the conventional argument for foreign direct investment fdi is that it brings in foreign exchange the conventional argument against fdi is that it displaces domestic manufacturers both arguments are mainly wrong above all fdi brings in knowledge and marketing links that can create comparative advantage where none existed before these unanticipated consequences of fdi are far more important than the initial dollars investment consider automobiles where fdi was once a liability foreign auto companies did not enter for lowcost production they believed car manufacturing in india was uneconomical yet they expected it to be profitable thanks to a ban on auto imports which was later relaxed but with astronomical import duties fdi in autos was the tariffjumping variety driven not by efficiency but profitability from uncompetitive manufacturing shielded by indian protectionism foreign companies opposed the import of secondhand cars including their own models to maximise gains from protection worse several indian states tried to attract foreign auto companies through tax breaks and cheap land in effect bankrupt states were sacrificing precious future revenue to subsidise inefficient manufacturing economists called this a race to the bottom between states i was among those who lambasted this as the worst form of fdi today i must eat crow fdi in autos is beginning to convert india into a global auto power foreign companies entered under the illusion that india had a huge middle class dying to buy cars they made the same mistake in china in both countries they found the market small competition fierce and profits nonexistent but once established in china they found that domestic component manufacturers had remarkable potential which could be harnessed to lower costs through new design and knowhow foreign investors started exporting reaped scale economies that further lowered costs and became profitable ditto in india having lost millions in the domestic market foreign companies are now making india a global supply base they have helped indian auto ancillary manufacturers to bring down costs and become globally competitive some foreign investors are now making india an rd base consider some highlights ford is exporting over half its production suzuki is using india as a base for exporting the alto and is considering an rd center here hyundai is making india a global export base daimlerchrysler is exporting cars and also accounted for eight per cent of all auto component exports in 200102 its global component purchases total 100 billion euros if india gets one per cent of this that means one billion euros ford is outsourcing 120 million to 160 million of auto components over the next two years delphi the biggest auto component company in the world plans to export 330 million to 350 million of components by 2005 of which it will manufacture onethird and outsource the rest from indian ancillaries timken one of the worlds biggest producer of automotive ball bearings is going to double its capacity and set up a rs 23crore global research centre in india