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The Rediff Business Special: Bimal Jalan

Multinationals: Demons or angels?

During this period, foreign direct investement has tripled in volume - from about $25 billion in 1980 to $ 78 billion in 1994. The bulk of this investment has gone to countries in East Asia and the Pacific, with China accounting for more than $25 billion of investment. South Asia, including India, accounts for a mere 1 per cent of total direct investment.

Unlike in the past, a striking new development is that most of the jobs created by foreign direct investment are in developing countries. As many as 5 million out of 8 million new jobs associated with foreign investment were located in developing countries. The real wages of labour employed in these firms have also been rising faster than average incomes.

Another feature of such investments is their strong presence in exports, with high domestic value added. A negative feature of foreign investment, from the point of view of receipient countries, is that it is more volatile than purely domestic investments. Capital tends to move out in response to increase in domestic wages over time or to political and other uncertainties.

From the standpoint of emerging new markets, this can be an advantage. China, for example, has gained new investments in recent years as wages have risen to higher levels in Korea and other East Asian countries because of the expansion of domestic manufacturing.

India is a relatively new destination for foreign direct investment, and the volume of such investment is still very low by international standards. Apart from its skills base, another advantage India has over other developing countries is that of a relatively mature domestic industrial sector. As such, most of the new direct investment proposals are in the form of joint ventures with Indian partners, managed and staffed by Indian nationals or persons of Indian origin. This should ensure greater stability of investments in the future.

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