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Role Of FDI In Higher Education Economics Essay

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Published: Mon, 5 Dec 2016

The post-liberalization period witnessed an increasing trend of FDI inflows in India with a high growth rate. The relaxation of policies towards international trade and investment supported by a positive response from capital exporting countries is also considered as a major determinant of FDI inflows into India. Whether it is education sector or information technology or telecommunication sector there is a continuous fluctuation in FDI inflows into these sectors over the years. That’s why FDI in education sector has become a point of discussion among the researchers. India with its diversity fascinates one and all. Indian Education has recently gained world recognition. FDI inflows in the education sector during May 2012 stood at US$ 31.22 million, according to a release by the Ministry of Commerce & Industry.

Higher education is assuming an upward significance for developing countries, especially countries including India which is experiencing service-led growth. Higher education is all about generating knowledge, encouraging critical thinking and imparting skills relevant to this society and determined by its needs. Education general and higher education in particular, is a highly nation-specific activity, determined by national culture and priorities. The growth of India’s higher educational institutions has indeed been outstandingly rapid. The numbers of universities have doubled since 1990-91, and enrolment has become more than doubled. India is one of the most attractive education markets but historically the government has not encouraged foreign participation in this sector. It faces a massive challenge to provide education to young people, especially in remote locations. According to the National Knowledge Commission estimates, the country needs to build 1,500 universities within a period of five years to endow enough people with the skills to sustain rapid growth. Given this state of higher education in India, liberalization would be considered as the best solution. The major concern regarding such liberalization is that it can lead to commercialization of higher education which may have an effect on a large section of society adversely.

The present paper aims to analyse the need of FDI in higher education in India and its implications on the Indian education system and to examine the importance of regulatory bodies in inviting the foreign universities and make recommendations for changing the present scenario in Indian higher education.The study is based on secondary data. Secondary data had been collected from various books and journals. The study covers the thoughts and writings of various authors in the stream of industry, academicia, and research.

The study reveals that India must act in its self-interest. India must manage to launch a proposal and commit to areas where there are strategic opportunities to be exploited through trade. Regulation of higher education in India should be achieved through the correct approach. This will ensure that profit making is not exploitative but channeled to raise the quality of education. In short, a pro-active rather than defensive approach is required to benefit from the liberalization of higher education services.

Keywords: FDI, Higher Education, liberalization, commercialization of higher education,



Today knowledge explosion is taking place across the world. Knowledge has become the key driving force in economies to become fast moving and rich based on use of knowledge effectively. Knowledge industry is nothing but education and it is becoming a key factor in the process of development of a nation. The Higher education in context with India has become very critical success factor to sustain the economic growth it has experienced in last 20 years which is partly due to knowledge based industries such as IT/ITES. India is moving and will continue to move towards “services industry” led growth and higher education is the most critical input in that domain. Higher education is all about generating knowledge, encouraging critical thinking and imparting skills relevant to this society and determined by its needs. The growth of India’s higher educational institutions has indeed been outstandingly rapid. The numbers of universities have doubled since 1990-91, and enrolment has become more than doubled. But this has been at the expense of quality, increased rigidity in course design, poor absorption of knowledge, and growing lack of access to laboratory facilities, journals and opportunities for field work, etc. The average Indian graduate compares poorly with her/his counterpart in most countries, including many developing ones. All this calls for reform, administrative changes, more funding, greater flexibility, quality improvement, etc.

In 2007, the Indian Government announced a nine fold increase in higher education spending over the next five years. For India to maintain its economic growth in a global market place fueled by the knowledge economy, it needs to nearly double its number of students in higher education by 2012. Fifty-one percent of India’s population is under the age of 25. According to the National Knowledge Commission estimates, the country needs to build 1,500 universities within a period of five years to endow enough people with the skills to sustain rapid growth.

India is one of the most attractive education markets but historically the government has not encouraged foreign participation in this sector. Since the impact of privatization, liberalisation and globalisation is penetrating in all sectors of the Indian economy, it is bound to affect education sector as well. Education is no longer need to be viewed only as a charity or social service but should be considered as a necessary input for economic growth. In this effort towards human resource development, the private sectors including foreign players through FDI has to play a major role since it is a major beneficiary of the knowledge industry. Government has proposed 100 percent foreign direct investment in higher education and hinted at making reservation mandatory in the institutions to be set up by foreign universities in the country. Once approved by the Cabinet and passed as law, the Foreign Education Providers (Regulation) Bill will grant deemed university status to such institutions.


