The effect of FDI on India and Chinese Economy; A

comparative analysis
-Dr.S.R.Keshava♦
Introduction

India and China are the two emerging economic giants of the developing world,
both situated in Asia with 37% of world population (Asian Development Outlook2005)
and with more than 8% growth in their respective GDP of their economies (World
Development Report 2006). Both the economies have immense natural resources, skilled
and unskilled, cheap but quality labour force, huge domestic market and above all the
relatively stable political environment. Both the economies hence have vast potential to
attract Foreign Direct Investment (FDI) to serve the local market and to become a more
important part of the global integration.

China got independence in 1949, after 2 years of India’s political Independence

(1947), but today, China has surged far ahead of India in socio-economic development
indicators (Comparative analysis figures in annexure1). After China’s entry into World
Trade Organisation (WTO) China has emerged into the most attractive FDI destination
in the developing world. The UNCTAD (2005) and Asian Development Outlook (2005)
highlight the fact that India’s FDI is far below that of China and there is a wide gap
between approvals and actual realization. The FDI in India is just 3.4% of FDI flows as a
percentage of Gross Fixed Capital Formation in India by 2004 and 5.9% of FDI stocks as
a percentage of GDP by 2004, whereas in China it was 8.2% of FDI flows as a
percentage of Gross Fixed Capital Formation and 34.9% of FDI stocks as a percentage of
GDP during the same year, In absolute terms China attracted US$ 53,510 million in 2003
whereas India attracted only US$3420 million and during 2004 China attracted US$
60,600 million, whereas India attracted only 4374 million US$ during the same period.
Hence it appears India can learn a lot from the FDI policy and experience of China in not
only attracting FDI but also utilizing it successfully for its development. Hence the main
objective of this paper is to:

♦
Faculty, Post Graduate Department of Economics, Bangalore University,
Bangalore-560056. e-mail:sr_keshava@yahoo.com
contact No.+91-080-23474929, +91-0-9480584544

1
Objectives of the Study

1. To analyse the impact of Foreign Direct Investment on growth in India

2. to analyse the Impact of FDI in India on exports, GDI, FOREX and other macro
variables

3. to identify the hard and smooth factors of FDI in India and China

4. to compare the India and Chinese FDI

5. to identify the lessons India can learn from Chinese experience

Hypothesis

The study seeks to verify the following hypotheses:

1. the impact of FDI on Indian economic development is moderate

2. Chinese are successful in utilizing the FDI for the development of their economy

3. hard factors in India are more seviour than China in making it as less attractive
FDI destination

Methodology

The present study makes use of secondary source of data collected from the
publications of Government of India, Reserve Bank of India, Ministry of Industry and
Commerce, World Bank, and IMF, UNCTAD, Centre for Monitoring Indian Economy
(CMIE), Government of China, other than books, Journals and Periodicals. The reference
period of this study relates from 1981 to 2004. Relevant statistical techniques, especially
regression, have been used in the study along with simple ratios and averages.

2
The effect of FDI on Growth of Indian Economy

In this section an attempt is made to analyse certain variables that determines FDI, so
that we can estimate the effect of FDI on economic growth. To assess the effect of four
major variables namely Gross Domestic Investment (GDI), Foreign Direct Investment
(FDI), Human Capital (HC), Labour Force (LF) on Gross Domestic Product (GDP). The
data for the variables have been collected from the publications of Government of India,
Central Statistical Organisation, Reserve Bank of India and EPW Research Foundation.
The familiar Coub-douglas Production Function has been used for such an
analysis, that is

Y= A + X1 α + X2 β + X3 γ + X4 λ … (1)

Where
Y = Gross Domestic Product in year‘t’
X1 = Gross Domestic Investment in year’t-1'
X2 = Foreign Direct Investment in year‘t-1'
X3 = Human Capital in the year‘t-1'
X4 = Labour Force in the year't-1'

Further A is the total factor productivity that explains output growth i.e. not
accounted by all the four factors listed,α,β ,γ ,λ are the respective elasticity coefficient of
the concerned variables as usual. This equation is transformed into linear one to facilitate
to use of ordinary least square method by taking logarithmic transformation,
That is
Log Y = Log A + α log X1 + β Log X2 + γ Log X3 + λ Log X4 … (2)

After making such a transformation the final equation is expressed as follows by the
corresponding lower case letters.

Log y = Log a + α log x1 + β Log x2 + γ log x3 + λ Log x4 … (3)

The ordinary least square method yielded the following regression equation:

y = 2.349 * + 0.497 * + 0.121 * * * + 0.346 * + 0.069 * *

(5.916) (3.928) (1.655) (3.710) (2.339)

R2 = 0.996 R-2 = 0.993 F = 532.30 Durbin-Watson = 1.825

3
* - Significant at 10% level
** - Significant at 5% level
*** - Significant at 1% level

The‘t’ ratio for the constant (a), GDI(x1), HC (x3), LF (x4) all are greater than two
implying the strong significance of these variables on the GDP, but FDI is showing
positive, but not relatively significant effect on GDP.
The R2 for the model as a whole is 0.93, the F value is significantly high revealing the
significance of the fitness of the model. The D-W Statistics for the model is 1.825
revealing, the problem of auto-correlation has been fairly solved.
The model shows that 1 percent increase in GDI leads to increase in GDP by all most 0.5
percent. The 1% increase in FDI brings about an increase in GDP by 0.12 percent. The
coefficient for human capital is 0.34 percent and that of the labour force is 0.7 percent.
Thus GDI and HC significantly affect the GDP. However the coefficient of FDI though
not significant as other variables in the study, is positive.

