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FOREIGN DIRECT INVESTMENT TRENDS IN CHINA AND INDIA:
Comparative Analysis
Maga (Mark) Yang
Department of Marketing and International Business
College of Business Administration
University of Toledo
Toledo, Ohio 43606
Phone: (419) 787-3453
E-mail: [email protected]
ABSTRACT
Currently, two huge countries, China and India are leading the Asian century by rapid economic
growth. One of the main sources of this growth is Foreign Direct Investment (FDI). Accordingly, many
studies and researches have been intensively focusing on FDI in two countries. While studies of FDI in
China and India have been prevalent, comparative analysis about two countries’ FDI trends (past, current
and future) was, however, limited. This paper assesses the overall trends of Foreign Direct Investment in
China and India. The main research focus of this paper is as follows: (1) The Size of Chinese and Indian
Economy Measured by GDP; The Size and Nature of industry and trade sector; (2) Comparative Analysis
of Two Countries in terms of FDI Trends. Especially, to compare two countries’ overall FDI trend will be
presented the following things: (1) FDI History and Reform policy (2) FDI Patterns (3) FDI Regimes.
Keywords: Foreign Direct Investment, FDI, FDI trends in China and India, Global Firms
1.
Introduction
Now, China and India are growing as emerging superpowers in terms of the size of population
and economy. While the economies of China and India are considerably smaller than that of the U.S.
which is a hyperpower in the world, China is likely to overtake and India to equal the U.S. economy in
size by mid-century [1]. China now has a commanding lead in manufacturing, with a large, qualified,
low-cost, and flexible workforce. India seems to be following suit in the promising offshore services
sector. It was quite possible through attracting huge amount of capital inflows, such as FDI and portfolio
investment [3]. Accordingly, Foreign Direct Investment (FDI) has been one of the most fascinating and
intriguing topics among researchers in international business over the last decades. It is one significant
form rapid international expansion to increase ownership of assets, derive location-specific advantages
and acquire additional knowledge [4]. Recently, the share of China and India has steadily increased from
44.6% to 64.8% and from 2.5% to 5.8%, respectively while the flows of FDI to main developing
countries have declined since 1998. In addition to that, both countries sustained high rate of economic
growth. (6.9%-9.5% as of 2003-04) It is predicted that China and India may sustain such a high rate of
growth for decades. It is said that while China is becoming the “world manufacturing factory”, India is
building “Next-generation IT and service center”. In the context of current world economic trends, this
paper will look at the overall economic trends of these both countries, China and India in terms of FDI
performance and trends. The main focuses of this paper are: <1> Main Economic Indicators of China
and India: (1) GDP; (2) industry sector; (3) trade sector; <2> Comparative Analysis of Both countries’
FDI Trends: (1) FDI History and Reform policy; (2) FDI Patterns; (3) FDI Regimes
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2.
The context of Chinese and Indian Economies
The combined population of 2.4 billion people, China and India are the two largest countries in
the world in terms of size of population. In this section key statistical economic indicators are addressed
for assessing the context of Chinese and Indian economy in relation to the world economy. We
deliberately limit our focus to three areas: (1) the size of Chinese and Indian economy measured by GDP
to understand its portion in the world economy; (2) the amount and character of Chinese and Indian’s
industry and trade sector to assess the engines of growth of China and India.
