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Impact of Foreign Direct Investment On Retail Shops: Dr. Prasanna Kumar
Impact of Foreign Direct Investment On Retail Shops: Dr. Prasanna Kumar
Associate Professor, K.L.U. Business School, K. L. University, Andhra Pradesh, India, dr.prasanna@kluniversity.in
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investment and outward foreign direct investment, which is the cumulative number for a given period. Direct investment
excludes investment through purchase of shares.
FDI may be distinguished into:
Horizontal Foreign Investment (HFI): It refers to investment of a firm in a foreign country to produce the same products which
produce in its home country.
Horizontal FDI implies that FDI is undertaken in the same industry by the firm as it operates in at home. For example,
Electrolux - a Swedish firm - the manufacturing of household appliances (such as washing machines, refrigerators,
dishwashers and so on) invested in Asia and Eastern Europe for producing similar household appliances is the case of
horizontal FDI.
Vertical Foreign Investment (VFI): It is meant for integration process in the production. There may be backward vertical
investment or forward vertical integration.
Backward Vertical Integration (B VI) implies that the firms directly invest in a foreign country to produce intermediate
goods that are meant to be used as inputs in its domestic production process. In extractive investment in petroleum or
minerals usually there is BVI.
Forward Vertical Investment (FVI) implies that the firm invests in a foreign country in producing the final stage goods
or assembly of the product to market it directly to the foreign buyers. FVI, thus, involves establishment of an assembly
plant or sales branch for exports.
Growth in Economy: Due to coming of foreign companies new infrastructure will be build, thus real estate sector will
grow consequently banking sector, as money need to be required to build infrastructure would be provided by banks.
Job Opportunities: Estimates shows that this will create about 80 Lakh jobs. These career opportunities will be created
mostly in retail, real estate. However, it will create positive impact on others sectors as well.
Benefits to Farmers: In most cases, in the retailing business, the intermediaries have dominated the interface between
the manufacturers or producers and the consumers. Hence, the farmers and manufacturers lose their actual share of
profit margin as the intermediaries eat up the lions share. This issue can be resolved by FDI, as farmers might get
contract farming where they will supply to a retailer based upon demand and will get good cash for that, they need not
to search For buyers.
Benefits to Consumers: Consumer will get variety of products at low prices compared to market rates, and will have
more choice to get international brands at one at one place.
Cheaper Production Facilities: FDI will ensure better operations in production cycle and distribution. Due to
economies of operation, production facilities will be available at a cheaper rate thereby resulting in availability of
variety products to the ultimate consumers at a reasonable and lesser price.
Availability of New Technology: FDI enables transfer of skills and technology from overseas and develops the
infrastructure of the domestic country. Greater managerial talent inflow from other countries is made possible. Domestic
consumers will benefit getting great variety and quality products at all price points.
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Long Term Cash Liquidity: FDI will provide necessary capital for setting up organized retail chain stores. It is a longterm investment because unlike equity capital, the physical capital invested in the domestic company is not easily
liquidated.
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Specialty Stores
These establishments typically concentrate their efforts on selling a single type or very limited range of merchandise.
Clothing stores, musical instrument stores, sewing shops, and party supply stores all fall within this category. A typical
specialty store gives attention to a particular category and provides high level of service to the customers. A pet store
that specializes in selling dog food would be regarded as a specialty store. However, branded stores also come under
this format. For example if a customer visits a Reebok or Gap store then they find just Reebok and Gap products in the
respective stores.
Department Stores
These establishments are comprised of a series of departments, each of which specializes in selling a particular grouping
of products. Under this compartmentalized arrangement, consumers go to one area of the store to purchase tableware
and another area to acquire bedding, for example. These typically are very large stores offering a huge assortment of
"soft" and "hard goods; often bear a resemblance to a collection of specialty stores. A retailer of such store carries
variety of categories and has broad assortment at average price. They offer considerable customer service.
