Introduction and Research Design

Transcription

1 Introduction and Research Design

2 CHAPTER I INTRODUCTION AND RESEARCH DESIGN 1.1 Introduction Foreign Direct Investment (FDI) is the life blood of International Business and the barometer of a nation s prosperity. FDI has played a phenomenal role in the process of globalization during the past two decades and it goes beyond simply easing financial constraints; it is viewed as an important means of integrating the economies with international markets as well. FDI generates benefits for both host country and the investing company or the investor. Host country is benefitted directly through bringing in non-debt-creating foreign capital resources, improving foreign exchange earnings & creating new employment; and indirectly through spillover s like transfers of advanced technologies, operational & managerial skill, human capital enhancement etc., The investor is benefitted by acquiring vast market potential, cheap & skilled manpower, tax concessions and subsidies, exploiting natural resources etc., Although the benefits of FDI are real they are not automatic and the magnitude of these benefits may also vary with respect to factors like: the country s developmental stage, its absorption capacity and the required sector or pattern of investment. For example, weak higher education proportions in a country will not be able to enjoy the benefits of knowledge spillovers and lack of technology readiness may lead to non-absorption of technology spillovers. However, in general the net positive impacts generated by FDI to the host country are truly inspiring. Over the period FDI has gained remarkable importance and wide recognition as a stimulant of economic growth of a country in various forms. Understanding the need and benefits of FDI inflows, countries have started making amendments in their policies that would enhance the Foreign Direct Investment inflows as well as the development benefits of such investment. Therefore almost all countries contemplating towards economic growth are keen in framing policies for attracting more FDI inflows, through liberalizing their policies, removing restrictions, creating better business environment, easing controls on foreign direct investments entry procedures, providing tax incentives and subsidies and undertaking more proactive measures. 1

3 Though the flows of FDI have been prevailing in the world throughout the past six decades, the volume, location and composition of FDI flows have changed markedly over the sands of time. During the past two decades FDI plays a very significant role in the global economy. The total stock of FDI increased from 8% of world GDP in 1990 to 26% in 2006 and peaked to 53% in 2010 (OECD Fact book). In short, it could be stated that FDI acts as lifeblood for the growth of world economy. Major flows of world FDI were into the developed economies until twentieth century except China (as it opened up its policies for foreign investors earlier during 1980s). The economic crisis slashed FDI flows by about 41% in developed nations and by about 35% in developing nations during the year 2009 (UNCTAD, 2010), affecting largely almost all countries and in all sectors. It should be noted that during the post-crisis period the developing nations had fared marginally better while compared to developed nations in maintaining their FDI inflows. The global economic downturn had forced the world to look for opportunities outside traditional economic strongholds like the OECD countries. For the first time in 2011 developing countries and transition economies together had attracted more than half of Global FDI inflows in contrast to continuous decline of FDI inflows in developed countries (World investment Report 2011). Among the developing nations China, India, Brazil and Russia holds a large share of FDI inflows. These four countries have proved to be the fastest growing economies and were also said to be the engines of the global recovery process. In 2001 Jim O Neill (Chief Economist of Goldman Sachs Asset Management) coined the acronym BRIC constituting Brazil, Russia, India, and China in his paper entitled Building Better Global Economic BRICs. These four economies are called as emerging economies or big four owing to certain common growth features such as: largest countries in the world holding 42% of world population with high young population, possess more than one fourth of world s land area, fast growing consumer markets, rapid economic growth and increasing productivity. The acronym has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies towards the developing world. According to the report, first China and then a decade later India will begin to dominate the world economy. 2

