Geeta Batra Foreign Investment Advisory Service …DRAMATIC GROWTH IN THE AUTOMOTIVE INDUSTRY Index:...

Geeta BatraForeign Investment Advisory Service

The World Bank

FDI-Trends

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

US

$ bi

llion

FDI f low s Portfolio equity f low s Other private f low s

So urce : Wo rld Bank. 2000. Glo ba l Develo pment Finance .

Foreign direct investment (FDI) has come to swamp all other financialflows . For aid programs that promote foreign investment the question isthus whether such promotion activities are a cost-effective pursuit ofpoverty reduction through increased growth.

Beneficial Effects of FDI-Stylized FactsBeneficial Effects of FDI-Stylized Facts

• Promotes Growth through rapid and efficienttransfer and adoption of “best practice” acrossborders. FDI translates this into broad-basedgrowth, not least by upgrading human capital.

• Reduces adverse shocks to the poor resulting fromfinancial instability

• Improves corporate governance.• Improve environmental and labor standards

(contrary to popular criticism), because foreigninvestors tend to be concerned about reputation inmarkets, where high standards are seen asdesirable.

• Finally, FDI generates taxes that support thedevelopment of a safety net for the poor.

Typical Profile of MNCsTypical Profile of MNCs

•Bigger (employ larger numbers of workers)•Invest more in technology and training•More productive (efficient)•Pay higher wages•Raise productivity levels of domestic firms throughspillovers

What Influences the Locational Decision of MNCs?What Influences the Locational Decision of MNCs?Enhanced Access to Domestic or International Markets

Lower costs of Production

A Stable, Low Risk economic and political environment

SKILLED WORKFORCE

Control: They avoid ownership restrictions and governmentownership

Clarity in Laws and Regulations

“Positive Attitude towards FDI: Reflected in Laws and Policies

Tax IncentivesBased on a FIAS Survey of Investors, 1999.

Overall Investment Climate is Important for FDIOverall Investment Climate is Important for FDI

Regulations

0 10 20 30 40 50 60 70 80

Business

Customs

Labor

Foreign

Environ

Fire

High

Tax

China

India

Financial ConstraintsFinancial Constraints

0 10 20 30 40 50 60 70 80 90

Collateral Requirements

Bank Paperw ork

High Interest Rates

Special Connections

Banks lack money to

Access to foreign

Access to non-bank

Access to Specialized

Access to lease

Inadequate Credit

China

India

Quality of Public ServicesQuality of Public Services

Quality of Public ServicesPercent firms ranking poor

0 10 20 30 40 50 60 70 80

Customs

Courts

Roads

Telephone

Power

Water

Health

Overall Gvt Efficiency

China

India

14

2 4

6

0

10

20

Barriers to GrowthBarriers to Growth

Source: Economic Intelligence Unit

GD

P/c

apit

a

First wave ofFirst wave ofeconomic reformseconomic reforms

Second wave ofSecond wave ofeconomic reformseconomic reforms

Indexed to US = 100 in 1998

1947 1960 1970 1980 1990 2000 2010

10%

5.5%4%

GDP growth rate

Productmarketbarriers

• Small scalereservations

• FDI restrictions• Poor regulation• High import

duties• Unequal taxes

2.3

India(Completereforms)

10.1

THREE KEY BARRIERS CONSTRAIN INDIA’S GROWTHTHREE KEY BARRIERS CONSTRAIN INDIA’S GROWTHCAGR (2000-2010)

0.3

Others barriers:• Labour market• Roads & ports

infrastructure

India(Statusquo)

5.5

1.3

Landmarketbarriers

• Unclear titles• Tenancy laws• Low property taxes

and low usercharges

0.7

Governmentownership

• Central PSUs• State PSUs

including power• Municipal services






2.3


10.10.3


infrastructure

India(Statusquo)

5.5

1.3

Landmarketbarriers


and low usercharges

0.7

Governmentownership



REMOVAL OF PRODUCT MARKET BARRIERS LED TODRAMATIC GROWTH IN THE AUTOMOTIVE INDUSTRYREMOVAL OF PRODUCT MARKET BARRIERS LED TODRAMATIC GROWTH IN THE AUTOMOTIVE INDUSTRYIndex: India = 100 in 1992-93

