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______________________________Recent Trends of Foreign Direct Investment in India and China

CHAPTER-5

RECENT TRENDS OF FOREIGN DIRECT INVESTMENT IN INDIA AND CHINA


The importance of foreign direct investment as a source of capital in developing world has increased significantly over the last couple of decades. By the down of millennium, more than half of all capital flows to developing countries took the form of FDI. The tremendous increase in FDI is undoubtedly related to the globalization of the world economy. At present, almost all developing countries are adopting liberal policies towards FDI. Foreign investment policy changes of two Asian giants India and China have been discussed as follows

5.1 Policy Framework of Investment Inflows in India


Realizing the important contribution of foreign investment to economic development, India has introduced many policy reforms to attract them. Restrictive investment regimes have been liberalized. In addition, various types of incentives are being offered to attract foreign direct investment. Greater attention is also being paid to create macroeconomic environment for foreign conducive investors. Changes in foreign investment policy framework of India are being studied in being four Phases viz. (a) (b) (c) (d) Cautious welcome policy from independence to the emergence of crisis in the late sixties (1948-66). Selective and Restrictive policy from 1967 till the second oil crisis in 1979. Partial liberalization policy from 1980-1990 with progressive attention of regulation. and Liberalization and open door policy since 1991 onwards signifying liberal investment environment. Phase I: Cautious Welcome Policy from Independence to the Emergence of Crisis in the Late Sixties (1948-66): India lacked a policy of its own on foreign capital before independence because it derived its faith in total laissez fair from the British government. Resultantly, foreign enterprises found it convenient to export products to India and were justified 63

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by local circumstances to set up branches or wholly owned subsidiaries. Local entrepreneurs, which did not have more prospect for obtaining foreign collaboration, set up industrial units without foreign collaborators as in the case of Cotton Textiles, Paper and Cement or they obtained the services of foreign consultants as in the case of steel. The advent of independence brought into focus the various issues involved in the import of foreign capital and expertise into the country, and emphasized the need for defining a policy with respect to foreign investment. The new independent government had specific views on industrialization and role of foreign capital. This was reflected in the first policy document of Industrial policy resolution in 1948. The industrial policy resolution in 1948 recognized the participation of foreign capital in enterprise, particularly as regards industrial techniques and knowledge. However, it was necessary that the conditions under which foreign capital could participate in Indian industry should be carefully regulated in national interest. In the mid 1950s when industrialization got underway foreign capital ventured into India primarily with technical collaboration. However, the foreign exchange crisis of 1958 marked a change in foreign collaborations in India in two ways: (1) (2) Foreign enterprises began to take equity participation more frequently. More of technical collaborations started to accept equity participation in lieu of royalties and fees. After 1958, Indian entrepreneurs were given provisional licenses required to secure part or all of the foreign exchange by way of foreign investment. In May 1966, the government decided that investments by NRIs would be allowed without any limit in public limited industrial concerns in India. In private limited industrial concerns their share would be allowed up to 49%.

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Phase II: Selective and Restrictive Policy from 1967 till the Second Oil Crisis in 1979: Under the new industrial licensing policy announced in February 1970, the larger industrial houses and foreign enterprises were permitted to set up industry in the core and heavy investment sectors except industries reserved for the public sector. In 1972-73, the government policy towards foreign investment continued to attract foreign investment in India. The policy became highly selective. Foreign Exchange Regulation Act (FERA) was amended in 1973, to regulate the entry of foreign capital in the form of branches, non-resident Indians investment and employment of foreigners in India. However, basic and core industries, export-oriented industries engaged in manufacturing activities needing sophisticated technology and tea plantation industries were allowed to carry on business with non-resident interest upto 74%. Such companies were also exempted to take permission from RBI to carry on business provided that they did not exceed the licensed capacity and undertook no expansion or diversification of activities. Phase III: Partial liberalization Policy from 1980-1990 with Progressive Attention of Regulation: In order to tap the resources from oil exporting developing countries, the government revised the foreign investment policy in October 1980, so that investment proposal from these countries need not be associated with transfer of technology and such investment could be of a portfolio nature. In 1982-83, the government liberalized facilities with regard to bank deposits and investment in equity shares of the corporate sector. These facilities were further liberalized in July-August, 1982 to cover preference shares and debentures issued by Indian company. The Reserve bank of India also simplified the formalities related to exchange control procedure to facilitate such investment. In 1983-84 the government provided the incentives in the form of