4 BRIC s share of FDI inflows in global FDI inflows have increased from 2.2 percent (excluding Russia due to unavailability of data) in 1990 to 17.7 percent in Amongst all four, China remains the top-ranked destination by foreign investors. According to the 2010 World Investment Report by UNCTAD, China ranked second in the world in attracting FDI and it has ranked first among developing countries for 18 years at a stretch, followed by Russia, India and Brazil in seventh, eighth and fifteenth positions. Subsequent to India s liberalization in its economic and foreign investment policies in 1991 FDI inflows had increased considerably during the past decade. The total FDI inflows into India has increased from US$ 4029 million in 2001 to US $ 46,847 million in 2012 and the number of FDI projects increased by 20% in 2011 reaching 932 projects. Foreign investment opportunity exists in India in number of sectors and India s economic growth will continue to be fuelled by trade in the future. But still the growth is said to be modest as India has vast potential for absorbing greater flow in the coming years. Now the crucial test for India is how to move from US$30-40 billion FDI economy to one where investment levels are US$ billion. Although the BRICs have attracted more FDI in recent years, their growth rates and paths are not the same. Since it had been widely proved and accepted that FDI inflows accelerate economic growth, the competition had become stronger within countries in attracting larger FDI inflows. The growing attention of investors interest on BRIC and India being one of the potential FDI destination, such attention on FDI studies, focuses on finding ways to explain the positions and roles of so-called emerging or even third world powers (i.e., Brazil, Russia, India and China) in FDI inflows and more specifically India s competitive position in attracting FDI. Any investor intending to invest in a foreign country, before choosing a location would go in for a detailed analysis on all required factors such as; Market size, Resource availability, Human Capital, Political stability, Better Regulations, Government efficiency, Better Institutions etc., And similarly any country aiming for higher FDI inflows should ensure its competitiveness in possessing those factors that would attract FDI inflows. 3

5 1.2 Significance of the Study In the past two decades the world has experienced a massive transformation in terms of improvements in macro-economics, political systems and business functioning. Brazil, Russia, India and China (BRIC) have acquired vital role as major contributors in the global GDP and more importantly, they have emerged as major destination to Foreign Direct Investment (FDI) inflows, resulting BRIC as a strong constructive economic Block. Goldman Sachs investment report (2001) focused on the current and future global importance of Brazil, Russia, India and China. The report highlighted the economic growth features of BRICs such as the fastest growing potential consumer market with larger middle-income group, increasing productivity, abundant supply of natural resources, modern infrastructure and implementing growth strategies. It has been predicted that by 2041 (later revised to 2039, then 2032 in the follow up reports) the BRICs would overtake the six largest western economies (G6) in terms of economic might. In (2007) Second Follow-up report, Goldman Sachs had asserted that "India's influence on the world economy will be bigger and quicker than implied in our previously published BRICs research". More recently, according to A.T. Kearney s Foreign Direct Investment Confidence Index survey (2012) India replaced the United States for the number two position and the other three major emerging markets China, India and Brazil took the top three spots as investment destinations of choice. The United States fell to fourth place from second, with its debt gridlock weighing heavily on investor sentiment. Above all, Jim O Neil who coined the term, BRIC, in 2001 later in his book The Growth map- Economic Opportunity in the BRICs and Beyond 2011 had ascertained that the growth in all four BRIC countries has surpassed expectations in the decade since the term came into existence. The world economy has doubled its size since 2001 and one third of that growth has come from BRICs. BRICs account to nearly 20% of world trade in 2010 compared to less than 10% in The global FDI inflows faced a tremendous shift of the power centre from the developed countries to developing countries especially to BRICs during the last decade. Further more he had stated that these countries should no longer be seen as Emerging Markets more accurately they should be Growth Markets for investors to understand the scale of opportunity. 4

6 Having understood the magnitude of BRICs FDI flows in World GDP and for the growth of the countries themselves FDI inflows need to be strongly encouraged. Along with the tremendous growth prospects and ample opportunities for FDI inflows for all the four BRIC countries the world s expectations on its growth is also raising substantially. Whereas the FDI inflows shows a distinctive trend for the four countries, China has out performed in the global FDI inflows, Brazil and Russia are growing in moderate tone reaching its expectation, India though have shown an overall growth trend and also likely posses high potential for attracting FDI inflows, does not seem to have consistent growth as predicted and expected. Hence it is inquisitive to study and understand the fluctuation in growth trend of FDI inflows in all the four BRIC countries. Increasing intervention of Information Technology in all parts of business functioning has lead to outstanding developments in International Business and hence all countries are becoming more competitive now a days. Global competition for FDI had given the bargaining power to Multi-National Corporations (MNCs) and their allies. A foreign investor chooses a country for establishing his business based on certain competitive factors of the host country and on its previous FDI inflows trend. There fore it becomes very important to study the competitive status of India in FDI attraction. Although diverse studies have been made relating to various aspects of BRIC economies, the comparative and competitive status of India s position among BRIC nations have not been analyzed. To make business in a country, investment or strategic decisions are to be made by individuals and business corporate, which need timely and adequate information about the host country. The findings of the present study will focus on to develop an approach to identify the factors determining a country s FDI inflows and the competitive position of India in FDI attraction among BRIC nations. And thereby suggesting suitable measures to overcome the challenges and promoting India as the best FDI destination among the BRIC nations. 1.3 Statement of the Problem The BRIC countries have attracted a sizeable amount of FDI inflows in recent years and it appears to have prosperity of economic and social development in the forth coming decades. Apart from the prospective growth features, the BRIC economies differ greatly in 5

