Picture Courtesy: The Indian Express/ Reuters File photo
Article No. 0088/2017
India, a rapidly growing nation with an enormous pool of educated youth and strong industrial bases in various cities across the country. It possesses a large and cheap workforce that is situated strategically between developing Asia, the Asian tigers and developed Western economies. China, Asia’s economic powerhouse, one of the world’s largest economies with booming Special Economic Zones (SEZs), hosts some of the largest global cities and acts as the worlds’ manufacturing hub. These two booming economies were responsible for jointly attracting over $177 billion in 2016. However, their treatment in the hands of the global investment climate has not been equal. This paper aims to investigate the causes behind China and India’s varying experiences with Foreign Direct Investment (FDI). This paper shall analyze the social, political and economic environments of both India and China in an effort to highlight the influence it has on FDI. The automobile industry has been examined as a case study to contrast the behaviour both governments have taken towards attracting investment in large-scale industries. The automobile industry represents a large sector of the manufacturing industry in both India and China, drawing in significant levels of international interest in recent years due to the cheap capital and factor costs that are available within developing Asia.
Foreign Direct Investment can be defined as an international investment which is undertaken by an individual or firm resident in one country with the intention of establishing an interest in a new or existing project in a second country. FDI is essential in developing economies as it generates employment by creating new productive capacity. Not only does FDI add to the capital stock of a country, but it also brings in intangible assets such as technological expertise, managerial skills and management skills as well as new products and industrial processes. Countries will therefore attempt to create positive economic conditions in order to increase the amount of FDI they receive. Developing countries provide both new and potentially more efficient markets which attract multinational companies to set up or invest in existing projects.[i]
Introduction
According to The United Nations Conference on Trade and Development (UNCTAD) 2017 report on World Investment, the world’s second largest destination for FDI continues to be developing Asia. Although the region experienced a contraction of 15% from 2015 to 2016, inflows to India and China remained stable (experiencing a roughly 1% decrease in the case of the latter). Although India saw a record number of greenfield projects announced in 2015, inflows remained largely static and did not record a significant uptake in 2016. Tax-related concerns are hindering foreign investors from investing in larger scale projects, despite some significant efforts at liberalization being undertaken in recent years[ii].
Table 1.1 – Data sourced from UNCTAD Country Fact Sheet (India)
FDI flows have remained largely insulated from the 2008 financial crisis, and are the least volatile of all external financial flows to developing nations. Their stability is attributed to the investments being based on long-term rather than immediate developments, and are less cyclical in nature as compared to the foreign portfolio and other investments[iii]. Thus any trends that are seen in FDI in China and India in the pre-2008 period can be assumed to have continued following on from the financial crisis.
As seen in Table 1.1, even in the pre-crisis years of 2005-2007, the annual average FDI inflow into China was $76,214 million. This figure is over four times higher than India’s average annual FDI during the same period. India’s FDI inflows in 2016 are nearly 2.5 times higher is the pre-crisis average whereas China has grown less than 2 times the original amount during the same period. As seen in the table above, FDI inflows into China seem to be plateauing in recent years (although UNCTAD predicts an uptake in 2017 as a result of increased investor confidence)[iv].
This data showcases that due to earlier policy regarding liberalization of foreign investment in China, more FDI was amassed as compared to India. The entry of FDI into China was carefully regulated and streamlined, through the adoption of a dual-track approach which regulated private projects and kept their operations in line with national targets. Overseas Chinese nationals contributed heavily towards FDI in the earlier years, catalysed through the creation of SEZs in south China. The turn of the millennium saw FDI acting as a replacement for bank loans and financed the import of high-tech equipment and components – fueling a manufacturing takeoff.[v]
As China is the most popular destination for FDI in developing Asia, it is worth questioning whether inflows into China are detracting from flows into other developing nations. In the case of India being geographically proximate to China (and many other nations receiving high levels of FDI such as Singapore, Hong Kong), perhaps China is the cause for its relatively low levels of foreign investment in the 2010s. In the early 2000s, China has been suggested as the cause of FDI dropping in nations such as Mexico and Malaysia, as it was a more attractive destination for low-cost production and export. Offering vast amounts of cheap human capital for labour intensive manufacturing processes, China has a comparative advantage against other developing economies[vi]
In a study done by Eichengreen, supported by results from earlier studies which have affirmed the same outcomes, Chinese FDI is complementary and not competitive with regards to other developing Asian nations. FDI originating from Organization for Economic Cooperation and Development countries (OECD), especially outflows from Japan, into China has had a net positive effect on FDI into nations such as Indonesia, Malaysia and Singapore. These nations have manufacturing and production links with China. Indonesia is a large supplier of raw materials while nations such as Malaysia belong to common supply chains with the manufacturing giant. Interestingly, the nations where there is the smallest correlation between an increase in Chinese FDI and its own FDI are the nations which have different supply chains with China. Eichengreen notes that India and Bangladesh are the smallest recipients of this positive effect as a result of them not being linked with China’s production processes[vii].
