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Comparison of China and India's FDI

Info: 5458 words (22 pages) Dissertation
Published: 6th Dec 2019

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Tagged: Finance


Welcoming Foreign Direct Investment (FDI), means of India and China differ to some extent which gives to some important subjects of concern about the definite FDI perspectives of India. In the days to come, can India became an FDI destination equivalent to that of China. The thesis mainly focuses on these issues. It will also guide us with the necessary steps that the country needs to follow to turn into a attractive FDI destination in World.

India was lagging to a large extent when compared to the FDI inflows that China has. In part, this difference shows the trust that the foreign investors have in China’s growth and the disbelieve they had in India’s loyalty towards the free market reforms. On the other hand, Indian Diaspora was the drawback for its own success until now and interested to welcome the investors to back home. India has become a supportive backbone to private enterprise in terms of its development in infrastructure. When compared to China’s capital markets India’s market shown a great potential and transparency

In the case of India which is more dependent on its organic growth, it is using a wide range of resources which shows that there will be a more sustainable progress that China’s FDI driven method. “Can India overtake China”? Is no more a childish question and if it shows up the India’s wiser progress and according to the policy experts, the wiser the step more growth is shown in the economy.


Brief Analytical framework

What is FDI?

Foreign Direct Investment (FDI) is a networking ingredient of the progress in the globalisation of world economy. FDI reduces the total capital invested by foreign investors, directly or indirectly to companies in different economy with a desire of attaining profits to be shared from the company in which they invest. The foreign investors attains possession of assets in the invested country companies as a relative ratio to their equity holidays. FDI by definition is generally known to show a long-term commitment because it will be a share of ten percent or more in the host country firm, together with the management capabilities.[1]

Role of FDI:

The significance of FDI lies beyond the financial investment that invested in the country. Along with this, FDI investment can be a mechanism for developing international marketing of products in terms of knowledge, management abilities, technical aspects of design, brand names, way of marketing and characteristics etc.. FDI can produce desirable results for both local industry and customer, by providing improved show up in the product design and technological transfer, way of utilizing global management skills of human resources, setting the firm with global standards of competitiveness new channels of export markets, providing wide range of services in terms of internationally quality goods and channels and with an increase in the employment prospects.[1]

Taking into consideration of all the above aspects, FDI can be mentioned as an important means of economic growth and is a driving factor of growth in developing countries. FDI investments are normally choosen as better option than the other forms of finance, as they don’t create any debts, no-volatile and returns are directly proportional on the projects invested by the financers. In the present situation of rapid growth and tremendous change both in technological and managerial aspects, their need is always to be welcomed.[1, 2]

Choice of location of FDI:

According to Dunning’s Ownership Location Internalisation (OLI) concept the worthful site productions of FDI investments to the host nations in terms of location benefits that the foreign investors made by the FDI. The concept shows that the involvement of developing nations in total investment of foreign direct inflow has been grown considering over the past 25years, taking into the consideration of the changes taken place in the past decades. For example looking for agricultural resources was high in 20th century when compared to the present. The present investments of FDI are complex to a large extent and are dependent on a wide variety of conditions base on the growing competition on the market in which the industries own and to the economic policies at the local and the host countries. [1,2]

FDI has been viewed as a technique to enhance the growth in the economy by the developing nations. In terms of IMF, FDI is an investment internationally for attaining a lasting interest by a local firm in one economy in an enterprise firm in another economy.

In spite the developing nations are pushing hard to get on the FDI but to a large extent FDI is gained by developing nations, for example it is one and half million dollar investment in the year 2004 China and India are the two developing powers of the developing nations, comprising of thirty seven percentage of world population. Both China and India has a large scale of natural resources, skilled labour and unskilled labour, affordable labour with good quality large local markets and the stable political use.[2]

By taking all these into consideration we can say that they have a tremendous growth in the FDI to setup the local and international markets and also to become a significant entity in the economic growth globally. India and China are the two growing nations of Asia which are at present the higher priority nations for FDI investment. Both India and China have their trends of policies for getting on the foreign investment.

