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

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9.7: Chapter summary

In conclusion, many respondents discussed how the domestic business sector has become very competitive following economic liberalisation and the increasing competition from foreign MNCs. In regards to direct spillovers, respondents did not report a significant amount of knowledge or technology had been acquired as a result of spillovers. Some respondents stated that backwards spillovers for input suppliers would eventually take place after a delay of several years. In the automobile sector such spillovers occurred faster when domestic sourcing requirements were in place. Increased proficiency in management techniques was reported by several respondents. Respondents reported an increase in wages in sectors of the labour market that require higher levels of skill due to the presence of foreign MNCs. However, several respondents reported an increase in casual and contract working contracts as a result of being linked with a global economy. Globalisation has also changed the nature of the production process for MNCs which has led to multi-layered subcontracting chains where poor and exploitative working conditions can be found at the lower levels. In India, the lowest levels of the global value chain often take place in homes where entire families, including children work for piece rate wages. The bonding of child labour to seed companies was examined to confirm criminological and sociological theories of corporate crime, specifically theories relating to organisational culture, criminogenic opportunity and rational choice. Child exploitation is the result of corporate crime as well as state crime as it is failing to eliminate violations of the Bonded Labour Act or the Juvenile Justice Act. Several participants discussed the problem of child labour as resulting from problems within the domestic environment and stressed the need for changes in domestic laws to bring them in line with international standards. Utilising definitions of crime as violations of human rights (Ruggie, 2008) or social harms (Dorling et al, 2005), when children are exploited for labour, both the Indian government and seed corporations can be deemed guilty of criminal actions.

Finally, every respondent stated that land displacement was a cost to India and its citizens as a result of both domestic and foreign investment. The government and corporations were criticized for not providing adequate compensation for the land or assisting those displaced into new areas or livelihoods. Several respondents discussed the need for land holders to be offered a share of the investment profits as compensation for giving something very valuable for both livelihood and social identity.

Chapter Ten: Conclusions

10.1: Introduction

This thesis set out to investigate the social and economic impact of FDI on India and its citizens. This topic has acute relevance because FDI brings wide-ranging social and economic implications, both helpful and harmful, to host countries. Few qualitative studies have ventured to examine the social impact of FDI and the aim of this research was to help fill that gap. In doing so, this research provided insight into the human experience of FDI which is broadly missing from the literature. The findings here go beyond India to shed light on the impact of FDI on a developing country. As FDI flows to developing countries are currently at a historical high (UNCTAD, 2015; 2013), it is critical to investigate FDI in the context of development. As developing countries clamour for FDI by offering incentives and constructing policy environments conducive to the needs of business, TNCs equally compete for profitable opportunities in developing markets. As the courtship between the two ensues, it is often the citizens of the host country who are caught in the middle.

This chapter is divided into four parts. Section 10.2 will return to the research questions and explore the theoretical implications of the findings. Section 10.3 will discuss the original contributions to knowledge and, following this, Section 10.4 considers the limitations and critical reflections on this research project which may prove helpful for future research. Finally, section 10.5 will examine the wider implications and policy recommendations for other developing countries derived from the findings and lessons learned from this case study.

10.2: Research findings and the implications

This thesis outlined five main research questions. The findings from these research questions and the wider implications will be explored here.

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?

Investment is crucial to economic development (Moran et al., 2005) and governments compete vigorously to induce business to enter or expand investment into their domestic markets. The need for investment propels states to make domestic environments, social and economic, conducive to the needs of business (see section 2.2.2, 3.2, 3.6) (Thomas, 2011). Through structural and agency power, developing countries experience direct and indirect pressure from business to frame policies with real and/or perceived business preferences such as low tax rates, financial subsidies and lightly regulated environmental and labour laws (section 3.2) (Thomas, 2011; Hill et al., 2013; Farnsworth, 2010). However as this thesis has made clear, the ability of business to dictate policy outcomes is variable as there are factors that serve to promote and constrain business influence (Farnsworth, 2010; Hacker and Pierson, 2002; Bell and Hindmoor, 2013). For example, the concepts of ‘mass politics’ and ‘elite politics’ whereby the government hesitates to go against the concerns of its citizens when political issues are a high concern to the majority of its constituents (Murali, 2010; Varshney, 1998) (see section 4.2.2, 6.3, 6.4) are of particular relevance here. All of these factors come to the forefront when governments attempt to construct investment strategies and policies to ‘sell’ themselves to investors and entice FDI (section 3.7) (Thomas, 2011; Farnsworth, 2010; Chang, 2003). What makes this process paramount is that the benefits of FDI do not automatically accrue and states need to carefully construct strategies and policies that can extract the potential benefits while mitigating for disadvantages (OECD, 2002, 2008; ILO-OECD, 2008) (see section 2.4, 3.7). More importantly, there are serious implications for the social welfare of citizens that are contingent upon the type of investment sought, the inducements offered to investors and the protections afforded within investment policies (Farnsworth, 2010; Thomas, 2011; Moran and Oldenski, 2013).