It is worth noting that Eichengreen’s data focuses on the period from the turn of the 1990s to 2003 and does not accurately represent FDI trends up until 2016. It may have been the case that OECD nations attempted to invest in nations which had common supply chains as a means of cheaply linking the different stages of production during the turn of the 21st century. In the present day, this trend may not be as applicable as a result of the change in priorities of nations with regards to FDI. China is growing increasingly closed to FDI in traditional sectors such as basic manufacturing. From 2005 onwards China’s focus, as per the National Development and Reform Commission (NDRC), the nations top economic planning agency, shifted towards the quality of investments over quantity. A preference towards investments in high-value added sectors, technology and innovation has been seen. Thus there is no longer an open and indiscriminate access to investing in China – which makes it more difficult for investors to strategically invest in low-value added sectors in developing Asia and continue the same practice in China. It is therefore plausible that India lost out on FDI as a result of China redirecting FDI towards itself, in the post-2003 years.[viii]
In the recent past, India’s complex rules and obligations, procedural delays and other regulatory policies act as hindrances towards investing. The interests of regional politicians within India have also resulted in FDI being opposed, to protect homegrown industries. Large retailers such as Walmart have been refused entry due to a fear of jobs being lost by domestic retailers.[ix] Therefore it is not solely the case that India is unable to attract potentially high levels of FDI, it is rather the case that forces within India are not welcoming FDI in all sectors. Improving the overall institutional framework of investing in India would be beneficial in attracting foreign companies to invest, as well as in improving the business environment for domestic actors. Policies which seek to enhance market efficiency, the effectiveness of public administration, access to and quality of infrastructure would greatly incentivize potential foreign investors.
The attraction of over $44 billion in FDI while also remaining a largely democratic setup is indicative of India’s ability to balance political realities on the ground with burgeoning foreign investment penetration. India has to face the hurdles of national, state and local level elections and the balancing of powerful interest groups before passing decisions on major projects. Interest groups which are responsible for both citizen’s voting behaviour, as well as campaign finances, need to be convinced of a project’s benefit before being executed. The nature of India’s political and social set-up would make the indiscriminate profit-earning of large foreign investors with no benefits to the local interested parties a significant challenge. China’s authoritarian setup makes the formation of economic policy, flexibility of decision making and goal-setting significantly easier than India’s democracy does. The decentralization of economic decision making and development of regional economic zones allowed the rapid development of regional manufacturing zones. India, on the other hand, is slow to reform the control that the central government has over state governments in matters regarding economic policies and more specifically, foreign investment. The local bureaucracy does not perceive itself to be an independent entity, or rather is not allowed to be, and thus are heavily dependent on a centrally-led strategy to dictate economic matters, stifling the development of policies and infrastructure that would benefit foreign interests.[x]
According to the World Bank Group’s ‘Doing Business 2017’ report, China ranks 78th out of 180 surveyed nations. Although this score is significantly lower than other nations in South-East Asia and much lower than its own offshoots of Taiwan and Hong Kong, it is far better than India’s position of 130th. The evaluation of a nation’s business environment’s is based on the ease of starting a business, ability to resolve insolvency, the enforcing of contracts, the ability to trade across borders, paying taxes, protection of minority investors, ability to acquire credit, the registration of property, the procuring of electricity and dealings with construction permits.[xi] Potential greenfield investment projects would be especially concerned with these factors as an outside investor would not have experience in the setting up and operation of a business in developing nations such as India. However, the survey does not concern itself with other factors which may influence a potential investor’s choice in setting up a project. These factors include the proximity to large markets, transparency of governance, the underlying strength of national institutions, safety and security of property and other more holistic infrastructural factors. These are also essential areas that influence the operation of projects in developing markets. Therefore the rankings on doing business, although considered seriously, should be approached cautiously.
