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


: Impact of FDI on domestic industry



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9.3: Impact of FDI on domestic industry


As discussed in Chapter Two (see section 2.4.2), FDI is argued to spur competition within the domestic economy driving domestic firms to strive for higher productivity, lower prices, and more efficient resource allocation (OECD, 2002). TNCs are also recognised as having the potential to stimulate spillovers in the form of knowledge, technology, research and development and management techniques (Held et al., 1999). The counter-argument is that TNCs actually lower competition in domestic markets because they tend to raise the level of market concentration in host economies (OECD, 2002) as well as prevent spillovers or, furthermore, facilitate disadvantageous ones (Singh, 2002).

Most of the respondents in this sample believe that the Indian business sector and business associations have evolved since the economic reforms in 1991 and are now well equipped to compete in open global markets. Several respondents in this sample concurred that competition from foreign investors has caused domestic companies to perform at a higher level. PS is a Professor of macroeconomics with a multidisciplinary centre for advanced research and training in the fields of social and economic development. His areas of speciality are development economics and international trade and finance. PS suggests that TNCs have helped to improve the competitiveness of domestic companies and industries:

I think with the economic reforms, we allowed MNCs to come in with their muscle and power, their financial power, technical knowhow and all that. That has given a kind of boost to the domestic industries to improve their competitiveness...and the overall competitiveness of the Indian economy has improved. And some of the Indian industries are doing much better now compared to before the reforms. So the spillovers have been good with FDI.

Some respondents stated the effect on domestic industries from foreign TNC presence is more contexts specific. BN is a Professor of economics with an academic institution concerned with economic and social development. His research specializes in trade and foreign investment. BN observes that in some cases the domestic companies may be better suited to compete in domestic markets against foreign TNCs, while in other cases the foreign TNC may prove too wealthy and powerful for smaller domestic companies to thrive. He suggests, if the latter is the case, the sector should be opened more slowly or with some restrictions on investment to allow the domestic players to ‘catch up’:

There could be small issues in every sector that FDI comes into. Now there are domestic players in India that are not very big or established...they are scattered, they are small, they are unorganised, and their R&D is not very strong. Now when you allow a big investor, say an MNC, so then what happens is that there is always a threat to the domestic players...it varies from one sector to another. It may be possible that in some sectors that the domestic players are more competitive than the foreign players. In some sectors, the foreign players are too big and too developed for the domestic players. So sometimes the government needs to make policies so that there is an adjustment period...a period where the domestic players can get to the level of development and all that.

One perception that was provided, in particular from liberal market orientated respondents, is that domestic industries do not have a choice in competing with TNCs. As explored in Chapter Two (see section 2.2.3) there is a tendency to view globalisation as a phenomenon that is occurring naturally through the internationalisation of markets rather than from the political decisions of governments and IGOs (Newell, 2002; Chang 2002; Stiglitz 2006). ‘There is no alternative’ or TINA (see section 2.2.3) is an example of this particular discourse.

Carrying on from the previous quote, BN goes on to say that domestic businesses realize that they have to compete with global TNCs:

So it is a sector specific issue but after 20 years of reforms, the level of competitiveness has grown and the Indian industry has realized that they are living in a globalized world and they will have to, at some point, compete with the MNCs. So they know they have to face globalisation, if not today, then tomorrow. So now actually across the sectors, there is no such problem of allowing FDI...ok, so some areas you have to go a little slow and some you can go very fast ...but you have to go.

SR is a Professor at a policy research organisation for industrial development. His research specialities include industrial organisation, industrial clusters, and technology and employment. He has done much research concerning FDI, spillovers and the automotive industry. He remarked that there has not been much in the way of direct technology transfer. Several respondents from my sample shared this belief and felt that, by and large, FDI has failed to produce significant technology transfer. He explains that the spillovers from FDI into the automotive industry have been more indirect in nature and have resulted from competition from automotive FDI which has propelled the domestic car producers to further upgrade their technology:

One aspect, I found, in terms of direct technology transfer ...I stress in the case of direct technology transfer, in the case of automobiles, we are not getting much advantage. But there are indirect effects. Before 1991 –before liberalisation—there were 2 or 3 domestic players. Now, after 1991 there are around 32, 35 models… companies of different types of cars have entered the auto market. The indirect effect is that the domestic players who were also investing in technological upgradation because of increasing competition they are forced to invest in higher technologies. So that is kind of indirect effect... when Honda is coming or when Mercedes is coming, domestic companies like TATA is forced to invest in new technology to compete with the foreign firms. So this is a kind of indirect upgradation that is happening.

