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Private Foreign Investment in India

Buy Custom Private Foreign Investment in India Essay


One of the most significant and dramatic global trends in the past two decades has been the expeditious sustained growth of international business. World markets in the true sense have become global for most products, services, and especially for all types of financial instruments.  The expansion of world product trade experienced an increase by more than 7% a year since 1960, which was more than 60% faster than output growth and the most significant growth in globalization, occurred in financial markets.  International business incorporates all those business activities that go beyond the national borders. Although there exist many definitions of international business in the business literature, no concrete or universally accepted definition is appropriate for the term ‘international business’.

One view of the definitional spectrum, defines international business as an organization, which buys or sells products and services across more than two national boundaries, even if facility locates in a single country.  While other view of the spectrum says, international business equates only with those large organizations that have facilities outside their own country. With the globalization of businesses, these organizations have gained popularity under the name of MNCs and TNCs (Bartlett 1989).

The classification of the International companies into several categories depends on the structure of business, mode of investment and product/service offerings. TNCs and MNCs are two popular categories of these. Both TNCs and MNCs are organizations which produce goods or services in more than one nation. Usually, they are business organizations having their headquarters in the home country and conduct operations in other nations, known as host country. Since 1990, India experienced an impressive growth in the presence of MNCs, and with their dramatic expansion FDI inflows occurred in the Indian economy. This paper analyzes the impact which this change has brought on Indian society. In particular, this paper addresses three significant questions: How and why this change occurs? What are the costs and benefits to Indian economy associated with this change? Further, what should India do to pursue its development? The final conclusion arrived is that intensification of international business activities by MNCs has left a significant powerful impact on Indian economy (Athreye 1999).

1.The Benefits to MNCs from India’s Liberalization

While it can be contested that India liberalization started before 1990s, most will agree that it was only in 1991 when Indian government in its earnest way adopted policies of liberalization. However, the concrete reason for implementation of these liberalization policies is not clear. In fact, there were three different forces that directed India to this crucial moment; two of them were external forces and another was an internal force. The internal factor which guided India towards liberalization was the critical economic destabilization it faced at that time.

The new economic policy embraced by Indian government contained three central characteristics: opening the Indian economy to global markets, reducing state intervention in domestic policy decisions, reducing import tariffs and stabilizing through structural reforms.

What occurred, in practice, was the devaluation of rupee and convertible for trade, abolishment of licensing in the industrial sector, elimination of import licensing, import tariffs reduced significantly, and further, Indian government abolished public sector monopolies in port, power, telecom, aviation and road industries. These exercises were not directly intended to attract MNCs, but the aim was to pull out of its economic downfall. However, the fact was that India had shunned its socialist blanket, attempting to adopt market-friendly reforms was the key encouragements to international business and foreign investors, who realized India’s immense potential, but its isolationist policies discouraged them (Siddiqi 2008).

Nonetheless, key efforts started to bring inflow of FDI at an enormous scale. For instance, India decreased restrictions on equity, raised limits on repatriation, revised investment licensing controls, modified tariffs and imports procedures favoring MNCs, and amended labor laws to enhance the business environment more attractive. Moreover, excluding small lists of reserved industries, all those sectors earlier reserved for the public enterprises opened for private investment accelerated the Indian economy. Now the question is, what impact these liberalization policies had on MNCs. The impact was a significant increase of FDI in India. In 1991, FDI inflows into India were approximately US$ 75 million. From 1991 onwards, FDI began to increase gradually so that, by 1996, the total FDI investment raised to $2.5 billion, and in 1997, it recorded $3 billion. In fact, statistics shows that from 1991 to 1998, India accumulated $ 56.7 billion in the form of FDI contracts. This evidence demonstrates that the operations of MNCs increased tremendously in India, since it adopted liberalization policy and it started moving towards economic reforms and development. It must be observed that, while Foreign Direct Investment is the scale of measuring growth of MNCs, these multinationals also expand by practicing non-equity arrangements for instance subcontracting, joint ventures, franchising, technology transfer agreements and research consortiums. Since, accurate statistics is not available for these indicators, as such, the focus of MNCs activity often limits to the level of foreign direct investment (UNCTAD 2010).

