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



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Chapter One: Introduction


Transnational corporations (TNCs) travel the far corners of the planet in the pursuit of new investment opportunities, gain access to raw materials and new markets (Korten, 1995; Klein, 2001; Bakan, 2004). In today’s globalised economy, the rate, speed and volume that investment can transverse international borders is unprecedented (Lipsey, 1997; Held et al, 1999). Foreign direct investment (FDI) is a type of international capital flow used by TNCs to invest in countries outside their home environment (Dunning, 1997b; OECD, 2002). In the past FDI mainly travelled from developed economies to other developed economies (Hirst and Thompson, 1996; Held et al, 1999; UNCTAD, 2013; O’Brien and Williams, 2007). However, increasingly, TNCs are establishing investments via FDI in developing countries (Nunnenkamp and Spatz, 2004; Dunning, 2002; Dunning and Lundan, 2008). Since 2012 developing countries received more FDI than developed countries (UNCTAD, 2013; 2014, 2015). FDI brings wide ranging social and economic implications and the benefits from such investment is neither uniform or shared equally within host countries.

For their part, developing countries view FDI as a conduit to fulfilling many of their development needs, such as accessing new capital streams, employment, technology and management expertise (Moran et al., 2005; OECD, 2002; 2008). Developing countries accordingly seek investment from TNCs with vigour (Stopford and Strange, 1991; Chang, 2003; OECD, 2002, 2008; Farnsworth, 2010). Governments hope that the valuable resources that TNCs hold will spillover, become absorbed in host countries and create domestic capabilities and capacities that can achieve development goals and priorities (Moran et al., 2005; OECD, 2002, 2008). Over the past three decades, several developing countries such as Brazil, India, China and Russia liberalised their economies and experienced high levels of economic growth and their engagement with FDI is often attributed to their development successes (UNDP, 2013; UNCTAD, 2013; Rodrik, 2011; Spence, 2012; Subramanian, 2011).

However, the fulfilment of development objectives from FDI is a ‘best case’ scenario and some go as far as to argue, are a ‘long-shot’ (Lipsey, 2000; Nunnenkamp, 2002). TNCs also bring risks. They can monopolise markets, drive down labour standards and wages, engage in dangerous and environmentally damaging practices and interfere in political and policy decision making (Korten, 1995; Bakan, 2004). The high presence of TNCs in developing countries has raised concerns that such firms profit from low wages and weak labour and environmental standards that are more easily exploited in developing countries (OECD-ILO, 2008; Korten, 1995; Farnsworth, 2004; Richter, 2001; Bakan, 2004). Making the situation more precarious is the fact that the benefits to developing countries from FDI are far from guaranteed and automatic (Chudnovsky and Lopez, 1999; OECD, 2002, 2008; OECD-ILO, 2008; Moran et al, 2005; Nunnenkamp and Spatz, 2004; Dunning, 2002). Moran et al (2005, p.375) conclude:

… a search for a “universal result” of FDI on a developing country economy is misguided. FDI can have dramatically differing impacts—both positive and negative.

Madeley (1999, p. 16) remarks:

If there is little or no net gain for developing countries from the presence of TNCs, the question is why they continue to attract them…TNCs offer help to countries that have economic wounds such as severe unemployment, chronic shortage of foreign exchange and sizable foreign debts. The corporations appear to be the engineers of wealth, to have money and skills to earn additional foreign exchange and create jobs. The deeper problems they can bring may not be considered alongside more pressing economic needs.

These issues go the heart of this thesis. It focuses on the social and economic disadvantages and benefits to developing countries from inward foreign direct investment. As there are many context specific variables that make generalising the impact of FDI to host countries difficult, as Moran et al (2005) and others such as Nunnenkamp and Spatz (2004) and Lipsey and Sjoholm (2005) conclude, this research uses New Delhi India as a qualitative case study. This chapter is divided into two sections. Section 1.2 presents the justifications for the research. Section 1.3 outlines the structure of this thesis and the content of its chapters.

1.2: Justification for the thesis


Few qualitative studies have been conducted that explore the impact, in particular the social impact, of FDI on host countries, and fewer still from a social policy perspective. Investigations into FDI are principally from the field of economics, business studies or development studies and are, in general, quantitative in nature. This thesis seeks to fill such gaps.

While social policy explorations of FDI to developing countries are widely absent, investigations of the impact of FDI to host countries are wide ranging in many other ways. FDI is particularly relevant to the field of business studies and investigations of FDI have been carried out often in this field as it helps to explore investor motivations and the impact of operating in host countries which have particular relevance for the firm (Gunnigle and McGuire, 2001). For example, Gunnigle and McGuire (2001) employed a qualitative research method to analyse key factors influencing the location decisions of inward investment to Ireland with specific focus on labour issues. Gunnigle and McGuire’s research (2001) is one of the few qualitative studies concerning FDI; however, its principal focus is on corporate decision making not the impact to workers which is more in line with a social policy perspective.

