NEWS
COMMENTARY
INTERVIEW
CHAT
ARCHIVES

The Rediff Business Special: Bimal Jalan

Multinationals: Demons or angels?

Many of these findings about the past behaviour of these companies are no doubt correct. However, in this respect, their behaviour has been no different than that of domestic companies. If markets are highly protected and fragmented, if competition is actively discouraged, if there is a bias against exports, and if there is no threat from new entrants, then industrial corporations, domestic or foreign, will behave in a predictable way in search of maximum profits with minimum work. The observed results in respect of past operational strategies of multinational corporations are, therefore, not surprising.

Under those circumstances, the bias against foreign investment in India's policies was also understandable. However, the policy environment now, both domestically and internationally, is very different. The past performance of foreign, or for that matter domestic, companies is not an adequate guide to their future behaviour.

To sum up, at present foreign direct investment in India is too small to have economy wide effects. As the volume of investment expands, it is necessary to ensure that other macro-economic policies, particularly tariff and trade policies, are such that positive effects of such investments are maximised. If protection levels are high and if there are trade restrictions, foreign investment may become a means of taking advantage of such high tariffs to generate high domestic profits. It may worsen the balance of payments if it results in large imports of components, raw materials and capital equipment from the parent company without adequate exports. Similarly, special fiscal incentives, which are not available for domestic investment, should also be avoided.

Such special incentives may simply encourage 'round trip' capital flows from the host country, without adding to total savings or investment. The best way of encouraging foreign direct investment is to implement more open trade policies and to improve the environment for all investments, including domestic investment.

In itself, foreign investment is neither good nor bad. In the past, it has been both. It is up to us to take advantage of the new opportunities provided by foreign investment to create jobs and accelerate growth in line with the country's comparative advantage.

Excerpted from India's Economic Policy, Preparing For The Twenty-First Century, by Bimal Jalan, Viking, 1996, Rs 300, with the publisher's permission.

Back