India s relative Prospects for Global Development through FDI

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1 India s relative Prospects for Global Development through FDI ABSTRACT -Prof. Rahul Bishnoi Foreign Direct Investment is an investment directly into the economy of a country by another country. It is also known as the net inflows of an investment in a country s national accounts. Basically speaking, it would be part of the investments (I) in the GDP equation: Y=C+I+G+(X-M). This paper would discuss the expectations from the BRIC countries (Brazil, Russia, India and China) in relation to the rest of the trading world in terms of their standings. The goal is to suggest ways for these countries to align their interest with the global opportunities and live up to their expectations. KEYWORDS: FDI & GDP FDI can be achieved in a variety of ways. It can be done by either expanding existing business operations in that country or by purchasing a business in the chosen target country. An exampleis Best Buy that has done both in China. First they acquired a large part in the fourth largest appliance store in China, Jiangsu Five Star Appliance, in 2006 and then opened the first Best Buy in China, in Another way is through a joint venture with some other investor or enterprise. In other words two companies can enter into a partnership together and penetrate a foreign market rather than going alone. In this fashion, the risk is split between the two enterprises. Another way is through a merger whereby a company in one country merges with another on foreign soil, together resulting in the two getting their hands on an additional market. There are numerous reasons that a business or firm would be interested in foreign direct investment. One reason is to take advantage of the given country s wages in which the business would not have to pay as high of a wage as it would somewhere else. Another reason is to receive tax exemptions that a country offers as an incentive besides being exempt from having to pay a tariff. A business can take advantage of low corporate tax and individual tax rates through FDI. Also a firm may be able to avoid regulations that it may otherwise face. Additional support in research and development in a foreign country may also provide icing on the cake. A business may even be able to take advantage of special economic zones that tend to be more free-market-oriented than in a typical country. Another advantage is in taking advantage of export processing zones which allows a company to land, handle, manufacture or reconfigure, and export without any intervention. 20 IJHPD Vol. 2 No. 2 July - Dec. 2013

2 Sometimes a company can take advantage of a bonded warehouse which would allow a company to store goods or manufacture them without having to worry about a payment of duty. Currently the country known as the largest recipient of foreign direct investments is the U.S. This is due to the U.S. fundamentally having lower barriers and an economy pretty much open to FDI. In 2010 alone it added up to $194 billion. Countries such as Canada, Switzerland, the Netherlands, United Kingdom, Luxembourg, Japan, Germany, and France made up 84% of the foreign direct investment in the U.S. Research has shown that foreigners from less developed financial markets hold greater shares of their investments in the United States. They also get more investments in equity and bond markets from countries that have greater trade with the U.S. and fewer capital controls.the chart below shows the United States inflows over the past 10 years. Second to the U.S. as a recipient of Foreign Direct Investment is China. Just in the first half of 2012, China had received more FDI than the United States. Even though foreign direct investment in China fell in 2009 due to the financial crisis it was able to rebound in 2010 and reached an impressive figure of $185 billion. IJHPD Vol. 2 No. 2 July - Dec

3 In 1990India had less than one billion dollars of foreign direct investment. Prior to 2010 a survey was done that projected India as being the second most important destination for multinational corporations for Among the leading sources of foreign direct investment were Mauritius, Singapore, the United States, and the United Kingdom. However the reality had not lived up to its lofty expectations as can be seen from the following chart. Due to a variety of political and financial reasons in the domestic economy, the net inflow gains reversed themselves in 2008 and had not climbed back up even by the latest readings. Regardless, in July of 2012, the United Nations Conference on Trade and Developments listed the above countries as the top 3 nations to invest in, that is China, United States and India in that order. Also it predicted that much of the money estimated to be spent in foreign direct investment will also be allocated to frontier and developing economies in the Middle East and Africa. Also East and South East Asia were voted as extremely important to multinational companies in a given survey. The top five would include Indonesia and Brazil on that list. Brazil also can also be viewed as a possible top 3 prospect in coming years. An important fact that can help is that it will be the host country for the FIFA World Cup in 2014 and the Summer Olympics in Though such events do not necessarily guarantee that it will prosper there is research that does support it. From the Olympics standpoint, countries that did not do well were those that were already suffering at the time but countries that were economically flourishing benefitted even more. The reward seems to be much higher than the risk because it is not just one major event but two within the span of 2 years for Brazil. 22 IJHPD Vol. 2 No. 2 July - Dec. 2013