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(1)

Taxation of investment income derived by a non resident Indian from the specified investment and long term capital gains arises out of transfer of these assets at a flat rate of 20% plus surcharge of 12.5% of such income tax.

(2)

Exemption of long term capital gains arising from transfer of any foreign exchange asset,

(3)

Exemption from wealth tax of the value of foreign exchange asset acquired and held by non resident

(4)

Exemption from gift tax of gifts of foreign exchange asset by non resident Indians to their relatives in India (Chopra, 2003).

Phase IV: Liberalization and Open Door Policy Since 1991 onwards Signifying Liberal Investment Environment: The Indian industrial structure was weak both financially and technologically during pre-liberalization period. The major prevailing problems were inefficiencies, high costs, poor management, non-competitiveness, excessive reservation, import controls, lack of export orientation and disincentives to the foreign investors. Prior to 1991, the government exercised a high degree of control over industrial activity by regulating the economic activity. The development strategy discouraged inputs from abroad in the form of investment or imports, while the limited domestic resources were spread out by licensing of manufacturing activity. As a result of which domestic industry remained highly protected from abroad due to import controls and high duties, and from domestic competition due to licensing and reservations. Industrial policy was dominated by licensing constraints by virtue of which strict entry barriers were maintained (Nagaraj, 2003). Reforms launched in 1990s focused on addressing some of these issues. Economic policies were liberalized with a view to encourage investment and accelerate economic growth. The changes provided freedom to foreign investors to enter into Indian industry. Under the ongoing policy phase, the thrust is on providing access to capital, technology and market in order to induce greater industrial efficiency and integration of the domestic economy with the global economy. 66

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Since 1997, successive governments have extensively pushed the agenda of integrating Indian financial markets with the rest of the world. Before the onset of the South-East Asian financial crisis, convertibility on capital account had become the new buzzword in Indian financial markets. In an attempt towards achieving capital account liberalization, the government appointed a committee headed by S. S. Tarapore in February 1997 to examine the issues related to capital account liberalization in India. In its report submitted to the government in June 1997, the committee has called for full liberalization by the year 1999-2000, provided that a few preconditions, like a lowering of the fiscal deficit, a low inflation rate, adequate level of owned forex reserves, and reduction in non-performing assets of the banking sector are met (Athukorala and Hill, 1999). The policy on Foreign Direct Investment (FDI) has been reviewed on a continuing basis and several measures announced from time to time for rationalization / liberalization of the policy and simplification of procedures. The measures adopted during this phase are as follows: Foreign firms obtained automatic rights over international brand names in 1992. Requirements for industrial licensing in specified industries (White goods, entertainment & electronics) were abolished and FIIs were allowed to invest in new mutual fund schemes in1993. Banks were allowed to set their rates for lending and companies were allowed to issue preferential equity to FIIs in 1994. FIIs were allowed to invest in unlisted firms and also allowed to invest 100% of funds (previous 30%) in debt instruments in 1996. 100% foreign equity was allowed in infrastructure projects like ports, roads and highways in 2000. Limited FDI in Print media was also permitted in 2002 (Srivastava and Sen, 2003).

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Another measure to attract FDI was reduction of controls on technology and royalty payments. Restrictions on foreign collaborations investment (both financial and technological) were by and large removed. There was a detailed roadmap for hiking FDI limit to 74 % in Indian Banks (Choudhury and Mavrotas, 2003).

