Global Journal of Finance and Management ISSN 0975 - 6477 Volume 3, Number 1 (2011), pp.

123-136 Research India Publications http://www.ripublication.com/gjfm.htm

Negative Impact of FDI on the Host Country : Surge in Crime Rate in India
G.T. Manjula School of Economics and Management South West Jiao Tong University st 111, 1 Section, Northern Second Ring Road, Chengdu, Sichuan 610031, China E-mail: amul27@hotmail.com

Abstract This paper examines the causal relationship between FDI inflows and total crime in India by using classical econometric methodology. The paper attempts to study the direction of causality between the two variables. There is sufficient evidence of FDI inflows in to India causing uneven economic growth leading to rising income inequality and social unrest. These negative effects are leading to surge in crime rate. First, a multivariate regression analysis was conducted to see the effect of FDI on total crime, taking four exogenous variables, i.e., FDI as a percentage of GDP, GDP in US dollars, GDP per capita and FDI net inflows in million US dollars and total crime as endogenous variable. Though the over all model was significant, the crime incidence due to FDI net inflows showed a weak positive influence. To explore further a univariate regression analysis was done with total crime as a regressand and FDI net inflows as regressor. The results did not make any significant difference from the multivariate regression results except showing that there was some indicative influence caused by FDI net inflows on total crime though it is not a strong evidence of causality between the two variables. But knowing that a multitude of factors cause the occurrence of crime and given the fact that a certain percentage of crimes go unrecorded, this result need not be ignored and the issue deserves further exploration. Keywords: Crime, GDP, FDI, Time series, inequality.

Introduction
Foreign investment moved across countries in search of profit for the last 300 years.

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In this process, flags followed foreign investment giving rise to colonial era. But the recent surge in foreign direct investment, (FDI), has been encouraged by the process of globalization. Globalization has encouraged flow of FDI on an unprecedented scale. Such massive flow of FDI to developing countries, (which are now called emerging economies), has helped increase investment funds available for the development of their economies. FDI has helped transfer new technology to these countries. FDI has increased employment opportunities and raised the level of wages. It has encouraged exports and made available foreign exchange resources thereby helping them to balance their foreign trade account. On the negative side, FDI has helped the rich countries to exploit the precious natural resources of the developing countries like Latin America and Africa. FDI has negatively impacted the environment of the host countries like destroying vast areas of forests in Latin America and Africa. Apart from such visible negative impact, FDI has encouraged illegal economic activities like drug trade, trade in arms, crime, money laundering, corruption, tax evasion and fraudulent financial transactions. It is true that all these illegal economic activities did not start with globalization per se, but they have increased in their magnitude beyond comprehension because of the flow of enormous amount of FDI across the boundaries of countries in the wake of globalization process. Scholars have attempted to study and quantify both the positive and negative impact of FDI inflows on host countries. Some studies showed that there was inverse relation between FDI inflows and growth rate of GDP. But this was attributed to the flow of FDI into the process of exploiting natural resources of developing countries. Later studies have shown positive relation between FDI inflows and GDP growth rate.( See for detailed review of literature, Sahoo, (2006, pp.26-27). However, several studies have confirmed the negative impact of FDI flows on the environment particularly the forest cover, air quality and water resources of developing countries. Some studies have also attempted to study the relation between flow of FDI and illegal and criminal acts. I have attempted in this paper to statistically probe into the relation between FDI inflows into Indian economy and surge in crime in India. Crime rate in India has increased significantly and is becoming a threat to Indian economy and society in the recent years. Particularly after the introduction of structural economic reforms in India, the process of globalization encouraged large scale outsourcing of BPO. BPO and Information technology activities spread and expanded in four major cities of India, i.e., Bangalore, Chennai, Hyderabad and Pune. These business activities required night shift work and large number of female workers were employed. These workers became increasingly exposed to criminal assaults. Such crimes on women have increased over time. This is the impact globalization and the resultant FDI inflows. It is a common knowledge that there is in fact a direct link between poverty and crime. Crime is an important consequence of poverty. Most of the studies have concentrated on the relation between poverty and crime, economic growth and crime. But enough attention is not paid to find out the impact of FDI on crime. This paper has tried to address this issue.

