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Comparison of China and India's FDI

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Welcoming Foreign Direct Investment (FDI), means of India and China differ to some extent which gives to some important subjects of concern about the definite FDI perspectives of India. In the days to come, can India became an FDI destination equivalent to that of China. The thesis mainly focuses on these issues. It will also guide us with the necessary steps that the country needs to follow to turn into a attractive FDI destination in World.

India was lagging to a large extent when compared to the FDI inflows that China has. In part, this difference shows the trust that the foreign investors have in China's growth and the disbelieve they had in India's loyalty towards the free market reforms. On the other hand, Indian Diaspora was the drawback for its own success until now and interested to welcome the investors to back home. India has become a supportive backbone to private enterprise in terms of its development in infrastructure. When compared to China's capital markets India's market shown a great potential and transparency

In the case of India which is more dependent on its organic growth, it is using a wide range of resources which shows that there will be a more sustainable progress that China's FDI driven method. "Can India overtake China"? Is no more a childish question and if it shows up the India's wiser progress and according to the policy experts, the wiser the step more growth is shown in the economy.


Brief Analytical framework

What is FDI?

Foreign Direct Investment (FDI) is a networking ingredient of the progress in the globalisation of world economy. FDI reduces the total capital invested by foreign investors, directly or indirectly to companies in different economy with a desire of attaining profits to be shared from the company in which they invest. The foreign investors attains possession of assets in the invested country companies as a relative ratio to their equity holidays. FDI by definition is generally known to show a long-term commitment because it will be a share of ten percent or more in the host country firm, together with the management capabilities.[1]

Role of FDI:

The significance of FDI lies beyond the financial investment that invested in the country. Along with this, FDI investment can be a mechanism for developing international marketing of products in terms of knowledge, management abilities, technical aspects of design, brand names, way of marketing and characteristics etc.. FDI can produce desirable results for both local industry and customer, by providing improved show up in the product design and technological transfer, way of utilizing global management skills of human resources, setting the firm with global standards of competitiveness new channels of export markets, providing wide range of services in terms of internationally quality goods and channels and with an increase in the employment prospects.[1]

Taking into consideration of all the above aspects, FDI can be mentioned as an important means of economic growth and is a driving factor of growth in developing countries. FDI investments are normally choosen as better option than the other forms of finance, as they don't create any debts, no-volatile and returns are directly proportional on the projects invested by the financers. In the present situation of rapid growth and tremendous change both in technological and managerial aspects, their need is always to be welcomed.[1, 2]

Choice of location of FDI:

According to Dunning's Ownership Location Internalisation (OLI) concept the worthful site productions of FDI investments to the host nations in terms of location benefits that the foreign investors made by the FDI. The concept shows that the involvement of developing nations in total investment of foreign direct inflow has been grown considering over the past 25years, taking into the consideration of the changes taken place in the past decades. For example looking for agricultural resources was high in 20th century when compared to the present. The present investments of FDI are complex to a large extent and are dependent on a wide variety of conditions base on the growing competition on the market in which the industries own and to the economic policies at the local and the host countries. [1,2]

FDI has been viewed as a technique to enhance the growth in the economy by the developing nations. In terms of IMF, FDI is an investment internationally for attaining a lasting interest by a local firm in one economy in an enterprise firm in another economy.

In spite the developing nations are pushing hard to get on the FDI but to a large extent FDI is gained by developing nations, for example it is one and half million dollar investment in the year 2004 China and India are the two developing powers of the developing nations, comprising of thirty seven percentage of world population. Both China and India has a large scale of natural resources, skilled labour and unskilled labour, affordable labour with good quality large local markets and the stable political use.[2]

By taking all these into consideration we can say that they have a tremendous growth in the FDI to setup the local and international markets and also to become a significant entity in the economic growth globally. India and China are the two growing nations of Asia which are at present the higher priority nations for FDI investment. Both India and China have their trends of policies for getting on the foreign investment.

India is the first country in Asia to setup a export technologies in 1965. India has drastically slowed down by not utilising the foreign investment because of it s self reliance and export replacement until the late 1980's till the introduction of new reforms (LPG) liberalisation, privatisation and globalisation in 1990- 1991.[3]

India and China are the two nations which are best suited for the FDI investments globally. Inspite, India has introduced excellent financial and instituting reforms easier to the China's introduction of these, now China shows up a better FDI in contrast with India. It is clearly evident that China is ahead of India, there are some important cases that India has to learn from China's experience.[1,3]

The financial markets governed by SBI in India are much enhanced when compared to China. India has a good service sector which requires small capital inflow than the manufacturing sector. Based on the analysis of AT Kearney, it is evident that India has a high enhance of becoming number one manufacturing location.[3]

Structure of Dissertation:

The thesis is discussed in a total of eight chapters. First chapter deals with the statement of the problem and comes out with the goal of this thesis. Second chapter deals with Indian and Chinese economy. 3rd chapter deals with FDI and developing countries. 4th chapter deals with Indian and Chinese FDI. 5th chapter deals with analysis of Indian and Chinese economy using SWOT and PEST analysis. 6th chapter deals with the methodology followed by observations and enhancements in the seventh chapter. 8th chapter deals with the conclusion and recommendation to be taken by nations to increase FDI inflow.

Statement of problem:

India secured independence two years earlier than China, but it is still behind in socio-economic development signs. Once China became a member of WTO China began to be choose as best FDI investment nation among the developing nations. In terms of Asian Development Outlook and UNCTAD(2005) point out that India's FDI is purely less than that of China and there is a quite enough difference between the actual realisation and approvals. However, China was ahead of the India because of this implementation of open door policy in 1979 for the inflows of FDI to grow its economy to the modern standards and capitalistic ways, it being a socialistic system.