The union cabinet decided on Oct 20, 2004 to raise the limit for foreign direct investment in domestic airlines from 40 to 49 % through automatic route while continuing to bar foreign airlines from making any direct and indirect equity participation. Cabinet meeting also approved 100% FDI in domestic airlines by NRIs and overseas corporate bodies (OCBs) through automatic route.

FDI cap in the domestic airlines sector has been enhanced from 40% to 49% and NRI investment is permitted upto 100 % with no direct or indirect equity participation by the foreign airlines.

FDI upto 100 under automatic route is now permitted for development of township, housing, built up infrastructure and construction development projects.

FDI cap has been increased from 49% to 74% in basic and cellular telecom services. (Economic Survey, 2005-06).

To allow FDI up to 51 % with prior Government approval for retail trade of Single Brand products.

To increase FDI caps to 100% and permit it under the automatic route for coal & lignite mining for captive consumption, setting up infrastructure relating to marketing in Petroleum & Natural Gas sector; and exploration and mining of diamonds & precious stones (SIA Newsletter, 2007-08).

100 per cent FDI is permitted for through the automatic route in case of hotels. For trading companies 100 per cent FDI is allowed for Exports, Bulk Imports and Cash and Carry wholesale trading.

For business activities in power sector like electricity generation, transmission and distribution other than atomic plants the FDI allowed is up to 100 per cent. 68

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For the production of drugs and pharmaceutical a FDI of 100 per cent is allowed, subject to the fact that the venture does not attract compulsory licensing, does not involve use of recombinant DNA technology.

FDI of 49 per cent is allowed in the Banking sector through the automatic route provided the investment adheres to guidelines issued by RBI.

For the Insurance sector FDI allowed is 26 per cent through the automatic route on condition of getting license from Insurance Regulatory and Development Authority (IRDA).

Up to 100 per cent equity is allowed in the following sectors


34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries Reserved for Small Scale Sector (SIA Newsletter, 2009-10).

5.2 Policy Framework of Investment Inflows in China


Foreign Direct Investment in China has experienced a growth since 1979, with an annual average growth rate of 38.7%. The high rate of FDI has been subject to considerable fluctuations at different times, which in large part reflect adjustments in

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the Chinese governments economic policies and resulting changes in the investment environment. The development of FDI in China has undergone through three phases. Phase I: (1979-1985) This is the initial stage of foreign investment in China starting with the promulgation of the joint venture law by the Chinese government in 1979 and the establishment of four Special Economic Zones (SEZs). In 1984, 14 coastal cities were opened to foreign investment resulting in a spread of FDI from SEZs to other coastal regions and led to the first boom of FDI in 1984-85. However, the initial boom ended in later 1995 due to high inflation and lack of legal clarity about FDI. During this stage, foreign investments were concentrated in small sized assembling and processing for exports. Phase II: (1986-1989) In response to a decline in FDI, the Chinese government published the Provisions for the Encouragement of Foreign Investment in October 1986, which was followed by a set of central regulations to implement them and by provisional and municipal level regulations. These provisions and regulations clarified the legal environment for FDI, and also provided solutions to some major problems facing foreign invested enterprises such as foreign exchange imbalance. To encourage foreign investment in high technology industries, all open coastal cities set up the Economic and Technology Development Zones with extra tax benefits and other incentives were offered. The improved investment environment promoted a quick recovery of FDI after 1986. In contrast to the period 1986 structure, over 70% of the FDI projects were involved in manufacturing industries in this period. The new investment boom ended in mid 1986 due to the worsening economic and political conditions. Phase III: (1990 onwards) In recognition of the negative reaction of foreign investors to the worsening investment climate, the Chinese government issued the amendments to the Joint Venture Law in April 1990. These amendments codified several rules designed to encourage investment. In 1991, the income tax law for enterprises with foreign capital and foreign enterprises was passed and standardized the income tax rates for different forms of Foreign Invested Enterprises (FIEs). Since 1992, the Chinese government has adopted the socialist market economy strategy to speed up the market oriented reforms. A set of commercial laws and regulations have 70