2. The Economic Benefits of Globalization and Liberalization to India

The impacts of liberalization and subsequent growth of international business on India’s economy proved to be overwhelmingly positive, and also confirmed by statistics. During the economic crisis of 1991, the growth rate of that year was 1.2%. Three years later, it recorded a growth rate of 5.5%, and subsequently economy took off in 1995 and 1996, realizing growth rate of 7.1% and 7.6% respectively. Since, 1994, Indian economy has been growing at an average of 7.1% annually, projecting India among the world’s leading countries in economic growth.  However, India’s population growth rate is higher; therefore, it is essential to look at the GNP figures. In the year 1992, real GNP per capita, for purchasing power, was $1,140 which in the year 1997 subsequently increased to $1.400 and by the end of 1998, it stood at $1500.  Hence, India’s high economic growth has been large enough to balance the population growth, as well as living standards. Some other key statistics shows India’s death rate decline from 9 per 1000 in 1991 to 8.0 per 1000 in 1996, and life expectancy increased from 55.0 to 64.5 in 1996. The question that still remains is to what extent improvements in India’s economic situation can be credited to MNCs; and the aim of this paper is to analyze such factors from high perspective. The advantages and benefits which MNCs bring to host countries have transformed India into a rapidly developing economy and steadily helping its economy to grow constantly. Thus, MNCs plays a vital role in the economic development, which India is experiencing over the past two decades. However, instead of speculating the credit of India’s economic success entirely because of MNCs, the paper will try to emphasize on tangible and direct benefits that India has achieved through MNCs (Kumar 2009).

3. Direct Benefits to India from the Increasing Presence of MNCs

The rising trend of MNCs’ presence in India is that, approximately 10,000 of Indians annually take up middle and senior level managerial jobs elsewhere in Europe and Asia.  With the expansion of operations all over Asia, MNCs experience deficit of skilled and qualified people for managerial jobs, and as India’s business schools have earned recognition among the world’s best business schools, they have become a valued source for MNC’s for filling the talent gap. The supporting factor for this is India’s streamlined education system, enhanced and above average English language skills, and finally its business students, who are quite enterprising in their careers. The positive impacts this has on India include enhanced income the Indians receive in general, since most of their earning would be routed to India as repatriated earnings, and would accelerate the economy (World Investment Report 2011).

Another rising trend that resulted from increasing inflow of FDI is that instead of India’s Union government inviting FDI and then distributing inflows to the states, now the initiative rests with the state governments, and, thus, attracting foreign investments has become a top priority for all states. In fact, because of such policy, Indian states, such as Bangalore, Pune, Noida and Gurgaon have become the hub of MNC’s activities and gained international recognition in the short period. Now, the result is that all states are competing with each other to attract large FDI, and this competition has led to the abolishment of many bureaucratic delays and battle of incentives. Now, the benefits do not limit to just increasing FDI, but also state governments are free to select the industries in which they prefer private investments, maintaining the nation’s benefit as a prime objective. Hence, FDI is more efficiently allocated, as these states understand better than Union government regarding the areas of the FDI investments, people of state can receive the maximum benefits (Braasch 1999).

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In India, middle class people view MNCs as a vehicle of economic growth. Middle class size estimation has increased dramatically, and the modest statistics estimates that more than 25% of Indian population can afford durable goods, such as cars and household appliances. Here, the role of MNCs obviously is to supply Indian consumer with the international brand name which society wants.  The economic benefit is that Indian consumption is constantly expanding rather than is restricted as it was earlier, when domestic Indian manufacturers were holding the monopoly in the markets. Now, with changing scenario consumers have an opportunity, to select better products at competitive prices manufactured by latest technologies, this means that the consumer has gained satisfaction, and utility with the entrance of MNCs in India (Morrison 2007).

This factor relates to the fact is that MNCs depend on India as a source of input. India possesses a massive reservoir of skilled, trained and relatively less expensive labor, for instance larger supply of unskilled workers, as well as low cost engineering talent.  Besides this, India also offers MNCs with other inputs, such as intermediate producers. In fact, Japanese MNCs, such as Toyota and Mitsubishi, depend on local producers for 85% of their inputs when compared to 50% in China. Hence, MNCs are more powerful and effective in accelerating India’s domestic production. Some of the examples of MNCs that benefit India are McDonald, Enron, Microsoft, Toyota, Ford Motor Company to name a few. The operation strategy of these companies is to source the maximum input from Indian economy that will mutually benefit to them, as well as Indian economy (Sinha 2004).

4. Future Strategic Direction for Indian Economy to Sustain Economic Growth

With the massive inflow of FDI and World’s top organizations establishing their base in India, MNCs, besides being an economic vehicle of growth, have brought significant disadvantages to Indian economy.  These disadvantages are in a shape of the strong force opposing to the expansion of foreign direct investments in India.  The first criticism that usually attracts is that MNCs introduce inappropriate products to India. Here, the recommendation is that nondurable products, such as food stuff, should be better left for domestic market that well understands Indian tastes and needs. In the past, McDonald, KFC, Pepsi, Coca cola and Pizza Hut experienced strong protests which support this argument. Connected to the significance of brand names is the criticism that these MNCs often blanket India’s domestic industries. It holds true that these branded products are most popular within Indian consumers, and, in fact, the top ten selling brands in 18 categories of consumer product capture a market share of 60%. It results in MNCs’ adopting a non-price method of competition, which demoralize domestic companies and, thus, these firms are often unable to compete: this factor also increases the restriction to the entry of new companies. The outcome of such practices is that oligopolistic or monopolistic market structure often exists. The negative impact, which it has on consumers, is that prices tend to accelerate more than normal, and MNCs reap the gains in terms of higher profits repatriated. For neutralizing this effect, economists recommend that is it is beneficial for Indian economy to eliminate those inefficient manufacturers, which have been under the protection from the competition for a long time, as this will lead in the long run to productivity and ultimately lower prices for consumers. Another criticism which attracts recommendation concerns the child labor that hampers India’s economic growth. According to ILO, India alone has 50 millions of child labor exploitation. This, in fact, is a serious threat to Indian economy indirectly, as children are the nation’s wealth and its future (Bhandari 2009).

Despite the availability of the sufficient evidence which supports that MNCs are successful in bringing significant benefits to India, however, two key problems associated with FDI in India are: the limited strength of FDI and the limited growth of foreign direct investments in India.  The limited strength of FDI relies on the fact that MNCs are less export oriented than other countries. For instance, Japanese MNCs sold the majority of their products in India. Whereas in China, the majority of goods produced are for exports. This factor undoubtedly offers monopolistic profits to MNCs, but, on the other hand, these MNCs are unable to accomplish the vital expectations of their FDI, which are to integrate Indian economy into globalization. In order to respond to this tendency, India must open its doors by providing more benefits for export oriented foreign investors (Prahalad 2005).

The next key limitation of FDI in India is that growth of FDI is not substantially enough when compared to other economies. The straightforward reason is that Indian government offers fewer incentives to MNCs, and this factor further discourages foreign investments. The well-known fact remains that success of the Southeast Asian economies, such as China, directly links to these factors of incentives. Another reason related to the expansion of FDI is the problem of Indian politics; and bureaucracy as Indian coalition governments are weak, and often change their policies over the importance of FDI. Foreign companies need clear guidelines, but politically framed rules are more and less vague. This transforms into a lack of the defined policy on FDI that further discourages MNCs.  Hence, for sustaining economic growth, India needs a further review of its economic policies of liberalization and offer maximum incentives to foreign investors for attracting large amount of FDI, and restructuring of its foreign investment policies will enable India to become more economically strong and healthy (Kumar 2004).


India shows the significant improvement towards economic development, yet serious problems remain, the most critical of which is that more than 270 million Indians live below the poverty line. Hence, the advantages of liberalization and dramatically growth of foreign direct investments could not positively reap the large benefits for Indian population. The first step that needs to be followed is that India has to stop applying its dreary performance as a scale of measuring its economy, and compare itself with southeast developing nations. Secondly, India has to convince the world that it is serious about liberalization and would not stop reforms even in case of political instability. The fact remains that for realizing India’s potential, liberalization and economic reforms must continue.

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