The Size and Growth of GDP in China and India. As shown in Table 1, both China and India
have maintained a relatively high rate of economic growth (average about 4~9% per year) since 2000. As
of 2004, China and India became the 5th and 7th largest economy in the world respectively. Both China
and India have positioned themselves as viable global economic powers (see Table 1). In terms of GDP,
China is more than double that of India. But what we have to notice is that their GDP per capita ($ at
PPP) is still much lagging behind than other developed countries and even developing countries like
South Korea. (China is $4,270 and India $2,620 while USA is $36,432 and South Korea $17,006 as of
2002) [5]
Countries
Table 1. The Size and Annual growth rate of GDP (US billion $; (%))
2000
2001
2002
2003
2004
GDP per capita
($ at PPP;
2002)
9,765 (3.7) 10,049 (0.5) 10,429 (2.2) 10,949 (3.1) 11,668 (4.4)
36,432
4,746 (2.8)
4,162 (0.4) 3,972 (-0.4) 4,301 (2.7)
4,623 (2.7)
26,944
1,308 (3.8)
1,320 (2.1)
1,437 (1.2)
1,758 (0.5)
2,003 (2.3)
27,500
1,081 (8.0)
1,176 (7.5)
1,271 (8.3)
1,417 (9.3)
1,649 (9.5)
4,720
1,075 (3.0)
1,090 (1.8)
1,186 (0.4)
1,468 (0.3)
1,672 (1.2)
26,655
714 (5.3)
705 (1.9)
725 (3.3)
857 (2.0)
980 (2.9)
30,740
457 (3.9)
479 (5.2)
509 (4.1)
601 (8.6)
692 (6.9)
2,620
512 (8.5)
482 (3.8)
547 (7.0)
608 (3.1)
680 (4.6)
17,006
USA
Japan
France
China
Italy
Canada
India
South
Korea
Source: World Development Indicators database, Human Development Report; Economist Intelligence
Unit. Country Data
Industry sector in China and India in the perspective of growth engine. The manufacturing
industry in China has been growing very fast over the past decades. Currently, there are some changes in
terms of formation of manufacturing sectors in China. That is, labor-intensive manufacturing sector are
moving into capital- and technology-intensive manufacturing sector [6]. This phenomenon is quite related
to the growth of IT sector (18.6% to 27.1%). On the other hand, India’s Manufacturing Structure is not as
strong as that of China. But some exception is existed in India such as Maruti Suzuki. This company is
leading the Indian automotive manufacturing industry through growing in size, profitability and global
performance. (Market share of Suzuki Motors in India was 54.6% as of 2003) [7]. The role of service
sector shows different patterns. India’s service sector increasingly enlarges its share to the GDP more than
50% while China’s is around 30%. %. In a sense, India is moving much faster to service-driven economy
like other developed economies even though India does not allow FDI in retail [8]. When it comes to IT
sectors, China is gradually becoming the world manufacturing center of IT equipment and products
through low-labor cost and relatively skilled labor power, while India is gaining the leading position in
software technology and become the second largest software country in the world [9]. However, Table 2
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shows that India is still lagging behind China in terms of the size of IT sector’s portion out of overall
GDP.
Table 2: GDP Industry Arrangement (% of GDP)
Country
Year
Manufacturing
IT (High-Tech)
Service Sector
2000
34.5
18.6
33.4
2001
34.2
20.6
34.1
China
2002
44.5
23.3
33.5
2003
…
27.1
33.1
2000
15.8
5.0
48.8
2001
15.3
5.4
49.4
India
2002
15.6
4.8
50.7
2003
…
4.8
51.2
Source: Development Data Group, The World Bank. 2002. World Development Indicators 2002 online,
U.S. Department of Commerce; World Development Indicators database
Trade sector as Engines for Chinese and Indian Economic Growth. Table 3 shows the amount
of exports by both countries. The amount of exports of China is much larger than that of India and it is
true with exports growth rate. In a sense, China economy is driven by exports and export is the engine for
China’s economic growth. The combined values of China’s trade sector (exports and imports) are almost
50% of China’s GDP. On the other hand, the trade sector of India is not as important as that of China.
India’s economy is not yet well-positioned to export huge amount of manufacturing products into the
world. The overall volume of foreign trade of India is no more than ¼ of that of China. Historically, the
rapid growth of China was triggered by Deng Xiaoping’s reform and liberalization in 1978 while similar
reforms in India began by Finance Minister Manmohan Singh in 1991. Here, 13-years time gap exists
between both countries. Obviously this time gap is one of the many reasons of different trade
performances between two countries [1] [9].
