FDI Retail in India

The issue of allowing FDI in multi-brand retail sector refuses to die down despite the government putting the decision on hold.

"Medium-term supply side measures to address supply side bottlenecks have become crucial, especially in terms of reforms of agriculture marketing and new entry and reinvigorated competition in supply-chain improvements (such as through FDI in multi-brand retail), both of which were recommended by the inter-ministerial group on inflation, headed by the ministry of finance," the mid-year analysis said.

In case of several of the bullets with "announcement implemented" tag, a closer read would tell you that the government is taking undue credit. For instance, the budget speech talked about making FDI policy more user friendly as also liberalizing the FDI policy. While two consolidated circulars have been issued by the industry department, policy liberalization is something that the government would be keen to avoid. After all, it had to beat a hasty retreat on allowing foreign retail chains to open stores in India after it failed to convince not just the Opposition, but even allies and Congress party members. In any case the consolidated circulars had become a norm of sorts even before Mukherjee's announcements.

 

Latest updates about FDI in India

The Prime Minister will meet leaders from key ally parties this morning in Parliament to gauge their support ahead of a possible vote on his new policy to allow 51% foreign ownership of store that stock different brands. The Congress must have the DMK and Mamata Banerjee on board - both parties have 18 Lok Sabha MPs each. While the DMK has agreed to support the government, Ms Banerjee’s party, the Trinamool Congress, has not changed its mind. Senior TMC leaders like Dinesh Trivedi said this morning that they cannot support a move that will allow international super-chains to sell directly to Indian consumers.
As the government does its math, lakhs of traders are on strike across the country. And Parliament remains paralysed. Both Houses have been adjourned till noon - the eighth day with no business being transacted in Parliament. The government has to either face a vote, or suspend its decision on FDI.
The vote on Foreign Direct Investment or FDI in retail is what the opposition has been pushing for- the BJP’s Sushma Swaraj has said the government does not have the confidence of the House on its reforms in retail. The BJP now wants the vote to follow a debate on an adjournment motion of its choice -the text of which asks for a “rollback” of the government’s policy. Last night, Finance Minister Pranab Mukherjee called BJP leader LK Advani and offered a one-line adjournment motion; because it did not refer to a revocation of the FDI policy, Mr Advani rejected it. He said the draft of the adjournment motion placed by the BJP is “non-negotiable.” But Mr Mukherjee told Mr Advani that the Prime Minister is not in favour or reversing his decision.
The DMK has already said it will support the government in a vote. Now, the Congress needs to win over Ms Banerjee, the Chief Minister of West Bengal. So far, she has said she wants the PM to ban any FDI in retail because the livelihood of thousands of farmers and traders is at stake.
The Congress has backed the Prime Minister and said there is no question of changing its stand to allow FDI in the retail sector.”The PM has made it clear that it is a well thought-out decision and the party supports it,” said Congress spokesperson Manish Tewari. Commerce Minister Anand Sharma told NDTV, “There is no question of a rollback.”
The half-way mark in the Lok Sabha is 272. With the TMC and the DMK, the government manages 282 votes. Without either of those parties, it drops to 264 votes - which means it loses the confidence of the House on the issue of FDI in retail. The government would then have to withdraw its reforms in FDI; the loss of moral authority would be hugely damaging.

America's open support for retail FDI

Batting for FDI in retail, US Ambassador to India Peter Burleigh today (November 29) said it will not affect small traders and rather help both consumers and farmers. "I think examples around the world countries which have FDI in retail, which are some very important economic countries including China are...the concern that small traders and small merchants in villages and towns will be badly impacted by this (FDI into multi-brand retail) that ...they will not be competitive, it has turned out to be not true," he said at a Rotary Club function in Chandigarh. 

Stating that though it was an obvious concern of small retailers, he said, "I do not think if FDI were increased by whatever amount., we will see difference with regard to small kiranas that exist all over the country. Backing FDI in multi-brand retail, he said that it would be in the interest of both consumers and farmers. 

"What would change (with 51 per cent FDI into multi-brand retail), I think, that prices for consumers would go downyou can have stable prices for farmers over time," he said. However, he said it is the Indian Government, political parties and people who would have to decide on this issue.

Twists in Indian Retail Tale

Policy paralysis has an alliterative tone to it. There is no ready antonym with quite that  characteristic. However, policy paralysis is defined, malaise is internal and domestic, no matter how much we blame the external world for our travails. Therefore , it is odd that the decision to open FDI in retail is being described as symptomatic of government climbing out of the rut it has dug itself into.

FDI in retail isn’t going to be manna. It won’t lead to deluge in FDI inflows. It won’t stem rupee depreciation. It won’t dampen food inflation. It won’t lead to a revolution in retail trade and make it organised . But nor will be it be a bane that will drive kirana stores into oblivion. Outside TV studio debates, truth is never in black-and-white.

