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FINAL REPORT
COMPARATIVE STUDY OF FOREIGN DIRECT
INVESTMENT (FDI) IN INDIA AND CHINA
INDEX
1. EXECUTIVE SUMMARY
METHODOLOGY
2. FDI SCENARIO IN INDIA
3. DATA ANALYSIS FOR INDIA
4. FDI SCENARIO IN CHINA
5. DATA ANALYSIS FOR CHINA
6. RECOMMENDATIONS
7. CONCLUSION
8. LIMITATIONS
9. ANNEXURE I
10.
ANNEXURE II
EXECUTIVE SUMMARY
Foreign direct investments in any country represent the long-term
sustainable inflows having a direct impact on the growth of the
economy as a whole. So far Indias effort to attract FDI have not been
too successful. Actual investments have fallen short of the potential
and the requirements of the economy, leaving India far behind many
other emerging markets such as China. One reason for the slack
response of foreign capital seems to be the inability of the foreign
direct investors to gain even a toehold in many key sectors of the
economy.
As far the sector wise distribution of FDI goes, in India the FDI
inflows have focused in just three or four segments of the economy.
Figures for the latest years show that Engineering, chemicals and
services amounted for more than half the FDI flowing into the country.
Whereas, in China the majority of inflows have been received in
Electricals, Textiles, chemicals and the latest emerging sector is IT.
The major factors that affect the FDI flows into India are Real interest
rate, exports, government debt, external debt, GDP and international
reserves. On the other hand there are very few but very influential
factors, which affect FDI in China. They are export, external debt and
international reserves. A multiple-regression model was developed in
order to identify the above factors.
Indias inability to improve the flow of FDI is reflected also in the
restricted sources of foreign funding. The figures clearly show that
despite all the efforts to liberalize FDI over the last decade most of the
investments continue to be cleared on an ad hoc basis. Although many
sectors have opened up for the automatic approval route but the latest
numbers indicate that less than five percent FDI have been cleared
through it. Thus we see that right policies are being framed but their
implementation is faulty and are not able to serve their purpose.
India should now follow a two-pronged approach. Firstly, access more
funds from the west focusing on knowledge based industries and
services sector in which India has a comparative advantage. Secondly,
attract more investments from Asian countries, which account for most
of the funds flowing into China.
industry with high and new technology, as well as medium and lowgrade residence projects.
Furthermore, China shall gradually grant national treatment to foreignfunded enterprises. With a view to further create a favorable
environment for the equal competition between foreign funded
enterprises and domestic ones, china shall gradually abolish the
different treatment between foreigners and domestic residents in terms
of hotel fare standard, transportation and tourism charges. Meanwhile,
China has unified the tax system and personal income tax system for
foreign-funded and domestic enterprises, adjusted the domestic
enterprises income tax rate to 33%, which is the same as that of
foreign-funded enterprises. These policies and various steps taken by
the Chinese government lead to a phenomenal growth in FDI in china.
From here we would proceed to carry out an empirical study whereby
we shall examine all those macro-economic factors that would affect
FDI flows.
Methodology:
To determine the cause and effect relationship between the 15 variables
considered and FDI inflows, Multiple Regression was performed on
Empirical results:
INDIA
VARIABLE
COEFFICIENTS
T-STATS
22.9708
1.7019
Exports
0.0672
9.9912
External Debt
-0.0175
-9.6669
GDP
0.0036
4.0913
Govt. Debt
-0.0059
-7.1222
Net Reserves
0.0676
5.0617
-1184.151
-6.7425
The above table shows the variables that have been included in the
multiple regression equation. The Adjusted R2 value is 0.9931. Thus,
all these factors considered could together explain 99.31% variation in
FDI. All the t-stats have absolute values near 2 or greater than 2
implying a good significance level. The Durbin-Watson stat at
2.8215 implies that we have successfully been able to remove any
positive collinearity between the independent variables considered.
with
increasing
demand,
increasing
corporate
VARIABLES COEFFICIENTS
T-STAT
External Debt
-0.3541
-4.6779
Exports
0.5043
7.22376
Net Reserves
0.1280
3.5907
-8296.992
-6.8454
The above three factors are similar to those observed in the case of
India. However the other factors such as GDP, real interest rates and
What causes the difference in FDI flows into India and China?
