FDI IN RETAIL SECTOR AND ITS IMPLICATIONS BY

FDI IN RETAIL SECTOR AND ITS IMPLICATIONS BY PROF. SAYYAD I. M DEPARTMENT OF ECONOMICS, Rayat Shikshan Sanstha’s S. M. JOSHI COLLEGE HADAPSAR, PUNE. 11/4/2020 1

FOREIGN DIRECT INVESTMENT Refers to the net inflow of investment to acquire a lasting management interest in an enterprise operating in an economy. It is the sum of equity of capital in the long –term capital as shown in BOP. It is usually involve participation in management joint ventures foreign technology and expertise. Retail Markets are divided into two types: 1. Organized Retail Market: Refers to trading activities under taken for licensed retailers that is those who register for sales tax, these include corporate backed hyper markets and retail chains etc 2. Un-Organized Retail Market: Refers to traditional forms of local kiranashops owner managed general stores 11/4/2020 2

Hand carts and pavement venders FDI POLICY ON RETAILING IN INDIA FDI a) up to 100 per cent for cash and carry wholesale trading and export trading allowed under automatic route. b) up to 52 per cent with prior government approval for retail trading of single brand products. c) Not permitted in multi-brand retailing in India. 11/4/2020 3

Hand carts and pavement venders FDI POLICY ON RETAILING IN INDIA FDI a) up to 100 per cent for cash and carry wholesale trading and export trading allowed under automatic route. b) up to 52 per cent with prior government approval for retail trading of single brand products. c) Not permitted in multi-brand retailing in India. 11/4/2020 4

Hand carts and pavement venders FDI POLICY ON RETAILING IN INDIA FDI a) up to 100 per cent for cash and carry wholesale trading and export trading allowed under automatic route. b) up to 52 per cent with prior government approval for retail trading of single brand products. c) Not permitted in multi-brand retailing in India. 11/4/2020 5

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MAIN THEORIES OF FDI �FDI theories – introduction and main questions �FDI theories on macro level �Development theories of FDI �FDI theories on micro level �Eclectic FDI theory (OLI theory 11/4/2020 7

FDI Theories on Macro Level Capital market theory One of the oldest theories of FDI (60 s) FDI is determined by interest rates Dynamic macroeconomic FDI theory FDI are a long term function of TNC strategies The timing of the investment depends on the changes in the macroeconomic environment “hysteresis effect“ 11/4/2020 8

Life cycle theory Raymond Vernon – 1966 It can be used to analyze the relationship of product life cycle and possible FDI flows FDI can be seen mostly in the phases of maturity and decline The conclusions of this theory are questionable nowadays Japanese FDI theories �Were initially developed in the 70 s of the last century �Main represent ant – Terumoto Ozawa 11/4/2020 9

�He analyzed the relationship of FDI, competitiveness and economic development based on the ideas of Michael Porter �He identified three main phases of development when he analyzed the waves of FDI inflow and outflow from a country. I. phase of economic growth The country is underdeveloped and is targeted by foreign companies wanting to use its potential advantages (especially low labour costs) Almost no outgoing FDI II. Phase of economic growth New FDI is drawn by the growing internal markets and by the growing standards of living Outgoing FDI are motivated by the raising labour costs 11/4/2020 10

. III. Phase of economic growth The competitiveness of the country is based on innovation The incoming and outgoing FDI are motivated by market factors and technological factors FDI theories on Micro Level � Existence of firm specific advantages (Hymer) �Access to raw materials �Economies of scale �Intangible assets such as trade names, patents, superior management etc �Reduced transaction costs when replacing an arm's length transaction in the market by an internal firm transaction � FDI and oligopolistic markets �In oligopolistic markets the companies follow the actions of the market leader �Mutual threats – game theory 11/4/2020 11

�. Theory of internalisation �Due to market imperfections, there may be several reasons why a firm wants to make use of its monopolistic advantage itself (or organise an activity itself) �Buckley and Casson (influenced by Coase), suggested that a firm overcomes market imperfections by creating its own market – internalisation �he theory of internalisation was long regarded as a theory of why FDI occurs �By internalising across national boundaries, a firm becomes multinational 11/4/2020 12

�. Eclectic FDI theory – John Dunning attempts to integrate a variety of strands of thinking He draws partly on macroeconomic theory and trade, as well as microeconomic theory and firm behavior (industrial economics) O = Ownership advantages Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation… This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs 11/4/2020 13

�L – Localization advantages �Producing close to final consumers or downstream customers �Saving transport costs �Obtaining cheap inputs �Jumping trade barriers �Provide services (for most services production and delivery have to be contemporaneous) 11/4/2020 14

�OLI approach – conclusions The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplies by exports 11/4/2020 15

