Comparison of Fdi in India and China

8/6/2019 Comparison of Fdi in India and China

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COMPARISON OF

FDI ININDIA AND CHINA

Submitted by:Harsimran Kaur

COMPARISON OF

FDI IN

INDIA AND CHINA

Submitted by:

Harsimran Kaur

Roll no:2237

GGDSD COLLEGE ,sec 32, chd.


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INTRODUCTIONTO FDI

Foreign direct investment (FDI) or foreign investmentrefers to the net inflows of investment to acquire alasting management interest (10 percent or more ofvoting stock) in an enterprise operating in an economy

other than that of the investor. Foreign direct investment, in its classic definition, is

defined as a company from one country making aphysical investment into building a factory in anothercountry. The direct investment in buildings, machinery

and equipment is in contrast with making a portfolioinvestment, which is considered an indirectinvestment.

Foreign direct investment (FDI) refers to the

net inflows of investment to acquire a

lasting management interest in an enterprise

operating in an economy other than that of

the investor.

FDI is ownership of 10% in business

The determinants OF FDI are market size,

Labour costs ,Infrastructure, Incentives and

o eratin conditions etc


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DEFINITION OF FDIIN CHINA

China adheres to the definition of FDI in IMF.

Chinas FDI includes:

Short and long-term loans;

Financial leasing; trade credits; grants; bonds; Non-cash acquisition of equity (tangible and intangible components such as

technology fee, brand name, etc.);

Investment made by foreign venture capital investors;

The round-tripping of funds from Hong Kong, Taiwan, and Macao into mainland

China;

Round tripping accounted for one fourth of china s total FDI.


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DEFINITION OF FDIININDIA

The principle components of FDI in India which are not as per the IMF

definition are:

Reinvested earnings by foreign companies

Foreign subordinated loans to domestic subsidiaries

Overseas commercial borrowings by foreign direct investors in foreign

invested firms.

Non-cash acquisition of equity of tangible and non tangible assets


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STRATEGIES OF FDI

Firm specific

strategy

Cost

economizingstrategy

Strategy of

entering innew areas

Cross

investmentstrategy

Joint venture

with a rivalfirms


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OBJECTIVES OF THE STUDY

To investigate the FDI flow in India and China

To study the comparison between FDI in India

and China To study the future of FDI in India

To investigate the FDI flow in India

and China

To study the comparison between

FDI in India and China

To study the future of FDI in India


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RESEARCH METHODOLOGY

Project is an analytical study.

Secondary data has been used.

The main sources have been economic survey, various publications of

government of India, internet and various journals.

LIMITATIONS :limitations of this study are:

It is very difficult to obtain entire data on China and India over last

twenty five years

India and China have grown at different time periods and India faces alag of thirteen years.


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FDIININDIA

According to the Ministry of Commerce & Industry ::

"FDI is freely allowed in all sectors including the services

sector, except a few sectors where the existing and

notified sect oral policy does not permit FDI beyond aceiling. FDI for virtually all items/activities can be brought

in through the Automatic Route under powers delegated

to the Reserve Bank of India (RBI), and for the remaining

items/activities through Government approval.

Government approvals are accorded on therecommendation of the Foreign Investment Promotion

Board (FIPB)."


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FDI History in IndiaFDI History in India

1973-Foreign Exchange Regulation Act (FERA) new clause introduced allfirms dilute their foreign equity holdings to 40% to be treated as Indiancompanies exit of IBM, Coca Cola

1980s-restrictive licensing procedures softened, technology transfer and

royalty payments relaxed, wherever possible foreign investment wasencouraged

1990s-Rupee devalued, NRI money withdrew, India turned to IMF, Traderegime and regulatory frame work was liberalized, FDI invited in widerange of industry, limit was increased from 51% to 100% in some cases,

service sector reopened for FDI, FIIs also encouraged

After 1995-Political instability but perception towards FDI changed,changing government kept focus on FDI

1943-1961With the force of independence direct investment in foreign companieswas activated. India encouraged FDI in the year 1957-58. Thus foreign companies likeGlaxo, General Motors, Unilever, Pepsi Drinks etc were officially asked to invest in Indiain new projects and ventures

1962-1977-the whole procedure was formalized through Foreign Exchange RegulationAct in 1973 and Monopolies and Restrictive Trade Practices in 1969. The quantum of

FDI and the number of joint ventures reduced significantly.

1978-1990- Government announced the Industrial Policy in 1977, which announcedthe relaxation in remittance of profits, royalties, dividends, etc for foreign companies.Industrial licensing was made much better and in a simpler way. MRTP act wasmodified to simplify business and export and import rules were relaxed and madefavorable

1991-2000- Period of globalisation and liberalization :This period received an all timehigh of FDI in India. More than 140 countries were registered in India during the period

1991-2000.


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FDI is not permitted in the following

industrial sectors IN INDIA

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite. Mining of iron, manganese, chrome, gypsum,

sulphur, gold, diamonds, copper, zinc


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FDIIN CHINAAfter more than twenty years of economic reform fueled by FDI inflow , China hasbecome one of the most important destinations for cross-border direct investment

Active government promotion through various policy measures has resulted in rapid

growth of FDI in China since the 1978. Foreign direct investment in China rose to a

record $105.7 billion last year.

China has been the worlds largest FDI recipient among developing countries since

early 1990s.

The proactive policies of china towards FDI are classified into four categories :

encouraged, restricted, prohibited and permitted.

China s policies towards FDI have experienced three stages: gradual and limiting

opening , active promoting through preferential treatment , and promoting FDI in

accordance with domestic industrial objectives.