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been passed to improve legal framework and policy setting in which foreign business operates. As a result, foreign investment surged after 1992. Since 1994, foreign investment in China has entered a new stage of adjustment and consolidation, presenting some new features. The average capital size of foreign investment projects increases, with the main focus shifting to large infrastructure and manufacturing projects. The growth rate of FDI is back to a sustainable level from an unusually high level (Sun, 1998). On the front of the FIE-specific regulations, the authorities began to move away from conferring tax benefits on FIEs to an approach that stressed information disclosure and streamlining bureaucratic procedures. An example was the Provisional Regulations for guiding the Direction of Foreign Investment in 1995 (subsequently revised in 1997). The guideline laid out, in great detail, a positive and negative list of economic sectors and official intentions of investment priorities. This was to address the long-standing complaints by foreign investors that Chinese negotiators were observed while their access to business regulations. In 1998, the authorities significantly streamlined the FDI project approval procedures by abolishing the requirement that project in excess of US$30 million are subject to review of the central government. The most far-reaching FDI liberalization was the decision in 19992001 to accede to the terms of the World Trade Organization (WTO). Under the WTO accession terms, China was obligated to eliminate all import quotas by 2006 and all tariffs on computers, semiconductors, and related products by 2005. Tariffs on industrial products were to decline from an average of 24.6% to 9.4%. Tariffs on motor vehicles were to decline from 80% to 25% by 2006. Foreign firms would be allowed to own up to 50% of FIEs in the telecom and insurance industries (Haung, 2003).

5.3 An Overview of FDI in India and China


As a part of liberalization of economy in 1990s, fresh foreign investment was invited in a range of industries. FDI inflows in India remained marginal in 1980s but rose steadily during 1990,s. India followed a fairly restrictive foreign investment policy as compared to most industrializing economies. Inward foreign direct investment was perceived essentially as a means of acquiring industrial technology 71

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that was unavailable through licensing agreements and capital goods import (Ghoshal, 1990). Chinas policy towards FDI has also been selective. It has included preferential treatment in areas in which FDI has been encouraged, i.e. the export oriented sectors and the sectors targeted for import substitution policies. Chinas policy towards FDI has met with remarkable success (Zhang, 2001). Presently China is the largest recipient of FDI among developing countries with annual investment rising from almost zero in 1978 to about 108 $ billion in 2008. Table 5.1 exhibits the trajectory of the realized flow of FDI going into China and India every year from 1980 to 2008. As compared to China, India is far behind on economic horizon as indicated in the Table 5.1. Aggregate capital inflows into China grew steadily during the 1980s, but these have increased very rapidly since the early 1990s. FDI in India and China has grown exponentially and became 526 times and 722 times respectively in 2008 as compared to the year 1980. The FDI flows in China were a mere 150 million $ in 1980. It grew to 3194 million $ in 1988, to 33767 million $ in 1994 and then peaked at 108312 million $ in 2008. FDI inflows in China have shown a continuous tendency to increase over the period of time at a Compound growth rate of 39.4%. However, FDI inflows into China were significantly below its potential both in economic and statistical sense. It was because of the reasons that Chinas opening up to foreign investment started relatively late and the Tiananmen Square incident temporarily diminished the FDI over 1989-90 (Wei, 1999). Foreign direct investment in India is also increasing but this is too less as compared to China. It was less than $ 0.2 billion per year from 1980 to 1990 except in the year 1989. It was merely 79 million $ in 1980 and grew to become 121 million $ in 1987. It was recorded to be only $ 74 million $ in the year 1991 but after this year it showed substantial increase in 1992 to reach at the level of 277 million $. FDI dropped in India and China by 12% and 11% respectively during the year 1999 particularly due to Asian crisis and the slow adjustment of domestic economies. Tremendous rise in FDI inflows can be easily visualised from the Table in the year 2006 where it increased nearly three times i.e 20336 million $ from 6598 million $ in the year 2005. There was shown a general increasing trend in FDI inflows in India

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Table 5.1: Indias FDI as a Percentage of Chinas FDI


