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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
1990$0.4 billion
2002$52.7 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
India
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.
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
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
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.
The main hurdle is corruption at every stage, this together with other reason added to less likeliness of FDI inflows.
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.
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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