comparative analysis of FDI activity in China and India

鐘思

Introduction

Due to the openness and independence of the world economy， the world trade is undergoing a prominent prospect under the background of globalization. The world business trade exceeded US$12 trillion and world commerce in commercial services is forecast to be US$4 trillion approximately （Doole and Lowe， 2012）. In additon， the international business trade is profound in terms of the range of activities as well. To be more specific， the world trade has become more complex in the course of time. Nowdays， international trade is related not only to commodity itself but also to some other activities like services， technology， capital， human resources and so on. Another significant outcome of globalization is foreign direct investment （FDI）， which is considered as an important factor in the globalization process since it plays a crucial part in intergrating states， districts and enterprises together.

IMF （International Monetary Fund） defines FDI as “The acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by nonresident investors. Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of profits”. Globalization offers an unpredictable opportunity for developing countries to improve the economic performance and new forms of capital flows are opened. Besides， more enterprieses from developing countries are entitled to be increasingly important players in international economic system by methods of trade and investment. In the period 1970s， FDI increased not as rapid as international trade； therefore， international trade was viewed as the most momentous international economic activity. However， there was a profound transformation in the middle of the 1980s， when world FDI began to grow rapidly. In this period of time， the world FDI has enhanced its influence by transferring technologies and establishing marketing and procuring networks for efficient production and sales internationally （Urata， 1998）.

The World Investment Report UNCTAD （2012） provides a basic overview about the regional trends in FDI. As we can see in the table following， FDI inflows had a positive performance in all major economic groups， namely， developed， developing and transition economies. Developing countries account for nearly 45 per cent of global FDI inflows in 2011 partly because of the strong growth in East and South-East Asia， which took up almost half of the FDI activities in developing regions. FDI flows to China reached a record level of $ 124 billion. China is still regarded as the most attractive countries and preferred destination for FDI despite of the remarkable rise in some other South-East Asian economies such as Indonesia and Thailand. In South Asia， FDI inflows have experienced a recovery in the years just after the crisis 2008-2010， reaching $39 billion， basically resulted from the increasing inflows in India， which occupied more than 80 per cent of the regions FDI.

It is obvious that both China and India have experienced fast pace of economic growth in recent years， which represent dramatically positive influence and moderate effect on these two countries. There is no denying that China and India have a great number of similarities in aspects of features that they are the worlds most populated and vast countries as well as the largest economies. Therefore， they are able to attract investors. Nevertheless， in spite of those correspondences， Agrawal （2012） argured that under the present economic climate， China has retained the worlds most important FDI destination and has been receiving substantial FDI compared to India. This essay aims at explaining the reason why China is more attractive for FDI activity than India on the background of present economic situation and the reasons behind the changing patterns of FDI inflows and outflows.

The market size and growth of economy

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Bajorubio and Rivero （1994） point out that due to the impact of market in foreign direct investment inflow implemented by transnational companies， the market with large size， strong purchasing power and rapid development trend are able to provide more growth opportunities to generate greater sales and profit. Therefore， the economic distinctions of target markets are viewed as the critical factors for the investment decision. China and India， two largest developing

countries in the world， have experieced rapid economic growth since the 1990s but China seems to be greater potential. Because of the economic reform process launched in 1978， China enjoyed the growth rate accelerate from an average of 5.2 per cent a year from 1960 to 1978， to 9.94 per cent a year， during the period from 1979 to 2009 （World Bank， 2010）. China developed more rapidly than Indian and exceeded India for the first time in 1984. Nowadays， China is much ahead of India and become the second largest economy in the world with GDP being almost three times than that of Indias.

According to Chadee and Schlichting （1997）， FDI activities are regarded as positive contributor to all the economies in the district where they carried on their research works about the relation between FDI and economic growth. Coincidenctally， Li and Liu （2004） asset that there is an increasingly close link between foreign direct investment and economic development. China is a vast country with a population of 1.3 billion， which shoul be considered as the place where has a huge consumption potentiality. Besides， as a vast consumer market in the world， the purchasing power and diposable income of Chinese people increased dramatically with the rapid development of economic growth. Yao et al （2008） emphasize that the impact of FDI on Chinas economic growth tend to be positive prospect and the production efficiency was reinforced correspondingly. Taking these economic factors and the relationship between FDI and GDP growth into consideration， China seems to represent greater potential to attract the foreign investment than India as a result of more promising economic growth.