Eventually, India also shown growth in its economy through LPG policies from 1991 onwards breaking out the barcodes of the license control raj. But according to RBI rightly spoken words "Despite all the talks we are no where even near to begun globalise in terms of any commonly used signs of globalisation. In fact we are still one of the best globalise among the major nations, however we take a look at it".

Justification of study:

The thesis point out the comparative study of India and China over FDI, it is mainly discussed about the policy reforms in India to make more FDI investments, next steps to be taken by India for attracting FDI and how to overtake China in the FDI inflows.

The growth of FDI is a major source making income for many developing nations like China and India. It brings several advantages like implementation of new products, skills, new markets and technology to the local country. India is preferred as the second best nation for the foreign investment after China which showed a growth of one hundred and eighty four percentage in the year 2006-2007. Inspite of better economical and managerial reforms of India over China, India is lagging behind China. The thesis demonstrates whether the current reforms in India are sufficient to overtake China.

AIMS and objectives:

  1. To identify the factors that develops the growth of Indian financial system through it's policy changes.
  2. To find out what initiatives made by Indian government to attract the FDI and it's policy changes made by the government of India to enhance the Indian health care system.
  3. To analyse participation and involvement of FDI in India and China, also to identify what India can learn from China.
  4. To produce qualitative evaluation about past and current issues which effects both India and China by FDI?
  5. To produce the comprehensive documentation of key findings of government participation of both countries by FDI.
  6. To conduct a competitive comparison by FDI in India as well as in China


A Framework of FDI

Overview of Indian FDI:

The Indian government behaviour towards the foreign investment has been modified to a large extent during the last decade. Foreign Investment at that time was restricted only to a certain particular industry under special norms has now been made liberal under the terms of restrictions and particular industries. This shows the changing confidence in the fundamental of the Indian economy and the drastic step of the Indian government to cope up with the global economy. Approval ways for foreign Investment in India are primarily most vigilant.[3,4]

FDI is considered as a significant step in the process of growth of economy in the developing countries. FDI is certainly the best investment policy in market when compared to the other reforms of finance since it does generate and debt, non-volatile and the benefits are dependent on the performance of project invested by the investors. With the implementation of new policy in 1991 (LPG) and other reforms policies, India has seen a growth in the investment and outflow of FDI into the nation. This was to a large extent due to the modification and dismission of trade opposing policies.[4]

Through economic liberalisation in India had taken its roots from the late 1970's, economic reforms in India have only started after 1991, the reforms which have opened up in 1991 have pushed the economy from the government control, government monopoly to the private sectors of the economy growth. The license raj is a constraint in the past, inspite of the slow down of the economy globally due to global crisis in 2008-2009 India had shown up a growth of nearly 6.7%. According to the Asian development banks Asia capital market report the Indian economy was grown as a third largest after the China and Hongkong in the growing Asian markets, with a market capitalisation of nearly US$ 600 million.[3,4]

Investment Environment:

Although India's foreign investment policy gives access to hundred percent FDI in most sectors, India till now has not attained its growth as an FDI destination to its maximum extent. The government's efforts in maximising the FDI investments are not up to the mark because of the flows with in the government like corruption, bureaucracy, and importantly the drawbacks in the needed infrastructure. India is known for its different operating ways which differ from state to state.[3,5]

Important reforms in the investments concerned issues; mainly the foreign investment was delayed in the last few years mainly because of UPA's dependence on India's communist party for the agreement in the parliament. The end of this agreement in 2008 brought into existence only a small set of reforms. For example, in February, the government implemented modifications that opened channels for FDI inflow like the insurance, telecom and retail.

The government's decision did not change any of the FDI capitals but it had given a chance to invest in these sectors beyond the limit but it should be taken place indirectly. Once major fore seeing, is that UPA government, which has been rejected without any support of the India's main left list parties, will now utilize its power to step forward in implementing more economic and investment reforms, many of which are anticipated to provide chances to foreign investors. [5,1]

Reforms are showing a growth with a normal place as a result of the global crisis and the diversity of views on the issues, even with the congress party itself. Plans to improve the tax system, create a self dependent debt management system and to a small extent privatisation of government owned firms are being taken into consideration and are proposal.

Recent performance:

There was a growth of 6.2% y/y in the GDP for Q2-09 (through it is less than the predicted one) with an increase of 5.8% in Q1-09. Grown was reduced to 7.4% for 2008 and is expected to continue the same pattern for the next few quarters. Growth in the first half of the year came on the side of high government prediction spending and stimulus spending. But less monsoon rainfall this year will reduce growth aspects. Industrial growth in the production is at 10.4% y/y in August at a tremendous state since October 2007, largely on the side of government mode of operation and inventory backing.[5,7,9]

Fiscal Policy:

The budget for the FY09/10 coming year is estimated that the reduction of the deflect to 6.8% of GDP from 6.0% the last year and the tax revenues getting worsened to 10.9% of GDP from 11.6%. Total investment of the central government is to grown to 17.4% of GDP on the things due to increased subsidies and for providing more opportunities on welfare and employment programs especially in rural areas to increase demand and growth trajectory. The period given to small farmers to repay their dues under the debt waiver and debt cancellation schemes has been increased up to the year end. More money is expected to be deposited into the National Rural Employment Guarantee scheme which gives assurance that each rural family works 100days on public sector projects. Fiscal consolidation is to be given up for small term improvement and is to be gained in the medium long term. The budget does not include important reforms which are significant for private business and foreign investment.[1,3 5]

Monetary Policy:

The Reserve Bank of India is likely to take the control of more monetary losses since October 2008 and to hold the repo rate as well as the reverse repo rate at 47.5% and 3.25% respectively in tis October meeting. The case reverse necessity can be increased once the liquidity conditions have become better. Lower policy rates are step by step converting into lower commercial rank landing rates, but the business is being more careful about the giving and taking.

Large energy prices earlier in 2008 had pushed the government to maximize retail fuel prices, making the Wholesale Price Induse(WPI), the RBI's target indicator for inflation, nearly to 12% in July 2008.