The impact of FDI on various macro economic variables

In this section an attempt has been to assess the impact of FDI separately on
various macro economic variables. As we all by now known, FDI involves the transfer
managerial resources to the host country. There have been disagreements about the costs
borne and the benefits enjoy by host and recipient country between pro-liberalization and
anti-liberalization/anti-market views. One country losses need not necessarily be another
country gains. Kindelberger (1969) argues that the relationship arising from the FDI
process is not a zero sum game. Ex-ante, both countries must believe that the expected
benefits to them must be greater than the costs to be borne by them, because an
agreement would not otherwise be reached and the under lying project would not be
initiated. However, believing in something ex-ante is not guarantee that it materializes
ex-post. The impact of FDI on host country can be classified into economic, political,
and social effects. The main intention at heart of every MNC is profitability and hence
they invest where the returns are high, buy raw materials including cheap labour where it
is relatively cheap. MNCs succeed because of market imperfections and cast doubts on it
as claim on welfare of host country. The conventional wisdom that FDI is always
improving is no longer a conventional wisdom (Leahy and Montangna, 2000). The
economic effect of FDI can be classified into micro and macro effects.

4
Micro Effects: The micro effects of FDI reflect on structural changes in the economic
and industrial organization. An important issue is whether FDI is conducive to the
creations of competitive environment in the host country. Markusen and Venables (1997)
put forward two simple analysis channels to find the micro effect of FDI. They are

1. Product Market Competition.

2. Linkage Effect

Product Market Competition (PMC)

Through PMC the MNCs will be substituting the products of domestic firms in
host country.
Linkage Effect
MNCs may work as complimentary firms to domestic firms in host country
where it is possible for FDI to act as a catalyst leading to the development of local
industry. FDI may have benefits, but it will not come without costs. The decade of
liberalization and the impact of the FDI on macro economic factors in India have to be
found in this study.
To assess the impact of FDI on various relevant macro-economic variables
namely exports, private final consumption expenditure, Forex, Gross Domestic
Investment, gross domestic savings, trade balance, balance of payments.
23 years data from 1980-81 to 2003-04 has been taken to analyse the impact of
FDI, the independent variable here is FDI which has been lagged (t-1) to assess the
impact on said macro-economic variables.

5
Partial Coefficients with respect to FDI
Constant β- coefficients R2 F
Exports 19084.47 7.899* 0.933 264.113
(4.434) (16.252)
GDS 74930.04 19.472* 0.925 233.354
(6.638) (15.276)
PFCE 444033.259 18.044* 0.855 111.859
(29.389) (10.576)
GDI 3.910 0.378* 0.829 86.997
(31.359) (9.327)
BOT -8275.833 -3.0988* 0.962 483.442
(-6.632) (-21.987)
Forex 8518.077 7.957** 0.934 286.329
(1.980) (16.381)
BOP 578.479 1.278* 0.632 32.67
(0.292) (5.716)

Note : * - Significant at 1% level

** Significant at 5% level
The table furnishes the estimates of relationship of the selected individual
variables with FDI. The R2 has been significantly high excepting for the BOP variable.
The signs are also as expected and the coefficient is statistically significant. Therefore,
when looked at from individual variable angle, FDI is significantly affected by different
by different Macro-economic variables. However, FDI being affected by several factors,
the results should be cautiously read. The results should be cautiously read. The results
should be cautiously read. The results do not indicate the exact ‘contribution’ of each
variable to FDI. But at this stage it would be revealing to quote some of the studies that
have arrived at similar conclusions.
Lall(1985) found a positive relationship between FDI and exports. in India
whereas Subramanyam and Pillai (1979) Panth(1993) and Kumar(1994) did not find any
empirical evidence supporting the thesis of better export performance by foreign
enterprises. Fry (1993) indicated that increase in FDI reduced national savings in the
cross section data for 16 developing countries. But that does not seem to have occurred
in India (Kumar and Pradhan, 2002). There is also a vibrant discussion regarding
whether FDI crowds out or crown in domestic investment, but in many cases, FDI is
found to complement GDI which is also the case in India.

6
FDI in China

The evolution of China’s open door policy in the aspect of FDI needs to be
understood in the wider context of China’s Political and economic reform, in particular
the difficult transition from a planning to a market economy as Deng Xiaoping once said,
reform in China is like “crossing the river by feeling the stones on the riverbed”. This
message has been translated into a series of guiding principles for the reforms.

The Hard and Soft Investment Environment in China

Based on the policy evolution and the economic progress we can now delineate the
favorable and not so favorable factors responsible for huge flow of FDI into China.
Fengli and Jingli (1990) have classified factors under Hard and Soft Environment as
follows:
Foreign Investment Hard Environment Soft Environment
Environment
• Transportation • Historical Elements
• Tele Communications • Political Background
• Energy Supply • Cultural and social structure
• Public Utilities • Economic Regime
• Other Infrastructure • Social Securities & welfare
KEY FACTORS • Raw Material & components • Law & Legal System
supplies • Human resources
• Others • Labour Relations
• Government Services
• Business Services
• Others

Whereas the hard environment refers to the conditions and characteristics of the
tangible infrastructure, many of which are readily measurable in quantitative terms, the
soft environment factors are mostly intangible and are very difficult to measure, but they
are most often critical to the operation and development of foreign invested enterprises.

