FOREIGN INVESTMENT AND EXPORT PERFORMANCE OF INDIAN TEXTILE AND CLOTHING INDUSTRY IN POST QUOTA REGIME

Transcription

1 Indian Journal of Economics & Business, Vol. 15, No. 2, (2016) : FOREIGN INVESTMENT AND EXPORT PERFORMANCE OF INDIAN TEXTILE AND CLOTHING INDUSTRY IN POST QUOTA REGIME MEETA MATHUR * AND ANITA MEENA * Abstract The liberalization of foreign investment regulations of textile and clothing industry has made India one of the fastest growing destinations for FDI inflows.india has most liberal and transparent policies in Foreign Direct Investment (FDI) amongst emerging developing countries. India is a promising destination for FDI in the textile sector.with consistent growth performance and abundant cheap skilled manpower, there are enormous opportunities both for domestic and foreign investors to make investments in textile sector in India. FDI provides market access for developing country producers to developed country markets and the opportunity to upgrade and add additional value through knowledge spillovers and technology transfer. The present paper examines the role of foreign investments on export performance of Indian textile and Clothing industry in post MFA regime and also explores future potential for foreign investment.the paper is divided into three sections. Section Ideals with introduction and review of literature. Section II examines the impact of FDI on export performance of Indian textile and clothing industry in post MFA regime. Section IIIexplores the future potential for foreign investment in Indian textile and clothing industry and deals with conclusion and policy prescriptions. Keywords: FDI, Market Access, Export Performance, MFA I. INTRODUCTION Fast growing economies may not be able to support the fast growth with domestic capital alone and hence there is a need to attract FDI particularly for those sectors that contribute maximum to the economic growth like the textile sector because the domestic capital may not be sufficient to enhance the production capacity and modernize the entire system. Developing Countries like India can be complacent with attracting and absorbing FDI and especially in the textile sector, the need for modern machinery is very well founded. Since exports are considered as an engine of economic growth, an empirical assessment of the role of FDI in a country s export performance is important. FDI promotes exports of a host nation by helping transfer * Department of Economics, University of Rajasthan, Jaipur , India, meetamathur72@yahoo.com, anumeena.eco@gmail.com

2 386 Meeta Mathur and Anita Meena of technology, facilitating access to new and large foreign markets and providing training to the local workforce and upgrading technical and management skills. At present, in India, 100% FDI is allowed in the textile sector under the automatic route. FDI in sectors to the extent permitted under automatic route does not require any prior approval either by the Government of India or Reserve Bank of India (RBI). The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inwardremittance. The industry (including dyed and printed) attracted Foreign Direct Investment (FDI) worth US$ 1.77 billion during April 2000 to September The Govt. has taken various initiatives over the past few years for FDI inflows. Launching oftechnology Mission on Cotton in order to provide quality cotton raw materials to the manufactures at reasonable price, setting up of The Technology Upgradation Fund Scheme (TUFS) in order to facilitate the technological advancement in the textile industry, setting up of The Scheme for Integrated Textile Park (SITP) in order to provide world standard infrastructure facilities and abolition of the reservation for the small scaled units are some of the initiatives. REVIEW OF LITERATURE Blomstrom et al. (2000) analyze the impact of FDI on host economy. The study examines some determinants of MNC strategies. It concludes that the technology imports of MNC affiliates increase with the increased competition and education level in the host market. Keane and willem (2008) examines the role of textile and clothing industries in growth and development strategies in developing countries. The studyreviews economic and social aspects of Indian textile industry. The report of NCAER (2009) analyzes the prospects of garment sector. It examines that dereservation of garment sector, introduction of TUFS, lowering of customs duties and MFA phase out are the major policy changes responsible for bringing changes in the garment sector. The global slowdown has also impacted the prospects of this sector. Prasad (1997) analyzes the competitiveness of Indian textile exports.the studyexamines that in the long run, competitiveness depends upon India s technological capacity and capacity of marketing its product in a relatively more free trade environment.verma (2002) examines competitive performance of India in the markets of EU and USA. The main focus is on the cotton textile and apparel. Yoganandan et al. (2013) review researches on the factors affecting the export performance of textile industry. It highlights that most of the studies have been carried out on establishing the relationship between GDP, exchange rate, labour, capital (FDI) and technology with export performance of textile industry. Most of the researchers found a positive relationship between these variables and textile exports. II. FOREIGN DIRECT INVESTMENT IN INDIAN TEXTILE AND CLOTHING INDUSTRY The simulative effects of FDI on exports of the host country derive from the additional capital, technology, and managerial know-how the multinational corporations

