Credit and finance for MSMEs: The government currently doesn’t maintain specific data for FDI in the MSME sector. Also, no specific study has been conducted on the advantages and disadvantages of FDI in MSMEs from competitiveness and viability point of view.

Credit and finance for MSMEs: A working paper by the Reserve Bank of India (RBI) analysing the impact of foreign direct investment (FDI) on profitability has said that FDI plays a greater role in enhancing the profitability of larger companies as compared to smaller companies. The age and size of a company are one of the factors that determine the profitability of FDI-receiving companies, that is, “older and smaller companies are likely to be less profitable.”

This is because in larger companies, the management is often more focused on preserving /improving its reputation, which helps in attracting greater FDI, the paper published on Tuesday said. Hence, larger companies are better placed to take advantage of the increased FDI funding owing to the economies of scale and the cost-effective nature of their operations, it added.

The paper was authored by Haridwar Yadav, Vishal Shinde and Samir Kumar Das from RBI’s Department of Statistics and Information Management.

With respect to the age of the company, “FDI in younger companies provides the much-needed stable funding, and technological knowhow which can make their operations more cost-effective, and thereby enhances profitability.”

Importantly, even as 100 per cent FDI is uniformly applicable to most of the sectors or activities including MSMEs under the automatic route, there is no specific study conducted by the MSME ministry on the advantages and disadvantages of foreign investment in the MSME sector from competitiveness and viability point of view. In addition, no specific data for FDI in the MSME sector is maintained, minister of state in the MSME Ministry Bhanu Pratap Singh Verma had informed the Parliament last year.

Also read: Nitin Gadkari calls for attracting more foreign investments into MSME sector

The FDI policy on single brand product retail trading, in case of proposals involving foreign investment beyond 51 per cent, mandates sourcing of 30 per cent of the value of goods procured, to be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors.

Likewise, on multi-brand retail trading, the FDI policy provides for at least 30 per cent of the value of procurement of manufactured/processed products purchased to be sourced from MSMEs which have a total investment in plant and machinery up to $2 million.

Meanwhile, the working paper by RBI also reported that an increase in the share of FDI in equity raises the profitability of the FDI-receiving companies. “An increase in the share of FDI in equity increases both returns on assets and return on equity.”

According to the Economic Survey 2022-23, FDI inflow in the manufacturing sector jumped to $21.3 billion in FY22 from $12.1 billion in FY21 as the pandemic-driven expansionary policies of advanced economies led to a surge in global liquidity. The country saw the highest-ever FDI inflows of $84.8 billion including $ 7.1 billion FDI equity inflows in the services sector in FY22.

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https://www.financialexpress.com/industry/sme/msme-fin-smaller-firms-likely-to-be-less-profitable-than-larger-ones-rbi-paper-on-fdi-impact-on-firms-profitability/3043681/