As a shade of grey, the present decision is no more than the thin edge of liberalisation . All liberalisation is good for consumers. The colour of competition (national versus foreign) doesn’t matter. There is choice, better quality and better service. There is downward pressure on prices. Post-1991 , this elementary proposition of economics has been empirically vindicated whenever competition has been allowed to seep in. There is no reason for consumers to be exploited by kirana stores, just as there is no reason for consumers to be exploited by the Future Group, Shoppers Stop or Vishal Retail.

Having said this, there is also another elementary proposition . Perfect competition is a figment of imagination. It doesn’t exist. The world is one of unfair and restrictive business practices. Hence, we need competition policy instruments . So far, thrust of competition policy intervention has been on manufacturing and some services. Retail trade hasn’t figured prominently . While that focus has to change, this isn’t an argument against opening up. Acrossthe-board opening up is infinitely preferable to selective and segmented opening up. Selective liberalisation distorts markets and allows opportunities for arbitrage.

Take this business of opening up wholesale cash-andcarry . Who has this benefited? It hasn’t helped consumers, at least not directly. It has helped hotels and so-called kirana stores, anyone who obtained a licence or got access to one. Why did we first allow 51% FDI in single-brand retail and why are we now opting for 100%? Who has benefited from this transition in policy between 2006 and 2011? There are foreign single-brand retailers who will now rework their joint ventures and jack up foreign equity to 100%. There are Indian joint venture partners who are cash-starved. The beneficiaries will thus be Indian joint-venture partners who will sell off 49% equity.

Single-brand or multi-brand , wholesale (cash-and-carry ) or retail are artificial distinctions . We should simply have had 100% across-the-board . At some future date, Indian jointventure partners will benefit again when FDI multi-brand equity is jacked up to 100%. Other than this, geographical segmentation remains. Why should liberalisation be restricted to one-million-plus cities? Do consumers elsewhere not deserve choice? As it is, as public subsidies go, there are pronounced pro-urban biases. We will pamper them more through this new policy.

Real-estate costs being what they are, big-bang benefits for retail should actually be outside one-million-plus cities. It gets worse if you read the Constitution . Delhi provides a framework policy. Implementation is up to states. While Seventh Schedule doesn’t quite use the expression retail , production, supply and distribution of goods is Entry 27 in the State List. To the best of my understanding , this means a state may choose not to open up retail trade. It gets worse in Sixth Schedule, since no person, “who is not a member of the Scheduled Tribes resident in the district shall carry on wholesale or retail business in any commodity except under a licence issued in that behalf by the District Council” . In general, deprived and backward states and regions are reluctant to open up. That’s the reason they aren’t mainstreamed and continue to remain deprived and backward. 

Stores will be in one-million-plus locations and consumers there will benefit. I have no problems with minimum threshold levels of foreign investment, or requirements that 50% has to be in back-end infrastructure. Retail today straddles assorted segments. Food is a small component, less than 10%. It doesn’t have to be that way. However, reforming the agro economy involves much more than opening up FDI in retail. There are supply-side constraints . There is low productivity . There are infrastructure problems, storage and processing. There are controls on storage and distribution , APMC isn’t the only one.

If all that is reformed, with disintermediation, farmers should get higher prices, without consumers paying higher prices. Depending on the study and product — it is higher for fruit and vegetables and lower for food grains — disintermediation efficiencies are between 10% and 30%. But why should government have rights of purchase over farm produce and what does it mean? As it is, high procurement prices have driven out private grain trade.

Finally, we are left with kirana stores, and this business of mandatory sourcing of 30% of purchases from MSMEs (or is it MSEs?) . No reforms are positive sum. There are gainers and losers. In this context, kirana stores will be losers. One shouldn’t deny that. However, getting organised retail to work takes years and years. China is the obvious example, where organised retail penetration is still less than 10%. Kirana stores have resilience. They change their line of business. They adapt. One should have faith in that resilience.

FDI will help farming sector in India

A farmers body today batted strongly for FDI in the retail sector, saying it will help create better marketing opportunities for agricultural products in the country. 

"Marketing was the biggest problem confronted by farmers in the country leading to phenomena like crop holidays and farmers suicides. FDI will help in creating better marketing prospects for their products and better income opportunities for them," National Advisor Consortium of Indian Farmers Associations (CIFA) Thakur Randhir Singh told reporters here. 

Singh said farmers are unhappy that most political parties and city based intellectuals are opposing FDI in retail which to a large extent is part of the liberalisation process in the agriculture sector. 

"However, farmers will support the liberalization process in agriculture sector including FDI in retail", he said. 

Singh, who is also UPA ally NCP's J & K unit chief, said, "We believe competition among Indian and foreign retailers will lead to better price and services to farmers."