Table 3. Trade Sector (Export and Import/ US billion $; (% of GDP))
Year
Exports
Imports
2000
281.0 (25.9)
250.8 (23.2)
2001
293.9 (25.5)
271.7 (23.1)
2002
367.2 (28.9)
329.2 (25.9)
China
2003
486.0 (34.3)
450.6 (31.8)
2004
662.9 (40.2)
646.4 (39.2)
2000
63.5 (13.9)
67.2 (14.7)
2001
64.7 (13.5)
67.5 (14.1)
2002
77.4 (15.2)
79.4 (15.6)
India
2003
87.1 (14.5)
96.2 (16.0)
2004
106.6 (15.4)
119.0 (17.2)
Source: World Development Indicators database
Country
In sum, based on the above data it can be analyzed that China and India have noticeable
differences. Table 4 is the summary of both countries’ comparison for main economic indicators.
According to the Table 4, India may surpass China in terms of the size of population, because India’s
population growth rate is a little higher than that of China. China’s average annual GDP growth rate
between 2000 and 2004 is 8.52% while India shows modest 5.74%. (See Table 1). As of 2004, the size of
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China’s GDP is 2.4 times of that of India. China sustains relative strength over India in almost all aspects
of economic indicators. The noticeable difference is India’s relative strength in service sector.
Table 4. Main Economic Indicators Comparative Data for India and China:
`
India
China
India’s Size
Relative to China
2000
2004
2000
2004
2000
2004
Population (billions)
1.0
1.1
1.3
1.3
81.0%
83.1%
GDP (US billion $)
457
692
1,081
1,649
42.3%
42.0%
Manufacturing Sector (% of 15.8
15.6(2002) 34.5
44.5(2002) 45.8%
35.1%
GDP)
IT Sector (% of GDP)
5.0
4.8
18.6
27.1
26.9%
17.7%
Service Sector (%of GDP)
48.8
52.2
33.4
34.5
146%
151%
Exports (US billion $)
63.5
106.6
281.0
662.9
22.6%
16.1%
Imports (US billion $)
67.2
119.0
250.8
646.4
26.8%
18.4%
3.
Comparative Analysis of FDI trends in China and India
Now, let’s say the main topic of this paper, FDI trends in both countries. Most developing
countries consider FDI as an important channel for assessing resources for economic development. No
exceptions are in China and India. Since Deng Xiaoping’s social market economy policy in 1978, foreign
direct investment was constantly expanded. Though this rising trend slowed down after 1995, the
momentum resumed in 2000. China’s joining the WTO is providing a strong incentive to a new wave of
Foreign Direct Investment to China [6]. In 2004, almost $60 billion poured in China. It was the 2nd largest
amount of FDI Flows all over the world. (USA: $115.5 billion) [10] A.T. Kearney’s January 2000 FDI
Confidence Index results show that China ranks 2nd (1.69) and India 7th (1.35). (USA: 2.03, UK: 1.49,
Italy: 1.32) [11] This index obviously indicates that the FDI performance in China and India has grown
with tremendous speed. (China: 25.5 to 60.0; India: 1.2 to 4.3) What are the essential elements of two
countries’ high attractiveness of FDI? Isn’t there any limitation and deterrents for investment in both
countries? Can we find the differences in terms of FDI performance between two countries? The
objective of this paper is to answer these questions. To explore these questions, first of all it will be
introduced the History of FDI and reform policy in China and India. And then, we will examine the
different patterns of FDI in both countries. Finally, it will be analyzed in what sense FDI Regimes of two
nations are different.