1. Political stability: When India and China are compared on the
platform of political stability, china is more stable than India as
far as the stable government is considered. China always had a
stable government, which gave clear-cut and structured policies
regarding foreign investments. Thereby, it could build credibility
in the minds of the foreign investors to take a long-term
perspective for making investments in the country. As far as
India is concerned its policies have always been unstructured
because of political instability. As and when there was a new
government its policies towards foreign investments changed.
Thereby in case of India the foreign investors were unable to
take any long-term view for their investments in India. The
procedural complexities even in the sector where foreign
investment was readily allowed has lowered its credibility
amongst investors.
2. Lack of Infrastructural Facilities: Compare to China the
infrastructural facilities available in India are very low. The
facilities like ports, railways, power generation, highways and
others are still underdeveloped in India.
Recommendations:
From the above results certain conclusions can be drawn regarding
efforts to attract FDI.
It is very necessary to
including
energy
supply,
transport
and
Conclusion
Once investors have been attracted to a particular destination country,
they expect a high level of facilitation services. Governments all too
often give inadequate attention to servicing investors needs, even
though large sums of money may have been spent on promotion
activities and success has been achieved against fierce international
competition.
Thus the provision of assistance to potential investors out of public
funds is vital because bureaucratic barriers turn away would-be
investors. They can represent a significant start-up cost to investors and
are actively compared between alternative investment locations. The
quality of assistance is also usually the first real test for the investor of
whether the host authorities are genuinely friendly towards business.
Supposedly one-stop investment promotion agencies are now
virtually universal. However, the quality of the facilitation process
varies widely. While governments and provincial authorities may
proclaim that their agency has sole discretion in granting the variety of
licenses and permissions required to operate legally in their country,
many, in practice, do not have the power to do so.
the group. However the group has tried to identify what these
factors could be and provide an explanation for these.
ANALYSIS OF DATA
INDIA
Variables
Exports
External Debt
Coefficients
0.0562
- 0.0167
GDP
0.0036
22.97
Net Reserves
0.0676
Government debt
- 0.0059
CHINA
Variables
Coefficients
Exports
0.503
External debt
0.354
Net Reserves
0.12
LIMITATIONS
Adjusted R square for India and China is quite high thus implying that
variables considered justify the FDI flow, but with this we cannot see
the impact of: Changes in government policy during the time period
considered, status of infrastructural factors and rate fluctuations.
ANNEXURE 1
Macroeconomic determinants of Foreign Direct Investment Flows
into an economy:
It has generally been observed that the volume of FDI rises when the
broad economic conditions are favorable. Socio-political stability,
business operating conditions and various other macroeconomic
variables such as wage rates, market size, interest rates, BOP etc. are
believed to have a significant influence on the flow of FDI into an
economy.
Previously various researches conducted research acknowledges that
non-public policy factors (wage rate, raw materials, GDP/capita, cost
of capital, etc.) significantly influence foreign direct investment in
most of the countries.
Here an attempt has been made to examine the relationship between
various macroeconomic and socio-political variables and their impact
on FDI flows into the economy. Particularly the relationship is being
analyzed for the two economies of India and China to understand what
factors have affected the flow of FDI into these economies over the
years. Empirical data for the past 19 years (1980 to 1998) have been
used for the purpose. The variables used have been selected a priori
based on the general belief of what factors affect FDI flows into an
economy.
The variables considered are as follows:
Central government debt, total (% of GDP): Total debt is the entire
stock of direct, government, fixed term contractual obligations to
others outstanding at a particular date. It includes domestic debt (such
as debt held by monetary authorities, deposit money banks,
nonfinancial public enterprises, and households) and foreign debt (such
as debt to international development institutions and foreign
governments). It is the gross amount of government liabilities not
reduced by the amount of government claims against others.
