October 18, 2014

FDI- Advantages, Disadvantages, Opinion, Solution

FDI!!! Theoretically speaking, it is Foreign Direct Investmney invested from a Multinational Company ,of a country, into another country. When a company, for forgotteninstance, Walmart (from Arkansas) directly invests in another country, for instance, India (Bharti Walmart), it is called as FDI. However, when this point is being made the term "direct" is very important because buying shares is also a tyscan Sava'spe of investment, but it is indirect and therefore, is not considered as FDI. The next question which arises about FDI, especially after Modi budget, is- Good or Bad? 
          The most frequent debate today is FDI- Increase or Decrease? The political question in India is Increased FDI or Decreased FDI? FDI has its merits as well as demerits. So in this post I provide you with the merit and demerits of FDI and also solution to the demerits as wells as my own opinion!!

  • Economic Growth- When FDI is done in any nation it increases the economy and the GDP of the country. The large investments mount the GDP to high ranges of growth. Economic Growth is very important for the country because I think that economic growth is the most basic solution to corruption It leads to growth and prosperity which reduces the probability of doing corruption. Economic growth also increases the resources for the government and hence will lead to growth and development of the whole nation. The best example is the time when FDI was introduced in India during 1991. India was nearly bankrupt,FDI let to the revival of it economy and led to one of fastest growing countries in the world
  • Employment Generation- FDI leads to large scale employment generations which ultimately reduces poverty and unemployment and brings prosperity and peace. Employment is generated not only in the manufacturing sector, but also in the retail sector because many local entrepreneurs get franchise opportunities. Also when investment is done in any other nation, the demands and output increases. For the manufacturing of more outputs, more workforce is needed which again leads to high scale employment generations. In India, 1.5 million jobs have been created due to FDI since the last 5 years. 
  • Competition Maintained- When many MNCs (Multi-National Companies) enter India a competition for providing the best quality goods at lowest rates is created which keeps a check on inflation. When FDI was introduced in India, the inflation rate stood at 17% and within one year it dropped to 7% which in the further one year dropped to 5.6%!! Its not a co-incidence but its the magic of FDI. Also if the company doesn't provide the consumers with good quality products, it will be defeated in the competition among other companies and hence FDI also provides better quality products. Also, when there is a competition, it minimizes the probability of monopolization.
  • Strengthens Bi-Lateral Relations- When companies from other countries invest in India, they have interest in our growth because India's growth would also increase their profits. They have interest and trust in our economical stability. Therefore, FDI also makes an economical relationships with other countries and economical relationship is the base of every other relationship. We need to maintain good relationships with other countries because if India wants to be part of the Security Council, it must be voted by other countries and other countries(veto) will vote for India when they have interest in our growth. Therefore, FDI is important and advantageous even for the external affairs. 
  • Consumers' Choice- When many MNCs enter a nation, the consumers get many choices and get the freedom to choose the best. Hence, the consumer is not forced to buy product which he/she doesn't like. Therefore, a company has to maintain the quality of its product and its economy which also reduces the greatest risk of FDI.
  • Improved Infrastructure And Supply Chain- When MNCs enter India it, revolutionizes the supply chain from the manufacturer to the consumer and also updates the infrastructure which reduces the loss of grains and other perishable goods.In India 20% of the grains produced is wasted due to poor infrastructure or unscientific methods of storage and transportation. This merit cannot be doubted because the UPA government made a law in 2011 which clearly states that at least 50% of the investment by foreign brands must be utilized in backhand infrastructure. Also, taking about this laws implementation, the companies will have self certify which can be checked by the Indian government as and when required. Secondly,when MNCs will enter India they will make the storage and transportation facilities more efficient. Today, their are one or more wholesalers and a retailer between the manufacturer and the consumer and hence, all the middlemen take their own share of profit making the product more expensive. However, when MNCs will enter India (especially retail sector) they will remove the role of middlemen and will provide the products directly from the manufacturer to the consumers and hence, will reduce the cost of the same product.
  • Tax Deduction- If a product which is usually imported from some other country comes to another country, the price will become higher because of thee application of import duty and taxes. Therefore, FDI will allow the company to set up their plants in the host country which will reduce prices of the products because of the deduction of the duty and taxes which were implied before. Hence, not only the deduction of prices be caused because of maintenance of competition but also because of import duty deduction.     
  • Destruction Of Domestic Retailers- When FDI (especially in retail) is done in a nation, it destroys the local, domestic retailers as the huge MNCs like Walmart, steal the customers of the local retailers. People start buying from huge supermarkets instead of ''sabzi mandis'' and ''kirana shops.'' This causes great unemployment. For example in Thailand, when FDI was allowed, 50000 retailers lost their job. 
  • Loss Of Self Competitive Strength- When MNCs enter a nation, the domestic retailers or the smaller companies don't have the will or power to compete against these large international giants. Also, if some company tries to compete against these large MNCs, they are either bought or merge with the bigger one. For example, we have never heard of an Indian counterpart of Walmart and by allowing Walmart to invest in India, we never will. 
  • Destruction Of Culture- When huge Multi-National Companies enter India, they destroy the Indian culture as they bring there own western culture. If FDI is further allowed in India, it will fully destroy the Indian culture as the multinational companies would attract all the customers by its economical price and excellent quality which would cause the closing of the cultural shops. 
  • The Fear Of Monopolization- As, we (Indians)learn from history, people who came as traders became rulers of the country. In the same way, when MNCs will enter any nation, there is always a fear of monopolization. If there is some very successful company, it may buy all other companies and merge with all its competitors leaving no or negligible competitors which may allow the company to increase the prices and decrease the quality. Since there are no other competitors, the consumers are forced to buy the products which they don't like. Hence, FDI may lead to monopolization over the market. The best and the most historic example which I can ever give is about the most successful software company- Microsoft. About some decades ago Microsoft had a very successful operating system for PCs and about 90 % of the computers in U.S.A. had Microsoft OS. However, other software of Microsoft such as Media Player and Data Base Management Systems were not that successful. So Microsoft only allowed Media Players and other software of Microsoft to work on its OS. Microsoft used its successful OS to make its other software successful. This monopolistic behaviour led to unfair competition and the monopolization of Microsoft over the software industry which prevails even today!
  • Increased Corruption- People give the reason that when MNCs come to any nation they infect the nation of corruption. People say that since FDI has been allowed in India, India has become corrupt and has made India the eighth most corrupt nation in the world. Also people give the argument that since MNCs have entered India they have caused the world's largest scams! This can be seen by a practical example of one of our neighbor country, which is said as the most favorable country for FDI - China. However, though China has such a large international market but it is the country with the highest corruption and also UNCTAD reports say that India's black money is only 5% of that of India.
  • Unhealthy Food Habits- People also give the argument that FDI leads to the development of unhealthy food habits. USA which is the nation with the highest obesity rate, people blame some leading food chains such as McDonalds for that. Similarly people fear of similar kind of unhealthy habits in India, if FDI is allowed.                              
 Personally speaking, I support FDI in all sectors. FDI ,as told above, is very important and advantageous. FDI not only increases economic growth, employment generation, quality of product and quality of supply chain but also keeps a check on inflation and monopolization and strengthens bi-lateral relationships. However, in the above lines I have also written about the disadvantages of FDI. Then, with a wholesome of disadvantages, why would I support increased FDI? I think that other measures can be taken to get rid of these demerits, however reducing or banning Foreign Direct Investment is not a solution to any of these!