7 terms of their size, their growth rates, prospective sectors, and institutional settings of foreign investment and FDI inflows. All the four BRIC countries have been modifying their policy frameworks like providing guarantees for investors, offering incentives and concessions, liberalizing the entry regulations, establishing various foreign investment promotion agencies etc., yet not all countries have achieved its target of expected FDI inflows. While China has doubled its FDI in the last decade and India s overall FDI inflows shows a significant growth trend. Despite the country s dynamism in possessing huge potentials and perceived increasing importance the actual FDI flows into India is relatively modest. Moreover when all the four countries were listed among the top economies ranked by GDP, India's record on productivity, FDI and reforms has been the most disappointing, as stated by the chairman of Goldman Sachs Asset Management Jim O'Neill in his book The Growth map- Economic Opportunity in the BRICs and Beyond The growing impact of BRICs in global economy through its substantial contribution of FDI flows underpinned by the increased international competition is subject to high fluctuations. All the four countries racing towards attaining the stage of development would have to encounter such upcoming challenges in procuring quality FDI. India is in need of $500 billion for the infrastructure development for the current fiscal year and $2 trillion for 12 th five year plan and it is very much required to identify the potential factors attracting FDI inflows and to examine the status of India in possessing those factors. The status of FDI attraction performance for a period of eleven years from 2001 to 2011 of India has been compared to Brazil, Russia and China. Stating these important research issues the study has been taken up to evolve in suggesting suitable measures to overcome these challenges of competition and to attain their potential growth with due importance to India s competitive position in FDI attraction. 1.4 Research Questions Based on the research gap found and the research problem stated above the present study is focused on finding answers for the following questions i) What are the significant factors that would determine BRIC country s FDI attraction? ii) What is the share of BRICs FDI inflows to world FDI inflows and why are the FDI inflows into BRIC volatile? In which modes of entry does FDI flow and how 6

8 iii) iv) was the composition of FDI inflows in different sectors for all the four BRIC countries? What is the status of India s in FDI attraction while compared to other BRIC nations during the study period? Who are the major investors in India? And in which sector do maximum investments flow? Which are the areas it needs immediate attention and what are the measures should India take to sustain or improve its competitiveness to attract more of quality FDI 1.5 Objectives of the Study Based on the theoretical understanding and meta-analysis of review on respective literature perceptive, the following objectives have been framed. To draw a conceptual understanding on FDI and competitiveness in FDI attraction and to assess the factors determining FDI attraction into BRIC countries. To evaluate the trend, composition and industrial pattern of FDI inflows to BRIC countries. To study the progress of FDI inflow into India, in terms of total investment: entry route wise, sector-wise and investing country -wise. To understand the competitive status of India in FDI attraction among BRIC nations and suggest suitable measures for promotion of FDI in India. 1.6 Hypothesis of the Study The hypothesis in the present study has been framed to state the competitive position of India as follows: H1: India does not enjoy competitive status in FDI attraction among the four BRIC nations. 1.7 Research Methodology In this study the FDI growth and development of India is accessed in comparison to its counter parts of emerging BRIC economics, Brazil, Russia and China. The current study is both explorative and diagnostic in nature. 7

9 I. Explorative Analysis A detailed literature survey was carried in the relevant areas like: FDI Determinants and its Impacts on Economies, Competitiveness of BRIC Nations in FDI Attraction, and FDI in Indian Perspective. This enables the author to form a basis for sourcing and preparing the datum for carrying out the analysis. II. Diagnostic Analysis This section of the study is divided into two parts. The first part has analyzed thirteen potential variables that are determining FDI attraction for Brazil, Russia, India and China and the second part has analyzed the composition and sectoral pattern of FDI inflows of BRIC nations with a detailed analysis on India s FDI inflows by the top ten investing countries and the prime industries that attracted FDI inflows into India Sampling Framework Understanding the prominence of BRIC in the global front and the increasing opportunities for BRICs from world wide investors becomes very crucial for each BRIC country to market itself for attracting FDI inflows. Also realizing the need for FDI inflows in India, the present study has been confined to analyze the competitive status of India in attracting FDI inflows among BRIC nations. Therefore the analysis has been carried out for all the four BRIC nations i.e., Brazil, Russia, India and China with due importance to India s competitive status and growth Data Sources The required statistical data on Foreign Direct Investment inflows of BRIC countries were sourced from the websites of UNCTAD (United Nations Conference on Trade and Development) FDI Statistics, International Trade Centre s (a joint agency of World Trade Organization and the United Nations) FDI statistics, UNCTAD annual reports ( ) and World Investment Prospects to 2011 Report, Published by Economist Intelligent unit, The Economist, 2011, ISBN: The variables used for determining FDI attraction were sourced from the websites of World Development indicators statistics of World Bank, World Economic Outlook Database of IMF (International Monetary Fund), Economic Freedom indicators from 8

