FDI is a mode of entry to international business. It refers to the investment made in a foreign country where the investor retains control over the investments. This can be made by an individual, as well as by business entities. FDI is a venture with long term considerations, as it cannot be easily liquidated. FDI as defined in Dictionary of Economics ( by Graham Bannock) as investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. FDI may be of 2 types: • With Alliance – through mergers, joint ventures, acquisitions and strategic alliances.
• Without Alliances – Through the Green field strategy where the company begins its business from scratch in a foreign country. The Indian Retail Sector The Indian Retail industry is rapidly growing sector. The growth can be attributed to the growing Indian economy, increase in consumption expenditure and the change in consumption pattern of the Indian populace. The changing consumption pattern, in turn, primarily remains driven by higher standard of living, growing middle-class population, greater proportion of working women and development of organized retail.
Despite the rapid growth, the Indian retail industry remains highly fragmented and unorganized. The organized retailing which is still in its formative stage, it accounts for only 5% of the total Indian retail market. Current position of the Indian retail sector: The good • Contributes about 33-35% of GDP • High growth rate • High potential as only 5% is organized • Provides numerous employment opportunities The Bad • Highly unorganized • Not recognized as an “industry” • unavailability of skilled and qualified workforce The government has announced following reforms in Indian Retail Sector: 1.
India will allow FDI of up to 51% in ? multi-brand sector. 2. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. 3. The retailers (both single and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers. 4. All retail stores can open up their operations in population having over 1million. 5. Multi-brand retailers must bring minimum investment of US$ 100 million. Half of this must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packaging etc.
to reduce post-harvest losses and provide remunerative prices to farmers. 6. The opening of retail competition (policy) will be within parameters of state laws and regulations. These reforms will have positive as well as negative effects on different people / businesses. The positive effects of FDI in retail include: 1. General consumers will be the biggest gainers as they will get world class services at competitive price, better quality products and they will enjoy better value added services. 2. Real estate agents and developers: The slow down real estate industry will benefit immensely due to increase in demand for commercial space.
3. Better infrastructure in terms of warehousing, cold storages, etc will result in reduction in wastage of raw materials. 4. Farmers will get good price and contract farming concept may develop in India. 5. Discourages unfair trade practices like hoarding, black marketing, adulteration, etc. 6. New job opportunities will be generated. 7. Provide stability and economics of scale which will benefit both the farmers and consumers. 8. Stable prices will help control inflation. 9. Eliminates intermediaries which shortens the distribution channels and in turn reduces prices.
10. The retail sector will become more organized and less fragmented. 11. Facilitates huge inflow of foreign capital. 12. Contributes to overall economic growth of the country. The negative effects of FDI in retail include: 1. Majority of the Indian small-scale industries or manufacturers will be forced to shut down as the retailers will bring in cheaper products from outside the India. 2. Small traders and shopkeepers running mom & pop stores, kirana stores, etc will be forced to shut down as they may not be able to compete with international retail giants. 3.
Decline in role of intermediaries will cause unemployment. 4. The global retailers would come together and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers. 5. High real estate prices. 6. Limited jobs in manufacturing due to increase in imports. 7. Encourages conspicuous consumption which results in unnecessary spending. 8. Increase the gap between the rich and the poor. 9. Farmers may be exploited. 10. There will be outflow of foreign exchange in terms of profits earned by the foreign retailers.