Foreign Direct Investment in China’s Economic Development

Chinese economic development since 1978 can be broadly conceptualized

as sequential process with the following phases:

• 1978-84: Agricultural transformation, massive increases in rural income and

saving and release of labour to industry.

7
 • 1984-92: Growth of ‘Township-Village Enterprises (TVEs) through exploration
of rural savings and demand and “simultaneous explosion of FDI-
overwhelmingly from the overseas Chinese, in the Special Economic Zones and
related coastal areas, primarily for export of labour-intensive light manufactures.

• 1992-2000: Proliferation of Multinational Investments in heavier, more capital

and technology intensive industries, and infrastructure, mainly for the domestic
market or the non-tradable sector.

Further the following basic facts of Chinese economic growth amplify the impact
of FDI on its economy:

• The Chinese economy has been growing of nearly 10 percent a year since last
two decades, the fastest rate of growth in the world.

• The savings rate in China has been exceptionally high at almost 35 percent in
1994.

• The magnitude of poverty has reduced to 6 percent from 22 percent. The

World Bank (2002) estimates also have substantiated it.

• Nearly 190 million people have been pulled out of the poverty.

• The enormous amount of investments that have been made in infrastructure,

especially in power and real estates, transportation in SEZs, boosted the over
all growth rates.

Poverty Reduction in China

In terms of number of people escaping absolute income poverty, china has

undoubtedly made the single largest contribution to global poverty reduction of any
country in the past 20 years. Using official income poverty lines as a bench
mark,(official income poverty line for china has been set at about $0.70 per day which
has base year of 1993 PPP or international prices) the number of poor in rural China fell
from 250 million in 1978, the first year of the economic reforms, to around 34 million in
1999. These gains are impressive not in themselves but also in comparison with the
trends in much of the rest of the world.

However, it is perhaps legitimate to model the Chinese development process as

one in which the initial growth of huge domestic market through an Agricultural

8
Revolution, followed by rural industrialization and export explosion with its domestic
multiplier effects, acted as an irresistible lure for the inward rush of large MNCs. The
process gained momentum with the unfolding of international division of labour. This
model implies a two-tier FDI process:

1. Mainly export-oriented investment in light manufacturing by the over seas

Chinese;

2. An accelerating in flow of multinational investment eager to establish a presence

in what was apparently going to be, in a few years, the largest domestic market.

FDI Policy and Environment

China has a fairly restrictive policy frame work with all Foreign Direct
Investment (FDI) Proposals being approved on a case-by case basis , FDI is encouraged
(in joint venture with domestic state- owned enterprises) in most of the manufacturing
industries and agricultural activities, though all industries in the service sector (except
hotels) are closed to foreign -investment 100% foreign ownership is permitted in export-
oriented hi-tech industries. China permits repatriation of profits only out of net foreign
exchange earnings. The important highlights of the FDI proposals are listed hereunder:

• All FDI Proposals are approved automatically, except in manufacturing and

agricultural activities where it is done by case-by-case basis.

• Repatriation of profits allowed only on net foreign exchange earnings.

• Most enterprises exempted from duties on import of capital goods.

• Corporate income taxed at a flat rate of 33 per cent tax holiday available for all
enterprises.

FDI in India and China; a comparative analysis

As has already been discussed China has been receiving substantial FDI
compared to India. Although prior to 1980s India received higher FDI than China but
because of the liberalization policy adopted by China in 1978, turned the tables in favor
of China. Since late eighties and throughout nineties China has been in forefront of the
developing world in terms of FDI inflows and hence economic development. A
comparative picture of FDI flows to India and China is provided in the table No1.

9
 Table 1

Selected FDI indicators of India & China

Country 1990 2000 2001 2002 2006

FDI Inflows China 3487 40772 46845 52700 69468

(million $) India 379 4029 6131 5518 16881

Inward FDI stock China 24762 348345 395192 447892 292559

(million$) India 1961 29876 35067 41525 50680
Growth of FDI Inflows China 2.8 1.1 14.9 12.5 -4%
(Annual %) India -6.1 16.1 52.2 10.0 153%
FDI stock as percentage of China 7.0 32.3 33.2 36.2 11.1
GDP (%) India 0.6 3.8 4.0 4.3 5.7
FDI as Percentage of gross China 3.5 10.3 10.5 NA 8.0
capital fixed formation (%) India 0.5 4.0 5.8 NA 8.7
FDI flows China 3.0 32.0 36.5 40.7
percapita(dollars) India 0.4 4.0 6.0 5.3
Share of foreign affiliates China 12.6 47.9 50.0 NA
in total exports (%) India 4.5 NA NA NA
2668
China 388 1080 11591 1237.2
906
GDP Billion dollars India 311 453 484 502
China 3.8 8.0 7.3 8.0 9.8
Real GDP growth India 5.0 5.4 4.2 4.9 9.0
Source: compiled from the World Investment Report of respective years

The growth of FDI inflows in China has raised from 2.8 per cent in 1990 to 12.5 per cent
by 2002 whereas in India also the FDI has grown by 10 per cent annually. In FDI stock
as a percentage of GDP, China by 2002 had 36.2 per cent whereas India at the same time
had 8.3 per cent of FDI stock as a percentage to GDP. Per capita FDI flows were 40.7
per cent in China during 2002 and at the same time it was 5.3 per cent in India. But of
late, India’s FDI is getting major boost and it had 153% of growth in 2006 over 2005.