10 Frazer Institute s Economic Freedom of the World (EWF) annual reports and World Economic Forum s Global Competitiveness Reports GCR)( ). The data used to construct the index and ratings of EFW and GCR have been sourced from IMF, World Bank and World Economic Forum and also based on surveys, expert panels and case studies that provide data for a large number of countries.(the methodology used to rate the factors are found in appendix www. Frazer institute.org and FDI statistics for India have been sourced from RBI Bulletins published by Government of India, Ministry of Commerce and Industry. And the data on BRIC s trade health practices is sourced from The BRIC Report, New Delhi, Oxford University Press, Ministry of Finance, Government of India, Analytical Framework of the Study Based on the literature deliberated and on conceptual understanding and the said objectives, analysis of the current study has been carried out in two magnitudes for the countries Brazil, Russia, India and China and thereby assessing India s competitive position in FDI attraction and its growth pattern. A discussion on the potential factors determining FDI attraction of BRICs has been drawn. The same has been analyzed using thirteen potential variables under two categories such as; Economic Indicators and Business Environment Factors of the four countries. FDI Attraction Status Analysis has been done including; i) Composition and Sector wise FDI inflows of BRIC Nations, ii) Contribution of BRICs FDI inflows towards economic growth, iii) BRICs FDI performance and potential index in the Global front. Also FDI inflows into India in terms of route- wise, top ten investing countries of India and major sectors attracting FDI have been studied. Finally the competitive status of India in FDI attraction among BRICs is assessed using paired t- test by comparing India to Brazil, Russia and China. Analysis of the current study is carried out in three magnitudes, in four phases: I. FDI inflows attraction determinant analysis of BRIC economies II. FDI inflows attraction status analysis of BRIC economies III. India s FDI inflows and its growth - A deeper insight IV. Comparing and Assessing India s Competitiveness in FDI attraction. 9

11 1.9 Statistical Tools Applied For effective data analysis and to derive the needed results the following financial and statistical tools were applied in this study: Trend analysis, Summary Statistics (Mean & Standard Deviation), Co-efficient of Variance, Annual Compound Growth Rate, Aggregate Growth Rate, Multiple Regression analysis, Pearson s Correlation analysis and Paired t test. Trend analysis is an important tool of horizontal financial analysis. This method determines the direction upwards or downwards and involves the computation of the percentage relationship that each statement item bears to the same item in the base year. In the current study trend analysis is performed for all the time series data. Measures of Summary statistics had been applied to measure mean and Standard Deviation between the time series data used for analyzing the FDI inflow into India and its medium. The Annual Compound Growth Rate helped to measure the average annual growth of FDI inflows into India and its medium. Karl Person s Correlation has been applied to analyze the correlation between the FDI inflow and its medium of attraction for all the four BRIC countries and India s business climate potential with FDI attraction. The same tool is used as determinant factor for measures of association in case of comparing India s competitive strength with the other BRIC nations i.e. Brazil, Russia and China. Similarly, the both students t test and paired t were performed to measure the internal consistency or deviation in the sample mean values for FDI inflow and its medium of attraction for all the four BRIC countries, India s business climate potential with FDI attraction and also as for measures India s competitive strength with the other BRIC nations i.e. Brazil, Russia and China. With the support of Multiple Regression Analysis, a research model has been framed to measure the prime determinants of FDI attraction for Brazil, Russia, India and China. FDI inflows was considering as dependent variable and the following twelve factors were considered as independent variables: 10

