Asia
Asia continues to be
the world’s top FDI spot, accounting for nearly 30% of global FDI inflows.
Thanks to a significant increase in cross border M&MAs, total inflows to
the region as a whole amounted to 426 billion in 2013, 3% higher than in 2012.
The growth rates of FDI inflows to the East, South-East and South Asia sub
regions ranged between 2 and 10%, while inflows to West Asia declined by 9%
(Figure 11.7). FDI outflows from sub regions showed more diverging trends :
outflows from East and South East Asia experienced growth 7 and 5%, respectively;
outflows from West Asia increased by about two thirds; and those from South
Asia plummeted to a negligible level (Figure 11.7).
For some low income
countries in the region, weak infrastructure has long been a major challenge in
attracting FDI and promoting industrial development. Today, rising
intraregional FDI in infrastructure industries, driven by regional integration
efforts (Section A) and enhanced connectivity through the establishment of
corridors between sub regions (Section b), is likely to accelerate
infrastructure build-up improve the investment climate and promote economic
development.
Against the backdrop
of a sluggish world economy and a regional slowdown in growth, total FDI
inflows to east and south east asia reached 347 billion in 2013, 4% higher than
in 2012. Inflows to east asia rose by 2% to 221 billion while those to south
east asia increased by 7% to 125 billion. FDI outflows from the overall region
rose by 7% to 293 billion. In late 2012, the 10 member states of association
for southeast asian development (ASEAN)and their 6 FTA partners (Australia,
China, India, Japan, the republic of Korea and Newzealand) launched
negotiations for the regional comprehensive economic partnership (RCEP). In
2013, combined FDI inflows to the 16 negotiating members amounted to 343
billion, accounting for 24% of global FDI flows. The expansion of free trade
areas in and beyond the region is likely to further increase the dynamism of
FDI growth and deliver associated development benefits.
China’s
outflows grew faster than inflows : FDI inflows to China have resumed their
growth since late 2012. With inflows at 124 billion in 2013, the country again
ranked second in the world (Fig 1.3) and narrowed the gap with the largest host
country, the United States. China’s 2% growth in 2013 was driven by rising
inflows in services, particularly trade and real estate.
As TNCs invest in the
country increasingly through M&MAs, the value of cross border M&A sales
surged, from 10 billion in 2012 to 27 billion in 2013.
In the meantime,
China has strengthened its position as one of the leading sources of FDI, and
its outflows are expected to surpass its inflows within two years. During 2013,
FDI outflows swelled by 15% to an estimated 101 billion the third highest in
the world. Chinese companies made a number of megadeals in developed countries,
such as the 15 billion CNOOC nexan deal in Canada and the 5 billion Shaunghui
Smithfield deal in the United States – the largest overseas deals undertaken by
Chinese firms in the oil and gas and the food industries respectively. As China
continues to deregulate outward FDI, outflows to both developed and developing
countries are expected to grow further. For instance, Sinopec, the second
largest Chinese oil company, plans to invest 20 billion in Africa in the next
five years, while lenovo’s recent acquisitions of IBM’s X 86 server business
(2.3 billion) and motorolo mobile (2.9 billion) will boost Chinese FDI in the
United States.
High
income economies in the region performed well in attracting FDI. Inflows to the republic of korea reached 12
billion, the highest level since the mid 2000s, thanks to rising foreign
investment in ship building and electronics industries in which the country
enjoys strong international competitiveness – as well as in the utility
industries. In 2013, FDI inflows to Taiwan province of china grew by 15% to 4
billion as economic cooperation with mainland china helped improve business
opportunities in the island economy. In 2013 FDI outflows from the republic of
korea declined by 5% to 29 billion, while those from Taiwan province of china
rose by 9% to 14 billion.
