A case for FDI in Multi Brand Retail in India


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A case for FDI in Multi Brand Retail in India

  1. 1. IJASCSE Vol 1 Issue 2, 2012Sept. 30 A case for FDI in Multi-Brand Retail in India Jatin Prasad Dr Jyoti Singh Research Scholar Associate Professor Rajasthan College, Jaipur Rajasthan University, Jaipur Abstract direct investment (“FDI”) to it. As per the present regulations 100% FDI is India is ranked as the third most allowed in wholesale trading and 51% attractive nation for retail investment is allowed in single-brand retailing. The among emerging markets and many FDI in multi-brand retailing has been MNCs have been looking for the just allowed and so the question, if potential benefits to be taken from it. opening up of FDI in multi-brand retail The development of organized retail is a boon or a curse, is opened up. has the potential of generating employment, improvement in technology, development of real estate etc. On the other hand critics of the 2. The Foreign Direct FDI feel that allowing FDI would Investment jeopardize the unorganized retail FDI is defined as "investment made to sector and would not only adversely acquire lasting interest in enterprises affect the small retailers and operating outside of the economy of consumers but will give rise to the investor. It is a long-term monopolies of large corporate houses relationship between the investor and also, which can adversely affect the the recipient entity.” (www.unctad.org) pricing and availability of goods. A case for the prospects for the same is For FDI there is a need of a 10% discussed in this paper. holding or greater. Most FDI ends up being 100% ownership by a Multi- Keywords: FDI, multi-brand retail, National Corporation (MNC). In the Wal-Mart past twenty years, FDI has increased 1. Introduction dramatically and has become the most common type of capital flow across the The retail industry in India is divided borders of world economies. into two sectors: organized and unorganized sectors. Since 1991, There are two matching ways and when economy was liberalized, concepts of measuring the FDI: organized retail has grown exponentially because of burgeoning  It is a particular form of the purchasing power of Indian middle capital flow across international class and the opening up of the foreign borders giving rise to a 1
  2. 2. IJASCSE Vol 1 Issue 2, 2012Sept. 30 as potential host countries often lack the resources for R&D to particular form of international acquire the latest technology, assets for the home countries. so they may acquire it from To be specific, the value of MNEs by FDI. holdings in corporations,  The MNE can train local people controlled by a home country of host countries with its resident or in which a home management skills to occupy country resident holds a certain managerial, financial and share of the voting rights. technical positions within the  It is a set of economic activities MNE, which eventually become or operations carried out in a generally available within the host country by firms controlled host country. or partly controlled by firms in some other (home) country.  The jobs are created directly These activities are, for and indirectly through the example, employment, multiplier effect. The indirect production, sales, the use and employment effects may equal, purchase of fixed capital and and sometimes exceed, the intermediate goods, and the direct effects. FDI sometimes carrying out of R&D. also eliminates jobs through displacement of local firms, but FDI is not only beneficial to individuals the net effect is generally of the society but it is spread additional employment within throughout the economy also via the the host economy. (Hill, 2005, theory of the multiplier effect, which p. 246) ultimately boosts the economy of a  FDI has a number of BOP country raising its standard of living. benefits for a host country: For the most part economists welcome  Due to an investment by MNE, the increase of FDI to developing the capital account registers a economies. It brings capital needed for credit - a one-off credit. economic development in the country  The current account will register in a way that is not as risky as credits, if the FDI is a substitute borrowing from overseas. It may also for imports bring a range of additional benefits.  If the MNE uses the investment for exports, again it will be the The benefits of FDI arise from: current account credit.  The important benefit is from Potential costs of FDI are: the trickle-down effect of the infusion of capital in the national  It is expected that a well- economy of the country. financed MNE with managerial  As MNEs typically possess expertise can drive existing state-of-the-art technology and local companies out of 2
