As discussed in Chapter Two (see section 2.3) companies and investors have various means available in which to enter and access foreign markets. How a company accesses a foreign market often refers to the type of FDI. The majority of respondents in this sample clearly indicated that certain types of FDI are preferred over others. When discussing FDI to India, respondents tended to categorise foreign investment into the following main categories: greenfield investment, joint ventures, and brownfield investments (see section 2.3 for definitions). When discussing brownfield FDI, respondents were referring to mergers and acquisitions (M&A) and/or round-tripping.
The majority of respondents discussed the prevalence of joint ventures, acquisitions of domestic Indian companies, and the high occurrence of round-tripping. Respondents often discussed the prevalence of investments in private equities (PE) which are counted as FDI but more similar in nature to portfolio investment (see section 2.3). PE was criticized by several respondents as being incapable of bringing the positive spillovers that ‘traditional’ FDI, arguably, can bring into the host country.
As explained in Chapter Two (section 2.3.2), joint ventures occur when foreign companies enter into partnership agreements with domestic companies in the host country. Joint ventures were perceived as potentially positive for both foreign and domestic partners. As partnerships occur, it is argued; the domestic firm can learn from, capture and build upon the ownership advantages of the TNC. However, some respondents stated the costs and benefits to the Indian partner would depend on the type of partnership formed and that ‘junior partners’ without much power in the relationship would not stand to gain as much as those with more equal footing in the arrangement.
Respondents often discussed the frequency with which foreign companies were acquiring domestic Indian companies or purchasing a large percentage of shares of Indian companies. While joint ventures were mostly perceived to have mutual benefit for both domestic and foreign partner, the perception of mergers and acquisitions were perceived by respondents to be more detrimental to the domestic firm and domestic market. It was argued by many in this sample that India has been the host to foreign investors looking for quick and large gains in the domestic market.
As discussed in Chapter Two (see section 2.4.2), M&A, are often criticized for monopolizing domestic markets (OECD, 2002). Acquisitions were often criticized by respondents in this sample as being a predatory type of corporate strategy that aims to monopolize the market without giving much back to the domestic industry or host country by way of positive spillovers.
KT is a distinguished researcher with a national-level policy research organisation in the public domain that concentrates on India’s industrial development and the corporate sector. His area of specialization is FDI. He explains that there has been underestimation of foreign acquisition of Indian business in the FDI data:
The real extent of Indian take-overs does not get expressed in the data. Even though there has been a lot of hype saying that Indian companies are buying abroad and that India’s FDI has been growing...on the contrary, leading small, medium and sometimes large domestic companies have been taken over.
There was also real concern expressed that once a domestic company is taken over, their long term and short term goals and strategies will be replaced with those of the TNC and these goals may not represent the best interest of the host country. This is particularly worrisome in the pharmaceutical sector where concerns that domestic capabilities and strategies to manufacture and market affordable medicines within India will change or diminish under foreign ownership.
India’s pharmaceutical industry, until 2005, was one of strict state intervention and protection and one which encouraged the domestic firm over TNCs (Linton and Corrado, 2007; Chaudhuri, 2005). During India’s ISI years, the Indian Patent Act of 1970 was enforced which disallowed product patenting and only recognised patents based on the process of manufacturing drugs but not the drug itself (Watal, 2000; Chaudhuri, 2005). Process patenting enabled domestic firms to develop strong capabilities for reverse engineering and catapulted India into the generic drug markets (Singh, 2007). A combination of state intervention, regulatory changes, and process patenting helped to establish the Indian domestic pharmaceutical industry as one of the world’s most efficient manufacturers of generic medicine (Chaudhuri, 2005, Watal, 2000; Linton and Corrado, 2007).
When India joined the WTO it was compelled to abide by the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement (see section 2.2.2). Under TRIPS, all countries who are members of the WTO are made to adhere to and enforce product patents in all fields of technology which includes pharmaceuticals. Developing countries, however, were given a grace period to enforce the agreement of pharmaceutical product patents by 2005 (Kale and Little, 2007). Thus since joining the WTO, the Indian Parliament has made several changes to their patent regulations and introduced many amendments in order to adhere to the WTO agreements.
One of the main concerns expressed by respondents in this sample regarding acquisitions of domestic pharmaceutical companies was that powerful pharmaceutical TNCs or ‘Global Pharma’ would monopolize the generic medication market. Given that less than three per cent of the FDI invested in the pharmaceutical sector is for research and development, critics argue, this is evidence that the motivations behind the spate of acquisitions are to capture the generic medicines market (GopaKumar, 2013). SSK is a Health Economist for an organisation that works to strengthen public health in India. His areas of expertise are pharmaceutical economics. He appeared confident that global pharmaceutical TNCs were aiming to capture the Indian generics market:
But what has really happened, especially in the last 6 months to a year is a huge number of acquisitions of top private Indian [pharmaceutical] companies by the foreign multinationals. I think the reasons are very clear...it is not that they wanted to come into the Indian market...I think the real issue is that they wanted to use Indian network, Indian generic network across developing countries, even in developed countries and take over. By taking over top Indian generic companies, they are trying to capture the generic market across the globe.