Hongkong (China &
Singapore) – the other two high income economies in the region – experienced relatively
slow growth in FDI inflows. Inflows to Hongkong (China) increased by 2% to 77
billion. Although this amount is still below the record level of 96 billion in
2011, it is higher than the three year averages before the crisis (49 billion)
and after the crisis (68 billion). In 2012, annual FDI inflows to Singapore
rose above 60 billion for the first time. A number of megadeals in 2013, such
as the acquisition of Fraser & Neave by TCC assets for about 7 billion,
drove FDI inflows to a record 64 billion. As the recipients of the second and
third largest FDI in developing Asia, Hongkong (China) and Singapore have
competed for the regional headquarters of TNCs with each other, as well as with
some large Chinese cities, in recent years (Box 11.1)
FDI
growth in ASEAN slowed, particularly in some lower income countries. FDI
inflows to ASEAN rose by 7% in 2013 to 125 billion. It seems that the rapid
growth of FDI inflows to ASEAN during the past three years – from 47 billion in
2009 to 118 billion in 2012 has slowed, but the balance between east asia and
south east asia continued to shift in favour of the latter .
Among ASEAN member
states Indonesia was most affected by the financial turmoil in emerging
economies in mid 2013. However, FDI inflows remained stable, at about 18
billion.
Attracting regional headquarters of TNCs : competition among
Asian economies
Hongkong (China) and
Singapore are very attractive locations for the regional headquarters of TNCs.
The two economies are similar in terms of specific criteria that are key for
attracting regional headquarters (European chamber, 2011). As highly open
economies, strong financial centers and regional hubs of commerce, both are
very successful in attracting such headquarters. The number of TNC headquarters
based in Hongkong (China), for e.g. had reached about 1,380 by the end of 2013.
Its proximity to mainland China may partly explain its competitive edge. The
significant presence of such headquarters has helped make the two economies the
major recipients of FDI in their subregions: Hongkong (China) is second only to
mainland china in east asia, while Singapore is the largest host in south east
asia.
The two economies now
face increasing competition from large cities in mainland china, such as
Beijing and Shanghai. By the end of October 2013, for e.g. more than 430 TNCs
had established regional headquarters in Shanghai, as well as 360 R&D
centers. However, the TNCs establishing these headquarters have targeted mainly
the Chinese market, while Hongkong (China) and Singapore remain major
destinations for the headquarters of TNCs targeting the markets of Asia and the
Pacific at large.
In March 2014, the
Chinese Government decided to move the headquarters of CIFIT group, China’s
largest TNC in terms of foreign assets from
Beijing to Hongkong (China). This decision shows the government’s
support for the economy of Hongkong (China) and is likely to enhance the city’s
competitive advantages for attracting investment from leading TNCs, including
those from mainland China.
In Malaysia another
large FDI recipient in ASEAN inflows increased by 22% to 12 billion as a result
of rising FDI in services. In Thailand inflows grew to 13 billion; however
about 400 FDI projects were shelved in reaction to the continued political
instability and the prospects for inflows to the country remain uncertain.
Nevertheless Japanese investment in manufacturing in Thailand has risen
significantly during the past few years and is likely to continue to drive up
FDI to the country. FDI inflows to the phillippines were not affected by 2013’s
typhoon haiyan; on the contrary, total inflows rose by one fifth to 4 billion
the highest level in its history. The performance of ASEAN’s low income
economies varied: while inflows to Myanmar increased by 17% to 2.6 billion
those to Cambodia the lao people’s democratic republic and viet nam remained at
most the same levels.
FDI outflows from
ASEAN increased by 5% Singapore the regional group’s leading investor, saw its
outward FDI double, rising from 13 billion in 2012 to 27 billion in 2013. This
significant increase was powered by large overseas acquisitions by Singaporean
firms and the resultant surge in the amount of transactions. Outflows from
Malaysia and Thailand the other two important investing countries in south east
asia dropped by 21% and 49% to 14 billion and 7 billion respectively.