Commercial service exports (current US$, WTO): Commercial
service exports are total service exports minus exports of government
services not included elsewhere. International transactions in services
are defined by the IMF's Balance of Payments Manual (1993) as the
economic output of intangible commodities that may be produced,
transferred, and consumed at the same time.
CHINA (ANNEXURE 2)
INDIA (ANNEXURE 3)
1980
1981
1982
1983
1984
1985
1986
1987
1988
PARTICULARS
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
GDP at market prices (current US$) (mill)
201687 192952 202088 227375 256107 304912 295716 268217 307167 342292
Net international reserves (current US$) (mill) 2545
5058
11349
14987
17366
12728
11453
16305
18541 17960
Inflation, consumer
prices
(annual
%)
0
0
0
0
0
0
0
7
19
18
PARTICULARS
186,392
200,116
217,744
210,513
231,795
247,816
Real interest rate (%)
-1 193,525
3
8
6
2
-3
3
2277,912 -3 295,7182
Money Supply(mill)
114880 134520 148840 174890 244940 301730 385900 457400 548740 583420
GDP at of
market
(current (US$,mill)
US$) (mill)
Imports
goodsprices
and services
16067 15851 14848
17066
23855
43438
43789
36679
43376 46239
Net
international
reserves
(US$,mill)
6,944
4,693
4,315 18906
4,937 24054
5,842 30365
6,420 34782
6,396365686,454
Exports of goods and services (US$,mill)
15236 16517
17980
40084 4,899
43530
Inflation,
consumer
prices
(annual
%)
11.37
13.12
7.89
11.87
8.32
5.56
8.73
8.80
External debt, total (US$,mill)
0
5797
8358
9609
12082
16696
23719
35340
42439 9.38
44933
Real
interest
rate
(%)
4.43
5.66
8.44
7.39
8.38
8.39
9.37
7.31
7.81
Gross domestic fixed investment(US$,mill)
58839 49722 56992
65479
75914
89830
89797
83901
95144 87834
Moneynational
(currentsavings(current
LCU) (mill)
273,712
308,553
365,578 103773
412,414104437
478,66997156
543,174
632,754
Gross
US$) (mill) 204,582
0 232,469
0
71282
80030
89852
110154
120090
Imports
of
goods
and
services
(US$,mill)
17,378
17,248
16,271
16,974
17,774
19,422
19,962
22,843
Long-term debt (DOD, current US$) (mill)
0
4913
5220
5301
6179
9937
16571
25963
3262026,843
37118
Exports
of goods and
US$,mill)
11,276 148715
12,370 167744
13,216 202814
12,773193245
13,637
16,217
18,213
Total
consumption,
etc.services
(current( US$)
(mill) 11,265
131536 11,394
129549 131774
171423
197394
221620
Total consumption,
etc. (US$,mill)
154,458
161,150
177,529 256107
171,553-1219648
183,727-591432
198,094 0223,594
234,056
Current
account balance
(% of GDP)
0 154,521
0
606264 454750
-307167
-342292
Long-term
debt
(US$,mill)
18,333
19,454
21,587
23,943
25,683
31,761
38,410
45,827
51,546
Overall budget deficit,(US$,Mill)
0
0
0
0
0
0
0
0
0
0
Gross domestic
fixed investment (US$,mill)
36,984
39,003
40,715
40,247 1030
46,547 1425
50,950166958,446234462,130
Foreign
direct investment(current
US$) (mill) 34,951
0
0
386
543
1124
2613
Gross national savings, (US$,mill)
33,395 38,974
38,611
39,590
37,877
46,266
47,642
51,810
57,385
External debt, total (US$,mill)
20,581
22,604
27,430
31,994
33,812
40,951
48,124
55,522
1990
1991
1992
1993
1994
1995
1996
1997
199860,477
Overall
budget
deficit,
(US$,Mill)
22503.1
25981
15632.59
23536.03
16510
11027.77
17339.41
17483
18656.92
GDP at market prices (current US$) (mill)
354644 376617 418181 431780 542534 700219 816493 898244 946316
Current
account
