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He's A.T. Kearney's expert on foreign direct investment. Paul Laudicina spent time with BT to say what's right and wrong with India's FDI policy.
Q. Your survey says India is on the radar screen of investors and that it has two of the major drivers of FDI---an expanding market and skilled and cheap labour. So why isn't the FDI flowing in? A. The reasons are reflected in the other side of the ledger---the liabilities. Bureaucracy is consistently mentioned as an overwhelming barrier to investment. There are also issues relating to cultural barriers. This means companies need to adapt products specifically geared to the Indian market rather than rolling out the same kind of product globally as manufacturers are wont to do. The other reasons cited by investors are the pace and consistency of reform and poor infrastructure. So it's one of the paradoxes of the Indian investment environment that, on the one hand, the market is so large and promising that all investors are looking at it closely, as they have been for many years. On the other hand, its per capita and gross FDI flows are rather small even compared to markets that are smaller than India like Argentina, Mexico, or Brazil. India is not getting its fair share of FDI. Q. What advantages do those countries have? A. Take Brazil. When President Fernando Cardoso (when he was the finance minister in the early 1990s) announced a series of macro economic reforms to stabilise the Brazilian currency, open the economy to outside investment, as well as to join the regional trading regime of Mercosur, Brazil began sending a clear, consistent message that it was open to business and was going to welcome private sector activity---both domestic and foreign. And it has done so. And the response of the investor community has been a steady and steep incline in terms of total FDI. Between 1997 and 1999, FDI flows into Brazil increased in excess of 67 per cent and this year we expect it to exceed the record of $ 30 billion. Q. What about China? A. China has been realising substantial volumes of FDI over the past six to 10 years at a $ 30 billion-plus level. In 1998, FDI flows had declined 8 per cent from $43 to $40 billion. And the Chinese became concerned about that. One reason why the Chinese pushed for entry into the World Trade Organization (WTO) was that they believed this would send a consistent and clear message to the investors that China welcomed FDI, and would do what is necessary to provide the right kind of environment. When, in the past, we asked investors why they invested in China, apart from market size and potential (which it shares with India), one reason they cited was their immense confidence in the government to provide a consistent, clear, and uniformly implemented series of policies and regulations conducive to private sector investment. They also said that while the Chinese market is similar to India's in the aggregate, they see that as more robust in terms of actual middle income consumer market development. They cite things like ease of doing business. But relatively speaking, India is ahead of China in areas like infrastructure, consistency of regulation as applied to business. So, India has to catch up with China in terms of how it is perceived by investors. Q. So it's a perception problem, not an actual one? A. We don't have data on whether it's actual or not. The FDI confidence index is an assessment of investor perception, and frankly, for our purposes, investor perception is as important as reality. It is for the Indian authorities to determine if the perception is wrong, how do we change the perception or if the perception is right, what needs to be done to attract the investor. Q. But India has liberalised its FDI regime a great deal. Doesn't that count for anything? A. Investors have noticed that. Certainly, 13 per cent of our respondents have cited government incentives as a positive factor. By that they mean not necessarily a tax incentive so much as the ways in which the government is trying to improve the conditions for investment like a one-stop investment approval process, expediting the regulatory regime, providing for larger share of equity of foreign partners in domestic industry across a broader swathe of sectors. These are all part of the pieces that one puts in place to begin to change the perception of the investment community about a given investment destination. If India continues to move in the right direction, pursuing the kind of policies that the government is debating and continuing to welcome FDI, it is likely to begin reaping some of the rich rewards that are out there. Q. Which are the sectors, which are likely to get most interest? A. The financial services and industrial products are the sectors which have a positive predisposition to India, as well as opportunities for FDI. Investors do see opportunities in power and utilities, despite the negative overhang of recent history. They see that the government is obviously trying to address those issues. Q. You have mentioned that foreign investors don't find Indian business very hospitable. Why is that? A. When you talk to foreign business leaders, sometimes they wonder if Indian indigenous investors want foreign investment as badly as other indigenous investment communities suggest that they do. That's just anecdotal evidence. We feel the market is protected domestically and we don't have as many opportunities to invest across a whole variety of sectors as we might in other economies, so we have to believe that it may be related to the fact that the government may be trying to protect domestic markets. Q. But isn't this true of other countries as well? A. It is. The US, not too many years ago, was debating the North American Free Trade Agreement (NAFTA) agreement and Ross Perot went on a campaign against the agreement, the labour unions were up in arms. These are all stages of development economies go through. The whole idea is to move up the food chain from a low value-added labour-intensive, low-skilled jobs base to a high value-added, high-skilled, and very productive job base. One just doesn't shift and arrive. It's a continuous evolutionary process. Q. If it is not peculiar to India, why is it a factor in wooing FDI? A. The problem of needing to shift is not peculiar to India. The problems of whether or not the Indian investment community is interested in shifting is a different story. It's the perception of the external investment community about the domestic market. And it's also not peculiar to India, because investors find in any emerging market situation that there are some people who are threatened by the changed circumstances. Q. What, ultimately, are the lessons for India? A. The story that we're telling is that India has had potential in the past and it continues to do so. What's different is that the investment community's perception of India is transforming. Slowly, not uniformly, but it is transforming. And in some pretty fundamental ways---mind you---particularly where it has to do with labour market conditions, with the robust nature of the market place, the government's commitment to reform, as well as political stability. These are all areas where India has traditionally suffered problems in terms of investor perception. And it's terribly important that the government continues moving in the right direction. Because the hard work and the dedicated effort that it has put in to transform the environment has begun to be noticed. It hasn't been in vain. Remember, consistency is the key. We have seen investors in other parts of the world continue to invest even in relatively unfavourable conditions because they knew those conditions were not going to change. They could adjust and adapt to them. What worries investors are uncertainties and imponderables or irrational irregular reactions in the market place. So it's not always a completely favourable position in one environment, and an unfavourable position in another. It's a game of relative positions. India has a lot of assets that it needs to be leveraging. |
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Nine years after liberalisation, Foreign
Direct Investment (FDI) inflows have hovered around $3 billion a year, a
piddling amount for a country with a huge market and immense
opportunities. India has also been slipping in terms of being an
attractive investment destination. Between June 1998 and January 2000,
India slipped from number five on global consultancy firm AT Kearney's FDI
Confidence Index to number 11 while other emerging markets like Brazil and
China continued to remain in the top five destinations. In this interview
with BT's Seetha, Paul Laudicina, Vice-President and Managing Director,
Global Business Policy Council, AT Kearney, lists the reasons why India is
no longer a magnet for FDI and the attractiveness of other emerging
markets.