PROJECT TITLE: EFFECTS OF FDI

ON EMPLOYEMENT

SUBMITTED TO:

SUBMITTED BY:

PROF: DR. RACHNA KALE

RAHUL DEB-17072

SUBJECT: MANAGERIAL
ECONOMICS

JYOTIKA RAYMOND-17222
SECTION-C

Abstract
A substantial amount of development has been observed in the inflows of Foreign Direct
Investment (FDI) in India over the last two decades. The extraordinary growth of FDI in 1990
around the world has made it an essential constituent of development strategy for both,
developed and developing countries. However, the most profound effect has been observed in
developing nations. Macroeconomists have performed various studies in order to prove that FDI
plays an important role in generating employment and improving the economic development, in
other words, increasing the level of gross domestic product (GDP) of host countries. A multipleregression model will be used intensely in order to analyze whether FDI has an impact on the
employment and GDP in India.

Introduction
The definition of FDI is not only limited to a simple transfer of money, but has now extended to
being defined as a measure of foreign ownership of domestic productive assets such as factories,
land and organizations and other intangible assets like technologies, marketing skills and
managerial capabilities. Economic literature has been dominated by FDI over the last 30 years,
especially the developmental areas of economics due to the highly receivable potential benefits
of a host country. The effects experienced spread over a wide range, from influencing
production, generation of employment, change in income levels, import and exports, impact on
economic growth, balance of payments and general welfare of the host country. FDI was found
to have emerged in India since the British rule but its presence was considered negligible. It was
natural for India to consider foreign capital as one of fear and suspicion as the British played an
exploitative role by draining away resources from the country. Gradually, as India achieved
independence, it became necessary for FDI to become a part of her national interest. FDI has
observed to portray a different trend in India since 1991 as finally the national economy was
opened to global trade. There has been an evident increase in the inflows of FDI in India which
continued to rise to peaks till 2008. According to various studies, currently India is among the
top 5 preferred destinations for FDI. (Ansari and Ranga, 2010) There have been many arguments
stating that inflows of FDI improves the economic growth, and consequently enhances
employment opportunities. FDI provides technological advances (increasing GDP) and widens
the scope for the domestic market (increasing employment). With the help of the regression tool,
a multiple-regression analysis will be carried out in order to confirm the above statement and if
not true then to study to what extent the employment and GDP are affected by FDI in India.

Importance of FDI
FDI plays a major role in developing countries like India. They act as a long term source of
capital as well as a source of advanced and developed technologies. The investors also bring
along best global practices of management. As large amount of capital comes in through these
investments more and more industries are set up. This helps in increasing employment. FDI also
helps in promoting international trade. This investment is a non-debt, non-volatile investment
and returns received on these are generally spent on the host country itself thus helping in the
development of the country.
Some of the sectors that attract high FDI inflows in India are the hotel and tourism industry,
insurance sector, telecommunication, real estate, retail, power, drugs, financial services,
infrastructure and pollution control etc. FDI is not permitted in the following sectors:

Railways

Atomic energy

Defence

Coal and lignite

An investor has to take a decision regarding the following aspects while investing:

Exchange Rate - The stronger the foreign currency is in comparison to that of the host
country, lesser will be the amount of investment required. In other words, depreciation of
currency in the host country will lead to more investments.

Market Size - This refers to the GDP growth. Developing and emerging countries are
more likely to attract investments.

Infrastructure - Investors will invest in a country if they think that the country has
suitable infrastructure to support the business.

Tax regime - MNCs are subject to tax in both the parent as well as host country. The host
country which attempts to reduce this double taxation of MNCs will attract more FDI.

Labour market conditions - The educational levels of the labour as well as the wage rates
also play a major role in determining the flow of FDI.

Financial and economic stability

Political stability

Following are some of the sectors in our country which attract massive FDI investments:

Retail Sector
This industry accounts for 13% of countrys GDP. Retail outlets acts as an interface between the
producers and the consumers of a good. Indian government liberalized FDI in 2005 in this sector
to 100%, thus enabling foreign investors to set up retail companies in India.
Retail industry is divided into organised and unorganised sectors. Organised sectors include
hypermarkets and retail chains whereas unorganised sector include local kirana shops (mom and
pop stores). The latter is more prevalent in India. Due to massive development taking place,
organised sector is increasing its foothold in the country. Since advanced technology and
management structure is used with foreign investments the price of the goods in the organised
retail industry falls and productivity of the firm increases. Today modern retail outlets provide
everything from basic amenities to luxury goods. They also provide consumer with a wide
variety. They have become the one-stop shop for customers. This trend is destroying the sales of
unorganised retail sector. Therefore on one hand FDI helps in reducing prices of the
manufactured goods and on the other, it is rendering our unorganized retail sector paralyzed. The
government has recently made it mandatory for foreign investors in multi-brand retail sector to
do their bulk sourcing from small farmers. With this move government is preventing wipe-out of
shopkeepers and small retailers.

Manufacturing Sector
Government has allowed 100% FDI in this sector except in defence industry and cigarette
manufacturing. Foreign investments in this sector will help in employment of semi-skilled labour
by providing them with access to developed technology.

Real Estate, Construction Development and Tourism

Any countrys growth and development is determined by its infrastructure. Due to increasing
population and migration of people from rural to urban areas, the real estate sector is booming.
Tourism industry is one of the major earners of foreign exchange for the country. It has a huge
potential for our economy. It is also one of the major sectors in employment. Large amount of
investments are needed to build roads, bridges, infrastructure so as to promote overall economic
development of the country.