The basic aim is to focus on the following aspects:

To study the status of Indian higher education system.

To analyze the need of FDI in higher education in India.

To examine the importance of regulatory bodies in inviting the foreign universities.

To find out the implications of bringing in FDI in Indian higher education sector.

To study the aspects of FDI entry in different countries in higher education.


The study is based on secondary data. Secondary data had been collected from various books and journals. The study covers the thoughts and writings of various authors in the stream of industry, academician, and research. The Journals and books have been referred were described in the bibliography.


The importance of FDI and human capital accumulation, education for economic growth or FDI in higher education has largely been discussed in many literatures which are given below:

Feenstra and Markusen, (1994), in their studies have highlighted the importance of FDI for economic growth and human capital accumulation. Economic theory recognizes FDI and human capital as two important conduits for economic growth. They found that FDI can contribute directly to the growth of an economy by improving knowledge, technical know-how and technology spillovers, by boosting capital stock and by instigating domestic production and consumption.

Stijns (2001,2006) in his study, on the role of natural resource abundance on human capital accumulation in various developing and developed countries suggests that FDI can have a lasting effect on country’s per capita income through a higher human capital stock.

Sharma, Rajesh Kumar (2006) in his article “FDI in higher education: official vision needs corrections”, examines the issues and financial compulsions presented on the consultation paper prepared by the commerce ministry. This article raises four issues which need critical attention: the objectives of higher education, its contextual relevance, the prevailing financial situation and the viability of alternatives to FDI. The conclusion of the article is that higher education needs long term objectives and a broad vision in tune with the projected future of the country and the world. Higher education will require an investment of Rs. 20,000 to 25,000 crores over the next five or more years to expand capacity and improve access. For such a huge amount the paper argues, we can look to FDI.

Buegelsdijk et al (2008) have highlighted the impact of FDIs on economic growth and found that FDIs have different impacts on human Capital accumulation and education depending on the type of FDIs. Vertical FDIs or efficiency-seeking FDIs look for cost advantages, mostly cheap low qualified labour. On the contrary, it may lead to specialization into low value added products, thus providing the local population little incentive to participate into higher education. Horizontal FDIs or market-seeking FDIs pursue increased market shares in the host countries, competing directly with one another as well as with the local firms. This is generally synonym to technology transfer, thereby contributing to the host country’s technological upgrading and human capital accumulation.

Chaudaha, Rahul (2010) has also conducted a study on the “primary motives of foreign universities interest in India and their influence on key Indian higher education trends”, and stated that foreign universities would concentrate on metro cities and states that have high demand, pricing power,

accessibility and employment opportunities for students. This means that they are not going to start campus in regions that actually require quality institutions.

Sharma,Brahm (2012) has concluded in his study “India – a lucratve destination for fdi in higher education” that Higher education in today’s global environment , is neither charity nor a purely social objective. Higher education is an economic requirement for the country for growth. Government must consider seriously corporatization of higher education so as to allow corporate houses to enter higher education and deliver education of global standards. This will also facilitate several private universities, research houses, large Corporates to consider foreign direct investment in India’s higher education market.


The system of higher education now existing in India was originally implanted by the British rulers in the mid-19th century to serve the colonial, economic, political and administrative interests, and in particular, to consolidate and maintain their dominance in the country. It was inherited by the state managers after independence (in 1947) as a colonial legacy, and has been expanded phenomenally during the last five decades. Knowledge is the driving force in the rapidly changing globalized economy and society. Quantity and quality of highly specialized human resources determine their competence in the global market. It is now well recognized that the growth of the global economy has increased opportunities for those countries with good levels of education and vice versa. The first Prime Minister of India considered foreign investment as “necessary” not only to supplement domestic capital but also to secure scientific, technical, and industrial knowledge and capital equipments. As part of globalization, the economic reform packages were introduced in India in the beginning of 1991. These reform packages have imposed a heavy compression on the public budgets on education sector, and more specifically on higher education.

The Indian education system starts at preschool level and goes on till Post doctoral level. It has core sector which consist of schools and higher education. The noncore sector mainly consists of vocational course such in IT/ITES and in other areas as airhostess training, sales management, and other vocational training etc.