1992-93 1999-00

100

356

256%increase

Labourproductivity

100

380

1992-93 1999-00

Output

1992-93 1999-00

111100

11%increase

Employment

Source: Interviews, SIAM, Annual reports

BarriersRemoved

• Licensingabolished

• FDI allowed

280%increase

PRODUCT MARKET BARRIERS HAMPER THE EFFICIENCYOF DOMESTIC APPAREL…PRODUCT MARKET BARRIERS HAMPER THE EFFICIENCYOF DOMESTIC APPAREL…

Note: Asia includes Sri Lanka, Thailand, Malaysia, Indonesia, Hong Kong, South China, BangladeshSource: NIFT survey American Apparel Manufacturers Association

Barriers

• Small-scaleindustryreservation inapparel andtextile

• Non-levelexcise dutieson textiles

Average rejection levelPer cent

Low scale

Low scalemachines per factory

India

China

50

500

Comparison between Indian and Chinese manufacturers

Poor qualityof fabric

India

China

3.3

1.8

11.3

38.1

Of top 10quotacountries*

… MAKING INDIAN APPAREL EXPORTS VULNERABLE… MAKING INDIAN APPAREL EXPORTS VULNERABLE

* US, Germany, UK, France, Italy, Belgium, Canada, Spain, Austria, Denmark** Japan, Netherlands, Switzerland, Sweden, Australia, Norway, Singapore, Poland, Korea, Chile

Source: UN International Trade Statistics

Per cent of total apparel imports

Of top 10non-quotacountries**

From China

3.2 1.6

Of top 10quotacountries*

Of top 10non-quotacountries**

From India

-50%

+337%

BAN ON FDI CONSTRAINS GROWTH OF MODERNRETAIL SECTOR …BAN ON FDI CONSTRAINS GROWTH OF MODERNRETAIL SECTOR …

Source: Euromonitor, McKinsey

Per cent; USD billion

8585

4040

15

60 6480 90

98

2210102020

3636

Tha

iland

Indi

a

Chi

na

Traditionalchannel

Modernchannel

100%= 22 55 325 180

US

2325

Bra

zil

Pol

and

100

India’s share of modern retail is low...

Country

FDI presence

Thailand

• 7 of top 10retailers

China

• 3 of top 10retailers

Poland

• 7 foreignhypermarketoperators

• Top 3 players(30% share)

Brazil

… partly because of restrictions on FDI

… LIMITING THEIR BENEFITS THROUGHOUT THE FOODCHAIN… LIMITING THEIR BENEFITS THROUGHOUT THE FOODCHAINTraditional supply chain

Farms

Consolidator

Commission Agent

Trader

Commission Agent

Wholesaler

Traditional Retailer

Supply chain restructuredby modern formats

Farms

Processor

Modern Retailer

Widely sharedWidely sharedgains of moderngains of modernformat retailingformat retailing

•8 million jobs inthe sector*

•10 per centlower prices

•Lower wastagesin the foodchain

•Higher pricesfor farmers

• Investment infood processing


Source: McKinsey analysis





2.3


10.10.3


infrastructure

India(Statusquo)

5.5

1.3

Landmarketbarriers


and low usercharges

0.7

Governmentownership



LAND MARKET BARRIERS LIMIT THE SIZE OF INDIANHOUSING CONSTRUCTION …LAND MARKET BARRIERS LIMIT THE SIZE OF INDIANHOUSING CONSTRUCTION …

Source: NICMAR; CSO; McKinsey Global Institute

Per cent, 1997

Barriers

• Unclear titles

• Low propertytaxes and usercharges

• Rent controllaws

Share ofemployment

3

3

5

5

1

Share of GDP

4

5

6

3

1

US

Korea

Brazil

India

Russia

Sectorcould

create over3 million

jobs in 10years

…RESULTING IN DISPROPORTIONATELY HIGHLAND COSTS……RESULTING IN DISPROPORTIONATELY HIGHLAND COSTS…

Source: Colliers Jardine, Asia Pacific Property Trends (October 1999); The Economist (1996)

KualaLumpur

2 6 7 9 12 13 1322

52

100

115

Indexed to New Delhi = 100; Ratio of land cost per sq. m. to GDP per capita in 1999

Sydney Bangkok Tokyo Singapore Jakarta Seoul Taipei Bangalore MumbaiNewDelhi






2.3


10.10.3


infrastructure

India(Statusquo)

5.5

1.3

Landmarketbarriers


and low usercharges

0.7

Governmentownership



INCREASE IN CAPITAL PRODUCTIVITY WILLDRAMATICALLY REDUCE INVESTMENT REQUIREMENTSINCREASE IN CAPITAL PRODUCTIVITY WILLDRAMATICALLY REDUCE INVESTMENT REQUIREMENTSIndexed to U.S. (1996) = 100