(US $ million)

Years
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CAGR

India
79 92 72 6 19 106 118 121 91 252 162 74 277 550 973 2144 2821 3577 2462 2155 2339 3904 8574 4585 5474 6598 20336 25127 41554 27.7 (5.15)

China
150 380 410 640 1258 1661 1874 2314 3194 3392 3487 4366 11007 27515 33767 37521 41726 44236 43751 38753 38399 44241 49621 53510 60630 72406 72715 83521 108312 39.4 (19.5)

Indias FDI as a Percentage of Chinas FDI


52.66 24.21 17.56 0.93 1.51 6.38 6.29 5.22 2.84 7.42 4.64 1.69 2.51 1.99 2.88 5.71 6.76 8.08 5.62 5.56 6.09 8.82 17.27 8.56 9.02 9.11 27.96 30.08 38.36

Source: World Investment Report for years 1982 to 2009.

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after this period to become 41554 million $ in 2008. FDI inflows have shown increase at compound growth rate of 27.7% in India and 39.4 % in China from the year 1980 to 2008. As a part of liberalization of economy in 1991, fresh foreign investment was invited in a wide range of industries. FDI inflows in India remained marginal in 1980s but rose steadily after 1991 due to opening up of economy by adopting liberal policy framework regarding inflows of foreign investment by the government of India. A comparison of FDI inflows into India in relation to that of China has also been shown both in Table 5.1 and fig 5.1 which clearly indicates the positions of China and India regarding FDI inflows in the year 1980 where Indias FDI inflows as a percentage of Chinas FDI inflows were 52.6%. China had just started the reforms in 1978; its FDI was significantly less during the period from 1980-82, which represents the highest ratio of India and Chinas FDI. As it is apparent in the Table and figure that. Chinas FDI grew at a much faster rate than India with the due course of time. FDI inflows in India were merely 0.93% of that of China in the year 1984. There relative position remained almost at consistent level after this period as level of FDI inflows into India was noticed to be low as a percentage of China i.e it ranged from 1.51% in the year 1984 to 17.27% till the year 2005. India marked 38.36% FDI inflows as a percentage of Chinas FDI in the year 2008. Overall trends show that both India and China has shown improvement in their positions regarding FDI inflows but the relative performance of China is quite better than that of India. China still holds a very sound position as compared to India as far as inflows of FDI are concerned.

India's FDI as a %age of China's FDI


60 50 40 30 20 10 0
19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

Years India's FDI as a %age of China's FDI


Figure 5.1

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Table 5.2: Approved and Actual FDI in India and China (US $ billion)
India Years Approved FDI
0.2 1.4 2.8 4.5 10.2 10.5 15.3 7.8 6.7 8.6 4.0 16.5 8.9 10.2 11.0 28.6 36.1 49.6

China Actual/Approv ed (%)


35 14.2 17.8 20 20.5 23.8 23.5 33.3 31.3 40.6 48.2 51.8 48.3 55.8 69.0 70.9 69.5 83.6

Actual FDI
0.07 0.2 0.5 0.9 2.1 2.5 3.6 2.6 2.1 3.5 5.4 5.6 4.3 5.7 7.6 20.3 25.1 41.5

Approved FDI
11.9 58.1 111.4 82.6 91.2 73.2 51.0 52.0 41.2 62.3 69.1 82.1 115.0 109.0 128.0 120.6 157.4 172.6

Actual FDI
4.3 11.0 27.5 33.7 37.5 41.7 45.2 45.4 40.3 40.7 46.8 52.7 53.5 60.6 72.4 72.7 83.5 108.3

Actual/ Approved (%)


36.7 18.9 24.7 40.8 41.1 57.0 88.7 87.4 97.8 65.3 67.8 64.2 46.5 55.5 56.5 60.2 53.0 62.7

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: India: Compiled from Various issues of Economic Survey and SIA Newsletter; China: Compiled from Various Issues of China Statistical Yearbook

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Approved and Actual FDI in India during 1991-2008


