FDI Story in China & IndiaEffect of Government Regulations
Agenda:
- China FDI History
- India FDI History & Government
Regulations
- Main Differences in FDI between India and
China
- FDI Discrepancy Argument
- Facts & Conclusions
China FDI History
TransitionTransition Chinese Foreign Join Venture Law
(1979)
Wholly Foreign Owned Enterprises (1986)
Economic Zones: Four Zones in 1980
Shantou, Shenzhen, Zhuhai and Xiamen
Fourteen cities by 1984 Whole China by late 1900’s
Rapid Growth in FDIRapid Growth in FDI Rapid economic growth in reform
period
Abundance of labor and its low costs
Rapid expansion of China’s domestic market
Role of overseas Chinese
Increasing integration with world economy
Rapid Growth in FDIRapid Growth in FDI
Why FDI?Why FDI? Offsetting the capital deficiency
Acquiring advanced technology
Gaining production know-how
Promoting exports
India FDI History
& Government
Regulations
1947-1948 British owned private foreign capital-Swadeshi movement & Industrial policy resolution
1949-1953 Trio of Domestic business houses, foreign capital and the government-nationalist sentiments in policies kept away foreign investment
1957-Second Economic Plan, launched “Industrialization though import substitution” encouraged private investment
1960s-Selective industries got foreign collaboration and JV mostly manufacturing –Indian participation retained
After 1960s-Devaluation of Rupee encouraged socialist idealism banks and foreign oil majors nationalized
1968 introduction of Foreign investment board –encouraging investments on own terms and conditions
FDI History in IndiaFDI History in India
1973-Foreign Exchange Regulation Act (FERA) new clause introduced “all firms dilute their foreign equity holdings to 40% to be treated as Indian companies” exit of IBM, Coca Cola
1980s-restrictive licensing procedures softened, technology transfer and royalty payments relaxed, wherever possible foreign investment was encouraged
1990s-Rupee devalued, NRI money withdrew, India turned to IMF, Trade regime and regulatory frame work was liberalized, FDI invited in wide range of industry, limit was increased from 51% to 100% in some cases, service sector reopened for FDI, FIIs also encouraged
After 1995-Political instability but perception towards FDI changed, changing government kept focus on FDI
Source-www.ems.bbk.ac.uk/faculty/kapur/personal/fdi.pdf retrieved on 29th Oct 2008
FDI History in IndiaFDI History in India
114,303 US
million$ till now
Source-www.dipp.nic.in/fdi_statistics/india_fdi_index.htm retrieved on 29th Oct 2008
FDI India InflowFDI India Inflow
Source-www.dipp.nic.in/fdi_statistics/india_fdi_index.htm retrieved on 29th Oct 2008
FDI LandscapeFDI Landscape
Restricting product market reform Politically sensitive areas like retailing, news media
and defense not deregulated yet 830 products reserved for firm below certain size
specially in clothing and textiles- can not receive FDI and can not even expand
Makes harder for local companies to innovate and be efficient ,local supply chains remain inefficient and unexposed to worldwide markets and skills
Loss for consumers and whole economy Examples to be considered liberalization of
automotive industry and air line industry
Government Government Regulations affecting Regulations affecting
IndiaIndia
Infrastructure Lack of infrastructure biggest hurdle for growth Physical infrastructure is state controlled, regional
differences in infrastructure concentrate FDI to some specific regions only
Multiple regional parties bring in political instability in state as well as central government making development projects slow and implementation of reforms inefficient
Also a major hurdle for India “electricity shortage”-Electricity act 2003 aimed to provide electricity continuously at low cost to businesses however only 8 states implemented the act
Sector itself good for FDI attraction, upgraded telecommunication highways and ports but power, railways, water and swage still major areas to be looked upon
Government Government Regulations affecting Regulations affecting
IndiaIndia
Large Bureaucratic structure –a ground for corruption Difficult to manage
overlapping government agencies and tedious paper work-system very complex
Foreign investment perceived as slow, difficult way of doing business in such bureaucratic structure
Foreign investment done at the cost of delaying projects
Main hurdle corruption at every stage , this together with other reason added to less likeliness of FDI inflows
Sign of improvement now!!