  3. 3. IJASCSE Vol 1 Issue 2, 2012Sept. 30 Wal-Mart has currently joint venture with Bharti that has six large format business. It may also inhibit the wholesale stores. It supplies to 130 growth of infant industry. Easy Day retail outlets owned by Bharti Retail. Although Wal-Mart is  The continuing outflow of pleased with their journey so far with earnings from the FDI and Bharti, but it has been planning to imports of components as part open 10 stores this year and a similar of total production process will number next year, mostly in tier-II and be shown as debits on the tier-III cities of south and west India. capital account. The reason behind this is that they  An emotional reaction can be believe there is more demand for multi evoked by the presence of an brand from consumers in India who MNE in a host country to also hold a large potential. apparent economic domination and loss of national identity. Wal-Mart India aims to establish farm linkages and work with the farmer to 3. A case for FDI in multi-brand improve productivity so as to establish retail in India linkages with its 1,000 plus suppliers in the country. There is a lot of talk about allowing FDI in multi-brand retail in India. There are The future of Wal-Mart in India is quite still some prohibitions for FDI in multi prospective. There is a boom in Indian brand retail trade in India. The country, retail scenario and Indian retailers are however, has recently allowed up to 51 performing well across the board. In per cent FDI in multi brand retail like the organized retail trade current single brand. profits are good and the future appears to be even more alluring. The savings The Wal-Mart has been thinking to are less today by an average urban enter the multi-brand retail in India with consumer than it were a few years ago FDI. “It is for the government to deal and more importantly, expenditure of with and as and when they come out income is on a wider array of goods with the conditions for allowing such than it was earlier. It is the investments. The final decision will expansionist mood of the current depend on government’s future stand market as consumers are willing to lap on its investment policy in multi brand up better and newer brands. By 2012, retail. We expect the government to the retails markets 16% account is to consider allowing at least 50 per cent be captured by organized retailers, FDI in multi-brand retail and then there which would be quite up from 4% of are other terms and conditions which today. The Indias retail trade size is too will be considered for shaping the estimated at $206 billion and it has future of Wal-Mart in India,” said Wal- been growing at five per cent per Mart country head in India. annum. 3
  4. 4. IJASCSE Vol 1 Issue 2, 2012Sept. 30 4. Conclusion Worldwide, the business of Wal-Mart With the case of Wal-Mart, it can be revolves around a very efficient supply said that FDI in multi-brand retail in chain, with savings in each aspect of India should be given a serious that supply chain. Its not just about thought and a gradual opening up negotiation to get better prices with the must be made possible. In spite of suppliers; it is actually to remove country wide speculation on the plight inefficiencies in the supply chain. of small retailers, India must take a lesson from China, where organized “Our relationship with India is broader. and unorganized retail is co-existing We have a sourcing relationship; we and growing together. With allow of buy a lot of merchandise out of India. FDI in multi brand retails, local Again, I think the wholesale enterprises of India will potentially opportunity is big. My experience over receive an up-gradation with the import the last few years has been in the of advanced technological and wholesale business in the US serving logistics management expertise from small business. I believe there is a role for us to play here serving kiranas and the foreign entities to improve its infrastructure, access sophisticated hotels and restaurants and other technologies and generate people and we’ll work on those things. employment for those keen to work in Also, we are trying to create the retail this sector. The FDI would lead to a infrastructure as we serve the Bharti more comprehensive integration of stores with cold chain, with a India into the worldwide market and, relationship with farmers and others, as such, it is imperative for the so that things are ready if and when it government to promote this sector for does present an opportunity for us to the overall economic development and open stores directly. social welfare of the country. If done in the right manner, it can prove to be a We are long-term thinkers. I think if boon and not a curse. you look back at the history of Wal- Mart’s business, not only outside the 5. References US, but even in the US, we like to start slowly and learn the business and Carkovic, Maria, and Ross Levine make our mistakes and fix them and (2002), “Does Foreign Direct once it is time, the government, Investment Accelerate Economic customers and society is ready, we Growth?”, University of Minnesota can do things faster if that is the case. Department of Finance Working But if not, we will just continue to go Paper, June. Hill 2005, p. 253. along as we are and have a long-term view” said Doug McMillon, President Lipsey, Robert E. (1994), “Foreign- and Chief Executive Officer of Wal- Owned Firms and U.S. Wages,” NBER Mart International. Working Paper No. 4927, Cambridge, 4
  5. 5. IJASCSE Vol 1 Issue 2, 2012Sept. 30 MA, National Bureau of Economic Research. ___________(2002b), “Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data,” in James Harrigan, Editor, Handbook of International Economics, Oxford, Blackwell, forthcoming. Retrieved from: http://www.mydigitalfc.com/news/wal- mart-links-future-india-jv-fdi-norms-115 http://www.articlesbase.com/internatio nal-business-articles/walmart-in-india- challenges-and-opportunities- 968038.html#ixzz1TOn7u0Z 5