� 4 types of FDI derived from OLI theory The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI: Resource seeking FDI Market seeking FDI Efficiency seeking (global sourcing FDI) Strategic asset/capabilities seeking 11/4/2020 16

Resource seeking FDI To seek and secure natural resources e. g. minerals, raw materials, or lower labor costs for the investing company For example, a German company opening a plant in Slovakia to produce and re-export to Germany. Market seeking FDI To identify and exploit new markets for the firms` finished products Unique possibility for some type of services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply) Automotive TNCs have invested heavily in China 11/4/2020 17

Efficiency seeking FDI To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms International specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations. 11/4/2020 18

Strategic asset/capabilities seeking FDI MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive position Acquisition of key established local firms Acquisition of local capabilities including R&D, knowledge and human capital Acquisition of market knowledge Pre empting market entrance by competitors Pre empting the acquisition by local firms by competitors 11/4/2020 19

We are all aware that retail sector liberalization is the result of National manufacturing policy announced by the central government. It has opened up the gates for private investment in agriculture, transportation of agricultural products and distribution mechanisms. These are the different dimensions of the arguments made by different quarters of the intelligentsia, policy makers and government sources. So far I have given you a detailed account them. But now I want to reflect my own thoughts on this issue entitled FDI and its implications for retail sector. 11/4/2020 20

We are all aware that retail sector liberalization is the result of National manufacturing policy announced by the central government. It has opened up the gates for private investment in agriculture, transportation of agricultural products and distribution mechanisms. Various arguments put forward by those favoring FDI in retail legitimizing government’s decision to open up FDI in retail. In the following analysis, an attempt is being made to put the things in right perspective. The arguments put forward in favor of FDI in retail can summarized as follows: I. Growth of organized retail will create millions of good quality of new jobs. II. Infrastructure would built and help saving agricultural produce from wastage. 11/4/2020 21

III. Farmers will be benefited in form of high prices for their produce. IV. Consumers will be benefited, as they will get goods at cheaper and thereby inflation can be controlled. I. Employment: FDI in Multi Brand Retail will kill employment PM says “the growth of organized retail will also create millions of good quality new jobs” the crises managers of the government has been trying to sell the argument that the proposed policy would lead to creation of 10 million jobs in next 3 years. No takers of this argument in fact, there is no basis of this argument and the same has been borrowed from publicity material of multinational retail giants. India has the highest shopping density in the world 11/4/2020 22

with 11 shops per 1000 people. Discussion paper issued by the Industrial Policy Promotion, indicating intention of the government to open this sector for FDI, also concluded that there are 120 lakh big and small shops in the country employing 3. 5 crore people directly, in addition to this there about 1. 5 crore engaged in wholesale, transportation and other related services. This is important to mention that 99 percent of small shops being run by self-employed people. INTERNATIOAL EXPERIENCE: International experience tell us that retail has virtually been wiped out in USA and Europe. Looking at international experience the small shops will close down at a much faster pace. Opening retail stores by these MNCs in 53 big cities of India. This may lead to a large scale unemployment because of closure of small shops. 11/4/2020 23

Unemployment is going to increase not only because small shops would close down, but also because of decline of manufacturing in in the country. Thus, it is very clear that if FDI in retail is allowed there will be a sharp increase in off shoring products in the country and thus, a widespread unemployment in manufacturing sector. While announcing the policy that is opening up of retail for FDI is along with a rider that they will procure at 30 per cent from small-scale industry. Later on the government had to concede that this condition is not for procuring from SSIs. From the above argument that; 1. A massive 300 million people are in the age group of 1629 years. 2. Nearly 100 million are in the age group of 16 -19 years assume only one in four seek employment close to 25 million new jobs are needed every year. 11/4/2020 24

Hence, it is incredible that retail one of the prime source of the employment in the country, is being handed out on a platter out to multinationals with their proven record of poor employment generation. II. Myth of Infrastructure Growth: One of the major arguments, justifying to open retail sector for FDI or 22 lakh crore of huge retail sector for MNCs would result in all round development of rural infrastructure . Especially warehousing and cold storages. Argument of the government is that 50 per cent of the vegetables go wastage. One and only solution to these problems is FDI in retail. Government also says that these MNCs would asked to channelize at least 50 per cent of their investment into in fracture. 11/4/2020 25

If we look into reality, even by going government’s argument of need FDI in infrastructure. It would be interesting to note that FDI in warehousing and cold storages was allowed more that a decade back. However, no FDI get attracted into this sector. Infrastructure Essentially Government Responsibility: It is the responsibility of the government to either create this storage capacity on its own or encourage private sector to create this by way of subsidies. If all these MNCs would provide storage in fracture, it would only be provided to strengthen their supply chain. We cannot expect that the cold storage built by these MNCs would keep potatoes produced by our farmers and save from hardships. 11/4/2020 26