Industry case study: Auto-parts manufacturing
The automobile industry can be examined as a case study for government led initiatives and foreign investment in both China and India. The production of automobiles has been classified as a “pillar industry” in China and contributes to over 45% of India’s manufacturing Gross Domestic Product (GDP), representing an important section of the secondary sector in the two nations. Automobiles represent a booming industry in both nations, with India, set to become the third largest automotive market by volume in the world by 2026, and China currently being the largest car market in the world.
In the years 2001 to 2011, Chinese auto-parts manufacturers received over $27.5 billion in subsidies and the government has committed to an additional $11 billion in the following decade. These large-scale subsidies have been crucial in growing the higher value-added manufacturing that China has been seeking in recent years, bringing in dynamic research and development in the field. The growth of the industry represents the strategies and supply chain decisions of large Multi National Companies (MNCs), whose entry has been facilitated by Chinese policy on the auto industry. A joint-venture between General Motors and the Shanghai Automotive Industry Corporation has become the largest car manufacturer in China with more than 1 million units of annual sales.[xii]
American imports of auto-parts from China have increased eight-fold from 2000 to 2010. U.S auto companies have been severing ties with suppliers in the US or are encouraging them to manufacture within China, showcasing a focus on manufacturing in China and then exporting to the home-front. This behaviour of American MNCs coupled with large-scaled domestic investment will not only make the industry more dynamic, but it will force new technologies from the US to be transferred into China – leading to a virtuous cycle of investment. With fixed investments in auto parts rising, and output value rising even faster, it is evident that China’s transition into higher value-added manufacturing is taking place with world-class enterprises and technology emerging.[xiii] This setup benefits both the Chinese state as well as American automobile manufacturers, with the former getting high levels of investment and technology while the latter drastically reduces its costs.
The policy of the National Democratic Alliance (NDA) government in India as of 2014 has been to incentivize manufacturing in India through the Make In India and Invest in India schemes. The government grants automatic approval for foreign equity investments of up to 100% with no minimum investments in the automobile industry. Weighted tax deductions payments towards research organizations and exemptions from Basic Customs Duty on lithium ion batteries are an example of the moves taken to increase R&D in the automobile industry.[xiv]Investment from Suzuki, Kia, Hyundai motors and additional Chinese auto manufacturers are strongly increasing with $8-10 billion expected to be pumped into the industry in various forms over the next four years.[xv] The government has extended state support to increase the production of environmentally friendly cars by 42% in the national budget. India also claims to offer land and power concessions and special incentive packages for mega projects, although the details of these remain unclear as investments in each state appear to be done on a case-by-case basis.[xvi]Manufacturing and imports in this sector are exempted from licensing and approval processes as well.
In order to compete with the massive inflows of FDI into China, India has to move away from the ‘plain vanilla manufacturing of components, incentivize and heavily invest in the production of critical components domestically. Chinese auto-production has been characterized by the transition into high-value added and technologically advanced forms of manufacturing auto-components at a cheaper rate than North American manufacturers. Thus China is able to use its technological edge over India to attract higher rates of investment within the automobile sector. Auto-component exports within India still largely comprise of traditional mechanical parts, with value added products constituting less than 10% of exports. Companies such as Maruti (which has committed to invest roughly $300 million) are heavily investing to set up R&D centres across the country which are set to be commissioned in the next 3 years.[xvii] This investment represents a commitment by companies to improve the manufacturing environment within India and bring it up-to-date, in order to compete with Chinese production. However, large-ticket investments in technology and R&D are better suited to originate from government initiatives rather than by MNCs. The reasons for this are, private corporations are more likely to be invested in profit-maximizing rather than the holistic development of industries. Knowledge transfer within the automobile industry will be severely limited if individual companies are having to separately invest in their own research and development ventures. These issues can be sidestepped by having the government be the sponsor of R&D that will permeate to domestic manufacturers. The long-term advantages of this measure are that domestic producers will be able to cheaply and effectively take utilize more modern production methods.
