Benefits Of Foreign Direct Investment Economics Essay

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According to my point of view,The FDI concept should be encouraged in retail sector as it will increase the employment,cheaper down the prices,will increse the availability of quality products and provide another benefits also.

Firsty we will discuss the concept of Foreign direct investment and advantages and the problems or hindrances which comes in doing FDI.After that we will discuss about the FDI in retail sectors.

WHAT IS FOREIGN DIRECT INVESTMENT (FDI) ?

The aim of obtaining Direct investment reflects a lasting interest by a resident entity of direct investor in an enterprise that is resident in the direct investment enterprise. The long-term relationship between the direct investor and the direct investment enterprise implies the existence of "lasting interest" and a significant degree of influence on the management of the latter. Direct investment includes both the initial transaction maintaining the relationship between the investor and the enterprise and all the subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. It should be noted that capital transactions which do not give rise to any settlement.

In other words we can say that investment directly by a company located in another country is into production in a country is Foreign direct investment (FDI), either by buying a company in the target country or by expanding operations of an existing business in that country. It is done for many reasons including cheaper wages & to take advantage of the country, special investment offered by the country such as tax exemptions  as an incentive to gain tariff-free access to the markets of the country or the region. contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds shows Foreign direct investment.

The country receiving investment and the investor is profitable for both in the foreign direct investment . FDI offers an exclusive opportunity to enter into the international or global business , new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities to the investor company. Foreign funds for development, transfer of new profitable technology, wealth of expertise and experience, and increased job opportunities is received by the host country.

Benefits of Foreign Direct Investment :-

The burden of risk of an investment from domestic to foreign investors is Shifted by FDI

Underlying investment are linked to profitability of the Repayments.

Since 1970 FDI is the only capital inflow that has been strongly associated with higher GDP growth.

FDI contributes to economic growth as raises the ratio of FDI flow to domestic investment.

Potential gains has been led through technology transfer by FDI .

Large employment opportunities has been generated in a number of Countries by FDI.

FDI has led to the growth of the international trade.

Hindrances Of Foreign Direct Investment :-

The scope of private investment for Domestic & Foreign is limited as the Monopoly is assigned by the public Sector.

If the Public Sector enterprises need foreign technology or investment they need the marked preference from the Foreign Government Sources.

In Export oriented industries or in high technology industries foreign investment was normally permitted.

A ceiling of 40 Percent was normally subject ny the foreign equity, although exceptions were allowed on the merit.

Corporate taxation was high & tax laws and procedures were complex.

FOREIGN DIRECT INVESTMENT IN RETAIL

Retailing is the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. A retailer is one who stocks the producer's goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.

The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the 'second most attractive retail destination' globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.

The Indian Scenario:

Trade or retailing is the single largest component of the services sector in terms of contribution to GDP. Its massive share of 14% is double the figure of the next largest broad economic activity in the sector.

The retail industry is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The Retail Industry is the sector of economy which is consists stores ,individuals, agencies, commercial complexes, organizations , companies, and etc., involved in the type of business which consists of selling or merchandizing diverse finished products or goods to the end-user consumers directly and indirectly. Goods and products of the retail industry or sector, are the finished final objects/products of all sectors of commerce and economy of a country. 

The FDI in india's retail business can be made through any of the following routes:

Joint Ventures

Franchising

Sourcing of Supplies from small-scale sector

Cash and Carry Operations

Non-Store Formats

PROS AND CONS OF FDI IN RETAIL:

The following are the main issues raised by those in favour of foreign equity in multi-brand HYPERLINK "http://businesstoday.intoday.in/story/fdi-retail/1/20407.html"retailingand those opposed to it:

Those against:

Endangered livelihood-It will close down of tens of thousands of mom-and-pop shops in the country and endanger livelihood of 40 million people.

Rise in inflation- It will bring down prices at initial, but fuel inflation once multinational companies get a stronghold in the retail market

Problems to farmers- Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers.

Problems of Small and medium enterprises- Small and medium enterprises will become victims of predatory pricing policies of multinational retailers.

Disintegration of Supply chain- It will disintegrate established supply chains by encouraging monopolies of global retailers

Those in favour:

Cutting of intermediaries- It will cut down intermediaries between retailers and farmers, thereby helping them gain more money for their production.

Cheaper Prices- It will help in bringing down the prices at retail level and calm down the inflation.

Reducing wastage- Big retail chains will invest in supply chains which will help in reducing the wastage, estimated at 40 percent in the case of vegetables and fruits.

Better Market - Small and medium enterprises will have a bigger market with the help of FDI, along with better technology and branding other facilities.

Advanced technology - It will bring much-needed foreign investment into the country, along with technology and global best-practices.

Employment- It will actually create employment situation than displace people engaged in small stores.

Healthy competition- It will create better competition in the market, thus it will benefiting both producers and consumers. 

Long term cash liquidity: FDI help in providing required capital for the set up of organized retail stores.It will be the long term investment because physical investment is not much liquidated unlike equity share capital.

