Wednesday, November 30, 2005
Contrasting the performance of China and India in terms of FDI Attractiveness
The question under investigation focuses on explanations for the idea that India has lagged behind China in terms of FDI attractiveness. The research is closely related to our very first attempt to compare and contrast India’s performance in terms of foreign direct investment (London Business School’s India Business Forum, 2004). In many ways, Wei’s paper provides with the statistical justification for the evidence that India has not fared as well as China has, and goes beyond the facts by attempting to identify the determinants fot the gap in the performance.
General economic performance
First, Wei notes that both countries have enjoyed sustained economic growth since the 1980s. However the gap between the two countries widened considerably. China’s GDP in 1980 was roughly the same as India’s. By 2002, China’s was 2.5 times larger.
In terms of GDP per capita, China fared worse than India in 1980. By 2002, China’s was twice as large as India’s. And the story goes on.
What’s more phenomenal, the author notes, is the difference in their FDI performance.
Official statistics show that that China reported FDI net inflows of $52.7 billion in 2002, from £0.4billion in 1980. India’s official statistics reveal an increase over the same period to $2.6 billion, from £0.07 billion in 1980.
Whatever way we look at FDI, the story remains the same – in terms of annual inflows relative to GDP and gross capital formation, rankings in UNCTAD’s FDI Performance Index, rankings in A.T. Kearney’s FDI Confidence Index.
GDP and gross capital formation
Since the early 1990s, annual FDI inflows into China represented at least 3.6% of its GDP, and 10% of its gross capital formation. India’s figures never exceeded 1% and 4% respectively.
In the FDI performance Index, measured as the ratio of a country’s share in global FDI flows to its share in global GDP, China ranked 54th and India 122nd in 1999-2001.
The survey of executives at the 1000 largest MNEs responsible for 70% of FDI flows ranked China 1st in 2002 and 2003, while India ranked 15th in 2002 and 6th in 2003.
UNCTAD’s World Investment Report, FDI helped drive economic growth in China. In 1989, foreign affiliates accounted for less than 9% of total Chinese exports, and their contribution had increased to 50% by 2002. In high-tech industries, the share of foreign affiliates in total exports was as high as 91% in electronic circuits and 96% in mobile phones. About two thirds of FDI flows to China went into manufacturing in 2000-2001.
In India, by contrast, FDI has been less important in driving export growth except in IT. A previous study by Sharma revealed that FDI “appeared to have statistically no significant impact on export performance although its coefficient had a positive sign”.
FDI in Indian manufacturing industries has been and remains domestic market-seeking FDI. As a result, FDI accounted for only 3% of India’s exports in the early 1990s. Even today, it is estimated to account for less than 10% of India’s manufacturing exports.
In China, FDI tends to target a broad range of manufacturing industries. In India, most of it goes to services, electronic and computer industries.
What does it mean? The fact that a large share of China’s exports is accounted for by local affiliates of multinationals probably means that China does not have many home-grown multinationals, capable of competing successfully in world markets. India, by contrast, has been successful in creating local firms with strong ownership advantages. By exporting their ownership advantages, Indian firms compete successfully in world markets where internalisation and location advantages can be sought. More will follow soon.