Advantages and Pitfalls of Foreign Investment

India has a trade deficit. This means that we import more than we export, consume more than we produce. This is no new thing, we have had a negative trade deficit for many years now. Then, how is it that we are still surviving? The answer lies in foreign investment, whether in the form of the direct establishment of an MNC (ie. FDI) or as an external investor in a local company (ie. FII). It is this foreign investment that holds our economy together and enables us to grow.Thus, we are effectively getting free cash to run our country. Or are we?

Consider why anybody would invest in a country, say India. It is because they believe that their money has the potential to grow here. How does money grow? It grows because the money is used to fund productive activities (ie. economically productive, even if it is destructive otherwise), and it is this produce that the investor gets in return for providing the means of production. Obviously, foreign investment has some very definite advantages. First, it increases the production in the country and hence provides employment. Wages from employment increases our earnings as a country and makes the economy stronger. In case of FDI, competition from foreign companies can help local companies improve their efficiency and competitiveness, while helping consumers get cheaper goods. In case of FDI, a company also brings new technology.

Yet there is a big drawback. All the profits go back to the foreign investor. But this is fair, because otherwise people would not invest and we cannot avail all the above mentioned benefits. Yet we must look at what we are losing. A foreign investor, by virtue of his/her investment, gains control of our resources and markets. And it is these resources and markets that they use to make their profits. Thus, we are in effect, selling off our country to balance our trade deficit. This is a dangerous habit, as a country controlled by entities which are not democratically responsible to the people is not a happy country, especially when they have the support of powerful foreign governments (read: the US government, G8 etc.) to back unethical activities that could have been stopped if they were domestic companies.  As more and more of the production happens via money from foreign investment, the lion’s share of the profit goes to the investors, while we are left with a meagre salary.

But resources are continuously created in any economic system. People get more skilled (what is called as education), new markets and opportunities develop and new natural resources are discovered and exploited. While we cannot exactly measure this growth, there is no reason to suppose that it will compensate for what we are selling. Indeed, the increasing presence of foreign MNC’s indicates the contrary.

Yet one cannot completely stop foreign investment, for it does have its advantages. The trick is in allowing it at the appropriate areas, and not assume that all foreign investment is good. We should take our lessons from Japan, which allowed its own domestic companies to mature before exposing them to foreign competition. This ensured that they benefited from the competition, but yet were not wiped out by it. They encouraged technological development and worked towards improving the producing and earning capacity of the people. They also appropriately ignored western cries for ‘liberalisation’ when it was not in their interest (which is almost always the case in a developing economy). Most importantly they had competent and sincere leaders who did what was good for the country, instead of a coalition that remains passive throughout and implements nonsensical policies at the end. Our government has opened up retail FDI despite the disastrous consequences that we have seen elsewhere and is engaged in meddling with the higher education system, instead of focusing on primary education.

Politics apart, some might argue that Japan could open its doors much earlier than India and survive. Why can’t we? Two reasons. One, India was brutally exploited by British colonisation, during which it was stripped off all its resources and the population was left languishing in poverty, making formal education all but impossible. Japan, on the other hand, escaped this to a large extent because of an advance warning of european missionaries that they had received, due to which, its competent leaders wisely threw the europeans out and shut their doors. Two, once it opened its doors, it learned very fast. They copied western technology, becoming better at it than the west, but preserved their culture which is so famous for it’s richness. We, on the other hand, ignored western technology and copied all the bad aspects of western culture and glorified it above our own. At the same time we have discarded whatever good western culture has. Obviously, it will take our industries more time to catch up, and direct comparisons to other countries without taking into consideration the surrounding situation is a formula for disaster (refer to my previous post: Ubiquity of Superstition).