Prospects
remain positive : Economic growth has remained robust and new
liberalization measures have been introduced, such as the launch of the China
(Shanghai) pilot free trade zone. Thus, east asia is likely to enjoy an
increase of FDI inflows in the near future. The performance of south east asia
is expected to improve as well party as a result of the accelerated regional integration
process (See below). However, rising geopolitical tensions have become an
important concern in the region and may add uncertainties to the investment
outlook.
As part of a renewed
effort to bring about economic reform and openness, new policy measures are
being introduced in trade, investment and finance in the newly established
china (shanghai) pilot free trade zone. In terms of inward FDI administration,
a new approach based on pre-establishment national treatment has been adopted
in the zone and a negative list announced. Specific segments in six service
industries – finance, transport commerce and trade professional services
cultural services and public services have been opened to foreign investors
(Chapter III). FDI inflows to the zone and to shanghai in general are expected to
grow as a result.
Accelerated regional integration
contributes to rising FDI flows
Regional economic
integration in east and south east asia has accelerated in recent years. This has
contributed to enhanced competitiveness in attracting FDI and TNC activities
across different industries. In particular investment cooperation among major
economies has facilitated international investment and operation by regional TNCs
in their neighbouring countries, contributing to greater intraregional FDI
flows and stronger regional production networks. Low income countries in the
region have benefited significantly from such flows in building up their
infrastructure and productive capacities. The geographical expansion of free
trade areas in and beyond the region is likely to further extend the dynamism
of FDI growth and deliver associated development benefits.
A
comprehensive regional partnership in the making. ASEAN was the starting point of regional
economic integration in east and south east asia and has always been at the center
of the integration process. Established in 1967, ASEAN initially involved Indonesia,
Malaysia the phillippines, Singapore and Thailand. Subsequently brunei
Darussalam, Viet nam the lao people’s democractic republic, Myanmar and
Cambodia joined. Since its establishement, ASEAN has made efforts to widen as
well as deepen the regional integration process contributing to improved
regional connectivity and interaction. Its economic links with the rest of the
world have increasingly intensified and its intraregional links have strengthened.
Over time, ASEAN has
broadened the scope of regional economic integration alongside its major
partners china the republic of korea and japan through the ASEAN + 3 cooperation.
The east asia summit involves these three countries as well in addition to
Australia, India and Newzealand. ASEAN has signed FTAs with all six countries. In November 2012, the 10 ASEAN member states
and the six ASEAN FTA partners launched negotiations for RCEP, which aims to
establish the largest free trade area in the world by population. In 2013
combined FDI inflows to the 16 negotiating members amounted to 343 billion or
24% of global FDI inflows.
Proactive
investment cooperation : Investment
cooperation is an important facet of these regional economic integration efforts.
In 1998, ASEAN members signed the framework agreement on the ASEAN investment
area (AIA). In 2009 the ASEAN comprehensive investment agreement (ACIA)
consolidated the 1998 AIA agreement and the 1987 agreement for the promotion
and protection of investments (Also known as the ASEAN investment guarantee
agreement). At the ASEAN economic ministers meeting in August 2011, member
states agreed to accelerate the implementation of programmes towards the ASEAN
economic community in 2015, focusing on initiatives that would enhance
investment promotion and facilitation.
In addition, various
investment agreements have been signed under general FTA frameworks in east and
south east asia. In recent years significant progress has been made, involving
leading economies in asia, including china, india, japan and the republic of
korea. For instance ASEAN and china singed their investment agreement in
August, 2009. In May 2012, china japan and the republic of korea singed a
tripartite investment agreement, which represented a crucial step in
establishing a free trade bloc among the three east asian countries.
Within the overall
framework of regional integration, these investment agreements aim to
facilitate international investment in general but may also promote cross
border investment by regional TNCs in particular. In addition, ASEAN has
established effective institutional mechanisms of investment facilitation and
promotion, aiming to coordinate national efforts within the block and compete
effectively with other countries in attracting FDI.