Research and literature from an economic and/or development disciplines often combine the interest and needs of transnational firms with the needs and assets of developing countries in various ways to explore the impact of FDI on host economies. John Dunning (1997a, 1997b, 2002, 2008) extensively researched the location choice determinants for firms as well as the role national governments play in affecting the competitiveness of economic activity within national borders by exploiting the firm’s ownership-specific assets.

There is a plethora of research from the field of development economics, for example, concerning the occurrence of the transference of resources from TNCs to domestic environments, known as spillovers (OECD, 2002; Javorcik and Spatareanu, 2005). Research investigating spillovers of resources from TNCs to host country environments provide insight into how developing countries can better capture resources such as technology advancements (Lipsey and Sjoholm, 2005) and research and development (Erdilek, 2005). For example, Theodore Moran, Edward Graham and Magnus Blomstrom are experienced researchers in the area of FDI, spillovers and developing countries. Their research in edited books such as ‘Does FDI Promote Development’ is important in three respects all of which are representative of the existing body of research and literature concerning the impact of FDI on developing countries. First, it explores the externalities and spillovers to host countries as mentioned above. Second, it contributes to the wide body of literature (Nunnenkamp, 2002; Lipsey, 2003; Carkovic and Levine, 2002; Borensztein et al, 1998) that investigates the relationship between FDI and host country growth, specifically economic growth. Thirdly, Moran et al (2005) help to contribute to the existing research (Dunning, 1997a; Chang, 2003, 2014; Long, 2005; Moss et al. 2005) exploring national policies and their ability to effectively capture positive spillovers from TNCs.

What is missing from this body of research is qualitative descriptions of how the citizens are being affected by FDI, by the spillovers that are or are not taking root and by the policies that are or are not mitigating harm and extracting benefit which is the focus for this thesis. For example, the research above provides important investigations into how FDI has impacted various economies but they are removed from the qualitative experience of stakeholders within host countries. It is argued here that qualitative data from stakeholders concerning issues of spillovers or policy implementation provides an insight into the human experience of FDI which is broadly missing from the existing literature. Such explorations typically do not fall within the remit of economics (Madeley, 1999) and this is where sociology and social policy can add further levels of analysis to FDI studies.

What also appears missing from much of the FDI literature from economic and business studies discourses is discussions concerning power. One of the principal contributions that a sociological perspective can bring to the study of the impact of FDI to host countries is the engagement with discussions of institutional power. Separating notions of power from FDI research essentially isolates the economic from the political as well as to disengage with the social environment. Strange (1997, p.136) comments on this occurrence:

The central idea that many economist have been brought up to believe is that ‘economics is the study of wealth-creation and distribution’. As such, they were led to believe, it could be divorced from the study of the social and political causes and consequences of any economic change, or of any system of production or of finance. To my mind (and to that of many sociologist, historians, and lawyers), such an unnatural divorce is a quite preposterous idea.

When discussions of power are missing from FDI investigations, in particular, in relevance to studies concerning the formulation of national policies to capture the benefits and mitigate harm from FDI, they will most likely fail to include the power of business to influence national policy decision making.

Finally research investigating the impact of FDI on host countries often neglects the role social welfare plays in promoting the benefits and mitigating risks of corporate investment to citizens.

This thesis aims to fill these research gaps by exploring how workers and citizens are directly and indirectly impacted by FDI through qualitative descriptions from elite policy stakeholders. It will utilise these responses to explore the wider implications to social welfare and social policy. Social policies are essential to the macroeconomic environment (Gough, 2000; Mkandawire, 2004; Block and Evans, 2005) and may be important in attracting or repelling investment (Farnsworth, 2010, 2012), protecting citizens from corporate harm and exploitation, and extracting the advantages from investment (OECD, 2002; OECD-ILO, 2008). Both citizens and businesses are dependent upon the state for needed welfare provisions to function and thrive (Gough, 1979; Glasberg and Skidmore, 1997; Farnsworth, 2012). While the needs of both business and citizens require a fair delivery of both corporate and social welfare, there are political and ideological factors that can cause disproportionate provisions of the two (Glasberg and Skidmore, 1997; Farnsworth, 2012). This thesis explores India’s social welfare provisions and how these may help or hinder the impact of FDI on its citizens. It also investigates the influence of corporate investment on social protections that are afforded or not afforded within investment policies. By linking social welfare to the impact of FDI to India, this thesis hopes to help bridge the gap between ‘economic’ and ‘social’ investigations and posit that the two belong on the same continuum.




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