The external sector:

2008 saw maximum trade downfalls due to the increase in the oil prices. At the same time the plunge in the commodity prices failed to make it a substantial current account profits in 2008 due to negative export performance and ----- value of rupee decreased to a maximum extent. The considerable reduction in imports in 2009 motivated to an growth in the current account deflect in Q1-09 after a large extent of downfall in the last three quarters of 2008. The overall Balance of Payment(BOP) figures for H1-08 showed a addition; but by H2-08 it became a negative.[6,1,2]

H1-09 BOP balance is now once again in showing improvement due to a firming on the capital account side but the current account side was worsened in Q2-09. Foreign reserves, though are of considerable amounts have been tightened in the past months, but have raised again in July up to USD 261 billion and showing over 9.4% months of current account debit cover. The external debt is a tiny one at 18.7% of GDP providing a solution. The rupee value dropping in 2008, have brought loss of 20.7% against the USD, but in 2009 it coped up when compared to the lost value worth.[1,2]

Changes of Policies in 1991:

In July 1991, India has observed some important reforms comprising of certain de-reputation of industrial sector as well as liberalisation of FDI and imports. The important conditions taken in this policy alternation were:

  • Cancellation of industrial licensing in all organisations with exceptions like security-concerned and strategic areas.
  • Enhancement of capacity facilitates the market necessities for the running industries.
  • Nullify the rules on investments by MRTP and FERA industries.
  • Approving normally for foreign investment below or equal to fifty one percent of the equity under consideration of high technology and high investment priority industries and liberalisation of capital market.

While implementing the practice of mixed economy would continue, the new economic policies had placed a few hard alterations in government sector industries. Example: Minimizing the set of industries reserved for government sector from 17 to 8 and by December 2002 the set included only three sectors under the public sector units.[8, 10]

  1. Atomic energy
  2. Minerals mentioned in the atomic energy order, 1953.
  3. Railway transport.

The number of fields according to which industrial licensing is necessary is reduced to fifteen, declaration of new policy renewal fund(NRF) in order to handle the worse state sector organisations; for converting them into more independent and accountable, along with which foreign investment upto fifteen percent is allowed without any restrictions and foreign technology allowance for 35 main industries. These types of policy changes had increased the argumentation in India among the supporters of liberalisation policy and one who doesn't support the policy. The argument is still on; however it was later changed slowly with time of almost a decade of policy introduction and the result in the performance was visible. [9,10]


FDI in China


Right from the start of economic policies and begin of foreign capital investment in 1979, China started getting a huge chunk of foreign investment flows. China has become the second largest FDI investment country in the world where United States occupied the first place and China has also secured the biggest host nation among the developing countries. China's position as a host nation of FDI can be termed equivalent to the developed country though it is a developing nation with the highest FDI inflow.[17]

For twenty years (1979-1999), the actual FDI investments in China from 1979 to 1999 is nearly USD 306 billion, which is equivalent to ten percent of the global investment and thirty percent of the developing countries together. Chinese FDI investment pattern can be studied according to the alterations in the policy reforms- the first phase is from 1979- 1983, second phase is from 1984-1991. In the first phase only the Chinese government has set up four Special Economic Jones(SEZ's) in Guangdon and Fujan provinces, and implemented new set of regulations with supporting capabilities for the FDI in these SEZs. Though the amount of FDI investments is limited it is mostly taken place in these SEZ's.[17,18]

Determination of FDI in China:

According to the study FDI is basically categorized into two types: market oriented and export oriented FDI. According to the market oriented type of FDI the driving factors for promoting the FDI investments is the size and growth of the host nation. The export oriented FDI on the other hand mainly concentrated on the wealth competitiveness. There are some of the features which support both FDI which China is said to have are mentioned below.[17]

  1. Size and growth of the Chinese economy and policies.
  2. Distribution of FDI in China in the sectors of natural and sect oral and geographical.
  3. Human resource capabilities like cost and quality of labour.
  4. Infrastructure interms of physical, economical and technology.
  5. Willingness to trade internationally and its channels to foreign markets.
  6. Introduction of regularity principals and economic policy coherence.
  7. Investment security and promotion.

Capital Availability:

By the early 2000's, China had outnumbered United States with a more number of investments globally. FDI is a technique in which a non-local investor is interested investing in a local location. The investments of FDI into China can be counted on the basis of the global capital markets presence at that time and normal economic environment at that particular time. [13]

A challenging global economy, capital markets and business situation at that time implement options of creating huge chuncks of investment capital that exceeds the amount of good ideas of local investment can result in the institutional, organisational and individual investors to invest in the growing and developing markets of the world.


China's welcoming nature as a perfect host of foreign investment capital lies on its enhancement of infrastructure, resource opportunities like(physical and labour), quality and working abilities and the development of the managerial vale chain. The high degree obviously make China as a perfect host of FDI when compared to other countries, like India which strive for its success in attaining the same investment capital. A growing and developing nation requires good standards of infrastructure and resources in order to promote its sale of goods and services. [13]

Less transaction charges, due to the good standard of the aspects, helps investors to earn returns on these investments as their organisations are able to make benefits roads, highways, bridges and other ways of physical infrastructure, must be present runned and should be more secure for the transportation of the goods and also for the commutation of the workers. Another aspect for being a perfect FDI involves the availability of desired labour, who have the required aptitudes, experience and perfectness to create , manufacture and provide goods and services that can be seleld in the growing markets.

Regulatory environment:

When a national government acts into scene by implementing rules and policies with an objective at favouring state entities at the cost of privately running firms, such an environment can be detrimental to initiatives that aim to attract FDI. Like these, the regulatory environment can enhance or become a downfall fro the foreign direct investment for China. Large amount of regulations tend to show the entrepreneur and commercial activities, as the management and labour must spend more quality of time to carry on with these rules and regulations. If an investor wants to start a manufacturing facility in China, excessive start up costs, loyal exposure and other difficulty compliance items may implement that investor to set up the facility anywhere the environment is more complaint to the industry.