India is the first country in Asia to setup a export technologies in 1965. India has drastically slowed down by not utilising the foreign investment because of it s self reliance and export replacement until the late 1980’s till the introduction of new reforms (LPG) liberalisation, privatisation and globalisation in 1990- 1991.[3]

India and China are the two nations which are best suited for the FDI investments globally. Inspite, India has introduced excellent financial and instituting reforms easier to the China’s introduction of these, now China shows up a better FDI in contrast with India. It is clearly evident that China is ahead of India, there are some important cases that India has to learn from China’s experience.[1,3]

The financial markets governed by SBI in India are much enhanced when compared to China. India has a good service sector which requires small capital inflow than the manufacturing sector. Based on the analysis of AT Kearney, it is evident that India has a high enhance of becoming number one manufacturing location.[3]

Structure of Dissertation:

The thesis is discussed in a total of eight chapters. First chapter deals with the statement of the problem and comes out with the goal of this thesis. Second chapter deals with Indian and Chinese economy. 3rd chapter deals with FDI and developing countries. 4th chapter deals with Indian and Chinese FDI. 5th chapter deals with analysis of Indian and Chinese economy using SWOT and PEST analysis. 6th chapter deals with the methodology followed by observations and enhancements in the seventh chapter. 8th chapter deals with the conclusion and recommendation to be taken by nations to increase FDI inflow.

Statement of problem:

India secured independence two years earlier than China, but it is still behind in socio-economic development signs. Once China became a member of WTO China began to be choose as best FDI investment nation among the developing nations. In terms of Asian Development Outlook and UNCTAD(2005) point out that India’s FDI is purely less than that of China and there is a quite enough difference between the actual realisation and approvals. However, China was ahead of the India because of this implementation of open door policy in 1979 for the inflows of FDI to grow its economy to the modern standards and capitalistic ways, it being a socialistic system.

Eventually, India also shown growth in its economy through LPG policies from 1991 onwards breaking out the barcodes of the license control raj. But according to RBI rightly spoken words “Despite all the talks we are no where even near to begun globalise in terms of any commonly used signs of globalisation. In fact we are still one of the best globalise among the major nations, however we take a look at it”.

Justification of study:

The thesis point out the comparative study of India and China over FDI, it is mainly discussed about the policy reforms in India to make more FDI investments, next steps to be taken by India for attracting FDI and how to overtake China in the FDI inflows.

The growth of FDI is a major source making income for many developing nations like China and India. It brings several advantages like implementation of new products, skills, new markets and technology to the local country. India is preferred as the second best nation for the foreign investment after China which showed a growth of one hundred and eighty four percentage in the year 2006-2007. Inspite of better economical and managerial reforms of India over China, India is lagging behind China. The thesis demonstrates whether the current reforms in India are sufficient to overtake China.

AIMS and objectives:

  1. To identify the factors that develops the growth of Indian financial system through it’s policy changes.
  2. To find out what initiatives made by Indian government to attract the FDI and it’s policy changes made by the government of India to enhance the Indian health care system.
  3. To analyse participation and involvement of FDI in India and China, also to identify what India can learn from China.
  4. To produce qualitative evaluation about past and current issues which effects both India and China by FDI?
  5. To produce the comprehensive documentation of key findings of government participation of both countries by FDI.
  6. To conduct a competitive comparison by FDI in India as well as in China


A Framework of FDI

Overview of Indian FDI:

The Indian government behaviour towards the foreign investment has been modified to a large extent during the last decade. Foreign Investment at that time was restricted only to a certain particular industry under special norms has now been made liberal under the terms of restrictions and particular industries. This shows the changing confidence in the fundamental of the Indian economy and the drastic step of the Indian government to cope up with the global economy. Approval ways for foreign Investment in India are primarily most vigilant.[3,4]

