Outward FDI, Trade Pattern and Trend between INDIA and FRANCE

Introduction

The removal of barriers to facilitate the movement of capital, technology, goods, and resources is a crucial feature of globalization. As trend globalization has rendered various aspirations and activities across the world including increased integration among countries because of economic reforms and liberation. Foreign trade has become a key component of globalization and major economic drive for economies like India. India is ranked amongst the fastest growing economy, and its recent development strategies put her in place to influence global economic activities in the future. Based on this background, France and India have long established trade ties. The establishment of the 1998 strategic partnership has seen a significant escalation of bilateral cooperation in commerce as well as the convergence of views on a number of international issues such as climate change, defense, nuclear energy, and space. This study seeks to highlight the current outward FDI, Trade pattern and trends between India and France.

The current outward FDI and Trade pattern and trend from two countries: INDIA and FRANCE

France is a significant player in the global economy. According to the World Bank (2017), France is the world largest sixth importer and eight exporters of merchandise. Trade represents more than a sixth of the country’s economy. Its major exports include vehicles, pharmaceutical products, vehicles, wine, electronic components, and hydrocarbons. Its major imports include pharmaceutical products, a variety of consumer goods, vehicles and hydrocarbons. Some of its major trade partners include the USA, countries from the European Union and China. However, the announcement of the exit of the UK from the EU (Brexit), may lead to reorganization of trade relations between France and the UK which is currently France’s 8th supplier and 5th customer.

According to OEC (2018), India exported a total of $292B, making it the 17th largest exporter in the world and the 45th complex economy. In general, India’s exports have been increasing at a rate of 1.2 % since 2012. However, the country has for years had a negative trade balance. In 2017, India imports totaled to $417B and exported $292B which resulted in a trade deficit. GDP per capita for India is $6,570, ranking it at 72nd out of 89 countries. Its top exports are refined petroleum, Diamonds, Packaged medication, Jewelerly, and rice. On the other hand, its top imports include crude petroleum, gold, diamonds, petroleum gas, and Coal Briquettes. India’s top export destination is the USA, the United Arab Emirates, China, Honking and Germany.

Undertake comparison for similarities and differences between the two countries.

France has the 5th largest economy in the world with a GDP of € 2.8 trillion and a GDP growth rate of 1.9% and a capita GDP of € 33,036 (World Bank, 2017).France is a member of the G-8 which is an international forum for the major industrial economies and G-20 which is an international forum that brings together some of the world’s leading industrialized and emerging economies. France is among the countries that account for 85% of the world’s GDP. France is also a member of the Organization for Economic Cooperation and Development (OECD) which brings together 34 democracies with the largest market economies and also work with other non-member economies to promote economic prosperity, growth and sustainable development. Its technological strength makes France a leader in food processing, aviation, railway, transport and agricultural research (OECD, 2019). France major imports include chemicals, machinery, chemical products, traditional industrial goods such as textiles and clothes and agricultural products. Trade in France is based on the exchange of goods as well as FDI investments. In respect of agricultural commodities, France increasingly exports raw agricultural products as well as agro industrial products such as dairy products, wines, tins and beverages, and the likes. France is also a major exporter of transport equipment, vehicles, and electronics. More recently, France exports in petrochemical and pharmaceuticals products have risen and partly explained by Indian pharmaceutical firms operating in France (Pradhan, 2007).

The greater part of France trade is carried with developed countries and FDI investments to both developed and developing countries. The European Union is France major trading partner and the reception for FDI. More than 60% of French imports and exports are destined to or originate from the EU. Germany is the most important trade partner, and the United States is the major partner outside the EU. Until recently, China and Russia have claimed a growing percentage of trade with trade. Agricultural and food exports are oriented towards European markets while industrial goods are exported to further markets across the globe.

The following table provides a summary of trade flows and FDI between France and India from 2007 to 2017.

20072008200920102011201220132014201520162017
Foreign direct investment, net inflows (% of GDP)FRANCE3.152.330.6881.4721.5441.3131.1240.20141.7561.841.833
INDIA2.073.6212.6521.6352.0021.3131.5161.6962.0921.9411.508
FDI net outflows (BoP, current US$ Billions)FRANCE132.24135.988.6272.5864.4652.0317.61553.0851.20773.2757.025
INDIA17.0219.25716.09615.96812.6088.5531.76511.6867.5145.0411.09
Imports of goods, services and primary income (BoP, current US$)FRANCE729 B830 B981 B903 B1.03 T986 B1. 013 T1.036 T914 B922 B981 B
INDIA297 B400 B349 B464 B579 B610 B593 B591 B529 B514 B606 B
Communications, computer, etc. (% of service imports, BoP)FRANCE48.12949.11552.01550.1148.251.752.254.658.357.956.9
INDIA35.89549.1152.0147.4243.04450.0949.84149.02448.8551.00548.85
Service imports (BoP, current US$) BillionsFRANCE169.42194.89176.153181.69203.006202.59228.19252.619233.268240.377245.879
INDIA70.1755.5653.0378.91377.75879.9278.72281.11982.64395.9109.3

Source: World Bank Group . (2019). Retrieved from https://data.worldbank.org/indicator/BM.GSR.TOTL.CD?end=2017&locations=FR-IN&name_desc=true&start=1970&view=chart

To what extent can the outward flow of trade and Foreign Direct Investment (FDI) be viewed as substitute or complements.

