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Introduction: One of the most striking developments in the last two decades has been in the FDI in the global economic landscape. FDI provides a win-win situation both to the host as well as home country. The rapid expansion in the FDI by multi-national enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalization of trade and investment regime, deregulation and privatization of markets in many countries including developing countries like India.
Initially FDI was not allowed in India in the retail sector because of the fear of the job losses, procurement from international market, competition and loss of entrepreneurial opportunities. FDI in multi brand retailing is prohibited in India.
FDI at macro level is a non- debt creating source of additional external finances. At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors and region of the host economy. Example: Entry of one Wall Mart supermarket would displace small retail stores and render people jobless. In India employment has always been a big problem. The rate of unemployment is higher than the rate of employment in India.
Now if in such a situation when employment growth has slowed down, the entry of foreign supermarket would further add up to this problem. British capital came to India during the colonial era of Britain in India. However, researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major amount of FDI came from the British companies.
British companies setup their units in mining sector and in those sectors that suits their own economic and business interest. After Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources.
With time and as per economic and political regimes there have been changes in the FDI policy too. During the s period the government adopted a selective and highly restrictive foreign policy as far as foreign capital, type of FDI and ownerships of foreign companies was concerned. The soaring oil prices continued low exports and deterioration in Balance of Payment position during s forced the government to make necessary changes in the foreign policy. Thus, resulting in the partial liberalization of Indian Economy.
The government introduced reforms in the industrial sector, aimed at increasing competency, efficiency and growth in industry through a stable, pragmatic and non-discriminatory policy for FDI flow. India emerged as a strong economic player on the global front after its first generation of economic reforms. As a result of this, the list of investing countries to India reached to maximum number of in Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows is vested with few major countries.
FDI inflows are welcomed in 63 sectors in as compared to 16 sectors in Definition Of FDI: An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange.
Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile.
The foreign direct investment generally encompasses the transfer of technology and expertise, and participation in the joint venture and management. For the investor company FDI offers an exclusive opportunity to enter into the international or global business, new markets and marketing channels, elusive access to new technology and expertise, expansion of company with new or more products or services, and cheaper production facilities.
While the host country receives foreign funds for development, transfer of new profitable technology, wealth of expertise and experience, and increased job opportunities. Owing to the ever-increasing globalization of businesses of almost all sectors, liberalization of trade policies, and loosening of foreign investment restrictions, the foreign direct investment FDI has been quite revolutionary and vital for faster economic growth of most of the developing and developed countries of all across the world for last few decades.
Supported by refinement in the information and telecommunication technology, and the increasing trend of Mergers and Acquisitions, the FDI is to receive tremendous impetus in various sectors in the future times to come, especially in the developing countries of the world. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers sell small quantities of those products to consumers. Evidently, retail trade is one that cuts off smaller portions from large lumps of goods.
It is a process through which goods are transported to final consumers. In other words, retailing consists of the activities involved in selling directly to the ultimate consumer for personal, non-business use. It embraces the direct-to-customer sales activities of the producer, whether through his own stores by house-to-house canvassing or by mail-order business.
Manufacturers engage in retailing when they make direct-to-consumer sales of their products through their own stores as Bata and Corona shoe companies, D. Stores, Mafatlals and Bombay Dyeing by door-to-door canvass or mail order or even on telephone. Even a wholesaler engages in retailing when sells directly to an ultimate consumer, although his main business may still be wholesaling. A retailer is a merchant or occasionally an agent or a business enterprise, whose main business is selling directly to ultimate consumers for non-business use.
He performs many marketing activities such as buying, selling, grading, risk-trading, and developing information about customer's wants. A retailer may sell infrequently to industrial users, but these are wholesale transactions, not retail sales. If over one half of the amount of volume of business comes from sales to ultimate consumers, i. Retailing occurs in all marketing channels for consumer products.
On the other hand, organized retailing refers to corporate-backed hypermarkets, retail chains and privately owned large businesses which are only allowed to retail under a license and are liable to huge sales and income taxes. Statistically speaking, retail in India is growing at a rate of A sale to the ultimate consumer. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.
A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. It encompasses all kinds of shops, from kiosks and small groceries to supermarket chains and large department stores.
Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Efficient logistics, production, and distribution channels. Digital records. Distribution and warehousing technologies.
Foreign retail majors have immense supply chain expertise and they will guarantee efficiencies in this critical component of the economy. There will be major investments in retail, creating at least 10 million jobs in industries such as agro-processing and logistics. The efficiencies of superior supply chains will reduce wastage and costs, thus lowering prices.
The minimum sourcing requirements will help small industries and boost incomes. More and more entry of foreign players will result into huge amount of capital inflow in our country and profit earned by these companies will give our government a handsome amount of money in terms of taxes.