Other types of regulations which are must the compulsory joint venture partnership in which, along with the foreign investors, the state entity or local entity or local industry as a partner. A well established judicial system is favoured for the perfect FDI host. If a judicial system is centralized towards the locals who some time wants to practice some unfair, unethical and illegal means of business opuurtunities will also contribute to making China as a less choose destination.[17]

Another regulatory technique which supports for a favourable investment is the government's implementation of investment activities by providing alluring financial breaks like the tax breaks, grants, cheap government promoters financial services then it can be more effective in enhancing the making of a business more benefitiable and within a short span of time.


Political and economic stability can improve the state of the on flows of FDI. Stability means estimation of future and giving opportunities for organisations to attain better understanding of future markets. On the other hand constant social turnover are the constraints which are not favourable for a good progress of the investments. Economic instability can lead to the depreciation of the currency value due to hyper inflation. To promote FDI, natives/works as well as trading should have a considerable amount of respect towards Chinese low end rates. Violence, underground criminal running, blackmail, kidnaps and duplicate currency and products have all been the flaws in China that serve to reduce the efficiency of conducting trade activities. The justice system should also follow best practices for eradication and elimination of these unfaithful activities for a better investment opportunities.[17,18]

Local Chinese market and business climate:

The most shining feature of China is the large size of its population and market, and the aspects of growth result from this size. The ability of organisations- backed by foreign investment to sell to a considerable amount of local market makes China as an attractive destination for FDI. As the Chinese economy is showing a tremendous growth, high end industries, engineering, robotics, and luxury goods among others can step into Chinese market as a large scale investors because of its perfect local conditions, resources and other FDI chances are enhanced growth and FDI can begin a "success domino effect". The more foreign investment in the regions the more will be its growth. If the growth of a particular location is in a good progress to more investors will be willing to make FDI inflows. This point gains the benefits of the China's sizeable market, which represents growth oppurtuniteis in the present and growing commercial business. The higher the FDI inflows into the nation, the more the economic growth, forming a cycle of economic growth.[14,18]

Openness to regional and international trade:

Open nature of the business market helps in enhancing the promotion of FDI hosts. The main important thing to be taken into consideration is the business capability to promote its products and services to both local and international markets. Is the Chinese based organisations have restricted or less trading activities to foreign customers to be taken into consideration the United States, Western Europe, Japan and others tehn the local market may not able to accomplish a single investment in money and energy. Trade restrictions such as tariffs are genrally considered as less motivated options by other nations. An American product which is having high price while being marketed in China is of no demand in the local market due to the unnaturally raised price, such actions normally rise the tariffs of such local Chinese product in contrast with the US products and in certain cases, an outright ban on certain goods and services.[15]

Export-friendly policies, normally will play a major role in determining whether to invest in China, especially for organisation which have large chuncks of investments in other local markets. For enhancing economic policies and growth, it is necessary to initiate business-friendly system, and international free trade agreements are needed to be implemented by market developing governments.

The impact of FDI on China's international trade:

Right from 1980, China's foreign trade has shown an tremendous growth. In the period of 1980 and 1998, its share in the world trade has rised to three percent from the base value of one percent. The China's economy free flowness can be measured by the ratio of foreign trade to GDP addition from twelve percent to thirty four percent. It is evident that the FDI has been the main aspect which enhanced the improved China's entrance in the international sector of the production process known as globalisation. The conclusions can be derived from the below state empirical evidences.

China's comparative advantages:

As estimated by economic theory, China's main structural strengths in international trade have been focused in a small definitive number of labour intensive manufacturing products leather and shoes, dress materials and some other manufactured products (like, sports items, toys). Its main structural drawback lies in investment and technology intensive goods; machinery, turbines, textile raw materials and plastics. Ten sectors in which China had excelled had resulted in a total of sixty eight percent of China's exports and ten sectors in which China has fallbacks resulted in a total of 42 percent of Chinese imports.[15]

This present a brief about the differences that exist in policy making with China's foreign trading partners ( the EU-15, the United States, Japan) and the four developing individualized economies (Hong-Kong, Taiwan, south Korea and Singapore) and the presence of big inter-sectarian complementary. In the same channel, China had an excellent net export in the labour based products both in its business with Asia and the rest of the world.

China's specialisation policies have never been introduced. Its excellence in some of the more basic sectors (clothing and knitwear, carpets) was turned off in the nineties, while new comparative benefits evolved and other were vanished. In particular China had introduced new comparative benefits in computer tools, consumer electronics and electrical appliances and home used electrical apparatus though there was excellent growth in exports. At that moment it had given up its comparative benefit in three sectors, out of which crude and refined oil are same. These turnovers in the specialisation also emerged the China's position in world trade. While in 1997 China still continued to hold the biggest market chuncks in the most tremendously growing world markets like tele communication devices, computer devices and electrical appliances and tools. [17]

A Comparatative analysis China and India in a context of composition of GDP:

There is scepticism about the China that has the business structure of a developing nation. The inter sectored business specialisations were more strongly established when compared to other developing Asian nations. This can be credited to the China's wide extent and big resources of cheap labour which helps it in having a continuous enlargement of labour specific exports.