Distance and Culture

It is not amazing that OFDI from emerging markets is becoming a increasingly prevalent phenomenon and there is such a high amounts of emerging-market transnational corporations which based in these countries have devoted themselves to invest internationally for decades （Sauvant， 2008）. Therefore， the foreign direct investment from emerging markets such as Asia are playing an increasingly role in the global FDI activities with the development of multinational corporations.

Markusen （2002） pointed out that most trade and FDI activities usually occurs the countries which has geographic closeness to other countries as well as the cultural similarity and the similar levels of industrial development. According to Dunning and Pitelis （2007）， the commercial activities for TNCs in international markets are likely to be more expensive than that of domestic firms. Therefore， FDI is attractive when foreign markets could offer some specific motivations such as location advantages metioned above. The distance between domestic country and foreign have an inflence on the transaction cost and the sales status. Simultaneously， the cultural diversities pose a remarkable contribution in the customers behaviour and the management style of multinational enterprises. The table below represents all foreign direct investment in China. As we can see in the table， in 2000， 59% of FDI is from Asia and 44% from Hong Kong and Taiwan， which is close to China with similar culture. In this case， Hong Kong and Taiwan benefit from the short distance as well as the similarity in culture.

Compared with China， the constitution of FDI in India show another sort of vision as follow. In terms of composition of FDI in India， Mauritius has been the prime source of FDI activities than any others. Foreign direct investment from Mauritius occupied 62.3% of the total FDI in India. In addition to the location specific advantage for FDI in China， the corporate tax rates are the same for all international companies， which is likely to account for the phenomenon that China is more attractive for foreign direct investment compared with India （REDIFF.com， 2003）.

Resource Availability and Relevant Infrastructure

Oman （2000） argued that transnational enterprises shoule make full use of the advantages of FDI in order to increase the sales and profit， preserve transaction cost competitiveness in their domestic market， expand potential business in foreign market and enhance the international competitive ability. To fulfil this， TNCs should be able to select appropriate target market where have great possibility to generate profits by taking advantage of all kinds of sources in the destination for FDI （Sharma， 2000； Smarzynska， 2002）.

The level of usability of various sources in the field of land， labour force and natural resources should be concerned by transnational companies when they intend to exploit international market and gain competitive advantage. China is a large country with huge population， vast territory and abundant resources. It is a country with great oil reserve and coal resource in the world. In addition， other natural resources such as minerals， land and iron are considered as huge economic value. Hood and Young （1979） suggested that a company could gain ownership-specific advantage when it achieves preferential access to raw materials or minerals. Therefore， China is a suitable place for foreign direct investment because of the OSA for multinationals to get.

Another critically important source is the human resources. China is a developing country with 1.3 billion people， the largest population in the world. Consequently， it is a country with abundant manpower resources in the globe. Though the labour force in India is available at relatively as low as that of China， the manpower in China is likely to be more skilled and qualified as a result of its higher literacy and education rates.

As we can see in the figures above， Chinas overall literacy rate in 2000 was 91 per cent， compared with Indias 61 per cent. Moreover， in the research conducted by Barro and Lee （2001）， the average years of schooling in the population ages 15 and over was 6.35 years in China and only 5.06 in India for the year 2000. Liu and Wei （2002） argued that the interaction between FDI activity and the quality of labour force pose a crucial part in improving economic efficiency. Based on the natural resource and literacy rate endowments， China is more attractive to international investment than India.

It is widely recognized that the usability of physical infrastructure such as roads， transportation and communication impose greatly impacts on the economic activities especially for the strategy of investment in international fields. Developed infrastructure is regarded as a immense advantage for multinational firms to put investment in. Some researches demonstrates that the countries with high levels of availability of infrastructure are likely to be the perfect place for FDI （ Chen and Kwan， 2000）.

The investment in Chinese physical in the past twenty years showed remarkable prospect compared with that of India. The energy costs for manufacturing industry in China is reported to be 35% less than that in India approximately. In the matter of transportation， the number of days in round-trip for cargo boats in Mumbai port is several times longer than that in Shanghai. Meanwhile， the number of days it takes for Chinese textile exports to a New York retail store is nearly half of that for India. In the field of communication， The number of telephone of average ownership in China is about 6 times than that in India， and the number of Internet in China is about four compared with India. Though there have been some prominent improvement in the physical infrastructure in India in recent years， it is still in raletive low level and to be improved in the long-term under the contemporary climate. In 1990， China hardly had any superhighways， but the situation improved greatly， 30，000 km of express way has been built since then. In 2004 India spent $2 billion on its road network； China spent $30 billion on the construction on road network in 2004， whereas， the spend for India is only $2 billion mainly owing to its relative low volume in GDP compared with China （Bardhan， 2006）.

