PROS AND CONS OF FDI IN

MULTI-BRAND RETAIL IN INDIA

Development Economics 14AR10036
What is FDI (Foreign Direct Investment) ?

the inflow of capital from outside/ abroad(foreign) as an investment in

production capacities, business or market expansion in an Economy.
It includes Greenfield projects and Brownfield Projects and can come across as
subsidiary, joint venture or merger or acquisition.

it doesnt involve indirect involvement through investment in equities mirrored by

portfolio flows, but rather it establishes influence or effective control over assets or
institutions of financial influence in that Economy via overseas investments.
What is FDI (Foreign Direct Investment) ?

According to OECD, a FDI investment by a foreign investor will create at least 10%
or more of the voting stock or ordinary shares for the company.
According to the International Monetary Fund,
foreign direct investment, commonly known as FDI, "... refers to an investment
made to acquire lasting or long-term interest in enterprises operating outside of
the economy of the investor."
What is FDI (Foreign Direct Investment) ?

FDI can be categorized as:

Horizontal Vertical Conglomerate

Establishment of similar Investments that broadly investor branches out from

Business operations as in follow the line of business as
home country. Example: a in the home country but are
Restaurant chain opening not entirely the same. They
up new branches in a are linked to the existing
different Economy. business at some point in the
value chain of the business.
the existing business structure
to invest in a different sector.
Often, this goes with help of
an existing firm of the
Economy in the new sector
to create entry as a joint
venture
What is Multi-Brand Retail?

Single Brand Retail

When a company or business sells its goods under its own name of a single brand without
third party interference. Ex: Sony selling its products via its showrooms.

Multi-Brand Retail
When a business sells goods, similar and competing in nature, under different and unrelated
brands
What is Multi-Brand Retail?

Advantages of Multi Brand Retail

Increase overall Market share and leaving less chance for competitors products.
Saturation of Market by variable products fixing Price and/or Quality differences.
Serving Users Who Switch Brands as Experimentation
Generating Internal Competition.
 Timeline of FDI in India

2006:
FDI -100 per cent for cash, 2012
carry wholesale trading, Government allowed 100
export trading allowed per cent FDI in single-
2016
under the automatic route brand retail, under the 100 per cent FDI in
up to 51 per cent with prior government approval Marketplace Format of E-
Government approval, route Commerce
single brand products. foreign retailers to own up 100 Per Cent FDI in Multi-
not permitted in multi- to 51 per cent in multi- Brand Processed Food
brand retailing brand retail, Retailing

2010 2015
Consumer Affairs Ministry Investors opening as many
and Planning Commission as 15 sectors.
gave the green signal for
The crux of the reforms
49 per cent FDI in multi-
was to further ease,
brand retail.
rationalise and simplify the
process
SWOT Analysis

STRENGTH WEAKNESS
Boosting Economy Marginal Capital Investment in this sector
High growth rate of trade and Retail in India Absence of Competition
Young Workforce Poor Infrastructure
Highest number of Shops, no fear for small outlets. Lack of Skilled/Educated Workforce
Absorption of Losses by Big Industries Wastage due to insufficient godowns or storage facilities

FDI in Retail

OPPORTUNITIES THREATS
Employment generation possibilities
Loss of Local Businesses
Improvement of farmers finances.
Inflow of Capital from stronger markets. Manipulation and too much influence on markets by
Better Technology foreign investors
Quality Improvement Job loss in Manufacturing sector
Reduction in Fiscal Deficit Capital outflow as Profits of the Investors
 Pros of FDI

Economic Expansion of Economy and Contribution to GDP

Development
and growth More Capital Inflow and Profit opportunities from Investments

Employment Jobs along the Value chain of Retail Sector. Expected ( 4-5 million new jobs in 3 years)
Generation

Competitive Entry of MNCs in the market creates strong competition for consumer goods sale

Market
Better products and at a more affordable rate.
 Pros of FDI

Increased increase consumer choice and therefore his control over the market.
choice for
Consumers product is bound to become more and more consumer oriented

Infrastructure more and better infrastructure with regards to storage and warehouses for
creation consumer goods, more so in the agro and food sector
2011 law states that at least 50% of the investment by foreign brands will be
involved in creation of backhand infrastructure.

Supply Chain More efficiency in storage and transportation as a result of entry of players from International Market

Efficiency Roles of Middlemen will be removed and products will go directly from manufacturer to
consumer, which will also cut the costs of the product.
 Pros of FDI

Higher FDI will result in 10-30% increase in remuneration for the farmers
remuneration
for farmers

More The cost effectiveness created by Competition, Efficient Supply chain, Technology
Consumer and Skill Upgradation etc.
Savings This will result in more investment capabilities of consumer

Technological MNCs will bring technological advancement and skillsets

Advancement
 Cons of FDI

Destruction of likely to destroy the local shops, Kiranas and general stores which wont be able to compete with
Smaller Local the huge firms entry into the market due to provision of Consumer goods at a much lesser rate
than the traditional Kiranas stores.
Enterprises and
Entrepreneurs Example: Due to FDI nearly 50000 retailers lost jobs in Thailand.

Shrinking of lot of Unemployment due to destruction of Local Businesses.

Jobs Job creation phenomenon is just a myth, as the jobs will only basically shift from Unorganized
sector to Organized Sector while the number of Jobs will remain the same.

Jobs in Manufacturing sector will be lost due to Sophisticated technologies.

Monopolization Entry of huge Players may result in Monopolization.

of Markets ultimately influence and manipulate market according the companys choices.
 Cons of FDI

No real Farmers will become a slave to the big companies and will be completely
dependent on them for the sale and production of raw materials
Benefit to
farmers huge competition for raw material in the International market and farmers are
bound to suffer losses

Money Hefty profits and Salaries to International Companies and their International
Drain Employees will result in Money being transferred to Foreign lands

Incorrect The critics are of opinion that India is a more Service based Economy and
comparison therefore FDI in Retail will not help it like it did with China which is a
Manufacturing Economy. Therefore we cannot draw reference from the
with China Chinese Growth Story.
Conclusion

FDI in multi brand retail is must in globalization of Economy.

FDI carries a number of Pros which outweigh the number of cons it has.
Most of the cons are based on fears of Exploitation and Job losses which can be handled
well with the government policies of rehabilitation as well as strong hand on the MNCs.
India has to grow in the manufacturing sector and is one of the biggest consumer markets
in the world
FDI will replenish the Economy with Capital Inflows and will create Infrastructural and
Technological development in the Retail sector which is very necessary for it to grow.