Power Sector
Power is considered most crucial sector for development. Since public sector alone was not able
to meet the demands, investments from private and foreign investors was encouraged. Power
generation, transmission and distribution are main areas of consideration. India has a vast scope
of development in hydel power, nuclear power, solar power, thermal energy as well as in wind
energy. Renewable sources of energy require vast amount of investments for research and
development.
FDI, thus on one hand helps in increasing the output through usage of advanced technology and
management techniques and on the other it is a threat to local companies in the country.
Government should take steps in the direction of integrating foreign investors with local
businesses. This will help in overall economic development as well as preservation of countrys
heritage. MNCs should be allowed to set up in such a manner that they help increase the standard
of living of our country instead of sole profit making.

Role of FDI on Employment

1-Employment Creation
It means the FDI brings new production capacity and new jobs. Meanwhile it can improve the
development of relevant industries.

2- Employment Crowding-out
It means the inflow of the FDI makes the competition more intensive. So some domestic
enterprises have had to reduce employment to improve their competitiveness.

3- Employment Shift
It means the cooperation between foreign and domestic companies will create joint ventures.
That will make workers transfer to new enterprises.

4- Employment Loss
It means the foreign-invested enterprise have their own management methods.
Those who have not efficiency or are not suitable for this corporate environment will lose their
jobs. There is direct and positive relationship between FDI and employment. As firms are
operated in India they require skilled and unskilled labour. In India labour is cheap source and
available in abundant. Therefore, FDI provides employment to all the section of the people. They
contribute a good proportionate of the total employment. Normally Greenfields generates
employment when they start a project or firm but mergers and acquisitions do not generate
employment at the time of entry but over the period it creates employment and also develops
trade linkages in the long run. One of the objectives of development of special economic zones is
generation of employment. More than two-fifth of the market capitalization originates in Class-3
cities. FDI-enabled firms in manufacturing sectors provide employment to about 15.6 lakhs
persons, accounting for about 4 to 5% of the total employment in the organized sector. Class-3
cities provide employment to about 7.9 lakhs workers (more than 50% of the Pakanati Someshu.
Sectors providing a relatively high share of employment in Class-3 cities include transport
equipment; growing and processing of crops; construction parts; textiles; and non-metallic
mineral products. FDI has played an important role in the process of globalization during the past
two decades. The rapid expansion of FDI by multinational enterprises (MNEs1) since the mideighties may be attributed to significant changes in technologies, liberalization of trade and
investment regimes, and deregulation and privatization of markets in many countries including
developing countries like India. Fresh investments, as well as mergers and acquisitions, (M&A)
play an important role in the cross-country movement of FDI While the quantity of FDI is
important, equally important is the quality of FDI. The major factors that might provide growth
impetus to the host economy include the extent of localization of the output of the foreign firm's
plant, its export orientation, the vintage of technology used, the research and development
(R&D) best suited for the host economy, employment generation, inclusion of the poor and rural
population in the resulting benefits, and productivity enhancement.

FDI in India and Its Growth Linkages

In India stood at $23 billion, showing a growth rate of 43.2 per cent over 2006. In 2008, total
FDI inflows into India stood at $33 billion. One of the most important and sensitive areas for
developing countries is foreign direct investment (FDI). It is now defined as not only a simple
transfer of money, but as a mixture of financial and intangible assets such as technologies,
managerial capabilities, marketing skills and other assets. There is a major debate in the literature
regarding the impact of FDI on economic growth. The traditional argument states that an inflow
of FDI improves economic growth and thereby enhances employment opportunities. Most
studies (Hill and Athukorala 1998 have shown that FDI's social and distributional impact on the
host country has been generally favorable in developing countries of various regions. Apart from
bringing in a package of highly productive resources into the host economy there have been a
visible positive impact on the creation of jobs not only in those sectors attracting FDI inflows but
also in the supportive domestic industries. Foreign Direct Investment (FDI) is often seen as a
driver for economic development as it may bring capital, technology, management know-how,
jobs and access to new markets. Policy-makers have, therefore, tended to emphasize the benefits
that FDI can bring to host economies, particularly in developing countries. Accordingly, many
governments have developed policies to encourage inward FDI. While FDI and
multinational enterprises (MNEs) are often perceived to be beneficial for local
development, they have also aroused much controversy and social concerns. For
example, MNEs have often been accused of taking unfair advantage of low wages
and weak labour standards in developing countries. MNEs also have been accused
of violating human and labour rights in countries where governments fail to enforce
such rights effectively.

In Indian Service Sector

The number of service sector jobs (skill and unskilled) has increased in India, new
findings have revealed. A survey conducted by the country's Labour Ministry
indicated that during the last quarter, employment in the industry rose to 15.72
million, Channel News Asia reported. The research revealed that two sectors have
shown the strongest improvement in terms of hiring levels; information technology
and business process. Out sourcing. Commenting on the findings, Nimish Adani,
chief executive of workosaur.com, told Channel News Asia: "As far as employment is
concerned, there have been certain short-term initiatives taken by the
government." There has been an infusion of stimulus packages in sectors which
were labor-intensive. So, there has been a marginal improvement. "Finance Services
sector is growing with rapid rate, Finance sector is the second preferred choice of
students of management post-graduation top B-Schools in India, following figures

are explaining the preference of skilled professional in Indian service sector. For
analyzing the perception of skilled toward various segment of service sector.