FDI in India’s Retail Trade: Some Additional Issues

Opponents of the entry of foreign direct investment (FDI) in retail trade generally point to its adverse impact on employment. This is indeed an important issue, as around 40 million people are engaged in retail trade in India, and even a small percentage loss of employment in this sector amounts to lakhs of unemployed.¹ At the same time, we need to take note of certain other issues as well, in particular the nature of the relations which international retailing giants establish with their suppliers, and their implications for workers and cultivators in countries like India.
Though FDI in retail trade is as yet restricted, the Government of India has a more liberal policy towards wholesale trade, franchising, and commission agents’ services, thus preparing the ground for FDI in retail as well. Foreign retailers have already started operations in India through various routes: (i) joint ventures where the Indian firm is an export house; (ii) franchising² (eg. Kentucky Fried Chicken, Nike); (iii) sourcing of supplies from small-scale sector; (iv) ‘cash and carry’ operations (Giant in Hyderabad, Metro in Bangalore)³; (v) non-store formats – direct marketing (Amway). Large international retailers of home furnishing and apparels such as Pottery Barn, The Gap and Ralph Lauren have made India one of their major sourcing hubs. Up to 100 per cent FDI is allowed in ‘cash and carry’ operations. The Great Wholesaling Club Ltd is one such example.⁴ In February 2002, the world’s largest retailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, it announced its entry under a joint venture with the Indian corporation Bharti. For the time being, Bharti is to own the chain of front-end retail stores, while the two firms will have an equal share in a firm that will engage in wholesale, logistics, supply chain and sourcing activities.⁵ This is seen as a preliminary step by Wal-Mart pending the removal of all restrictions on FDI in retail trade.
Distinct character of Indian retail trade
The Indian trading sector, as it has developed over centuries, is very different from that of the developed countries. In the developed countries, products and services normally reach consumers from the manufacturer/producers through two different channels: (a) via independent retailers (‘vertical separation’) and (b) directly from the producer (‘vertical integration’). In the latter case, the producers establish their own chains of retail outlets, or develop franchises.
In India, however, the above two modes of operation are not very common: For in India, today, less than three per cent of the retail transactions are done in the organised sector; and this is projected to increase to 15-20 per cent by 2010.⁶ To date, the organised sector is restricted to metropolises. The second mode is found in a few national firms and some subsidiaries of global firms. Indian wholesale trade too is not organised. The few government initiatives (such as the formation of Boards for tea, coffee, and spices, and the State Trading Corporations) have largely become defunct by now, and private initiatives have mostly remained localised.⁷
Small and medium enterprises dominate the Indian retail scene. The trading sector is highly fragmented, with a large number of intermediaries. So also, wholesale trade in India is marked by the presence of thousands of small commission agents, stockists and distributors who operate at a strictly local level. Apart from these, in many cases small producers such as artisans and farmers sell their goods directly to end consumers (often one family member is a producer and another sells the products). The existence of thousands of such individual producer-cum-sellers is an example of  ‘vertical integration’ as it is found in the Indian retail sector. There is no ‘barrier to entry’, given the structure and scale of these operations.
‘Customer relationship management’ (to use the marketing jargon) is handled in India by numerous small vendors locating themselves close to their customers – either by opening a tiny outlet in a residential area or by hawking goods at the consumer’s doorstep. In this process, a personal relationship develops, often extending beyond immediate business interests.
The retail sector acts as an important shock absorber for the present social system. Thus when a factory shuts down rendering workers jobless; or peasants find themselves idle during part of the year or get evicted from their land; or the stagnant manufacturing sector fails to absorb the fresh entrants into the job market, the retail sector absorbs them all. A skilled labourer turns into a street hawker, a farmer turns to delivering milk packets door to door, an educated unemployed youth hawks newspapers and a better off unemployed person starts a telephone booth and retails telecom cards as an ‘add on’ service. When (in exceptional cases) the factory reopens, or harvesting time arrives, some of these new entrants leave the retail trade and return to their respective employments.
Thus, after agriculture, the incidence of under-employment is probably highest in the Indian retail sector. There are nearly 12 million retail outlets. Small retailers operating in the unorganised sector dominate the trade. Those displaced as a result of FDI in retail may not show up as an increase in visible unemployment. Only the extent of under-employment in the retail sector might increase.
The source of the pressure for allowing FDI in retail
Why is the government so keen in inviting FDI in the retail sector? Let us look at  some arguments made by the proponents of FDI:
 (i) “Only a few global firms possess proprietary expertise in retail trade. They would not transfer their expertise to local firms unless they were allowed to operate in the domestic market.”
Reality: In the literature on retail, we could not trace the existence of any cutting edge proprietary expertise – either technical or managerial.
FDI to meet its foreign exchange requirements.”
Reality: Because of large capital inflows, the Government of India is today burdened with huge and growing foreign exchange reserves. By April 13, 2007, the foreign exchange reserves had swollen to $203 billion. The argument for FDI in retail to attract foreign exchange is not tenable.