FDI in organized retail could help tackle inflation, particularly with wholesale prices. Growth of infrastructure. FDI in retail will help farmers secure remunerative prices by eliminating middlemen. Rupee will be appreciated. The operation in big stores like Wal-Mart are highly automated and employ very less work-force Big players can afford to owner the prices in initial stages in order to knock-out the competition and become a monopoly and later on raise the prices.
This kind of phenomenon was evident earlier in the case of soft-drinks. Eviction of Campa-cola by Pepsi and Coke is one of the example A lot of objections have been raised by the opposition parties and public at large , As a result of which the said bill has been kept on hold PowerPoint Presentation: India doesn't need foreign retailers, since homegrown companies and market may be able to do the job Just like BPO industry, work will be done by Indians, Profit will go to foreigners.
Remember East India Company. It earned India as a trader and then took over politically The government hasn't built consensus. Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.
Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector. According to World Bank, opening up the retail sector to foreign direct investment FDI would be beneficial for India in terms of price and availability of products. The study strongly advocates that foreign direct investment should be allowed in retailing since it would speed up the growth of organized formats. Organized retailing has significant backward linkages through setting up of supply chains, investment in food processing industry and manufacturing units increased productivity of agriculture, growth of interlinked sectors such as tourism and IT.
Consumers will also gain from organized retailing since it leads to lower price, improves the quality of the product and widens the choice of products available to them. The slow growth of organized retailing is affecting the progress of allied sectors such as agriculture, food-processing industry etc. Follow us on:. Go to Application. US Go Premium. PowerPoint Templates. Upload from Desktop Single File Upload. Foreign Direct Investment in Retail Sector simranps3.
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It is my opinion that it is not a coincidence that almost all major Indian private corporate groups The Tatas, The Reliance, The Birlas have also entered the retail sector in one way or another. In fact, the potential changes in the relative balance of power among these various formats and their direct beneficiaries in the advent of large foreign retailers are at the core of the ongoing debate.
During the last two decades, the middle class has grown significantly and its average income has increased and its consumer aspirations. With the improvement in transportation and communication infrastructure, there has been a convergence of consumer tastes.
Furthermore, since India has a relatively young population, The median age being about 26 years it is not only a source of very large future demand but also since their tastes and preferences are likely to be less rigid than they were before, the market in India has unprecedented potential to grow. Generally, FDI helps build the stock of physical capital in whichever sector in which investment might take place.
Particularly, in developing countries where the stock of physical capital is low and there is a shortage of domestic funds to finance investment, FDI can go a long way in increasing the physical capital stock and productivity. I will discuss some of the pertinent issues which I feel are important in realizing the benefits in my opinion.
As I discussed above, retailing depends on supply chain logistics. I feel that an efficient logistics — which would largely be based upon well-developed networks of transportation, communication, and storage infrastructure — would not only provide us with timely and uninterrupted market access to the producers but also ensure that quality and lower prices are also afforded to the consumers. An example that I can envisage is that of the farmers who, without the development of appropriate storage infrastructure, cannot have access to an efficient market system that will pay fair prices and therefore, fall prey to unscrupulous middlemen.
Furthermore, since a significant portion of the produces are destroyed in the process of being transported from the farmers to the retailers and ultimately to the consumers, the consumers have to pay higher prices for relatively low-quality products. In India, primarily due to the unorganized and fragmented nature of the retail sector, there is a severe shortage of funds for investment in the basic infrastructure required mainly for back-end retail logistics.
The retailers are too small to make such large investments. Although the government has stepped in, the infrastructure built by the government has not been adequate. Allowing FDI in retail is expected to go a long way in alleviating this situation because the large retailers would build the necessary infrastructure to create an integrated back-end supply chain for efficiency.
In addition to augmenting physical capital stock, FDI in developing countries will also act as a conduit of technology transfer. Foreign capital brings along advanced technology from developed countries that increases productivity. In retailing, advanced technologies will tremendously improve processing, grading, handling and packaging of goods. An example of this could be the use of cold-storage facilities, refrigerated vans, pre-cooling chambers which will reduce wastage and thus, help maintain product quality.
These efficiency gains will lower price and improve quality for the consumers. The entry of foreign retailers will provide the customers, particularly in the organized retail sector, the opportunity to choose from a wide variety of brands and products. A market with more choice and consequently, more competition would improve upon the consumer wellbeing besides making the manufacturers strive towards more quality.
In addition, larger space for product display, a hygienic environment in the shopping area, availability of a large number of products under one roof, and better customer care will increase customer satisfaction. I discern this from various studies which show shopping in large malls and departments also go a long way in providing entertainment to the customers. The advent of multinational retailers will increase competition that will benefit consumers.