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A few decades ago crime rate could be related as an inevitable result of poverty. But since 1990s with the liberalization of economic policies and encouraging private sector economic activity in India, considerable progress has been made in loosening government regulations, especially in the area of foreign trade and investment. Many restrictions on private companies were lifted, and new areas were opened to private capital. The new industrial policy of 1991 ushered in a series of policy measures which liberalized FDI inflows into Indian economy.Over the years due to a steady liberalisation of the current account transactions, more and more sectors have come to be opened up for foreign direct investment and portfolio investment facilitating entry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors. India has attracted huge FDI and that has helped achieve high rate of growth of its GDP. The cumulative impact of liberalization, privatization and globalization has been to raise the income levels of all sections of the society though at varying rates. Indias spectacular economic growth over the past decade has raised per capita incomes substantially, which has increased the size of the middle class and raised their income level. This has been attributed partly to the FDI inflows into the country. At the same time the increases in income levels has been highly uneven across the country, and also within individual states. Thus Indian economy is faced with widening income and wealth inequalities which are a fertile ground for the crime to thrive. So, if crime rate is related to poverty in the context of such impressive economic growth in a country, one would expect that crime rate should decline. But the crime rate in India is increasing along with the increase in the countrys GDP as well as per capita GDP. This paradoxical situation is a sufficient justification to explore the possibility that FDI could be helping economic growth in the country favoring only certain regions, sectors and groups of people resulting in widening income inequalities and creating uneven job opportunities and thereby, as backlash, increasing the crime rate in the society indirectly. India has been able to attract huge FDI due to the factors such as being liberal, and largest democracy which enjoys political stability; second largest emerging market (US$2.4 trillion); skilled and competitive labor force; highest rates of return on investment; large GDP and market potential; English language facilitating easy and hence low cost of communication, low labor cost , low taxation, lower environmental protection regulation and independent judiciary to arbitrate commercial disputes. It is true that India permits FDI in certain sectors only. FDI is not permitted in defence related activities, railways, multi-product retail trade and agriculture. There are also sectoral caps in the entry of FDI. Even so, there is a growing realization to relax such restrictions on the flow of FDI. What is disappointing is that FDI has flown into certain sectors and regions where there is availability of the necessary infrastructure, availability of skilled workforce, adequate power supply and access to technology. Thus FDI takes advantage of the countrys natural resources to earn high rate of return, leaving behind the underdeveloped areas which deteriorate further due to neglect of the domestic private sector as well as the government. The poverty stricken masses remain poor thus creating a sense of social injustice, frustration due to unemployment which feeds criminal ideas into their minds motivating them to seek vengeance against the better off and/or resort to crime as a means of survival.

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Legal Definition of Crimes in India

The first schedule of the Criminal Procedure Code, (CPC), classifies all the offences of Indian Penal Code (IPC), in India into two categories: Cognizable Crimes, and Non-cognizable crimes. Cognizable Crimes All cognizable crimes reported in the country are dealt by the police in which, a police officer may arrest a person without a warrant. In such crimes, the police have a direct responsibility to take immediate action on receipt of compliant or credible information, visit the scene of crime, investigate the facts, apprehend the offender and arraign him before a court of law having jurisdiction over the matter. Cognizable crimes are broadly categorized as those falling either under the Indian Penal Code, (IPC), or under the Special and Local Laws, (SLL). Non-Cognizable Crimes Non-Cognizable crimes are generally left to be pursued by the affected parties themselves in Courts. Police do not initiate investigation in non-cognizable crimes except with magisterial permission. Various crimes that are being recorded for Statistical Information System can be broadly grouped under the following categories. Broad Classification of Crimes under the Indian Penal Code (IPC) is as follows: 1. Violent Crimes 2. Crime against Women, (IPC +SLL) 3. Economic Crimes 4. Property Crimes 5. Crime against scheduled casts and scheduled tibes, (SCs/ STs). 6. Crime against Children 7. Cognizable Crimes, (IPC). 8. Cognizable Crimes, (IPC +SLL). In this paper I have considered the total IPC crimes in India from 1990 to 2005 for the analysis of impact of FDI inflows into India on total crime.