(iii) “Only global retailers can satisfy the rising and varied demands of Indian consumers.”
Reality: It has yet to be shown which product or service is being offered by foreign retail firms is unavailable at present to Indian consumers, or cannot be provided without FDI. Moreover, the alleged benefits of ‘consumer choice’ are being inflated. Indeed, the availability of excessively wide choice makes it so complex and time-consuming for the consumer to decide that it leads to stronger loyalty to particular brands! Research reveals that an average grocery store in USA, offers 35,000 to 40,000 stock keeping units versus 12,000 to 15,000 thirty years ago. The suppliers offer about 20,000 new items each year; of which 1,000 are new efforts and the rest are line extensions. However, the top 5,000 items still account for about 90 percent of sales, as they did thirty years ago.⁸
Rather than internal ‘pull’, the reason that the Government is interested in pushing FDI in retail trade is external pressure. Foreign firms are interested in the growing Indian market of the better-off; India is an emerging procurement site for global retailers, especially for handicraft products (including textiles) and semi-processed local food items; the profitability of major retail firms in the developed countries is declining, and capital is looking for better pastures; and new rules in international trade encourage movement of FDI across nations to maximise return on investment.
Thus major retail chains like WalMart and Tesco have already opened their procurement centres in India. For large-scale procurement operations, they will have to make substantial investments in infrastructure and develop an efficient supply chain. By opening retail chains in the host country they would like to exert monopsony⁹ power, eliminating other major buyers from the market. In this context, we must remember that India is fortunate to be part of two major centres of biodiversity out of the few remaining such centres in the world. The wide food variety and rich heritage of textile and other handicrafts makes India a very attractive source of supplies for retail giants. Wal-Mart procured goods worth $1.5 billion from India in 2004, which is expected to touch $2 billion this year. From India, Wal-Mart mainly sources home furnishings, T-shirts, night-suits etc.¹⁰ It has also been reported that Wal-Mart has already proposed to the West Bengal government to take over the fresh food markets of in and around Kolkata. Though the government has not accepted the proposal as yet, it has not rejected it either.¹¹
Analysis of FDI flows in trade indicates that, over the 1990s, developed countries faced market saturation and became relatively less attractive to foreign investors. Instead, developing countries and Central and East European countries became increasingly attractive to foreign investors.¹²
Trade liberalisation and improvement in communication systems have increased opportunities for retailers to buy their products from producers worldwide. Some of the factors that have contributed to this trend are the reduction in tariff, incentives provided to foreign investment, cheaper real time communications, and cheaper transport.
These are some of the reasons that transnational retail giants are interested in entering India. Thus it is principally external pressure that is compelling the Indian government to liberalise FDI in retail.
Possible impact on marginal producers and work force – the experiences of other
countries
Proponents of FDI in retail trade claim that it will improve the incomes of small and marginal producers by doing away with middlemen whose margins constitute such a large percentage of the final product. Is this true? In fact, an important issue missing in the whole debate is the relation between FDI retail firms and numerous small and marginal producers, especially in the agrarian and handicraft/hand loom sectors. Let us look at some previous research findings on this issue.
(i) In April 1999, the Director General of Fair Trading (DGFT) asked the Competition Commission, UK, to investigate the supply of groceries from multiple stores in Great Britain. The Competition Commission identified 24 multiple grocery retailers who supplied groceries from supermarkets with 600 sq. meters or more of grocery sales area, where the space devoted to the retail sale of food and non-alcoholic drinks exceeded 300 sq meters and which were controlled by a person who controlled ten or more such stores.
The Commission received many allegations from suppliers about the behaviour of the main parties in the course of their trading relationships. Most suppliers were unwilling to be named, or to name the main party that was the subject of the allegation. As the Commission could anticipate a climate of apprehension among many suppliers in their relationship with the main parties, the Commission had put a list of 52 alleged practises to the main parties and asked them to tell which of them they had engaged in during the last five years. It was found that a majority of these practises were carried out by many of the main parties. They included requiring or requesting from some of their suppliers various non-cost-related payments or discounts, sometimes retrospectively; imposing charges and making changes to contractual arrangements without adequate notice; and unreasonably transferring risks from the main party to the supplier. A request from a main party amounted to the same thing as a requirement. Ultimately, such practises would exert downward pressure on the incomes of farmers and workers involved in the supply of goods to such retail chains.
(ii) How large is the share of Third World  producers in the developed country retail price of their goods? A 1981 study by the U.N. provided some data.¹³  It showed that the Philippines suppliers of bananas to TNCs in 1974 received only 17 per cent of their retail price in the Japanese market. And Thai suppliers of fresh pineapples in 1978 earned only 35 per cent of the final consumer value of pineapples canned and marketed by US transnational corporation Dole. Of this 35 per cent, only 10 per cent was the share of the agriculturists, and the remaining 25 per cent was accounted for by processing, packaging, etc., which were predominantly carried out by subsidiaries of transnationals.
