Foreign Direct Investment in India and China - Essay Example

1 Introduction Foreign direct investment (FDI) is the most talked about these days in the international economic parlance and for a long time, a rat race has been continuously going on among the world nations, especially the developing countries, to attract as much FDI as possible. China and India are the two growing economies in Asia that have been frequently making news with regard to the FDI. Though these two are the two most populous countries being guided by the commonality of abundance of human resources, the disparity between these two countries in the inflow of FDI is as huge as the Himalayas. Statistics reveal that in 2001 alone, China received around US $ 53 billion FDI while India's figures did not cross even US $ 4 billion indicating that it was below 10 % of what China had attracted ( Internet, Ong, China, FDI : China V.S. India / chart). If you go further, China had attracted a phenomenal amount of US $ 60 billions in 2004 while India had received a meagre sum of US $ 5.3 billions in that year (Internet, Venkitaramanan, 2005, Para 9). Now it is clear that inflow of FDI into China had increased from $ 53 billion in 2001 to $ 60 billion having a growth of $ 7 billion in just 3 years while India had seen an increase of just $1.3 billion during the period. This difference has been continuously growing year after year making China the most sought after destination for the investing MNCs. And India has been really struggling to attract more and more FDI into its soil. 2 This difference is really vast considering that both countries have opened up their economies and moved ahead with economic reforms becoming the Asian giants. Both of them are high potential consumer markets too because of their huge populations. But, these two countries are still the developing economies and have been desperately looking for huge volumes of FDI for economic growth. Because of the severe resource crunch at home, developing nations have been increasingly looking at alternate investment resources for boosting up their industrial growth and creating employment opportunities. Globalisation and internet revolution have only strengthened the importance of FDI but truly the investing multinational corporations / enterprises go by several factors in choosing the final destination of their huge investments. Krugell argues that the aim of MNCs in internationalising their production is to generate more profits and earn more money through the full exploitation of local markets and cheap factors of production (Krugell, 2005 P 53). It is therefore natural for MNCs to invest in countries that would fetch them cheap but efficient labour and highly rated technical expertise among other things. Let us examine and discuss in detail how these and other factors have been playing different roles in attracting FDI and creating the disparity in relation to China and India. 3 Main essay China has certainly reached an enviable position in relation to attracting FDI. It has become a favourite spot for all MNCs for pumping in their investments. In fact, China had overtaken the US as the top global destination for FDI in 2003 (Internet, Business line, 2004, Para 1). The USA had of course regained its number one position in the very next year, followed by United Kingdom and China (Internet, Venkitaramanan, 2005, Para 3). Standing next only to the US and the UK, China has been consuming major share of the FDI among all the developing nations. When we compare the Chinese position with that of India, we are bound to conclude that India is not that much favoured by the MNCs. But there is a world of difference on the perception of FDI between these two countries. United Nations Organisation (UNO, 2003, P 88) reveals that India does not treat as FDI reinvested earnings by foreign companies, overseas commercial borrowings, investments between direct investors / associate companies / subsidiaries and investments by offshore and domestic venture capital funds. On the other hand, China considers a good number of heads as part of the FDI. Specialists working for the Centre on Globalisation and Sustainable development (CGSD), Columbia University, (Internet, Bajpai et al, 2004, Paras 1 & 2) point out that China has included into the FDI purview several heads that do not really represent FDI. They say that China includes in FDI funds round - tripped through Hong Kong , Taiwan 4 and Macao into China , internal debt transactions of companies, all types of loans and leasing transactions, investments accumulated through bonds, credits and grants, venture capital investments, control premiums and imported machineries and equipment and several other heads. Explaining that China's FDI figures in 2000 stood at US $ 40.7 billion but would come down to $ 20.3 billion, reduced by more than half, with the exclusion of all these heads, they argue that India's FDI goes up to $ 8.1 billion from the originally declared figure of $ 3.2 billion with the inclusion of some of the heads it originally excludes. World Investment Report (WIR) further confirms that figures of FDI revealed by the MNCs that invested