Development strategies and policies

Many studies on China and India come to an agreement widely that these two countries have applied broadly diverse policies to foreign direct investment. Manor （2005） holds the view that China performs better in appealing to FDI as a result of its more proactive policies than India. Adopted the reform and opening policy in 1978 by Deng Xiaoping， China has been liberalizing its investment regime step by step with the help of the attention the Chinese Communist party paid on economic development by opening its door to foreign markets. Compared with China， though India opened its economy to FDI earlier， FDI activities start to develop vigorously only in the begining of 1990s due to the specific implementation of liberalization at that time （Nagaraj， 2003）.

The polices for foreign direct investmetn seem to be more efficient and beneficial than that of India. According to a survey conducted by The World Bank Group about international enterprises starting new business in China and India， there are 10 permits firms should get in India compared to 6 in China. In addition， the time for firms to start their business in India is about 90 days， nearly 3 times longer than that in China （UNCTAD， 2002， 2003）.

Changing patterns of FDI inflows and outflows

Chinas foreign direct investment attained $ 124 billion， a remarkable degree than before. China is still regarded as the most attractive countries for FDI despite of the remarkable rise in some other South-East Asian economies such as Indonesia and Thailand. In South Asia， FDI inflows have experienced a recovery in the years just after the crisis 2008-2010， reaching $39 billion， basically resulted from the increasing inflows in India， which occupied more than 80 per cent of the regions FDI. There are some changing patterns should be metioned in term of FDI inflows in China， that is， FDI flows to the services sector exceeded those flows to manufacturing industry for the first time mainly in consequence of the growth flows to some non-financial services， correspondingly， a descending flows to manufacturing sector （UNCTAD 2012）.

In aspect of outward foreign direct investment， as explained in the previous content， OFDI from emerging markets tend to be common occurance particular in some major economies such as China； Hong Kong， China； Singapore and Indonesia. China has evolved to be a vital investor country in the past decade for overseas investment. Chinas average outward foreign direct investment （OFDI） flows had a increasing trend from $0.8 billion in 1990 when the foreign investment in India started to spring up to more than $12 billion in 2005. Outward foreign direct investment from China spread more than 160 countries （MOFCOM 2006； UNCTAD 2005a）.

Outward foreign direct investment （OFDI） from Hong Kong， China， which is regarded as huge source of FDI and the financial centre in this district， had a sustained growth in the last quarter of the year despite of the decrease by 14.5% to $82 billion in 2011. OFDI from China declined by 5.4% to $65 billion. On the contrary， outflows from other countries in this region represented different levels of growth. Compared withe China， the OFDI from India showed a positive increase from 2010 to 2011， namely， $13.2 billion and $14.8 billion. Nevertheless， multinational corporations from India tend to be unenergetic in terms of acquiring overseas assets （UNCTAD 2012）.

One of the reasons to account for the increasing global activities of Chinese multinational enterprises and their international economic impact proposed by Sauvant （2005） is the noticeable part imposed by the government of China. Since the programme of economic reform launched in 1978， outflows FDI played an increasing role as trade expanded rapidly. The government focused much more on inward FDI while OFDI was not taken seriously in some degree from 1979 to 2000. On the background of the government transformed to a policy of actively provoking OFDI， “go global” policy was put forward for the sake of improving the global competitiveness of Chinas large enterprises （Davies， 2010）. Based on these factors， the changing patterns of OFDI in China are tend to be intelligible.

Conclusion

This paper aims at providing a comparative evaluation of the performance of FDI activities in both China and India. Though China and India， two fastest growing major economies and largest developing countries in the world， have a large amount of similarities， China seems to be more attractive to FDI activities. Most international investors regard China as a perfect destination for investment opportunities over India in consideration of larger market size， easier marke entry， government motivation and developed infrastructure. In terms of the trends of FDI activities for China， government policy will continue to play a dominant role. OFDI performances from China are likely to increase gradually and become more diversified in industries. The experience of Chinese TNCs to compete with other foreign MNEs in the international environment is conducive to improve the comprehensive economic power of the nation.

References

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