Recently there have been many concerns about the motives of multinationals and foreign investments, not in communist China but in United States, mother of capitalism and free trade. As a matter of fact, there is a growing sentiment of protectionism in United State: much of it can be attributed to the loss of manufacturing industry and high-paying blue collar jobs to foreign countries. The sentiment can be clearly heard on campaign trails of Democratic Party’s presidential candidates, production floors of few remaining manufacturing plants, TV and radio shows like Lou Dobb’s War on Middle Class, and most surprisingly on the recent cover page of the Business World, a leading business magazine!! Let’s try to address this with the case of Indian economy.
The early policymakers of independent India were highly influenced by the economic model established by socialist USSR as well as Gandhi’s philosophy of self-sufficiency and controlled spending. This helped to establish and develop the key road and railroad infrastructure, strategic industries like steel and cement, mammoth agricultural reforms to feed huge population, public rationing system and state-of -the-art technological institutions. Most of these enterprises were state-owned and funded with combination of domestic capital and foreign aid but not the foreign investment capital. The private industry was generally encourage but largely controlled with the system of quotas, permits and licenses lampooned as quota-license-permit raj (state of quotas, licenses and permits). The system allowed only state and few private industrial houses to control to most of the industry and market. Indian companies enjoyed a great protective environment without fear of competition.
But something changed in late eighties. Social and political instability was at the peak. The long-embraced socialist model collapsed with the collapse of socialist regimes in East Europe and USSR. The balance-of-payments came under severe liquidity crisis fuelled by rising fuel prices in the wake of first Gulf war. The foreign exchange reached bottom and the federal government had to use its gold reserve to obtain foreign exchange, widely viewed as national disgrace. Practically the nation was on the verge of bankruptcy and was forced to take massive economic reforms – ending quota-raj, opening several sectors for private sectors once reserved for private sector, easing import regulations and most importantly encouraging foreign direct investments and multinational companies.
Multinationals soon started investing India- setting manufacturing plants and launching superior products with very aggressive marketing. The Indian companies were not ready for the competitions in terms of products, technology, marketing and capital. Many multinational started acquiring Indian businesses thus taking advantages of established marketing and distribution networks and the brand loyalties. For instance, Coca-Cola acquired Parle, the largest player in soft drink in the market that virtually enjoyed monopoly since Coca-Cola’s exit from India in 1977. Hindustan Lever, a subsidiary of Unilever, acquired many Indian companies including Tata Oil Mills Co. (TOMCO), part of giant Tata group.
Most of the people didn’t like these reforms and tried to forge an unusual alliance of socialists, trade-unionists, Old Gandhians, and even right conservatives to oppose these ‘anti-national’ reforms. The acquisitions of Indian companies by giant multinationals were compared to the colonization of India by British East India Company. I was in mid-school that time. I remember the huge campaigns and rallies against multinational.
But again things changed in few years. Instead of getting into the uneven fight with giant multinationals, Indian companies changed their business model. Instead of producing everything they preferred to specialize on few. They concentrated to on IT, engineering, heavy industries leaving Fast Moving Consumer Goods sectors for multinationals. They innovated the new products and processes (e.g. outsourcing services) and refined business model (e.g. inexpensive products). Indian companies soon started acquiring foreign businesses once they feared of. Acquisition of Corus by Tata Steel, another Tata group company, may be seen much symbolic in the perspective of acquisition of Tata Oil Mills by Unilever in 1993.
This questions the validity of the original question -Does protectionism really help a nation’s economy?
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