Analysing India’s investment bureaux revealed that India is adopting a two-pronged strategy to entice FDI (section 6.2). It is clear from promotional segments on these bureaux that it is targeting market seeking and service sector FDI by advertising highly skilled and English speaking labour as well as the burgeoning purchasing power of its middle and upper classes. However, the government is also employing functional strategies that promote abundant and cheap labour. Enticing investment based on abundant and cheap labour runs the risk of keeping wages at depressed levels. For example, efficiency seeking firms which engage in high competition to save costs will be attracted to host countries with abundant and cheap labour but these firms are most associated with a race to the bottom in terms of working conditions and wages (see section 3.5) (UNCTAD, 2006). Investment bureaux analysis also revealed a recent concentration on and promotion of manufacturing investment. This indicates a change in priority and strategy from service sector predominance to manufacturing. However in this case, the government is enticing manufacturing investment with relaxed labour laws and financial incentives. Thus the government’s overall investment strategy appears polarised in trying to attract high end service sector FDI with skilled labour and purchasing power to suit the middle class and FDI with liberalised labour laws and low wages to suit the lower classes.

The wider implication here is that this strategy will likely increase the dualism or “two track society” (Dreze and Sen, 2011) within India’s population. By increasing the dualism and polarity within labour markets, this strategy may further increase the inequality and social tensions, two major social consequences of current investment patterns reported by elite policy stakeholders (see section 7.2). The government appears to be trying to apply a ‘quick fix’ to the problem of insufficient manufacturing employment and FDI (see section 7.2), however, doing so with relaxed labour laws may create more insecure employment with poor working conditions, two conditions unlikely to create the pro-poor growth that India needs (see section 7.2).

These findings were reinforced by the case studies presented in Chapter Six (section 6.3). On the one hand the MBRT policy is targeting market seeking, service sector FDI with the escalating purchasing power of the middle and upper classes. The policy, it is argued, will modernise the retail sector, expand consumer choice and lower prices. However, critics argue it will do so at the expense of the livelihoods of millions of small retailers and farmers, two socially disadvantaged groups in India.

The NMP is an example of the government’s strategy to attract manufacturing investment. This policy which is promising inclusive growth and increased employment opportunities to semi and unskilled labourers by offering investors liberalised labour laws and hire and fire policies within State provided, self-regulated autonomous manufacturing zones. As found in Chapter Six (section 6.3.2) there is a risk that the liberalisation of labour laws in the NMP will create insecure and hostile work environments.

The two policies contrast each other in the level of afforded social protections. The Indian government implemented several stipulations into the retail policy to ensure greater positive spillovers and protection from investment. Business groups have criticised the policy as being too demanding to attract investment. It was argued that because the retail policy was very politically contentious and a ‘mass politics’ issue in India that business influence into the policy’s outcome was limited and protections were needed to ensure more confidence from the public. The National Manufacturing Policy, on the other hand, afforded business associations all of their policy preferences. The NMP is the first investment policy in India whereby national labour protections have been curtailed. The lack of protections may have resulted because the policy did not draw the same level of public attention; it did not become a ‘mass politics’ issue (Varshney, 1998; Murali, 2010) and business was afforded more influence in the policy’s outcome. Furthermore the government may have felt the need to provide incentives in the form of relaxed labour and environmental regulations to compensate for the other factors thwarting manufacturing investment.

A major implication to these findings is that investment policies matter; they can have wide ranging and direct impact on the social welfare of workers and citizens. In one respect, the findings illustrate that public engagement can be important in forcing the government to listen to the concerns of citizens as opposed to those of the business community. However, in another respect, the findings here also illustrate that constructing policies that balance the needs of citizens, workers and business can be difficult to manage. The recent divestiture of FDI from the retail sector in India (UNCTAD, 2014) also illustrates that business will express displeasure by withdrawal from domestic markets if policies and investment climates become too demanding and uncertain.

