Foreign Direct Investment

Important Excerpts (with inputs):

https://www.thehindu.com/opinion/lead/the-brick-and-mortar-of-fdi-20/article29587738.ece

  • The world has undergone a structural change with the emergence of Internet Multinational Companies (MNCs) such as Microsoft, Google, Facebook and Twitter that are based on ‘winner-takes-all’ platform business models. This leads to the concentration of resources in the hands of a few. This situation demands a policy response.
  • Why China banned internet MNCs – This led to China creating nine out of the 20 global Internet leaders. China strategically deploys a quid pro quo policy. MNC firms are mandated to transfer technology, share patents and enter into 50:50 joint ventures with Chinese partners in return for market access.
  • There is a need for a new FDI policy i.e. FDI 2.0.
  • Rather than accepting the ‘winner MNC takes it all’ as fait accompli, FDI 2.0 should harmonise interests of all stakeholders including Indian consumers, the government and investors. FDI 2.0 could deploy ‘List or Trade in India’ as a strategic policy tool to enable Indian citizens become shareholders in MNCs such as Google, Facebook, Samsung, Huawei and others, thus capturing the ‘upside’ they create for their platforms and companies. This is equitable to all, since Indian consumers contribute to the market value of MNCs.
  • Way ahead –
  • List in India: Majority (more than 51%) foreign-owned Indian-listed MNCs could be eligible to domestic company tax rate whereas unlisted MNC subsidiaries could be subjected to a higher tax rate. Many countries such as Bangladesh, Vietnam and Thailand have used tax incentives to attract listing by MNCs.  To ensure the success of this proposal, the government will need to reconsider the present policy of allowing 100% MNC-owned subsidiaries to compete with their listed Indian counterparts that erodes the value accruing to Indian shareholders.
  • ‘Trade in India’ i.e. U.S. dollar-denominated parent MNC Shares to be ‘Admitted for Trading’ on Indian bourses]: In this proposal, Indian investors could buy shares of parent MNCs (where global profits and value get consolidated).
  • Educate Indian investors about the value of diversification of their portfolio in international stocks for achieving better risk adjusted returns.
  • Summing up, increasing Indian equity ownership of MNCs would offer diversification benefits and make Indians more prosperous. Wealth distribution through mutual funds would create a virtuous cycle of innovative ideas, entrepreneurship, employment, consumption, higher taxes, social and physical infrastructure for the benefit of Indian society. MNCs would earn the goodwill of Indian consumers while expanding their investor base. In other words, this is a win-win for all stakeholders.