in China and figures revealed by China on the inflow of FDI do not match giving credence to the argument that China has been exaggerating its figures of FDI (Internet, Venkitaramanan, 2005, Para 12). Despite these shortcomings and anomalies inherent in the system of FDI calculations in relation to China and India, the former stands atop the list of countries receiving FDI and you will find the latter's place at a lower strata. Economic reforms Why is India lagging behind It must be noted that economic reforms are one of the prime reasons that favoured China as the brightest spot for FDI. China began its journey 5 of economic reforms as far back as 1978 while India took the path of reformation in 1991 under the prime minister ship of the late PV Narasimha Rao, the old man with a young mind (Internet, the tiger in front, 2005, Paras 3 & 6). This shows how India is several steps backward in the matter of economic reforms. Though politically led by a communist ruled regime, China is 13 years ahead of India in reforms and its silent integration with the global economy has fetched the country some early and bigger rewards. With clear planning and objectives in mind, China since 1978 adopted an 'open door' policy (Internet, Fung, 2005, Para 3) to attract FDI. That China is now on the verge of becoming the 'factory of the world' is not an overnight development. The communist regime had adopted a double strategy from the very beginning in which it introduced the market system into its economy while simultaneously liberalising the regime guiding the inflow of FDI. It is now clear that the Communist leadership of the country had implemented and promoted its economic reforms with the sole intention of attracting FDI to boost up its economic growth. As revealed in Appendix 1 at the end of this paper, China's inflow of FDI zoomed very aggressively to $ 45 billion in 1992 but came down to below $ 30 billion the very next year .Afterwards it never looked back as it continued to attract major share of the FDI inflows. 6 Again, as Appendix 1 reveals, FDI intake into Chinese economy was more before 1997 and after wards it came down substantially, though it picked up after 2000 again. Discussing the pre-1997 scenario in China, Prof. Yasheng Huang of Harvard Business school (Internet, Kasper, Event details, an institutional perspective) argues that inflow of FDI gained prominence because of the inefficiency of the Government-owned enterprises and ill treatment of efficient private companies. He says that foreign companies, however, enjoyed property right in China since 1982. This right came to the domestic private companies only in 1999. Indian reforms and FDI India, unlike China, opened up its economy very late to the world in 1991 providing new looks to its economic system. Its integration with the global economy resulted in higher growth rates and better investments and trade flows, but the results are yet to show up in their fullest form. Indian Embassy (Internet, Embassy of India, 2001) in the US says that between 1991 and 2001, out of a total FDI of $ 71 billion approved for India, $ 15 billion was from the US. But surprisingly, as shown in the Appendix 2 at the end of this paper, major part of FDI that flowed into India between 1991 and 1998 was from Mauritius. As per the statistics available ( Internet, Embassy of India, 2001), out of total American FDI in India, 39% was absorbed by Power and Oil refinery followed by Food processing 7 industry with 11%, Telecommunications with 10%, services sector with 9% and electrical equipment with 8%. As of February 2001, out of the 538 foreign institutional investors (FII) registered with the Securities and Exchange Board of India (SEBI) for portfolio investments, 220 firms were from the US. These figures show that major part of FDI inflows into India has been going into the primary sectors. Bilateral trade and FDI Besides belatedly launching the economic reforms, India is also plagued by lack of growth in international trade. Research has proved that FDI has a direct relation with the bilateral trade and certainly both are complimentary to each other with trade mostly having its impact on FDI as proved by Jeon and Stone (Djarova, 2004, P 39). When bilateral trade is in full swing between two nations, there grows the possibility of FDI flowing from one country to another. If we examine China and India in relation to their bilateral trade with Japan, we get some interesting results. India totally missed the equation with Japan with regard to bilateral trade (Internet, Vishvanath, 2005). During both pre and post reform periods, India failed to improve bilateral trade relations with Japan and it was always less than 0.5% of the latter's global trade. It resulted in closing the doors of the Japanese FDI into India. Between 1993 and 2003, India never received more than $ 220 million a year from the Japanese outgoing FDI of $ 50 billion a year. At the regional level in Asia, it constitutes 2% of the Japanese FDI whereas China's 8 share in it was 22 %, higher by more than 10 times. On the other hand, Japan continued to be the major trading partner of China for several