B K Mukhopadhyay from Guwahati, India
Let us first have a look at what is going on right now globally so far as FDI (foreign direct investment) is concerned. The slow recovery in Greenfield FDI in 2011 ground to a halt in 2012, with the second biggest decline in FDI since the start of the global recession. All regions of the world experienced a decline in FDI - main exceptions being Chile, Spain, Indonesia, Poland and Oman, all of which experienced strong growth in inward investment projects.
Chile replaced Brazil as the star performer of 2012. Investment in Chile is driven by sustained 5 per cent+ GDP growth rates and, in 2012, an influx of renewable energy investments (attracted by excellent conditions for solar power and electricity demand from the mining sector).
So far as BRIC (Brazil, Russia, India and China) economies are concerned, it shows they have in recent years attracted over 22 per cent of global FDI projects (share declined in 2012 to 17.6 per cent). The FDI into China, India, and Russia peaked in 2008 and has not recovered since. The FDI into Brazil (after a record high in 2011) declined in 2012. The number of FDI projects recorded in China and Russia in 2012 was at the lowest level in the last decade. With Brazil struggling to regain growth, Russia meddling along, and growth levels in China and India falling, now the expectation is that the market share of BRIC in global FDI would continue to decline in 2013.
The UKTI (UK Trade & Investment) rightly observed that the special focus on tax and FDI shows that multinational enterprises (MNEs) minimise their tax burden through their overseas operations and provides new evidence indicating the strong link between corporate tax rates and FDI performance. Governments face a huge challenge in ensuring MNEs pay the tax due without undermining their attractiveness for FDI. Coordinated multilateral action would seem the only way to achieve this.
Whatever is India's position must not be belittled. During 2011-12 fiscal, India emerged as the fifth-largest investor with 81 projects, creating 5,454 jobs. For 2012-13 fiscal, India emerged as the fourth largest investor in the UK. The '2012/13 Inward Investment Annual Report' of UKTI revealed that 89 Indian FDI projects had helped create as many as 7,255 jobs in Britain (software services major Infosys led the team of inward FDI by a total of 28 Indian companies, which generated 429 additional jobs for the London economy in the last year alone), one of the top five inward investors' economies in the UK with the US leading the charge with 396 projects and 48,802 jobs, followed by Japan with 113 projects yielding 7,442 jobs. Italy and France came in a joint third with 93 projects each and 6,892 and 16,001 jobs respectively. China, with just 70 projects in 2012/13, slipped from its position as third-largest investor with 92 projects in 2011/12 to sixth after Germany (78 projects).
"Looking to the future, the increased funding in the Autumn Statement 2012 will help deliver an ambitious package of support designed to reinforce the UK as the location of choice for Europe-bound investors, and to help deliver its aspiration to become the number one or two European destination for FDI from emerging markets, enhancing investment support in emerging markets including India and China".
To summarise on this score: the UK received a major vote of confidence from foreign investors confirming that the UK remains a world leading business destination.
The UK saw a total of 1,559 investment projects secured over the last year, marking an 11 per cent increase in the number of projects recorded during the previous year. Attracting foreign investment is an important element of the UK government's economic and growth programme and UKTI is all set to continue to work with companies to help create and sustain a globally attractive, highly competitive and truly international economy.
Historically speaking, the growth of foreign direct investment in the last four decades had been phenomenal. The FDI can take the form of a foreign firm buying a firm in a different country, or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation.
The international growth of Spain's Telefonica is something to take note of: until the 1990s Telefonica was a typical state-owned firm. Since then it expanded into Latin America and Europe, among other regions. Mittal Steel is another example on this score: expansion from a small, family-run operation in India, to being the world's largest steel company headquartered in Rotterdam. Mittal Steel's growth strategy involved acquiring companies in distress at low prices, improving their efficiency, and capitalising on a growing demand for steel. Mittal Steel also used its growing power in the industry to drive down the prices of raw materials. Its most recent acquisition involved European steel maker Areclor, which was acquired in a hostile takeover in 2007 to create ArcelorMittal. Today, the firm boasts sales of $110 billion and a net income of $10.2 billion.
Now, at this juncture, the question arises: is it that FDI - a measure of foreign ownership of domestic productive assets such as factories, land and organizations - is all bad or all is well? Why not examining the same as a neutral observer?
While developed economies still account for the largest share of FDI inflows, recent data indicate that flow of FDI has not only jacked up, but is moving towards developing economies also - more specifically to the fast emerging economies, globally. Apart from using FDI as investment channel plus a method of reducing operation costs, many blue chips are looking at FDI as one of the ways to internationalise. Side by side, the reality is that the movement from developed to developed zone still remains higher, compared to that between developed to developing or developing to developing zone. Still, the flow of FDI has gone up and moving towards developing zone and more so in the emerging economies.
The positive side of FDI must not be missed as otherwise any analysis on this score is bound to be biased. Opposition for opposition's sake is never desirable nor a fit case to be entertained by responsible quarters. The sole important thing is whether the economy loses control or allows it to act in a way which is detrimental to the economy's well being/interest.
During the 1990s, FDI was one of the major external sources of financing for most countries that were growing economically. It helped several countries when they faced economic hardships. China, South Korea, Singapore as well as the Philippines derived maximum benefits out of FDI that helped them to fly high.
Professor Dr B K Mukhopadhyay is a management economist.
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