3 Foreign Investment and Export Performance of Indian Textile (MNCs) bring with them along with access to global, regional, and especially homecountry markets (UNCTAD, 2002). FDI promotes exports by facilitating India access to new and larger foreign markets.this involves foreign affiliates privileged access to not only MNCs international production systemsbut also MNCs intra-firm markets and access to MNCs customers in global, regional and home-country markets.export-oriented foreign affiliates provide training for the local workforce and upgradetechnical and managerial skills that benefit the Indian exports. This is especially true forexport-oriented investments in advanced technological capabilities.the positive role of FDI in India s exports may be categorised in terms of direct and indirect effects. The direct effects refer to exports by foreign affiliates themselves. The spill overs of FDI on export activities of local firms make up the indirect effects. FDI enhances India s manufacturing exports through spill over effects on local firms exporting activities. For instance, local firms increase their exports by observing the export activities of foreign affiliates ( learning by watching ) and by making use of the infrastructure of transport, communications and financial services that develops to support those activities. The second spill over effect involves the influence of FDI on the competitiveness of domestic firms exports and the diffusion of new technologies. By bringing their advanced product-process technology, management, and marketing competence, MNCs may increase competition in the Indian markets and force local firms to adopt more efficient methods. The third spill overs are related to the linkage between foreign and local firms. The role of foreign affiliates in India s textile exports suggest that FDI has contributed substantially in India s textile exports. Export function may be specified simply as: X i = ƒ (K if, K id, W i, SE i ) (1) Where X i is textile export volume ofi th industry, K i F and K i D are foreign capital (i.e. FDI) and domestic capital in the industry respectively, W represents wage rate, and SE measures scale economies. Domestic capital has significant influence on the capability and competitiveness of an industry and therefore its export performance. Thus more capital can enhance the industry s productivity and exporting ability. A negative link between exports and labour costs (W) can be suggested by the conventional factor-proportion model, from which India is expected to export labor-intensive productsbecause it has abundant labour. The new trade theory suggests scale economies at the firm-level as a determinant of exports. Large firms tend to export more since they have strong incentives to take advantages of scale economies and more resources to overcome additional difficulties in entering foreign markets, such as collecting market information, launching overseas sales-promoting campaigns and adapting products to foreign markets. Econometric Specification can be given by X i = K if + 2 K id + 3 W i + 4 SE i + i (2)

4 388 Meeta Mathur and Anita Meena Where 1, 2, 3 and 4 are the elasticities of exports with respect to FDI, domestic capital, laborcosts and scale economies.all variables are taken in form of natural logarithmto reduce possible heteroscedasticity. Exports (X) are measured by total export value in the textile industry, foreign capital stock or FDI stock (K F ) is current value of total foreign invested capital stock and domestic capital stock (K D ) is current value of total domestic capital formation. Wage rate (W) is proxiedby the ratio of total wages to the number of employees in the industry. The average firm size (the ratio of gross output value of the industry to the total number of firms in the industry) is taken as aproxy for economies of scale (SE). Table 1 Major Determinants of Textile Export from to (Values in Rs. Crore) Year Total Textile Gross Capital FDI Wage Rate Scale Economies Exports (X) Formation (K D ) (K F ) (W) (SE) Source: Annual Survey of Industries, Ministry of Statistics and Programme Implementation On the basis of collinearity Statistics through SPSS, it has been found that the problem of multicollinearity exists for Wage rateand Scale Economies because for these two variables VIF>10. Hence to remove the multicollinearity, one variable out of these two will have to be removed. Wage rate has been removed in order to solve the problem of multicollinearity. Descriptive Statistics Mean Std. Deviation N VAR VAR VAR VAR

5 Foreign Investment and Export Performance of Indian Textile Correlations VAR00001 VAR00002 VAR00003 VAR00004 Pearson VAR Correlation VAR VAR VAR Sig. (1-tailed) VAR VAR VAR VAR N VAR VAR VAR VAR Model Summary b Model R R Square Adjusted R Std. Error of the Durbin- Square Estimate Watson a a. Predictors: (Constant), VAR00002, VAR00003, VAR00004 b. Dependent Variable: VAR00001 ANOVA a Model Sum of Squares df Mean Square F Sig. 1 Regression b Residual Total b. Predictors: (Constant), VAR00002, VAR00003, VAR00004 Coefficients a Model Unstandardized Standar- t Sig. Collinearity Coefficients dized Statistics Coefficients B Std. Error Beta Tolerance VIF 1 (Constant) VAR VAR VAR

