Foreign Investors And Special Privileges

Written by YRK Reddy | Updated: May 31 2004, 05:30am hrs
Several chief ministers have been competing for over a decade to showcase their states and attract foreign investment. So much so that even a doubtful investor with a foolish project, a dubious history and questionable intentions enjoys the benefit of an audience with them. Special attention, special dispensation, concessions, waivers, land allotments and the like are lined up indiscriminately and without due diligence. Even if it is for such an outlandish idea as Formula One racing.

There are also stories of a CM meeting a potential investor only to find that he had actually come to complain about a lost wallet! Lately agriculture projects are being turned around by NRIs as biotech, and pathological work as stem-cell research, for the sake of this special attention.

There should be no worry if the officialdom is affable and accessible. But there is indeed an advantage of reduced transaction cost and hidden subsidies for such investors that are denied to domestic industry. The local investor will be lucky if he is spared from speed money that is being extracted for even routine processing of various permissions and registrations. Worse still is the case of state level public enterprises which will be happy to escape with just a low priority. The cost of differentiated advantage for the foreign investor is indeed hidden.

All foreign direct investment (FDI) does not necessarily result in economic development or human development. In the earlier decades, there was hope that FDI would fill the gap between low domestic savings and investment needs. Despite this attractive assumption, research had shown negative transfers in several countries. Though there have been studies on the positive transfer of technical and managerial skills along with FDI, there is inconclusive proof that the associated import bias and negative intangibles actually get offset by the positive benefits.

Despite some adverse findings, the recent years have given better hope, arising from a cluster of non-LDCs (least developed countries) particularly in Asia, that foreign investment can spur economic growth in some sectors.

Central to the debate whether foreign investment actually leads to development is the role of the actors involved. These actors are typically the multinational enterprises and institutional investors. According to UNCTAD (United Nations Conference on Trade and Development), there are 60,000 of them operating from 800,000 foreign affiliates. Obviously, foreign investment relies on the promise of better returns than the domestic yields. The channels used are normally a combination of technology fees, transfer pricing, royalties, licence fees, and export of capital equipment and of course, capital market operations. From another perspective, foreign investment flows along opportunities, which also could be the fault lines in the host system, that promise higher returns.

These actors are not the ideal transnational corporation that has no tilt to one nation. These companies are headquartered in countries of their origin with dominant shareholders from that particular country. The actors will obviously act in their self-interest, a la Adam Smiths baker. But some reform-savvy chief ministers treat the baker as a benefactor and shower speedy approvals, exceptions, exemptions, priority, and subsidy. Reportedly, there is inadequate due diligence on them and no analysis of potential benefits. The race among states appears to be for gross numbers of projects and investments. It is understandable that Indian corporates now find reason to invest in other countries and derive similar benefits that elude them at home.

If our policy makers aspire for foreign investment and hope that it truly contributes to sustainable development, they must rely less on invalid assumptions and more on deeper analysis. For instance, the assumptions behind FDI in the port sector may not be valid for the furniture, perfume or fashion sector. The former may meet the objectives of long-term investment as well as technological needs while the latter meet neither criterion. While the former may deserve the differential advantage from government, the latter probably may deserve some hurdle or handicap not merely in policy but also in treatment. For instance, should companies such as Metro Gmbh in Bangalore and Shoprite Checkers in Mumbai which operate as cash and carry wholesale traders, and which the industry associations claim is a camouflage for the prohibited retail business, get special advantage or disincentive from the State machinery

Obviously, foreign investment is not a one-way street either in flow or in benefits. Consequently, in the open trade regime, we have to learn the art of more subtle barriers and disincentives for foreign investment in some sectors and for some types vis-a-vis the others. The powerful countries have mastered this and apply it constantly. It calls for a more nuanced approach and understanding than relying on gross numbers and grosser policies of chasing and pampering every faint suggestion of foreign investment.

The author can be reached at yrk@yagaconsulting.com