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US Investment Rises In India Despite COVID-19, While Japan Sees Decrease: Digital Transformation Paved The Way – Analysis


While American investors were upbeat in India, despite Covid 19 ravaging the economy, Japanese investors slipped into coma. Both are among the five top foreign investors in India. While US investment in India surged by 297.2 percent in 2020 over the preceding year, Japanese investment fell by 59.4 percent during the same period. In 2019, investment from the USA and Japan were neck-to-neck, with a marginal increase of USA investment over that of Japan.

The truth behind the paradox is the USA’s challenge to bid India’s new age economy, driven by the digital economy. India announced 1 trillion of economic value for its digital market by 2025. India has emerged as the country with second most internet connections in the world, next to China. With nearly half a billion internet connections and the second most smartphone users, India has emerged as the global leader for digital economy. 

In 2020, USA was the second biggest foreign investor in India, next to Singapore. More than one third of total USA investment in India flowed in the digital economy. Google was a behemoth to trigger USA investment in the digital economy. More than 90 percent of investment in the digital economy was made by Google.  

Digital transformation reaps more benefits to the investors compared to low labour costs, according to Dr Thie B Peterson. Given digital technology is increasingly being used in the economy, production process will be more capital and technology intensive in the economy. This signifies a major impact on international competitiveness, which has become one of the main attractions of the MNCs in developing nations. When human labour is replaced by robots, computer and machines, the advantage of cheap labour loses competitiveness, according to Dr Peterson. Initially, these  production process are cost burden. But, over the period, the costs become  competitive   in  terms of productivity.

The COVID induced pandemic and widespread lockdown leveraged digital transformation in India ,  ensuring  business continuity in India , according to a Swiss report by Fanny Von Heland, Office of Science and Technology, Sweden. India is the second largest digitized economy in the world. With massive investment in the digital economy and huge internet market , India has emerged an upcoming leader in digital solutions. This movement attracted the US investors, despite the Indian economy swung into downtrend during the Covid 19 period . 

The digital impact on productivity, the key to the sustained economic growth, is visible on the ground. Many governments, including India, are moving services online to make them transparent and less vulnerable to corruptions.   

Digital India is the flagship program of the government. Government’s effort to introduce Aadhar, the national biometric digital identity program, is a case in point. It is the first gigantic attempt of  digital transformation of India to enroll 1.2 billion Indians since it was introduced in 2009. Likewise, GST network, established in 2013, brought all transactions of about 10.3 million indirect tax payment in one digital platform, ensuring  a major leg up for Ease of Doing Business. 

Another significant outcome of the digitization was the narrowing down between the rich and poor states. States like Uttar Pradesh and Jharkhand are expanding their internet infrastructures.

Japan missed the bus. Paranoid by the sharp fall in the economy due to unabated the COVID 19 pandemic and India’s withdrawal from RCEP (Regional Cooperation of Economic Partnership), Japan withheld its investment in India. Automobiles continued to be the principal sector for Japanese investment, without responding to India’s new age economy. Japan could hardly gauge India’s structural dynamism and competitiveness in the economy, catalyzed by digital transformation.  

Japan failed to map out India’s potential for US $ 1 trillion market of the digital economy by 2025. According to Mckinsey, India has plenty room to grow, despite her leadership in digital economy. India made rapid growth  in digital banking. Despite this, 90 percent of all retail transactions are made in cash. E-Commerce revenue is growing more than 25-30 percent a year. Yet, only 5 percent of the trade in India is done online.  

Japan is the third biggest economy and technology giant in the world. Notwithstanding, it is embroiled in a serious disadvantage  with regard to a laggard digital transformation. It is behind USA, China, EU, South Korea and even India in terms of the rate of increase in the digital transformation of its economy, according to a Mckinsey report “Using digital transformation to thrive in Japan’s new normal: An urgent imperative”. This led Japan into a serious disadvantage in investment in overseas, including India, which plank increasingly on the digitally transformation of the economy. For example, the COVID 19 induced lockdown increased the demand for digitization in services in India to reduce human contact, such as in-home online entertainment, food delivery, pick-up services, online meetings, online fitness, telemedicine and others. Few Japanese investors came forward to address these services after the lockdown.

Japanese business leaders understand that digital transformation is the next opportunity for global business operation. At the same time, they feel that they are not sufficiently prepared to adapt the digital transformation. One reason could be their traditional managerial culture and business practices. The Mckinsey survey revealed that traditional Japanese companies lack in-house digital talent. They  generally outsourced for their IT operations. Compared to the USA , where companies use 65 percent in-house IT engineers and outsourced 35 percent, Japan has only 28 percent in–house  IT employees and 72 percent are outsourced. 

One of the barriers is organizational structure and managerial practices in Japan. Traditional Japanese companies are rarely inclined to external talents since the seniority basis promotion and life long employment act disincentive to foreign talents, according to the Mckinsey survey.

Given the rapid growth of digital transformation, which has proven more cost effective in the longer run, India should revisit its FDI policy to attract foreign investment to uptick its digital economy.  

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Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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