A crucial question concerning FDI is whether it increases or decreases a country’s volume of trade. One argument is that FDI is a substitute for trade and it occurs when opt to not export and instead set up supply markets abroad. An alternative argument is that MNs relocate different stages of production to different countries which in turn promotes complementary trade. FDI and trade results in complementarity and substitutability when the trade is either vertical or horizontal in nature (Kumar, 2007). Vertical FDI refers to investments at different levels of production whereas horizontal FDI is where investments in the host country are made at the same level of production.

In principle, the relationship between exports complementarity and substitutability could hold with FDI. In essence, FDI takes place when investors from Multinational (MN) firms that are based on the domestic nation establish operations in the host nation (Hymer, 1976). Generally, the underlying motivation is to be able to produce products that had previously been exported from the host nation, when this happens, FDI and the exports from the home nation are substitutes. On the other hand, Multinational operations can be linked vertically with those of the host nation such that an increase in the activities in the latter results in an increased demand for intermediate products including capital goods from the former (Export-Import Bank of India, 2017). Moreover, marketing and distribution channels that have been created by the FDI may be arranged such that they enable the MN to export to customers that could not earlier reach without the FDI agreement (Blonigen, 2001). In such a case, the exports from this arrangement will be complements.

Identify and apply the relevant FDI and trade theories for critical analysis in relation to why andwhat factors have shaped the two countries’ outwardFDI and trade flows

Expansion of FDI in the last decades has not changed the structure of international trade but also accentuated the growth of Multinational firms. To a great extent, we can argue that FDI has increased in importance than international trade between countries as (UNCTAD, 2018) highlight that about a third of a country’s international trade occurs between intra firms. With this said, scholars have made several attempts to integrate international trade theories with FDI. Smith (1776) and Ricardo (1817), pioneered the classical theories that provided the explanation of international trade between countries. Smith theory which was based on absolute differences in cost highlights that trade will occur between countries if one country has an absolute advantage in the production of a given commodity vies a vies another (Smith, 1776). This theory, however, failed to explain trade between countries where one country was superior and had no line of production. Ricardo (1817) who elaborated Smith’s theory postulates that a country will specialize in the production and subsequently export the commodity in which it has a comparative cost advantage in and import the commodity/s whose comparative advantage is the least. Ricardo’s, the theory is based on only one factor of production which is labor and difference in the other factors of production are explained in the different in costs which serve as the incentives for trade. Over and above, these theories provide a general insight into international trade which helps explain why India exports pharmaceutical products to France and why France chooses to export manufacturing products rather than textile yet assuming that labor is immobile does not help account for international trade within the movable cost of capital.

In contrast to the classical theories, Heckscher and Ohlin (1933), proposed the factor proportion theory that explains that countries are endowed differently in the factors of production and hence the relative costs they spend in production. As such, countries would export goods and services that utilized a significant quantity of their abundant resources and import goods and services whose resources or factors of production are scarce in the country. This theory extends to expands the notion of comparative advantage within the framework of endowment (Nayak & Rahul, 2011). This theory is realistic and reflective of both India and France trading pattern. For example, being endowed with cotton, India trades in textile.

Conclusion and Recommendations 500 words

The report has analyzed the patterns and trends if FDI by Indian and France enterprises. Outwards FDI from India has notably increased over the decades following liberalization policies and trade reforms undertaken by the government. In retrospect, FDI has emerged as an important mechanism through which the Indian economy is integrated with the global economy, along with growing FDI and trade. Unlike before, India’s FDI patterns has increased with both a geographical and sectorial focus. Geographically, Indian firms are widespread in both developing and developed countries. On a sectorial scale, Indian companies have diversified production to sectors that they have a comparative advantage in such as Technology and pharmaceuticals. Similarly, France has also expanded trade with India in areas where they have a competitive advantage. However, France remains the largest beneficiary as India contributes to just a meagre of the country’s needs. With this said, results from the previous section consists of studies on FDI patterns of developed and developing countries which tend to support that India’s exports and direct investments are complements and not substitutes.

References

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Blonigen B., 2001, In Search of Substitution Between Foreign Production and Exports, Journal of International Economics, vol. 53, pp. 81-104.

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Export-Import Bank of India, July 2017. The Internationalisation Of Indian Firms Through Outbound Foreign Direct Investment: Nature, Determinants And Developmental Consequences. Occasional Paper No. 183.

France Diplomatie, 2019. France and India Bilateral Relations.Available from https://www.diplomatie.gouv.fr/en/country-files/india/france-and-india/[Accessed April 21, 2019].

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