The Foreign Investment And Technology Collaboration

Published Date: 02 Nov 2017

Rao and Dhar (2009) attempted to present the FDI flows to India for past 10years. Following the commercial bank debt crisis and the aid fatigue, in the 1980s, once again, countries became more interested in non‐debt creating sources of external private finance.

An extensive amount of literature on FDI has emerged regarding its role in not just augmenting domestic savings for investment but more as provider of technologies and managerial skills essential for a developing country to achieve rapid economic development. FDI was given greater freedom and a role of its own to contribute to India’s development process along with gradual liberalization of India’s economic policies which started in the 1980s.4 The New Industrial Policy, 1991, which accelerated the process of liberalisation, stated:

While Government will continue to follow the policy of self‐reliance, there would be greater emphasis placed on building up our ability to pay for imports through our own foreign exchange earnings.

Foreign investment and technology collaboration will be welcomed to obtain higher technology, to increase exports and to expand the production base. Foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. The government will therefore welcome foreign investment which is in the interest of the countryʹs industrial development.

India has gradually expanded the scope for FDI by progressively increasing the number of eligible sectors as also the limits for FDI in an enterprise.

The steps taken included removing the general ceiling of 40% on foreign equity under the Foreign Exchange Regulation Act, 1973 (FERA), lifting of restrictions on the use of foreign brand names in the domestic market, removing restrictions on entry and expansion of foreign direct investment into consumer goods, abandoning the phased manufacturing programme (PMP), diluting the dividend balancing condition and export obligations, liberalising the terms for import of technology and royalty payments and permitting foreign investment up to 24% of equity of small scale units and reducing the corporate tax rates.

FDI accounted for 36% of the total inflows of $81 bn. covered by the 2,748 cases and that going into manufacturing sector formed a mere 10% of the total.

Only a small proportion of the total inflows are subjected to specific government approvals. Interestingly, compared to the other investors, specific approval from the government (FIPB/SIA) was sought to the maximum extent by what we termed as realistic FDI investors. Nearly all of NRIs’ investment is through the Automatic Route.

Prasad(2012) highlighted the key impact of FDI on India’s trade and the policy issues related to it. The world economy has been receiving shocks at regular intervals. Accordingly, GDP growth of global economy is revised downwards to 3.3 percent in 2012 and 3.6 percent in 2013 which is down by 0.2 and 0.3 percentage points respectively as per October 2012 projections compared to the July 2012 projections. IMF has also reduced its earlier projections for world trade in goods and services to 3.2 percent for 2012 and to 4.5 percent for 2013, drastically down by 0.6 and 0.7 percentage points respectively. There is a drastic fall in import and export projections for emerging and developing economies by 0.8 and 1.7 percentage points respectively for 2012, compared to the marginal fall for advanced economies by 0.2 and 0.1 percentage points respectively. India’s export performance has been much better than many other countries on the export front as it could not only surpass pre-crisis levels but also reach pre-crisis trends and maintain it for a fairly long time in the post-crisis period. But in the last few months India’s export growth has also started to decelerate.

Thomsen, Otsuka and Lee (2011) attempted to present the role of Southeast Asia in the global FDI flows. As hosts to international direct investment, ASEAN countries have emerged from the recent global crisis in relatively good shape. Inflows are at record levels in some countries, and the prospect for future flows is good. Although many regions have followed the path breaking development strategy of ASEAN in welcoming inward investment, ASEAN member states are holding their own against this com-petition – including from China.

Southeast Asian countries, with few exceptions, also have a well-established track record of openness to FDI. Neither in the 1997 Asian financial crisis, nor in the most recent global one, did governments in the region resort to protectionism. On the contrary, governments in some crisis-affected economies in 1997-1998 actually opened further to foreign investors in key sectors such as banking.

Information on the activities of foreign investors in ASEAN suggests that they are increasingly focusing on the regional market. Local markets still account for the largest share of sales of affiliates, but regional sales are growing faster than exports to the home country of the investor. This suggests that competition for global FDI will in the future depend as much on the appeal of the ASEAN market itself as it will on the costs of production and related factors.

Thomsen (1999) explained the role of direct investment in the development of Southeast Asia. The four countries reviewed in this paper - Indonesia, Malaysia, the Philippines and Thailand have all to varying degrees welcomed inward investment for its contribution to exports. FDI has been a key factor driving export-led growth in Southeast Asia. Foreign firms have by no means been the only actors, but they have played a leading role in those sectors with the fastest export growth such as electronics.

Malaysia and Thailand were among the most open in the developing world to foreign investment. They were quick to recognize the powerful role that foreign investors could play in fuelling export-led growth. Partly as a result of FDI inflows, the two countries were among the world’s fastest growing economies before the crisis.

FDI trends in the ASEAN4 (Indonesia, Malaysia, the Philippines and Thailand)

With the exception of the Philippines, which until the 1990s had not generally welcomed foreign investors, the ASEAN4 have all been major recipients of foreign direct investment (FDI). The period of most intense foreign investment activity occurred in the late 1980s when firms from Japan and the Newly Industrialising Economies (NIEs) were looking for production bases abroad to escape appreciating home currencies and the loss of preferential access to many OECD markets.

Hill and Chandra(2000) updated the literature survey on FDI in Southeast Asia. It focuses on the impact of Asian economic crisis of FDI inflows relative to other forms of capital inflows, the link between FDI and trade, and technology transfer and adaptation. Major trends which were evident included: FDI flows were increasing much more quickly than world GDP. Secondly OECD-north continued to be the source of FDI.

Developing Asian countries received 6.1% of Global FDI over the period 1975-80. This share tribled to18.1% for 1990-95. Six East Asian economies( China, Singapore, Malaysia, Thailand, Indonesia, Hong-Kong) were among the eight largest developing country recipients of FDI in 1990-95.

Total FDI flows in Malaysia were $3billion by 1996. Real estate, resource development and financial services have been the dominant areas of investment. As in Singapore overseas manufacturing investment by Malaysian firms is limited. Majority of Malaysian investment is in Singapore, Hong Kong, USA, Australia and Britain.