The growth of higher education provider’s in terms of Universities and Colleges had been

spectacular since independence. There were 20 Universities and 500 Colleges at the time of

independence. Now, India is the third largest higher education system in the world (after China & the USA) in terms of student enrolment, with 33, 657 number of institutions (634 universities and 33023 colleges). According to 2011 statistics ,India has 43 Central universities, 297 State universities,129 deemed universities, 15 Institutes of National importance and 17 Institutes established and functioning under the State Act; 33023 colleges including 203 Autonomous colleges. Of these there are 67 unaided deemed universities with enrolments of 60,000 students and 7,650 private colleges with enrolment of 3,150,000 students.

The gross enrolment ratio (GER) signifies the health of higher education in the country and

indicator of the level of participation in higher education. India’s annual enrolments in higher education have grown since independence but the GER (Gross Enrollment Ratio) of 15 % as estimated for 2011 is far below the global average of 26%. After nearly six decades of Independence, higher education is not accessible to the poorest groups of the population. In US and UK, percentage of enrolment in higher education is 82.4 and 60.1 respectively. In India, regardless of recent increment due to private players, current enrolment is merely 12 %. Even South East Asian countries have higher enrolment rate like 31% in Philippines, 27% in Malaysia, 19% in Thailand and 13% in China. To maintain the positive trends and an economic growth rate of 7 percent, India‟s higher education gross enrollment ratio (GER) would need to boost from 12 to 20 percent by 2014. The Indian government has set a target of achieving a GER of 30% by 2020.Even with such a huge system in place, higher education in India is still in a miserable condition. This poses a severe constraint on the supply of qualified manpower.

According to United Nations Educational, Scientific and Cultural Organization (UNESCO), public spending on higher education in India has one of the lowest public expenditure on higher education per student at US 406 dollars, which compares adversely with Malaysia (US 11,790 dollars), China (2728 dollars), Brazil (3986 dollars), Indonesia (666 dollars) and the Philippines (625 dollars). This expenditure in the USA is 9629 dollars, in the UK 8502 dollars and in Japan 4830 dollars. India needs to deal with issues of both quantity and quality.

In view of this shortage of public spending, parents and students are increasingly looking to private education for a solution. Every year nearly 0.4 million Indians go abroad for higher studies spending approximately $12bn. This leads to not only loss of foreign exchange, but also ‘Brain Drain’, as most of these rarely comes back to India subsequent to completing their courses. The primary reason for a large number of students seeking professional education abroad is lack of capacity in Indian Institution. There is no doubt that the state of affairs in public universities in India is not so good. Also, with increasing enrollment in higher education, it is not probable for the government to provide higher education on its own. But, the private institutions are themselves ailing. Many don‟t have experience and many are trying to just grow money without quality.


Governments of India has taken several bold initiatives and legislation to allow FDI in India.

The Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010 is such one initiative to regulate the entry and operation of foreign educational Institutions in India which is currently pending with parliamentary standing committee.

At present India is allowing 100% FDI in higher education through automatic sector. But, still no university has established a campus here, due to a large no. of guidelines and regulation. Also, many rules are vague. Right now 106 institutions are running programmes in India with collaboration with foreign universities. But, only 2 out of 106 are approved by AICTE (All India Council for Technical Education). Indian government does not allow foreign universities to honor any separate degree. It could only provide dual degree with collaboration with local institutions. Currently, many degrees given by these foreign universities are not even recognized in their own countries.

The main governing body at the tertiary level is the University Grants Commission (India), which enforces its standards, advises the government, and helps coordinate between the centre and the state. As of 2009, India had 20 central universities, 215 state universities, 100 deemed universities, 5 institutions established and functioning under the State Act, and 13 institutes which are of national importance. Most of these institutions are public funded. Some of these institutions have been globally applauded. However, India has failed to produce world class universities like Harvard, Stanford, Oxford, Cambridge or the Massachusetts Institute of Technology (MIT). If The Foreign Educational Institutional Bill will be passed, it will not only permit foreign universities to set-up campuses and award degrees in India, but simultaneously facilitate Indian government regulation of their operations.

The purpose of the bill is to regulate entry, operation and quality of education by the foreign universities. Foreign Education Institutes will have to get a deemed university status by UGC. All Foreign education institutes operating before commencement of the Act (once the Bill is passed) will have to get themselves registered and accredited within 6 months. The programs offered in India have to be comparable to that offered in the country of origin of the Foreign Education Institutes. They will have to maintain a minimum corpus fund of INR 100 million and Foreign Education Institutes may not utilize more than 75% of the income derived for the development of their institution in India and balance 25 % as corpus of fund.


No foreign institution can provide degree to Indian student unless such institution is confirmed as Foreign Educational Provider by Indian Government.

Have to maintain a fund of at least 500 million rupees.