The Question of Foreign Direct Investment (FDI) in Retail:

Given this backdrop, the recent clamour about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments to support both sides of the debate. It is widely acknowledged that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption.

But the most important factor against FDI driven "modern retailing" is that it is labour displacing to the extent that it can only expand by destroying the traditional retail sector. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganised retail sector should be kept on hold.

Though most of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till date) will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy, will render millions of small retailers

jobless by closing the small slit of opportunity available to them.

Imagine if Wal-Mart, the world's biggest retailer sets up operations in India at prime locations in the 35 large cities and towns that house more than 1 million people13. The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. Wal- Mart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell low - severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high.

Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the 'predatory' pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, "By controlling both ends of the chain, the company could buy cheap and sell dear". The producers and traders at thelowest level of operations will never find place in this sector, which would now have demand mostly only for fluent English-speaking helpers. Having been uprooted from their traditional form of business, these persons are unlikely to be suitable for other areas of work either.

It is easy to visualise from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hyper markets.Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. But stopping an Indian retailer from growing bigger is something current public policy cannot do, whereas the State does have the prerogative in whether foreign entry in the retail sector should be stalled or not.

It is true that it is in the consumer's best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits.

As I discussed in starting that govt. should encourage FDI in retail, the reason behind that are following:

1) Direct benefit to Farmers: There will be the biggest benefit of FDI in retail to farmers in India. In the world, the big giants in retail purchase the produce directly from the farmers, thereby eliminating the intermediaries.Through which farmers will get much better price which is atleast 15-20% higher than the existing price they get. In present system, the farmers get approximately 30-35% of the retail price, all rest price is taken over by middle men like traders etc. For eg: During the onion shortage in India most of the hoarding was done through onion traders, whereas they got price as high as Rs. 35 Kg, the farmer got only Rs. 4-5 Kg.Thus farmers will get direct benefit from direct purchase.

2) Reduction in Food Inflation: The incoming of FDI will bring in strong competition amongst the retailers at the same time the elimination of middle men who are also the hoarders of stocks will help reducing the supply constraint. The direct purchase policy of bigger retailers will help in passing on the benefit of low procurement cost directly to consumers. Thus helping in reducing food based inflation to a great extent.

3) Earning of Forex: India will earn a great amount of foreign exchange reserves from the investments which the mega multi brand retailers will do in India. Each retailer is suppose to do minimum of 100 million dollars, considering that setting up an average one store costs 5-10 million dollars, one can easily expect to get investment upto 1 billion dollar from each retailer in total, which can be approx 15-25 billion dollars spread over 5 years.

4) Huge Employment Benefits: The international model suggests that all those countries which opened up multi brand retail to FDI added huge amount of employment. In India the government expects it to generate atleast 1 million employment over the next few years.It is very critical to note that the government is allowing Foreign retailers to open retail stores in India in joint venture with Indian partners only in top 53 cities with a population of 1 million and above.

5) Drop in Food Wastage: A huge chuck of almost 30-40% of total food is wasted in transportation and poor storage facilities. Not to mention the millions of grains that rot in govermennt godowns every year. The government has made it compulsory for the foreign retailers to invest alteast 50% of the investment in infrastructre. Thus it will become critical for them to reduce food wastage by making better storage and quick transport facilities available.

6) Better Consumer Choice: The other major beneficiar will the consumer. Since most of the retail stores operate over a very large format they generally have a large amount of SKUs (products). Thus they will store as much variety as possible. Which generally kirana stores do not keep since they are not sure of its sale.

7) Benefit to Kirana Stores: Well dont be suprised from this point but its true. As per government approved policy it is compulsory for the mega retailers to have 30% of their sales from small retailers. The Punjab state is a perfect example of this cash and carry model.

At the same time one must realise that the kirana store retailers have been paying a high price to middle men to procure good, which they can now procure at much lower price from the bigger multi brand foreign retailers. At the same time the multi brand retailers with FDI will be allowed to sell only in 53 big cities with population of more than one million. Thus the Kirana stores can directly benefit from buying from cities and selling them in their towns.

One must not forget that most of this big brand multi retail shops will be based on out skirts of city whereas the Kirana stores are in heart of city providing home delivery.

8) Creation of backend Infrastructure: The government has made it compulsory for the foreign brand multi retailer to invest alteast 50% if there amount into back end infrastructre. Thus giving a boost to facilites like cold storage, food grain banks etc, ..

9) More Purchase from SMEs: Its been made mandatory by the government for the mega brand multi retailers to procure atleast 30% of its requirement from SMEs. Till today its been very difficult for the SMEs to sell their products via kirana stores since non existence of brand. The kirana stores used to reject the goods produce by SMEs due to lower offload.But the multi brand retailer will have to compulsorily purchase from the SME upto 30%.

10) Overall growth: India's GDP has been slowing down since last few quarters. The influx of foreign funds will lead to huge incoming of investments in critical sectors like construction, employments etc. Such investment will easily contribute upto 0.5% to the GDP growth backed by other critical reforms. Though the government has to bring down interest rates to boost growth, it also has to bring in more reforms.

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