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Exports: The Untold FDI Story

Pramit Pal Chaudhuri January 10, 2012

Upfront: I fully support foreign direct investment in retail in India. That’s partly principle, as I am a committed supporter of free markets. I generally think barriers to trade, capital and labour between nations are effectively just means to promote mediocrity and, eventually, unsustainable economic structures.

Many critics of Walmart and other giant retail multinationals like Carrefour or Tesco go on about how these firms flattened small grocery stops in their home countries. But these are developed Western countries. The real measure of the impact of such firms on India would be better obtained by looking at their impact on emerging Asian economies like China.

In China, organized foreign retail is big but not a big deal. The biggest retailer in China is Gome Electrical Appliances which is as Chinese as kungpao chicken. The supermarket business is dominated by Shanghai Bailian. The mighty Walmart has been around for 15 years and has opened 338 shops and earns about $7 billion – which sounds like a lot, until you realize that it’s about three per cent of its US earnings and a drop in the $1 trillion Chinese retail market.

What Walmart and other foreign retail firms have been amazing at doing in China is converting the Middle Kingdom into a logistics base to make and export products to Walmarts in other parts of the world, most notably the US.

Thus the oft-quoted statistic that Walmart, as an independent economic entity, would be one of China’s 10 largest trading partners. In 2007, Walmart exported from China some $27 billion in goods to its home country, the US. This causes much anguish in protectionist times in the US, but what is important is that this is the main economic gain from organized retail: exports.

Walmart would almost certainly have outsourced products from China. But by having a domestic base and market, its motivation to find local suppliers of goods and train them to meet global specs was multiplied a thousand fold.

This could well be the real economic gain for India as well. While it is unlikely, at least as long as infrastructure is such a mess, that India will match China’s numbers, there will still be a huge boost to its exports.

It is not merely what Walmart ships off to its outlets that matter. Its subcontractors will become exporters in their own right. A linkage with a major retailer means a guaranteed consumer who pays you millions. It means learning how to make and package products for a global consumer market. After you’ve got all that, becoming a Chinese exporter is not too hard a jump. I would suspect another 15 to 2 billion dollars worth of exports is derived from the spillover effect that Walmart has had on other Chinese firms.

India already provides goods for major global retailers like Ikea and, in the case of knitwear and some textiles, Walmart as well.

There are other good reasons for FDI in retail, but one that should not be forgotten is the boost it would give to India’s manufacturing base and exports.