Research into positive spillovers from FDI often report that domestic companies that supply inputs to foreign TNCs often become more efficient and productive in their business operations (OECD, 2002; 2008). It is thought that the domestic input supplier will have to produce both a greater quantity and a better quality product to the TNC which often has higher quality standards in producing for global markets. This is known as a backward spillover effect. BN, Professor of economics, discussed backward spillovers and linkages with global markets as positive results from TNC presence:

I was recently in a conference and they were discussing backward spillover effect but the backward spillover effect occurs after a couple of years and initially it does not have that much effect...but after a couple of years, the fact that the foreign investment has come to a particular industry tends to improve the productivity of the input suppliers because they then have to meet the higher standards of the foreign factory. So in terms of productivity, this is good.

As explained in Chapter Three (section 3.7) one way that countries try to ensure that domestic input suppliers gain from foreign investment is to implement sourcing requirements into domestic legislation (Moran et al, 2005). Sourcing requirements force foreign companies to purchase a certain amount of the input materials from domestic sources. These requirements, however, are often disputed in the WTO as trade violations. Prior to liberalisation and joining the WTO, India had stipulations that foreign investors had to purchase the majority of automotive parts from domestic Indian suppliers. This is no longer a requirement as it was deemed a violation by the WTO. One respondent (SR) explained that when sourcing requirements were in place, domestic component producers were able to improve their business operations and successfully supply components to TNCs. He went further to explain that the repeal of domestic sourcing requirements has changed the way foreign companies work with domestic suppliers. He remarked that often the major foreign players will bring in one of their input suppliers from another country into India and purchase the input supplies from them to produce for wider global markets. He explained that the sharing of knowledge and technology does eventually occur but that spillovers used to occur much faster when there were domestic sourcing requirements. The repeal of sourcing requirements has lengthened the time it takes to benefit from FDI.

India became a preferred destination for global pharmaceutical TNCs’ clinical trials and it was often argued that India will gain research capabilities from such trails (Srinivasan, 2009). The majority of clinical trials in developing countries are being conducted through contract research organisations (CROs) who are TNCs themselves as in the case of Quintiles (Srinivasan, 2009). AG is a medically trained physician and has conducted extensive research in the areas of public health, pharmaceuticals policy and intellectual property rights. AG concludes that knowledge and research capacity is not increasing in the domestic sector as a result from clinical trials in his opinion. He had previously explained that the Indian personnel involved in helping the CROs are only involved in simple processes such as data collection. He compares India’s participation in this sector as well as IT to a type of low level indentured labour:

And there is evidence to show that the CRO conduct all the trials...so this basically means that this is not research that you are doing...which is my answer to the idea that these clinical trials are increasing research capacity; it is not actually increasing any research capacity. Because the protocols, the research question is being determined by the company… the foreign entity of the company which is outside India. The data goes back to the foreign company. So there is no enhancement of research capacity...so it is a different kind of indentured labour that you are using. In fact you see the same in the IT sector in India.... much of the IT labour is very low level. One hundred years earlier you had indentured labour where you worked in the farms; now you wear coats and ties but it is essentially indentured labour. You are not contributing to the productivity of Indian products.

One of India’s most successful industries is the IT sector (see section 4.3.2). CC is a senior Professor of economics with a major university in India. His area of expertise is development economics. CC argues that although there has been significant foreign investment and foreign collaboration in this industry, the domestic Indian companies which are now very successful have not resulted from spillovers from foreign investment, but have developed their capabilities indigenously:

Well, let me put it this way the most successful area, the area in which we are most successful globally is IT and ITES. And most of those firms are Indian firms. Firms like TCS and Infosys...these are all Indian firms and they did not have foreign collaboration. They did not get their capabilities because of spillovers. They got it because they hired people and trained them all in a period of time. Ok, this is not to deny that there can be some spillovers ...there are spillovers but it is very difficult to estimate the cost of getting this benefit but I would think that the cost we paid is too high.

Another area for possible spillovers from TNCs to domestic industries is workforce practices and managerial styles. TNCs are often perceived to have better management operations and employees who work for TNCs will learn this advanced way of management and will bring this knowledge to a domestic firm when employed with them. Several respondents, in particular with liberal market orientations, indicated that improved management techniques have occurred as a result of FDI. DH is a Director with one of India’s business associations. He explained that FDI has been very beneficial to the business culture in India:

And this has affected India in a number of ways. Because what comes along with FDI is a different kind of culture, for example Human Resource practices. And also what happens is that employees that you employee here in your unit, they will also get out and work with Indian companies at some point in time. Employers attitude has been hugely positively impacted or affected by FDI....management techniques have been improved. FDI leads to an integration of cultures. Let’s say you come all the way from the US and operate in India...so we learn from you and you learn from us and there is a kind of integration. And that integration is why we encourage import and export.....that we take advantage of each other’s specialization

In summary, respondents in this sample agree that the Indian business sector is now very competitive although there were differences in opinion as to how much this has resulted from spillovers and competition with TNCs. The proceeding section will explore perceptions of how labour conditions and employment has been impacted by FDI.




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