FDI is considered as a significant step in the process of growth of economy in the developing countries. FDI is certainly the best investment policy in market when compared to the other reforms of finance since it does generate and debt, non-volatile and the benefits are dependent on the performance of project invested by the investors. With the implementation of new policy in 1991 (LPG) and other reforms policies, India has seen a growth in the investment and outflow of FDI into the nation. This was to a large extent due to the modification and dismission of trade opposing policies.[4]

Through economic liberalisation in India had taken its roots from the late 1970’s, economic reforms in India have only started after 1991, the reforms which have opened up in 1991 have pushed the economy from the government control, government monopoly to the private sectors of the economy growth. The license raj is a constraint in the past, inspite of the slow down of the economy globally due to global crisis in 2008-2009 India had shown up a growth of nearly 6.7%. According to the Asian development banks Asia capital market report the Indian economy was grown as a third largest after the China and Hongkong in the growing Asian markets, with a market capitalisation of nearly US$ 600 million.[3,4]

Investment Environment:

Although India’s foreign investment policy gives access to hundred percent FDI in most sectors, India till now has not attained its growth as an FDI destination to its maximum extent. The government’s efforts in maximising the FDI investments are not up to the mark because of the flows with in the government like corruption, bureaucracy, and importantly the drawbacks in the needed infrastructure. India is known for its different operating ways which differ from state to state.[3,5]

Important reforms in the investments concerned issues; mainly the foreign investment was delayed in the last few years mainly because of UPA’s dependence on India’s communist party for the agreement in the parliament. The end of this agreement in 2008 brought into existence only a small set of reforms. For example, in February, the government implemented modifications that opened channels for FDI inflow like the insurance, telecom and retail.

The government’s decision did not change any of the FDI capitals but it had given a chance to invest in these sectors beyond the limit but it should be taken place indirectly. Once major fore seeing, is that UPA government, which has been rejected without any support of the India’s main left list parties, will now utilize its power to step forward in implementing more economic and investment reforms, many of which are anticipated to provide chances to foreign investors. [5,1]

Reforms are showing a growth with a normal place as a result of the global crisis and the diversity of views on the issues, even with the congress party itself. Plans to improve the tax system, create a self dependent debt management system and to a small extent privatisation of government owned firms are being taken into consideration and are proposal.

Recent performance:

There was a growth of 6.2% y/y in the GDP for Q2-09 (through it is less than the predicted one) with an increase of 5.8% in Q1-09. Grown was reduced to 7.4% for 2008 and is expected to continue the same pattern for the next few quarters. Growth in the first half of the year came on the side of high government prediction spending and stimulus spending. But less monsoon rainfall this year will reduce growth aspects. Industrial growth in the production is at 10.4% y/y in August at a tremendous state since October 2007, largely on the side of government mode of operation and inventory backing.[5,7,9]

Fiscal Policy:

The budget for the FY09/10 coming year is estimated that the reduction of the deflect to 6.8% of GDP from 6.0% the last year and the tax revenues getting worsened to 10.9% of GDP from 11.6%. Total investment of the central government is to grown to 17.4% of GDP on the things due to increased subsidies and for providing more opportunities on welfare and employment programs especially in rural areas to increase demand and growth trajectory. The period given to small farmers to repay their dues under the debt waiver and debt cancellation schemes has been increased up to the year end. More money is expected to be deposited into the National Rural Employment Guarantee scheme which gives assurance that each rural family works 100days on public sector projects. Fiscal consolidation is to be given up for small term improvement and is to be gained in the medium long term. The budget does not include important reforms which are significant for private business and foreign investment.[1,3 5]

Monetary Policy:

The Reserve Bank of India is likely to take the control of more monetary losses since October 2008 and to hold the repo rate as well as the reverse repo rate at 47.5% and 3.25% respectively in tis October meeting. The case reverse necessity can be increased once the liquidity conditions have become better. Lower policy rates are step by step converting into lower commercial rank landing rates, but the business is being more careful about the giving and taking.