Hence India in order to keep pace with China has to speed the second generation
reforms.

The policies of china and India regarding FDI have become significantly more
liberal during the past several years. The comparison of the two countries polices in
attracting foreign investment gives us fair idea to indicate the reasons for the differences
in inflows of FDI and will enable us to suggest how India can improve its investment
climate.

10
(i) Reforms

With open door policy adopted since 1979, China has tried to attract FDI to
modernize its economy in its own way, capitalistic characters, within the socialistic
system. FDI regime in China is delineated, in major investment laws and their
implementing regulations, featuring control over foreign investment and requirements. In
additions to these measures china offered number of incentives to attract FDI’s since
1980’s.
India also gradually opened its economy since 1991 removing itself from license-control
raj. But as RBI rightly points out “….Despite all the talk, we are no where even close to
being globalized in terms of any commonly used indicator of globalization. In fact, we
are still one of the least globalised among major countries-however we look at it…”
(RBI, Annual Report 2000). Due to lack of political consensus the labour reforms, fiscal
reforms and freeing the economy from the iron grip of bureaucratic controls still has to
take place in India

(ii) Policy Changes and Initiatives

Indian government has regulated the inflow of FDI through a highly selective policy..
India’s first generation reforms in 1991, was restrictive, limiting the maximum foreign
equity participation generally to 51 percent though FIPB. It also gave the discretionary
powers to FIPB to permit 100 percent equity ownership in some cases. It also gave
liberal tax concessions to foreign enterprises. Approvals for opening liaison offices by
foreign companies were liberalized and procedures for the out ward remittance of
royalties and technical fees were streamlined. Bhagawati (1993) rightly points out that
the policy changes were neither “credible” nor “momentum-giving” reforms as they were
not comprehensive in their scope and did not go for enough to make a significant impact.

Whereas China, too, grants preferential tax treatment to enterprises set up in

Special Economic Zones and specified coastal cities. Enterprises that qualify as Export-
oriented or technologically advanced also avail of a 50 percent reduction in the income
tax rate. A crucial characteristic missing in the Indian policy is the absence of tax
exemption on imported materials and equipment, some tax reduction is possible in the
case of power projects, coal mining, and petroleum refining projects.

11
(iii) Employment and Infrastructure

The Indian FDI Policy, nevertheless, scores over the policies of other competing
countries in the matter of employment of foreign personal while restrictions on their
employment do not exist in India, they are prevalent in most countries in the ASEAN
countries as well as in China. Further, though India has a large number of free trade
Zones and 100 per cent export oriented units providing similar benefits, their functioning
is hampered by location-specific or infrastructural problems. These schemes require
greater attention of the policy makers in India.

In terms of the policy areas, simplification of the entry routes, raising of equity
ceiling, introduction of a negative list, simplification of the operating systems and
procedures, IPR legislation and a comprehensive dispute settlement system are critical.

Unless India and its policies are marketed vigorously, the anticipated fallouts
from policy liberalization will remain sub optimal. One way to create a better image of
India as a business location will be to introduce stability in the system incremental policy
changes as is being done in the case of the power and telecom sectors can cause total
confusion regarding the sincerity and stability of any policy regime.

(iv) Growth rate and Growing market

With 37 percent of the world’s population, India and china are potentially the world’s
largest markets and the biggest host countries for FDI from the European Union.
Investment from abroad has been a major driving force in the attainment of high growth
rates in these countries. It became clear to both the Chinese and Indian governments that
their economic takeoff could only be achieved by attracting technology embodied
foreign investment. Given their size and their level of development, china and India are
apparently direct competitors for FDI.

In fact, size of domestic market has been the most important factor responsible
for the China fever with about 1.2 billion population and the economy growing at an
average rate of 10 percent for the past one decade, China has emerged as one of the
fastest expanding markets in the world. Hence, large members of Multinational
Corporations from the USA, Europe, Japan, and South Korea have been moving into
china to have a slice of investment opportunities.

12
 India is not far behind in terms of the size of market it offers to investors, the size
of Indian market, which has over 350 million people in the middle-income group, is
considered to be the most important factor attracting overseas investors. India. also is
second largest pool of scientific, and technical manpower in the world, the net result is
India is exporting a very high quality human resources to the world. The wages in India
are also one of the lowest in the world.

(v) Sunrise Sector Investment

Although India is a “First-Phase FDI recipient” China as a more mature FDI

recipient attracts more investment in the sunrise sectors. Totally in opposition to the
Indian situation, the EU, a relatively small investor in China, tends to invest more in the
high-tech sectors than its Japanese or American counterparts.

China example should be mentioned, so long as foreign capital is flowing in and

particularly in those areas where China is lacking, the Chinese authority is not bothered
about the type of technology the Foreign Investor is bringing. The system is regimented
and it has ruled about a debate in political circles, which are very common in a
democratic set up in India. This type of system has been found to be very suitable for the
foreign investors. South Korea also has been able to import modern technology in crucial
industries so that it can maintain competitive edge in the export front.