* Assumes 1 MW of capacity costs $1 million currently** Assumes steel capacity will be put up at 25% higher capacity created with assets; (resulting in a cost per ton of US$ 350 per ton

as compared to US$ 440 per ton in plants put up recently)Source: McKinsey analysis

65

90

Steel

39

100

Power generationCurrentproductivity

Potentialproductivity

Currentproductivity


Total savings= US $52 billion

Telecom

59

100

Currentproductivity


30%

20%

Poverty reduction (1992-94) was higher instates with good investment climates

-20%

0

-10%

10%

Poor

State investment climateGood

UttarPradesh

WestBengal

Kerala

Punjab

TamilNadu

Karnataka AndraPradesh

Gujarat Maharashtra

States with good investment climateshad good growth

FDI Investment Growth

➃ Results of firm surveys completed in 85 countries (controlling forsize, sector):

Financing -2.46*

(0.62)

High Taxes -1.69**

(0.73)

Predictability of Policies -3.75*

(1.47)

Corruption -2.57***

(1.45)

Education 2.78*

(0.76)

Formal Training 2.07*

(0.25)

Enterprise Training by OwnershipEnterprise Training by Ownership

…Training levels vary with level of economic development…MNCs have higher levels of training than domestic firms

Training and Foreign Ownership

00.10.20.30.40.50.60.70.80.9

1

Trinida

d and

Tob

ago

Pakist

anIn

done

sia

Haiti

El Salv

ador US

China

Venez

uela

Costa

Rica USArg

entin

aCan

ada

Singap

ore

% F

irm

s T

rain

ing

Domestic Firms Training

Foreign Firm Training

Total

Source: WBES 2000

Enterprise Training by Firm Size

…Across countries training increases with firm size

Formal Training and Firm Size

0%

20%

40%

60%

80%

100%

ChinaPak

istan

Mala

ysia

Indo

nesia

Singap

ore

Phillip

ines

Tota

l

% F

irm

s T

rain

ing

Small

Medium

Large

Source: WBES 2000

Source: WBES 2000

…Skilled workers readily hired from other firms, use of maturetechnologies, informal training adequate, high labor turnover are themain constraints to training in LAC.

MARKET FAILURES IN TRAINING?LAC: Principal Constraints to Training (Identified by Firms)-Regional Average

Reasons for little or no training-LAC

0 5 10 15 20 25 30 35 40 45 50

Limited Resources

Labor Turnover

Lack knowledge

Mature Technologies

Skilled Workers readily available

Institutions meet needs

Skeptical about benefits

Informal training adequate

% Firms

…Findings not unique to LAC.Use of mature technologies, informal training being adequate and highlabor turnover cited as key reasons for little or no training in East Asiatoo

EAST ASIA: Principal Constraints toTraining (Identified by Employers)

Reasons for little or no Training-EAST ASIA

0 5 10 15 20 25 30 35 40 45 50

Limited Resources

Labor Turnover

Lack knowledge

Mature Technologies

Availability of workers

Skeptical about benefits

Informal training adequateR

easo

ns fo

r lit

tle

or n

o tr

aini

ng

Percentage of Firms

Source: WBES 2000

KEY ISSUES TO BE ADDRESSED• Under-investment in training by enterprises in developing countries

2. In countries which have a payroll levy (Guatemala, Nicaragua)enterprises that contribute to the levy do not benefit from it--most publicinstitution programs are directed at pre-employment programs and theinformal sector; but even here gaps exist

3. Capacity for internal and external generation of technical assistanceand expertise is weak--poor links between technologically

advanced large enterprises and SMEs.

4. Enterprise development is not linked to human resource development--Although enterprises recognize the need for training they have notinvested in it (market failures).

KEY ISSUES …• There is a concentration of training programs within large cities

• Allocation of majority funds from the payroll levy to a single publictraining provider (INTECAP, SENA, INATEC) leads to an insensitivityof supply to training needs and hence makes them less market-driven.

• The Supply of Training is relatively weak and lacks diversity--nosignificant entry of private providers in smaller countries; firms arediscouraged by the double payment involved in using providers otherthan the public training providers.

• What is the role for government?

Date post:	31-Jul-2020
Category:	Documents
Upload:	others
View:	3 times
Download:	0 times

Geeta Batra Foreign Investment Advisory Service …DRAMATIC GROWTH IN THE AUTOMOTIVE INDUSTRY Index:...

Documents