The Analysis of the IMPACT of FDI on China's structure:

China's policy is so attain export-related FDI which is interested in its enhancement has gained a excellent success. It has allowed it to construct on international level of manufacturing sector, which is highly capable to meet the world markets. There was no effect on this export-related and import-related sector during the Asian crisis is a net worthy point to be appreciated. FDI companies can be viewed as the firms which want to enhance the China's comparative benefits by improving its specialisation in the exports of labour related products and technology related products. The good show up of the China's building block of strategy was not clear, however for domestic firms, which noted a relatively good export show up. The international sector also improved few drawbacks and enhanced the linkages with the rest of the economy.[13]

China's industry, its performances and its competitiveness:

A valid point why local company's exports were always less can also be judged in their restricted access to foreign tools and technology. China's mark into the WTO will make out high-end situations. It will demolish the partition of China's trade routine and implement a more equal access to foreign resources. Chinese firms should take significant benefit from the cheap import rates to move on with their technical enhancement and improve their competitive spirit onlocal and global markets. After attaining the China's business is no longer much bothered about the foreign companies as liberalisation will enhance the imports taking place in the local market?

The ruling out of AMF quote will also enhance the clothing exports and production mainly advantageous to local companies which are the important for greater than seventy five percent of these exports. In a nation like China, involved in a good inter-sectored expertise, business liberalisation is predicted to make important redistribution of resources with in the local economy. As mentioned by several researches, combining the WTO will allow it to have an enhanced transfer of production features from agriculture to industry and within industry from economy related to labour related sectors. [1,2, 18]

Business liberalisation will improve China's comparative benefits in labour related sectors. It is obvious to strengthen China's introduction in the international market of production feature as this technique makes it easier to caaptilise on its expertise in labour related steps of production while enhancing its export capacities in the places of technology driven products.

FDI on China's industry, it performance and its competitiveness:

High influence on the industrial structure and competitive sector foreign organisations has become high priority entities in China's industrial enhancement. Their large chunck of wealth onlocal investment and to manufacturing output, their higher economy intensity and labour utilisations, compared to local organisations, indicate advantageously good effects on industrial structure and output. FIE's expertise shows a favoured opinion towards the labour related industries but not taking into matter it promotes for their strong involvement in some economy related industries.

Another important observation is that, inspite of supporting aggressively to China's export output, FDI production at present more local than export related. FDI has introduced new entities into the China's industry and hence enhanced the wide spread of ownership property, which has been part of giving raise to competitive sectors, FDI production at present is a primary part than import in the supply of Chinese local demand, illustrating that FDI has been an primary factor in the growth of China's economy. China entering into WTO will make it to enlarge the business liberalisation and induce higher competition in the local market.[2,13,17]

Other important properties can be viewed the Chinese manufacturing sector seems to be realized by improving returns to scale, when considering the labour force and both local and foreign economy. Relative rates of returns will normally display a high margin on the production of foreign economy, however, with small diversifications in between the regional and across sectors.

There is a undoubted gap between coastal and inner states in terms of their production process, with a strong technology expertise in the coastal regions when party dependent for big amounts of FDI investments which have major policy situations for coming future China could enhance the productivity of production capabilities in homeland states by involving correct steps to allot high return inflows. Moving FDI towards more economy related activities in coastal states and towards inner states for labour related activities is likely to produce overall productivity enhancements for China's industry. China should take part of economic related steps that enhance the development of labour related industries in control and western parts of China. This will make up a good chance for bringing out China's comparative benefits in both existing and new sectors of economic activity.[1,7,13]


Threats to India from China:

India's FDI figures are undervalued because of the deletion of certain components that are included by other countries, which go by the IMF's classification. But indistinguishable across the board placement with the IMF classification is not noteworthy either, though the Indian FDI analysis looks minute the much advanced China's. India should be necessarily update the FDI classification in some particular aspects but not in all, even if that undervalues the investments undoubtedly, China's experience in welcoming foreign direct investment (FDI) is much higher when compared to that of India. In fact, India was viewed as an "underachiever" in welcoming the FDI.[1114]

However, within other aspects there was a strong assurance about the unrelated Chinese supremacy in welcoming FDI investments vis-à-vis India, there has sometimes been some doubts what all China involves while showing of its FDI numbers and at the same time about the original of the FDI break between China and India as proposed by the official analytical data of the corresponding countries. On the other hand, it has been mentioned in the FDI concepts that Indian FDI is major under shown because of non publishing nature india's way of calculating FDI to the international standards.

As a rough estimate, we have to crate necessary modifications in China's FDI statistics, that is by removing data under various departments that China implements in its FDI, but we should fall into the trap by looking at the analytical data of the FDI these department includes: the round tripping of funds from hongkong, Taiwan and mallo in to the Chinese nation; inter organisation macro debt estimates short term long term boundaries financial business credits grants, funds; no-cash attachments of euqilaties inflow made by foreign venture, capital invetors and imported machinery.

Round -tripping of Chinese economy is a general study and a huge body of analysis has been surrounded by it. Such round tripping is often termed as a study which helps for the enhancement of investment of adjacent nations as also of Hong-Kong into the Chinese territory. According to the round-tripping analysis, Chinese companies transfer funds to these nations using malpractice methods and that in turn gets invested in Chinese territory as FDI investments in order to be advanatages from the preferential treatment given to FDI in terms of fiscal and other regulation. Since round tripping is normally a malpractice. Correct data regarding these are generally non-available. Analysis of these accounts to one fourth of China's total FDI.[1,18]

Key findings:

There are important elements of no-confirmation between the IMF classification of FDI and those utilized by the RBI for calculation ways. On a whole, when it comes to the international measure, the Indian FDI analysis becomes a restricted one as it involves a single technique-the foreign equity economy proposed on the basis of allowance/transferring of quite or selected shares to foreign direct investors. Basic common techniques that India removes from the IMF classification while utilizing original FDI investments are:

  1. Gains of foreign firms are reinvested.
  2. Remaining of foreign equity lists and foreign belonging loans to local subsidiaries as a part of inter-organisation debt estimates.
  3. Gloabal commercial debits by foreign direct investors in foreign investment implemented companies.
  4. Non-cash attainment of equity, investment done by foreign venture capital investors, earnings information of irregularly held FDI firms, control premium, non competition fee etc., as per IMF classification, which are generally implemented in other nations statistics.

