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How vauluable is foreign investment for a developing economy?

Sunday May 13, 2018
By Prabhat Sinha

Emerging economies have a compelling drive to be ahead on the Foreign Direct Investment (FDI) curve. To accomplish that, leaders pursued policies and change that are designed to help make their economies more FDI friendly.

There is nothing wrong in being an attractive destination for FDI, which also serves as a strong benchmark for the potential of an economy. However, America attempting to attract FDI is very different from Somalia, China or India attempting being FDI friendly.

How valuable is FDI if it is limited to making a consumer economy spend more?

If the influx of FDI does not help build the local capital, and does not yield to local products or services becoming more robust and globally competitive, then it merely becomes a simple proliferation of giant international business. Most of these businesses have their heritage in the advanced economies of North America and Europe.

Although one may call that a leftist argument, but, economies are not just about being a captive market. If an economy is not equally participative in the global evolution of technologies, research and development, growth of the human capital, and opportunities for the next generation to live and work better, how would it rate on the ease of doing business index?

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Therefore, the question is whether FDI supports the development and growth of opportunities for people, or whether it merely furthers the search of consumer colonies.

The Indian automotive market is one of the best examples of FDI involvement. When the market opened up to attract international capital, there was a surge among the local entrepreneurs to invest in manufacturing centres for components. 15 years hence, neither has an Indian company created a world class car that can compete in the advanced international markets, nor have Indian entrepreneurs developed a new competitive component technology. All that they may have done is tailored to the fit described by the already successful automotive giants.

What is worse, amidst the substantial increase in valuations of these international automotive giants, the valuations of brands such as Tata or Mahindra, without their international acquisitions, are languishing among the mid cap on a global scale. I met one such leading entrepreneur recently, who has diversified into design and printing. He was forced to diversify after the return on his automotive investment reaped only marginal benefits.

Once a hub is built, and competition created, the demand gets diversified across a wider segment of suppliers, lending a strong opportunity for the buyer to ask for better prices. The Information Technology industry in India is another example, where the early stage entrepreneurs grew much faster and at an unthinkable scale. However, within a span of just two decades, tech entrepreneurs are contesting to quote the lowest possible prices, in order to keep their business alive, as outsourcing expands into hutments.

FDIs poised to scope out more competitive colonies

Although FDI is not quite like the British colonising countries at a political level, it is important to remember that if Britain was the largest colonial empire, the French, Dutch, Spanish or Portuguese were no less proliferate. More significantly, if the East India company was the foundation of the British government, does that mean that emerging democracies may become the executive body for policies made at another global capital?

Who will be the true beneficiary of the worldwide revolution in digital economy, if Silicon Valley continues to be the major investor in the startups that cropped up in Israel, Brazil, Thailand, and China?

Will the capitalist economy engage in social justice by integrating equitable intellectual capital? In valuing a business, there is scope for considering the engagement of the entrepreneurs for their time, wisdom, and energies, not with the view to buy out, instead, with the view to include their competence in the future growth of the business.

At this stage, however, one cannot ignore the economising of resources, growing into power. The power may remain at the economic levels, but, it may open up opportunities for political engagement, if the developing world resists being economised.

Prabhat Sinha is an established business leader, as well as a speaker, writer, blogger, success coach and mentor.

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