At least twenty years of establishment in its own country.

Quality of education, curriculum, method of imparting and the faculty employed will be in accordance to guidelines of UGC.

Institution has to publish prospectus writing clearly about fee structure, refund norms and amount, number of seats, condition of eligibility with min and max age, detail of faculty, process of admission, min pay payable to each category of teachers and staff, infrastructure and other facilities, syllabus, rules and regulations, etc. at least sixty day prior to date of commencement of admission.

In case of violation of any guidelines a penalty of min 10 million and max 50 million rupees along with tuition fees should be refunded to the student.

At max 70% of the income raised from the fund can be utilized in the development of institution in India and rest should be added to the fund. No part could be used in any other purpose other than growth and development of the institution established by it in India.

Any foreign institution not confirmed by Indian government as Foreign Education Provider which is awarding any certificate to Indian students should submit a report regarding course to the commission.


Beyond the establishment of foreign universities, the bill and the government must deal with the relationship between foreign direct investment and education. In 1995, the Indian government signed the WTO treaty the General Agreement on Trade in Services (GATS). The agreement aimed to give the international community access to the Indian services sector by deregulating markets. According to GATS, the private education sector qualifies as a tradable service, and therefore the Indian government is required to remove any barriers to the trade of that service. Several countries are exporting higher education and making huge profits. The United States has shown largest trade surplus in education. The trend of treating education, particularly higher education, as a tradable commodity has affected the economy and education system of many developing countries including India.

India has received desires (for opening up of services) from several countries (Australia, Brazil, Japan, New Zealand, Norway, Singapore, USA) in education services in the new round of service trade negotiations launched in January 2000 (GATS 2000 round), which mostly focus on higher education, adult education, and other education services. All requests to India are for full market access and national treatment commitments. India has not made any proposal in education services in the GATS 2000 round due to sensitive public good nature.

There was a general perception that from January 1, 2005, India is obliged under the WTO to open up its higher education sector to foreign providers and to end public subsidies, with adverse consequences for the quality and affordability of higher education. It’s worth noting that India did not schedule education services either in the Uruguay Round or in its revised commitments under the ongoing Doha Round. Hence, India has no multilateral obligation under the WTO to open up higher education services to foreign participation. Whatever liberalization has occurred in this area, such as allowing 100% FDI on automatic route and permitting foreign participation through twinning, collaboration,

franchising, and subsidiaries, has been autonomously driven. But it’s unlikely that India will agree to such demands of liberalization in future.

The issue then is largely a domestic one. The impact of opening up higher education services is shaped not by the WTO but by domestic factors, including the domestic regulatory framework and the state of the domestic education system in terms of quantity, quality, costs, infrastructure and finances. In this context, evidence suggests that some of the concerns about opening up education services may not be so misplaced.


Developing and transition countries are further challenged in a highly competitive

world economy, because their higher education systems are not adequately developed for the creation and use of knowledge. If we look at the problem India is facing in expansion of higher education, one may say that FDI are being acceptable just because we don’t have sufficient money to spend on this area. But, the problems are others too which FDI will focus.

FDI in higher education will resolve the problem of enrollment rate as we are in a situation of less supply high demand.

Some new tools and techniques will be used in teaching.

Indian money and talent going abroad will come in check.

FDI in higher education sector will improve the Infrastructure.

It might happen that India may develop one of its own world class universities.

An increase in facilities, both in terms of physical magnitude and geographical spread, for inculcation of vocational skills backed by an increase in the general quality of higher education.

India needs to fill the technological lag as fast as it can to compete with China.

The resulting competition with local universities would also induce us to become internationally competitive through quality improvements brought about by changes in curricula and other responses to an evolving market.

Further, FDI in education would generate employment.

Allowing FDI in education might lead to export of Indian education abroad in which there are large potentials

There will be better scope for research as foreign universities have different methodology to run and generate revenues.

India may move towards practical study based learning rather than rote learning.

Existing institutions need to be rebranded to overcome their poor image.


A brief formulation of one set of policies for India‟s higher education could include the

following components:

• Provide public funding only for those higher education activities such as R&D that have public

goods characteristics and which would not be privately funded to the socially optimal degree.

• Eliminate all public support for those higher education activities the result of which has

sufficient private returns to envelop the costs.

• Ensure equality of opportunity and access to higher education in reply to expressed needs and demands of the population.

• The range of disciplines must match the range of skills needed and changing opportunities available in a dynamic economy. A competitive market-liberal system must be allowed to operate instead of central planning.


