Multinational Corporations Investments In China And India Economics Essay
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Published: Mon, 5 Dec 2016
Environment for attracting investors. There are many policies employed by developing countries to attract foreign investment. China and India, as a major emerging markets, has attracted significant flows of FDI, China became the second largest receipt. Market size is a major factor for FDI especially for US firms. China’s absorbing foreign direct investment (FDI) has contributed importantly to its economy growth. Various economic determinants of FDI in china are market size, labor cost, infrastructure, and government policies. Privatizing oil sector and banks to reduce government intervention and provide economic freedom, opening economy to level playing field to TNCs by reduced tariff and taxes and flexible labor laws to permit free entry and exit to TNCs will help India attract higher FDI. I would also like to investigate the impact of FDI on China’s and India’s economic growth. This research assesses some of the factors that deter investors from investing in the country, investigates the reasons why India cannot attract FDI as much as China. In order to make FDI work for development there is a need to define and see how FDI fits in with India’s and China’s development objectives. Furthermore, I would like to discuss challenges, new trends and the future opportunities facing China and India.
STATEMENT OF RESEARCH QUESTION:
“Comparative analysis of different policies attracting Multinational corporation’s investments in China and India”
The choice of these large emerging economies stems from their success in attracting a significant amount of foreign investments, through effective policymaking and the reason India having very less inward FDI flows compared to China.
The questions which immediately arises relative to my research and which I would like to answer are as follows:
How countries can attract FDI and what is the motivation for foreign investors to invest abroad?
Do countries need to transfer resources to promote inward FDI or should they improve economic fundamentals?
What are the determinants of FDI and in India and China?
What are the problems and issues regarding foreign investment?
What are the administrative barriers to foreign investors in India and China?
How FDI can enhance the local competition in the host country?
What are the countries developmental objectives in order to attract FDI?
What are the effects of policies on host country?
What are the advantages and challenges for the firms to invest in India and China?
What lessons can India learn from china in attracting foreign investment?
What is the policy regulatory frame work and how policies can be implemented?
Based on the international trade theory comparative advantage of the host countries are identified as most important determinant of FDI. Later this approach declined slowly as it failed to explain why countries choose FDI rather than cooperating or licensing. Hymer (1976) explained that reduction of rivalry in international markets, exploiting monopolistic advantages and diversification of risk are the reasons to choose FDI and postulated that FDI is attracted depending on the global market environment. As per internalization theory (Rugman, 1986), foreign investments internalize transaction costs to improve profitability. Buckley and Casson(1976), Williamson(1986) claimed that when assets are intangible, internationalization reduces the transaction costs.
In this research I would like to adopt OLI electric paradigm developed by Dunning (1980, 1995) which explains FDI emerges due to ownership, internationalization and location advantages. Location advantages determine which country to be chosen for investment. They can be country’s factor endowments (Ex: capital, labor, technology, and natural resources, transportation and communications, infrastructure and its market size), Social factors (language, ethnicity, business customs and culture) and political advantages such as government’s transparency and policies like trade barriers and investment regulations (Dunning, 1980; Eden, 1991).
EXPECTED IMPLICATIONS FOR THE ORGANISATION:
Know the relationship between the globalization and foreign direct investment.
Identify different types of measures to attract inward FDI and factors affecting foreign investment.
Understand the competition between developing countries to attract foreign investment and their development objectives.
Role of policy in making FDI work for the growth and development of the India and China.
Understand international expansion of activities by transnational corporations through FDI.
Examine the appropriate policy framework to implement them.
HYPOTHESIS TO BE TESTED:
To answer the research question the hypotheses that are to be tested are the following:
Countries at different stages in their development need different type of policies to attract inward FDI.
Countries consisting of better infrastructural facilities and business friendly environment, receive more FDI compared to others.
Countries with higher GDP growth rate and higher per capita GDP are more likely to receive larger amount of FDI compared to others.
FDI enhance local competition
Property rights and contract enforcement affect FDI
DATA SOURCES AND JUSTIFICATION FOR CHOICE:
UNCTAD (United national conference on trade and development) organization functions as a forum for intergovernmental deliberations. It undertakes research, policy analysis and data collection for the debates of government representatives and experts and publishes them. UNCTAD compiles, validates and processes a wide range of data collected from national and international sources. Through UNCTADstat, free access to comprehensive statistical time series and indicators essential for the analysis of world trade, investment, international financial flows, and development can be done. We can access investment policy reviews on different countries and world investment reports.
OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. It`s publications are a prime vehicle for disseminating the Organization’s intellectual output. OECD publishes regular outlooks, annual overviews and comparative statistics. Among them:
OECD Economic Outlook assesses prospects for member and major non-member economies.
OECD Factbook is a key reference tool for everyone working on economic and policy issues.
OECD Economic surveys provide individual national analyses and policy recommendations.
Going for Growth presents comparative indicators and evaluations of national performance.
OECD iLibrary online service is used to access the publications. Through OECD.stat we can get access to most of the OECD statistical databases.
Provides access to the World Bank’s formal publications, including the acclaimed World Development Report and a range of books that cover the full spectrum of economic and social development. World Bank Policy Research Working Papers is a collection of policy research working papers, policy research reports and world development reports in the World Bank’s Archives. Doing Business provides objective measures of business regulations and their enforcement across 183 economies. FDI.net is used to access information on FDI.
Government publications include annual reports, reports of various ministries. Reports of ministry of information technology, ministry of commerce and finance ministry would give us an indication of latest investments, FDI flows and about the changes the in the policies. Regular publications include papers, magazines, and journals. Prominent and globally regarded sources like economist, financial times, business week would assist in getting a global opinion and significance with respect to global scenario. It is also easy to get access to this data source. These would also let us know the opinion of the industry leaders over various key developments and issues. Academic text books are most easily available and well compiled source of data. It is valuable data as the authors are distinguished academicians and their works are result of years of research, observation and study. They are available in library and e-resources.
PRELIMINARY LITERATURE REVIEW:
Since the 1990s, several nations are in a global race with regard to attracting FDI, which lead to increasing competition among countries for Multinational Corporations investments. Developing countries are the main competitors in this battle, as several emerging economies have based their strategies for industrialization on MNCs. Initially, in order to understand the context of the research question the preliminary literature review has been done by viewing UNCTAD and OECD publications and reports. Major focus on literature has been on Oman(2000), Dirk Willem te velde(2001), Sanjaya lall(2000).
Technological advances and increased liberalization in the developing countries attracted FDI over the last 3 decades. According to Lall (2000) governments are liberalizing FDI policy to attract MNC’s, thus facilitating the economic development and poverty reduction. The positive effects of FDI are increase in capital, organizational, market and managerial skills, technology know-how, global market access.FDI may also bring negative effects such as environmental damages and inequality between individuals and regions(D W te velde(2001). Competition between the developing countries to attract foreign investment is increasing day by day leading to undesirable effects such as making the governments to engage in “biddng wars” that increase investment subsidies to exorbitant levels, drive down workers’ rights, labor standards and public measures that are needed to protect the environment(Oman 2000).As it is referenced in the work of D W te velde(2001) theoretical developments( Blomstrom et al 2000) and empirical evidence( Borensztein et al 1998) local capabilities are important for benefiting from FDI.
The reasons for attracting FDI may be resource seeking, market seeking, efficiency seeking or asset seeking. In order to create business friendly environment, the countries should reduce costs arising from unstable macroeconomic and regulatory environment, administrative barriers and bureaucratic routine (Ramkishen S Rajan, 2004). He explains the importance of Investment promotion agency to attract FDI.
According to OECD literature studies, factors considered by investors to decide on investment location are stable macroeconomic environment, non-discriminatory regulatory environment and an absence of undue administrative impediments, presence of good infrastructural facilities and human capital. The measures followed by governments to meet investor’s expectations are Safeguarding public sector transparency, ensuring that rules and their implementation rest on the principle of nondiscrimination between foreign and domestic enterprises and are in accordance with international law, providing the right of free transfers related to an investment and protecting against arbitrary expropriation, putting in place adequate frameworks for a healthy competitive environment in the domestic business sector, removing obstacles to international trade, making changes in the tax system, Ensuring that public spending is adequate and relevant. Tax incentives can promote the investment but they are not substitute for policy measures. They serve as supplement to attract investment of an already attractive business environment. (Oman (2000). OECD study suggests the existence of a two-stage investment decision process. Investors first analyze economic and political factors and shortlist set of countries. Here, investment incentives play no role. It is only after the shortlist is made that investors consider investment incentives as one factor to decide where to invest (Oman, 2000).