India must continue organically produce its own technology in order to compete with Chinese auto-part production, which can only be done so through heavy investment by the government in R&D, and not except foreign actors to take on the responsibility. Production of cutting-edge technology and critical components in India by domestic actors initially will catalyze investment by foreign firms seeking to invest in the automobile sector. Similar to American automobile multinational companies in China, firms can cheaply produce and export components necessary for automobile production from India thereby benefitting both their own production chains as well as contributing to India through capital investment.
Government policy in both China and India appears to be geared towards maximizing foreign investment in key industries. With industries beginning to feel the increasing price of labour and manufacturing, Beijing is attempting to persuade potential investors who are seeking to shift to other developing nations to retain their investments and interests within China. Rising labour costs and excessive bureaucratic red-tape have been hindering the operations of foreign firms and their access to markets and regulations.[xviii] It also appears that FDI inflows have been stabilizing rather than steadily increasing in the recent years. Perhaps in an effort to attract more qualitative investments, China has been focusing on higher-value added FDI rather than attracting capital for traditional manufacturing, which may explain the recent slowdown in FDI figures. In light of these recent challenges, India is strongly suited to present itself as the new first-option within Asia, with the caveat that it is able to provide the same technological and cost advantages that China has been providing to foreign investors.
India while appearing to be committed to a liberalization of foreign investment and moving towards a manufacturing climate, still faces obstacles at regional levels. With access to quality infrastructure and basic necessities still a problem, government corruption and numerous regulatory filings required, higher levels of FDI inflows continue to be challenged. If India is committed to a foreign-investment oriented growth trajectory, it is vital to address issues that exist at the most local levels.[xix]
Conclusion
India’s ability to attract less FDI is not necessarily indicative of its position as a weaker economy or a non-investment friendly environment but rather reflective of delays in liberalization and congestion in terms of government policy among other domestic factors. China’s authoritarian system has allowed it to streamline the foreign investments it receives and direct it towards key manufacturing industries. A focus on higher value-added technology has however resulted in FDI slowing down and stabilizing in China, potentially opening up opportunities for other developing nations. India’s democratic set-up acts as a double-edged sword for her economic opportunities. Although the several levels of governance allows the citizenry a high level of political engagement, it also deters potential foreign investors from entering. Reducing the level of bureaucratic red tape and increasing investment in infrastructure and dynamic high tech industries would rapidly attract investments from nations such as Japan and the United States.
Endnotes:
[i]Eichengreen, Barry. 2007. “Is China’s FDI coming at the expense of other countries?” Journal of the Japanese and International Economies 153-172.
[ii]United Nations Conference on Trade and Development. 2017. “United Nations Conference on Trade and Development.” UNCTAD Website. July. http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx, pg 52
[iii]United Nations Conference on Trade and Development. 2017. “United Nations Conference on Trade and Development.” UNCTAD Website. July. http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx, pg 12
[iv]United Nations Conference on Trade and Development. 2017. “United Nations Conference on Trade and Development.” UNCTAD Website. July. http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx, pg 3
[v]Subramanian, K. 2002. FDI: any lessons from China? The Hindu.
[vi]Eichengreen, Barry. 2007. “Is China’s FDI coming at the expense of other countries?” Journal of the Japanese and International Economies 153-172.
[vii]Eichengreen, Barry. 2007. “Is China’s FDI coming at the expense of other countries?” Journal of the Japanese and International Economies 153-172.
[viii]SUBRAMANIAN, K. 2007. China’s FDI policy Changing gears for national interests. November 24. http://www.thehindubusinessline.com/todays-paper/tp-opinion/article1675579.ece.
[ix]Teli, R.B. 2014. “A critical analysis of foreign direct investment inflows in India.” Procedia – Social and Behavioral Sciences 447-455.
