economy : fdi in layman terms
Answer by Balaji Viswanathan:
The other Balaji has already provided good details.
FDI means a foreign company makes an active investment in local business. This is contrasted with FII – where a passive investment is made – often through stock markets.
For instance, if Ford buys Tata motors from the money it makes in the US and runs Tata, that is counted as FDI – as Ford is going to actively manage and run it. If Citibank buys 1 million shares of Tata motors as an investment that is counted an FII – as Citi is not going to manage Tata Motors, but just be a stockholder.
Some types of FDI:
- Greenfield FDI: Build a completely new factory or business. The best kind as it creates new jobs. If Ford sets up a new factory in Chennai that is counted under FDI. Google, Microsoft, Facebook, Amazon have all setup new establishments in India.
- Brownfield FDI: Buy an existing business and grow it. Vodafone bought Hutch. Groupon bought Crazeal. They bought an existing business and are growing it. Helps get new technology and business innovation. For instance, Vodafone would train Indian managers with latest telecom ideas from the rest of the world. Some of these managers could later move to other Indian companies and pass on the best practices.
- Bring high paying, new jobs. For instance, Microsoft's IDC in Hyderabad has brought 1000s of new jobs in the region.
- Bring new technology and create new markets. In 1989, GE came to India to setup an outsourcing unit in Bangalore. Soon, IBM and Accenture followed. The managers trained by these companies moved to other local companies like TCS/Infosys improving their capability or setup their own companies. In 2 decades, that has completely revolutionized India.
- Increase exports: When Hyundai setup a factory in Chennai, they immediately had an idea for exports. Hyundai already has a base in Southeast Asia and used India factory to export there. It is much better for Hyundai to export cars from India than Tata to export, as Tata doesn't have as many foreign dealers or bases. Another example is in tech. Whatever Microsoft or Google makes in India is automatically "Exported" to the rest of the world.
- Bring new dollars: India is always short of foreign currency and FDI can help us with new dollars and enable us to better purchase oil and other imports.
- Foreign companies will have more control over the domestic market. Some security analysts fear that letting Huwaei control India's telecom industry can weaken India in a potential conflict with China.
- Foreign companies might have less incentive to develop domestic markets and domestic labor as this is not their country.
- Corruption: It is harder to earn kickbacks from foreign companies as these companies also have to obey strict rules back home. For instance, Google can get into serious trouble with the US government if they bribed someone in India. Thus, the bureaucrats and politicians are not too excited about the FDI.
Overall, the benefits of FDI far dwarf the drawbacks. Why is it such a major issue? It is because various vested interests would be affected by FDI:
- Local businessmen who got used to providing sub-standard product/service will lose. In India, customer service is often a joke and adulteration is rampant. Some of these businessmen will lose out against better competitors. What will these local businessmen do? Pay money to politicians to delay foreign competition. The successful ones will thrive in good competition. For instance, Infosys didn't get killed by the entry of Accenture, rather it grew further. Same with Tata motors or the Aditya Birla group.
- Local politicians & bureaucrats who got used to getting their hands greased. Foreign companies are much more against paying bribes. These guys decide the policy.
- Labor unions: Toyota and Honda are not going to tolerate too much of labor unions. In general, American companies are much more against labor unions and their extortionary techniques. Thus, unions will do their best to block FDI. They have huge voting power.
- The ultra-nationalists: This group wants to buy only those things made by Indian companies. They wouldn't buy Hindustan Lever, even though Lever is practically Indian
- The Communists: They are against Corporations of any kind.
- The paranoid: A chunk of India is still not out of the East India Company mold [although the Company left India 160 years ago].
In short, FDI has a deeply entrenched opposition in India that is well funded and well supported. These opponents will sing poems on Indian kiranas, but will not bother about Indian consumers. They will not say the child labor the kirana is using, abusive wages he is paying, the lack of training he is providing, the complete tax evasion by not providing a bill or the rampant adulteration. For instance,, leading to deaths, diseases and malnutrition, but we are still too emotionally attached to the guys doing this to us.
Somehow the common public have to give up our rights to keep a fraction of bad shopkeepers living [There are a good kiranas who will actually grow with foreign entry as they will have better tech and local expertise – maybe even become Amazon's or Walmart's partner – like what happened in China after Walmart entered there.]