Policies also depend on type of FDI for example Greenfield investment stimulates competition, M&A lead to more concentrated sectors (UNCTAD, 2000). This shows the importance for competition policy ( Te velde (2001). Oman (2001) explains the prisoner’s dilemma nature of competition between the governments to attract foreign investment results in permanent nature such as “bidding wars”. The policies are classified in to 1) policies attracting potential foreign investment 2) policies useful to promote established foreign investor and 3) policies affecting the response of domestic firms( D W te velde, 2001) .
According to the statistics from the UNCTAD, china attracts more investment than India(Exhibit 3). At present, further economic development of China depends to a large extent on continuous FDI and policy-making that will facilitate inward investment. Moreover, China’s entry to the World Trade Organization (WTO) suggests that trade will play an important role in the country’s economic development. So under this new international environment, do multinational enterprises go to China to exploit some conventional advantages such as low labor costs, or do they have other motives to meet challenges of the new international competition.(Shaukat ali and Wei guo 2005)
There are lessons that India can learn from China. Emulating and replicating successful infrastructural stories such as DMRC, DVP, and Golden Quadrilateral will help develop infrastructure. Structural Shift in terms of moving idling labor in agriculture to ‘skill-neutral mass manufacturing’ will employ millions from ‘seven-up’ BIMAOR UT UP CHA JA (sick get up and conquer) states, instead of current trend of just developing the service sector core competence only.(Dr swapna s sinha, Dr david H.kent, Dr Hamid shomali 2007)
Exhibit 3: FDi inflows in China and India.
FDI inflows in US $
Exhibit 3: FDi inflows in China and India.
Source: UNCTAD statistics.
“He, who fails to plan, plans to fail.” Without creating the proper plan to do the research, it is difficult to reach the objectives. I divided the allocated time period of 6 months logically as shown in the research plan below. Firstly, different policies employed by government and competition between the developing countries to attract inward investment are studied. Secondly, the factors that attracted MNC’s in India and China are studied and a comparative analysis is made. Thirdly, the work continues with the study of implementation of policies and finally conclusions and recommendations are drawn based on the overall analysis.
Understanding the Research topic
Identifying the issues that need to be addressed and the objectives to be met
Formulating a hypothesis for achieving the research goals
Review on literature work
Identifying the secondary Data sources
Theorizing and developing the conceptual framework to test the hypothesis stated
Develop theories using conceptual framework that explain patterns and connections in research material
Interpreting and analyzing research material
Compilation of the results for the stated & tested hypothesis
Framing arguments and preparing the documentation
Developing conclusions and recommendations
METHODOLOGY TO BE EMPLOYED:
I would like to choose qualitative research and analysis methodology to answer the proposed research question. Desk based research, where secondary data is used forms the main basis for the research. In order to collect the necessary information to meet the objectives and to test hypothesis, the research process is spilt in to three parts.
Documentary analysis is done by collecting information from journals, government publications, textbooks, information and statistics provide by international organizations (Example: UNCTAD, OECD, World Bank etc) and other resources to understand the policies to attract FDI. The journals are accessed through Aston e-library and other internet sources. Data streaming which is available at library is also used to collect information on countries.
Case studies on India and China are employed in order to understand different policies implemented by their respective governments to attract foreign investment.
Comparative analysis is done between India and China to answer the research question by interpreting the information from the above study.
As it is a qualitative research not many ethical issues are involved but care should be taken not to violate the copyrights reserved for journals and published books and reference should be given to all data that is adopted from other sources in compliance with Aston Business School rules on plagiarism and collusion. This research will comply with research ethics in terms of accurate transcription of data and findings such that the data will be processed fairly and lawfully. Ethics also involve not obtaining information through illegal or restricted procedures. There should be openness and honesty in communicating information about the nature of this research to all interested parties. It is also a courtesy to acknowledge all the people who contributed towards the research work.
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