Supermarkets
This is a self-service store consisting mainly of grocery and limited products on nonfood items. The supermarkets can
be anywhere between 20,000 and 40,000 square feet (3,700 m2), example: SPAR supermarket. These retail
establishments, which were primarily involved in providing food to consumers, have increasingly ventured into other
product areas in recent years. They account for the vast majority of total food-store sales in America.
Discount Stores
Tend to offer a wide array of products and services, but they compete mainly on price. They offer extensive assortment
of merchandise at affordable and cut-rate prices. Normally retailers sell less fashion-oriented brands. These retail outlets
offer consumers a trade-off: lower prices (typically on a broad range of products) in exchange for lower levels of
service. Indeed, many discount stores operate under a basic self-service philosophy.
Mail-Order Businesses and other Non-store Retailing Establishments
The customer can shop and order through internet or mail or other mediums and the merchandise are dropped at the
customer's doorstep. Here the retailers use drop-shipping technique. They accept the payment for the product but the
customer receives the product directly from the manufacturer or a wholesaler. This format is ideal for customers who do
not want to travel to retail stores and are interested in home shopping. However, it is important for the customer to be
wary about defective products and non-secure credit card transaction. Example: Amazon, Pennyful and eBay. NonStore sales have become an increasingly ubiquitous part of the American retail landscape; indeed, some retail
establishments subsist entirely on mail / internet order, forsaking traditional stores entirely, while other companies
maintain operations on both levels. This category includes sales made to end consumers through telemarketing, vending
machines, the Internet, and other non-store avenues. Electronic retail has been growing at a significantly higher rate
than retail trade as a whole.
Current Challenges
Consumers today have changed the way they interact with businesses. Prime among them is the means by which they purchase
products, services or offerings. The consumer has adapted to multiple channels and moves easily across channels to search for
products, decide on the best product through discussions with peers, search for the best prices and promotions, finalize a
store/web-store and finally make a purchase. Retailers need to understand this need to service the customers through various
channels, while presenting an integrated view of the business. In the world of retail where product differentiation is minimal and
consumers tend to be price sensitive, there is a need to provide differentiation by creating a consistent experience when consumers
move across channels and create incremental mind share through personalized experience. A proper framework is needed to
understand all the facets of operations and technology, which need to be deployed to deliver on the expectations.
REVIEW OF LITERATURE
Multi-brand FDI to hit kirana shops: Metro Boss
By Dipti Jain, Sources: The Economic Times
Not just small traders and kirana stores are worried over loss of business if foreign direct investment (FDI) in multi-brand retail is
allowed. Even international chains such as German retailer Metro Cash & Carry believe that the reform move may affect local
businesses.
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While the influx of international retail giants will bring in investments in back-end and supply chain management, the Indian arm
of Metro Cash & Carry said this will decrease the importance of small traders in the country as consumers would shift to large
format stores from the local kirana shops.
Consumers will shift to large format stores, so the relevance of small traders will decrease. Because of substantial increase in
disposable income due to a growing economy, the focus has today shifted from small to large format stores, said Rajeev Bakshi,
managing director, Metro Cash & Carry, India.
The statement by the German company comes as a surprise especially after international chains have been waiting for the opening
of FDI in the sector as they reason it would benefit smaller players by way of technological enhancements as well as creation of
new jobs, besides giving them an opportunity to tap into the growing retail market in India.
The government and other retailers have argued that the entry will help local outfits get more efficient and innovative and check
wastage as nearly 40 per cent of the farm produce is lost due to poor storage and distribution facilities in the country. Several
global giants such as Wal-Mart and Carrefour are waiting for the government to finally permit FDI in the multi-brand segment, an
area that Metro does not intend to enter immediately.
In recent weeks, the government has pitched for opening up multi-brand retail and even cited the backing it has received from
several states.
The government allowed 100 per cent FDI in single brand retail last year. However, the permission for 51 per cent FDI in multibrand retail had to be put on hold after widespread protests by Congressmen as well as UPA allies, including Trinamool Congress.
While the impact on small traders would affect Metros business in the country, the company is betting on a growing business
from hotels, restaurants and caterers (Horeca) for continued growth. This will indirectly impact our business, but then the other
business takes off. People are eating out much more than before. Therefore, our Horeca business will go up. The net effect on us
is balanced, Mr. Bakshi said.