(1) FDI History and Reform Policy
Brief review of FDI History in China and India In 1978, after nearly 30 years of long
separation, China finally started to rejoin the world economy. By 1978, Deng Xiaoping was emerging as
post-Mao China’s leader. He started to put economic reforms and finally a policy of “Open Door” was
formally adopted by the central committee. In 1979, the “Law of the People’s Republic of China on Joint
Ventures Using Chinese and Foreign Investment” was adopted. By 1980, four special economic zones
had been established along the southeast coast (Shenzhen, Husain, Xiamen, and Shantou) and then it was
extended to another 14 coastal cities and Hainan Island. In 1990, amendments to the joint venture law
were passed. Recently, in 1990, the concept of SEZs was extended to the Shanghai Pudong New Area. A
series of events led to attract FDI in 1991-93 ($ 42 billion) which is much more than amount that attracted
over the entire 1978-1990. In fact, the growth in FDI did not begin to speed up until mid-1980s when lots
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of measures were adopted to improve the investment climate in China. The growth of actual FDI was
accelerated in 1991-93. The reason for such abrupt increases in FDI was as follows: 1) More positive
attitude toward FDI; 2) Various legislated investment incentives; 3) Simplified final decision process
through joint-venture approval. In particular, Chinese government set the ownership laws, the increase in
the security of private rights created greater confidence among foreign direct investors, leading to the
increase in FDI [12].
On the other hand, India has had a relatively long history of foreign investment. At independence,
in 1947, India was host to large foreign capital flows, principally British. In fact, between 1919 and 1947
during the colonial period, there was a considerable increase in Indian entrepreneurship. As a
characteristic of colonial heritage, foreign investments were concentrated in extractive industries; for
example, 85% of the tea industry belonged to foreign-owned; another tea of concentration was
internationally traded. From the 1960s, until the commencing of reforms in 1991, a self-sufficient
economy policy had dominated Indian society so as to develop national industries. Large amount of
investments went into the state-owned enterprises, which accounted for two-thirds of Indian industry.
During this period, the attitudes toward foreign investment became more strict than they had ever been
before. This resulted in annual foreign direct investment inflows of only around $100 million in the late
1980s, compared with annual inflows into China in the mid-1980s of $3.5 billion (See Table 5) [14]. The
year of 1991 was turning point of India’s FDI History. India suffered a major economic crisis in 1991,
largely because of the effects of oil price shocks resulting from the 1990 Gulf War. This economic crisis
led India to cut the budget deficit and implement a number of economic reforms including liberalization
of FDI rules, sharp cuts in tariff and non-tariff barriers. These reforms helped increase economic growth
and led to a surge in FDI inflows to India in the mid-1990s (See Table 5) [15]. Since 1991, India opened
up its economy and allowed MNEs in the core sectors. Since then it has attracted a large amount of FDI
flows to the developing countries and India became one of the lucrative investment locations.
Table 5. FDI Flows to India and China (US million $)
Country
Year
FDI
Country
Year
1979-1980
304
1990-91
1981-1982
815
1991-92
1983-1984
1,894
1992-93
1985-1986
3,535
1993-94
1987-1988
5,507
1994-95
1989-1990
6,880
1995-96
China
India
1991-1992
15,374
1996-97
1993
25,759
1997-98
1998-99
1999-00
N/A
2000-01
Source: Handbook of Statistics on Indian Economy, RBI, 2001; China Statistical Yearbook
FDI
40
73
222
423
949
1,650
2,303
3,041
2,382
2,148
2,458
Comparison for Reform Policy As mentioned, in China, the reform process began in 1978. It was
further consolidated in the late 1980s, and in 2002 China accessed to WTO. China’s reform was basically
proceeding in the form of market-based reforms. Considering the historical background, China’s decision
to open up their economy to the world was very timely. It was actually one leader, Deng Xiaoping’s
charismatic decision. It worked. Another factor of China’s reform policy can be said that “in some
circumstances, partial reform is desirable if it can be a precursor to successful economy-wide
liberalization”. As the coastal zones began to grow at a certain rate, they became the model for the rest of
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the economy to follow, and reform progressively extended to other regions and sectors. The driver of
India’s reform was a little different. It was due to the effects of oil price shocks. The Indian Government
couldn’t help but to start the reform to escape the economic disaster. As a result, these reforms brought
India economic growth and increase in FDI flows [15]. Thirdly, the geographical distribution of FDI in
China and India shows a different pattern. FDI in China was concentrated mainly in the coastal provinces
and two southern ones, Guangdong and Fujin resulting from China’s reform policy [12]. In contrast,
Indian government allowed SEZs (Special Economic Zone) to scatter relatively various parts of the
country [13]. Lastly, one common aspect is that both China and India squandered the chance for rapid
economic growth in the first decades after World War II because of Mao’s communism and Nehru’s
socialism. Their rigid and totalitarian political systems hindered foreign investors’ capital flows, resulting
in the underdeveloped countries [1].