4 Also with the increased tourism, the visitors may end up investing in having a vacation home in Brazil. As a result, stores like Best Buy or Wal-Mart should consider foreign direct investment so those new homeowners have a familiar shopping experience to look forward to rather than trying to figure out where they should shop. Another country with the same situation as Brazil is Russia. It will be the host of the Winter Olympics in 2014 and the FIFA World Cup in The only problem is the fact that it is hard to envision Russia as the same potential investment when tourists tend to gravitate to warmer weather for vacation homes in general. Even so Russia is still predicted as a rising FDI option and, if the pattern holds true, the Winter Olympics and the FIFA World Cup will only further that goal. IJHPD Vol. 2 No. 2 July - Dec

5 Where there are countries with high foreign direct investment potential there are countries with low foreign direct investment potential. Among these countries are Ethiopia, the Philippines, and Thailand. The main reason that these countries are such low prospects is because of their restricted economies. Another relevant topic for discussion is those countries that engage in Foreign Direct Investment outflows. The top three countries with a high percentage of foreign direct investment net outflows to GDP as of 2011, are Luxembourg, Mauritus, and Hong Kong SAR China. Luxembourg spent 486.9% of their GDP as FDI, which means that they sent out a net out flow of nearly 5 times their GDP. Mauritus spent a net outflow of 215.2% of GDP, which means they spent a net outflow of more than 2 times their GDP. And lastly we have Hong Kong SAR, China who spent a net outflow of 33.5% of their GDP. The following graphs show how their net outflows fluctuated over the years. Many companies have made foreign direct investments across the world, thus integrating themselves into various markets. Some big names from the USA include Best Buy, Wal-Mart, Starbucks, and McDonald s. In exploring we find Best Buy as a luxury item store that has made a name for itself alongwith Geek Squad. It opened its first superstore in Burnsville, Minnesota and quickly made its first foreign direct investment move was in 2001 when it acquired Future Shop Ltd in Canada. As of today Best Buy has opened well over 1000 stores and has expanded internationally to countries such as Canada, China, Mexico, the United Kingdom, parts of Europe, and many others. Wal-Mart first incorporated in 1969 and had 38 stores operating in Arkansas. It expanded internationally into Canada when it acquired 122 stores of Woolco Corporation. Currently Wal-Mart has 4,263 international stores in 15 different countries such as Canada, Mexico, Brazil, and India. 24 IJHPD Vol. 2 No. 2 July - Dec. 2013

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7 Another big company that has expanded internationally is Mcdonald s. It opened its first store in California in 1940 and its first overseas store in 1967 in Canada. McDonald s has 34,000 restaurants worldwide and is located in 119 different countries. It has locations that include Japan, Germany, Brazil, and Hong Kong. Interestingly, though it has many locations it does not necessarily have the same menu. McDonald s adjustsits menu, if needed, to fit the country s culture. For example in India they have a Maharaja Mac that is made of chicken, although originally it was lamb, due to religious views on eating beef. Starbucks is another big foreign direct investor. It opened its first store in 1971 in Seattle, Washington. Since then it has branched out to over 20,000 stores in 61 different countries. The first country Starbucks went to was Canada by opening a store in Vancouver. Since then it has invested in countries including Japan, the United Kingdom, China, South Korea, Mexico, Taiwan, the Philippines, and Thailand. As can be seen, many companies choose foreign direct investment as a means of growing exponentially. By doing so they integrate themselves into different markets and reap greater benefits. Plus it allows them to become more innovative with their international products, besides giving them a larger sample size to try forimproving their sales. It is ironic that India has not lived up to its expectations in international markets as per their recent predictions. Forecasters had seen the potential with industrial giants like Tata Motors acquiring Jaguar and Rolls Royce companies. Many Indians are currently doing exceptionally well abroad with Multinational giants like Pepsico, Citigroup, Mastercard, Deutschebank and the like. The Indian expatriates are much revered in the research fields too where they hold prestigious positions at various American universities where they are training future industrialists and leaders. Now it is the turn of the Indian politicians to stop bickering with their partisan viewpoints about FDI in India and see the light at the end of the tunnel. It shows great promise for world trade and benefits for India as well. -Prof. Rahul Bishnoi Professor Frank G. Zarb School of Bussiness Hofstra University, New York, USA 26 IJHPD Vol. 2 No. 2 July - Dec. 2013