Human Capital and Foreign Direct Investment: India versus

china: A Case Study

Chirjot kaur

Neha Khanna of IIM Ahmedabad and Yang Hui from Cheung Kong
Graduate School of Business in Beijing are called to represent their countries
in a Management fest in USA to represent their economies as the Next hub
for global workforce. The judge David Arkless an executive board member,
Manpower UK is called as a jury to conclude the session.

Neha Khanna: China is still what I would refer to as a more “inward

looking economy” which can easily self fuel its growth from the domestic
economy, where as India is essentially becoming an “ outward looking”
economy which will generate more of its growth from foreign investment
and by becoming one of the largest labour exporters in the world.

Yang Hui: Mam, I have different view point here In Foreign Direct
investment, FDI, China + Hong Kong received US$106 billion in
2007[US$70billion from NRC's] vs US$3.6 billion [US$0.2b from NRI's for
India! Only better Governance can attract FDI and Tourists. In exports,
China is nearly +700% of India. Taking the exports of Hong Kong + Macau
into account, China's exports would be +1000% of India! China?s GDP is
50% in manufacturing or $ 650 billion per year. India’s GDP is 25% in
manufacturing or $110 billion per year. China’s manufacturing base is nearly
6 times of India.

Neha Khanna: I agree with your point but the data you have quoted was
relevant two years ago when the view that India might have a more
competitive economy than China was met with incredulity. Now a
comparison of the two countries offers valuable insights for anyone studying
economic growth. A fundamental distinction is that China’s growth stems
from resource accumulation while India’s is rooted in increasing efficiency.
Those who warned that India attracted too little foreign direct investment
undervalued its business environment, characterized by entrepreneurship,
healthy competition, and minimal political intervention.
I would also like to quote that another myth is that China’s rise was due to
major investment in infrastructure, when economic liberalization and
institutional reforms deserve more credit. Indeed, Yasheng Huang of MIT
notes that single-minded development of infrastructure has its drawbacks,
and China pursued this goal while giving less priority to education. India’s
educational system, on the other hand, has steadily improved, especially in
rural areas. For these and other reasons, he postulates, India could
outperform China over the next 20 years - unless that is, the Chinese learn
from their neighbor and rival.

Yang Hui: My friend has very rightly pointed out that China has focused
primarily on Infrastructure development but let me tell her that Why China
gets 60 Billion Dollars as FDI whereas India is unable to get even 6 billion
dollar is an Intriguing question. For China Congenial Business climate
factors comprising of making structural changes, Infrastrucal models,
Developing SEZ strategically, providing economic freedom, opening up its
economy and creating flexible labour laws has been one area where China
has created an edge over India.

Neha Khanna: India has not lagged behind in any of the areas; we have
opened our economy quite late that is in 1990 and have grown phenomenally
due to our human capital, size of market, rate of grown of market and
political stability. India is on the radar of global investors and has a lot of
outsourcing and BPO services from US and EU.

Yang Hui: On the other hand, China has grown 10 times faster in terms of
FDI inflows and has grown three times faster economy as compared to
India.

Neha Khanna: Having a look at the latest data, we see that India appears to
have permanently broken out of its leisurely “Hindu rate of growth”– an
annual gross domestic product increase of around 2 to 3 per cent – and its
performance is beginning to approach the East Asian level. From April to
June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in
the same period the year before. More impressively, India is achieving this
result with just half of China’s level of domestic investment in new factories
and equipment, and only 10 per cent of China’s foreign direct investment.
 While China’s GDP growth in the last two years remained high, in 2003 and
2004 it was investing close to 50 per cent of its GDP in domestic plant and
equipment – roughly equivalent to India’s entire GDP. That is higher than
any other country, exceeding even China’s own exalted levels in the era of
central planning. The evidence is as clear as ever: China’s growth stems
from massive accumulation of resources, while India’s growth comes from
increasing efficiency.