All of these up for a large scale under valuation of FDI in India and therefore with correct modification in accordance with IMF rules, the FDI data in India could be eventually grown. As described earlier, an specially significant technique of FDI that is removed is India comprises the reinvested gains, which firms till now have given details on a irregular and independent basis. India had several foreign firms' investments right from the beginning and they reinvested largely during the period. If the regained earnings of all these are added up, tehn the present return on the stock of regained earnings will have to be accumulated to the returns on calculated FDI. Summed up together, these final returns would be relatively large to the stock of calculated FDI.

China, in contrast to India, sticks to the IMF rules of FDI calculation. China implements all the techniques of IMF in its classification of FDI. It also defines imported machinery as FDI while India presents it as the imports in its trade data. China's FDI figures also involve a considerable amount of round tripping. In the technique, the original investments are widely undervalued in India's FDI giving an explanation in comparison to such nations as China that stick to IMF rules of FDI calculation.[1,15,18]

A brief statistical analysis:

The non-conformation of India's FDI statistics to international ways has declined the summed data about the FDI for India direct comparison to other nations. Specifically, the fact that the FDI investments in India are whole calculated on equity inflows while setting other techniques a side means that the FDI investment into India have been undervalued. If its cash technique of FDI been increased to a small extent in 2001. This is due to the removal of certain technologies of FDI calculations by India that are implemented in other nations, which establishes conformity with the international rules. It is also a topic of concern that the statistics of the Indian FDI looks importantly negligible in comparison to that of China. But undistinguishable, across the board alignment of FDI classification with the IMF calculation is not right either. To be more accurate, it is necessary to update our FDI classification in several terms but not in all, even if that number undervalues India's FDI when compared with other nation in some extent.[4,16]

Areas in which alteration and/or alignment of FDI data in India is necessary to have reinvested earnings, which are the benefits of foreign investor earnings that are not shared with the stake holders as dividends and are re-invested in the entities in the local country, necessary to be seen as investments of FDI. While taking into consideration of the technical aspect of the view, it is well noted that it is very hard to take a note of reinvested benefits on the basis of the reporting capabilities for the foreign transfer transactions. This is primarily due to the transactions of such type are not originally taken place and therefore have to be added to the balance of payment statistics. However, the undervaluation of the total and re-invested benefits can be reduced by including of the subsidiaries, associates and branches etc.

The reinvested benefits can also be taken into account through correctly implemented surveys by the government organisations. The system which reports this type of data must be made judicially compulsory for the organisations re-invested benefits as a negative entry can also be sometimes shown as dividends came from the current account transactions that are noted under direct inflow income.

The inflow of FDI:

FDI inflow made up by the direct investor in his branches globally by debiting on the braches domestic market does not show up in the balance of payments. However, this flow could be subjectively taken into account for it data accumulated is related in part upto some extent on a survey system involving of totally relying on the central banking structure.

The non-cash acquisitions of equity, which is in the form of flexible and inflexible techniques such as tool of economy equipment, technology and know how brand signature etc.. must be introduced into India's FDI inflows. This is due to the non-cash flows have the strength to produce direct and spread over gains same to these expected from FDI in the form of equity flows, and the investment invested by the foreign venture capital investors must be made part of India's FDI.[1, 15]


The possibilities Indian Diaspora helps India to overtake China:

The Indian Diaspora is the biggest one globally to be mentioned after the China's and will have its initial steps in each nation in the world. The set up of the first Pravasi Bharaitya Divas from 9-11 January 2003 in this aspect was a noted historical event which pointed out the starting of a new trend between India and the Indians abroad. This was an aspect started up by the Indian government to take advantage of the global Indians to construct a strong economic future to India. Inspite of global recognization and notification of Indian who are successful abroad, there is palce of gap between the worldwide Indian society and India. Since its establishment in 1989, the GO PIO international is busy in reducing the gap by pulling down the global Indian diaspora under one roof and providing assistance in several economic and social development related works to welcome the investment flow to India and to other nations with PIO relation.[1,17]

The Indo- Asian news service while saying about the foreign policy journal said that the non-resident Indian's can provide proper support to India to turn it into a excellent growth thus beating China in coming future. The report is not a false one which does not misguides or generates a confusion; it is related on the facts about the economic numbers and the will power of the Indian Diaspora to take India to a high position with the Diaspora provide India with the necessary economic investments for a enhanced and tremendous growth to beat China? The result will be a yes.

Strong bond provides between India and Indian Diaspora:

Right from the start of economic policies in 1991, there has been structural transformation in India which is making it enhance a healthy rate. Non-resident Indians have done a major contribution in foreign investment but its part to the Indian economy was seen very late. When India faced the worst situation of payment crisis in the early nineties, its foreign exchange amounts were lessening and it was going make a default on clearing its international payment obligation, India turned to tis "National Reserve Indians" and it was the NRI investment that pulled out India from the ongoing crisis at that time. In 55 years of Indian history this was the first case where the Indian Diaspora pulled out India from the crisis showing how it can be useful in constructing a strong Indian economy. In 1998 also the Indian Diaspora held out its helping hand during the nuclear tests.[1,2]

India respects of democracy and human values:

India for the sake of democracy it caused a lot of economic drop backs, but it is only a political aspect that can classify this republic an dour nation. India is known for its secularist democracy and pluralistic. It is infact correct that China is showing a tremendous progress in the economic development ahead of India, but India is going in a correct path by the democratic rule of laws and human morals which are bigger and good technologies to be followed which will obliviously brings out the results. China is purely authoritarian where no methods prevail and where a man is not required if the press of it are not free to express. Labour laws are not properly configured. China is not trusted by peace loving countries.[1,16]

Taking a cue from Chinese Diaspora:

Taking a cue from Chinese Diaspora the Chinese economic growth which we are seeing right now is certainly up to some extent was built by the Chinese staying abroad. The Chinese Diaspora which figures up to 55million markets out almost six percent of the total China's foreign direct investment, while Indians with 20 million are not pot the mark by contributing ten percent.