Rising
intraregional FDI flows : Proactive
regional investment cooperation efforts in east and south east asia have
contributed to a rise in FDI inflows to the region in general and intraregional
FDI flows in particular. ASEAN has seen intraregional flows rise over the past
decade and for some of its member states inflows from neighbouring countries
have increased significantly. During 2010-12, the RCEP negotiating countries
(or ASEAN + 6 countries) provided on average 43% of FDI flows to ASEAN,
compared with an average of 17% during 1998-2000 .
China, India , Japan
and republic of Korea as well as Singapore, Malaysia and Thailand have made
considerable advances as sources of FDI to ASEAN. It seems that this has taken
place mainly at the cost of the United States and the European union (EU).
Singapore is an important source of FDI for other countries in ASEAN, as well
as for other major asian economies such as China and India. Japan has been one
of the leading investors in south east asia and ASEAN as a whole accounted for
more than one tenth of all Japanese outward FDI stock in 2012. In 2013,
Japanese investors spent nearly 8 billion in ASEAN which is replacing China as
the most important target of Japanese FDI. In recent years, FDI flows from
China to ASEAN countries have rapidly increased and the country’s outward FDI
stock in ASEAN as a whole had exceeded 25 billion by the end of 2012 (Fig 11.9).
The establishment of the China ASEAN free trade area in nearly 2010 has strengthened
regional economic cooperation and contributed to the promotion of two way FDI
flows, particualry from China to ASEAN. Accordingly, the share of ASEAN in
China’s total outward FDI stock rose to 5.3% in 2012.
Emerging
industrial patterns and development implications : Rising intaregional FDI flows have
focused increasingly on infrastructure and manufacturing. Low income countries
in the region have gained in particular.
Manufacturing
: Rising interregional FDI in manufacturing has
helped south east asian countries build their productive capacities in both
capital and labour intensive industries. TNCs from Japan have invested in
capital intensive manufacturing industries such as automotive and electronics.
For instance, Toyota has invested heavily in Thailand in recent years, making the
country its third largest production base. Attracted by low labour costs and
good growth prospects, Japanese companies invested about 1.8 billion in Viet
nam in 2011, and 4.4 billion of Japanese investment was approved in 2012. FDI
from Japan is expected to increase in other ASEAN member states as well, particularly
Myanmar. China’s investment in manufacturing in ASEAN covers a broad range of
industries but is especially significant in labour intensive manufacturing.
Infrastructure
: TNCs from Singapore have been important
investors in infrastructure industries in the region, accounting for about 20%
of Greenfield investments. In recent years, Chinese companies have invested
Indonesia and viet nam. In transport, Chinese investment is expected to
increase in railways, including in the Lao People’s Democractic Republic and
Myanmar. In November 2013, China and Thailand signed a memorandum of
understanding on a large project that is part of a planned regional network of
high speed railways linking China and Singapore. In the meantime, other ASEAN
member states have begun to open some transport industries to foreign
participation, which may lead to more intraregional FDI (Including from Chinese
companies). For e.g. Indonesia has recently allowed foreign investment in
service industries such as port management. As some countries in South-East
Asia announce ambitious long-term plans, total investment in infrastructure in
this subregion between 2011 and 2020 is expected to exceed 1.5 trillion. Fulfilling
this huge amount of investment will require mobilizing various sources of
funding, in which TNCs and financial institutions within East and South-East
Asia can play an important role, through both equity and non equity modes.
For most of the low
income countries in the region intraregional flows account for a major share of
FDI inflows, contributing to a rapid build up of infrastructure and productive
capacities. For instance, Indonesia and the Philippines have seen higher
capital inflows to infrastructure industries, such as electricity generation
and transmission, through various contractual arrangements. Cambodia and
Mynammar, the two LDCs in South-East Asia, have recently emerged as attractive
locations for investment in labour-intensive industries, including textiles,
garments and footwear. Low income south-east asian countries have benefited
from rising production costs in China and the subsequent relocation of
production facilities.