There are wider social implications that arise specifically from the NMP. The most visible social policy concern is the future possibility and, perhaps, inevitable manifestation of labour market reform at the national level. Murali (2010) argues that a key constraint to business influence in labour reform is Indian coalition politics, the fragmented decision making and the lack of consensus that coincides with the multiple political agendas of a coalition government. However, in 2014 one political party, the BJP, won an overwhelming electoral majority at the national level. This is the first time in 35 years that India does not have a coalition government. The BJP is known for their “industry-friendly” stance and thus there are concerns that labour regulations will be curtailed (Mander, 2014). This raises an important question: If the curtailment of labour protections within the NMP is the first step towards national reform, will a more inclusive and efficient system of social welfare be implemented prior to reform? The majority of respondents agreed that there is an urgent need for labour reforms but reforms that ensure more efficient protection of workers and not simply curtailment of existing protections (see section 7.3.3). As one participant explained, the labour reforms debate often focuses on how labour laws are hindering business rather than how they are failing to protect workers. As Harsh Mander (2014), noted Social Worker and activist argues: “India needs to amend its labour laws not destroy the weak safeguards that exist now but strengthen them.”

Why do elite policy stakeholders feel India has attracted the type of FDI it has and what do they believe are the main social and developmental consequences that have resulted from the FDI India is attracting?

TNCs basic motivations to internationalise operations is either to better exploit their existing competitive advantages or protect or increase their advantage (Dunning, 2002, 2008; UNCTAD, 2006). FDI may be market seeking, efficiency seeking or resource seeking (see section 3.5). Different types of FDI bring different capabilities to bring potential advantages and disadvantages (OECD, 2008; Rao and Dhar, 2011b; Forsgren, 2013).

Data from interviews and analysis from investment bureaux uncovered that the government is actively attracting market seeking and service sector FDI. From my interviews with elite policy stakeholders, it was revealed that India had high inequality at the time of economic liberalisation and a middle class with burgeoning purchasing power which attracted market seeking and service sector investment. The government also provided IT parks which saved investors the hassles of acquiring land and other hurdles associated with greenfield investment.

From my interviews with elite policy stakeholders, it is clear that there is a misalignment between the types of investment India is receiving and the types of investment that might bring greater benefits to the country. Service sector led growth coupled with the stagnant manufacturing sector and unproductive agricultural sector has stunted the structural transformation of employment in India. This is particularly problematic as the majority of India’s population are situated in an unproductive agriculture sector with little opportunity for livelihood transition as the service sector requires a threshold level of skills and education that most in India do not possess. Interviews with elite policy stakeholders relayed explicit concern that those transitioning out of agriculture with semi and low levels of skill were being forced into the informal realms of the service sector where employment is unstable and working conditions are poor.

Elite policy stakeholders consistently revealed that India’s investment pattern of attracting predominately market seeking and service sector FDI (and insufficient manufacturing FDI) was linked to four main social and developmental consequences: the majority of the population with lower levels of skill are excluded from productive employment, economic growth is not reaching or helping the poor, it is increasing inequality and increasing social tensions.

There are two wider implications of these findings. First, economic growth should not be the end goal itself; rather, growth needs to be associated with economic inclusion for all so that the benefits of economic growth reach those who need it most. Economic growth needs to create sufficient employment opportunities for decent and productive work so that the structural transformation of the workforce can occur. Second, FDI alone will not necessarily provide a solution to a country’s developmental problems. Elite policy stakeholders, both liberal market and human rights oriented revealed a clear perception that FDI will not fix a country’s development problems. It will not ‘fill in the gaps’ or substitute the hard work needed for sustainable and inclusive growth. As the OECD (2002) concludes, FDI can act as a catalyst for a country’s strengths and weaknesses, magnifying its advantages and its problems. India has strength and comparative advantage of a wealthy middle class and highly skilled, English speaking labour and FDI is exploiting these resources and bringing employment opportunity, economic growth and an increased range of products to India’s middle class. India’s weakness is its inequality with a large share of its population with lower levels of skill that are excluded from productive service sector employment. FDI appears to magnify this inequality by providing opportunity for the minority but not the majority. Furthermore, the OECD (2002) concludes in Foreign Direct Investment for Developing Countries: Maximising Benefits, Minimising Costs (p.22):

FDI-induced economic change may produce some adverse distributional and employment effects in the host country. Both categories of problems should be temporary, but they can be prolonged and aggravated in the absence of appropriate policy responses.