However, Mr. Bakshi added that it is not just foreign retail majors; even large cash-rich domestic players have the capacity to
exploit the market. Despite discussions that modern stores and wholesale chains would make the local channels irrelevant, Mr.
Bakshi said with the demand pattern shifting, these models are becoming irrelevant themselves. Metro Cash & Carry entered
India in 2003 and currently has 11 wholesale distribution centers.
The company has already invested close to Rs 1,000 crores and plans to open six to eight stores annually, each entailing an
investment of around Rs 60 crores. The company recently opened its store in Delhi and Jaipur and is planning two more stores in
Chandigarh and Indore.
FDI in multi-brand retail bound to affect small traders, says C. Rangarajan
C.R. Sukumar, ET Bureau Sep 21, 2012, 04.09PM IST
Tags: PMEAC Chairman Dr C. Rangarajan,
Amidst concerns of the opposition parties over the adverse impact of foreign direct investment into multi-brand retail, Chairman
of the Prime Minister's Economic Advisory Council (PMEAC) Dr. C. Rangarajan said it would affect the small traders, who need
to become part of the modern retail change story.
Addressing an international seminar on 'Organized Retailing vis-a-vis Farm Economy of India' in Hyderabad on Friday, he,
however, said the fear that FDI in multi-brand retail "could result in large scale replacement of small retailers is misplaced."
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According to him, "The existence of large retail chains even in advanced countries has not wiped out the small shopkeepers or
what are called 'Mom and Pop' stores. They retain a personal touch which is absent in large retail outlets. Also, their proximity to
where people live is a great advantage."
Rangarajan viewed that an overwhelming percentage of food and grocery being sold in India was through traditional retail outlets
such as kirana stores, street hawkers and wet market stall operators. "Once the share of overall modern retail in food reaches about
25-30%, it is bound to affect the kirana traders first and then the small and marginal traders."
To address the adverse affects, he advised the small traders to take part in the modern retail change story and be assimilated into
organized retail, upgrade through infusion of capital and better training and organize themselves under their banner through
franchises.
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Rangarajan, who has been for years advocating FDI into retail sector, said the aim of the modern organized retail was to offer
better prices to both consumers and producers and reduce the gap between the two. Saying that modern retailers were able to offer
better prices to consumers and producers owing to economies of scale in procurement, handling and logistics, he has advised the
farmers to form into groups for better bargaining with the modern retailers.
"Direct marketing of produce to modern organized retail networks also helps the farmer in getting a better price than through
mandis. Regular supply agreements with groups of farmers and modern retail outlets will help farmers have an assured minimum
income besides cutting down on wastage, transportation costs and providing fresh supply of food items to consumers," the
PMEAC chairman said.
Citing high vegetable prices in 2010-11 that shot up by 60-70% owing to deficiencies in the current archaic marketing
arrangements, he said FDI flows into backend infrastructure such as cold storages and warehouses could help softening of prices
and thereby help contain inflation.
Rangarajan said the Agriculture Produce Marketing Committee (APMC) Act was amended aimed at providing more competitive
choices to the farmers and to encourage private investment. Now "there is a strong case for removing perishables from the
purview of APMC regulations as the nature of the commodity requires speedy transaction in order to minimize wastage."
Clarity on quantity of foreign investments into multi-brand retail sector is expected in a few months, he said, expressing inability
to hazard a guess on how much it could address the current account deficit, which stood at 4.2% of the gross domestic product
(GDP) last year. "The total capital flows that are required to cover the current account deficit are around $70 billion and therefore
one form of capital inflow cannot really make a big dent on financing the current account deficit," he said.
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OBJECTIVES OF STUDY
RESEARCH METHODOLOGY
Primary Data: Sample Size: 100; Sampling Technique: Random Sampling; Population: Finite; Data Collection Instrument:
Observation, Interview and Questionnaire; Demographic: 100% retail shops owners. The sample profile was all the sections of
society. Geographic Location: Vijayawada city.