(iii) Similarly, the World Bank’s Global Economic Prospects and the Developing Countries 1994 noted: “The high cost of processing, packaging, advertising, marketing, and distribution means that the cost of the primary product as a share of the final product price is usually small: for raw cotton the growers’ price represents about 4-8 per cent of the final product price; for tobacco this share is closer to 6 per cent. For bananas, producer countries obtain about 14 per cent of the retail price; for jute goods it is 11-24 per cent; for coffee, between 12 and 25 per cent; and for tea the growers’ price is 47 per cent of the U.K. retail price for pocketed tea but only 15 per cent of the U.S. retail price of tea bags.”¹⁴ These figures seem too high. Michel Chossudovsky estimated around the same period that producer prices of coffee were only 4 per cent of the final retail price in North American markets.¹⁵
(iv) A recent research project by Oxfam¹⁶ shows that during the period since the U.N. study referred to above, the condition of the poor suppliers of fresh fruits has deteriorated further. Oxfam interviewed hundreds of women workers and many farm and factory managers, supply chain agents, retail and brand company staff, unions and government officials. In all, the research included interviews and surveys spread over 12 countries with 1,310 workers, 95 garment factory owners and managers, 33 farm and plantation owners and managers, 48 government officials, 98 representatives of unions and non-government organisations (NGOs), 52 importers, exporters, and other supply chain agents, and 17 representatives of brand and retail companies The research documented the experiences not only of women workers, but also of their employers, the managers and owners of farms and factories. We quote below a few important findings of the report:
Globalisation has hugely strengthened the negotiating hand of retailers and brand companies, whose global supply chains stretch from the world’s major shopping centres to the farms and garment factories of the third world. New technologies, trade liberalisation, and capital mobility have dramatically opened up the number of countries and producers from which they can source their products, creating a growing number of producers vying for a place in their supply chains. These companies have tremendous power in their negotiations with producers and they use that power to push the costs and risks of business down the supply chain. Their business model, focused on maximising returns for shareholders, demands increasing flexibility through ‘just-in-time’ delivery, tighter control over inputs and standards, and ever-lower prices.
Under such pressures, factory and farm managers typically pass on the costs and risks to the weakest links in the chain: the workers they employ. For many producers, their labour strategy is simple: make it flexible and make it cheap. Faced with fluctuating orders and falling prices, they hire workers on short-term contracts, set excessive targets, and sub-contract to sub-standard unseen producers. Pressured to meet tight turnaround times, they demand that workers put in long hours to meet shipping deadlines. And to minimise resistance, they hire workers who are less likely to join trade unions (young women, often migrants and immigrants), and they intimidate or sack those who do stand up for their rights.
The demands for ‘just-in-time’ delivery have typically cut production times in a few sectors by 30 per cent in five years. Coupled with smaller, less predictable orders and high airfreight costs for missed deadlines, the small producers are pushed to the walls. Moroccan factories producing for Spain’s major department store. E1 Corte Ingles must turn orders round in less than seven days. “The shops always need to be full of new designs, we pull out all the stops to meet the deadline … our image is on the line” said one production planning manager. But the image they hide is of young women working up to 16 hours a day to meet those deadlines, underpaid by 40 per cent for their long overtime working.
Global supply chains have created new opportunities for labour-intensive exports from low-cost locations. The result is a dramatic growth in the number of producers, heightening competition among the world’s factories and farms for a place at the bottom of the chain. At the top end, however, market share has tended to consolidate among a few leading retailers and brand names. Such an imbalance between intensely competing producers and relatively few buyers in the global market puts the small suppliers at the receiving end. The owner of a Brazilian shoe factory, facing intense international competition to sell to leading footwear retailers in Europe commented: “We don’t sell, we get bought”.
Over the past twenty years, fresh produce and food service industries have headed towards global consolidation. In the food service industry, US-based Yum Brands has 33,000 restaurants – including Taco Bell, Pizza Hut, and KFC – in over 100 countries, and is especially focusing on expansion in China, Mexico, and South Korea. Supermarkets – grocery retailers with multiple stores – dominate food sales in rich countries and are rapidly expanding their global presence.
In the USA, by 1997, supermarkets and even bigger ‘super-centres’ owned by companies like Wal-Mart and Kroger controlled 92 per cent of fresh-produce retailing. In the UK, by 2003, just five supermarket chains controlled 70 per cent of the market.
Since supermarkets increasingly control food retailing, the world’s farmers are competing for a place in their supply chains. It can be good business, especially for farmers selling top-quality and out-of-season produce. But fresh produce is a risky business. And the extreme imbalance in negotiating power between a handful of supermarkets and the world’s farmers means that most of the gains from trade are captured at the top. Supermarkets are pushing price and payment risks onto farmers and growers, controlling packaging and delivery requirements, squeezing producers’ margins, and focusing on technical, not ethical standards. The figure below captures the real picture. While the African producers as a whole get only 9 per cent of the retail price of an exported apple, the overseas retailers in UK corner a 42 per cent share.