(vi) FDI by Non-resident Chinese and Indians (NRCs and NRIs)

China’s development as a haven for FDI and a source of labour intensive exports
is a logical as well as chronological sequel to the pacific miracle. India’s development
has no such organic link with the East Asian experience. Expatriate Indian entrepreneurs
played, but a minor role in East Asia’s growth and expatriate investment had a negligible
share in India’s total FDI. Of course, the ‘Open Door’ is a far more recent phenomenon
in India, dating back only to 1991, as opposed to the early 1980s in China. However,
enough time has passed since 1991 to assert that India has not experienced anything like
the early surge of expatriate investment in China has been accelerating after a slow start
and its growth curve is not too similar to that of early MNC investment in china. Nor is
the character of MNC investment very different in the two countries. Largely, in both
countries, such investment has been oriented towards the domestic market rather than to
exports. It has been attracted by economics of scale and large market sizes, not primarily
by low-wage costs. Non-resident Indian (NRI) Investment, on the other hand, has been

13
far more export-oriented. It has also tended to favor small-scale and labour-intensive
technologies. The following Table provides data on NRC and NRI investment in their
respective countries.

Table 2

Comparison of NRC and NRI (Share in their respective country’s FDI)

Year % of NRC to % of NRI in

total FDI of total FDI of
China India
1991 71.28 45.59
1992 80.34 22.17
1993 82.91 31.36
1994 77.98 34.00
1995 72.09 28.89
1996 69.28 19.65
1997 64.96 06.32
1998 NA 02.69
Source: UNCTAD, 2003
During 1983, early stages of Chinese reforms NRCs contributed greatly for surge
in FDI inflows into China by contributing more than 66 per cent on average in between
1983 to 1990. They initially were contributing around 59 per cent that rose to 75 per cent
in 1989. India was not fortunate to get such a monumental start from NRIs in boosting
FDI in India. Though India opened her doors to MNCs with a bang, NRIs did not do
their role as their counter part, NRCs did for China .NRCs contributed 71.28 in 1991,
which rose to 82.91 per cent in 1992, though marginally declined to 64.96 per cent by
1997. The NRIs were no match, as their peak contribution of 45.59 per cent came when
India opened her doors for MNCs. Later on, they demanded and got more provisions
rather than increasing their share in total FDI. Their contribution instead of increasing
after getting more incentives is shrinking and it reached rock bottom at 2.69 per cent
during 1998. Because of which China could attract about 25 per cent of total FDI inflow
into the developing countries. The next country in the line, that is, Brazil could attract
only 10 per cent. The predominant position of China in attracting FDI for 1995 on wards
cannot be explained by normal economic parameter.

14
Investment Climate in India and China

Table: Indicators of Investment Climate

FDI as %
gross

of

al Invester
ICRG risk
Regulation

worthiness

debt rating
Euromney
Institution
repatriatio
regulation
formation

Composit

sovereign
longterm
country

Moody
capital

rating

rating
credit

credit
Entry

Exit

ti
of

&

n
199 2001 2001 2001 200 Dec Sept.200 Sept.2002 Foreign Doestic
0 1 2002 2 currenc Currency
y 2003 2003
China 2.8 10.1 S F F 75.0 58.9 56.4 A3 --

India 0.3 3.2 A F F 66.3 47.7 55.1 Ba2 Ba2

Source: World Development Indicators, 2003

China on all accounts fair better in the factors of investment climate. FDI as
percentage of gross capital formation is 10.1 per cent in 2001 and India during the same
period is 3.2 per cent. In the entry regulation, India is restrictive and China permits
authorised investors only to enter but whereas once enter the repatriation of income and
capital is free in both the countries. The composite international country risk guide rating
of both the countries are good, but China's rating is excellent. The institutional investor
credit rating ranks the countries on the chances of countries default, where China's rating
is good at 59 per cent whereas India it is at 47.3 per cent. The Euro-money country credit
worthiness rating which studies the risk of investing in an economy, rates both the
countries as equally good. The Moody's sovereign Foreign or domestic currency long
term and debt rating ranges from AAA which is extremely strong capacity to C which is
default ranks China's foreign currency ahead of India, but for the domestic currency it
has not calculator but for India both is at Ba2 which reefers to fair rating.

Similarities between India and China

• In both cases, the approach is a multi-stage approach;

• Reforms proceed by a series of steps that are constantly under review.

• The use of a five-year plan in both countries as a synthetic framework of

economic policy helps in designing the reforms.

• There are many common instruments of the economic reforms in the two
countries: outward-looking policies; attraction of FDI through fiscal incentive;

15
 • Creation of free trade zones (Special Economic Zones (SEZs) in China, and
Export Processing Zones (EPZs) in India);

• Emphasis on technology-embodied FDI; willingness to tackle the regional

problem.

Major Differences between India and China

¾ The first dividing factor is the different positioning of the two countries on the
learning curve. Since China initiated its new policy 12 years before India, it is
well able to fine-tune its incentive package, whereas India, as a "first phase FDI
recipient” is primarily concerned with the revival of its growth rates.

¾ The approach has been gradual in both cases indeed, but in Chinese case, there is
a continuous, logical, and chronological flow of policies and events, whereas in
the Indian case, there is a series of spurts followed by contractions.

¾ The Chinese five year plan is well thought of and is aimed at designing and
implementing coherent strategic choices, whereas in India the decision to accept
new foreign investor are taken on a case by case basis, a practice that leads to
arbitrariness, and that militates against a coherent view.

¾ There are no clear policy guidelines for investment in different sectors, there are
no clear strategic choices, and the threat to reverse some freshly born policies is
all too vivid.