Data and Model

In this paper I have tried to test the hypothesis that FDI increases the total crime incidence in India. Before testing this hypothesis, I have tried to examine the relation between the GDP per capita (which is a measure of economic growth), FDI inflows in US$ million and total cognizable crime (IPC). These variables are presented in Table 1 in Annexure. The Chart 1 in Annexure displays the FDI inflows in US$ million from 1990 to 2005. From 1990 to 1997 there was a steady rise in the inflows from $165 million to $3,682 million. Thereafter, it dipped to $2439 million in 1999 and again spiked to

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$4,222 million in 2001 and thereafter slightly increased to $3754 million and fell to $2171 million in 2005. Chart 2 in Annexure shows that crime incidence has been increasing steadily from 1991 to 2005, except for a slight dip now and then. Crime incidence reached its peak in 2004 to about 1.8 million in the same year when the FDI inflow was quite high at $3754 million, compared to previous years.

Trends in Total Crime Incidence and FDI Inflows into India from 1990 to 2005
If we observe the Table 1 closely we notice that all the three variables, i.e., GDP per capita, FDI inflows and total crime incidence, have steadily increased from 1993 to 1998, which gives an impression that FDI inflows helped increase economic growth (measured in terms of GDP per capita) and growth of GDP in turn influenced the crime incidence. However, if we closely examine the Table 1 for the years from 1999 to 2005, we find certain intriguing patterns. FDI inflows declined for the years 1990 to 2000, while the GDP per capita and total crime incidence increased. Though there was fluctuation in the FDI inflows and total crime incidence, GDP per capita shows a steadily increasing trend throughout the period from 1993 to 2005. The year 2005 had the highest FDI inflows into the country to the tune of US $4,222 million and there was a corresponding increase in GDP per capita. But the total crime incidence declined by 1,776 compared to previous year. However, this decline was only for a single year, compared to the trend observed for five years from 1993 to 1998 which shows increase in all the three variables. As it was argued earlier that poverty can be an important cause for crime, Table 2, in Annexure below shows that from 1990 to 2005 there has been a decline in the percentage of population below poverty line. This decline indicates that with the rising economic growth, poverty has declined which should push down the total crime incidence. But according to the data presented in Table 1 there is an increasing trend in total crime incidence with increase in economic growth and decline in poverty. Although a study, (Chakraborty and Nunnenkamp ,(2006), on FDI has pointed out the advantages and has provided sufficient evidence to show that FDI promotes economic growth in the host country, another study,(Kumar,2007), relating to India has found that FDI has only benefitted manufacturing and service sectors. In the case of India, though FDI inflows benefit in terms of transfer of technology and management know how, all these concentrate only in certain sectors such as manufacturing that too concentrating in some locations and neglect other sectors, and this creates an uneven distribution of economic benefits in the society. The data presented in Charts 1 to 6 and Table 2 clearly show that with the rise in GDP per capita, the total crime incidence has also shown an increasing trend and the poverty rate seems to have declined noticeably as shown by the estimates of the Planning Commission of India. Although Indian economy has grown steadily over the last two decades, its growth has been uneven between different social groups, economic groups, geographic regions, and rural and urban areas. See for details about growing inequalities after liberalization Jayadev, et al, (2007), and Vakulabharanam,

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(2010). Does this in any way indicate that increasing income and wealth inequalities have increased the total crime incidence in India? I have tried to investigate and find an answer to this question by subjecting the relation between FDI inflows and total crime incidence in India to statistical tests.

Statistical Analysis
The argument of this paper is that FDI inflows into India cause uneven economic growth creating negative impact on the society thereby leading to increase in crime incidence. For this purpose I have used the variables: FDI inflows in to the country and GDP in US $ (2009 prices), and tested how they impact crime incidence. This statistical analysis looks at the direct effect of FDI inflows on total crime incidence in India using regression analysis. In the first stage, regression is run on total crime as an endogenous variable with four exogenous variables: FDI as a percentage of GDP, GDP in US$ million, GDP per capita in US$ and FDI net inflows in US $ million. In the second stage a univariate regression between FDI net inflows and crime is run to see the direct impact of FDI net inflows on crime. In both the regressions I have used one year lagged models.