years, followed by the US, EU and Hong Kong. Statistics (Internet, International trade) reveal that China's imports and exports together in 1999 stood at $ 66.2 billion, $ 61.5 billion, $ 55.7 billion and $ 43.8 billion with Japan, the US, the EU and Hong Kong respectively. It is therefore quite reasonable for China to receive 22 % of the Japanese outgoing FDI. As China has established solid trade relations with the USA and other countries, it has naturally become the focal point for FDI. The strategy of China China had adopted an intelligent strategy to attract the bulk of world FDI. First, it concentrated on its neighbours by forming special economic zones (SEZs) in the country's south-eastern parts with a clear eye on the MNCs of Hong Kong, Taiwan and Macau and this was the reason for the inflow of major part of the FDI from these countries, especially during the late 1980s and 1990s (Internet, Fung, 2005, Paras 4 & 5) . Guangdong and Fujian, the two coastal provinces in the south-eastern parts contained four SEZs and as they are border provinces to Hong Kong, Taiwan and Macao, some top 9 most companies of the neighbouring countries pumped in their investments to make use of the benefits accruing through the SEZs. The point, however, to be understood here is that major part of the FDI flowing from these countries belong to Chinese firms located there but channelled to China again in shape of FDI just to avail of several concessions prevailing in the SEZs. The advantages of investing in a nearby country are innumerable. It is very easy for the investing companies to interact with their subsidiary companies saving lot of time and money in travelling and meetings. Because of this reason, the MNCs in the neighbouring countries of China had found it beneficial to invest in that country. Prof. Huang (Internet, Kasper, Event details, Paras 3 & 4), explaining the phenomenon of FDI flows into China, explains that 80 % of FDI was spread over in coastal areas while 20% of it was invested in rural areas of the country and stresses the point that FDI involvement was in all types of industries including those controlled by the country's traditional entrepreneurs. He also clarifies that most of the FDI inflow into China has been coming in from small companies based in Hong Kong, Macau and Taiwan, as against the usual practice of inflows from big MNCs. Markets and location Some analysts argue that countries having bigger markets or higher GDP rates attract more FDI than those having lesser consumer markets and lesser GDP rates. Sure, China's 10 population and GDP statistics are above those of India (Internet, Dikshit, Appendix 1). But researchers have established that the size of the population or market potential could not be cited as the reasons for attracting higher volumes of FDI. Jone and Stone, (Djarova, 2004, P 39) dealing with the topic of FDI, clearly establish that host country population / markets do not have any thing to do with the inflow of FDI. They argue that GDP of host country also can not be a factor for attracting FDI. But then there are clearly other factors too, known as the location specific determinants that have been influencing the MNCs to invest more in China than in India. As Krugell (Krugell, 2005, P 54) establishes in his arguments, labour troubles, tariffs and trade barriers, technology limitations, and restricted Governmental policies are prominent among the factors that adversely affect the inflow of FDI into any country and this is what is exactly happening in case of India. Investing MNCs always look for countries with sound infrastructure, less labour trouble and more workmanship. Labour, one of the main factors of production, should be available at cheaper rates. Compared to India, all these conditions were more favourable in China than in India for MNCs. Experts (Internet, Dikshit, Appendix 1) point out that MNCs face less likelihood of strikes in China compared to India. The likelihood of strikes, when measured in points, is 3.46 and 5.8 in India and China respectively where 1 is very high and 7 very low. Overall infrastructure, when measured in points again, is 2.18 and 2.87 respectively in India and China respectively where 1 is very low and 7 is very high. In the telecommunications sector, India is very poorly connected with 1.86 main lines per 100 11 population while it is 6 in China. When it comes to the issue of corruption, it is 2.9 and 3.4 in India and China respectively where 1 is very corrupt and 10 is very clean. As regards the investment atmosphere, Government involvement in the economy in terms of public consumption is 12 % and 11.2 % of the GDP in India and China respectively. These factors look very small on appearance but carry heavy weight with the investing multinational corporations. Conclusion India has to go a long way in the arena of FDI. Available data (Internet, Dikshit, Appendix 1) on inflation indicates that China has been wisely managing its economy and always keeping the inflation under control while India has been struggling to manage inflation. Most surprisingly, the statistics further indicate that India has been spending on its R&D sector comparatively more in relation to that of China. India spends for R&D 0.8% of its GDP while it is only 0.5 % of its GDP in case of China. In spite of this great fact, India is poor in attracting FDI because of the other discouraging internal and external conditions as discussed above. India is no doubt getting the attraction of MNCs and its inflow of FDI is gradually rising year after year and bit by bit. But, if it wants to compete with China in becoming a focal point for FDI inflows, it should do the following. 