Large energy prices earlier in 2008 had pushed the government to maximize retail fuel prices, making the Wholesale Price Induse(WPI), the RBI’s target indicator for inflation, nearly to 12% in July 2008.

The external sector:

2008 saw maximum trade downfalls due to the increase in the oil prices. At the same time the plunge in the commodity prices failed to make it a substantial current account profits in 2008 due to negative export performance and —– value of rupee decreased to a maximum extent. The considerable reduction in imports in 2009 motivated to an growth in the current account deflect in Q1-09 after a large extent of downfall in the last three quarters of 2008. The overall Balance of Payment(BOP) figures for H1-08 showed a addition; but by H2-08 it became a negative.[6,1,2]

H1-09 BOP balance is now once again in showing improvement due to a firming on the capital account side but the current account side was worsened in Q2-09. Foreign reserves, though are of considerable amounts have been tightened in the past months, but have raised again in July up to USD 261 billion and showing over 9.4% months of current account debit cover. The external debt is a tiny one at 18.7% of GDP providing a solution. The rupee value dropping in 2008, have brought loss of 20.7% against the USD, but in 2009 it coped up when compared to the lost value worth.[1,2]

Changes of Policies in 1991:

In July 1991, India has observed some important reforms comprising of certain de-reputation of industrial sector as well as liberalisation of FDI and imports. The important conditions taken in this policy alternation were:

  • Cancellation of industrial licensing in all organisations with exceptions like security-concerned and strategic areas.
  • Enhancement of capacity facilitates the market necessities for the running industries.
  • Nullify the rules on investments by MRTP and FERA industries.
  • Approving normally for foreign investment below or equal to fifty one percent of the equity under consideration of high technology and high investment priority industries and liberalisation of capital market.

While implementing the practice of mixed economy would continue, the new economic policies had placed a few hard alterations in government sector industries. Example: Minimizing the set of industries reserved for government sector from 17 to 8 and by December 2002 the set included only three sectors under the public sector units.[8, 10]

  1. Atomic energy
  2. Minerals mentioned in the atomic energy order, 1953.
  3. Railway transport.

The number of fields according to which industrial licensing is necessary is reduced to fifteen, declaration of new policy renewal fund(NRF) in order to handle the worse state sector organisations; for converting them into more independent and accountable, along with which foreign investment upto fifteen percent is allowed without any restrictions and foreign technology allowance for 35 main industries. These types of policy changes had increased the argumentation in India among the supporters of liberalisation policy and one who doesn’t support the policy. The argument is still on; however it was later changed slowly with time of almost a decade of policy introduction and the result in the performance was visible. [9,10]


FDI in China


Right from the start of economic policies and begin of foreign capital investment in 1979, China started getting a huge chunk of foreign investment flows. China has become the second largest FDI investment country in the world where United States occupied the first place and China has also secured the biggest host nation among the developing countries. China’s position as a host nation of FDI can be termed equivalent to the developed country though it is a developing nation with the highest FDI inflow.[17]

For twenty years (1979-1999), the actual FDI investments in China from 1979 to 1999 is nearly USD 306 billion, which is equivalent to ten percent of the global investment and thirty percent of the developing countries together. Chinese FDI investment pattern can be studied according to the alterations in the policy reforms- the first phase is from 1979- 1983, second phase is from 1984-1991. In the first phase only the Chinese government has set up four Special Economic Jones(SEZ’s) in Guangdon and Fujan provinces, and implemented new set of regulations with supporting capabilities for the FDI in these SEZs. Though the amount of FDI investments is limited it is mostly taken place in these SEZ’s.[17,18]

Determination of FDI in China:

According to the study FDI is basically categorized into two types: market oriented and export oriented FDI. According to the market oriented type of FDI the driving factors for promoting the FDI investments is the size and growth of the host nation. The export oriented FDI on the other hand mainly concentrated on the wealth competitiveness. There are some of the features which support both FDI which China is said to have are mentioned below.[17]

  1. Size and growth of the Chinese economy and policies.
  2. Distribution of FDI in China in the sectors of natural and sect oral and geographical.
  3. Human resource capabilities like cost and quality of labour.
  4. Infrastructure interms of physical, economical and technology.
  5. Willingness to trade internationally and its channels to foreign markets.
  6. Introduction of regularity principals and economic policy coherence.
  7. Investment security and promotion.

