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 Indias political Independence (1947), but today, China has surged far ahead of India in socio-economic development indicators (Comparative analysis figures in annexure1). After Chinas 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 Indias 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

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.

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 + X2 + X3 + X4 Where Y = Gross Domestic Product in yeart X1 = Gross Domestic Investment in yeart-1' X2 = Foreign Direct Investment in yeart-1' X3 = Human Capital in the yeart-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,, , , 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 + log X1 + Log X2 + Log X3 + 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 + log x1 + Log x2 + log x3 + Log x4 (1)

(3)

The ordinary least square method yielded the following regression equation:

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

(5.916) R2 = 0.996 (3.928) R-2 = 0.993 (1.655) (3.710) (2.339) F = 532.30 Durbin-Watson = 1.825

* - Significant at 10% level ** - Significant at 5% level *** - Significant at 1% level Thet 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.

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.

Partial Coefficients with respect to FDI Constant - coefficients Exports GDS PFCE GDI BOT Forex BOP 19084.47 (4.434) 74930.04 (6.638) 444033.259 (29.389) 3.910 (31.359) -8275.833 (-6.632) 8518.077 (1.980) 578.479 (0.292) 7.899* (16.252) 19.472* (15.276) 18.044* (10.576) 0.378* (9.327) -3.0988* (-21.987) 7.957** (16.381) 1.278* (5.716)

R2 0.933 0.925 0.855 0.829 0.962 0.934 0.632

F 264.113 233.354 111.859 86.997 483.442 286.329 32.67

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.

FDI in China
The evolution of Chinas open door policy in the aspect of FDI needs to be understood in the wider context of Chinas 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 Environment Hard Environment Transportation Tele Communications Energy Supply Public Utilities Other Infrastructure Raw Material & components supplies Others Soft Environment Historical Elements Political Background Cultural and social structure Economic Regime Social Securities & welfare Law & Legal System Human resources Labour Relations Government Services Business Services Others

KEY FACTORS

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 Chinas 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.

1984-92: Growth of Township-Village Enterprises (TVEs) through exploration of rural savings and demand and simultaneous explosion of FDIoverwhelmingly 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

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 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 exportoriented 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. manufacturing by the over seas

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.

Table 1
Selected FDI indicators of India & China Country FDI Inflows (million $) Inward FDI stock (million$) Growth of FDI Inflows (Annual %) FDI stock as percentage of GDP (%) FDI as Percentage of gross capital fixed formation (%) FDI flows percapita(dollars) Share of foreign affiliates in total exports (%) China India China India China India China India China India China India China India

1990 3487 379 24762 1961 2.8 -6.1 7.0 0.6 3.5 0.5 3.0 0.4 12.6 4.5

2000 40772 4029 348345 29876 1.1 16.1 32.3 3.8 10.3 4.0 32.0 4.0 47.9 NA

2001 46845 6131 395192 35067 14.9 52.2 33.2 4.0 10.5 5.8 36.5 6.0 50.0 NA 11591 484 7.3 4.2

2002 52700 5518 447892 41525 12.5 10.0 36.2 4.3 NA NA 40.7 5.3 NA NA 1237.2 502 8.0 4.9

2006 69468 16881 292559 50680 -4% 153% 11.1 5.7 8.0 8.7

China 388 1080 GDP Billion dollars India 311 453 China 3.8 8.0 Real GDP growth India 5.0 5.4 Source: compiled from the World Investment Report of respective years

2668 906 9.8 9.0

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, Indias 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.

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(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 FDIs since 1980s. 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.. Indias 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 Exportoriented 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.

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(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 worlds population, India and china are potentially the worlds 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.

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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) Chinas 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. Indias development has no such organic link with the East Asian experience. Expatriate Indian entrepreneurs played, but a minor role in East Asias growth and expatriate investment had a negligible share in Indias 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 countrys FDI)
Year % of NRC to total FDI of China 71.28 80.34 82.91 77.98 72.09 69.28 64.96 NA % of NRI in total FDI of India 45.59 22.17 31.36 34.00 28.89 19.65 06.32 02.69

1991 1992 1993 1994 1995 1996 1997 1998

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.