Figure 1: Share of different parties in the final price of apples exported from South Africa to U.K. supermarkets

Sector	% share of income
Farm labour	5
Farm income	4
Supermarket	42
Importer's commission and duty	7
U.K. handling	7
Shipping	12
Transport and customs	6
Farm inputs and packaging	17
Source: Oxfam (2004)

(v) In another recent report,¹⁷ which corroborates the above observation, it was estimated that in case of bananas sold in European market by US multinationals, the farmer might get around 10 per cent of the retail price, with workers getting anything from 9 per cent in the case of Fair trade bananas to as little as 1.5 per cent on traditional farms. Whereas trading companies such as Del Monte, Chiquita, Dole and Fyffe’s could be getting up to a third of the price, retailers took around 40 per cent.
(vi) This pattern does not hold only for agricultural goods. The break-up is similar in the case of the typical manufactured exports of the developing countries. In the case of garments, Chossudovsky gathered data for Bangladesh garment factories which showed that the share of Bangladeshi workers’ wages in the final retail price of a shirt in North American markets was 1.7 per cent; the profit of the Bangladeshi employer was another 1 per cent. ‘Gross commercial profit, rent and other income of distributors’ accounted for 71.8 per cent.¹⁸
Small suppliers, unorganised workers and consumers are the major losers as global retailers and brand owners consolidate their power through free movement of global capital. Changes in labour laws are brought about in line with the requirements of supply chain flexibility: easier hiring and firing, more short-term contracts, fewer benefits, and longer periods of overtime. The Indian Government is trying to bring about such changes, both directly and indirectly.
Pressure to ensure irreversibility of opening up to FDI in retail
It may be imagined that, if the entry of transnationals in retail trade leads to harmful consequences, the government can restrict and regulate their activities, or even remove them altogether. However, TNCs in services are striving to bring in changes in the General Agreement on Trade in Services (GATS) to ensure that their entry is irreversible and ever-expanding. For example, major associations of global retailers like the FTA (Foreign Trade Association) and European Services Forum (ESF), of which global retail firms such as Metro, Ahold and Marks & Spencer are members, have taken renewed initiatives to introduce a separate agreement under the World Trade Organisation (WTO) on trade and investment to safeguard their overseas investments. In a position paper on trade and investment in April 2003, the European Services Forum demanded a comprehensive WTO agreement on rules for investment. According to that document (ESF, 2003), a WTO agreement on investment should be legally binding and based on the fundamental legal principles of most favoured nation and of national treatment (i.e. non-discrimination). It should contain the following:

• A stand-still against the introduction of new barriers on investment;
• Post-investment protection;
• Protection of all material and intellectual property of the company;
• Effective protection against direct expropriation as well as against indirect expropriation through discriminatory treatment;
• A mechanism for compensation in the case of expropriation;
• Independent and binding disputes settlement mechanisms;
• The right of the company to determine its own ownership structure and provisions on legal, regulatory and administrative transparency;
• Scheduling of concrete and specific commitments by WTO members to further open their markets to foreign direct investment.

Earlier, in 2001, the FTA demanded the abolition of any restriction – both product exclusion and sectoral limitation – on what is termed ‘mode 3’ (commercial presence) of trade in services. It also called for the strengthening of the investment rules (in GATS). Euro Commerce, the employers’ confederation, not only lobbies for liberalisation under the GATS agreement, but also pushes for the reduction of tariffs in Non-Agricultural Market Access (NAMA) and on agricultural goods, since the retail sector wishes to import its merchandise as cheaply as possible.
Before investing in the emerging economies, the global TNCs demand concrete and specific commitments on unlimited freedom of operation from the host countries. They expect all such commitments to be made under GATS framework so that once any commitment is made, the host government loses the option of retracting from it in future.
In this context, the experience of Thailand, which opened up its retail sector for FDI in the 1980s, is revealing. The Thai government liberalised its trading sector before the GATS negotiation process was started. The European retail giants Tesco, Royal Ahold, and Carrefour set up their operations in Thailand. As expected, many of the traditional retailers had to draw down their shutters, unable to compete with global firms in an unequal fight. Traditional traders controlled 74 per cent of the retail market in 1997, but by 2002, their share came down to 60 per cent. Faced with severe criticism from local retailers, the government announced that they would place controls on large retail establishments by imposing zoning policy regulations. In 2002, the ‘Retail Business Act' was enacted to control the expansion of foreign retailers. However, the Thai government reversed its decision regarding zoning regulation, allegedly under pressure from the European Commission (EC), which had requested Thailand to open up their retail sector through GATS negotiations. As WTO lists zoning laws as ‘trade barriers’, it is feared that the Thai government would lose what tools remain to control the expansion of giant retail chains if they further open their retail sector through commitments under the GATS negotiation process.¹⁹