Outlook
: The negotiation of RCEP started in May 2013
and is expected to be completed in 2015. It is likely to promote FDI inflows
and associated development benefits for economies at different levels of
development in east and south east asia, through improved investment climates,
enlarged markets, and the build-up of infrastructure and productive capacities.
RCEP is not the only integration mechanism that covers a large range of
economies across asia and the pacific. As the asia pacific economic cooperation
and the trans-pacific partnership (Chapter I) extend beyond the geographical
scope of the region, so may the development benefits related to increased flows
of both trade and investment.
FDI inflows to south
asia rose by 10% to 36 billion in 2013. Outflows from the region slid by nearly
three fourths to 2 billion. Facing old challenges and new opportunities, south
asian countries registered varied performance in attracting FDI. At the
regional level, renew efforts to enhance connectivity with other parts of asia
are likely to help build up infrastructure and improve the investment climate.
India has taken various steps to open its services sector to foreign investors,
most notably in the retail industry. It seems that the opening up of single
brand retail in 2006 has led to increased FDI inflows, that of multi-brand
retail in 2012 has so far not generated the expected results.
Trends in M&MAs
and announced Greenfield projects diverged :
In 2013, the total amount of announced Greenfield investments in south
asia dropped by 38% to 24 billion (Table D). In manufacturing Greenfield
projects in metals and metal products and in the automotive industry
experienced considerable drops, in services, a large decline took place in
infrastructure industries and financial services. Most major recipients of FDI
in the region experienced a significant decline in Greenfield projects, except
for Srilanka, where they remained at a high level of about 1.3 billion.
In contrast, the
total amount of cross border M&A sales rose by 70% to 5 billion. The value
of M&As boomed in manufacturing, particularly in food and beverage,
chemical products and pharmaceuticals (Table B). A number of large deals took
place in these industries. For instance in food and beverage, relay
(Netherlands) acquired a 27% stake in United Sprits (India) for 1 billion, and in
pharmaceuticals, mylan (United States) took over Agila (India) for 1.9 billion.
Some smaller deals also took place in south asian countries, including
Bangladesh, Pakistan and Srilanka.
FDI inflows rose in
India but macroeconomic uncertainties remain a major concern. The dominant
recipient of FDI in south asia, India experienced a 17% increase in inflows in
2013 to 28 billion (Table A). The value of Greenfield projects by TNCs declined
sharply in both manufacturing and services. Flows in the form of M&As from
the United Kingdom and the United States increased while those from Japan
declined considerably. In the meantime, the value of Greenfield projects from these
countries all dropped, but only slightly. The main manufacturing industries
targeted by foreign investors were food and beverage, chemical products and
pharmaceuticals.
Macroeconomic
uncertainties in India continue to be a concern for foreign investors. The
annual rate of GDP growth in that country has slowed to about 4% and the
current account deficit has reached and unprecedented level – nearly 5% of GDP.
The Indian rupee depreciated significantly in mid 2013. High inflation and the
other macroeconomic problems have cast doubts on prospects for FDI, despite the
Government’s ambitious goal to boost foreign investment. Policy responses to
macroeconomic problems will play an important role in determining FDI prospects
in the short to medium run.
For Indian companies
domestic economic problems seemed to have deterred international expansion and
India saw its outward FDI drop to merely 1.7 billion in 2013. The slide
occurred mainly as a result of reversed equity investment from 2.2 billion to
2.6 billion and large disinvestment by Indian TNCs accounted for much of the
reverse. Facing a weak economy and high interest rates at home, some Indian
companies with high financial leverage sold equity or assets in order to
improve cash flows.