12 1 It must try to improve its bilateral trade with Japan and other countries from which it expects FDI. 2 .It must keep inflation under control. 3. The leadership of the country must see to it that frequent labour problems do not recur. 4. The Government must speed up the economic reforms process to attract more and more FDI participation. 5. Attractive and reasonable incentives should be announced for the MNCs. 6. It should invite FDI into R & D too. Bibliography : Books, journals and articles: Krugell W (2005) "The determinants of foreign direct investment in Africa", in Gilroy, Bernard Michael (Ed) Multinational Enterprises, Foreign Direct Investment and Growth in Africa, Springer, New York. PP 49-72 Djarova, Julia (2004) Cross border investing : The case of central and eastern Europe, Springer Publishing, New York. UNO (2003) Global Development Finance: striving for stability in Development Finance, World Bank Publications, USA. Web Sites: Bajpai, Nirupam and Nandita Dasgupta. " FDI to China and India : The definitional differences." http://www.thehindubusinessline.com/2004/05/15/stories/2004051500081000.htm (Accessed 06/05/2006) 13 Business line. "China set to attract $60 b FDI." http://sify.com/finance/fullstory.phpid=13573320 (Accessed 06/05/2006) Dikshit, Chetan. "How can India attract more FDI- uncluttering the mind." http://www.iimcal.ac.in/imz/imz-archive/article.aspid=FDI (Accessed 08/05/2006) Embassy of India. "India-US. economic relations." http://www.indianembassy.org/indusrel/economy.htm. (Accessed 09/05/2006) Fung, K.C, Hitomi Iizaka and Alan Siu. " Economic Forum." http://www.tdctrade.com/econforum/hkcer/hkcer050201.htm (Accessed 06/05/2006) International trade. " China's top 10 trading partners in 1999." http://www.chinatoday.com/trade/a.htm (Accessed 09 / 05/2006) Kasper, Sara. "Event details." http://www.carnegieendowment.org/events/index.cfmfa=eventDetail&id=566 (Accessed 09 /05/2006) Ong, Lynette. "China, India: Difference in the details." http://www.atimes.com/atimes/China/FD30Ad04.html (Accessed 06/05/2006) The tiger in front, 2005. " Survey : India and China." http://www.economist.com/surveys/displayStory.cfmstory_id=3689214 (Accessed 07/05/2006) Venkitaramanan S. "Time for India to draw FDI into R & D ." http://www.thehindubusinessline.com/2005/10/17/stories/2005101701150800.htm (Accessed 06/05/2006) Vishvanath, V. "Why FDI from Japan to India declined." http://in.rediff.com/money/2005/may/02guest.htm (Accessed 09/05/2006) 14 Appendix 1 Graph showing inflows of FDI into China and India from 1991 to 2001 (Source: http://www.atimes.com/atimes/China/FD30Ad04.html) Appendix 2 Graph showing FDI inflows into India between 1991 and 1998. ( Source: http://www.iimcal.ac.in/imz/imz-archive/article.aspid=FDI ) 15 Table 1 Table showing FDI inflows into China and India and other related figures) ( Source : http://www.iimcal.ac.in/imz/imz-archive/article.aspid=FDI) China India FDI FDI Confidence Index score (January 2000) 1.45 1.14 . FDI inflow (US $ billions, 1998) 45.5 2.3 FDI Stock (US $ billions, 1998) 261.1 13.2 Market Population (millions) 1254.6 986.9 GDP (nominal US $ billions, 1999 estimate) 993 468.4 Number of people with income over $15, 000 per year (millions, 1998) 24.8 0.9 5-year real GDP growth forecast (percent change in GDP, 1999-2004) 132.2 28.7 Productivity Labour productivity (value added per person employed 1997, 1990 US$000) - 4.3 Wages (real wage index, latest available data, 1992-97) - 112.5 R&D expenditure in country (percent of GDP, latest available data, 1992-97) 0.5 0.8 Likelihood of strikes (1=very high, 7=very low) 5.8 3.46 Infrastructure Overall infrastructure (1=very low, 7=very high) 2.87 2.18 Road indicator (road km adjusted for land area) 0.33 1.83 Telecommunications indicator (main lines per 100 population) 6 1.86 Investment environment Government involvement in the economy (public consumption as % of GDP) 11.2 12 Inflation (year end forecasts for 1999, %) -0.5 6.5 Corruption score (10=highly clean, 1=highly corrupt) 3.4 2.9 Corporate tax rate (percent) 30 35 Value added tax rate 12 to 45 17 - Table 2 China Vs. India: The economic Parameters (Source: http://www.atimes.com/atimes/China/FD30Ad04.html) China 1982 1992 2001 2002 GDP (US$ billions) 221.5 454.6 1,167.1 1,232.7 Gross domestic investment/GDP (%) 33.2 36.2 38.5 41.0 Exports of goods & services/GDP (%) 8.9 19.5 25.5 29.5 Gross domestic savings/GDP (%) 34.8 37.7 40.9 44.0 India GDP (US$ billions) 194.8 244.2 478.5 510.2 Gross domestic investment/GDP (%) 21.7 23.8 22.3 22.8 Exports of goods & services/GDP (%) 6.1 9.0 13.5 15.2 Gross domestic savings/GDP (%) 18.3 21.8 23.5 24.2 Read More