(2) The Patterns of FDI in China and India
Sources of FDI by country The largest source of foreign direct investment to China is overseas
Chinese, which is Hong Kong and Taiwan. Hong Kong and Taiwan together accounted for about 40% of
FDI as of 2002 (See Table 6). A sizable portion of the FDI in China is investment made by the Chinese
from foreign location---so called “round tripping”1---and this takes place to a large extent because of
special treatment by the Chinese government towards foreign investors compared with domestic
investors. Estimates suggest that as 30 % of FDI in China may be a result of round-tripping (UNCTAD,
2003). In contrast, in India the largest source of foreign direct investment is Mauritius through tax
incentive arrangements (See Table 6). This means that U.S. firms have set up the holding companies in
Mauritius. There are some reasons that the US companies have routed their investment through Mauritius.
Firstly, US companies have positioned their funds in Mauritius. Secondly, it is because the tax treaty
between Mauritius and India stipulates a dividend tax of 5 %. The round tripping is much smaller in India
[9].
Table 6. Foreign Direct Investment to China and India by Source country (US billion $; (% to total)
1999
2000
2001
2002
China
Hong Kong, China
16.3 (40.6)
15.4 (38.1)
16.7 (35.7)
17.8 (33.9)
Taiwan
2.5 (6.4)
2.2 (5.6)
2.9 (6.4)
3.9 (7.5)
USA
4.2 (10.5)
4.3 (10.8)
4.4 (9.5)
5.4 (10.3)
Japan
2.9 (7.4)
2.9 (7.2)
4.3 (9.3)
4.1 (7.9)
South Korea
1.2 (3.2)
1.4 (3.7)
2.1 (4.6)
2.7 (5.2)
India
Mauritius
0.45 (32.4)
0.78 (47.3)
1.86 (62.3)
0.50 (16.7)
USA
0.43 (31.0)
0.36 (21.8)
0.36 (12.2)
0.55 (18.6)
Japan
0.15 (10.8)
0.17 (10.3)
0.14 (4.8)
0.20 (6.7)
United Kingdom
0.09 (6.5)
0.06 (3.6)
0.03 (0.9)
0.54 (16.3)
South Korea
0.04 (2.9)
0.02 (1.2)
0.003 (0.1)
…
Source: China Statistical Yearbook, China Foreign Economic Statistical Yearbook, Almanac of china
External Economies and Trade, various issues; SIA Newsletters various issues, Government of India
Distribution of FDI by sectors It is important to note that India and China focused on different
strategies for industrial development. India encouraged FDI primarily on high technology activities,
Round tripping refers to China’s investments being channeled through Hong Kong, China and returning as
“foreign” investment to secure the greater privileges and security that foreign investors typically receive. As China’s
reforms progress, this round-tripping FDI appears to be a diminishing proportion of total inflows.
1
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whereas China favored export-oriented FDI concentrated in manufacturing sector. China’s strategy is
basically based on the attracting FDI for exports. These different strategies stem from different economic
determinants of two countries. Although China is higher than India in terms of overall economic
indicators, there are some different endowments between two countries. First of all, China had more large
natural resources than India and China’s infrastructure is more competitive. But India has an advantage in
technical manpower, particularly in information technology as well as better English Language skills. By
2000, in China manufacturing industry and service sectors accounted for 60% and 37%, respectively.