What would be some of the basic requirements for companies considering a foreign investment?

Depending on the industry sector and type of business, a foreign direct investment may be an attractive and viable option. With rapid globalisation of many industries and vertical integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends in their industry. From a competitive standpoint, it is important to be aware of whether a company’s competitors are expanding into a foreign market and how they are doing that. At the same time, it also becomes important to monitor how globalisation is affecting domestic clients. Often, it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thus a combination of a number of key factors including:

	assessment of internal resources,
	competitiveness,
	market analysis
	market expectations.

From an internal resources standpoint, does the firm have senior management support for the investment and the internal management and system capabilities to support the set up time as well as ongoing management of a foreign subsidiary? Has the company conducted extensive market research involving both the industry, product and local regulations governing foreign investment which will set the broad market parameters for any investment decision? Is there a realistic assessment in place of what resource utilisation the investment will entail? Has information on local industry and foreign investment regulations, incentives, profit retention, financing, distribution, and other factors been completely analysed to determine the most viable vehicle for entering the market (greenfield, acquisition, merger, joint venture, etc.)? Has a plan been drawn up with reasonable expectations for expansion into the market through that local vehicle? If the foreign economy, industry or foreign investment climate is characterised by government regulation, have the relevant government agencies been contacted and concurred? Have political risk and foreign exchange risk been factored into the business plan?
Outside of the analysis of internal resources, a vast amount of information is needed to assess the viability and ultimate method of foreign investment as outlined above. Much of this information is available on line through a range of websites and portals.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:

	Avoiding foreign government pressure for local production.
	Circumventing trade barriers, hidden and otherwise.
	Making the move from domestic export sales to a locally-based national sales office.
	Capability to increase total production capacity.
	Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in very general terms.  While it is nice that many business writers like the expression, “think globally, act locally”, this often used cliche does not really mean very much to the average business executive in a small and medium sized company.  The phrase does have significant connotations for multinational corporations.  But for executives in SME’s, it is still just another buzzword.  The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies.  Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets.  Small and medium sized companies tend to be more concerned with selling their products in overseas markets.  The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues.  SME’s in particular are now focusing on access to markets, access to expertise and most of all access to technology.

How Has FDI Changed in the Past Decade?

As mentioned above, the overwhelming majority of foreign direct investment is made in the form of fixtures, machinery, equipment and buildings. This investment is achieved or accomplished mostly via mergers & acquisitions. In the case of traditional manufacturing, this has been the primary mechanism for investment and it has been heretofore very efficient.  Within the past decade, however, there has been a dramatic increase in the number of technology start ups and this, together with the rise in prominence of Internet usage, has fostered increasing changes in foreign investment patterns. Many of these high tech start ups are very small companies that have grown out of research & development projects often affiliated with major universities and with some government sponsorship. Unlike traditional manufacturers, many of these companies do not require huge manufacturing plants and immense warehouses to store inventory. Another factor to consider is the number of companies whose primary product is an intellectual property right such as a software program or a software-based technology or process. Companies such as these can be housed almost anywhere and therefore making a capital investment in them does not require huge outlays for fixtures, machinery and plants.

In many cases, large companies still play a dominant role in investment activities in small, high tech oriented companies. However, unlike in the past, these larger companies are not necessarily acquiring smaller companies outright.  There are several reasons for this, but the most important one is most likely the risk associated with such high tech ventures.  In the case of mature industries, the products are well defined. The manufacturer usually wants to get closer to its foreign market or wants to circumvent some trade barrier by making a direct foreign investment. The major risk here is that you do not sell enough of the product that you manufactured. However, you have added additional capacity and in the case of multinational corporations this capacity can be used in a variety of ways. 

High tech ventures tend to have longer incubation periods. That is, the product tends to require significant development time. In the case of software and other intellectual property type products, the product is constantly changing even before it hits the marketplace. This makes the investment decision more complicated. When you invest in fixtures and machinery, you know what the real and book value of your investment will be. When you invest in a high tech venture, there is always an element of uncertainty.  Unfortunately, the recent spate of dot.com failures is quite illustrative of this point.