¾ Another major difference between the two countries is the role played by
technology in the growth and development process. Technology imports and
Technology Transfer (TT) are strongly encouraged in China. TT has become a
sine qua non condition for a successful investment strategy in China.

¾ In an effort to foster industrial upgrading and restructuring, China has been

spending heavily on imports of Technology, advanced machinery, and equipment
worth US $ 18.4 billion during the period 1979 – 1994 (People’s Daily 1996).

¾ Another major difference is that the objective of “National Interest” is much

stronger in China than in India. In China, Sino-Foreign JVs and cooperative
enterprises are required to abide strictly by the principle of sharing the common
interest; both Chinese and foreign partners have to bear equal risk.

16
¾ In attracting FDI, China wants to maximize its own national interest by
“accepting beneficial inputs, while restricting and eliminating those which may
have an unfavorable impact” (Beijing Review, 1994). Those activities with an
“unfavorable impact” are those that have resulted in the monopolization of the
market in obstructions to the development of national industry, and that have
created environmental pollution. In restricting foreign ownership to 51 per cent in
some industries, India is also dedicated to the principle of “national interest” but
the country allows foreign firms to gain quick returns on their investment
regardless of the economic externalities.

¾ Just as striking, China is basically a homogenous society, dominated by the Hans

race despite the presence of a few ethnic, religious and linguistic minorities in
regions such as Tibet, Xingjian and Manchuria. India, in contrast, is a veritable
museum with every conceivable variety of heterogeneous castes and religions,
languages, cult and culture.

¾ The Chinese polity is a monolithic dictatorship of one party with a single

individual wielding vast power, or at least influence. The Indian political system
is a complex federal democracy with power so widely diffused that ‘Galbraith’s
famous description of it as a ‘functioning anarchy’ remains to this day its apt
characterization.

¾ In its quest to increase FDI flows, the Indian government has not (yet) been able
to discriminate between the beneficial and unfavorable activities. Some first steps
in this direction are perceptible the environment ministry had made it mandatory
for all thermal power stations to switch over to washed coal since 2000. The
notoriously high ash content in Indian coal and the resulting carbon dioxide
emissions from them, make them one of the most polluting industries.

¾ On the other hand, India’s poor performance in terms of competitiveness, quality

of infrastructure and skills, productivity of labour, were responsible for less
attractive ground for Foreign Direct Investment.

The major hindrances to both the economies as listed out by IFC are

17
 Hindrances of India-China

CHINA INDIA

• Anti competitive practicing & financing. • Corruption

• Tax administration-High taxes. • Exchange rate
• Regulations. • Inflation
• Political Instability or un certainty
• Infrastructure to taxes & regulations
• Functioning of the organized crime
• High taxes.
• Fire regulations
• Environmental regulations
• Labour regulations
• Customs regulations
• Business regulations.
Source: IFC (2001)

However, what is significant to note is that an internal IFC survey (foreign

investor survey) has found that while the main business environment in India is better
than China, but the legal and regulatory infrastructure for financial institutions,
bankruptcy law and commercial law enforcement, and above all the corruption, Red-
tapesim, lack of transparency, bureaucratic hurdles makes India less attractive.

Conclusion

The rich countries club, OECD rightly observed, “The effective and thorough
implementation of China’s WTO Commitments would be critical to its success in
achieving its potential in luring FDI”. Besides, china’s success would also rely on its
ability to carryout complementary reforms, to open up domestic markets, to improve the
performance of state-owned enterprise, to better protect intellectual property rights and to
speed up competition and judicial enforcement that are essential to the effective
functioning of China’s markets.

Whereas India is still far behind China in becoming the attractive FDI
destination, for the obvious reason such as power shortage, poor infrastructure, security
consideration, absence of an exit policy etc. If India has to reach its target of attractive
more FDI for its development, The Indian Policy makers should understand that the good
intentions and mere plan layouts alone are not sufficient condition, but a bold aggressive
third generation reforms is the need of the hour. Only then one can expect India to attract
FDI to its potential and can become a popular investment destination as China.

18
 Annexure1
Comparative Facts and Figures of India and China
INDIA China
Basic Facts
Official Name Republic of INDIA People's Republic of China
Capital New Delhi Beijing
Area (Sq. Km) 3287263 9571300
People
Population (2002 E) 1045845200 1284303700
Population Growth Rate(2002E) 1.51% 0.87%

Population Density (2002E) 330 Persons/ Sq. Km 134 Persons/ Sq. Km

Government
Form of Government Federal Republic Communist State
Head of the State President President
Head of the Government Prime Minister Premier
Legislature Bicameral Legislature Unicameral Legislature
National People's Congress:
Lok Sabha (545 Members) 2979 deputies
Rajya Sabha (245 Members)
Voting Qualifications Universal at age 18 Universal at age 18
Constitution 26th JANUARY 1950 4 December 1982, amended,
1993-99
Highest Court Supreme Court Supreme People's Court
Armed Forces Army, Navy, Air force Army, Navy, Air force
Total no of Military Personnel 1263000 (year 2001) 2310000 (year 2001)
Military Expenditure\share GDP 3.1% (2000) 5.3% (year 2000)
First Level Political Divisions 28 States and 7 Union Territories 23 Provinces, 5 Autonomous
Regions, 2 Special
administrative regions,&
municipalities.
Urban Rural Distribution
Urban Share 28%(Year 2000) 32% (Year 2000 E)
Rural Share 72%(Year 2000) 68%(Year 2000)
Shanghai(13560000(Year
Largest Cities, with Population Mumbai(11914398(Year 2001)) 1999))
Delhi(9817439(Year 2001)) Beijing(11300000(Year 1999))
Kolkata(4580544(Year 2001)) Tianjin(9420000(Year 1999))
Chennai(4216268(Year 2001)) Wuhan(4250000(Year 1999))
Ethnic Groups
Indo- Aryan: 72% Han Chinese (92%)
Dravidian : 25% Others (8%)
Other ;3%
Languages
Official language Hindi: 40% Mandarin
Other Languages 13 languages listed are enlisted Yue, Wu, Minbe, Minnan
Acquaintance with English Very Good, English has associate Poor
status in India.