Among services, real estate is the largest recipient sector. In contrast, in India, chemicals accounted for
19% which is the largest portion of FDI, followed by transport sector and electrical with 9% and 8%
respectively, telecommunication (IT) sector with 7% and service sector with 6%. Interestingly, foodprocessing sector attracted less FDI inflows (5%) [16][17]. Table 7 summarizes the distribution of FDI by
sectors in China and India.
Table 7. Distribution of FDI by Sectors (1990-2000)
Sector
Share %
Sector
Manufacturing
61
Chemicals
Industry
Service sector
31
Transport
including Real Estate
/Telecommunication
(IT)
China
India
Transport
2.5
Electrical Equipment
/Telecommunication
Service sector
Others
5.5
Food-processing sector
Others
Source: MOFTEC, 2001; The Singapore Economic Review, 2003
Share%
19
16
8
6
5
46
Global Firms’ Activities Both China and India are good candidates for the relocation of labor
intensive activities by MNEs, a major factor in the growth of Chinese exports. In India, however, this has
been primarily in services, notably information and communication technology. Indeed, almost all major
U.S. and European information technology firms are in India, mostly in Bangalore. Companies such as
American Express, British Airways, Dell Computer and GE Capital have their back-office operation in
India. Other companies such as Amazon.Com and Citigroup outsource services to local or foreign
companies already established in the country. Investor’s sentiment on China as a location for investment
is improving. Nearly 80% of all Fortune 500 companies are in China, while 37% of the Fortune 500
outsource of India. Among IT sectors in information and communication technology, China has become a
key center for hardware design and manufacturing by such companies as Acer, Ericsson, and General
Electric, Microsoft, NEC, Nokia, Philips, Samsung, and other major electronics MNEs. India specializes
in IT services; call centers, business back-office operations and R&D [9].
Comparison for FDI Performance Table 8 shows that FDI flows to China are almost ten times
of that to India over the past decades. In respect to the annual rate of growth of FDI inflows, India is
much higher than China. Regarding FDI stock China’s performance is much more conspicuous than that
of India. Accordingly, FDI stock to GDP in China is about 30% compared with India’s 4-6% range. India
is also more lagging behind China in terms of FDI flows per capita. In conclusion, timing, pacing and
content of FDI liberalization and the overall development strategy in the two countries seem to account
for the difference in FDI performance. A recent business environment survey indicated that China is more
attractive than India in terms of the macroeconomic environment, market opportunities and policy
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orientation towards FDI. India, on the other hand, scored better on the political environment taxes and
financing. (EIU, 2003) One survey (Federation of Indian Chambers of Commerce and Industry) suggests
that China has a better FDI policy framework, market growth, consumer purchasing power, labor law than
India. (FICCI, 2003) [9]
Table 8. China and India: Selected FDI indicators
Item
Country
1990
2000
2001
China
3.5
40.0
46.8
1. FDI Flows
India
0.1
4.0
6.1
(US $ billion)
China
2.8
1.1
14.9
2. Growth of
India
-76.3
97.0
52.2
FDI Inflows
(Annual %)
China
3.0
32.0
36.5
3. FDI Flows per
India
0.1
3.9
5.9
Capita (US $)
China
24.8
348.3
395.2
4. Inward
India
1.5
21.0
27.1
FDI Stock
(US $ billion)
China
7.0
32.3
33.2
5. FDI Stock
India
0.5
4.5
5.6
To GDP (%)
Source: World Investment Report (UNCTAD) 2003, Reserve Bank of India (2004)
2002
52.7
4.7
12.5
-24.0
40.7
4.5
447.9
31.8
36.2
6.2
(Note: Flow of FDI refers to the amount of FDI undertaken over a given time period. Outflow of FDI is
the flow of FDI out of country. Inflow of FDI is the flow of FDI into a country. On the other hand, Stock
of FDI refers to the total accumulated value of foreign-owned assets at a given time.)[18]
FDI in China by major categories Specifically, compared with India, China has different forms
of FDI. Table 9 provides data on the four major forms of FDI in China: (1) Equity Joint Ventures (EJVs);
(2) Cooperative Enterprises (CEs); (3) Wholly Foreign-Owned Subsidiaries (WFOS); (4) Offshore Oil
Exploration Ventures (OSOEVs). Equity joint ventures involve joint investment by Chinese and foreign
