Transnational companies have become an important feature of most economies in the world today. Typical of the impact of globalization is the fact that transnational companies alone account for an added value of about a tenth of the world’s gross domestic product. They had a share of 5 per cent in 1982. The data provided by the World Investment Report 2003, issued by the United Nations conference on trade and development recently, show that transnational corporations — numbering around 64,000 in various countries and operating about 870,000 foreign affiliates — have become an important fixture on the global landscape. They employed an estimated 53 million workers in 2002, an increase from 20 million in 1982. The stock of foreign direct investment belonging to transnational corporations generated a total sales of nearly $18 trillion, more than double the world’s exports. The network of foreign affiliate companies accounted for more than one-third of the world’s exports. FDI is, therefore, an inescapable attribute of the world economy.
Critics of globalization need to note that the FDI is also not only from rich countries to rich countries. The developed world, such as the United States of America, United Kingdom, European Union, is itself holding two-thirds of the world’s inward FDI stock. What is more interesting is that the EU has nearly $ 3 trillion outward stock of FDI compared to half of the US. The myth of dominance of the US amongst transnational companies has to be taken with a pinch of salt.
In recent decades, the developing countries have also increasingly come to depend on FDI in comparison with other forms of capital inflows. The FDI stock for developing countries on an average accounts for nearly a third of GDP. The dependence of developed countries is, however, less in as much as the ratio of FDI stocks to GDP for developed countries is only 19 per cent. The growth of FDI in the last decade is seen from the fact that the stock of FDI has increased from 13 per cent in respect of developing countries to nearly 33 per cent in the period. In respect of developed countries also, the increase is from 5 per cent to 19 per cent.
The inward direct investment as a percentage of GDP varied widely among various countries. As of 2002, the US had a FDI stock of nearly 12.9 per cent, UK 40.8 per cent, Germany 22.7 per cent, France 28.2 per cent and Canada 30.4 per cent. Amongst developing countries, Brazil had a FDI stock of 52.1 per cent in relation to GDP and China had a stock of nearly 36.2 per cent. India stands low with a ratio of 5.1 per cent. Admittedly, the ratio of FDI to GDP is not by itself a clear determinant of economic growth. That Brazil has a high ratio of FDI to GDP has not made for robust and steady growth. India with 5.1 per cent has not fared too badly in terms of growth compared to countries with a much higher ratio. Critics of globalization have a point in their favour when they stress that high FDI amounts to shifting the location of decision-making outside the countries. The fascination for FDI is justified by the impetus to growth that it has conferred on countries, like China, the US and UK.
China has proved to be the most powerful magnet for FDI in recent times. In 2002, China attracted FDI of $53 billion, which was far in excess of $30 billion, which poured into the US. Chinese economic growth is partly the result as also the cause of the high FDI.
The World Investment Report 2003 makes a specific reference to the difference between China and India in regard to FDI flows. In its view, China’s high FDI reflects its better infrastructure as also a more pragmatic approach to foreign investment compared to India’s. China opened its borders to foreign investment earlier than India. FDI flows to China increased from $3.5 billion in 1990 to nearly $53 billion in 2002, whereas FDI flows to India were a lowly 0.4 billion in 1990 before the onset of liberalization.
What is more significant is that FDI flows into China have contributed to the rapid increase of China’s merchandise exports at an annual rate of 15 per cent between 1989 and 2001. In 1990, foreign affiliates accounted for less than 9 per cent of China’s total merchandise exports, while in 2002, they accounted for nearly half. In exports from hi-tech industries, foreign transnational companies of China contributed much more: 91 per cent in electronic circuits and 96 per cent in mobile telephones.
FDI in Indian manufacturing has been mostly confined to “seeking” the domestic market. Even today, FDI accounts for only 10 per cent of India’s manufacturing exports. This reflects different emphases on the strategic approach to FDI in India and China. It may be significant that China has opened its retail markets to multinational organizations, such as Wal-Mart. The FDI advocates in India feel we also should follow suit.
Among the major contributory factors for higher FDI in China are the presence of educated labour and better labour conditions. China has also well-developed natural resources. The emphasis of Chinese authorities on developing physical infrastructure over the years, particularly in respect of power, transport and ports, has led to more propitious conditions for export manufacturers and hence FDI.
The rapid economic growth in China, both in rural and urban areas, has also increased domestic demands for consumer goods. The World Investment Report 2003 notes that China in comparison to India has demonstrated a more business-oriented attitude to FDI, making its procedures easier and taking quick decisions. China has more flexible labour laws, a better labour climate and easier entry and exit procedures. These have all ultimately contributed to China’s attracting substantial FDI.
China has the advantage of an earlier start in regard to attracting FDI flows. It happened to open its doors to FDI at a time India was closing its doors. India started tightening regulations on entry of foreign investment just 30 years ago. In the late Seventies, it also dramatically threw out IBM and Coca-Cola. But China took a leap forward from communism to an open-door policy for FDI.
We must recognize that the Chinese economic strategy has been holistic. It is not confined only to a pragmatic approach to FDI. China’s national policies have also been growth-oriented. Wherever FDI helped this cause, it was encouraged. China delegates its powers of approval of FDI to local organs, such as townships and provincial governments, while India concentrates authority at the Centre. China’s capacity to take speedy decisions is also reflected in its sharp turnaround of strategy from an ideology-based “closure” of all avenues to foreign investment to opening the doors with emphasis on national priorities.
One instance of the Chinese approach to FDI is the Boeing story. In the early Nineties, China offered to buy a large number of Boeing jets. China has now become the outsourcing centre for Boeing’s manufacture of its plane. Boeing exports jet plane parts and jet planes from China to the rest of the world. Transfer of technology came hand in hand with huge investments in response to a skilful procurement decision.
Similarly, China negotiated with IBM to set up a plant in the country. It is not for nothing that the eminent Indian economist, K.N. Raj, is stated to have remarked in 1985: “It is certainly not without good reason that China has chosen to be hospitable even to markets with worldwide ramifications, like IBM, evidently in the expectation of securing the know-how for building up a semi-conductor industry of its own. Those who do not realize the implications of all this for India are living in a dream world.” These comments show that blind opposition to FDI does not pay, while a constructive approach to FDI can help the national objective of growth with equity.
FDI flows into India have slowly risen to $5.1 billion in 2002 from a low of $379,000 in 1990. During the same period, China showed an increase from $3.4 billion to $52.7 billion. The share of foreign affiliates has also increased substantially in China compared to India.
FDI is attracted by many factors. India has to take a conscious step towards making the country an attractive destination for FDI through clear policies on infrastructure, human development and incentives and implementation of these.
The World Investment Report 2003 provides a picture of the incentives offered by different countries to attract FDI. These countries keep their national perspectives in mind when dealing with transnational companies. The success of FDI policies lies in such a fine balancing act. Let us hope that in the increasing pragmatism shown by the Indian government, there will be a greater attention to attracting FDI.