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

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section industry data. However, the impact of FDI on the economy is still not clear and there is little evidence on the economy-wide impact of FDI in India. However, there is great interest among academics and policy makers to critically examine the impact of FDI on the different sectors of the economy and various regions of the country. In India, FDI equity flows are concentrated in a few states (Morris, 2004). Of the total approved FDI flow, Maharashtra accounted for the largest proportion with 46 per cent, followed by Gujarat with 15 per cent, and Delhi with 7.7 per cent. Other states with significant and large investments were Andhra Pradesh, Karnataka and Tamil Nadu. Among these states, only a few cities were involved in a significant amount of FDI. These included Ahmedabad, Bangalore, Kolkata, Chennai, Coimbatore, Goa, Hyderabad, Jamnagar, Kancheepuram, Mumbai, Pune and Raigarh, indicating that the geographical flow of FDI in India is skewed in favour of relatively large cities. However, for all investments, it is regions with metropolitan cities that have the advantage in headquartering the country operations of MNEs, thereby attracting the bulk of FDI. The study suggests that there are vast gains to be made by attracting FDI, especially in services and high-tech skilled labour-seeking industries. Aggarwal (2007) has shown that there are wide variations in the FDI inflow across the states of India. Only seven states 2 accounted for over 97 per cent of the total amount of export-oriented FDI and 83 per cent of total FDI approvals during 1991-2001. The presence of Export Processing Zones was found to be a relevant pull factor in attracting export-oriented FDI. Further, while explaining the sensitivity of FDI to labour market conditions, the study revealed that labour market rigidities and labour costs are more pronounced for export-oriented FDI than for domestic market-seeking FDI. Infrastructure and regional development are found to be key factors in attracting higher FDI, both in the export and domestic market-seeking sectors. FDI plant location is a complicated phenomenon. By utilising plant-level data across 100 of the largest cities in 17 states of India, Goldar (2007) established that the inter-state and inter-city distribution of plants of foreign firms is almost identical to that of domestic firms. This indicates that the factors influencing the location of plants of foreign companies are, by and large, the same as those for domestic companies. But the number of plants of foreign companies in a city is positively related to the size of the city, civic amenities in the city, size of the largest city in the state and investment climate in the state. The presence of a metropolitan city in the state probably captures the advantage in headquartering the country operations of multinational companies. Examining industry-specific spill-over effects, Bergman (2006) has shown that pharmaceutical MNCs in India made a positive contribution to the growth and development of the industry. Spill-over effects through imitation, industrial management skills and competition were explicitly observed in the industry. Such effects were generated not only in product development, but also in marketing and documentation techniques. The foreign firms’ presence has indirectly encouraged domestic firms to increase their managerial efforts and to adopt some of the marketing techniques used by MNCs. Further, the presence of foreign firms has intensified competitive pressure in the industry and stimulated domestic firms to use accessible resources more efficiently. India’s comparative advantage in pharmaceuticals has boosted the Indian pharmaceutical enterprises to move and operate abroad. FDI benefits the host country in a number of ways. However, most of the studies conducted in India and abroad have been confined to firm/industry-level analyses that focus on determinants and spill-overs from MNEs to domestic firms. In the Indian context, there is a perception that the flow of FDI, either through greenfield investment or mergers and acquisitions, and their associated benefits are concentrated only in urban/metropolitan areas. It is thus important to know whether and by how much FDI has reached relatively small cities/ towns since many of these are likely to have 2. Andhra Pradesh, Tamil Nadu, Maharashtra, Gujarat, West Bengal, Uttar Pradesh and Kerala. INTRODUCTION 3
