What made this report useful was that it was done in partnership with MNCs, including those from the financial sector. As was explained by World Banks chief economist Nick Stern, who moderated the seminar, FDI flows to emerging market economies have been remarkably stable of late, although there have been compositional shifts towards services like financial and telecommunications. But destination-wise, they are concentrated only in a few emerging economies. So what indeed determines the whys and wherefores of FDI According to the report, India with its large market and a well educated and English-speaking labour force will continue to attract FDI in selected sectors, including technology. But, more broad-based FDI is being impeded, however, by a difficult business environment, uncertainties about receptivity to FDI, red tape and bureaucracy and a lack of adequate infrastructure facilities. This should serve as a reality check against a widespread feeling among Indias officialdom about our attractiveness for FDI.
The speakers who spoke at the seminar were also involved in the working group and included a spokesman of the Santander Group which has a dominant presence in the financial services in Latin America, and Peter Puf, chief economist in economic research at DaimlerChrysler AG.
They emphasised that foreign direct investment has a long-term horizon of over 10 years; that they go where the markets are, that they go where there is trust and a common culture. That is why they have gone to Latin America.
The report of the working group further added that FDI in emerging economies is now being undertaken more to service domestic demand rather than to tap cheap labour; that the investment climate has an important bearing on determining investment location; that emerging markets which are best prepared to address infrastructural bottlenecks are likely to secure greater amounts of FDI. These should have relevance for countries like India. The recent financial crises have, however, also highlighted the importance of the legal framework and enforceability of contracts.
A predicatable legal system which among other things creates a level playing field is bound to ensure that emerging market economies attract more FDI. More and more MNCs are paying more attention to financing aspects of their investment decisions and that some are economising on equity and intercompany loans in favour of reinvested earnings and so on.
The development of domestic financial markets so that they can rely on local financing in a big way might therefore weigh on their FDI decisions.