Facing
old challenges as well as new opportunities, other countries reported varied
performance : Bangladesh experienced
significant growth in FDI inflows from 1.3 billion in 2012 to about 1.6 billion
in 2013. Manufacturing accounted for a major part of inflows and contributed
significantly to employment creation (UNCTAD 2013 a). The country has emerged as an important player
in the manufacturing (RMG) and has become a sourcing hotspot with its
advantages of low cost and capacity (WIR 13). However, the industry in
Bangladesh has faced serious challenges, including in labour standards and
skill development (Box 11.2)
FDI inflows to
Pakistan increased to 1.3 billion thanks to rising inflows to services in 2013.
The country recently held its first auction for 3G and 4G networks of mobile
telecommunications. China mobile was the winning bidder and now plans to invest
1.5 billion in Pakistan in the next four years.
Box 11.2 Challenges facing the garment,
industry of Bangladesh : Roles of domestic and foreign companies
Bangladesh
has been recognized as one of the “Next 11” emerging countries to watch,
following the BRICS countries (Brazil, Russian Federation India, China and
South Africa) and listed among the Frontier Five emerging economies along with
Kazakhstan, Kenya, Nigeria and Viet Nam. The RMG industry has been the major
driver of the country’s economic development in recent decades and is still
fundamental to the prospects of the Bangladesh economy. This industry is
considered the next stop for developed country TNCs that are moving sourcing away
from China. Such opportunity is essential for development as Bangladesh needs
to create jobs for its growing labour force (ILO, 2010).
With
the prediction of further growth in the industry and the willingness of
developed country firms to source from Bangladesh, the picture of the demand
side seems promising. However, realizing that promise requires the country to
address constraints on the supply side. At the national level poor infrastructure
continues to deter investment in general and FDI in particular (UNCTAD 2013a).
At the firm level, one issue concerns the need for better compliance with
labour legislation, as illustrated by several tragedies in the country’s garment
industry. Besides strengthening such compliance, the industry needs to develop
its capabilities not only by considering strengths in basic garment production
but also by diversifying into higher value activities along the RMG value
chain.
Currently,
Bangladesh’s garment firms compete predominantly on price and capacity. The
lack of sufficient skills remains a major constraint and both domestic and
foreign invested firms need to boost their efforts in this regard. A recent
UNCTAD study shows the dominance of basic and on the job training which links
directly to established career trajectories within firms. However, high labour turnover
hampers skill development at the firm level. On the job training is
complemented by various initiatives supported by employer organizations, which
have training centers but often cooperate with governmental and non
governmental organizations.
FDI has
accounted for a relatively small share of projects in the Bangladesh RMG
industry in recent years. During 2003-2011, only 11% of investment projects registered
in the Industry were foreign originated. Nevertheless, owing to the larger
scale of such projects, they account for a significantly high share of
employment and capital formation, and they can be an important catalyst for
skills development in the labour force.
FDI to the
Islamic republic of iran focuses heavily on oil exploration and production, and
economic sanctions have had negative effects on those inflows, which declined by
about one third in 2013, to 3 billion.
Services
have attracted increasing attention from TNCs as countries open new sectors to
foreign investment. However, as demonstrated in India’s retail Industry , some of the new liberalization efforts have not yet been able
to boost FDI inflows as governments expected. One reason is the uncertain
policy environment. For instance responses from foreign investors to the Indian
Government’s liberalization efforts have been mixed.
Enhanced
regional connectivity improves FDI prospects in South Asia. Poor infrastructure has long been a major
challenge in attracting FDI and promoting industrial development in the region.
Policy developments associated with enhanced connectivity with east asia,
especially the potential establishment of the Bangladesh China India Mynanmar
economic corridor and the China Pakistan economic corridor are
likely to accelerate infrastructure investment in south asia and to improve the
overall investment climate. As a result of interregional initiatives, China has
shown its potential to become and important source of FDI in south asia,
particularly in infrastructure and manufacturing industries. The Chinese
government has started negotiating with the Indian Government on setting up an
industrial zone in India to host investments from Chinese companies. China is
the third country to consider such country specific industrial zones in India,
following Japan and the republic of Korea.
