One of the more interesting aspects of the furore over foreign direct investment (FDI) in multi-brand retail is that opposition was driven not just by ideological considerations – as evidenced by the Bharatiya Janata Party and the Communist parties joining hands – or the rank opportunism characteristic of Indian politics, but also by the fear of the outside world that continues to have deep resonance in India.
It is this fear that, more than any other factor, perhaps explains the starkly contrasting approaches of India and China to FDI. China openly embraced multinational corporations (MNCs) that, lemming-like, rushed to invest in the country. That investment was fundamental to driving both China’s incredible export expansion in manufacturing and its internal growth. With intra-industry trade a key driver of global trade, MNCs married their low-cost production bases in China to their global networks, to produce the Chinese export miracle.
But what is more instructive for India is how the Chinese used MNCs to develop their own technological capabilities, which are fundamental to long-run growth. They learnt, copied, stole and stripped the MNCs of their production and technological knowledge. Domestic imitators swiftly set up copycat lower-cost production facilities, many of whom have scaled up rapidly to pose serious competitive threats to the very MNCs that set up shop in China hoping to capture the Chinese market. Unlike Indian purists who decry imitation, China has laughed all the way to the bank doing just that. The capacity to absorb, replicate and improve manufacturing technologies, both product and process, is not easy. China’s complementary massive investments in human capital – and increasingly its higher education sector – have played an important role. Here again China has openly embraced global human capital – by sending its students overseas in record numbers and inviting faculty from abroad – but with the consistent goal of developing its own domestic institutions of higher education.
The differences in approach cannot simply be ascribed to the cognitive baggage of history. Yes, India suffered from the East India Company syndrome, but the depredations suffered by China at the hands of foreigners are hardly less than the Indian case. Given the bloody history of Japan’s invasion of China – and the continuing (and growing) tensions between the two countries – it is extraordinary that there are more than 20,000 Japanese firms operating in China and barely a few per cent of that number in India. China has shown equal foresight in attracting investment from its most formidable strategic competitor, the US — which takes us to where we started, namely Walmart. Yes, the firm has scores of stores in China, and the possibility that their presence has had an adverse effect on small retail Chinese mom-and-pop stores cannot be ruled out. But the parallel story is how Walmart helped develop low-cost Chinese manufacturing and logistics systems into a key global sourcing base, with the result that at one point Walmart alone accounted for nearly a tenth of China’s current account surplus with the US.
The irony of Japanese and American MNCs investing in China and creating the most formidable strategic competitor to their home countries demonstrates how China has used geoeconomics to drive geopolitics. The build-up of China’s massive foreign exchange reserves and huge trade surplus vis-à-vis the US is a stark reminder of China’s ability to leverage its domestic market to drive not just economic growth but also its concomitant emergence as a world power.
More From This Section
Why have so many of Indian politicians and intellectuals continued to be so suspicious of MNCs? Why do they not believe that India can leverage MNCs the way China has done? If the answer does not lie in history, it certainly does not lie in the two countries’ view of capitalism. Given the role that money plays in contemporary India’s political and intellectual life, it would take a particularly strong delusion to believe that Indians are not money-minded.
The answer perhaps lies in something more deep-rooted: the fundamental lack of trust that is now pervasive in Indian society. Indians today view public institutions as places where everyone in power is corrupt and ready to sell out to the highest bidder. From social movements to civil society, from academics to the media, there are all sorts of attempts to address the lack of accountability in India’s public life and root out the cancer of corruption. But whatever formal and clever rules one can create, and however much technology is leveraged, it is impossible for any state to function effectively without discretion. That discretion certainly requires transparency and monitoring. But it also requires faith in our government that, if Walmart’s entry creates massive problems for small retailers, zoning and tax rules can be devised accordingly; a trust in Indian society that its members have the creative and entrepreneurial wherewithal to take on competition; and a trust that the two in combination can allow India to leverage MNCs to the country’s advantage.
But that trust is absent. And as long as it continues, so will the fear of the “foreign”.
The writer is director of the Centre for the Advanced Study of India at the University of Pennsylvania