balance
(%
of
GDP)
2118382
2538100
1578371
2584382
1751799
1287749
2163637
2445261
2775245
Net international reserves (current US$) (mill) 29586 43674 20620
22387
52914
75377 107039 142762 149188
Central government
debt, total
(% %)
of GDP) 78918.4
58599.96
48617.11
35668.63
55839.96
56782.87
Inflation,
consumer prices
(annual
3 61547.7
4 34034.79
6
15
24
17
8
3
-145978.71
Foreign
direct
investment,
net
(US$,mill)
8
10
65
63
62
160
208
181
287
Real interest rate (%)
4
2
1
-3
-7
-1
4
8
8
Money Supply(mill)
700950 898780 1171430 1676110 2153990 2559680 3066260 3834330 4321700
1995
1996
1997
1998
Imports of goods and services (US$,mill) 1989507991990731721991
81553 1992
73943 1993
137632 1994
167960 171679
207251
207590
GDP
at
market
prices
(current
US$)
(mill)
296,539
322,737
272,104
263,715
279,524
330,533
363,982
397,132
420,783
430,024
Exports of goods and services (US$,mill)
62172 60588 75106
80291
127210 151870 155706 166754 165902
Net international
reserves
(US$,mill)
3,859
1,521
3,627 85928
5,757 100457
10,199 118090
19,698128817
17,922
20,170
24,688
27,341
External
debt, total
(US$,mill)
55301 60259
72428
146697
154599
Inflation,
consumer
prices
(annual
%)
6.16
8.97
13.87
11.79
6.36
10.21
10.22
8.98
7.16
13.23
Gross domestic fixed investment(US$,mill)
90478 103484 130565 161819 195575 243079 280679 303436 340399
Real
interest
rate
(%)
7.57
5.00
3.00
10.00
6.00
5.00
6.00
7.00
8.00
4.00
Gross national savings(current US$) (mill)
134186 143265 156813 178875 230126 287523 330390 374334
0
Money
(current
LCU)
(mill)
746,893
853,556
1,046,100
1,120,900
1,330,250
1,695,050..
2,148,910
2,419,250
2,703,490
Long-term debt (DOD, current US$) (mill)
45515 49479 58663
70632
82974
95764 103410 115233 126667
Imports
of goods and
23,288 251152
23,585 308642
27,947 398224
32,990477370
39,657
41,607
45,109
47,419
Total
consumption,
etc.services
(current(US$,mill)
US$) (mill) 27,934
220060 31,485
233075 260462
514462
550184
Exports
of
goods
and
services
(
US$,mill)
21,201
23,028
24,879
27,917
31,468
41,437
51,213
55,696
59,297
59,138
Current account balance (% of GDP)
1063932 1506468 836362 -1295340 542534
0
816493 2694732 2838948
Total consumption,
etc. (US$,mill)
233,473
206,203 -1085068
225,002-1400438
263,161
282,304
319,288 0 336,646 340,212
Overall
budget deficit,(US$,Mill)
-709288251,716
-753234 213,400
-836362 -863560
-1632986
-898244
Long-term
debt
(US$,mill)
66,340
72,550
74,901
79,126
85,676
93,907
86,964
85,431
93,616
Foreign direct investment(current US$) (mill)
2657
3453
7156
23115
31787
33849
38066
41673
4111788,610
Gross domestic fixed investment (US$,mill) 64,756 72,536
58,450
57,603
58,464
70,849
86,699
92,136
96,301
97,625
Gross national savings, (US$,mill)
58,224 64,692
54,936
53,778
52,679
72,354
83,826
85,104
85,538..
External debt, total (US$,mill)
75,407 83,717
85,421
90,264
94,342 102,483
94,387
93,470
94,320
98,232
Overall budget deficit, (US$,Mill)
12251.1 17852.8 27615.57 23481.3 12679.55 20361.73 20398.68 17918.29 14307.03 26435.34
Current account balance (% of GDP)
1826505 2895351 3774137 3108620 1778343 3375238 3721680 3565094 3014599 5689604
Central government debt, total (% of GDP) 23766.4
13645 50301.53 67863.9 64887.09 201151.2 183248.6 181069.9 176873.4 361742.1
350
97
129
315
586
1,314
2,144
2,821
3,557
2,380