The concerns regarding acquisitions go farther than Indian domestic companies losing the profit from the generic medications market to global pharmaceutical TNCs. The issue of the capture of the generic medicines also has large public health implications and concerns. Respondents expressed concerns that foreign TNCs could take generic medications off the market entirely causing a diminished access to affordable medicine. GK is a legal advisor to an international NGO involved in North-South development issues. His area of expertise is pharmaceuticals, access to medicines, and trade related intellectual properties. He relayed his concerns for the threat to affordable medicines:
This overall kind of business...this kind of taking over can accelerate the period of introduction of patented drugs. [With] the capturing of Indian market, the share of patented drugs can increase in the market and gradual side-lining of generic products by these companies because these companies will have this network so they can withdraw some of the brands and they can substitute it with non-generic products...substitute it with the patent medicines. So this may create a real problem.
Under TRIPS legislation, each country does have some leeway in how they interpret the legislation and how it is implemented in the law. Accordingly, India has applied some flexibility into their enactment of TRIPS, which provides a small amount of ‘wriggle room’. Several respondents expressed concern that flexibilities incorporated into national law would not be expressed as it would go against Global Pharma’s interest. GK explains:
So then secondly, India’s overall TRIPS implementation strategy is to use the flexibilities...and it is a fact that we have incorporated all kinds of flexibilities into the law. But if the companies are being taken over, then who is going to use the flexibilities? Because in India we do not currently have a credible public sector [for medicine] manufacturing capability. In that absence, the private sector has to carry out manufacturing...we have to depend on the private sector and if the private sector is controlled by TNCs then who is going to use these flexibilities? And this is the biggest threat.
Respondents in this sample placed blame on the government’s inefficiency in framing FDI policies to mitigate for potential harm from foreign investment. Interviewees’ perception of the government’s ability to effectively construct and implement FDI policies to mitigate for potential harm as well as capture advantages will be explored further in the proceeding empirical chapter.
The last major issue regarding the types of investment to India concerns the prevalence of round-tripping and investments in private equities (PE) (see section 2.3). The majority of respondents in this sample stated that these types of investments were a significant contributor to India’s reported FDI inflows. Round-tripping investments were criticized by several respondents in this sample as being of lesser quality and less likely to bring the assets India’s needs. Investments in PEs were associated with being short term, speculative and concerned only with return of assets. Furthermore, these investments were criticized as adding uncertainty to India’s macroeconomic stability.
KT, a distinguished researcher with specialization of FDI in India, highlighted the problematic nature of FDI data and how it is being analysed and calculated:
You know FDI data is so costly...very few people can access it. So whatever these reports say, they go as uncontested truth. The statistics are grossly misleading. In India’s case, we estimated that at least half of what is reported as FDI will not be FDI in the true sense of the term. All this tax havens...and round tripping...and financial investments...they will do a lot of double counting. First the private equity sales will come...that is [counted as] FDI. Then later they will sell to a foreign company...that is FDI...this is simple double counting. What is this data in which everyone is basing the conclusions on? Frankly, I have reviewed some research for international journals and recommended them for rejection basically because researchers even at the top level, they are not looking at the data within the data.
The nature of the investor and the motivation behind the investment was directly linked with the potential costs and advantages that FDI can bring to host countries by several respondents. KT remarks that due to the muddled nature of FDI, it is difficult to determine how much of India’s FDI has the potential to bring spillovers and help contribute to development needs. He suggests domestic policies need to address these issues but are failing to so:
But today, the way it [FDI] is defined we are beginning to think it is more of a financial play than a real investment. Particularly if you open it up to, say, real estate and land development and things like that, they are more speculative areas. And who are those players? They are not the traditional, what you call ‘true blue’ multinationals. They are what some people call ‘global citizens’...they just keep on changing from one company to another...they gain experience, they start floating private equity or hedge fund or whatever. If these are the investors, where are the multinationals? Today, the concept has become so diluted; in fact, it is difficult to say how much has the potential to contribute to development because there is so much divergence in FDI. And that is where the domestic policy becomes important and that is where we feel that there are no strategies today.
Many respondents in this sample heavily criticised the amount of round tripping investment is occurring in India. Respondents in this sample associated investment from tax haven countries as round tripping and argued that it was not true FDI because it was essentially domestic investors channelling money out and back into India to avoid taxes. As explored in Chapter Two (2.3.2) round tripping can result in major losses in tax revenues for governments and this has large implications for social welfare funding (see section 3.6).
Respondents often reported that round tripping as well as PE type investments are causing inflated FDI statistics. As will be explored in Chapter Eight, several respondents reported the Indian government’s selective focus on reporting high numbers for FDI and a priority for quantity of FDI rather than quality of FDI.
In sum, responses revealed that certain types of FDI were preferred over others and had the potential to bring different types of risks and advantages. Not only is the sectoral composition of investment important but, as explored here, the motivations behind the investment are important as well and carry wider implications for India and its citizens.