Source: China Could Learn From India’s Slow and Quiet Rise;Yasheng
Huang;The Financial Times, 27 January 2006

An economic litmus test is not whether a country can attract a lot of FDI but
whether it has a business environment that nurtures entrepreneurship,
supports healthy competition and is relatively free of heavy handed political
intervention. In this regard, India has done a better job than China. From
India emerged a group of world-class companies ranging from Infosys in
software, Ranbaxy in pharmaceuticals, and Bajaj Auto in automobile
components and Mahindra in car assembly. This did not happen by accident.

Yang Hui: I believe facts are a better witness to our country’s success:

1. FDI inflow (China + Hong US$ billions/year 106 8

Kong)
2. Forex Reserves US$ billions 1017+122= 175
(China+Hong Kong) 1,139
3. GDP (China+Hong Kong) US$ billions 2102+179= 750
2,281
4. GDP Growth (2006) in % rate over last year 9.3 7.9
5. Labour Composition Agriculture %/Industry 49/22/29 60/17/23
%/ Services %
6. Population millions 1,314 1,095
7. Population increase per millions 7.2 15.3
 year
8. Unemployment rate % of workforce 20 30
9.. Labour force in millions 797 496

Neha Khanna: Yes China was able to Attract FDI but could provide very
little efforts to nurture it. Not at FDI, It has grown very less on Human front.
China made a costly mistake in the 1990s: it created many world-class
facilities, but badly under-invested in education. Chinese researchers reveal
that a staggering percentage of rural children could not finish secondary
education. India, meanwhile, has quietly but persistently improved its -
educational provisions, especially in the rural areas. Sector

China has a plethora of talent problems.

1. It has complex variations in cost of labour.

2. Poor management skills in teamwork and leadership
3. Low wages in Industrialized hinterland
4. Higher wages in manufacturing and services along coast.
5. Talent retention has always been a problem for china.

Yang Hui: Even India has some basic imperatives to develop itself as a
global workforce. It has to invest in basic education an develop an inclusive
workforce. It has to reduce bureaucracy and make labour laws flexible.

Neha Khanna: India is expected to account for a fourth of the world's total
skilled workforce by 2020 and the central government is according top
priority to higher education, allocating Rs.275,000 crore (Rs.2.75 trillion) to
the sector. India has the potential to create over 500 million trained people
by the year 2020. That would be over a fourth of the global workforce. This
big and unique opportunity for India will come from an education revolution
that we must undertake as our most important national Endeavour. India’s
work force quality is superior. I will give you some examples: in India we
have the largest English-speaking population The workforce is cost-
effective, highly educated and has a high level of cross-border mobility.

It is projected in a survey by business edition that India to Contribute 12.2%

to Global Economic Growth by 2020, and India alone making up 30% of the
net increase in global employment with 142 million new jobs.

Yang Hui: World’s consumer spending will expand at an annual rate of

5.6% to US$ 62 trillion by 2020 compared to US$ 27 trillion today. Though
US will continue to be the largest consumer market, China will emerge as
the world’s second largest consumer market

Neha Khanna: But India will rival the bigger European markets. India’s
share in world consumer spending will increase from 1.9% in 2005 to 3.1%
in 2020. Also, 471 million net new workers will enter the global workforce,
with India accounting for a remarkable 142.4 million, followed by China
with 65 million and the United States with 12.5 million new workers.

The debate stops here and the Jury is called upon to conclude the discussion.

Q.1) which of the countries is expected to grow as the largest hub for
attracting FDI in the coming times?

Q.2) What factors will be restraining and driving factors for India to emerge
as global workforce?

Q3) Critically analyse the progress of India and China in terms of FDI and
Human capital growth rate.
Reference for a case study:

1. http://www.wakeupcall.org/china_india_comparision/china_india_chart.php
2. http://www.wakeupcall.org/china_india_comparision/china_india_chart.php
3. http://yaleglobal.yale.edu/display.article?id=6887