Prime Minister Narendra Modi, in his maiden Independence Day speech, articulated his vision of several social and economic policy objectives of his government. It is generally agreed that the objectives so forcefully expressed by him are unexceptionable, but what is required, and often difficult, is their effective translation into practiceThe Prime Minister must be commended for stating so clearly that domestic manufacturing will be the core and central tenet of his foreign investment policy as that puts job creation or employment generation at the top of the objectives in inviting foreign investment to the country.
Global manufacturing hub
This welcome emphasis in our foreign investment policy on efficient and competitive domestic manufacturing will serve multiple objectives. First and foremost, it will enhance job opportunities within the country; second, it will minimisze the imports of such products into the country, thereby mitigating the pressure on our trade deficit; third, in the long run, if not in the near-term, it will help augment and diversify our exports from the manufacturing sector; fourth, it will help in bringing latest technologies into the countryand lastly, such domestic manufacturing will help minimize some of the trade frictions we have with other countries. The importance of domestic manufacturing with foreign investment in reducing trade frictions with other countries is at present ignored or underestimated. As a corollary, the focus on world-class domestic manufacturing may also be the best way to cope with globalisation and to maximise the possible benefits from it. The size of our domestic market and the abundant availability of skilled and technical manpower at low cost is a leverage that we need to put to use consciously to induce foreign investors to make India as a manufacturing hub in their operations. If there is one lesson we can learn from the Chinese, it is how the size of the domestic market and the availability of skilled and disciplined manpower could be put to effective use for the industrial and technological development of the country with foreign investment.
It is, however, in the translation of the policy into practice that co-ordinated action is needed on several fronts. First, it is of paramount importance that the foreign investment, foreign trade and intellectual property rights (IPR) policies are viewed in a holistic manner to ensure that they mutually reinforce each other in achieving the policy objective ofworld-class domestic manufacturing.
Second, with respect to the broad contours of the foreign investment policy, it needs to be remembered that investment opportunities, as reflected by our large domestic market and low-cost skilled and unskilled manpower, may be a necessary, but not a sufficient condition, to induce foreign investors to come to India with their capital and technology. The congeniality of the investment climate or environment, as reflected in the stability of the policies and the rules as well as the conditions attached to the approval of the investments, is even more important to assure foreign investors of fair and non-discriminatory treatment.
The focus of our foreign investment policy should be on the positive aspects of what is produced in India, with what kind of technology and skills, how efficiently and competitively it is produced, and whether it is of world-class standards, and not on negative aspects such as ownership and control, enterprise-specific performance requirements, or other conditions that interfere with the internal commercial decisions of the enterprises.
The best way to ensure that foreign investment is of a high quality and yields value to the country is to have a policy framework that requires it to operate in an unprotected, open and competitive environment, and not behind high tariff walls or import restrictions, nor with the aid of subsidies or other giveaways.
Third, with respect to the contours of the foreign trade policy, it is by and large confined now to dealing with exports and imports compartmentally — encouragement of exports with various kinds of subsidies and prop-ups, and curtailment of imports by high tariffs and other so-called trade remedy measures like anti-dumping or countervailing duties or other import restrictions. Encouragement of domestic manufacturing of world-class standards, either by domestic or foreign investors or both, has not been a major objective of our foreign trade policy so far.
Our foreign trade policy must recognise that encouragement of domestic manufacturing of world-class standards, catering solely even to our own market, is a preferable alternative to protection and subsidisation through high tariffs, trade remedy measures and financial giveaways. Rather, the policy must encourage freer imports of capital goods, industrial raw materials, components, tools and devices, as well as technology-laden imports, with a view to upgrading the quality and competitiveness of our domestic manufacturing.
Fourth, the importance of the protection of intellectual property rights (IPRs) in the scheme of attracting foreign investment and establishing high quality domestic manufacturing must not be overlooked.
Ensure IP protection
IPRs do not consist only of pharmaceutical patents as is commonly understood in our country: they include as well copyright (computer software in our country is protected by copyright), trademarks, trade secrets, geographical indications, designs, trade secrets, business confidential information and data, and the like.
Even if our IPR policies do not have domestic manufacturing as a central objective, they need to be implemented in such a way that they do not impede or deter technology-oriented domestic investments from foreign investors. The protection of patents, trademarks, trade secrets, layout designs and the like is crucial to these and other sectors where we want foreign investment of high quality with modern technologies. Our intellectual property laws are largely in conformity with international standards as reflected in the TRIPS Agreement of the WTO and other international conventions to which we have subscribed. Yet we tend to create an impression around the world that we do not value intellectual property or respect its adequate protection.
Address local woes
One other aspect that does not fall within the ambit of the aforesaid policies, but which is crucial to competitive domestic manufacturing needs to be touched upon here. Among the major reasons for our domestic industry being competitively disadvantaged vis-a-vis the rest of the world, two stand out prominently: first, the inadequacy and poor quality of our infrastructure, and second, the high cost of our capital. While protection and subsidisation is not the solution, this huge disadvantage faced by the domestic industry requires to be addressed with priority and ways and means found to mitigate it.
To conclude this essay in a lighter vein, in one of the famous cartoons of Dennis the Menace, the irrepressible boy tells his father with a logic beyond his years: “Dad, if everything is made in China, then God must be living in China”. When the Prime Minister’s vision of “Come, Make in India” is realised, and India becomes an enviable manufacturing hub of the world, Dennis may perhaps find God shifting hisP residence to India!
(The author is a former Commerce Secretary and former Member/Chairman, Appellate Body, World Trade Organization)
FOREIGN DIRECT INVESTMENT
Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. The foreign direct investment generally encompasses the transfer of technology and expertise, and participation in the joint venture and management. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled work forces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.
The foreign direct investment is profitable both to the country receiving investment (foreign capital and funds) and the investor. For the investor company, FDI offers an exclusive opportunity to enter into the international or global business, new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities. The host country receives foreign funds for development, transfer of new profitable technology, wealth of expertise and experience, and increased job opportunities.
An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.
Advantages of FDI
The free flow of capital across national borders has been favoured because it allows capital to seek out the highest rate of return. Unrestricted capital flows may also offer several other advantages. First, international flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. Second, the global integration of capital markets can contribute to the spread of best practices in corporate governance, accounting rules and legal traditions. Third, the global mobility of capital limits the ability of governments to pursue bad policies.
In addition to these advantages, which in principle apply to all kinds of private capital inflows, the following gains to host countries from FDI can take several other forms:
- FDI allows the transfer of technology – particularly in the form of new varieties of capital inputs – that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.
- Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.
- Profits generated by FDI contribute to corporate tax revenues in the host country.
FDI in India
The steadily growing one of the major economies of the world, India has been enjoying huge and regular FDI from diverse investors of all around the world for the last few decades. According to a recent UNCTAD (United Nations Conference on Trade and Development) Survey, India has emerged out as the second most famous and popular destination in the world for FDI, after China. Majority of this foreign direct investment in India is made in the sectors of telecommunication, computer hardware and software, construction and services, by investor companies from USA, UK, Singapore, Mauritius, etc.
The foreign direct investment in India can be made in a variety of ways and in a rather wide range of economic sectors. Worldwide prominent Global Jurix has been helping individuals, associations, private and public companies/organizations, and institutions of diverse sectors for making their cherished FDI in India, through both the automatic and government routes, for a long time.
Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. But recent work also points to some potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country’s total capital inflows may reflect its institutions’ weakness rather than their strength. Though the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI. Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign.