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K. Ramesh

FOREIGN direct investment as an important factor of the economy cannot be disputed, although it has become fashionable for many experts to make endless comparison with China, being the significant beneficiary of FDI in the region and, that India too should learn to embrace FDI, without which growth, exports, technology transfer and job creation would take a beating. In this regard, it may be worthwhile to consider the following.

The theory that FDI is an essential ingredient for transfer technology is not fully true. Multinational and other global firms, with deep pockets for R&D spending and sound legal protection for their IPRs, would continue to retain the competitive advantage on cutting-edge technologies or exploit them through their wholly-owned subsidiaries. This is evident from such firms lobbying for strong protection of their IPRs under TRIPS. Technology transfer can be achieved through such alternative structures as technical collaboration arrangements, without equity participation.

The notion that equity has no cost is a myth. Unlike debt, equity does not have a fixed cost, though, in the longer term, the dividend and capital gains would be a definite — sometimes costing heavily as debt.

The other aspect of job creation also seems to be an exaggerated argument favouring the FDI. The experience on FDI, world over, suggests that most of it is through mergers and acquisition of firms, rather than funding greenfield projects. Additionally, such acquisitions would inevitably involve pruning existing labour, rendered redundant through automation and cost-cutting, consistent with industry practice globally. There is no direct co-relation available as to how much FDI has contributed incrementally to exports.

A recent article The Great Sale of China by a Chinese academic in a business magazine, makes interesting reading. The author is emphatic that FDI has resulted in acquiring some of blue-chips firms in China, which are starved for funds, even while the Chinese firms are concentrating on low-end products for their exports. With banks steeped in non-performing assets, bleeding state-owned enterprises, highly subsided industries, excessive dependence of FDI, with the sole object of increasing exports could be devastating in the coming years. The author compares the status with India to confirm that Indian business houses such as Infosys, Wipro, Ranbaxy, and so on, are at least successful in creating world-class Indian MNCs. Finally, the FDI Policy of the Government of India has come a full circle. Starting from negative list, over to the selective list, it has virtually now ended up in promoting FDI in all sectors. Neither the freeing of funds to 100 per cent has dramatically increased the quantum of funds flow into India, nor has the reduction of the quantum had a dramatic negative impact, as seen in the last one year. Surprisingly, the economy seems to grow, even while FDI flows are dipping!

FDI, no doubt, can play a vital role, adding marginally to local resources, but the country should primarily depend on both domestic capital and demand to sustain its long-term interests.

(The author is a Chennai-based practising chartered accountant and advocate.)

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