partners in limited liability corporations with sharing of profits (losses) and risks as defined by 1979 Law
on Joint Ventures. Cooperative enterprises are also known as contractual joint ventures. An example of
this type is that the foreign partner provides technology while the Chinese contributes the land, labor,
materials and services. Third type of FDI in China---Wholly Foreign-Owned Subsidiaries--- involves
locating the 100% foreign-owned companies in China using domestic Chinese resources. The fourth--Offshore Oil Exploration Ventures--- involves joint sea oil exploration and exploitation projects jointly
undertaken by the foreign sides and the Chinese Government. It can be seen from Table 9 that
Cooperative Enterprises were the most important type of FDI during the immediate post-1978 periods
(1979:97.20%, 1980:83.80%, and 1985:62.80%). But the relative importance of Cooperative Enterprises
steadily declined throughout the 1980s. By contrast, other forms of FDI, especially Equity Joint Ventures
and Wholly Foreign-Owned Subsidiaries, became increasingly important (EJVs: 2.80% as of 1979 to
47.50% as of 1989; WFOSs: 3.40% as of 1980 to 37.00% as of 1990). Offshore oil exploration projects
have been the least important of the four major categories of FDI in China. The percentage was only
slightly changed (N/A as of 1979 to 3.00% as of 1990). In conclusion, the fact that EJVs and WFOSs are
steadily increasing tells us that China is more engaging with global business rules and practices. By
reducing constraints of foreign investment China provides positive encouragement with foreign investors.
In India it is not easy to find these obvious types of FDI like China. In a sense, China is well-organized
than India in terms of FDI favorable environment which is vital element of the successfully attracting
foreign investors [12].
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Table 9. Foreign Direct Investment in China by major Categories (1979-1990) ($ US Million)
1979
1980
1985
1989
1990
14 (2.80%)
76 (12.8%)
2,030 (36.40%) 2,659 (47.50%) 2,704 (41.00%)
EJVs
490 (97.20%)
500 (83.80%)
3496 (62.80%) 1,083 (19.30%) 1,254 (10.00%)
CEs
N/A
20 (3.40%)
46 (0.80%)
1,654 (29.50%) 2,444 (37.00%)
WFOSs
N/A
N/A
360 (6.40%)
204 (3.60%)
194 (3.00%)
OSOEVs
504
596
5,572
5,600
6,596
Total
Sources: Almanac of China’s Foreign Economic Relations and Trade, various issues
(3) FDI Regimes in China and India
FDI policy or regimes may differ between China and India. Table 10 shows how different or
similar they are. Firstly, it is about ownership structure. It can be said that unlike non-equity forms,
licensing and franchising FDI usually accompanies the foreign ownership and equity, etc. The increase of
foreign ownership through FDI stems from privatization and liberalization of SOE (State-Owned
Enterprise) sectors. Over the past two decades, SOE sector has been diminished while shares of the nonSOE domestic sector and foreign firms have risen rapidly. This phenomenon can be true with both
countries. One thing need to be mentioned is the intensity and contents of the changing. That is, more
rapid declining of SOE sector is taking place in China than in India and accordingly more various private
and foreign firms is in China than in India. Secondly, China’s international connection comes from
overseas Chinese. Their network system which is called “round tripping” is equipped pretty well. As
mentioned, around 20-30% of the China’s FDI is considering being “round tripping”. Although India has
a large Diaspora which facilitates India’s connections to the international economy, its intensity of
network system is relatively weak. In addition, since 1991 reforms, India’s transformation of commercial
environment is still on the way. It can be said that the foreign-investment boom in China was started by
overseas Chinese. Overseas Indians, in contrast, are scattered around the world and across professions
without deep commitment to India [10]. Thirdly, China’s human capital is relatively strong with
universal literacy and technical development. China also has R&D strengths resulting from the past
emphasis on heavy industry. India’s human capital and R&D also has a lot of international excellence,
mostly in information technology and in some defense-related heavy industry. However, until recently,
India has quite high levels of illiteracy. Thus, in contrast to China, India’s major approach into
international information technology industry has been service sector rather than manufacturing sector.