Multivariate Model
The hypothesized form of the crime rate function takes the following form for measuring the influence of FDI on crime: CRIME= (FDI_PGDP, GDP_US, GDP_CAP, FDI_NET) Where, CRIME = Number of IPC crimes per00,000 population FDI_PGDP= FDI as a percentage of GDP GDP_US= GDP growth measured in US dollars GDP_CAP = GDP per capita in US$ FDI_NET = FDI net inflows in millions of US $. I have used the following Basic Model for the multivariate regression: Y (Crime)t = 0 + 1 (FDI net inflows as % of GDP)t + 2 (GDP in US$)t + (GDP per capita)t + 4 (FDI inflows in US $ (million))t +

The exogenous variables are lagged 1 year to overcome the problem of autocorrelation that normally exists when time series data is taken in sequential periods and also on the assumption that crime takes a considerable time to show up and be measured. In other words, the process of FDI inflows takes time to create conditions for the crime to surge. Hence one-year lag is used. So the fitted equation is: Y (Crime) t = 0 + 1 (FDI_PGDP) t-1 + 2 (GDP_US) t-1 + 3 (GDP_CAP) t-1+ 4 (FDI_NET) t-1 +

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Crime = 1510548.032 87289.598 (FDI_PGDP) -1.744X10-7 (GDP_US) + 618.559 (GDP_CAP) + 37.381 (FDI_NET) Analysis of the correlation matrix shows that GDP per capita has highest correlation with total crime, (0.887), amongst other explanatory variables considered. All the exogenous variables considered seem to have moderately positive correlation with the crime. We can notice the correlation between FDI net inflows and GDP in US million dollars, a reasonably high correlation, which indicates that FDI increases economic growth measured in terms of GDP. But there exists a strong correlation between GDP per capita and GDP in US million dollars, (0.99). This would imply multi-collinearity and explains the relatively low t-values for these two variables. VIF is greater than 10 for all the four variables as the two FDI variables are also strongly correlated though less than the GDP variables. Analysis of the signs of the coefficients of the variables reveals mixed results. We can notice that 151, 0548 of the crimes are caused by other factors than the variables considered. Increase in GDP per capita increases crime incidence. And FDI also increases crime incidence though to a very small extent. FDI operates in many ways: 1. It creates uneven job opportunities causing household income inequality. 2. Creates urban bias of public policy, which allows city-based elites to capture a disproportionate share of economic opportunities creating social injustice and social tension. 3. Disparity in the distribution of wealth results in the poor and the lower middle class to have limited ability to organize, influence policy and defend their interests. 4. Government s policy of privatization of public sector units creates resentment among public sector workers. 5. Extremely uneven growth in respect of different sectors like between agriculture and non-agriculture sectors results in poverty in rural areas. 6. Extreme mechanization reduces demand for manual labor, who in turn migrate to urban slums. When they fail to find remunerative jobs in urban areas, the tendency is to resort to crime. 7. Both employee and consumer exploitation are on rise in private sector which creates backlash resulting in crime. From our regression statistics: R2 = 0.866. So we can infer that 86% of the variation in total crime is explained by the variations in the exogenous variables considered. Adjusted r2 shows that 81% of variation in Y (total crime) is explained by all X variables) used, taking into account the four variables used and sample size of 15. F value from the regression test yielded 16.168, and P value is less than alpha at 0.05 indicating us to reject the null hypothesis of none of the variables can explain crime and accept the alternative hypothesis that there is overall significance of the model proving positive influence of FDI inflows on total crime incidence and there is evidence of at least one of the independent variables influencing the total crime incidence in India.

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A univariate model with FDI inflows as exogenous variable and total crime incidence as endogenous variable is run to overcome the problem of multicolinearity that existed in the previous multivariate model. Univariate Model To test the direct impact of FDI inflows on crime incidence, the following univariate model is used: (Total Crime) t = 0 + 1 (FDI_net) t-1 + Total crime = 1650883.772 + 36.686 FDI_net inflows This model does not violate any of the assumptions of linear regression and is over all significant and also with respect to individual exogenous variable FDI inflows, it is significant when we check the t-statistic. 1 from our analysis tells us that the total crime incidence increases by 36 on an average (a negligible magnitude ?) for each additional one million US dollar inflow of FDI inflows. R square is 0.65 and correlation between FDI inflows and total crime is 0.81 which is moderately high. From F-test and P-value the over all model is significant. From T-statistic (4.9) FDI is quite significant in explaining the variations in total crime incidence in India Considering the crime occurrence in hundred thousands a year, 1 being 36 is not so significant though it shows that there is a positive effect. R square tells us that 65 % of the variation in crime is caused by the variation in FDI inflows and correlation between FDI inflows and crime is moderately positive at (0.81).