There will be special offers and various free or discounted services that will accompany the products. This competition will also keep prices low that in turn will be a check on inflation. As discussed above, lower prices are expected because of more efficient supply chain logistics that reduces the cost of moving goods from the producers or wholesalers to the retailers and ultimately to consumers.
The development of transportation and storage infrastructure also helps reduce the volatility of prices, particularly of agricultural products. Supporters of FDI in the retail sectors argue that the farmers will benefit immensely from the entry of multinational retailers. The construction of storage facilities and improved transportation will reduce the losses to the farmers due to the easily perishable nature of their products and will provide a larger market.
They will be able to get away from excessive reliability on intermediaries who often pay lower prices. Furthermore, local suppliers and domestic manufacturers will gain access to larger, and potentially to global markets as the multinational retailers will establish extensive forward and backward linkages that will spread beyond national boundaries. I expect that the growth of the organized retail sector because of FDI should create jobs not only in frontend retailing but also in activities which are related to it at the back-end of retailing.
Since these jobs will be in the organized sector, the laws that protect the interests of the workers will be applicable to the retail sector which should, in turn, ensure the quality of jobs which are on offer in the organized retail sector. Higher wages and better work conditions will improve the standard of living for those who find employment in the organized retail sector.
Another more obvious benefit of would be that of revenue generation. Since most retail outlets in India are in the unorganized sector, they hardly pay any taxes to the government and are evasive which leads to tax leakages via under-invoicing or non-reporting of sales. As FDI in the retail sector helps the organized sector grow, it will generate revenue for the government due to the retailers being on the record. I will now take the case of Wal-Mart whose model of retailing I will set as a benchmark to examine the possible effects of allowing entry of large foreign retail firms in India.
To start with, let us examine the advantages of Wal-Mart in the USA and other countries, and whether these advantages can be translated in India and if so, what could be the possible effects in terms of net benefit or losses for different stakeholders here.
The basic strategy of the owners was simple- enter small towns with a population of to towns which were not served by large retailers and therefore, derive a scale advantage in relation to the size of small-town markets and consequently, eliminate the smaller players which might be present there.
This was similar to a natural monopoly in which, due to the size of the market, one large player with global economies of scale serves the market much more efficiently than a large number of small players would. I have demonstrated the outcome of this strategy with a simple partial equilibrium theory. In Figure 3, D is the demand curve of one such small town.
With these costs, the equilibrium market price is P and the quantity served is OQ. Now, when a large player with global economies of scale enters the market, the cost curves of whom are LACl and LMCl, and it charges a market price of P1 which is equal to long-run average cost, the supply increases from Q to Q1. The decline in the market price might cause the exit of small firms. The question raised is whether it would result in unemployment as the smaller firms employ more labor per unit of output produced than the single large firm with economies of scale?
The increase in output supplied from Q to Q1 will, in my opinion, absorb some of the labor which would be released by the exit of some of the smaller firms. Given that the costs of the supply chain infrastructure remain more or less fixed, the constant and positive marginal cost can be treated as the goods turnover and labor costs.
Also, the decline in price from P to P1 would increase the consumer surplus to the extent of PabP1 and real incomes. The increase in real incomes will increase expenditure and the savings so made could, in turn, generate employment in other activities. Therefore, after realizing the cost advantage of expansion in small towns, Wal-Mart translated its operations in larger cities with an aggressive cost and price cutting and consequently, grew at a rapid pace.
One can argue that a large firm could act as a monopolist after it drives out the small firms and produce at a point where the marginal revenue for D intersects LMC1, which may imply a price higher than the small firms P. However, Wal-Mart has not been guilty of this till now as this would be primarily against the whole pricing strategy- keeping costs and prices as low as possible and realize high turnover with thin margins.
The following provides the different processes of the cost advantage. From its very beginning, Wal-Mart has always focused on increasing the volume of customers that visit it to realize economies of scale. By keeping the prices low, it increases sales by such a margin that the decrease in the markup is more than compensated for. This unrelenting drive to attract a large number of customers by keeping the prices low puts pressure on all the major stakeholders- workers, managers, and suppliers.
Thus, Wal-Mart competes with the establishment in a wide array of sectors both directly and indirectly. Wal-Mart has derived the competitive advantage that it holds in numerous countries by the adoption of a highly efficient logistics and distribution system which was and is leveraged by new technologies, eg. That too is the Wal-Mart effect. Wholesale employment declines by approximately 20 jobs over five years. This, in my opinion, implies that in terms of net effects more jobs were created through an increase in incomes and expenditure than those of direct losses.
Therefore, it can be safely said that the above discussion shows that Wal-Mart derived a sustainable advantage with respect to competitors in the US which had net positive effects on the economy as a whole. Toggle navigation. Help Preferences Sign up Log in.
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