The government has arbitrarily selected certain `core' sectors, as worthy of FDI, and has restricted investment elsewhere, especially in consumer goods. Is this policy justifiable on economic grounds? Even if we just focus on industry, sweeping aside other issues such as those concerning foreign capital, technology transfer, consumer interests etc, there is strong evidence that arbitrary restriction of FDI is harmful for India's industrial growth. Research and empirical evidence have shown that the two main channels by which FDI affects Indian industry are competition and backward and forward linkages.

Let's look at competition first. Suppose Suzuki enters the Indian car industry and thereby provides competition to locally manufactured cars -- for example, the Ambassador. Hindustan Motors either goes out of business or losesconsiderable market share. Or the competition spurs HM to become more efficient, and then Suzuki and HM share the market. Or HM becomes so efficient that it drives the multinational out. Any of these three outcomes is possible. When Suzuki sets up a plant in India it will source parts such as tyres, seats and paints locally. Their manufacturer will face greater demand. Firms will start making more auto parts and their supply will increase.

This is the backward link to the economy -- the entry of Suzuki (FDI) eventually leads to growth of the auto ancillary industry in the country and generates employment. Now, when the ancillary industry develops, it encourages other manufacturers such as Mercedes, Tata and Ford to enter the car industry, as they can now get quality parts at competitive prices in India. This is the forward link -- growth of the parts industry leads to greater final goods production.

So when Suzuki enters the car industry it motivates the growth of both the auto parts industry as well asthe car industry. Clearly, the linkages generated by the MNC are beneficial for industrial development and employment in India. The following case study demonstrates the role of FDI in generating industrial growth:

In the early 1960s, the sewing machine industry in Taiwan was a tiny, backward sector. In 1963, the US multinational Singer, set up a plant to manufacture sewing machines in Taiwan. Initially, Singer sent its managers and engineers to Taiwan. To ensure low costs and high quality, it supplied specifications, equipment, and training. By training over 140 parts suppliers, Singer provided the initial backward link leading to the growth of the parts industry. Improved supply led to a forward link encouraging four major Japanese sewing machine makers to enter the market in the 1970s. The four companies benefited from the low-cost local suppliers. As a result of the chain reaction started by the multinational Singer, by the late 1970s Taiwan had become the largest supplier of sewing machines in theworld.

There are numerous other examples of MNCs spurring industrial development. Singapore became the world's largest producer of hard disk drives largely due to the decision of US multinationals such as Seagate and Conner Peripherals to locate their plants in the country. The industry has grown into a multi-billion dollar one providing employment to more than 30,000 people. Similar is the story of the shoe manufacturer Nike investing in Taiwan, and the electronics giant Motorola in Hong Kong. These countries are now exporting shoes and semiconductors to the rest of world. Multinationals played a key role in their industrial success.

To adequately appraise the value of FDIs, we have to consider the links they forge in the Indian economy. There seems to be a consensus in favour of FDI in high technology areas. However, we cannot neglect the development of other industries, including the consumer goods sector. Research points to the application of two important criteria for judging benefits to our economyfrom multinationals -- what percentage of inputs are bought domestically and what fraction of total production is for export.

In order to generate backward and forward links with the Indian economy, Suzuki should buy its inputs such as tyres locally. Indeed, in the sewing machine industry, the Taiwanese government stipulated that 80 per cent of Singer's inputs should be produced locally. This requirement enabled the creation of the links. The case for earmarking a certain percentage of MNC production for exports is also strong. The hard disk drive industry in Singapore and the semiconductor industry in South Korea received a major boost from massive exported.

There remains the fear that MNCs will drive out local industry. Monopolies, whether foreign or domestic, should be controlled through regulation, not by restricting entry. Critical elements of such regulation should be a stipulation that inputs be sourced domestically, which encourages development of linkages, and an export requirement, whichprevents dumping in Indian markets. It must be borne in mind, however, that the evidence of multinational monopolies is extremely thin.

In all the rhetoric about a level-playing field for Indian industry it is surprising how little attention is being paid to the generation of backward and forward links by the MNCs. When the government says no to multinational potato chips manufacturers, it is indirectly saying no not only to the development of the potato chip industry, but also to potato growers, the food packaging industry, and all the workers who would be potentially employed in these industries. While the rest of the world is bending over backwards to attract the maximum FDI, we remain mired in archaic protectionist policies and resistant to change.

While analysts across the globe increasingly view FDI as a win-win situation for both MNCs and for the local economy, we remain wedded to the concept of we being the losers and the MNC being the winner. It is time we learnt from our past mistakes.Industrial development doesn't occur in a vacuum. The catalyst can come from multinationals. Preventing them from entering sectors other than high-technology ones is denying industrial development through linkages and consigning these sectors to stagnation and, possibly, death.

The writer is a research scholar at the London School of Economics