There is a clear risk that FDI may be heightening the adverse distributional effects India is experiencing such as a widening of class polarisation and deepening of inequalities, however, policy responses are needed to mitigate such effects. Policies such as universal access to quality public education and skill training are needed and are further explored in an upcoming section (section 10.5).

Do elite policy stakeholders believe that the Indian government is balancing the needs of business and citizens in its development strategy or is one prioritised over the other?

Both citizens and businesses are dependent upon the state for needed provisions to function and thrive (Gough, 1979; Glasberg and Skidmore, 1997; Farnsworth, 2012) (see section 3.6). Farnsworth (2012, p.3) argues that it is helpful to contemplate welfare provision as a “continuum of need satisfaction” whereby social and corporate welfare are located at the extreme ends. How host governments balance the needs of business and its citizens and where they position policies along on the welfare continuum will help determine the impact of FDI to the citizens of a host economy.

Elite policy stakeholders revealed an inclination of the government to prioritise the creation of high GDP over the creation of social welfare development. Every respondent discussed India’s lack of social welfare provisions and one respondent characterised social provision as an ‘add on’ or appendage to the economic policy (section 7.2). The wider implication in prioritising GDP growth over social welfare is that the state has failed the majority of its citizens in the development of the social capital needed to compete in formal market opportunities. One respondent stressed that social capital, in India, is derived from the individual’s capacity to invest in education and healthcare and this is something the middle classes can afford and lower classes cannot.

By investigating the third research question, the nature of the Indian government-business relationship was explored. The Indian government now pursues “a business led development” plan at the expense of everyone else’s needs, according to one respondent. The favouring of economic growth over social welfare may have derived from the Indian government–business relationship and the increased access to policy-making acquired by business since economic liberalisation, as discussed in Chapter Eight (section 8.2). Kohli (2012) argues that the shift in development priorities to suit business needs has stymied the redistribution of economic growth as policy priorities towards the needs of the underprivileged are not facilitated or promoted by business. This is a major implication of the growing influence of business over the policy decision making in India.

A further implication that arises from the increasing collusion of the state and business is the incidence and occurrence of corporate crime and state- corporate crime. As explained in Chapter Three (section 3.3.3 and 3.3.5) corporations often have rationalisations and neutralisations ingrained in the corporate culture that facilitates the partial and selective adherence to regulations (Benson and Simpson, 2015, 2009; Clinard and Yeager, 2006, 1986). When the state and business share goals that would be hampered by regulation, the state may facilitate corporate criminal behaviour, undertaking what Kramer et al (2002) argue is state-corporate crime (see section The empirical findings (section 6.3.2, 7.3.3) reveal that labour laws are being blatantly broken by business and that the state is complicit in this crime by not enforcing labour laws. Additionally, elite policy stakeholders discussed the exploitation of child labour by TNCs in India (see section 9.5).

There are widespread consequences of corporate crime and state-corporate crime. It is argued that the political and economic power of corporations provides protection or a ‘corporate veil’ to conceal criminal acts (Lilly et al, 2015). This level of secrecy or non-transparency increases exponentially when the state is complicit in corporate harm and crime. The government is the institution that is supposed to regulate corporate behaviour and ensure national legislation is followed. When the state is complicit, facilitates or initiates corporate crime, there is a complete lack of accountability. In this case, civil society can demand accountability from the government and corporations. Issues of the growing collusion between the state and business, as well as corporate crime and state-corporate crime needs to become a ‘mass politics’ issue where citizens make it politically unacceptable for the government to collude with corporations in harmful and criminal ways. This is currently happening to an extent in India. In 2012 there was a large anti-corruption movement in New Delhi. The movement has gathered momentum and in February 2015 the anti-corruption political party, Aam Aadmi Party (AAP), led by anti-corruption activist Arvind Kejriwal swept the Delhi state elections (Biswas, 2015). While only a start, it is a hopeful step in the right direction for curbing state-corporate crime and corporate crime.

Do elite policy stakeholders perceive the government’s FDI policies to be effective in minimizing the negative effect of TNCs while maximising benefit to its citizens and economy?

FDI is capable of bringing a range of costs, harm and crime as well as opportunity and benefit (see section 2.4). The OECD (2002) stresses the importance of effective national policies in mitigating negative effects and maximising benefits (see section 3.7). Chapter Eight (8.4) investigated respondents’ views regarding FDI policies and the government’s ability to construct effective policies to minimise disadvantages and maximise benefits. Respondents’ were equally as pessimistic towards the ability of India’s FDI policies to mitigate harm and promote benefit as they were of India’s social policies to do so. In congruence with the Indian government’s priority for high GDP above all else, respondents indicated the government pursued FDI “come what may” as “FDI will cure all”. These inclinations have led the government to privilege the quantity of investment over quality and the quality, respondents argued, is most important. Some respondents reported problems with incorporating recommendations from think tanks into the policy and others stated that there were social protections within the investment policies but they were not being implemented on the ground. Several respondents commented on the discord within Parliament that hindered the approval of needed policies resulting in a policy paralysis within India.

