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FDI policy: Indian consumers should have more choice by Nirmalya Kumar

Most developing countries have a love hate relationship to foreign investment. They love the jobs that it creates, the technology that it accompanies, the additional choices that it provides, and the local millionaires/billionaires it creates through creative phased restrictions.

On the other hand, since many developing countries have a colonial heritage, and cash is concentrated amongst developed world MNCs, the host are wary of it.

The more nationalistic elements within a country see FDI as a failure of the host country to control its own destiny. In 2011, India saw this debate on FDI play out in the retail sector, and to a lesser part, in the education sector.

Whilst both the forces for and against FDI mobilised themselves, the largest, and most important constituency in my opinion, which is the consumer, was barely heard from or considered.

The oft-heard argument against the retail sector FDI was that foreign retailer entry would cause millions of shopkeepers to go out of business. There are three problems with this argument.

First, it represents a fundamental misunderstanding of the dynamics of a free economy where businesses compete for customers, and it is the customers who decide the fortunes of businesses.

Just because Tesco or Walmart will open stores, is not going to make shoppers rush to these stores unless they have a relatively better proposition to offer compared to the corner shop or other currently available alternatives.

And, if they do not, as Walmart did not against Aldi in Germany, the foreign retailer will fail regardless of how big they may be elsewhere.

Second, as is often said, capitalism without bankruptcy is like religion with hell. It is the fear of failing (providing a better proposition for customers whilst being able to make an adequate profit) that forces businesses to improve, to innovate, to become more efficient, and to force their partners in the supply chain to do the same.

For example, it is the rise of Walmart that has forced the leading consumer packaged goods companies like Coca Cola, Procter & Gamble, and Unilever to lose their arrogance and flab. As a result, today CPG firms are much smarter companies than twenty years ago.

Retail is a very large sector of the economy in any country and for it to be sheltered from innovation and efficiency is unacceptable.

One is handicapping the economy. Furthermore, even if they succeed, foreign retailers will fail to drive all the indigenous small shops out of business as some of them will find creative ways to serve a niche need for the consumer, just as one sees the many corner shops in high density countries like the UK.

There is always the space for the "nearest" in retail, just as there is for the "cheapest", the "biggest", and the "best".

Third, that the biggest loser when there is a lack of free competition is the consumer. They have fewer choices, pay higher prices, and receive poorer quality.

Let me evoke the education sector in making my argument here as the most detrimental impact of restricting FDI can be demonstrated there. India has a young restless population seeking better opportunities for themselves compared to their parents.

A basic human aspiration for the young is access to university education. The failure of India to provide adequate university education facilities has seen more than a 100,000 students seeking to pursue higher studies outside the country.

After China, India is the largest exporter of students to universities in the developed world. The cost of this is can be debated but even at a low number of $10,000 per annum, the students are spending more than a billion dollars of foreign currency annually.

And, I am sure many readers by now are thinking that my figures to make the calculations convenient are a substantial underestimate as others put the number at 10 billion dollars!

The current FDI bill, developed to placate all the various forces including the indigenous education sector, is so flawed that few universities will enter the country underit. And, I doubt any of the highly reputed institutions will do so.

In contrast, realising the importance of providing the best education, countries like Singapore and the UAE provide incentives to top institutions such as Cornell, Insead, or London Business School to set up in their country instead of some other country.
There hope is not only to better educate their own people but also become a global or regional hub for education.

The worry that these institutions may repatriate their earnings must be considered in light of the billion dollars that is already flowing out of the country because of inadequate education facilities.

And the fear that second-tier universities may come and set up again needs to be argued in light of the fact that thousands of Indian students are already attending these second tier foreign universities, seeing it as their best option!

It is better they spend their education dollars in India with the spill over effects into the domestic economy, instead of these funds being totally lost. And even profits are repatriated, assuming they do not reinvest itin expansion, this number by definition has to be smaller than the entire fee going overseas.

What is a top tier or second-tier or third-tier university is often based on research rankings. The best university for a particular student is not always Harvard or MIT. It depends on the particular student and the fit with his or her interests and capabilities.

I pursued my MBA at University of Illinois at Chicago. It was not in the top 100 US universities or MBA programs at that time, doubt it still is, but I got a wonderful education.

It also doesn't seem to have had any negative impact on my career. Similarly, for B.Com. in Calcutta, I was rejected at St Xaviers College and instead enrolled at Bhawanipur Education Society, but still seemed to have managed to get through life.

Only 10% of college aged youth in India attend university, compared to 20% in China and 60% in the USA. Universities and free markets are about giving as many people as possible opportunities to increase their life chances.

Some will seize them, whilst others will fail. And, that is the character of life. Let us trust the Indian consumers to make the right choices and increase the menu at their disposal, be it about which retail outlet to patronise or which university to attend.

(The author is Professor of Marketing and codirector of the Aditya Birla India Centre at the London Business School)