Humane investment

Challenge before us is to maintain the soft character of our FDI and not look for short term gains like China does.

At the recently concluded BRICS summit, prime minister Manmohan Singh once again harped on the need to promote global capital flows to meet the requirement of investment in infrastructure in the country. Little does he realise that things have changed fundamentally. India has become a net exporter of capital. Our domestic needs for investment can easily be met by improving the domestic environment for investment and encouraging our own capital to stay home. The problem today is to proactively deal with our corporate sector that is investing overseas.

A bit of history. Manmohan Singh had wanted to open the economy to FDI speedily in one go at the very beginning of reforms in the nineties. In contrast Swadeshi economists wanted domestic liberalisation to precede external liberalisation. We should allow FDI only when domestic companies have become strong to face their onslaught. Manmohan Singh, followed by Yashwant Sinha, could not open the economy to FDI due to this opposition.

This led to slowing of inflow of FDI. Indian companies got time to strengthen themselves. Today they are ready to face MNCs on their own turf. Outward FDI from India was $25 billion in April-Oct 2011 against $20 billion inward FDI. India has become a net exporter of capital. The UPA government has played a positive role in this recent transformation by reducing restrictions on outward FDI. Outward FDI has been placed on the automatic route up to a particular limit.

We need to look ahead. It is likely that outward FDI from India will increase exponentially. We have managerial skills. We also have rich experience of adapting frontier technologies to developing country needs. Outward FDI is likely to grow on these strengths. Consequently, we may find that our companies are abhorred in foreign lands as MNCs were abhorred in India in the nineties. There is need to proactively put in place a policy framework to avoid such an outcome.

Comparison of outward FDI from China and India will help clarify the issues involved. I had opportunity to visit Tunisia two years ago. The capital Tunis is headquarters to the African Development Bank. Professionals from ADB told me about the Chinese FDI. State-run Chinese companies would bring plane loads of Chinese workers—even for unskilled jobs for which local labour was available. They would establish a separate Chinese community complete with stores selling Chinese goods, a Chinese bank and restaurant, and all other facilities as if this was part of China. The community was sealed from local interaction. It formed an island in the host country.
This led to creations of many apprehensions among the local people and often erupted into opposition to Chinese companies.

The character of Chinese FDI is not much different from that made by British companies in the colonial period. Objective of both FDI was to extract natural resources from the host country and export them back home. Both relied on the political power of their country to make inroads into the host country. British companies entered India on the back of British rule of the country. Chinese companies are entering on the strength of foreign aid given by the Chinese government. There was little vertical integration with the host country in both FDI.

The character of Indian FDI is different. Primary objective of Indian companies is to undertake manufacturing for host country markets, earn profits and, maybe, remit them to India. In this they are closer to contemporary global MNCs. Of course this leads to spillover benefits to the Indian economy in supply of skilled manpower, technologies and capital equipment though this is not the main objective. Our companies do not enter on the strength of the political prowess of our government. Our companies are mostly driven by their skills and technology advantages. Our FDI organically integrates into the host economy. It uses host country raw materials to manufacture for host country markets using host country labour. Naturally there is transparency in our operations and opposition is less. Challenge before us is to maintain this soft character of our FDI and not be carried away by short run gains made by the Chinese approach.

Our government is planning to encourage outward FDI. This welcome step must be circumscribed  with certain policy orientation in order to become stable and beneficial in the long run for us as well as the host countries. First policy imperative is that of transfer of technologies. We must require our companies to share technologies with the host country. We should focus on the inherent strengths of our culture to create permanent need of our presence.

Second policy imperative is of profit repatriation. The United Nations Development Programme had cautioned in one of its Human Development Reports that the long term burden of profit repatriation on the host country may more than wipe out the short run gains from inward FDI. It may therefore be necessary for Indian companies to reinvest at least 75 per cent of the profits in the host country. This will support growth in the host country and reduce debilitating seepage of wealth.  

Third policy imperative is that of resource pricing. India imports phosphates, coal, uranium and other natural resources. It is natural that Indian companies would invest in extraction and exports of these resources. This can lead to impoverishment of the host country if the resources are exported at artificially low prices to India. It can therefore be provided that Indian companies shall export natural resources at international prices and not below. These policies will help ensure that there is no backlash against Indian companies abroad.