Skill Development

Impact of FDI on Skill development: Boon or Bane?

In midst of the political hassle that ensued after the Government of India’s decision to include Foreign Direct Investment (FDI) in retail sector, one often tends to ignore the potential it has to become an engine of economic growth and development. At US$ 450 billion, the Indian retail market currently accounts for 15% of the country’s GDP1 and with the provision of FDI; it is projected to expand by about $ 400 billion by 20202. FDI in retail sector is estimated to create over 10 million jobs in three years which would include direct employment and those created in logistics, contract labour, housekeeping and security4. With such an upsurge in employment opportunities, there would be a need of skilled labourers required to fill this titanic vacuum.

The penetration of Multinational Companies (MNCs) through FDI would impact Skill Development in a twofold manner, which can be defined in terms of labour demand and supply3. While on the Demand Side, the host country strives to upgrade the skill level of the local population in order to attract more FDI as well as to increase the benefits incurring through FDI. On the other hand, these MNCs directly facilitate skill upgrading through training processes and participation in employees’ education thus supplying skilled labour.

There is widespread agreement on the fact that the investing MNCs use superior technology in comparison to the host country. One of the major evidence that supports this belief is the R&D intensity of these MNCs.  The knowledge intensity of MNCs can raise the host country demand for skills through several channels. The host country is benefitted by the transfer of technology to local affiliates of the MNCs as well as to other domestic firms through market and spillovers. Besides this, the MNCs’ capital investment for the induction of new technologies may indirectly contribute to the need of skill upgrading.3

The MNCs demand for skilled labour encourages these firms to invest in higher formal education directly or through sponsorships and scholarships. There is empirical evidence of companies collaborating with universities and higher institutions for the development of infrastructure and technical facilities. As reported by UNCTAD in 1994, the MNC’s “demand for highly trained graduates manifests itself in the form of financial support, particularly to business schools and science facilities, the provision of assistance and advice through membership of advisory boards, curriculum review committees, councils and senates”.

The MNCs directly contribute to skill development by providing training to their employees. As already mentioned, these firms are generally technologically superior so their training enables the employees to become competent at a global level. This also results in spillovers when the employees join other firms or start a firm of their own.

Moreover, the fiscal benefit from the operations of these MNCs in the country can be further invested in the skill development through the funds allocated to NSDC. Also, it can be speculated that the increase of MNCs in India will augment the number of Public Private Partnerships for vocational training initiatives.

As mentioned in the report on Human Capital and Inward FDI6, the relationship between FDI and Skill Development is one of reciprocity. While inward FDI creates the plausibility of knowledge enhancement for the local population, at the same time the country’s level of human skill decides the amount of FDI that the country attracts and whether the country is able to absorb the spillover benefits with regards to human capital development. Although the effect of FDI on skill development in India can’t be assessed to be linear, however we can safely conclude that FDI will definitely have a positive impact in building the country’s demographic capital.

Ekta Jalan

Ekta is a Policy Officer at Youth for Policy and Dialogue and can be reached at ekta.jalan02@gmail.com

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