The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment

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5.8: Chapter summary

This chapter has explored the theoretical foundations, methodology and methods that guided this this research. It began by explaining the research questions that are pivotal to the investigation. This was followed by the methodological approach, specifically a description of the case study that was utilised here as well as the reasoning behind the choice of India as a single case study method was explored. The process by which the data was collected was observed next, including the sampling process, interviewing methods and the process of analysing the data. Following this, the chapter presented the multimethod approach that was employed and how documents, policies and transcripts of multi-media interviews provided context and complementarity to the analysis. The positionality of the researcher was presented and issues of ethnicity, gender and other identifying characteristics that impacted the research process were explored. Ethical issues comprising informed consent, anonymity and confidentiality were presented next. Barriers encountered in the field during my time in India were explored as well as the wider methodological difficulties of researching the powerful. The absence of TNC and government officials’ perspectives and how this may have impacted the findings was examined here as well.

The proceeding chapter will be the first of four empirical chapters.

Chapter Six: Investment strategies and the social welfare implications of FDI to India

6.1 Introduction

As states compete with one another for FDI, they will often construct investment strategies to promote national advantages to potential investors via investment bureaux (see section 3.7) (Farnsworth, 2010). The resources a country has to offer will vary between states but the investment strategies utilised will try to entice investment best suited to development needs by advertising specific national comparative advantages attractive to investors (Thomas, 2011; Farnsworth, 2010). The social consequences derived from investment are highly contingent upon the investment strategies of the government; what the country is offering investors and the type of investment attracted (Chang, 2003; Thomas, 2011; Farnsworth, 2010). Contingencies for social welfare are also directly dependent upon the investment policies, how they are framed and the social protections afforded to protect citizens, workers and local communities (UNCTAD, 2002; Farnsworth, 2010; Thomas, 2011).

Given these arguments this chapter will explore the first research question:

How is India selling itself to investors and what are possible implications for social welfare that are likely to flow from the Indian government’s investment strategy?

It will answer this question by analysing India’s main investment bureaux to gain insight into the types of investment the state is targeting and the conditions and incentives it is employing to entice investment. This chapter will proceed to further investigate this research question by analysing two specific FDI related policies: The National Manufacturing Policy and Foreign Direct Investment in Multi-Brand Retail Trading Sector. These policies will be analysed via documentary analysis and interview data. These specific policies were selected as they are both important to India’s investment strategies and carry wide ranging implications for citizens. The two policies contrast each other in the level of afforded social protections and explanations as to why will be explored along with the social welfare implications that may arise from the varying levels of protections.

As explained in the Methodology chapter, in depth interviews were conducted in New Delhi, India with 40 participants who are employed within highly respected and well known universities, NGOs, IGOs, and policy and research organisations that target economic and social development issues. Appendix Two list the participants’ fictitious initials in alphabetical order and describes their areas of expertise as well as the organisation where they work.

6.2: Investment strategies and investment bureaux: The need to attract investment

As examined in Chapter Three (see section 3.7), investment strategies can be divided into two main types: functional and selective strategies (Chang, 2003; Lall, 1997). Functional strategies do not favour any particular activities, industrial sectors, or firms over any other. Functional strategies appeal to ‘universal’ business needs and are applied irrespective of the nature of the host economy or the particular stage of development (Chang, 2003). Selective strategies, on the other hand, are tailored to a country’s needs and the government actively intervenes to influence the type of investment sought as well as the terms under which companies are allowed to invest (Chang, 2003; Lall, 1997). While selective strategies can be vital to accelerate and deepen the development process (Lall, 1997), neoliberal ideology supports the open door ethos of functional policies and discredits selective strategies as interventionist, protectionist and, thus, ineffective (Chang, 2003). This argument is based, in large part, on the belief that investment decisions are determined on the amount of freedom granted to TNCs (Chang, 2003). Using these investment strategy descriptions to explore content within India’s investment bureaux will aid the exploration of motivations on behalf of the Indian government to attract investment to fulfil development needs.

Invest India is an example of an investment bureaux designed to promote the Indian economy to outside investors. Invest India is a not for profit joint venture between the Department of Industrial Policy and Promotion (DIPP) within the Ministry of Commerce and Industry and the Federation of Indian Chambers of Commerce and Industry (FICCI), one of India’s most well established business associations.

Invest India provides a good depiction of India’s investment strategy in how it is promoted to foreign investors. One of the first qualities listed under the ‘Advantage India’ tab on Invest India’s Home page indicates ‘the Indian government’s constantly evolving investor friendly policy’. It continues to state that further liberalisation will continue suggesting to investors that if they do not see an investment opportunity in their realm of expertise, there will likely be one in the future as the country is constantly liberalising foreign investment policies:

India’s steady economic liberalization and its embrace of the global economy have been key factors in attracting FDI. The government recently opened up multi-brand retail and civil aviation markets to 51 and 49 per cent FDI respectively and with more reforms expected in insurance and pension sectors, among others, India will continue to offer compelling opportunities to the global investment community (Invest India, 2015a).

This promotion of economic liberalisation typifies a functional investment strategy in that it is generic and market friendly. The implications of employing functional strategies such as this are that they risk encouraging investment that is not suited to India’s development needs.

The cost and skill quality of the labour force is a critical part of a national investment strategy (Farnsworth, 2010). After briefly explaining the ‘Indian growth story’ and how two decades of economic liberalisation launched India onto the global stage where it is now a favourite investment destination, the bureau promotes its large, youthful, and cheap labour force:

India not only supports one of the largest populations in the world, but also one of the youngest. Fifty per cent of its population is below the age of 25 and two-thirds below the age of 35. Also, about 65 per cent of Indians are in the working age group of 15 to 64 years, giving the country a significant edge in terms of cost competitiveness and low labour costs (Invest India, 2015b).