12 Determinants of FDI inflows = α + β1x1 + β2x2 +β3x3 + β4x4 + β5x5 + β6x6 + β7x7+ β8x8+ β9x9+ β10x10+ β11x11+ β12x12 + e Where, (Y) = X1 =GDP (based on purchasing power parity) X2 = Volume of imports of goods & services X3 = Volume of exports of goods & services X4 = Population X5 = Current account balance X6 = Labour X7 = Government Efficiency X8 = Legal Structure X9 = Monetary Growth X10 =Business Regulation X11 =Technology Readiness X12 =Innovation Where, α (FDI inflows) is constant and β1, β2, β3, β4, β5, β6, β7,β8, β9, β10, β11,& β12 are coefficients to estimate, and e is the error term, which has been assumed as NID for this research Scope of the Study FDI offers the prospects of economic growth and spillover benefits to host countries, but attracting it in the required sector amidst increasing competition and reaping the benefits of such investments requires a good deal of effort. This empirical study aims to fulfill this core need and is an indispensable reference guide for multi-national material suppliers, product manufacturers, foreign investors, executives, distributors, academicians, research scholars and many more, who are dealing with these composite markets Period of the Study The period of study is eleven years from 2001 to 2011 and is important for three reasons. First of all, it was during 2001 the BRIC acronym was coined by Goldman 11

13 Sachs. Secondly, it was during this period the trend of global FDI inflows had gone through a shift from emerged to emerging economies and since this had happened for the first time in the history, it becomes interesting to analyze the inflows of FDI and determinants during this period. Thirdly, while all the three countries in BRICs surpassed growth in almost all parameters during 2001 to 2010, India was said to have received insufficient FDI inflows. Therefore it is very much necessary to look back the trend of India s FDI inflows for the period 2001 to 2011 and to evaluate its potential factors determining FDI attraction and thereby bringing out a clear picture on the Competitive status of India in FDI attraction among BRIC countries Limitations of the Study Every research work faces some limitation, due to time factor or limit of geographical extent, or due to non availability of required data from relevant source. The limitations which were observed in the present study are being summarized as follows: The present research work has focused only on secondary data and the required data available from reputed sources were not uniform and hence interpreting results based on the statistical analysis may not be accurate. For example analyzing the significance of potential FDI determinants at country level is a highly complex task. And to use raw data for business environmental factors like Business regulations, Government Efficiency, Technology readiness etc., was difficult but, on the other hand exempting it would not meet the objective therefore the competitive scoring derived by world s renowned Frazer Institute have been taken. There were also differences in the data available from different sources like FDI inflows data sourced from RBI in India does not accurately match with that of UNCTAD FDI statistics and similarly for economic indicators from IMF, World Economic Outlook and UNCTAD. No proven methods were available to segregate and find out the determinants of a country s FDI attraction. The time limit for the research was eleven years since 2001, when BRIC acronym was framed till 2011, earlier data on FDI has not been considered. 12

14 1.13 Chapterization The present research work has been presented as a broad overview on the study of the FDI inflows in BRIC countries and an analysis on the competitive status of FDI inflows in India. Chapter one covers an introduction about the study, significance of the present study, statement of the research problem, research methodology, analytical framework, scope and period of the study, hypothesis of the study and limitations of the study has been presented in this chapter. Chapter two presents a brief overview of the review of earlier literature about FDI which has been categorized into: FDI Determinants and its Impacts on Economies; Competitiveness of BRIC Nations in FDI Attraction and FDI in Indian Perspective. Based on the detailed review made, Research Gaps were identified for the present study. Chapter three provides a clear understanding on the concepts and determinants of FDI, an overview of world FDI, Significance of BRIC, FDI in BRIC, the potential determinants of BRIC, Bilateral Investment Treaties in BRICs and a comparison on Brazil, Russia, India and China in Global Competitiveness Ranking. The Chapter also provides the methodology of FDI concepts in India, the historical background and the role of Investment Promotion Agencies of India in attracting FDI. Chapter four comprises of a comprehensive analysis on FDI inflows in BRIC, its potential determinants and the trend & composition of actual FDI inflows. Analysis has been carried out in four phases: Phase one analyses the potential factors determining BRIC countries FDI attraction, Phase two analyses the FDI inflows attraction status of BRIC countries in terms of FDI inflows total, FDI inflows Stock, Greenfield investments, Mergers and Acquisitions, Sector wise inflows and the contribution of FDI inflows towards Gross Domestic Product and Gross Fixed Capital Formation, Phase three analyses the FDI inflows in India under; Route- Wise, Top investor-wise and Sector- wise and Phase four brings out a clear picture on the competitive status of India by comparing with other three BRIC counter parts in terms of FDI attraction determinants and FDI attraction status. Chapter five discusses the summary, findings, suggestions regarding the necessary measures to be initiated to meet the global challenges in attracting FDI inflows to India. 13