Conclusion
The above empirical analysis supports the view that FDI inflows into emerging economies do create conditions which breed crimes in urban areas. Although the results trace a very small direct influence of FDI inflows, given the multitude of factors contributing to total crime incidence in India and limited number of observations, we can say that there is some possibility of FDI inflows impacting on crime. And the argument that FDI inflows cause uneven economic growth and disparity of wealth in the society leading to increased crime incidents tends to be quite relevant in our analysis. This has been borne out by the increasing number and frequency of criminal assaults on well paid female workers employed in BPO and IT business activities. Bank robberies were rare in India until the process of globalization spread to all urban centers. This surge in crimes in urban areas has been the result of widening income and wealth inequalities. Now we hear virtually every day bank ATMs being ransacked in one city or the other. To emphasize, this surge in crimes in urban areas has been the result of widening income and wealth inequalities. While the long-term solution to this surge in crimes should be found in achieving rapid and inclusive economic growth, in the medium and short-run governments in India should formulate unemployment relief measures and urban poverty alleviation schemes to provide immediate relief to the urban unemployed youth.

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References
[1] Sahoo, Pavakar (2006), Foreign Direct Investment in South Asia: Policy, Trends, Impact and Determinants, ADB Institute , Discussion Paper 56, November. Chakraborty, Chandan and Nunnenkamp, Peter ( 2006), Economic Reforms, FDI, and Economic Growth in India, Montclair State University, NJ, USA. Kumar, Anil, (2007), Does Foreign Direct Investment Help Emerging Economies ?, Federal Reserve Bank of Dallas, January 2007. Economic Letter. Jayadev, Arun, et al,( 2007), Pattern of Wealth Disparities in India During Liberalization Era, Economic and Political Weekly, September, Mumbai. Vakulabharanam,Vamsi ,(2010), Does Class Matter? Class Structure and Worsening Inequalities in India, Economic and Political Weekly, July, Mumbai. Chaudhuri,S (2006), Partially Awakened Giants: Uneven Growth in China and India, The World Bank Policy Research Working Paper, Number 4069. Sharma, Kishore, (2000), Export growth in India: Has FDI Played a Role?, Charles Sturt University, Australia, July. Singh, Kulwinder,(2005),Foreign Direct Investment in India: A Critical Analysis of FDI from 1991 to 2005, Center for Civil Society, New Delhi .

[2] [3]

[4] [5]

[6] [7] [8]

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Annexure
Table1: Trends in GDP Per Capita, FDI Inflow and Total Crime Incidence in India.

Notes: FDI/PGDP: FDI as a percentage of GDP. FDI:Net US $m: FDI net inflows in US$ million. Sources: Crime: The Registrar General of India,(Crime), http://ncrb.nic.in; FDI data: Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, GOI, New Delhi, http://dipp.nic.in/fdi_statistics, http://dipp.nic.in/fdi_statistics/India_yearwise.pdf GDP per capita : International Monetary Fund http://www.imf.org; http://www.indexmundi.com/india/ ( data are in 2009 US dollars) GDP in US$ million: International Monetary Fund - 2009 World Economic Outlook, World Development Indicators database. Table2: Trends in Proportion of People below Poverty Line.

Chart1: Trend in FDI Inflow into India from 1990 to 2005.

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Chart2: Trends in Total Crime Incidence in India from 1990 to 2005.

Chart3: Trend in Par Capita GDP of India from 1990 to 2010.

Chart4: Trend in the Level of Per Capita GDP of India from 1990 to 2010.
Crime Incidence Versus FDI inflows in US$(Million)
2500000 2000000 1500000 1000000 500000 0 0 1000 2000 3000 4000 5000 FDI inflows in US $ ( million) Series1 Linear (Series1)

Chart5: Associations between Total Crime Incidence and FDI Inflows into India.

Total Crime(IPC) Incidence

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Chart6: Percentage of People below Poverty Line in India.

Model[1] table

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Model [2] table

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