India Foreign Direct Investment (FDI) Analysis - Essay Example

INDIA AND FOREIGN DIRECT INVESTMENTS 0. INTRODUCTION Globalisation is a phenomenon experienced only within the last fifty years (Soros, 2002). Discussion of globalisation connotes the development of global financial markets, growth of transnational corporations, and their increasing dominions over national governments (Soros, 2002). Moreover, globalisation also pertains to massive migration of people, changing national identities and cultural belongings (Suarez- Orozco & Qin- Hilliard, 2004), thus, shattering internal and external borders among and between nations. The multifaceted connotation of globalisation as a concept, policy and process describes and reflects increased economic interdependence of countries, which includes flows of goods and services across borders, reductions in policy and transport barriers to trade, international capital flows, multinational activity, foreign direct investment, outsourcing, increased exposure to exchange rate volatility, and immigration. These movements of goods, services, capital, firms, and people are believed to contribute to the spread of technology, knowledge, culture and information across borders (Fischer, 2003; Soros, 2002; Balakrishnan, 2003) shrinking the world (Supporting SMEs, 2007). As globalisation permeates the contemporary world, understanding the role of foreign direct investments becomes necessary. Foreign direct investment (FDI) is an explicit consequence of the principles of globalisation – economic liberalisation, free trade and decentralisation. Economic liberalisation upholds the ideals of individual liberty, “treaties of friendship, liberal national legislation, bilateral trade /commerce and less and less government intervention in the market.” (Killion, 2003 p5). While free trade which is entailed in the idea of free market connotes the idea of the lowering or the elimination of tariffs and other forms of economic barriers (Helleiner, 2003; Chakraborty & Basu, 2002) and at the same time implementing less and less governmental intervention in the market (Burbidge, 1978;Helleiner, 2003;Killion, 2003). Thus, the role of FDI is primordial in understanding national economy and market in the global economy. In this regard, this paper will look into FDI in India, but why India? The prevalence of ethnic and linguistic diversity (Nayar,2006) marks the uniqueness of India among all the other developing countries making her an “instance of a pluralistic society” (Mishra & Nayak, 2006:9). Despite this reality, India’s growth makes it one of the emerging powers in the 21st century among the Third World countries (Harris, 2005; Huang & Khanna, 2003). This feat India has attained only for two decades since her integration in the world economy on 1991(Selko, 2008; Nayar, 2006). Being such, the paper will have the following structure: first are the presentation of introduction, which contains the background from where FDI currently develops, what is FDI, and the reason why India has been chosen and the structure of the paper. The second part is the review of literature pertinent to the subject matter and last is the conclusion. 1.1 FDI in INDIA: IN FOCUS India’s 2008 GDP is $1,217.49 billion still higher by $40.60 billion than 2007despite the world economic crisis. In addition, foreign direct investments have tremendously increased from $6,677 million in 2005 to $22,950 million in 2007. (World Development Indicator, 2009). As the government continues to create policies that attract foreign investments, the advantages that accrue to the local market continues (Menon & Sanyal, 2007). These advantages are: First, foreign investors’ interests in the manufacturing sector of India are concretely manifested by the continued increase in the growth rate of the manufacturing sector. As of 2007, the manufacturing sector employs 25.5 million people and grows at the rate of 12% (Selko, 2008). It is projected that between the years 2014 – 2015 “the sector will have a market capitalization of $520 billion compared with $272 billion in 2007” (Selko, 2008; 38). The interest of the foreign investors in the manufacturing sector is fuelled by several favourable conditions existing in India today. These conditions are 1. India’s huge market (Hensman, 2001). 2. India’s world class education (Selko, 2008; Nayar, 2006; Qureshi & Wan, 2008). India’s education has created a pool of human capital that are skilled, educated, English-speaking labour force and at a competitive price (Hensman, 2001). 3. The government continues to implement policies fighting red tape and corruption (Li & Zhang, 2008; Selko, 2008). This is very important as a good and clean image will definitely further increase foreign investments. Second, another advantage of FDI in India is the transfer of knowledge especially in the information technology sector (Balasumbramanyam & Mahambare, 2003). A visible effect of this to India is her rapid advancement in the information technology and in the pharmaceutical industry, which in turn, continues to attract investors. The entrance of FDI in the IT sector of India has opened the development of local workers who are highly IT skilled. Currently, India “has emerged as an economic power in case of computer software” (Nayar, 2006; 37). In this case, India manifests the positive spill over of information technology