FDI-India China Comparison

Abhishek Sharma Aditi Singhal Aditya Arora Ankita Jain Isha Lamba Harangad Singh Chadha

Introduction
Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint venture, transfer of technology and expertise IMF defines FDI as The acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by non resident investors. Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of profits

FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. The economic developments of China and India, two of the largest developing countries in the world have been very impressive recently, but FDI policy and real FDI inflow in the two countries are different

India and China ComparisonStatistics For FDI

China's track record in attracting foreign direct investment (FDI) is far superior to that of India even after having a complex approval process The policy of china has been to rely heavily on FDI for the investment made in China. For example: FDI as a % of total investment in the year 2007
INDIA- 21% of total investment

CHINA- 42% of total investment

FDI net Inflows

FDI NET INFLOWS OF CHINA

1990$0.4 billion

2002$52.7 billion

FDI NET INFLOWS OF INDIA

2002- $2.6 1990$0.07billion billion

 In fact, India has been considered an "underachiever" in attracting FDI. In the year 2007 china attracted FDI of, $134 billion against only $ 34 billion by India.

China

Financial Assets220% of GDP

India

Financial Assets160% of GDP

This huge difference between the ability of the two countries to attract FDI can be directly attributed to the economic policies adopted by them and the steps taken by them to attract FDI.

Capital Structure

Wasted Capital
Majority of financial capital of both countries going to less productive areas. Chinas fund going to State Own Enterprises rather than the private sector Indias major share taken over by government to finance budget deficit. Much of whats left goes to Agriculture, tiny Households, etc.

Comparison between the approach followed by two countries

China provides many facilities to foreign investors to set up manufacturing plants in China, particularly for export of goods manufactured by them. In comparison, India has not differentiated very much between FDI for export and that for domestic consumption Thus though, India offers better environment to foreign investors to set up manufacturing plants for local sales, it did not offer substantial incentives for export oriented industries

 As a result, FDI has contributed in driving Chinas economic growth due to the rapid growth of Chinas merchandise exports. In India, by contrast, FDI has been much less important in driving export growth except in information Technology

For China, the share of FDI inows in 20002001 went to a broad range of manufacturing industries. For India, most went to services, electronic and computer industries

Difference in Definition
The IMF denition of FDI includes as many as 12 different elements, namely: equity capital, reinvested earnings of foreign companies, intercompany debt transactions, short-term and long-term loans, nancial leasing, trade credits, grants, bonds, non-cash acquisition of equity, investment made by foreign venture capital investors, earnings data of indirectly held FDI enterprises and control premium, non-competition fee, and so on However, with the singular exception of equity capital reported on the basis of issue/ transfer of equity/preference shares to foreign direct investors, Indias current denition of FDI does not include any of the other above elements. China instead includes all these in its denition of FDI

China also classies imported equipment as FDI while India captures these as imports in the trade data

Why is China performing better on the basis of economic determinants

Chinas total and per capita GDP are higher, making it more attractive for market seeking FDI
Its higher literacy and education rates suggest that its labour is more skilled, making it more attractive to efficiency-seeking investors China also has large natural resource endowments. In addition, Chinas physical infrastructure is more competitive. But, India may have an advantage in technical manpower, particularly in information technology China has a gigantic domestic market with a system of mass production. This reduces the cost of production considerably. India has yet to evolve a system of bulk production at the scale prevalent in China

China has more business-oriented and more FDI-friendly policies than India. Chinas FDI procedures are easier, and decisions can be taken rapidly. The World Bank Group survey found that, on average, it teaks 10 permits compared to 6 in China, and 90 days in India relative to 30 days in China, to start up a new business

In India there are more obstacles to business operations and development relative to domestic firms, especially on issues related to government regulations and legal institutions China has more exible labour laws, a better labour climate and better entry and exit procedures for business

Round tripping
It has been widely acknowledged that Chinas FDI inows are somewhat inated Reported ows are thought to be overestimated due to overvaluation of capital equipment contributed to joint ventures by foreign investors (the value of which is translated into equity investment and recorded as FDI) whereas Round-tripping in India as a part of the total FDI is almost insignicant, maybe as low as 23% China is a large recipient of FDI mostly because of the investments from her non-resident Chinese (NRC). Whereas Non-resident Indian (NRI), which have mostly preferred to invest in bank deposits in their country as opposed to FDI and hence the low levels of FDI in India

Government Regulations affecting India

1) Restricting Product Market Reforms
Politically sensitive areas like news media and defence still not regulated. There are also issues with the recent FDI regulations in multi brand retailing. Makes harder for local companies to innovate and be efficient, local supply chains remain inefficient and unexposed to worldwide markets and skills. Loss for consumers and whole economy.

2) Infrastructure
Lack of Infrastructure is the biggest hurdle for growth Physical Infrastructure is state controlled, regional differences in infrastructure concentrate FDI to some specific regions only Multiple regional parties bring in political instability in state as well as central government making development projects slow and implementation of reforms inefficient.

Also a major hurdle for India- Electricity shortage- Electricity Act 2003 aimed to provide electricity to businesses at low cost but only 8 states implemented it.

Sectors themselves attract FDI and have upgraded telecommunication highways and ports but there is a need for improvement in power, railways and water.

3) Large Bureaucratic structure- a ground for Corruption

Difficult to manage overlapping government agencies and tedious paper work-system very complex. Foreign investment is perceived as slow. It is difficult way of doing business in such bureaucratic structure.

The main hurdle is corruption at every stage, this together with other reason added to less likeliness of FDI inflows.

Steps taken to improve FDI inflow in the past decade

In the overall, inflows of FDI have increased substantially compared to the earlier regime in which the scope for FDI was quite restricted.
Stock of FDI in India
1990 $1.6 billion 2000 $17.5 billion 2009 $164 billion

 In the nineties, the government adopted a selective approach to foreign investments with emphasis on transfer of high technology and promotion of exports.
India has gradually expanded the scope for FDI by progressively increasing the number of eligible sectors. Further, it has also the limits for FDI in an enterprise. The steps taken to improve FDI inflow are : removing the general ceiling of 40% on foreign equity under the Foreign Exchange Regulation Act, 1973 (FERA) lifting of restrictions on the use of foreign brand names in the domestic market removing restrictions on entry and expansion of foreign direct investment into consumer goods

 abandoning the phased manufacturing programme (PMP) diluting the dividend balancing condition and export obligations, liberalising the terms for import of technology and royalty payments and permitting foreign investment up to 24% of equity of small scale units reducing the corporate tax rates. The parallel process of virtual withdrawal of the Industrial Licensing System and the retreating from the primacy given to public sector also enhanced the scope for FDI participation in India. As a result of the many steps that have been taken, Indias FDI policy is now quite open and comparable to many countries.

Current News on FDI

Foreign direct investment (FDI) by overseas Chinese will slow down in 2012 due to the policy curbs on the real estate industry Investment from overseas Chinese grew at the highest place in the property sector among all industries in the past decade, among to the report published by the Overseas Chinese Affairs Office of the State Council. The Mainland drew a record $116 billion in FDI in 2011, of which 20% went to the property sector and mainly came from overseas Chinese Foreign direct investment in India slid by 78 percent in June 2012, as reported on 25th August 2012, amid mounting worries about corruption, bureaucratic delays and lack of economic reforms.

The major drop is in construction, mining, real estate and business and financial services. There is a dire requirement to make changes in the current FDI policies. According to the central bank, this decline in investment can be reversed by shortening investment approval times and sorting out land acquisition issues

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