But now a days the cultural-economic distance between the Indian and Indian Diaspora is reducing. Even though one desires for a fast growth in the economic policy changes, however, the Indian government is going in the correct direction with all the economic constraints in right position.

China has some difference benefits that India does not have. China started its economic policies in 1979 where as India's policies in 1991 with 0.7percent stake in the world trade where the China begin with 3.3percent, India is more concentrated on the export related growth policy to be more efficient China's foreign reserve is more than $194 billion and the FDI is more than $44 billion when compared with India, which is $5.6 billion in 2002. At the time India's manufacturing industry is displaying an tremendous growth. Indo-China together trade has grown from $338 million in 1992 to $5 billion in 2002.[1,12,17]

Not a long way to catch the dragon:

Inspite of these fact India has some advantages which China does not have and will take time for attaining those. China is no longer able to maintain its economic growth with proper setting up of political policies. China is quite different from India as the former is an authoritarian state an dthe later is an democratic state. The greatest advantage India has among the Indian Diaspora is not their economy but there vast knowledgeable people like scientists, professionals etc.. India can challenge and beat China when the Indian government implements correct policies for the NRIs/PIOs.

Can India come near to China? In the aspects of buying power priority, India's economy is the fourth biggest one, after the US, China and Japan respectively. By 2010, India is estimated to beat Japan. Many economic intellectuals hope that in coming 20years of time India's accurate GDP has the capability to see growth of ten percent and if it implements new policies it may grow up to 15 percent. If India focuses on enhancing other fields like agriculture, software and exports in these 20years it may get near to the China. Many Indian organisations are starting up their branches in China to take a benefit for the growth.[3]

China and India implemented quite different methods for the development. India is not performing at par when compared to the China, but it is also not under performing. India is performing in a good way if it continues to enhance in this way it may beat China. If this is the case, it will not only illustrate the significance of local entrepreneurship to a long-term economic development; but it also shows the restrictions of foreign direct investment (FDI) dependency which China is following.

Need for more policy Initiatives:

India can welcome more foreign Direct Investment if procedural aspects are reduced. To build the confidence in the investors it should implement a conducive climate. The expertise in the areas of managerial, financial, corporate trade and banking industries of the NRIs must be taken into hands for the economic modernisation of India. Through a decree implemented in 18th August, 1990, the Chinese government has issued a special set of rules and regulatory mechanisms for overseas Chinese to enhancing investments. There is no such set of rules and regulatory mechanisms in India by its Diaspora. What number of NRIs/PIOs knows about the instrument rules in India? It is started recently only to implement its action in the correct direction. By combining India with Indian Diaspora with some good policy methods such as dual citizenship and some economic sops may not be capable to lure them in the Indian market. Opportunities and potential return on investment will decide how great India's new bond love with Indian Diaspora's.[1,3]

Diaspora makes India proud:

India gets nearly $14billion a year in official remittances and this amount has plays an important role in India's $80 billion foreign assets. According to the latest balance sheet of payment data of Reserve Bank of India Remittances during April to December 2002 alone accounts to $10.8 billion. Seven Indians made it into the billionaires list globally while India came third among the Asian countries, whose people have taken place in an elite club. Most of them have taken their positions due to booming software sector. There was increase in the number of Indian companies getting stock listed in the New York stock exchange.

The India Diaspora especially the Non Resident Indians would praise the Indian government to make a rapid progress and allow the involvement of private sector in the development process. To attain the expected pace of policy making, the government requires a good political will and a strong economic policy, and the Diaspora is ready to show up its involvement. [1,3,18]


FDI in Indian and China, a comparative analysis:

As previously mentioned, China was welcoming a considerable amount of FDI when compared to India. Prior to 1980s India has good inflows of the FDI but once with the start of the liberalisation reforms in 1978 in China, it changed the scenario with China heading. Since late eighties and all through nineties China has been an icon in the developing nations in terms of FDI investments and hence economic development.[21]

The growth of FDI investment in China has grown from 2.8percent I 1990 to 12.5 percent by 2002 where as India has also seen a growth of 10 percent yearly. In FDI share as a percent of GDP, China by 2002 had 36.2 percent when compared to India's 8.3 percent of FDI share as a percentage of GDP.

During 2002, in China the per-capita FDI inflows are 40.7 percent and at that time it was 5.3percent in India. But of late, India's FDI is getting major strength and it had seen 15.3percent in 2006 over 2005. India in order to maintain its pace with China has to implement some good second generation policies. The policies of India and China with respect to FDI have become considerable more liberal during the last several years. The quick view of two countries policies in welcoming foreign investment gives us a brief idea to demonstrate the constraints for the difference in the investments of FDI and will enable us to suggest how India can enhance its investment environment.[3,20]


With open door reform implement since 1979, China has put its efforts in welcoming the FDI inflows the economic development growth, capitalistic characters, with in the social system. FDI flows in China are delineated, in major inflow rules and there setup regulations, featuring access over foreign investment and requirements. Along with these conditions China offered several initiations to welcome FDI's since 1980's. India also eventually opened up its economy from1991 clearing the barricade from itself of the license-control raj. But, as RBI views it as "Despite all the necessary negotiations, India are not even close enough in becoming globalised in terms of any commonly used indicator of globalization. In fact we globalize to a less extent with comparison with major countries- however we are looking on it" (RBI, Annual Report 2000)

Policy changes and initiatives:

Indian government has monitored the investment of FDI through a selective set of policies. India's first generation reforms in 1991, was limited, restricting to a large extent of foreign equity involving normally to 51percent through FIPB in some areas. It also gave liberal tax reductions to foreign organisations permits for starting branches by foreign firms were liberalized and steps foe giving remittance of royalties and technical tariffs were kept in order. Bhagavate (1993) corrects mentions that the policy alterations were not credible and also were not accelerating any momentum in reforms. Whereas China, too allows preferential tax implementation to enterprise set up in.