brought by FDI (Balasumbramanyam & Mahambare, 2003). Third, FDI reduces poverty (Menon & Sanyal, 2007). In India’s manufacturing, it employs 25.5 million people as of 2007 and since there is a projection that the sector will continue to grow, then it necessarily entails that more people will be employed in the future (Selko, 2008). In the agricultural sector, the influence of FDI is not only measured in terms of the reduction of poverty due to employment and of the lifting of restrictions in what to plant, when to plant where to sell (Mishra & Nayak, 2006) It is also measured in terms of the benefits that informal agricultural workers are now currently receiving. It is known that workers in the agricultural sector are one of the most exploited and abused, with no health benefits while working for long hours. But since, there is a global demand coming from international groups, non-governmental organizations and international institutions for the rights of the workers to be upheld, foreign investors recognise it (Moran, 2003; Hensman, 2001), which redounds to a better working condition and protection for the informal agricultural workers (Hensman, 2001). Fourth, FDI in India has prodded the government to invest on infrastructures to further encourage the influx of foreign investors. In the agricultural sector, the government has done “greater infrastructural investment and accelerated application of advanced technologies to promote agricultural growth.”(Li & Zhang, 2008: 1286). While in the manufacturing industry, the government “is spending $750 billion between 2007 – 2015” (Selko, 2008: 40) to address limitations in infrastructure. Though there may be other factors that influence the government to invest on infrastructures, the vital role of FDI in providing the ethos for infrastructural investments is unquestionable (Selko, 2008; Li & Zhang, 2008). These positive movements in the economy brought by FDI in India are undeniable. And since FDI is a sure sign of a countrys integration in the global market, India’s integration in the world economy works as an impetus for India’s continued economic growth (Qureshi & Wan, 2008; Nayar, 2006; Kasbahtla et al, 2007). However, it has to be noted that India’s FDI when compared with that of China can be described as slow and non- performing. (Nayar, 2006; Li & Zhang, 2008). This is not surprising since China’s FDI is “miraculous” (Yao, 2006). However, this difference is not without reason. This is due to the “East India Company Syndrome” that still afflicts India. East India Company is what the British has used in order to conquer India from the 17th century to the19th century. And because of this, India has been distrustful of foreigners. In fact, until now there is a continuous opposition against foreign investment for fear of foreign political and economic domination (Nayar, 2006). Is this a possible cause of concern? Nayar (2006) claims that if compared with China, indeed, it may be easy to valuate India’s FDI as an underperformer in global trend. However, it should be remembered that India has long history behind their cautious opening to the global market. It is not a lack of interests from foreign investors but it is a matter of public policy (Nayar, 2006). It is suggested that the ‘low’ FDI of India be appreciated as a “supplement to the Indian local and national markets and not to supplant it” (Nayar, 2006: 59). In this sense, India has set an example to developing countries. As the ethos of globalization is plurality and borderless economy is its prime mover, the sense of national identity rooted in common historical experience and background should drive Third world countries to find their mark and create their niche in the pluralistic world just like what India is doing. 1.2. CONCLUSION Globalisation loosens and sometimes even shatters boundaries among and between countries. A definitive sign of this contemporary phenomenon is foreign direct investment. FDI has become the impetus of growth of many developing countries including India. FDI in India has several advantages. It includes: first, increase growth in the manufacturing sector. Second, transfer of knowledge especially in the information technology sector. Third, FDI in India has helped reduce poverty. Fourth, it has stimulated the government to undertake infrastructural investments. In the end, India’s economic success becomes an authentic means for the emancipation of people of India from poverty. (1503 words) REFERENCES: Balasubramanyam, V.M., & Mahambare, V. (2003). “FDI in India”, Transnational Corporations, Vol. 12, No 2, 45 – 72. Balakrishnan,P. (2003). “Globalisation, power and justice”, Economic and Political Weekly, 3166 – 3170. Burbidge, J.B. (1978). “Post Keynesian Theory: The International Dimension”, Challenge, 40 – 46. Chakraborty, C., & Basu, P. (2002). “Foreign direct investment and growth in India: A cointegration approach”, Applied Economics, 24, 1061 – 1073. Fischer, S. (2003). “Globalisation and its challenges”, The American Economic Review, Vol. 93, No 2, 1 – 30. Helleiner, E. (2003). “Economic liberalism and its critics: The past as prologue”, Review of International Political Economy, 10, 4, p 685 – 693. Hensman, R. (2001). “The impact of globalization on employment in India and responses from the formal and informal sectors. 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