Fdi_in_Defense

FDI. The effect of labour market rigidities and labour cost however is more pronounced for the export oriented FDI as compared with the domestic market seeking FDI. It is therefore evident that beside promoting the other factors, India will have to attempt to exploit its comparative advantages in the labour intensive sector before they get eroded. Wages in India are low but as mentioned by a Japanese businessman , its labour is costly. Due to stiff political opposition any major change in labor laws may be ruled out. However, the government would do well by concentrating on reforms in the export sector. This may not attract wide publicity but would be effective nevertheless. It is documented in the literature that export oriented FDI may have greater spill over effects also. Export oriented FDI has favourable externalities of information on export potential for domestic firms beside transfer of best technology to the host country. The government may therefore do well by focussing on attracting export oriented FDI. It is generally argued that the difference between India and China is not substantial in attracting FDI when adjustments for GDP differences are made. If corrected for measurement bias, the ratio of FDI to GDP would be 1.7% in India and 2.0% in China (Pfefferman 2002, see also Kumar 2004). The difference is however huge in terms of export oriented FDI. In China the proportion of exports contributed by MNCs is over 50% while it is 6%-7% in India (UNCTAD, 2002). One may therefore argue that FDI is largely behind China’s emergence as a manufacturing hub of the world. One of the reasons why India has performed poorly in attracting export oriented FDI could be the labour market rigidities. Our study here has shown that efforts to introduce labour reforms in this sector may prove to be highly effective. There could be a cautious attempt to introduce these reforms. The Taskforce on employment opportunities (Government of India, 2001) headed by Montek Singh Ahluwalia as well as the Report of the National Commission on Labour (Government of India, 2002b) may provide important guidelines in this direction. They recommended to introduce soft reforms in labour union act, contract labour laws and the Industrial dispute act. They have also recommended to put a scheme of social safety net in the form of unemployment compensation, which they suggested, should be self financing based on compulsory deductions of contribution from the employer. These recommendations may be implemented in the export oriented sector first. This sector could thus be a laboratory to experiment with such reforms. The presence of EPZs is also found to be a relevant pull factor for export oriented FDI even though attracting FDI is not a stated objective of the EPZ policy in India. Since the year 2000, the government of India has been making accelerated efforts in extending liberal policy concessions to promote EPZs. It is now time to adopt pragmatic operational strategy to implement them and also undertake research into the problems and constraints that the EPZ units are facing. Econometric evidence found in the study suggests that infrastructure and regional development is a key factor in attracting higher FDI both in the export and domestic market sectors. Finally, there is evidence that the development of human capital is also likely to induce greater inflows in India. Though India has failed to attract strategic asset seeking FDI in the export oriented sector, human development and R&D related factors emerged significant in determining the domestic market seeking FDI. -------------------------------------------- [ 2 ]. Quoted in D.H.Panandiker (2004).