III. FDI IN RETAIL IS ANTI FARMER: Government tried to boiled down the debate on the need to permit FDI in retail with reference to the farming community, stating that it would bring boon to farmers and farming community. They claim that large organized retail would not only benefit consumers, who would enjoy lower prices owing to cost efficiencies, but also farmers as these companies would provide stable market and purchase their produce at a reasonable prices. The government argues that opening the FDI in retail would wipe off intermediaries and thus would benefit the consumers. Theoretically, it may be correct but practically it is not. International experience tells us that there are hardly a few multinational giants that control majority of the food sales. These companies enjoy some monopsonic power. 11/4/2020 27

IV. Controlling Price Rise by MNCs Another argument is that is opening up retail sector for FDI is that it would control inflation. Perhaps the common people reeling under inflation may welcome any policy that provides relief from inflation. What is Government Claims: MNCs in retail sector in the country would reduce distributional cost of the goods. Government claims that companies would procure goods from farmers and manufacturers directly and therefore, the margins earned by the intermediaries would be eliminated. In India margins of wholesalers and retailers are much less than the mark-ups of multinational retail giants. Higher markup price of multi-brand retailers are in built in their business mode. 11/4/2020 28

Higher mark-up price of organized retailers(MNCs) built in their business mode. , are due to the fact that process of retailing involve much higher costs as compared to small retailers. Flawed Argument of Freedom for States: 1. Kerala a state ruled by the congress led alliance has openly opposed the policy of FDI in multi-brad model. 2. Who knows better than the government about the implications of international agreements. It seems that government in its hurry to open up FDI in multi-brand retail used flawed arguments. 11/4/2020 29

1. Evidently there is no national consensus on allowing FDI in retail business. Broadly there are two views about FDI in retail business in India. Advocates of FDI tout it as the much needed major policy push that could arrest the economic downturn, bring in not only foreign funds but advanced technology and expertise, create infrastructure, offer better prices to farmers, generate ancillary industries and create millions of jobs. The main argument for FDI in multi brand retail is that it would lead to creation of storage facilities for food grains so that the current 40 percent wastage in government facilities would be ended. 11/4/2020 30

This would also increase market supplies and hence, help in combating inflation. However, skeptics present a doomsday scenario and state that FDI in retail business in India will wipe out small farmers and traders result in job losses and open the floodgates for cheap goods from countries like china, adversely impacting the Indian industry. Closely related to these contrasting arguments, one more argument is that how big our big business is 11/4/2020 31

2. , Carrefour and Tesco going to do after all what are Wal-Mart India that Reliance, Birla, Future, and Bharati have not already tried? It is not as if India’s business groups lack capital, technology or management expertise. In fact, these same business groups are actually exporting their terrific business capabilities across the world. If there was money to be made investing in cold chains, directly procuring from farmers, developing exciting new retail formats or from just lowering prices, you can be sure that Reliance, Birla, Future, and Bharati would have already done it. Another argument is that is it not much ado about nothing i. e. . Why so much debate on FDI in retailing in India. It follows that 11/4/2020 32

3. India’s kabanas, chemists, sareewalas, and mom and pop stores need not fear of anybody. Displacing them is very hard. What will displace them is retailing innovation for India, of India, and by Indians, not FDI in retail from traditional western retailers. The new age retailing models that are becoming successful in the country are on line models with excellent off line enablement. These business models are incredibly innovative in terms of their procurement, inventory management, vendor base development, and collection approach (Primarily cash-on- delivery). These models are customized for Indian conditions. India’s small retailers should not fear of Wal- mart, instead they should fear India times shopping, Flipkart, Myntra, Red. Bus, Healthkarf etc who are offering 20 -40 percent lower prices, it is an irresistible value proposition. Can wal-mart or Carrefour match that? 11/4/2020 33

Apart from these arguments, some comments and some questions are found in our way to understand the dynamics of FDI in retailing in India. 4. Lot many debates whether hypothetical's might happen. Will wal- mart take away jobs? Carrefour invests in cold chains? How well will Tesco pay farmers? These questions are just not only of academic interests but also with some policy implications. 5. With regard to the future of unorganized retailers in India, great economist like Jagdish Bhagwati made it clear that the entry of MNC retailers may lower the sales increase for unorganized retailers, but it will not reverse their growth in the near future which is not acceptable to most of the unorganized players in the retailing business 11/4/2020 34

6. It is an imaginary fear that MNC retailers after some time they may become monopolies in Indian markets. politics? “We oppose what ever you propose” phenomenon. Conclusion: FDI in retailing in India is a Zero sum game or Win–win proposition? depends on how we make use of FDI in India. In other words, the word “we” is more important than the FDI in retail sector. We and our wisdom, vision, mission and reality are more powerful than the effects of FDI. 11/4/2020 35