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Outward FDI from China and India

A Preliminary Comparison


R Nagaraj

Indira Gandhi Institute of Development Research Goregaon East, Mumbai 400065. Email: nag@igidr.ac.in

It is an accepted fact that capital outflows from China are many times larger than India’s, sustained for much longer period; with a much wider sectoral distribution and geographical coverage.

Up to 1991, Indian capital outflow was tightly regulated to conserve the limited domestic saving for investment at home; it was allowed mostly in joint ventures in third world countries, mainly as a means to export capital goods, and in industries in which India has attained fair amount of technical capability – mainly in light engineering, and textiles. As India liberalized its rules for inward FDI, restrictions on the outward flow also got loosened. It is only in the present decade that there is a sharp surge in capital outflows into developed economies, mainly by mergers and acquisitions (M&A), mostly in advanced manufacturing, and IT and ITES. There are also investments in acquiring firms dealing with industrial raw material, mostly in oil exploration and extraction – principally by public sector entities. It is this recent phenomenon in China and India that has caught the attention worldwide.


China and India are both capital scarce and labour abundant economies. Therefore, capital outflow from these economies, at first glance, seems anomalous. Of course, both the economies are continuing to be net capital importers.

Both the countries are resource poor, relative to their size and their industrial requirement and ambition, especially in energy and core industrial raw materials like oil and coal.

Need for technology: Both economies have strong domestic manufacturing sectors that are eager to acquire advanced technologies. Lenevo’s acquisition of IBM’s PC business is a telling example of it.

Markets: As industrial capabilities in these economies mature, they are eager to find external markets; just as many of the industrialized sought to penetrate external markets about a century ago. The urge is perhaps more for China as it has invested heavily in export oriented industrialization.

Geo-political reasons: As large and potentially powerful economy, China has made enormous investments in Asia, Africa and Latin America right from 1978, in pursuance

of its foreign policy objectives. But India seems to have done very little of it, especially

after the reforms when the national and strategic considerations policy took back seat.

A Comparison between China and India:

Despite many reforms, state’s role in China in sustaining high economic growth in order keep the potential popular unrest under check remains the primary political objective. In pursuit of it, the strategic role of the state has not diminished, but perhaps got modified and decentralised. To ensure uninterrupted domestic growth, and of exports, the state agencies take the necessary strategic foreign investment to ensure access to raw material, technology and markets.

In contrast, India has perhaps witnessed a diminished role of state in economic matters, including in strategic foreign economic policy issues. As India’s foreign policy has shifted its leadership role in non-aligned movement (and tilt towards the US), it has perhaps deliberately reduced economic considerations in its foreign policy. Perhaps the only visible initiative is the “look east” policy to hitch India on to the East Asian economic bandwagon.

India’s outward FDI is predominantly private sector driven, while its is mainly public sector driven in China.


China is likely to succeed in its objective of securing raw materials and strategic geopolitical goals better than in India, given the undivided focus of its policy makers. This is evident from China’s growing role in Africa and Latin America. India too has stepped up economic assistance to Africa to facilitate private investment, but the scale and scope of it seems modest compared to China’s, despite India’s long standing political closeness (since the days of de-colonisation).

But in acquiring technology from foreign operations, assimilating it productively to exploit its synergies with domestic capabilities, Indian private firms would perhaps be

better placed given the relative freedom to firms, long established traditions of domestic market based institutions, their managerial capability, and wider use of English language

in India.

Moreover, as most large industrial and commercial firms in China are directly or indirectly state-controlled; China is likely to face increasing political resistance; Rio Tinto is a case in point.

China seems to still suffer from a lack of clarity of property rights, lack of well-defined institutions governing private sector, poor corporate governance and lack of experience in dealing with international business. Therefore, private sector firms in China may perhaps be less capable of exploiting the opportunities offered by outward FDI.

Lenevo’s acquisition of IBM’s PC business is perhaps a case in point. Lenevo is a complex organization owned by many organs of the state, including the Chinese Academy of Social Sciences. Given its complex governance structure and lack of clarify on property rights, Lenevo-IBM joint venture is registered in Hong Kong to give assurance to the foreign partner, via a shell company, though it operates from China. One suspects that such hurdles could pose increasing problems for Chinese outward FDI, where foreign partner would not be sure how to resolve commercial disputes.

In contrast, India has a well defined property rights guaranteed by the constitution, reasonably well functioning courts (by relative standards), well functioning domestic institutions of capital markets and the rule of law. Success of Indian firms – be it in IT or in manufacturing – on a wider range of businesses is perhaps a testimony to India’s long experience with market-based institutions.


The principal economic reasons for outward FDI from China and India are the same: to secure technology, and access markets and raw materials. Political argument for capital outflow is international dominance, and to influence the course of world events.

There has been greater capital outflow from China than from India. Of course, China’s per capita income, domestic saving rate and the pace of industrial growth is ahead of India – sustained over a longer period. China has followed its strategic economic and political interest consistently by providing foreign aid to developing countries to facilitate its commercial interests to follow.

In contrast, up to 1991, India promoted joint ventures in developing countries as a means of exporting capital goods. India probably did not pursue its strategic economic and political interests by capital export, as China did - certainly not to the same extent. As part of the economic reforms, regulations on capital outflows by Indian firms were liberalized which led to a boom in the recent years, to developed countries, to secure technology and access markets.

Starting with similar resource endowments, while motivations for the outward FDI by both the countries remain the same, China probably has a greater advantage in leveraging on its state supported finance and implicit guarantees; Indian firms are perhaps in a better positioned to leverage their superior environment of market based institutions, their ability to handle international financial markets and managerial capability – based on a much longer and uninterrupted experience in dealing with the advanced country markets.