverse impacts the growing retail sector imposes on the country’s economy in the near future then the country as well as the retail industry will enjoy tremendous benefit from it. However the success and the failure of the food retail industry in different countries are different, the expansionary policies of the companies are in need of proper evolution so as to enjoy maximum success in each country.      References 1. Christopherson, S. (2007). ‘Barriers to ‘US style’ lean retailing: the case of Wal-Mart’s failure in Germany’, Journal of Economic Geography, Vol.7, pp 451-469 2. Coe, N. M. & M. Hess (2005). ‘The internationalization of retailing: implications for supply network restructuring in East Asia’, Journal of Economic Geography, Vol.5, pp 449-473 3. Durand, C. (2007) ‘Externalities from foreign direct investment in the Mexican retailing sector’, Cambridge Journal of Economics, 31, pp 393-411 4. Food Industry India (2011). FDI in Multi Brand Retail Sector, available at http://www.foodindustryindia.com/newfood/detailnews.jsp?n=FDI%20in%20Multi-Brand%20Retail%20Sector&id=888 (accessed on 20th May, 2011) 5. Guruswamy, M. Sharma, K. Mohanty J. P. & T. J. Korah (n.d), FDI in India’s retail sector, Centre for Policy Alternatives, available at http://www.indiafdiwatch.org/fileadmin/India_site/10-FDI-Retail-more-bad.pdf (accessed on 20th May, 2011) 6. Hill, (n.d.) 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