India Must Work Harder To Attract Foreign Investment Says Report

by Philip Morton, Investors Offshore.com

14 August 2001

According to a recent report commissioned by the American Chamber of Commerce in India, the country is failing to live up to its potential when it comes to attracting foreign direct investment (FDI). The study, undertaken by consultacy firm McKinsey & Co, showed that while India last year attracted less than $2 billion (half of what was invested three years before), China attracted over $43 billion over the same period, and Malaysia $4.6 billion.

McKinsey has suggested that India has the potential to garner as much as $100 billion in the next five years, but needs to address some fundamental problems. The major barrier to FDI, according to the consultancy firm, is not poor infrastructure, but red tape and resistance from trade unions, political parties, and beaureaucratic bodies.

However, the report also points to the mind set of Indian business people as another potential stumbling block, saying that there is an inherent distrust of foreign investment in key Indian companies. Foreign companies with Indian partners are seen as unreliable, and likely to drop the Indian company as soon as they establish themselves in India, it observed. In the IT sector, which is by far the most dynamic industrial sector in India, the report explains, leading companies have managed well without foreign investment, and although they work closely with their foreign clients, are reluctant to take them on as partners.

The McKinsey report suggests that in order to improve India's competitiveness on an international level, special attempts should be made to attract foreign direct investment in selected sectors such as energy, telecommunications, financial services and food processing. The consultancy firm also warned that it was imperative to halt the exodus of existing foreign investment, especially in the energy sector which once attracted eight foreign power companies, most of whom have now left India or are planning to do so.

Recommended