This promotional segment is a functional of investment strategy. First and foremost the passage is promoting a very large, young and relatively cheap labour force, suitable to many types of business needs. Enticing investment based on abundant and cheap labour, however, endangers depressing national wage rates and locking them at low levels. As explored in Chapter Three (see section 3.5) efficiency seeking firms which engage in high competition to save costs will be attracted to host countries with cheap labour but these firms are most associated with a race to the bottom in terms of working conditions and wages. Furthermore, it may be difficult for the government to increase wages in time as these firms often have low sunk costs, are mobile and may employ an exit threat to curtail policy changes to increase national minimum wage rates.

The promotional segment proceeds to advertise India’s skilled labour force:

Moreover, India’s labour force has a strong knowledge base with a significant English-speaking population, making it a top destination for multinational corporations that are looking to expand their overseas operations for market and talent (Invest India, 2015b).

Here the government is promoting the country’s knowledge base and segment of the workforce that is fluent in English. This appears to be targeting more ‘high end’ investment and, for example, would be something a firm in the service sector or IT/ITES would be looking for. India’s success as a destination for business process outsourcing such as call centres and other service sector oriented investment, has meant advertising the English speaking skills of its labour force is warranted and indeed a vital aspect of its investment strategy.

The next important heading within ‘Advantage India’ is titled ‘Indian consumer spending will grow 2.5 times by 2025.’ This is clearly promoting India’s mass domestic markets in an attempt to convince market seeking investors that India has a comparative advantage in its growing middle class with growing consumer needs:

Consumer spending in India grew from US$ 549 billion to US$ 1.06 trillion between 2006 and 2011, putting India on the path to becoming one of the world’s largest consumer markets by 2025. India’s consumption is expected to rise 7.3 per cent annually over the next 20 years. Seventy per cent of this expenditure will be on discretionary items like entertainment, healthcare, communication, education, personal products, services and so on. This rise of India’s “new middle class” is globally significant as it will usher fundamental changes in India and around the world… (Invest India, 2015b).

This passage is clearly advertising the merits of India to foreign investors on the basis of the consumer demands and preferences of its middle class. Ghosh (2004) argues that following economic liberalisation, India’s macroeconomic strategy became openly based on the demand stimulus of the middle and upper classes and this promotional segment is indicative of this strategy. This segment is also promoting India’s middle class service sector needs.

Investment strategies encompass not only promoting the resources that a country can offer investors but may also strategically attempt to capture the type of investment the country requires and is suitable to its development needs. Thus, investment bureaux try to stimulate investment in sectors the government wants to further cultivate. The types of investment a country wants to attract will most likely change as its development needs change and the country progresses through different stages of development (Chang, 2003; Farnsworth, 2010). Successful strategies will be adaptable and capable of promoting national resources as they develop and target investment that can further develop national capabilities and resources (UNCTAD, 2006).

As emphasised above (see section 4.3.1), India is in need of manufacturing investment. In 2010, the Finance Minister in his annual budget speech emphasized the need to increase manufacturing activity, the first time manufacturing had been stressed since economic liberalisation in 1991 (Rao and Dhar, 2011b). Increased investment in manufacturing was also stressed throughout India’s most current development plan which outlines the development initiatives and strategies for the upcoming five years: The Twelfth Five Year Plan (Planning Commission, 2013). In looking at Invest India’s Investment Brochure, the first sector promoted is manufacturing, a sector that has been stagnant following liberalisation (Krueger, 2007; Mazumdar, 2011; Binswanger-Mkhize, 2013). The promotion of manufacturing within investment bureaux, coupled with the creation and implementation of the National Manufacturing Policy in 2012 indicates a desire to shift India’s predominant investment from services to industrial production such as infrastructure and manufacturing. Invest India encourages manufacturing in the following passage:

In 2012, the Government of India unveiled a comprehensive National Manufacturing Policy (NMP). This flagship initiative undertaken by the government is aimed at stimulating infrastructure development and unlocking the country’s manufacturing potential. Further, the NMP offers some novel solutions relating to labour laws, repatriation of capital, skill availability, environmental laws, and infrastructure (Invest India, 2015c, p.8).

Here the bureau is employing a strategy with both selective and functional aspects. It is selective in that it is tailored to India’s need for manufacturing investment. However, in trying to attract manufacturing, it is employing a functional strategy promoting ‘taken-for-granted’ business needs such as liberal labour and environmental laws as well as financial incentives. As India has not been successful in attracting manufacturing investment, incentives such these are provided to attract investors and outbid other competing host countries. However, TNCs are more likely to invest in host countries because of the country’s assets and not because of specific incentives (see Chapter Three, section 3.7) (OECD, 2008; World Bank, 1985; Chang, 2003). The Manufacturing Policy 2012 and the incentives offered will be explored in further detail in the subsequent section.

From the promotional segments illustrated above, it appears India is employing a two pronged investment strategy. On the one hand, these bureaux are using selective investment strategies to target investment based on middle class consumer and employment needs by advertising their purchasing power and high level of skills and English speaking capabilities. Much of India’s investment strategy, as highlighted here, indicates a development trajectory based on the employment and consumer needs of the middle class. On the other hand, it is employing functional investment strategies to spur investment based on abundant and cheap labour. It is selectively targeting manufacturing investment with relaxed labour laws and financial incentives. This strategy may serve to increase the polarisation and fragmentation within India’s labour markets (see section 4.3). Furthermore, if wages are kept low for the majority of the labour force as this strategy is promising; demand for manufacturing products may not increase serving to further stifle the sector.

The proceeding section will examine two important FDI policies for India’s investment strategies: FDI in Multi-Brand Retail Trading and the National Manufacturing Policy.

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