FDI in India Is Ripe for the Essay

  • Length: 10 pages
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  • Subject: History - Asian
  • Type: Essay
  • Paper: #48969221

Excerpt from Essay :

FDI in India

India is Ripe for the Picking

India ranks second only to China in its attractiveness as a target for foreign direct investment. Of particular interest are the retail and technology sectors, as well as construction and manufacturing sectors. India is an up and coming market with potential for companies that want to expand into this lucrative land of opportunities. This research examines the opportunities exist in India as well as the climate that makes it a favorable location. It also addresses the obstacles to its continued expansion.

Although India has many opportunities, it has several problems with its policies that make create a certain risk, particularly in the area of taxes and other policies. India is in a state of flux and it is experiencing growing pains. As a result the Indian government keeps changing policies as far as taxing issues are concerned. This decreases confidence due to inconsistencies in changing policies.

' In addition to inconsistent tax policies, India continues to use change its position on foreign investment. India restricts foreign investments to allow for the growth of their own businesses. Labor laws are also restrictive, forbidding layoffs for any reason. Workers are protected in India, which is another consideration when MNCs considering foreign direct investment. However, for the company that is willing to tolerate these policies and inconsistencies, India represents one of the greatest investment opportunities in the world.


Four hundred years of British Rule in India ended when India gained its freedom in 1947. When India gained its independence and the right to form its own style of government, it adopted a highly socialistic form of democracy. It developed a complex, layered system of rules and regulations that involves a high level of government intervention (Yallapragada & Paruchuri, 2003). This pattern set the stage for the government and society that exists today. This was the foundation of the bureaucratic rules that govern foreign direct investment and that limit its ability to attract interested investors.

This research examines the governmental and bureaucratic components of the country profile that hinder its ability to attract foreign direct investment. In addition, several cultural constructs also play a role in the attractiveness of investment in India. The sectors that have achieved the greatest growth in most recent years are construction, telecommunications, computer software and computer hardware (Yallapragada & Paruchuri, 2003). In recent times, the sectors have led economic growth in many countries around the world. India has an excellent opportunity to capitalize on growth and the tech sector, but it is not able to do so unless it is willing to make changes that will result in greater attractiveness to investors. This research will explore the changes that need made by India in order to maximize their benefits in terms of foreign direct investment in these rapidly expanding sectors.

Political and Legal Environment

Main Features

The legal and political environment in India poses the greatest threat to the growth of foreign direct investment. In general, growth in foreign direct investment has been slow, compared to countries such as China. For instance, in 1990 FDI inflow to India was an equivalent of $162 million U.S. dollars. By 1998 it had grown to $3.3 billion in 1998. By comparison, China's FDI grew from $3.4 billion to $45.6 billion (Yallapragada & Paruchuri, 2003). This slow growth in India it indicates that they face problems in getting other countries to invest in them.

India's political situation is paradoxical. On one hand, and is one of the largest democracies in the world. It has one of the oldest judiciary systems in the world. By comparison, China is communist and under authoritarian rule, which often makes it less attractive as a target for FDI due to high amounts of corruption. In general, democratic governments with capitalistic economies are considered more advanced than those ruled by authoritarian, communist governments. This makes countries with established democratic governments more attractive and stable than communist markets. From this theoretical perspective, it does not make sense that China outpaced India in terms of FDI inflow during the 1990s.

India has a large middle class with a high degree of spending power. It has an active economy, yet many overlook it as a possible investment target. The amount of FDI in India does not reflect the many opportunities that exist in terms of their growth in certain sectors. Construction is the biggest growth category in the country. English is the national language in India and it has a well-educated workforce. India would seem to be the better of the two investment choices when compared to China.

The reason for this discrepancy between FDI inflow and its suitability for such an opportunity lies within India's political structure and rules. Although India has an established democracy, it also has one of the more unstable ones as well. One of the reasons for this instability is the existence of many competing political parties. They frequently change prime ministers. The government spends more time resolving internal issues than resolving the problems being faced by the country. Reforms are slow in this type of political atmosphere (Yallapragada & Paruchuri, 2003). Reforms are usually limited due to the need to satisfy so many different competing interests and parties.

From an economic perspective, the infrastructure is considered to be the weakest link in the economy and the ability to achieve greater economic growth. This has been cited as one of the greatest hindrances to economic growth of FDI in India (Yallapragada & Paruchuri, 2003). The road system is sparse in rural areas, making transportation of goods difficult. It also suffers from an inadequate power grid to handle the increasing load. This is also particularly problematic in rural areas. The infrastructure itself offers many opportunities for FDI in terms of contracts for the increase of the infrastructure.

The current legal framework concerning FDI has been slow to change. India recognizes that it must find a way to compete on a global basis and to attract higher levels of FDI in the future if it is to remain a competitor on the global market. However, due to inefficiencies in the speed with which the government adopts policies, it is difficult to bring about the changes needed fast enough. This places them at a disadvantage when it comes to attracting FDI. The process of investing in India has a long and drawn out process. An MNC must go through many levels of the bureaucracy before approval is granted.

Another hindrance to attracting FDI is that India frequently changes tax laws without notice. In addition to these fluctuating tariffs on a national level, India has many states and each of these has their own set of taxes and rules to follow (Yallapragada & Paruchuri, 2003). For examply, companies must pay taxes to be granted permission to retire their employees. The tax laws and policies place the company that wishes to invest in India at a disadvantage. If things were not already bad enough, the government is known for corruption on all levels. It is considered culturally acceptable, even expected, that the way to get things done is to offer money. This is a social custom. Corruption is culturally acceptable. This is an important factor that businesses wishing to invest in India have to take into account in their decision (Yallapragada & Paruchuri, 2003). What many consider to be corruption, in India is a cultural tradition.

Implications on MNCs

India has many conditions that from the outside would make it appear to be a good target for foreign direct investment. However, its own policies and tax structure make it unable to take advantage of the opportunities that exist within their markets. India is being its own worst enemy when it comes to FDI. As a result, those wishing to seek FDI opportunities are going to other nations. Every company that decides to go to another country is a missed opportunity that may never be again. India needs to adopt better policies and procedures if it is to remain competitive in the global market far into the future.

A market that is ripe for expansion, yet abundant missed opportunities creates undervalued stocks in many Indian domestic businesses (Jubak, 2011). Partnerships with companies that are undervalued present many opportunities for foreign investors. Although FDI in India is not at the levels desired, there are still many multinational companies (MNCs) that have chosen to set up shop. These companies include IBM, Nokia, and Vodaphone ("Multinational Companies in India," 2010). Companies such as MAC are attracted to India largely due to the existence of an abundant and cheap labor force (Shukla & Nigam, 2011).

Policy has been unfriendly towards the entrance of retailers due to left parties' desires to protect domestic companies (Nandi & Sahu, 2007). Large retailers like Wal-mart and Carrefour are not allowed to sell directly to Indian shoppers (Ahmed, 2011). These policies have brought FDI to a near standstill in the retail sector. Currently there are no resolutions in sight as political infighting…

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