Hot wheels

Foreign direct investment (FDI), as a vehicle for foreign investment, is welcome in that it brings capital, new technology and modern management practices with it. However, as the case of the Andhra Pradesh government in attempting to attract Volkswagen to invest in the state shows, it should be accompanied by common sense.

While investment by FDI is a powerful means for pushing growth in the economy, domestic investment forms the bulk of investment in the economy. A greater focus on improving the investment climate for all investors, domestic or foreign, reducing red tape, cutting down on delays, opening single windows for government clearance including environmental clearance and inspections is required. Whether a foreign company sets up a steel plant, or a domestic private sector company sets up a steel plant, in an open and competitive environment, the benefit to the people is the same. International evidence suggests no special gains from FDI that do not come from investment by domestic private companies in a market economy. Discussions that focus on greater FDI flows to China, as opposed to India, often fail to acknowledge that the bulk of domestic investment in India comes from a dynamic private sector and not from SOEs (state owned enterprises), as it does in China.

In short, governments need to guard against their desire to attract FDI turning into a fetish. The focus should be on improving the investment climate for all investors, foreign and domestic, a system of greater transparency and less government intervention in business.