The Hindu Business Line : How not to measure FDI

India needs to shed its bias towards the dollar value of FDI, and switch to the utilitarian approach. It can gain much by switching to measures of performance that include the number of `jobs', innovative leadership, methods, processes, organisation structures, and incentives that would make FDI work. Like China, India must nourish FDI, say G. Ramachandran and Chandrasekhar Krishnamurti.

INDIA'S approach to the evaluation of foreign direct investments (FDI) reflects the utopian attitude to resources and wealth. By contrast, China's approach reflects the utilitarian attitude to training, employment, incomes and accumulated experience. An analysis of public comments made by leaders of the two countries in business and government since 1993 on FDI shows that India's leaders are dollar-driven in their evaluation.

The utopian approach leads to the reinforcement of inapt policies aimed at attracting FDI. Attracting FDI of a significant magnitude is India's continuing problem. India is expected to attract up to $5 billion in 2003-04, but we think that FDI should not be measured in monetary terms.

By contrast, China's leaders are highly utilitarian towards FDI and in evaluating their success in nourishing FDI. They understand that FDI requires nourishment. If FDI can be nourished, then more of it can be attracted with confidence and certainty. Attracting FDI of a large magnitude is merely the first step in China's efforts aimed at being global. The more important issue that gets the attention of China's top leadership is the nourishment of FDI.

China's leaders at every level understand clearly the distinction between attracting FDI and nourishing it. They know who has the competitive advantage to work on attracting FDI and who has the competitive advantage and the set of incentives within China to nourish it. Moreover, they know that ordinary people nourish FDI.

Ordinary people have responded admirably well to the FDI opportunity, especially in manufacturing and logistics, by bending their hitherto unbending internal bureaucracies. They have aptly and smartly devised purposeful incentives and meaningful disincentives. China's extraordinary success in attracting FDI is the logical and happy result of its utilitarian approach to nourishing investments.

China's policymakers know their role is limited and that success in attracting FDI lies in nourishing it. Quite unsurprisingly, the Chinese business press is highly utilitarian in its evaluation of FDI. The utilitarian attitude continually reinforces policies aimed at nourishing FDI. Nourishing FDI of a large magnitude is indeed the focus of China's policy.

Commentators who compare India with China usually stop at saying that China attracts almost $50 billion annually in FDI while India struggles to attract a tenth of that.

Though we think that FDI should not be measured in monetary terms, it is difficult to ignore the awesome magnitude of FDI under the nourishing care of China's managers and trained employees. They manage nearly $1.8 trillion in plant and equipment, work-in-process inventory, and logistical and supporting infrastructure related to FDI. By contrast, India manages about $130 billion of FDI.

No micro, no potato

China's managers and trained employees have accumulated valuable learning experience since the time the Chinese market was opened to FDI. China opened the minds of its people to new technologies, industrial processes and organisation, manufacturing methods, incentives and performance evaluation. China made no distinction between toys for kids and computers. They plunged into the business of manufacturing toys for children below three and computer accessories for global companies. They were clear that leadership, methods, processes, organisation structures, incentives and performance measures were the principal gains from FDI.

These are quite clearly the intangibles that make global businesses what they are.

The dollar value of the investments and the output were regarded as subordinate measures. India, by contrast, has had a monetary and strategic approach to FDI. It has sought to pick firms producing microchips and has been reluctant to encourage firms that make potato chips.

The public arguments in 1996 clearly favoured microchips. India had an erroneous notion that societies that made microchips were wealthy and innovative. The potato chip business is as lucrative and innovative. It is the source of talented human resource for a range of industries because it nurtures innovative leadership, methods, processes, organisation structures, incentives and performance measures.

Measures that nourish

India needs to switch to the utilitarian approach to FDI. It could gain considerably by switching to measures of performance that include the number of `jobs', and the innovative leadership, methods, processes, organisation structures, incentives and performance measures that would make FDI work in favour of India.

It has to shed its bias towards the dollar value of investments. The emphasis on jobs that FDI creates and sustains over the long-term will uncork the real benefits of FDI. Behavioural economics offers many reasonable arguments on how humans choose behavioural patterns on the basis of how their performance is measured.

The opportunistic choice of patterns has been found to be true in circumstances that involve small groups as well as large. By measuring jobs, management, training and leadership in firms and in government, there would be a concerted effort aimed at nourishing FDI.

BPO, ITES and basics

India's opportunities in business process outsourcing (BPO) and information technology enabled services (ITES) are considerable. BPO and ITES offer thousands of jobs to young Indians. But these jobs are unlikely to involve big ticket and big dollar investments in India.

There is a great likelihood that jobs related to BPO and ITES will not fully satisfy the desire of some government departments to showcase their policy towards FDI. Their focus may be on monetary capital. But FDI that involves big dollar investments does not necessarily lead to an explosion in the number of jobs.

The nourishment of FDI requires managerial and entrepreneurial talent. The dollars will come from around the world if India can nurture managerial and entrepreneurial talent. BPO and ITES show that leadership and human talent dominate the dollar value of FDI. India can utilise its vast talent pool to grow its economy without FDI of a large magnitude. But policymakers should shift their attention to how the domestic infrastructure can nourish its vast talent pool. The domestic talent pool has to be nourished in order to nourish FDI. The accumulation of experience has to begin now.

(G. Ramachandran is a financial analyst. Prof Chandrasekhar Krishnamurti teaches at the Nanyang Business School, Nanyang Technological University, Singapore. Feedback may be sent to ackrishna@ntu.edu.sg or indiagrow@sify.com)

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