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Investment Climate in India and China Table: Indicators of Investment Climate

FDI as % of gross capital formation Exit regulation & repatriatio n of Composit ICRG risk rating Institution al Invester credit ti Euromney country credit worthiness rating
Sept.200 2 58.9 47.7 Sept.2002

Entry Regulation

199 0 China India 2.8 0.3

2001

2001

2001

200 1 F F

Dec 2002 75.0 66.3

Foreign currenc y 2003 A3 Ba2 --

Moody sovereign longterm debt rating

Doestic Currency 2003 Ba2

10.1 3.2

S A

F F

56.4 55.1

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;

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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 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. 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. 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. 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. 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. 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 (Peoples Daily 1996). 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.

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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. 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. 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 Galbraiths famous description of it as a functioning anarchy remains to this day its apt characterization. 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. On the other hand, Indias 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

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Hindrances of India-China
CHINA Anti competitive practicing & financing. Tax administration-High taxes. Regulations. INDIA Corruption Exchange rate 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, Redtapesim, lack of transparency, bureaucratic hurdles makes India less attractive. Conclusion The rich countries club, OECD rightly observed, The effective and thorough implementation of Chinas WTO Commitments would be critical to its success in achieving its potential in luring FDI. Besides, chinas 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 Chinas 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.

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Annexure1 Comparative Facts and Figures of India and China

INDIA Basic Facts Official Name Capital Area (Sq. Km) People Population (2002 E) Population Growth Rate(2002E) Population Density (2002E) Government Form of Government Head of the State Head of the Government Legislature Republic of INDIA New Delhi 3287263 1045845200 1.51% 330 Persons/ Sq. Km Federal Republic President Prime Minister Bicameral Legislature Lok Sabha (545 Members) Rajya Sabha (245 Members) Universal at age 18 26th JANUARY 1950 Supreme Court Army, Navy, Air force 1263000 (year 2001) 3.1% (2000) 28 States and 7 Union Territories China People's Republic of China Beijing 9571300 1284303700 0.87% 134 Persons/ Sq. Km Communist State President Premier Unicameral Legislature National People's 2979 deputies Congress:

Voting Qualifications Constitution Highest Court Armed Forces Total no of Military Personnel Military Expenditure\share GDP First Level Political Divisions

Universal at age 18 4 December 1982, amended, 1993-99 Supreme People's Court Army, Navy, Air force 2310000 (year 2001) 5.3% (year 2000) 23 Provinces, 5 Autonomous Regions, 2 Special administrative regions,& municipalities. 32% (Year 2000 E) 68%(Year 2000) Shanghai(13560000(Year 1999)) Beijing(11300000(Year 1999)) Tianjin(9420000(Year 1999)) Wuhan(4250000(Year 1999)) Han Chinese (92%) Others (8%)

Urban Rural Distribution Urban Share Rural Share Largest Cities, with Population

28%(Year 2000) 72%(Year 2000) Mumbai(11914398(Year 2001)) Delhi(9817439(Year 2001)) Kolkata(4580544(Year 2001)) Chennai(4216268(Year 2001)) Indo- Aryan: 72% Dravidian : 25% Other ;3%

Ethnic Groups

Languages Official language Other Languages Acquaintance with English

Hindi: 40% 13 languages listed are enlisted Very Good, English has associate status in India.

Mandarin Yue, Wu, Minbe, Minnan Poor

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Health and Education Life Expectancy Female Male Infant Mortality Rate Population per Physician Population Per Hospital Bed Literacy Female Male Education Exp(% of GNP) Compulsory Schooling Students\ Teacher, Primary schools Economy GDP ( In US $) GDP Per Capita (US $) GDP by Economic Sector Agriculture, Forestry, Fishing Industry (%) Manufacturing (%) Services (%) GNP(US $ Bn) Per Capita GNP(US $) Per Capita PPP(US $) Gross Domestic Savings Gross Domestic Investment*(%) Industry Industrial Production (%) Sugar (Mn. Tonnes) Chemical Fertilizers(Mn. Tonnes) Motor Vehicles (' 000) Agriculture Index of Ag Prod(1989-91=100) Work force in Ag(% to Total pop) Production (Million Tonnes) Rice Wheat Sugar Tea Tobacco Fertlizer Consumption(per/hectar) Infrastructure Electricity Consumption Per capita Rail Route (Kms) Freight (Mn. Tonnes) Passengers Carried (Mn) Air Passengers Carried ('000)