Lastly, both countries pursue high level of decentralization economic policy. In fact, as mentioned, their
transition from control policy stem from complex historical background. (See Section 2: FDI History and
Reform policy) [13]
Feature
Ownership Structure
International
Connections
Human Capital
FDI Regime in Practice
Table 10. FDI Regimes
China
Dominant but declining SOEs, rapidly
risking private and foreign firms
Hong Kong, China important; large
diasporas
Pockets of excellence; uneven, rapid
catch-up
Continuing though declining SOE
preference; rapid decentralization;
much corruption
Source: Hill (2003)
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India
Large SOE sector; reservations
schemes for small firms
Large and active diasporas;
relatively weak
Pockets of excellence; continuing
high illiteracy
Reforming; high levels of
decentralized economic policy;
much corruption
4.
Conclusion
So far, we examined the FDI trends between two countries. First of all, through analyzing
statistical economic indicators such as GDP, industry and trade sector in China and India could see the
position of China and India from the world economy and could recognize the arrangement of economic
structure in both countries. Although China and India have positioned the 5th and 7th largest economy in
the world in terms of the size of GDP, their GDP per capita is still legging behind the developed
countries. With respect to industry sector, China is strong in the manufacturing industry while India is
relatively strong in the service sector. Regarding trade sector it can be said that China pursues more
export-oriented economy than India does.
Secondly, we examined FDI trends in both countries through FDI History and reform policy and
FDI Patterns as well as FDI Regimes. China started their economic reform through open-up policy in
1978 while India’s similar reform triggered by oil-price shock began in 1991. These economic reforms
enabled both countries to integrate with the global economy at tremendous speed. FDI patterns in China
and India show some differences. The “round tripping” contributed FDI in China with a great portion but
overseas Indians didn’t. In addition, the existence of four major types of FDI shows great potential of
China’s future FDI trends. It would be better if India would follow the model of China. In the FDI
Regimes we examined five features. The most important thing of FDI Regimes is the transformation of
ownership structure through privatization and liberalization of SOEs.
Despite rapid economic growth through FDI, there are some deterrents for investment in both
countries. Many people express concern about India’s red tape which is bureaucracy and slowdown of
reform and poor infrastructure and cultural barriers and poverty/income disparity and corruption in India.
And they do about China’s saturated labor-intensive manufacturing market. Both countries should prepare
their future economic environment. As China emerges as India’s greatest competitor for FDI flows, India
must find the way to compete themselves against China and the world. India can develop their technically
trained and English-speaking workforce as their differentiator from China. In addition, investment
promotion efforts and strategy towards the services sector would be helpful to increase flows of FDI.
Some changes will take place in China’s FDI market. First, M&A will become an important part of FDI.
Second, more MNCs will choose China as their regional headquarters, R&D centers. Third, more service
sectors will be more open to foreign investors. China’s preparation toward next decades’ new FDI market
should be maintained [6].
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About the Author
Mr. Mark Yang is a MBA student of Department of Marketing and International Business
at the University of Toledo, USA. Mr. Yang holds a bachelor degree in Chinese from
Hankook University of Foreign Studies. He studied one year in China as an exchange
student. His research interest is international business practices in China, India, and
Korea.
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