Internationalization of higher education is occurring quickly through the spread of international branch campuses. Most such campuses have been established since the mid-1990s and they are concentrated in the Middle East and Southeast Asia, with growth currently occurring in India, China and Central Asia. U.S. and Australian universities have the largest number of branch campuses, with smaller numbers operated by institutions based in the United Kingdom, Malaysia and Singapore. Most are branches of universities but some are polytechnics or vocational training colleges. Singapore’s Ngee Ann Polytechnic, for example, is establishing a campus in Shenyang (China), primarily for Chinese students, but also for their Singaporean students to gain international experience. The Malaysian-based University College of Technology & Innovation has embarked on an Indian Ocean strategy, with overseas campuses in Colombo (Sri Lanka), Karachi (Pakistan), Panipat (India) and Perth (Australia). Some Indian institutes have also set up campuses abroad, primarily imparting education in Information Technology (NIIT, Aptech). Even developed countries are continuing with reforms in higher education. Despite the fact that the USA has the finest system of higher education in the world, it has set up a commission to ensure that America remains the world’s leader in higher education and innovation. For this purpose, the USA intends to make an investment of US $134 billion in higher education over the next ten years. Faced with deteriorating standards and low accountability in its public sector higher education, UK government has now allowed the universities to compete for students and charge variable fees, bringing an end to the regulated fee regime in the UK. In many developing countries in Asia, (Japan, Philippines and South Korea) and Latin American (Chile, Brazil and the Dominican Republic) private higher education has become the main venue for increasing access to higher education. These countries have majority enrolment in private sector. Agarwal (2006) has discussed that two trends in higher education have been observed worldwide: (i) towards transformation from elite to 9mass (or even universal) and (ii) privatization. Countries have responded to these challenges in various ways. Some examples are:


Korea has one of the highest gross enrolment ratios in higher education in the world with more than 80 per cent of it being in the private sector. In 1995 the Government began loosening controls since the problems from serious regulation were becoming uncontrollable. The government gave small incentive grants to reward act and introduced competition among universities and colleges by making them more autonomous and more competitive.


Foreign Universities can set up campuses as branches by invitation. Twinning Arrangements with Universities abroad is also possible. Five foreign Universities have set up Branch Campuses, namely Monash, Curtin and Swinburne Universities of Australia, SAE Institute of Australia and University of Nottingham, UK. There are17 public Universities, including 6 university colleges with enrollment of 300,000. In addition, there are 600 private institutions with similar levels of enrollment. Private institutions can be set up by:

• Large corporations or organizations closely linked to Government (e.g. Petronas Technology University, Telekom Malaysia etc.)

• Large corporations that are public listed companies

• Political Parties (e.g. MIC’s TAFE College Seremban, MCA’s Kolej Tunku Abdul Rahman, and UMNO’s UNITAR etc.)

• Independent Private Colleges

• Local branches of Foreign Universities


China is creating new universities of different kinds to supply to different needs. The government has confirmed education, science and technology to be the strategic driving forces of sustainable economic growth. It is now working towards loosening of statutory control over their higher education systems. The most recent legislation governing FEPs in China was released in 2003. The legislation governing FEPs in China (2003) contains the following features:

• Foreign institutions must partner with Chinese institutions;

• Partnerships must not seek profit as their objective;

• No less than half the members of the governing body of the institution must be Chinese citizens;

• The post of president or the equivalent must be a Chinese citizen residing in China;

• The basic language of instruction should be Chinese;

• Tuition fees may not be raised without approval.

However, this is not the whole story. There are a number of institutions in China (including NIIT from India), which provide education on commercial terms. Moreover, there is inadequate data on the scale of activity of FEPs in China. There are a total of 72 joint programs that are approved by the Ministry of Education (Garrett, 2004). In addition, there are a number of other non-approved programs or those programs that are approved at other levels of government (Municipal, Provincial or Local Governments). This is made amply clear by the data from the Australian Vice-Chancellor’s Committee (AVCC) in May 2003, which states that 27 Australian Universities offer 200 current offshore programs in China, 157 (79 percent) of which involve either Australian bachelor’s or master’s programs. It is reasonable to assume that America, United Kingdom and other major source countries are also offering non-approved degree provision on a similar scale. Hence the level of FEPs activity is far in excess of that reported by the Ministry of Education. It appears that the regime for FEPs is far more liberal and flexible than that indicated above.


There is no regulation governing FEPs and Singapore has also not offered any

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