Capital Availability:

By the early 2000’s, China had outnumbered United States with a more number of investments globally. FDI is a technique in which a non-local investor is interested investing in a local location. The investments of FDI into China can be counted on the basis of the global capital markets presence at that time and normal economic environment at that particular time. [13]

A challenging global economy, capital markets and business situation at that time implement options of creating huge chuncks of investment capital that exceeds the amount of good ideas of local investment can result in the institutional, organisational and individual investors to invest in the growing and developing markets of the world.


China’s welcoming nature as a perfect host of foreign investment capital lies on its enhancement of infrastructure, resource opportunities like(physical and labour), quality and working abilities and the development of the managerial vale chain. The high degree obviously make China as a perfect host of FDI when compared to other countries, like India which strive for its success in attaining the same investment capital. A growing and developing nation requires good standards of infrastructure and resources in order to promote its sale of goods and services. [13]

Less transaction charges, due to the good standard of the aspects, helps investors to earn returns on these investments as their organisations are able to make benefits roads, highways, bridges and other ways of physical infrastructure, must be present runned and should be more secure for the transportation of the goods and also for the commutation of the workers. Another aspect for being a perfect FDI involves the availability of desired labour, who have the required aptitudes, experience and perfectness to create , manufacture and provide goods and services that can be seleld in the growing markets.

Regulatory environment:

When a national government acts into scene by implementing rules and policies with an objective at favouring state entities at the cost of privately running firms, such an environment can be detrimental to initiatives that aim to attract FDI. Like these, the regulatory environment can enhance or become a downfall fro the foreign direct investment for China. Large amount of regulations tend to show the entrepreneur and commercial activities, as the management and labour must spend more quality of time to carry on with these rules and regulations. If an investor wants to start a manufacturing facility in China, excessive start up costs, loyal exposure and other difficulty compliance items may implement that investor to set up the facility anywhere the environment is more complaint to the industry.

Other types of regulations which are must the compulsory joint venture partnership in which, along with the foreign investors, the state entity or local entity or local industry as a partner. A well established judicial system is favoured for the perfect FDI host. If a judicial system is centralized towards the locals who some time wants to practice some unfair, unethical and illegal means of business opuurtunities will also contribute to making China as a less choose destination.[17]

Another regulatory technique which supports for a favourable investment is the government’s implementation of investment activities by providing alluring financial breaks like the tax breaks, grants, cheap government promoters financial services then it can be more effective in enhancing the making of a business more benefitiable and within a short span of time.


Political and economic stability can improve the state of the on flows of FDI. Stability means estimation of future and giving opportunities for organisations to attain better understanding of future markets. On the other hand constant social turnover are the constraints which are not favourable for a good progress of the investments. Economic instability can lead to the depreciation of the currency value due to hyper inflation. To promote FDI, natives/works as well as trading should have a considerable amount of respect towards Chinese low end rates. Violence, underground criminal running, blackmail, kidnaps and duplicate currency and products have all been the flaws in China that serve to reduce the efficiency of conducting trade activities. The justice system should also follow best practices for eradication and elimination of these unfaithful activities for a better investment opportunities.[17,18]

Local Chinese market and business climate:

The most shining feature of China is the large size of its population and market, and the aspects of growth result from this size. The ability of organisations- backed by foreign investment to sell to a considerable amount of local market makes China as an attractive destination for FDI. As the Chinese economy is showing a tremendous growth, high end industries, engineering, robotics, and luxury goods among others can step into Chinese market as a large scale investors because of its perfect local conditions, resources and other FDI chances are enhanced growth and FDI can begin a “success domino effect”. The more foreign investment in the regions the more will be its growth. If the growth of a particular location is in a good progress to more investors will be willing to make FDI inflows. This point gains the benefits of the China’s sizeable market, which represents growth oppurtuniteis in the present and growing commercial business. The higher the FDI inflows into the nation, the more the economic growth, forming a cycle of economic growth.[14,18]

Openness to regional and international trade:

Open nature of the business market helps in enhancing the promotion of FDI hosts. The main important thing to be taken into consideration is the business capability to promote its products and services to both local and international markets. Is the Chinese based organisations have restricted or less trading activities to foreign customers to be taken into consideration the United States, Western Europe, Japan and others tehn the local market may not able to accomplish a single investment in money and energy. Trade restrictions such as tariffs are genrally considered as less motivated options by other nations. An American product which is having high price while being marketed in China is of no demand in the local market due to the unnaturally raised price, such actions normally rise the tariffs of such local Chinese product in contrast with the US products and in certain cases, an outright ban on certain goods and services.[15]

Export-friendly policies, normally will play a major role in determining whether to invest in China, especially for organisation which have large chuncks of investments in other local markets. For enhancing economic policies and growth, it is necessary to initiate business-friendly system, and international free trade agreements are needed to be implemented by market developing governments.

The impact of FDI on China’s international trade:

Right from 1980, China’s foreign trade has shown an tremendous growth. In the period of 1980 and 1998, its share in the world trade has rised to three percent from the base value of one percent. The China’s economy free flowness can be measured by the ratio of foreign trade to GDP addition from twelve percent to thirty four percent. It is evident that the FDI has been the main aspect which enhanced the improved China’s entrance in the international sector of the production process known as globalisation. The conclusions can be derived from the below state empirical evidences.

China’s comparative advantages:

As estimated by economic theory, China’s main structural strengths in international trade have been focused in a small definitive number of labour intensive manufacturing products leather and shoes, dress materials and some other manufactured products (like, sports items, toys). Its main structural drawback lies in investment and technology intensive goods; machinery, turbines, textile raw materials and plastics. Ten sectors in which China had excelled had resulted in a total of sixty eight percent of China’s exports and ten sectors in which China has fallbacks resulted in a total of 42 percent of Chinese imports.[15]

This present a brief about the differences that exist in policy making with China’s foreign trading partners ( the EU-15, the United States, Japan) and the four developing individualized economies (Hong-Kong, Taiwan, south Korea and Singapore) and the presence of big inter-sectarian complementary. In the same channel, China had an excellent net export in the labour based products both in its business with Asia and the rest of the world.

China’s specialisation policies have never been introduced. Its excellence in some of the more basic sectors (clothing and knitwear, carpets) was turned off in the nineties, while new comparative benefits evolved and other were vanished. In particular China had introduced new comparative benefits in computer tools, consumer electronics and electrical appliances and home used electrical apparatus though there was excellent growth in exports. At that moment it had given up its comparative benefit in three sectors, out of which crude and refined oil are same. These turnovers in the specialisation also emerged the China’s position in world trade. While in 1997 China still continued to hold the biggest market chuncks in the most tremendously growing world markets like tele communication devices, computer devices and electrical appliances and tools. [17]

A Comparatative analysis China and India in a context of composition of GDP:

There is scepticism about the China that has the business structure of a developing nation. The inter sectored business specialisations were more strongly established when compared to other developing Asian nations. This can be credited to the China’s wide extent and big resources of cheap labour which helps it in having a continuous enlargement of labour specific exports.

The Analysis of the IMPACT of FDI on China’s structure:

China’s policy is so attain export-related FDI which is interested in its enhancement has gained a excellent success. It has allowed it to construct on international level of manufacturing sector, which is highly capable to meet the world markets. There was no effect on this export-related and impo

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