100
Approved and Actual FDI

80 60 40 20 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Years

Approved FDI

Actual FDI

Data Source: Compiled from Various issues of Economic Survey and SIA Newsletter Figure 5.2

Approved and Actual FDI in China during 1991-2008


300 250 200 150 100 50 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Approved and Actual FDI

Years Approved FDI Actual FDI

Data Source: Compiled from Various Issues of China Statistical Yearbook Figure 5.3

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In FDI statistics two concepts are used i.e the amount of actual FDI and approved FDI. Actual FDI refers to investments paid by a foreign entity to a resident enterprise in another country. Approved FDI on the other hand represent the amount of proposed contribution or share of foreigners to various projects in a country as approved and registered by board of investments. Not all of the approved investments are materialised during the period. There is a gestation period between actual and approved (Ministry of Commerce of India). Table 5.2 and Figure 5.2 summarises trends in FDI approvals and actual inflows in India. It is apparent from the Table that the ratio of actual to approved FDI has improved from the last few years. In 1991, India attracted US $ 0.07 billion of actual FDI as compared to approved FDI of just 0.2 $ billion. The ratio of actual FDI to approved FDI has declined from 35% in 1991 to 14% in 1992. After that it started rising upwards reaching to 83.6% in 2008. It is clear from the Table 5.2 and figure 5.3 that the gap between actual and approved FDI has become stable since the mid of 1990s in China. In 1991, the amount of approved FDI was US $12 billion, but the amount of actual FDI was US $ 4.3 in China i.e only 36.5 % of the approved FDI. From 1991 to 2008, this ratio has wide range of 18.9% to 97.8% as indicated in Table 5.2. The ratio between actual and approved FDI became closer during the year 1997-1999, it may reflect the fact that foreign investors were becoming more rationale while making investment decisions in China but after that the ratio dropped again to 62.7% in 2008.
FDI as a Percentage of GDP
7 6 5 4 3 2 1 0

FDI as a % age GDP

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Years China India

Figure 5.4

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From 1991, India began its investment policy reform, and the New Industrial Policy of India demonstrated a close correspondence with the Chinese pattern of globalization. India's switch towards globalization in 1991 was a consequence of domestic resource deficits and balance of payments problems. It was suggested that if only India could attract enough foreign capital it could move on to a higher growth path (Alamgir, 1999). However, despite the encouragement, FDI flows to India remained relatively small even in the 1990s. The annual inflow of FDI in India was about two to three billion US dollars in the second half of the 1990s. This amount of inflows was much higher than that before 1991, still it was less than 1 percent of gross domestic product during the year 1980-2005 except in the year 2002 as indicated in fig 5.4. However, the position started improving from the last few years in terms of FDI as percentage gross domestic product ratio i.e (2006-2008). China shows fluctuating trends in terms of FDI as percentage gross domestic product. During the same period, the annual net FDI inflow in to China was about 5 percent of GDP, and China became the largest host of FDI in the developing world. In an increasingly competitive market, getting a fair share of FDI flows and benefits will be tough work. Attracting FDI will require a shift in mind-set for Indian government. Having achieved a fair degree of political consensus on the need for economic reforms, India is now vigorously pursuing its vision to become a developed nation by the year 2020 (Herrero and Simon, 2003). While both China and India opted for a gradual approach to reforms, India had to begin with stabilization measures due to the fiscal and balance of payments crisis of 1991. Since Chinese reforms were initiated long before Indias, the latter country could benefit by drawing relevant lessons from the former. It is evident that FDI flows into India have increased steadily, but it is still less than China. China was a decade ahead of India in terms of foreign investment. This is due to several reasons as suggested by so many previous studies available on this issue. These are highlighted as under:

5.4 Reasons for High FDI Inflows into China than India
There has been late initiation of economic reforms in India in the year 1991, however market based reforms in China were started in 1978. China has concentrated heavily on different issues such as banking sector, state-owned 78

