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Prospects of Foreign Direct Investments into India in the Nineties

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  • Morris, Sebastian

Abstract

The eighties have witnessed major changes in the phenomenon of foreign direct investments (FDI). There have been major shifts their sources and destinations. Japan became an important source, the US the largest host for inward FDI both of Japanese and Western European based FDI. The important underlying reason has been the declining competitive position of US firms in relation to German and Japanese firms, and the assemetry in growth between the three advanced regions – the USA, Japan and Western Europe. An important development has been the emergence, and now dominance, of services related FDI, although these flows have as yet to affect the LDCs significantly. The host countries within the LDCs too have changed as growth in Latin America has collapsed or declined in the eighties. The fast growing economies of East and South East Asia, have became important hosts, since non resource seeking FDI typically seeks to follow growth. There have been changes too within the Indian economy. The eighties witnessed good growth after a near recessionary period of nearly a decade and a half. It is argued that while the FDI inflow into India is likely to increase in the nineties, such increase is contingent on the maintenance of the industrial growth of the eighties in this decade too. Inflows anywhere near the Chinese level is quite out of question, except in the remote chance that India achieves the ‘high speed’ growth of China. FDI into India is more likely to take the form of joint-ventures and other so called ‘non-equity’ forms. As indigenous businesses have gathered strength over the period of sheltered growth in the eighties (and even earlier), FDI entry into India would rarely be without an active Indian collaborator. FDI has had little role to play in the manufactured exports growth from most of the NICs, and their role in India is likely to be even less significant. Yet other foreign firms (like retail chain stores in the West, the Shogo Shosho of Japan) and transnationals too, have, to the great benefit of LDC firms sourced manufactured items from them, the LDC firms having acted as subcontractors or as OEM suppliers. Given the wide diversification of the economy, the low cost of manpower, availability of a wide variety of skills, and large excess capacities, subcontracting and OEM relationship in manufacturing can provide the crucial economies of scale, and steady market to segments of Indian manufacturing which are most competitive, even if at low margins, so that a significant contribution to the extensification of growth can be made.

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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP1993-01-01_01156.

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Handle: RePEc:iim:iimawp:wp01156

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