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Tuesday, Nov 23, 2004

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Ensuring sizable FDI flows — Matter of good homework, concerted action

Bhanoji Rao

The soon-to-be-set-up Investment Commission should lose no time in putting in place strategic initiatives that push-start the investment-growth-investment cycle. Going beyond such predictable measures as tax concessions, it must detail a work-plan that prioritises thorough homework before meetings with company CEOs and involves the best efforts of the diplomatic corps in bringing economic benefits to the country, says Bhanoji Rao.

A FORTNIGHT ago, this column applauded the decision of the Central Government to set up the Investment Commission and, in particular, pointed out two key attractions for investors: India's market size and market growth.

Raising the growth rate requires substantial investment, as is clear from the virtuous circle of investment leading to growth, and growth leading to investment. To push-start the virtuous circle, however, some strategic initiatives must be put in place as soon as possible, and should be an integral part of the working philosophy and work-plan of the proposed Commission.

At the outset, one must be clear that FDI flow cannot be simply and favourably influenced merely by using such outdated carrots as tax concessions, which are easy to implement, difficult to get rid of and have little impact on the quantum of FDI inflow.

In fact, some nations in India's immediate neighbourhood were good at providing incentives; yet, their record of FDI inflow was dismal. Incentives help, but for solid investment inflows, one must go beyond.

A little away from India, to its South-East, a relatively small nation has done very well from the mid-1960s in getting every conceivable MNC to invest there. That country's policy makers took a clear decision to have sizable FDI flows at a time when it was not the `in thing'.

They took steps over and above the usual tax incentives. They put in place a government that is productive and efficient and ensured that an investor wastes little time in unproductive activities, such as meeting one leader after the other, and one officer after the other.

The country has several state enterprises that are the envy of free-marketers. MNCs from outside are delighted to partner with them, if necessary, and buy products and services from them. Their leaders routinely boast of zero tolerance for corruption, and punishing the corrupt is a matter of days, not years or decades.

Significantly, that small nation's trade unions inculcated discipline in the workforce in order to ensure good living standards not only through wages and profit-sharing, but also through the operation of beneficial enterprises — in retailing and insurance, for instance — set up and managed by an apex body of the unions.

The proposed Investment Commission symbolises the growing conviction that a pro-active approach is needed to obtain $20-$30 billion in FDI funds.

The pro-active approach is indeed the key for success in attracting FDI, not only in volume terms, but also in quality, backward and forward linkages and the promotion of employment and exports. The philosophy of the Commission must be to do all that is needed in a cost-effective manner and to shy away from unwanted and undesirable FDI.

For instance, substantial amounts have been spent by various State-level leaders since the early 1990s to promote their respective States as great destinations for foreign investment. Had their efforts been successful, FDI inflows should have recorded a quantum jump. This has not happened.

Leaders are welcome to go abroad; they have won the mandate from the people; and they deserve a couple of trips abroad. But it is best to call it a part of the perks of ministers and senior officials. They need not call it investment promotion when the real purpose is a shopping and sightseeing spree.

Much preparation and homework are needed before taking a trip abroad in connection with investment promotion. E

xpecting diplomats to arrange mega meetings in just days and hours for investment promotion teams, or expecting results from eloquent impromptu speeches from our `bhadralok' is wishful thinking.

The best and most operationally efficient strategy would be for leaders and officials going abroad to have meetings on a one-on-one basis (with just one or two aides taking notes) with the CEOs of major companies. Based, of course, on thorough homework on the companies concerned, their FDI allocations and commitments, investment plans, product mix, their importance for India, the names and CVs of the CEOs, and such other information as would enable purposeful interaction. Mobilising the diplomatic corps and assigning an active FDI promotion role to them must be part of the concerted action.

At present, the diplomatic community has no direct, visible and structured involvement in attracting FDI. This must change and diplomats must generate economic benefits for the country.

To play the role actively and be a link to the Investment Commission, all senior diplomats — especially those accredited to major investment sending countries, such as the US, Canada and most countries in Europe — must have proper budgets for the activity and it could also mean upgradation of the infrastructure (hard and soft) at the Indian missions.

Upgradation in terms of infrastructure could take the form of having state-of-the-art meeting facilities, sound commercial intelligence-gathering, building data bases on top investors and investment channels, and so on. The idea is not to allow Parkinson's Law to take hold and no new units/cells/divisions are to be allowed. The Ambassador or High Commissioner must be the one responsible, and the activity must not be delegated.

The aim should be to promote routine informal and formal interactions between the diplomats and the top executives of the manufacturing, trading and service MNCs.

Such meetings can be an effective vehicle to fill information gaps and perception inadequacies about the investment and trading climate in India.

The Investment Commission needs to be selective too. One must not seek FDI from all and sundry. Most notably, we must not indiscriminately seek the kind of FDI that promotes and abets corruption. We have enough of that on our own and we need not seek external help to augment it.

Transparency International, though well known for its Corruption Perception Index, also publishes, from time to time, a Bribe Payers Index.

The BPI currently available for 2002 is based on surveys relating to the propensity of companies from leading exporting countries to pay bribes to senior public officials in the surveyed emerging market countries.

The BPI is available for 21 countries and in terms of propensity to pay bribes, the rank order is Russia in the top spot, China second, Taiwan third and South Korea fourth. Italy occupies the fifth position, while Malaysia and Hong Kong share the next spot.

On a scale of zero to 10, with a high score indicating least propensity to pay bribes, all the aforementioned countries have scores less than 5. Those with scores above 5, in descending order of the scores are Australia, Sweden, Switzerland, Austria, Canada, Netherlands, Belgium, the United Kingdom, Singapore, Germany, Spain, France, the US and Japan.

Most MNCs are located in these countries and, hence, it makes sense for the Investment Commission to zero in on those countries.

(The author, formerly with the World Bank and the National University of Singapore, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be contacted at

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