19
Health and Education
Life Expectancy 63.2 Years(2002 Estimate)
Female 63.9 Years(2002 Estimate)
Male 62.5 Years(2002 Estimate)
Infant Mortality Rate 61 Deaths Per 1000 Live
Births(2002 Estimate)
71.9 Years(2002 Estimate)
73.9 Years(2002 Estimate)
70.9 Years(2002 Estimate)
27 Deaths Per 1000 Live
Births(2002 Estimate)

Population per Physician 2459 People(1993) 595 People(2000)

Population Per Hospital Bed 1271 People(1991) 420 People(2000)
Literacy 64.84% (2001Census) 98% (2001 Estimate)
Female 54.16% (2001 census) 96.7% (2001 Estimate)
Male 75.85% (2001 Census) 99.2% (2001 Estimate)
Education Exp(% of GNP) 3.2 % (1996) 2% (1998)
Compulsory Schooling 8 Years(1998) 9 Years (1998)
Students\ Teacher, Primary schools 72 Students Per Teacher(1998) 21 Students Per Teacher(1998)
Economy
GDP ( In US $) $457 billion(2000) $1080 billion(2000)
GDP Per Capita (US $) $450 (2000) $860(2000)
GDP by Economic Sector
Agriculture, Forestry, Fishing 24.9 % (2000) 15.9 %(2000)
Industry (%) 26.9 % (2000) 50.9 %(2000)
Manufacturing (%)
Services (%) 48.2 % (2000) 33.2 %(2000)
GNP(US $ Bn) 442 980
Per Capita GNP(US $) 450 780
Per Capita PPP(US $) 2149 3291
Gross Domestic Savings 21 (% to GDP) 43 (% to GDP)
Gross Domestic Investment*(%) 7.4 12.8
Industry
Industrial Production (%) 7.1 11.6
Sugar (Mn. Tonnes) 15.5 6.4
Chemical Fertilizers(Mn. Tonnes) 13.9 28.1
Motor Vehicles (' 000) 711 1470
Agriculture
Index of Ag Prod(1989-91=100) 106 140
Work force in Ag(% to Total pop) 61 68
Production (Million Tonnes)
Rice 122 193
Wheat 66 110
Sugar• 14.2 8.3
Tea 0.9 0.6
Tobacco 0.6 2.5
Fertlizer Consumption(per/hectar) 95.3 Kg 262.3 Kg
Infrastructure
Electricity Consumption Per capita 347(Kwh) 687(Kwh)
Rail Route (Kms) 62.5 56.7
Freight (Mn. Tonnes) 446 1668
Passengers Carried (Mn) 4348 941
Air Passengers Carried ('000) 16521 53234

20
Motor Vehicles (per 1000 People) 7 8
TV Sets (Per 1000 People) 69 272
Telephone (per 1000 People) 22 70
Personal Computers(per 1000 people) 2.7 8.9

Internet Hosts (per 10000 people) 0.2 0.5

Scientists & Engineers in R&D 149\ million people 454\million People
Patent Applications Filed (No)@ 10155 61382
External Sector & Exchange Rate
Exports ($ Billion ) 33.6 183.8
As % of World Exports (%) 0.6 3.5
Exports of Commercial Services 11.1 $ Bn 24 $ Bn
Imports ($ Billion ) 42.7 140.2
Current Account,($ Billion) -4.9 29.3
Forex Reserves ($ Bn) 35.5 157.4
Monetary Unit 1 Indian Rupee, (100 Paise) 1 Yuan, Consisting of 10 Jiao
Exchange Rate(Rs/ Renminbi/US$)† 46.8 8.3

Inflation, Banking &Capital market

Consumer Prices (%) 3.4 -1.4
Domestic Bank Credit,(% GDP) 44.9 130.4
Interest rate spread (%) 2.8 3.6
Commercial Lending Rate (%) 12.5 6.4
FDI Inflows ($ Billion) 2.2 40.4
Listed Domestic Cos(No.) 5863 950
Market Capitalization ($ Bn) 184 330
External Debt
Total Debt Outstanding ($ Bn) 98.2 154.6
Debt Service Ratio (%) 20.6 8.6
Social Sector Indicators
Gross Enrolment ratio(primary) 100% 100%
Adult Literacy (%) 73.3 98
Education Exp (% of GNP 3.2 2.3
Per capita intake of
Calories 2496 2897
Fats (Grams) 45 71
Protein (Grams) 59 78
Physicians (per 1000 people) 0.4 2
Health Expenditure (% of GDP) 5.2 4.5
Contraceptive Prevalence rate†† 41% 85%
Poverty Ratio (%) 22.7(2004-05) 5
Source: Encarta Reference library, 2003 and Tata Statistical outline of India, Economic Survey of relevant years

21
 BIBLIOGRAPHY

BOOKS

Ashwini Puri, 1993: Comparative Study of FDI Environment in Select Asian Countries,
Price Waterhouse and Co., India.