[x]Wysoczanska, Karolina. 2013. “Why has FDI followed different paths in China and India?” China Policy Institute Website. May 23. https://cpianalysis.org/2013/05/23/why-has-fdi-followed-different-paths-in-china-and-india/
[xi]The World Bank. 2016. Doing Business 2017: Equal Opportunity for All. The World Bank.
[xii]Haley, Usha C.V. 2012. Putting the pedal to the metal: Subsidies to China’s auto-parts industry from 2001 to 2011. Economic Policy Institute .
[xiii]Haley, Usha C.V. 2012. Putting the pedal to the metal: Subsidies to China’s auto-parts industry from 2001 to 2011. Economic Policy Institute .
[xiv]Government of India. 2017. Make in India: Automobile Sector. Accessed July 28, 2017. http://www.makeinindia.com/sector/automobiles.
[xv]Mukherjee, Sharmistha, and Ketan Thakkar. 2017. Maruti, Hyundai and other car makers to invest heavily in factories to expand production in India. Economic Times, India Times.
[xvi] Government of India. 2017. Make in India: Automobile Sector. Accessed July 28, 2017. http://www.makeinindia.com/sector/automobiles.
[xvii]Mukherjee, Sharmistha, and Ketan Thakkar. 2017. Maruti, Hyundai and other car makers to invest heavily in factories to expand production in India. Economic Times, India Times.
[xviii] South China Morning Post . 2017. Xi Jinping woos foreign firms as investors look beyond China. South China Morning Post .
[xix] South China Morning Post . 2017. Xi Jinping woos foreign firms as investors look beyond China. South China Morning Post .
References
Bedi, Priyanka, and Ekta Kharbanda. 2014. “Analysis of Inflows of Foreign Direct Investment in India- Problems and Challenges.” Global Journal of Finance and Management 675-684.
BMR Advisors, Amit Jain. 2015. “Indian automotive industry: The road ahead: The government and the industry must work together for successful results.”
Eichengreen, Barry. 2007. “Is China’s FDI coming at the expense of other countries?” Journal of the Japanese and International Economies 153-172.
Government of India. 2017. Make in India: Automobile Sector. Accessed July 28, 2017. http://www.makeinindia.com/sector/automobiles.
Haley, Usha C.V. 2012. Putting the pedal to the metal: Subsidies to China’s auto-parts industry from 2001 to 2011. Economic Policy Institute .
Jadhav, Pravin. 2012. “Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factors.” Procedia – Social and Behavioral Sciences 5-14.
Mukherjee, Sharmistha, and Ketan Thakkar. 2017. Maruti, Hyundai and other car makers to invest heavily in factories to expand production in India. Economic Times, India Times.
South China Morning Post . 2017. Made or mad in India? Red tape and taxes are putting brakes on Modi’s push to emulate China. South China Morning Post .
South China Morning Post . 2017. Xi Jinping woos foreign firms as investors look beyond China. South China Morning Post .
SUBRAMANIAN, K. 2007. China’s FDI policy Changing gears for national interests. November 24. http://www.thehindubusinessline.com/todays-paper/tp-opinion/article1675579.ece.
Subramanian, K. 2002. FDI: any lessons from China? The Hindu.
Teli, R.B. 2014. “A critical analysis of foreign direct investment inflows in India.” Procedia – Social and Behavioral Sciences 447-455.
The World Bank. 2016. Doing Business 2017: Equal Opportunity for All. The World Bank.
United Nations Conference on Trade and Development. 2017. “United Nations Conference on Trade and Development.” UNCTAD Website. July. http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx.
Wysoczanska, Karolina. 2013. “Why has FDI followed different paths in China and India?” China Policy Institute Website. May 23. https://cpianalysis.org/2013/05/23/why-has-fdi-followed-different-paths-in-china-and-india/.
[Maazin Buhari is an Intern, C3S. He is an undergraduate student of Politics and Economic and Social History at the University of Edinburgh. Maazin has interests in the economic history of China, particularly focusing on the early to mid 20th century period. He has carried out research on identified issues on China under the guidance of the members of C3S. The views expressed in this article however are of the author. He can be reached at s1518141@sms.ed.ac.uk ]