6 390 Meeta Mathur and Anita Meena CollinearityDiagnostics a Model Dimension Eigenvalue Condition Variance Proportions Index (Constant) VAR00002 VAR00003 VAR Residuals Statistics a Minimum Maximum Mean Std. Deviation N Predicted Value Residual Std. Predicted Value Std. Residual Table 1 shows major determinants (Gross Capital Formation, FDI and Scale Economies) of textile export from to We have applied Multiple Linear Regression Model to test whether the overall fit of the model is good or not. The results show that mean and standard deviation for Textile Export, Gross Capital Formation, FDI and Scale Economies are , ; , ; , ; 14.24, 3.152respectively. There is low degree of positive correlation (.094) between Textile Exports and Gross Capital Formation, moderate degree of positive correlation (.680) between Textile Exports and FDIand a high degree of positive correlation (.928) betweentextile Exports and Scale Economies respectively. Value of R (.939) indicates a good level of prediction of Textile Exports. The coefficient of determination or R 2 value shows that 88.1% variation in Textile Exports is explained by Gross Capital Formation, FDI and Scale Economies. Since d L <d<d U it means that the test for positive autocorrelation at significance Q, is inconclusive. The obtained F value (F=12.383) is significant at 5% level of significance. It indicates that all the regression coefficients are significantly different from zero or the regression model is a good fit of the data. III. RESULTS AND CONCLUSION Future potential of Foreign Capital in Indian Textile and Clothing Industry It is found that Textile Exports mainly depend on Gross capital Formation, FDI and Scale Economies. Low degree of positive correlation between Textile Exports and Gross Capital Formation, moderate degree of positive correlation between

7 Foreign Investment and Export Performance of Indian Textile Textile Exports and FDI and a high degree of positive correlation between Textile Exports and Scale Economies have been found.a good level of prediction of Textile Exports has also been found. 88.1% variation in Textile Exports is explained by Gross Capital Formation, FDI and Scale Economies. The regression model is a good fit of the data. The results indicate that FDI has a positive impact on India s exports. Its effects are much larger than those of domestic capital. National policies and host governments bargaining power relative to multinational corporations matter for attracting export oriented FDI and for reaping its full benefits for exports. References Bhatia S. (1997), Indian Garments Industry in the Post- MFA Period, Occasional Paper No.7, Indian Institute of Foreign Trade, New Delhi. Blomstrom M., Kokko A. et al. (2000), Foreign Direct Investment: Firm and Host Country Strategies, Macmillan Press Ltd., Great Britain. Chatterjee S., Mohan R. (1993), India s Garment Exports, Economic and Political Weekly, Volume No.28, Issue 35, 1993, pp Hayashi M. (2007), Trade in Textiles and Clothing: Assuring Development Gains in a Rapidly Changing Environment, Paper Prepared under UNCTAD series on Assuring Developing Gains from the International Trading System and Trade Negotiations, UNCTAD/DITC/ TNCD/2006/9. Keane J., Willem D. (2008), The role of textile and clothing industries in growth and development strategies, Investment and Growth Programme, Overseas Development Institute. NCAER (2009), Assessing the Prospects for India s Textile and Clothing Sector, Ministry of Textiles/Ministry of Commerce and Industry/CITI/2009. Prasad H. (1997), India s Competitiveness in Export of Garments in the MFA Phase-Out and post MFA phase out period, Occasional Paper No.10, Indian Institute of Foreign Trade. Spinanger D. (1998), Textiles Beyond the MFA Phase-Out, Working Paper No. 13/98, Centre for the Study of Globalization and Regionalization (CSGR), United Kingdom. Tendulkar S. (2000), Indian Export and Economic Growth Performance in Asian Perspective, Working Paper No.54, Indian Council for Research on International Economic Relations, New Delhi. Verma S. (2002), Export Competitiveness of Indian Textile and Garment Industry, Working Paper No.94, Indian Council for Research on International Economic Relations, New Delhi. Yoganandan G. et al. (2013), Factors Affecting the Export Performance of Textile Industry in Developing Countries-a Review of Literature, International Journal of Commerce, Business and Management, Volume No. 2, Issue No.4, 2013, pp. No