FDI IN INDIA AND ITS GROWTH LINKAGES neighbouring rural clusters. The present study is a modest attempt to quantify the linkage of benefits that FDI in India has provided to its rural population. 1.3 FDI in India There have been significant changes in the growth models of developing economies during the past two decades. Many of these economies, including India, have moved away from inward-oriented import substitution policies to outwardoriented and market-determined export-oriented strategies. The scepticism about the role of FDI in reinforcing domestic growth has given way to greater openness to FDI, with a view to supporting investment and productivity of the host countries. While developing countries have started accepting FDI inflows with some caution, which is obvious, the developed countries have moved their investments to foreign locations, subject to safety and profitability of their business operations in foreign lands. FDI plays an important role in the transmission of capital and technology across home and host countries. Benefits from FDI inflows are expected to be positive, although not automatic. A facilitating policy regime with minimal interventions may be ideal to maximise the benefits of FDI inflows. The debate on its pros and cons has not yet been settled and is likely to continue. It is not possible to reach a decisive value judgement on whether FDI is good or bad for the developing country/host economy. It may or may not have the desired and expected growth-enhancing impact on the host economy. Even more difficult is the question of whether it brings about equity along with growth effects. FDI might enter a labour-abundant country with capital-intensive technologies; however, if the labour laws are not flexible, this would have a relatively small impact on employment generation. On the other hand, the entry of FDI in labourintensive firms would have a positive impact on equity and poverty reduction if the FDI-enabled firms choose to locate close to suburban/rural areas. The history of capital flows shows that large amounts of FDI criss-crossed the high-income countries and benefited their economies. The newly industrialised economies (NIEs) constitute important case studies. Many developing countries, including India, have started receiving significant amounts of FDI in the past two decades. A large quantum of such FDI originates from high-income countries including the United States and the EU, while south-south FDI flows have also been increasing. However, nothing comes for free. Mere openness to FDI inflows may be a necessary but insufficient condition and the host economy needs to provide a sufficiently enabling environment to attract foreign investors. In order to fulfil sufficient conditions, the host country has to ensure that it creates absorptive capability to make the best use of the FDI it receives. It needs to create a level playing field through developing an efficient, competitive and regulatory regime, such that both domestic and foreign invested companies play a mutually reinforcing role within a healthy competitive environment. 1.4 Investment Outlook A number of studies in the recent past have highlighted the growing attractiveness of India as an investment destination. According to Goldman Sachs (2003), the Indian economy is expected to continue growing at the rate of 5 per cent or more until 2050. According to the A.T. Kearney (2007), India continues to rank as the second most attractive FDI destination, between China at number one and the United States at number three. India displaced the United States in 2005 to gain the second position, which it has held since then. FDI inflows in 2006 touched $19.6 billion and in 2007, total FDI inflows 4
Page 2 and 3: FDI IN INDIA AND ITS GROWTH LINKAGE
Page 4: PROJECT TEAM Study Team Project Lea
Page 7 and 8: linkages with the economy. The sect
Page 10: Contents Executive Summary Chapter
Page 13 and 14: Chapter 5: FDI: Linkages with the E
Page 16 and 17: Executive Summary Foreign direct in
Page 18 and 19: EXECUTIVE SUMMARY petroleum product
Page 20 and 21: Chapter 1: Introduction 1.1 Backdro
Page 24 and 25: in India stood at $23 billion, show
Page 26 and 27: viii) Backward and Forward Linkages
Page 28 and 29: Chapter 2: FDI Scenario in India: T
Page 30 and 31: Secretariat for Industrial Assistan
Page 32 and 33: Table 2.2 shows that FDI outflows f
Page 34 and 35: at about 2 per cent or less of the
Page 36 and 37: Table 2.5 Sector-wise Break-up of F
Page 38 and 39: Table 2.7 FDI in India in the Servi
Page 40 and 41: Figure 2.4 Country-wise FDI Inflows
Page 42 and 43: 2.10 Foreign Technology Transfers A
Page 44 and 45: Chapter 3: Mergers & Acquisitions a
Page 46 and 47: Table 3.2 Short-term effects of FDI
Page 48 and 49: proportion of foreign investment in
Page 50 and 51: Chapter 4: Special Economic Zones (
Page 52 and 53: 4.4 Management of SEZs SEZs are und
Page 54 and 55: in the eight major SEZ’s exports
Page 56 and 57: Foreign Direct Investment in SEZs S
Page 58 and 59: In a span of a few years, there hav
Page 60 and 61: SPECIAL ECONOMIC ZONES (SEZS) AND F
Page 62 and 63: existing infrastructure, (b) exploi
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Page 70 and 71: 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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QUESTIONNAIRE 257
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