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The impact of FDI on China

China transformed from a Soviet style planning system to amarket-oriented economy.

China has also achieved economic growth at an impressivespeed

China has made great strides in its reforms to open up itsmarket for foreign direct investment.

China in 2009 overtook the U.S. to become the worlds

biggest car market, passed Germany as the largest exporter . It may overtake the U.S. as the largest economy by 2027,

according to Goldman Sachs Group Inc. chief economist JimONeill.


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CONTD.

Among developing countries, China is now the largestrecipient of foreign capital. Foreign direct investment is stillconcentrated in the southeast and the coastal areas.

Foreign-invested firms have played an increasinglyimportant role in Chinese economic reform. It is also a largepart of Chinas trading activities with the rest of the world.

It can be said that without foreign investment, Chinasreform will eventually suffocate.


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A COMPARISON

ACOMPARISON


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A COMPARISON

UNDOUBTEDLY, China's track record in attracting foreign directinvestment (FDI) is far superior to that of India.

In fact, India has been considered an "underachiever" in attractingFDI.

How ever, there has occasionally been some skepticism aboutwhat all China includes while compiling its FDI figures.

On the other hand, it has been pointed out in the FDI literature

that Indian FDI is hugely under-reported because of non-conformity of India's method of measuring FDI to theinternational standards.


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CONTD. China, contrary to India, adheres to the IMF standard of

FDI computing. China includes all the components ofIMF inits definition of FDI.

China's FDI numbers also include a substantial amount of

round tripping.

Indian FDI inflow figures are underestimated at present.This is because of the exclusion of certain components ofFDI measurement by India that are included in other

countries, which maintain conformance with theinternational standards.

INDIA needs to update her FDI definition in certain aspects.


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Chinas positive points along with

their negative aspect :

China liberalized its economy quite some time ago, whereas India continued

under the Nehruvian straitjacket for at least a decade longer.

China has successfully sold the world the mantra of 'a billion-people market'

whereas the set of actual consumers with disposable income is far smaller.

China is indeed a market leader in manufacturing many low-end products at low

cost, although they have severely understated the cost of labour and especially

of capital.

China enjoyed growth rates in the double figures for several years, and that it

continues to grow at the rate of over 7 per cent a year but as per authoritative

sources (at least 2 to 3 per cent of GDP growth is simply made up because of the

famous FDI inflows through round tripping).


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Where does India Stand

It is general IMF-approved practice to include various otherinflows such as reinvested earnings, overseas corporateborrowings, and subordinated debt in FDI. But India does not.

On an apples to apples comparison, India's FDI goes up to $8billion or so and China's comes down to $20 billion or so.

In 2001 FDI inflows increased from $1.18 billion to $1.89 billion in2002. So the picture in Indian FDI is certainly not all that grim.

India is not doing as badly as people think, and China is doingworse than people think.

BUTINDIAIS STILL MILES BEHIND CHINAIN FDIINFLOW.


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THE FUTURE OF FDIININDIA

Since 1991 when liberalization began, annual gross domestic product (GDP)growth has been twice as high as it had previously been. As a result, povertyrates have fallen by nearly a third in both rural and urban areas.

The celebrated software and outsourcing industries have created hundreds ofthousands of high-paying jobs and generated billions in export revenues.

Foreign investment and global competition must be allowed to reach moresectors, including some in which the government now plays a significant role.

large sections of the economy remain sheltered by high tariffs and restrictions onforeign direct investment.

The country must go further in removing foreign-investment barriers if it is tocontinue integrating itself into the global economy.


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CONCLUSION


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ANALYTICAL COMPARISON

The study took two largest countries in the world and rapidly emerging economies tostudy the phenomenon of foreign investment inflow in these countries.

India is the largest Democracy and China the largest emerging Economy in theWorld

China has grown rapidly getting $60 billion dollars in 2005 in FDI and India is trailedbehind at getting even less than $6 six billion last year in FDI.

China opened its economy in 1978 and within 25 years grew at a rapid pace

India is trailing behind due to its focus on services and specialized skill based relativelysmall manufacturing model in contrast to China

Chinese growth is due to structural changes in the economy, creating strategicinfrastructure on its coastal boundary by developing Special Economic Zones

The size of Chinese economy, its annual growth rate, and political stability have alsoplayed a role in attracting FDIover last twenty-five years.


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MANAGERIAL IMPLICATIONS

The study might help the Indian government and various interestgroups in creating the right congenial business climate formaximum FDI flow and India can grow rapidly.

The project helps in knowing the lacking behind of INDIA fromchina when INDIA itself has the potential to attract largest FDI inASIA.

The project helps in understanding the deep dark secrets ofChinese FDI policies which increases their GDP in fake numbers.

The study delves into these issues and steps that might be takenby the emerging market governments to grow their economies inthe modern globalized world.


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A LESSON TO BE LEARNT

TNCs would like to manufacture in India six times more as comparedto China due to the exchange rate advantage and the relative strengthof US dollar to Indian rupee as opposed to Chinese Yuan. But Indianeed to change its FDI outlook to become a global player in the worldeconomy and create congenial business climate in the followingways:_

Let the FDI of TNCs enter its borders as TNCs try move to benefitfrom exporting and marketing opportunity in merging markets.

Create structural changes at a faster pace

Create economic freedom for increasing private sector and TNC

participation Opening trade to become more global in its outlook

Formulating flexible labor laws to attract free market determinedorganizational structures

Comparison of Fdi in India and China

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