HYPOTHESIS OF STUDY
H0 (Null hypothesis): FDI not impact on retail shops.
H1 (Alternative hypothesis): FDI impact on retail shops.
Finally, the result has been FDI impact on retail shops the result calculating under the range of the respondents and frequency
table and percentage analysis. So h1 is accepted.
RESULTS AND ANALYSIS
Table-1
0-4 = NO
10%
5=NETURAL
21%
6-10=YES
69%
Sources: Priamry Data
The above table depicts that the data has been divided into three categories and indicate the codes to the retailers, these three
categories are 10% retailers say no and 21% retailers under into neutral and 69% retailers said yes, therefore the impact on
FDI is high.
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FINDINGS OF STUDY
Need is to attracts good FDI to improve economic growth and providing job opportunities and adopting technology
from other countries.
India gives desired returns from FDI and makes ways for more FDI.
Medium and small retailers shutdown from the FDI, and most of the retailers suffering from FDI.
They are trying to alternative strategy for their business. Like gumastha jobs, and courier wala.
They want to change infrastructure of the shops facing competitiveness in the market.
They are losing customers from FDI because of FDI offers best price of the product to the customers.
They except subsidies from the government.
Peoples that are more qualified are preferred organized stores.
In organized sector, parking facility is available so peoples are agreeing organized is preferable.
Quality of products is available in both the sectors.
In organized sector more num of respondents are visit according to proper planning.
In unorganized sector, their visit is unplanned one.
In organized sector, different verity of products is under one roof.
SUGGESTIONS
To attract the new customers, organized retailers needs to offer low price and available more brands.
Customer considers quality as their first preference, so the outlet should give more stress on it; resulting organized as
well as unorganized retail should always improve services and update their technology.
Organized retail outlet should try new dealers who have the potential, so they can target more market.
Organized outlet should improve its after sales service because its hits badly to the companys market share. More
detailed customized services should be provided.
To attract the new customers, organized retailers needs to offer low price and available more brands.
CONCLUSION
Many policy makers and academics contend that FDI can have important positive effects on the Indian country economic growth.
In addition to direct capital financing, FDI can be a source of valuable technology and knowhow while fostering linkages with
local firms, which can help jumpstart an economy. Based on these arguments, industrialized and developing countries have
lowered their trade barriers and offered incentives to encourage foreign direct investment in their economies. In fact, the empirical
results obtained in this paper seem to reflect that idea. Analyzing the data from the questionnaire and given result to this research,
so most of the retailers suffering from FDI they are thinking like they want to change infrastructure of the shop and some retailers
searching for alternative business for their life but FDI is needed to India but it is impact on retail shops.
REFERENCES
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Guruswamy, M., Sharma, K., Mohanty, P. J., & Korah, J. T. (2005). In Indias Retail Sector: More Bad than Good?
Economic and Political Weekly, 40(7), 619-623.
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Kalhan, A. (2007). Impact of malls on small shops and hawkers. Economic and Political Weekly, 42(22), 2063 2066.
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Mukherjee, A., Satija, D., Goyala, M. T., Mantrala, M. K., & Zou, S. (2011). Impact of the retail fdi policy on Indian
consumers and the way forward (ICRIER Policy Series No. 5).
4.
Patibandla, M. (2012). Foreign Direct Investment in Indias retail Sector: Some Issues (Working Paper No. 366).
Indian Institute of Management Bangalore.
5.
Sarma, E. A. S. (2005). Need for caution in retail FDI. Economic and Political Weekly, 40(46), 47954798.
6.
Jain, Dipti. (2012). Multi-brand FDI to hit kirana shops: Metro boss. The Economic Times.
7.
Ravi. (2012, September 20). FDI in Indian Retail: The big benefits will come tomorrow. Not Today in India.
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Sukumar, C. R. (2012, September 21). FDI in multi-brand retail bound to affect small traders. Economic Times Bureau.
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International Journal of Retailing & Rural Business Perspectives Pezzottaite Journals.
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