6 fixes to help India get more FDI: IIM Indore, Wharton researchers

At a time when companies across sectors are either leaving or considering exiting China, India must invest in policy and administration, infrastructure, the legal system and implementation to attract more foreign direct investment (FDI), a research paper suggests.

Titled ‘FDI Value Proposition Framework: Six interventions to attract MNCS to India’, the paper looks at why companies are opting for destinations like Vietnam and Taiwan and what India can do about it.

The paper was authored by Prashant Salwan, professor of strategy and international business as well as chairman of executive education at Indian Institute of Management (IIM) Indore, and Yorum Wind, professor of management at Wharton School, University of Pennsylvania. It was reviewed by Amlendu Dubey, faculty member at Indian Institute of Technology (IIT) Delhi.

“As companies started leaving China, Indian policymakers were quite upbeat that they would come to India. But sadly, that wasn’t the scenario. Nomura Group Study found that in 2019, out of the 56 companies that shifted their production out of China, only three invested in India; while 26 went to Vietnam, 11 to Taiwan, and 8 to Thailand. In April 2020, Nikkei noted that out of the 1,000 firms that were planning to leave China and invest in Asian countries, only 300 were seriously thinking of investing in India,” the paper states.

Indian cost of production is half that of China, but the latter still has more FDI. Vietnam’s market is a fourth of the size of India, but 46 per cent of companies leaving China went there and only 5 per cent came to India, the paper points out.

India’s manufacturing FDI is quite low at 0.6 per cent of gross domestic product (GDP) compared to Indonesia’s 1 per cent. “These examples show that market size or labour cost is not the only variable to [impact] global location decisions. There are other factors and combinations of these factors that firms take into consideration before taking any decision,” the paper further states.

According to Salwan, policymakers need to link the understanding of a firm’s requirements in creating Customer Value Proposition

(CVP) to the competitive advantage a country has.

Based on analyses of FDI frameworks, the four factors used by firms in deciding FDI investment — firm fit, location characteristics, government incentives, and competitive effects —and discussion with 31 multinational companies, the team came up with the ‘Value Proposition Model of FDI’.

With six pillars and 20 sub-factors classified as pull and push factors, the paper looks at the steps the Indian government needs to take to attract FDI.

The pillars are government policy and administration, infrastructure, economy, business ecosystem, legal system and implementation, and location advantages.

Based on these pillars, the team created a FDI value proposition index, which shows that though India enjoys some advantages over Vietnam and Taiwan in terms of infrastructure and economy, the latter score over India in government policy and administration, legal system and implementation, as well as location advantages.

“India has taken positive steps like allocating a huge chunk of land and policy changes regarding land acquisition. But Indian government needs to take a structured approach in attracting FDI… [it] needs to work on government policy and administration, infrastructure, and legal systems and implementation on a war footing. Developing policy and facilitating strategies using these six pillars will help India attract FDI to a ratio of 1.5 per cent to 2 per cent of GDP,” the paper states.

Paper says Vietnam, Taiwan managed to attract more firms exiting China than did India