Special economic Zones and specified coastal cities organisations that are eligible for export related or technologically advanced also make up a 50 percent reduction in the income tax rate. A main important goods, some tax reduction is accepted in case of power projects, coal mining and petroleum refining projects.

Employment and Infrastructure:

The Indian FDI policy, this particular aspect is a noteworthy one when compared to the other competing nations in the issue of employment of foreign personal without any restrictions on their employment in the host countries like in India they are prevalent in most nations which include ASEAN nations as well as in China. Further, though India has a huge number of free trade zones and 100percent export related bases providing similar advantages; their working is diminished by region based on infrastructural problems. These methods require greater interest of the policy areas, easiness of entry ways, increasing of equity ceiling, introduction of a negative list, making ease to use of operating systems and methods, IPR legislation and a detailed disputes settlement system are necessary.

As long as India and its reforms are marketed aggressively, the expected dropdowns from policy liberalisation will be subnormal. To create India as a perfect trade location will be able to introduce stability in the system add up policy alterations as is being done in case of electrical and telecom services can result in a whole suspicion regarding the stability and integrity of nay policy construction.

FDI statistics in India and China:

A proper quantity of countries openness to FDI reduced by the size of the host nation which is supportive characteristic of an economy to welcome FDI. Nations vary in their economic and market size and the size of FDI inflows which are to be judged based on the size of host economy.

Certain Indicators of Relative FDI Performance:

A nation with a ratio of FDI to GDP that is more than one is believed to have getting more FDI than the size of its economy. It shows that the nation may have a comparative benefit in making of enhanced growth features showing up extensive market size for foreign company. On the other hand, a nation that has the ratio value less than one will be more protectionists or technically not sound or may have a political or social movement which indicates hinders the investment inflows. On a whole, FDI-GDP ratio is an index which determines the existing investment environment of the host economy. Nations with more methods for liberalisation policies and measures tend to have much higher stake FDI inflows to their GDP.

Inward FDI flows as a percentage of Gross fixed Capital Formation (GFCF):

A normal method of the relative size of FDI is the "FDI/capital formation ratio", given by the quantity of FDI inflows in one year divided by the total fixed assets inflows made by foreign and local organisations in the same year. FDI flows represented as a percent of GDCF can provide a basic method of the significance of FDI in an economies capital formation. The share of inner FDI investments as a percent of GFCF measures the relative weight of FDI in summed up accumulation investment taking place in the host economy. [20, 21]

Sunrise sector investment:

Inspite India is a first phase FDI attraction, China is a more destination of FDI for inflow in the sunrise sectors. Totally against to the Indian scenario, the EU, a comparatively small investor in China, is tending to invest more in the high-tech industries when compared to the Japanese or American sectors of investment.

China should be considered as an example, till now the foreign inflows is being invested in those places where there was a slow down nature in China, the Chinese government is not that particular about the kind of technology the foreign investor is setting up in the host nation. The system is partitioned and is taken into consideration about the debate in the political situations, which are the most frequent happening in a democratic state like India. This kind of system was more attractive as an destination for the foreign investors. South Korea also has been able to set up modern technology in growing sectors so as it can cope up with the competitive edge in the export sector.

Pre-Adjustment composition of FDI inflows in India and China IFC:

According to it, the FDI in India was classified by the RBI in such a procedure that does not give its conformation as the International standard as it does not involve several techniques, which are involved in the International reporting conditions of IMF as stated in table 10. When taken into consideration the international set of rules as well as to China, the show up of FDI investments in India's balance of payments statistics is a way to show much smaller channel of FDI investments. This was because it was restricted into only to the foreign economy equity implement on the basis of attainment/conversion of equity or preference stakes to foreign direct investors. Some of stakes to foreign direct investors, some of the basic techniques that India removed from IMF classification while predicting the original FDI investment was:

  1. Reinvested benefits by foreign organisations.
  2. Foreign equity records which are described US proceeds and foreign subordinated loans to local branches as part of inter-organisation and debt estimates.
  3. Global commercial debts by foreign direct investors in foreign invests organisations.
  4. Equity which is maintained good over 20percent in terms of American Repository Deposits (ADRs) and global repository Receipts (GDRs) taken into hold by foreign organisation investors(FOIs)
  5. Investment made by global institution in Indian firms as venture capital investments.
  6. llowances give to the base company to the counterparts of India.
  7. Non-cash acquisition of equity, benefits data of indirectly set up FDI organisations, as per IMF classification, which are generally implement in other nation statistics.

Similarities between India and China:

  • In both cases, the method is multi staged method; policies are initiated by a series of stages that are regularized under a review.
  • The utilisation of 5-year schedule in both nations as a synthetic design of economic policy promoting in the initiation of the reforms.
  • There are several basic methods of economic reforms in the two nations: like outward looking policies; attraction of FDI through basic incentive.
  • Setting up of free business zones in China and export processing zones in India.
  • Analysis of technology related FDI which Is ready to handle the local problem


  1. The first separating feature is the diversified locations of the two nations on the expertise of gaining scenario. Right from the initiation in China which is 12years a head of India, is able to well maintain its related package, where as India has a first phase FDI destination is generally dependent on the driving constants of its growth rate.
  2. The method has been showed up in both cases but in the Chinese scenario, this is a constant, logical and chronological flow of policies and events, where as in the Indian scenario it is a set of steps with constant rates.
  3. The Chinese five year schedule is well planned and is concentrated and initialising and implementing coherent strategic options, where as in India the rule of new foreign investors are taken on a scenario by scenario basis, approach that leads to a progress and opposes with a coherent view.
  4. There are no evident policy principles for

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