New round of
retail liberalization has not yet brought expected FDI inflows to India
Organized
retailing, such as supermarkets and retail chains, has expanded rapidly in
emerging markets. In India organized retail has become a 28 billion sector and
is expected to grow to a market worth 260 billion by 2020, according to
forecasts of the Boston consulting group. As a part of an overall reform
programme and in order to boost investment and improve efficiency in the
industry, the Indian Government opened up single brand and multi-brand retail
in 2006 and 2012, respectively. However the two rounds of liberalization have
had different effects on TNCs investment decisions and the recent round has not
yet generated the expected results.
Two rounds
of retail liberalization. The liberalization of the Indian retail sector has encountered
significant political resistance from domestic interest groups, such as local
retailers and small suppliers (Bhattacharya 2012). In response the Government
adopted a gradual approach to opening up the sector – first the single brand
segment and then the multi brand one. When the Government opned single brand
retail to foreign investment in 2006, it allowed 51% foreign ownership, five
years later, it allowed 100%. In September, 2012, the Government started to allow
51% foreign ownership in multi-brand retail. However, to protect relevant
domestic stakeholders and to enhance the potential development benefits of FDI,
the Government has simultaneously introduced specific regulations. These
regulations cover important issues, such as the minimum amount of investment
the location of operation the mode of entry and the share of local sourcing.
For instance, a single-brand retailers must source 30% of their goods from
local small and medium size enterprises. Multi-brand retailers may open stores
only in cities with populations greater than 1 million and must invest atleast
100 million. In addition, the government recently clarified that foreign
multi-brand retailers may not acquire existing Indian retailers.
The
opening up of single-brand retail in 2006 led to increased FDI inflows. Since the initial opening up of the retail
sector a number of the world’s leading retailers such as wal-mart (Unites
States) and Tesco (United Kingdom) have taken serious steps to enter the Indian
market. These TNCs have started doing businesses of wholesale and single brand
retailing, sometimes through joint ventures with local conglomerates. For
instance, jointly with Bharti group, wal-mart opened about 20 stores in more
than a dozen major cities. Tesco’s operations include sourcing and service centers,
as well as a franchise arrangement to supply star bazaar with exclusive access
to Tesco’s retail expertise and 80% of the stock of the local chain.
Thanks to
policy changes in 2006, annual FDI inflows to the trade sector in general
jumped from an average of 60 million during 2003-2005 to about 600 million during
2007-09. Inflows have fluctuated between 390 million and 570 million in recent
years (Fig 11.10). The share of the
sector in total FDI inflows rose from less than 1% in 2005 to about 3% during
2008-2009. However, that share has declined as investment encouraged by the
first round of investment liberalization lost momentum.
The opening
up of multi-brand retail in 2012 has not generated the expected results.
Policy related
uncertainties continue to hamper the expansion plans of foreign chains. Although
foreign investment continues to flow into single brand retail, no new investment
projects have been recorded in multi-brand retail and in fact dinvestments have
taken place. Major TNCs that entered the Indian market after the first round of
liberalization have taken steps to get out of the market. For instance,
Wal-Mart (United States) recently abandoned its plan to open full scale retail
outlets in India and dissolved its partnership with Bharti.
TNC’s
passive and even negative reactions to the second round of retail
liberalization in India were due partly to the strict operational requirements
and continued policy uncertainties. As the two rounds of policy uncertainties.
As the two rounds of policy changes encountered significant political
resistance, compromises have been made at both national and locals to safeguard
local interests by regulating issues related to the location of operations, the
mode of entry and the share of local
sourcing required.
The way
forward. A different policy approach
could be considered for better leveraging foreign investment for the
development of Indian retail industry. For e.g. in terms of mode of entry,
franchising and other non-equity forms of TNC participation can be options.
Through such arrangements the host country can benefit from foreign capital and
know-how while minimizing potential tensions between foreign and local
stakeholders.
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