fdi in india and its growth linkages - Department Of Industrial Policy ...

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Chapter 1: Introduction 1.1 Backdrop Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, foreign direct investment (FDI) plays a complementary role in overall capital formation by filling the gap between domestic savings and investment. FDI has played an important role in the process of globalisation during the past two decades. The rapid expansion of FDI by multinational enterprises (MNEs 1 ) since the mid-eighties may be attributed to significant changes in technologies, liberalisation of trade and investment regimes, and deregulation and privatisation of markets in many countries including developing countries like India. Fresh investments, as well as mergers and acquisitions, (M&A) play an important role in the cross-country movement of FDI. However, various qualitative differences have been identified between fresh FDI (greenfield FDI) and M&A. An important question that arises is whether FDI merely acts as filler between domestic savings and investment or whether it serves other purposes as well. At the macro–level, FDI is a non-debt-creating source of additional external finances. This might boost the overall output, employment and exports of an economy. At the micro-level, the effects of FDI need to be analysed for changes that might occur at the sector-level output, employment and forward and backward linkages with other sectors of the economy. There are fears that foreign firms might displace domestic monopolies, and replace these with foreign monopolies which may, in fact, create worse conditions for consumers. Thus, it is important to have an efficient competition policy along with sector regulators in place. While the quantity of FDI is important, equally important is the quality of FDI. The major factors that might provide growth impetus to the host economy include the extent of localisation of the output of the foreign firm’s plant, its export orientation, the vintage of technology used, the research and development (R&D) best suited for the host economy, employment generation, inclusion of the poor and rural population in the resulting benefits, and productivity enhancement. 1.2 Literature Survey FDI plays a multidimensional role in the overall development of host economies. It is widely discussed in the literature that, besides capital flows, FDI generates considerable benefits. These include employment generation, the acquisition of new technology and knowledge, human capital development, contribution to international trade integration, creation of a more competitive business environment and enhanced local/domestic enterprise development, flows of ideas and global best practice standards and increased tax revenues from corporate profits generated by FDI (Klein et al., 2001; Tambunan, 2005). While FDI is expected to create positive outcomes, it may also generate negative effects on the host economy. The costs to the host economy can arise from the market power of large firms and their associated ability to generate very high profits or by domestic political interference by multinational corporations. But the empirical evidence shows that the negative effects from FDI are inconclusive, while the evidence of positive effects is overwhelming, i.e., its net positive effect on economic welfare (Graham, 1995). 1. MNEs, MNCs, and TNCs are used synonymously. They are corporations or enterprises that manage production or deliver services in more than one country.
FDI IN INDIA AND ITS GROWTH LINKAGES FDI in manufacturing is generally believed to have a positive and significant effect on a country’s economic growth (Alfaro, 2003). However, based on empirical analysis of data from cross-country FDI flows for 1981-1999, Alfaro (2003) points out that the impact of FDI on growth is ambiguous. FDI in the primary sector tends to have a negative impact on growth, while investment in manufacturing has a positive effect, and the impact of FDI in services is ambiguous. In general, multinational enterprises have increasingly contributed to capacity addition and total sales of manufacturing. Further, FDI plays an important role in raising productivity growth in sectors in which investment has taken place. In fact, sectors with a higher presence of foreign firms have lower dispersion of productivity among firms, thus indicating that the spill-over effects had helped local firms to attain higher levels of productivity growth (Haddad and Harrison, 1993). Besides being an important source for diffusion of technology and new ideas, FDI plays more of a complementary role than of substitution for domestic investment (Borenzstein et al., 1998). FDI tends to expand the local market, attracting large domestic private investment. This “crowding in” effect creates additional employment in the economy ( Jenkins and Thomas, 2002). Further, FDI has a strong relation with increased exports from host countries. FDI also tends to improve the productive efficiency of resource allocation by facilitating the transfer of resources across different sectors of the economy (Chen, 1999). Little empirical evidence is available on the impact of FDI on the rural economy, in general, and on poverty, in particular. However, in recent times, there has been increasing interest in studying the linkage between growth and poverty. FDI inflows are associated with higher economic growth ( Jalilian and Weiss, 2001; Klein et al., 2001), which is critically important for poverty reduction. But the pattern and nature of the growth process in an economy also assumes importance. It has been found that FDI had a positive impact on poverty reduction in areas where the concentration of labour-intensive industries was relatively high (Doanh, 2002). It has been shown by Bajpai (2004) that India’s labour-intensive manufacturing can potentially absorb a major section of the labour force and it holds the key to achieve dynamic growth in the country. Further, Aggarwal (2001) showed that high-tech industries are not attracting efficiency-seeking FDI; medium- and low-tech industries with foreign stakes seem to have performed better, indicating that India’s comparative advantage in exports lies with low-tech industries. However, Siddharthan and Nollen (2004) showed that in the information technology sector, exports by MNE affiliates are greater when they have larger foreign equity stakes. Though it is expected that growth tends to benefit the poor, this has not happened in many countries. There is no clear picture whether growth reduces poverty (World Bank, 2000). It is believed that increased flow of capital raises capital intensity in production, resulting in lower employment generation. However, a higher level of investment accelerates economic growth, showing wider positive effects across the economy. Tambunan (2005) found that FDI has positive effects on poverty reduction mainly through three important ways, viz., labour-intensive growth with export growth as the most important engine; technological, innovation and knowledge spill-over effects from FDI-based firms on the local economy; and poverty alleviation programmes or projects financed by tax revenues collected from FDI-based firms. However, the host country’s policies and institutions, the quality of investment, the nature of the regulatory framework and the flexibility of labour markets are important to attain the expected benefits from FDI (De Melo, 1999; Klein et al., 2001). The impact of FDI has been found to be the strongest in countries with higher education levels (Borenzstein et al., 1998; Jalilian and Weiss, 2001). However, FDI may indirectly benefit the poor by creating better employment and earning opportunities for the unskilled workforce in developing countries (ODI, 2002). India-specific studies on FDI have dealt with determinants of FDI, technology spill-overs, export growth and good governance practices transferred from foreign to domestic firms (Banga, 2003; Kumar, 2002, 2003; Pant, 1995; Siddharthan and Nollen, 2004). These effects have been estimated through firm-level case studies and through cross- 2
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construction (4200); fuels, includi
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FDI: LINKAGES WITH THE ECONOMY S. N
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Table 5.5 Sector-wise FDI in India
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FDI IN INDIA AND ITS GROWTH LINKAGE
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Chapter 7: Primary Survey: Analysis
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the North and South zones, whereas
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PRIMARY SURVEY: ANALYSIS AND RESULT
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Table 7.1a Distribution of Surveyed
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Table 7.2b Zone-wise Distribution o
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Table 7.3b Zone-wise Distribution o
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Table 7.6a Number of Employees in S
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Table 7.7a Mode of Transport from F
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Table 7.8a Number of FDI-enabled Fi
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Chapter 8: FDI Data Reporting and C
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sector, non-profit institutions ser
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three categories, namely, (i) inves
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Table 8.1 Trends in FDI Inflows to
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FDI DATA REPORTING AND CLASSIFICATI
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Table 8.3 Trends in FDI Inflows by
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Table 8.5 DIPP Classification of FD
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SECTOR-WISE CODE 3700 DEFENCE INDUS
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S. No. DIPP DIPP Activity NIC 2-Dig
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Chapter 10: Key Findings and Salien
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Findings � About half the total o
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7. Forex Implications: To understan
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manufacturing firms taken together.
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References Australian Bureau of Sta
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for economic growth and poverty all
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Tables for Chapter 6
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Questionnaires
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