An Analysis of Perception of Foreign Direct Investment in India

By Alse, Janardhana A.; Srinivasan, Arun K. | Indian Journal of Economics and Business, June 2008 | Go to article overview

An Analysis of Perception of Foreign Direct Investment in India


Alse, Janardhana A., Srinivasan, Arun K., Indian Journal of Economics and Business


Abstract

Foreign direct investment to India increased from a mere $97 million in 1990-91 to $5,526 million in 2004-05 because of institutional restructuring. This investment led to a change in technological, economic and social conditions in India. Our analysis using Likhert scale and ordered probit regression indicates that respondents perceived that economic liberalization policy was beneficial and has resulted in creating a competitive environment, and improvement in the quality of goods and services. Younger respondents were overwhelmingly supportive that foreign direct investment has resulted in better job opportunities for the educated, while older respondents perceived that foreign companies have increased the disparity between the rich and poor.

Keywords: Perception, Foreign Direct Investment, Ordered Probit, India

JEL Classification: F21, 053

L INTRODUCTION

In 1991, India was forced by the International Monetary Fund to embark on market liberalization and economic reforms to attract foreign direct investment (henceforth FDI) to avert an impending economic crisis. Since then the country has witnessed a steady influx of FDI inflows. The inflows reached its record level of $6,130 millions in 2001-02 to experience a slight dip in 2003-04 only to recover and settle at $5,526 millions in 2004-05. A decade after liberalization, India finds itself at a cross roads--investors are generally upbeat about the country, but somewhat hesitant to invest because of a perception that India has done less than other emerging markets to reduce fundamental obstacles to investment. Yet, the optimistic Indian government is trying to overcome that image with billboards and slogans like "world's fastest growing free-market democracy," and "15 years, six governments, five prime ministers, one direction," and such, demonstrating their commitment to ongoing investor friendly reforms while seeking to increase the country's share of global FDI inflows. In the past five years, numerous surveys have been conducted to assess investor's opinion about investing in India, but to date, none to assess citizen's perception on liberalization policies, FDI inflows and its impact on India. In this study, we survey the citizens of India to elicit their perception on liberalization, FDI and its impact on them as well as the economy.

II. ECONOMIC REFORM POLICIES IN INDIA

India had several complex and arcane policies, such as the Foreign Exchange Regulation Act (FERA) of 1973, which limited majority ownership of Indian companies by foreign companies. It allowed foreign firms to enter the Indian market only in "selective" industries. In addition, a complex system of industrial licensing procedure regulated firms that entered these "selective" industries. These old policies coupled with the 1991 Gulf War compounded the domestic economic problem. The rising import bills; decline in export receipts; decrease in the remittances from non-resident Indians from the Middle East lead to a massive external balance of payments crisis. The country needed to be rescued from "the very verge of a calamitous economic recipe." As a result of the dire economic situation, the country sought a structural adjustment loan from the IMF and the World Bank. The IMF and the World Bank offered the loan to India on the condition that it undertakes economic reform policies.

In July 1991, India's Prime Minister, Mr. P.V. Narasimha Rao, enacted a new industrial .policy. This new policy abolished the Foreign Exchange Regulation Act (FERA) and increased the foreign equity participation up to 51% in 34 "high priority" industries, proposed automatic approvals of foreign technology transfer and royalty agreements, and provided quick clearance to investments that fell outside the priority list but met India's developmental goals. The new industrial policy totally eliminated the licensing requirement, thereby removing major roadblocks to start new businesses and to increase the capacity of the existing ones.

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