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enterprises, tax reforms, insurance and sound financial system. In India, continued reform actions are lacking in the areas of fiscal consolidation, openness of the economy, tax reforms, foreign investment policy, and the financial sector. Chinas entry into the world trade organization (WTO) has made it very attractive to foreign investors. China has committed to relax the restrictions on foreign participation in terms of equity share in a number of industries by entering the WTO. This has enabled foreign joint ventures to increase its equity in shares in existing affiliates. China has enjoyed the fastest sustained economic development by registering high real per capita growth over the past decade in comparison to India. Its rapid economic growth has made China more attractive to market oriented FDI. Chinese government formulated laws and regulations specially to attract foreign investment. China offered many incentives like an exemption of income tax for the foreign firms over the last two decades. Such benefits were not available to domestic Chinese firms. The government initiatives in this concern are lacking in India. China has better infrastructure like highly developed banking network, power sector, transport and communication, improved commercial and financial services, excellent legal framework and democratic values ingrained in society. But India failed to provide such kind of infrastructure to the potential foreign investors. There have been influential business pressure groups against foreign investment in India, which are powerful political backers as well. Many domestic Firms are in favour of checking the entry of foreign firms in India due to their inability of facing the competition likely to prevail in the free market mechanism. However Chinese government devised policy framework regarding foreign investment without any external pressure of large business entities.

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One of the important factors to attract FDI in China is the comparative advantage in availability of competitive production factors like developed human resources, land, natural resources, unutilized production potential, marketing facilities, sources of raw material, financial resources, cheap and skilled labour force etc.

In China, there is a continuous, logical, and chronological flow of policies and events, whereas in the Indian case, there is a series of spurts followed by contractions. The Chinese five year plans were well framed and aimed at designing effectives policies with rational strategic choices, whereas in India the decisions to accept new foreign investor were taken on a case by case basis, a practice that leads to unnecessary procedural complexities which discouraged foreign investments.

Technology imports and Technology Transfer (TT) has been strongly encouraged in China in order to foster industrial upgrading and restructuring. China has been spending heavily on imports of Technology, advanced machinery, and equipment but serious efforts toward this factor on part of India seem to be lacking.

The Chinese polity is a monolithic dictatorship of one party with a single individual wielding vast power. The Indian political system is a complex federal democracy with power so widely diffused among different political parties at centre and state level. That is why, it is comparatively easier in China to formulate and implement policies and practices regarding FDI while in India it is very difficult in lieu of coalition govt often at centre level to bring general consensus among all the political parties with varied ideologies to except and implement the idea of liberalised policy framework in order to attract foreign investors (Keshava, 2007).

The failure of India to adopt international guidelines on measuring FDI statistics implies that aggregate FDI data for India are not directly comparable to the other countries, especially with China. Chinas reinvested earnings and intra-company loans together accounted for about 30% of total FDI inflows

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during 1997. Accounting for these components in FDI statistics would bring Indias FDI figure much closer to those in China (Srivastava, 2003).

5.5 Hindrances to FDI Inflows in India and China


Progressively liberal foreign investment policies in India and China have emphasised a greater encouragement and mobilisation of foreign investment inflows. However both the economies still suffer from some weaknesses and constraints either in terms of policy and regulatory framework or in terms of accelerating the reform process which restrict the flow of FDI in these economies. The factors which limit the growth of FDI in India are outdated laws and their inefficient implementation, reservation of items for small scale industries, outmoded and inflexible labour regulations, weak credibility of regulatory system and conflicting role of various agencies and government, corruption and red tapeism, Inadequate, inefficient and poor quality infrastructural facilities, political instability and defective marketing structure (Panagaria, 2007; Das, 1998; Rao et al, 2005; Kumar, 1998; Sexena, 1989; Nagaraj, 2003). However, in case of China these factors are business regulations, anti competitive practices, Corruption, inefficiencies in tax administration and procedural complexities due to government monopolies and unnecessary control (Zhang, 2000; Cheng & Ma, 2008; Ng & Tuan, 2003; Ali & Guo, 2005; Keshava, 2007).

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