Therefore, the expanded role of technology and intellectual property has changed the foreign direct investment playing field. Companies are still motivated to make foreign investments, but because of the vagaries of technology investments, they are now finding new vehicles to accomplish their goals. Consider the following:

 

Licensing and technology transfer.  Licensing and tech transfer have been essential in promoting collaboration between the academic and business communities. Ever since legal hurdles were removed that allowed universities to hold title to research and development done in their labs, licensing agreements have helped turned raw technology into finished products that are viable in competitive marketplaces.  With some help from a variety of government agencies in the form of grants for R&D as well as other financial assistance for such things as incubator programs, once timid college researchers are now stepping out and becoming cutting edge entrepreneurs. These strategic alliances have had a serious impact in several high tech industries, including but not limited to: medical and agricultural biotechnology, computer software engineering, telecommunications, advanced materials processing, ceramics, thin materials processing, photonics, digital multimedia production and publishing, optics and imaging and robotics and automation. Industry clusters are now growing up around the university labs where their derivative technologies were first discovered and nurtured.  Licensing agreements allow companies to take full advantage of new and exciting technologies while limiting their overall risk to royalty payments until a particular technology is fully developed and thus ready to put new products into the manufacturing pipeline.

	Reciprocal distribution agreements.  Actually, this type of strategic alliance is more trade-based, but in a very real sense it does in fact represent a type of direct investment.  Basically, two companies, usually within the same or affiliated industries, agree to act as a national distributor for each other’s products.  The classical example is to be found in the furniture industry.  A U.S.-based manufacturer of tables signs a reciprocal distribution agreement with a Spanish-based manufacturer of chairs. Both companies gain direct access to the other’s distribution network without having to pay distributor support payments and other related expenses found within the distribution channel and neither company can hurt the other’s market for its products.  Without such an agreement in place, the Spanish manufacturer might very well have to invest in a national sales office to coordinate its distributor network, manage warehousing, inventory and shipping as well as to handle administrative tasks such as accounting, public relations and advertising.
	Joint venture and other hybrid strategic alliances.  The more traditional joint venture is bi-lateral, that is it involves two parties who are within the same industry who are partnering for some strategic advantage.    In some cases, syndicates are actually easier to manage because the project itself sets certain limits on each party and close cooperation is not always a prerequisite for ultimate success of the endeavour.
	Portfolio investment.  Yes, we know that you’re paying attention and no we’re not trying to trip you up here.  Remember our definition of foreign direct investment as it pertains to controlling interest.  For most of the latter part of the 20Th century when FDI became an issue, a company’s portfolio investments were not considered a direct investment if the amount of stock and/or capital was not enough to garner a significant voting interest amongst shareholders or owners.  However, two or three companies with "soft" investments in another company could find some mutual interests and use their shareholder power effectively for management control. This is another form of strategic alliance, sometimes called "shadow alliances".  So, while most company portfolio investments do not strictly qualify as a direct foreign investment, there are instances within a certain context that they are in fact a real direct investment.

Understanding Foreign Direct Investment (FDI)

Definition

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organisational technologies and management skills, and as such can provide a strong impetus to economic development.    Foreign direct investment, in its classic definition,  is defined as a company from one country making a physical investment into building a factory in another country.  The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest  in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a  facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property,   In the past decade, FDI has come to play a major role in the internationalisation of business. Reacting to changes in technology, growing liberalisation of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalisation, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatisation of many industries, has probably been been the most significant catalyst for FDI’s expanded role.

 

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI..   Driven by mergers and acquisitions and internationalisation of production in a range of industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998 (Source: UNCTAD)

Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment).  Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition.  The truth lies somewhere in the middle.

For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities.  In the past 15 years, the classic definition of FDI as noted above has changed considerably.  This notion of a change in the classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct foreign investment is still made in the form of fixtures, machinery, equipment and buildings. Moreover, larger multinational corporations and conglomerates still make the overwhelming percentage of FDI. But, with the advent of the Internet, the increasing role of technology, loosening of  direct investment restrictions in many markets and decreasing communication costs means that newer, non-traditional forms of investment will play an important role in the future.   Many governments, especially in industrialised and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.  In the United States, the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is responsible for collecting economic data about the economy including information about foreign direct investment flows.  Monitoring this data is very helpful in trying to determine the impact of such investments on the overall economy, but is especially helpful in evaluating industry segments. State and local governments watch closely because they want to track their foreign investment attraction programs for successful outcomes.

 

FDI MEANS??

Foreign direct investment (FDI) in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.

[1] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). 

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.

FDI IN DETAIL

FDI stands for Foreign Direct Investment.

Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control

Consistent economic growth, de-regulation, liberal investment rules, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment or FDI.

FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.