It was made clear in Chapter Seven (section 7.4) that elite policy stakeholders criticised the ways in which FDI is accessing Indian markets and participants linked these problems to India’s ineffective FDI policies. Several respondents spoke of the high levels of brownfield investment and round-tripping investment to India which is underrepresented in India’s official FDI statistics. Brownfield and round-tripping were viewed, at best, as less beneficial than greenfield investment in delivering positive spillovers and at worst, a predatory form of investment with the intent to monopolise markets. Private equities from institutional investors are an important source of FDI to India and a significant source of capital for the government in trying to finance its current account deficit. It is criticized, by some, as being much closer to portfolio investment and incapable of bringing the positive spillovers that traditional FDI, arguably, can bring. For others, it was a speculative form of capital that was adding instability to the economy. The high level of M&A was of particular concern for the pharmaceutical sector where many of India’s domestic companies are being acquired by Global Pharma. Many participants discussed the worry that generic medications would be removed from the market causing a direct impact on access to affordable medicines. The large occurrence of acquisitions may also thwart the ability to use the flexibilities afforded in TRIPS legislation to manufacture life-saving medication prior to patent expiration as this will not be in the interest of Global Pharma.

There are two wider implications derived from these findings. First, what is clear from my interviews is that not all FDI is alike or equally beneficial to host countries (see sections 7.2, 7.4). Elite policy stakeholders demonstrated clear opinions that different types of FDI carried different possibilities and policies were crucial to minimising negative consequences and maximising benefit. Every respondent explained that FDI could be useful if it provided jobs, technology and other helpful spillovers; no one thought FDI should be restricted in all sectors across the board. However, just as economic growth should not be the end goal in itself, neither should FDI. The second implication is that the stakes can be very high regarding FDI. Risks of harm can be much more detrimental than technology or managerial skills failing to spillover, issues of public health and access to medicines can hang in the balance, as explicated by respondents.

What spillovers, both positive helpful and harmful, do elite policy stakeholders feel TNCs are bringing to the citizens, workers and local economies?

FDI is often purported to spur economic growth and decrease poverty; make domestic industries and firms more competitive and productive; facilitate technology transfer and create employment opportunities, often of high quality with higher wages (Borensztein, 1998; OECD, 2002; Nunnenkamp, 2002; Moran et al, 2005) (see section 2.4). Obtaining positive spillovers is a large reason why developing countries seek to attract FDI. However, as observed, the empirical evidence for FDI and positive spillovers conclude that there are no universal relationships (Nunnenkamp, 2002; OECD, 2002; Lipsey and Sjoholm, 2005; Moran et al, 2005). Nevertheless, despite the wide-ranging variability in spillover studies, “policy makers seem to have made their own judgements that inward FDI is valuable to their countries” (Lipsey and Sjoholm, 2005, p. 23) and pursue FDI with vigour.

Analysis of the spillovers revealed a mixed picture in terms of both benefits and costs brought to India from FDI. In line with previous empirical discussions (6.2, 7.2), India’s current growth pattern which includes the increase in FDI following economic liberalisation is catering to the middle class consumer and employment needs. In the higher productivity service sector realms, for example, FDI has increased opportunities and wages. It has also helped to deepen India’s capital markets which India’s business class can access and benefit. Several respondents listed increased proficiency in management techniques as one helpful spillover from TNCs in India. In regards to direct spillovers of knowledge or technology, on the whole, elite policy stakeholders did not feel India had gained much from FDI in these respects. In general, it was remarked by participants that FDI does not appear to bring much benefit for those in the lower social classes. What’s worse, it is bringing costs such as land displacement and lower levels of global value chains which are rife with poor working conditions and exploitation.

The theoretical implication here confirms that the benefits of FDI are not automatic or universal. Furthermore, responses from participants were sometimes conflicting demonstrating that spillover research can be ambiguous and subjective. As mentioned above, these findings indicate a need for effective policies to ensure the benefits are extracted and harms mitigated.

These then are the research questions and the implications of the findings. The following section will discuss the original contributions to knowledge that are informed by this research.

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