Bimal Jalan, 1996: Indian Economic Policy Preparing for Twenty First Century, Viking,
New Delhi.

Blomstom, Magnus, Ari kokko and Mario Zejan, 2002: FDI- Firm and Host Country
Strategies, MacMillan Press Ltd. London.

Chai, Joseph H, 1998: China Transition to a Market Economy Carendon press, Oxford

Chopra, Chanchal 2003: Foreign investment in India -The Emerging Scenario, Deep and
Deep Publications, New Delhi

Coyne, Edward j, 1995: Targeting the Foreign Direct Investor-Strategic Motivation,

Investment Size and Developing Country Investment Attraction Packages, Kluwer
academic publishers, Boston

Daniels JP Vanhouse D, 2002: International Monetary and Financial Economics, South

Western publishers, UK.

Easson, A.J. 1999: Taxation of FDI: An Introduction, Kluwer Law International, The
Hague-London-Boston.

Fengli and Jing li, 1999: Foreign Direct Investment in China, Macmilan press, London.

Gedam, Rathnakar, 1996: Economic Reforms in India: Experiences and Lessons, Deep and
Deep Publication, New Delhi..

Kojima Kiyoshi, 1986: Foreign Direct Investment, Croom Helm, London

Lal S. 1985: Multinationals, Technology and Exports, Allied, London.

Mahajan, V.S. 1994: Manmohan's India and other Current Writings, Deep and Deep
Publications, New Delhi.

Moosa, Imad A, 2002: FDI: Theory, Evidence and Practice, Palgrave, New York

Moran, Theodore H, 2001: Parental Supervision: The New Paradigm For FDI and
Development, Institute For International Economics, Washington.

Nagesh Kumar, 2002: Globalisation and the Quality of FDI, Oxford university press.

22
Negandhi, Anant R. 1966: The Foreign Private Investment Climate in India, Vora and
Co., Publishers Pvt. Ltd., Bombay.

Nguyen D.T. And Roy, K.C. 1994: Economic Reform, Liberalisation and Trade in Asia-
Pacific Region, Willey Eastern Ltd., New Delhi.

WORKING \RESEARCH\OCCASIONAL PAPERS

Bhatacharyya, B. and Satinder Palaha, 1996: FDI in India: Facts and Issues, Occasional
paper2, Indian Institute of Foreign Trade, New Delhi.

Dhar Biswajith and Murali Kallummal, 2002: Capital Inflows and Effects of Market-
Driven Investments: A Focus on Southeast Asian Crisis, RIS Occasional Paper
no.66. Research and Information System for the Non-Aligned And Other
Developing Countries, New Delhi.

Dhar, Biswajit and Sachin Chaturvedi, 1998: Multilateral Regime for Foreign
Investment: An Assessment of the Emerging Trends, RIS Occasional Paper no.52,
Research and Information System for the Non-Aligned And Other Developing
Countries, New Delhi.

Goldar, Bishwanath, Etsuro Ishigami, 2000: FDI in Asia Working Paper, Institute of
Economic Growth, Delhi.

Kamal Saggi, 2000: Trade, FDI and International Technology Transfer: A Survey,
Policy Research Working Paper, World Bank, Washington, D.C.

Nagesh Kumar,1989: Determinants of Traditional and New Forms of Foreign

Investments: The Case of Indian Manufacturing RIS Occasional Paper No.24,
Research and Information System for the Non-Aligned And Other Developing
Countries, New Delhi.

Pami Dua and Aneesa I.Rashid, 1999: Foreign Direct Investment and Economic Activity
in India, Working Paper No 62, Centre for Development Economics, Delhi
School of Economics, New Delhi.

Punam Chuhan, Gabriel Perez-Quiros and Helen Popper, 1997: International Capital
Flows: Do Short-Term Investment And Direct Investment Differ? N2043,
IECDD.

Rupa Chanda, 1992: Impact of Trade Liberalisation on FDI in Services –Case Study of
Siberian Economies, Working Paper103, IIM, Bangalore.

23
Stephen S.Everhart and Mariusz A. Sumlinski, 1998: Trends in Private Investment in
Developing Countries-Statistics For 1970-2000 and the Impact on Private
Investment Of Corruption and the Quality of Public Investment Discussion
Paper, World Bank, Washington, D.C.

REPORTS

Relevant issues of Centre for Monitoring Indian Economy (CMIE), 1991: New Economic
Policy Measures, Bombay, July, 1991.,1994,

CSO, 2001:2002 Selected Socio-Economic Statistics of India, Government of India, New

Delhi.

EPW Research Foundation, 2002: National Accounts Statistics of India, 1950-51 to

2000-01, EPW Research Foundation, Mumbai.

Government of China: China’s External Economic and Trade Year Book Relevant Issues

Government of India: Economic Survey Various years.

India Investment Centre: News Letters, Monthly Reports; Relevant Issues.

Ministry of Commerce and Industry: SIA News Letters, Secretariat of Industrial

Approvals, Government of India, Relevant Issues.

Reserve Bank of India, 2001 and 2002: Hand Book of Statistics on Indian Economy,
Mumbai.

Relevant issues of World Investment Report, United Nations Conference and Trade and
Development, Geneva

Asian Development Outlook, relevant issues

24