Source-http://en.wikipedia.org/wiki/Corruption_Perceptions_Index retrieved on 29th Oct 2008
Government Government Regulations affecting Regulations affecting
IndiaIndia
Main Difference in FDI between
India & China
India could not attract foreign investment in both products and services market, only seen as a service industry specially in IT.
To eliminate this difference, three steps can be taken to stimulate domestic demand RBI to keep interest rates regionally
competitive Implement Value Added Tax (VAT) Government to reduce budget deficit
India & China – The India & China – The DifferenceDifference
Depth of NationsDepth of Nations China’s Financial Assets
– 220% of GDP
India’s Financial Assets – 160% of GDP
China’s Financial system shows a greater strength in countries savings & investment
India’s Savings and Investment occur outside the formal financial system
Credit Distribution – Credit Distribution – Effect on Demand and Effect on Demand and
SupplySupply
Majority of financial capital of both countries going to less-productive areas
China’s fund going to State Own Enterprises rather than the private sector
India’s major share taken over by government to finance budget deficit
Much of what’s left goes to Agriculture, tiny Households, etc
Reason for this skewed type of lending in both countries is preserving jobs
Wasted CapitalWasted Capital
FDI-Discrepancy
Argument
Over reporting of FDI by China in terms of its alleged ‘Round Tripping’ of FDI
What is ROUND TRIPPING?
Chinese firms illegally transfer domestic (unaccounted) money to other foreign countries and then invest it in the mainland as FDI inflows in order to benefit from the preferential treatment given to FDI in terms of taxation, labor policy, etc.
Under reporting of FDI by India because of non-conformity of India’s method of measuring FDI to the international standards.
FDI-Discrepancy FDI-Discrepancy ArgumentArgument
Facts & Conclusions
Source: CEIC data Grant Thornton International Business Report 2008 retrieved on 28 th Oct 2008
FDI ComparisonFDI Comparison
Micro foundation India – Not overly depend on commodities and US
FDI vs. FII
Exchange Rate Policy
Democracy vs. CommunalismIndia - POSCO,ARCELORMITTAL,NUCLEAR DEAL,TATA NANOState + Center FD - 10% GDPLarge Subsidies, Rewarding failuresChina - Fiscal Surplus, No Debt, $2 T Cash
Source: http://www.ndtv.com/convergence/ndtv/video/video.aspx?id=42447 retrieved on 28th Oct 2008
Brief Important FactsBrief Important Facts
Projected GDP US – 3%, INDIA – 7%, CHINA – 8%
0
5
10
15
20
25
30
35
40
45
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
GD
P in
Trl
lion
Dol
lars
US
INDIA
CHINA
Projected GDPProjected GDP
High FDI potential
Low FDI potential
Low FDI performanceHigh FDI performance
India
China China
India
Position in 2003-2005
position in 2004-2006
Source:http://www.unctad.org/sections/dite_dir/docs/ retrieved on 28th Oct 2008
Matrix of Inward FDI Matrix of Inward FDI performance and performance and
potentialpotential
Conclusion
Source-http://www.indexmundi.com/g/g.aspx?v=66&c=in&l=en retrieved on 30th Oct 2008
China in a stronger position compared to India
But INDIA can do better if It opens more sectors for FDI
Eliminate barriers in foreign investment
Improve productivity and population control to increase Per Capita Income
More efforts to decouple economy and equity market’s over dependence on FII
Should make Efforts to reduce bureaucracy
ReferencesReferences www.McKinsey Quarterly.com
Article 1: China’s and India’s financial systems: A barrier to growth
Article 2: Why believe in India
Article 3: China and India: The race to growth
Article 4: Making foreign investment work for China
World Fact Book
http://www.financialexpress.com/news/fii-vs-fdi/127133/
http://www.youtube.com/watch?v=7zmzw5WV-RA
http://www.youtube.com/watch?v=VFPx1iLEGn8
http://www.ndtv.com/convergence/ndtv/video/video.aspx?id=42447
http://www.ser.tcu.edu/2003-Pro/SEP2003%20Yallapragada%20Paruchuri%2027-
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