63.2 Years(2002 Estimate) 63.9 Years(2002 Estimate) 62.5 Years(2002 Estimate) 61 Deaths Per 1000 Births(2002 Estimate) 2459 People(1993) 1271 People(1991) 64.84% (2001Census) 54.16% (2001 census) 75.85% (2001 Census) 3.2 % (1996)

Live

71.9 Years(2002 Estimate) 73.9 Years(2002 Estimate) 70.9 Years(2002 Estimate) 27 Deaths Per 1000 Live Births(2002 Estimate) 595 People(2000) 420 People(2000) 98% (2001 Estimate) 96.7% (2001 Estimate) 99.2% (2001 Estimate) 2% (1998) 9 Years (1998) 21 Students Per Teacher(1998) $1080 billion(2000) $860(2000) 15.9 %(2000) 50.9 %(2000) 33.2 %(2000) 980 780 3291 43 (% to GDP) 12.8 11.6 6.4 28.1 1470 140 68 193 110 8.3 0.6 2.5 262.3 Kg 687(Kwh) 56.7 1668 941 53234

8 Years(1998) 72 Students Per Teacher(1998) $457 billion(2000) $450 (2000) 24.9 % (2000) 26.9 % (2000) 48.2 % (2000) 442 450 2149 21 (% to GDP) 7.4 7.1 15.5 13.9 711 106 61 122 66 14.2 0.9 0.6 95.3 Kg 347(Kwh) 62.5 446 4348 16521

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Motor Vehicles (per 1000 People) TV Sets (Per 1000 People) Telephone (per 1000 People) Personal Computers(per 1000 people) Internet Hosts (per 10000 people) Scientists & Engineers in R&D Patent Applications Filed (No)@ External Sector & Exchange Rate Exports ($ Billion ) As % of World Exports (%) Exports of Commercial Services Imports ($ Billion ) Current Account,($ Billion) Forex Reserves ($ Bn) Monetary Unit Exchange Rate(Rs/ Renminbi/US$)

7 69 22 2.7 0.2 149\ million people 10155 33.6 0.6 11.1 $ Bn 42.7 -4.9 35.5 1 Indian Rupee, (100 Paise) 46.8

8 272 70 8.9 0.5 454\million People 61382 183.8 3.5 24 $ Bn 140.2 29.3 157.4 1 Yuan, Consisting of 10 Jiao 8.3

Inflation, Banking &Capital market Consumer Prices (%) 3.4 Domestic Bank Credit,(% GDP) 44.9 Interest rate spread (%) Commercial Lending Rate (%) FDI Inflows ($ Billion) Listed Domestic Cos(No.) Market Capitalization ($ Bn) External Debt Total Debt Outstanding ($ Bn) Debt Service Ratio (%) Social Sector Indicators Gross Enrolment ratio(primary) Adult Literacy (%) Education Exp (% of GNP Per capita intake of Calories Fats (Grams) Protein (Grams) Physicians (per 1000 people) Health Expenditure (% of GDP) Contraceptive Prevalence rate Poverty Ratio (%) 2.8 12.5 2.2 5863 184 98.2 20.6 100% 73.3 3.2 2496 45 59 0.4 5.2 41% 22.7(2004-05)

-1.4 130.4 3.6 6.4 40.4 950 330 154.6 8.6 100% 98 2.3 2897 71 78 2 4.5 85% 5

Source: Encarta Reference library, 2003 and Tata Statistical outline of India, Economic Survey of relevant years

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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 AsiaPacific 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 MarketDriven 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? IECDD. N2043,

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

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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: Chinas 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

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