Firstly, talking about the destruction of domestic retailers, it is the best argument I have met so far. However, it is just some research which relieved me. In 2011, a law was passed stating that foreign multi brand wholesale shops can be opened only outside the boundaries of the city. This will prevent the customers of domestic retailers too be stolen by the wholesale giants. Secondly,Thailand has opened some funds for the domestic organized retailers. Similar funds can be opened in India also to protect these retailers. Thirdly, there is another law that 30% of the products of multi brand retail giants must be bought from Indian companies with a total investment of less than 1 million US$. I think, due to this law, increased FDI in retail will increase the profits of domestic Indian manufacturers.
             Coming to the next demerit i.e. destruction of culture, I must say that is the weakest argument I have met! I think that FDI can be no reason for the destruction of culture, because even without FDI India is highly exposed to other cultures through social media and internet. Therefore, destruction of culture cannot become any kind of barrier for the success of FDI. However, still for satisfying the people, separate funds can be opened and financial assistance can be provided to the shops that sell products featuring a particular culture.
               Coming to the next point that is the fear of monopolization is something which is nothing to fear. To prevent monopolization by any company or trader a law has been made in the U.S.A. as well as in India which allows the court to take action against any company which displays monopolistic behavior. To make you understand this better I will take the same case which I took as an example to explain the ''fear of monopolization.'' In U.S.A. when Microsoft displayed such kind of monopolistic behavior (read the point ''fear of monopolization'') some companies such as Oracle, which had a very successful database management system but was failing due to Microsoft's behavior, approached the Court. Then, the Court divided Microsoft into two companies, one looking after its OS (Operating System) and the other looking after its other products such as Media Player. The Court said that the customers would buy Microsoft's OS as an different product and Media Player and other things as different products. This gave the customers the freedom to choose the best product in the best category. For example, now the customers could buy Microsoft's OS and Oracle's Database Management System. 
                 Now, taking about corruption caused by the MNCs, this is also a very weak argument. I don't realize why people blame FDI for the increased corruption in any nation. I don't think that MNCs are responsible for corruption because corruption can be caused by any corporation irrespective of the country where it has originated. Taking about India, when people talk about the coal scams, let me tell you that the companies involved in the scams were corporations like Adani Group and Aditya Birla Group which are Indian corporations rather than Multi national corporations. Taking about China, it is so much corrupt because of the kind of government there. China has a communist government that is the whole country is ruled by a few people, and these people are highly corrupt. Also another probable reason for corruption in China is that because being in power , that will have to satisfy the people and hence, usually bribes are given to be in power.

FDI in retail is one of those topics in which the debate is unending but never tedious. However, when it comes to 'yes' or 'no' it comes to you because by saying that I support FDI in retail, I don't want to restrict your minds from thinking. However, FDI in retail is something which at one hand increases the economic growth but at the other side destroys the domestic retailers. It will strengthen India's relation but at the same time will destroy the self-competitive strength of the Indian companies. So, FDI has two faces, one is the evil face of demerits and another is the holy face of merits, but its just the angle by which you see this!  

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