fdi india and china done

Bhuvan deep Antil TNC 13389722

Unit Code MKT9003M-1213

Submitted by Bhuvan Deep Antil

Id No 13389722

Tutor’s Dr. David Floyd

Date 24/5/2013

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Table of ContentsAbstract...........................................................3

Introduction.......................................................3India & china Background...........................................3

Chinese companies outflow..........................................6Determinants of FDI................................................9

Education & Illiteracy..........................................13Mergers & Acquisitions & Labour Productivity....................13

Country risk is another determinant for FDI’s...................14Research & Development..........................................14

Trade openness in tariffs.......................................15Porter’s Diamond..................................................15

Conclusion........................................................17

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AbstractThis assignment estimates about the potential of two Asian countries as a market for FDI’s inflows & outflows.The study & reading utilised books, websites & journals comparison between China and India revealed based on FDI determents. Study based on some companies example and tell which between the Asian two countries have better market conditions for FDI. The paper has taken past present & future norms to understand the two economies and the decisions that made them competitor as well aboutthe differences that they share to draw a better market structure globally.

IntroductionEconomic policy makers left no stone unturned to attract FDI (Foreign direct investment) to improve the Economic stability of their country. In 1990, FDI’s became the basic pillar of all biggest economies in the world. Trendgrew up & today’s world is global platform for investment, trade, transport, culture, building, shippingand many others. Moreover, they not only boost the economy of the country but also facilitate in improving the efficiency, employment generation as well balance of payment, giving stability to economy (Buthe and Milner, 2008: 741-759). Factors like GDP of a country, market size, infrastructure of the country, degree of industrialisation, labour quality, labour cost, level of research and development and country ability to deal withrisk are most influencing factors for investment (Buthe and Milner, 2008: 741-759). The total average FDI flow inthe world 2005-06 was $1.24 trillion which were less than

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average flow before financial crisis however UNCTAD believes that flow will boost soon and will reach up to 1.7 trillion by the end of 2013 (UNCTAD , 2011).

India & china Background According to World Bank China is a home to 1.34 billion people (2011) with huge regional differences and varied spoken language like Hokkein, Can notonese, Hakka, Teochiu and various others too. To boost it is business activities china has large number of club, societies & chambers like World Fujian group. China & India are most promising economy in Asia as well in World now (Backman and Butler, 2003: 24-50). Open Door Policy came as big success story, after 1980 large number of recession-hit companies and entrepreneurs alleged that they finally gota country where ample number of FDI was possible with more than a billion population and such a country with boosting political laws and geographically diverse that is ‘CHINA’ (Jehle, 1995: 195-205). Simultaneously India adopted the policy of Liberalisation and globalisation under it is sixth prime minister of India Mr. Rajiv Gandhi and Finance minister Dr.Manmohan Singh (Nayak, Rajib and Chakravarti, 2004).

In year 2001 China joined WTO, before that, it was a set of laws and policies for FDI that controlled invested in China. A company for instance Peugeot are the examples who came, suffered and sold it is stake to other companies to defend from further losses. In 1998, a survey discovered that out of 229 joint ventures only 38%were not in loss. Despite of all this in 1990’s china attracted about US $350 million of FDI through joint venture which shows that china was regularly irresistiblemarket which attracting companies around the globe in it

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is market. In 2001, it was China’s foreign investors who accounted in 33000 projects with actual US $35 billion investment (Backman and Butler, 2003: 24-50). China domination continued after that. In 2008 china accounted 29% of total number of projects in ASIA, cities like Shanghai & Beijing are still among top destinations for FDI projects however there is a noticeable decline from 2004 to 2009.Olympics 2008 in Beijing increased FDI projects by 30 % (Asia-Pacific - China continues to pull in the crowds., 2009).

Entry of FDI’s: According to Gatignon & Anderson, a FDI must choose the best entry mode and best market for seeking considerable business function for instance production, distribution and management. With choices of a single wholly-owned subsidiary, a joint venture or a non equity arrangement some of the best FDI’s do actual survey to decide the best mode of entry as well market sothat they can figure out the perfect analysis factors influencing their business like degree of risk, returns on investment, laws and regulations etc (Anderson and Gatignon, 1999). Traditionally, the gigantic majority of FDI have originated from the countries like USA, Japan and some European countries. American companies started to capture India’s software market, Japanese started withproduction facilities in china and some others like British and other European has taken others like Brazil, Singapore (Dunning, Kim and Park, 2008).

FDI set them self in two divisions Vertical and Horizontal. Horizontal occurs when a company undertakes different countries for same production activities and they transform raw material into finished goods for sale in domestic market. Vertical occurs when a company undertakes at least two stages of production and take the

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benefit of factors like skilled labour, natural resourcesetc (Buthe and Milner, 2008: 158-159).

China & India both focused on low manufacturing cost and service capabilities over last 15 years. As these countries continue to grow, it was expected that real global giant companies will come up from these countries.A huge growing middle class, which is further expected togrow to 520 million by 2025 with 50 to 60 % annually increase in Chinese lavish market. Through similar growthIndia will touch 200-300 million middle class by 2025 butstill far behind Chinese (Inkpen and Ramaswamy, 2007: 4-12)..

Facts about two giants

CHINA

China is the largest goods exporter & second largest importer.

China population in 2012 was 1.35 billion with largest dominating community Han accounted 90% of total.

China urbanisation ascended from 10.6% in 1949 to 52.4% in 2012 and expected to reach 65%in 2030.

From 1985 to 2010 global lifted population were 70 % of Chinese31 airports and 602 shipping berths for 10000-tons ships.

Clean energy investment in china in 2012 was 67 million which is highest again around the planet.

Illiteracy rate in 1949 was 80% in 2012 it was less than 0.8%.

R&D rate annually increasing at the tempo of 12%. Consumer price index in 2013 January 10.4% remain

high.

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China has highest number of internet users, approx 554 million.

China has world largest car market with 109 million people with

INDIA

India’s GDP fell consecutively from 2010-11, 2011-12,2012-13from 9.3%, 6.2% and 5% respectively.

India is suffering from Inflation as well lowest growth of decade in 2013-14 that is less than 5%.

India’s industrial fell by 0.7%, 0.6% fell year by year in industrial production and 4% in mining

India shows second highest trade deficit ever $20 million in January from December 17 million.

Consumer price index in 2013 January 10.4% remain high.

Source: UKIT website

Chinese companies outflowWith great inflow and with increasing of competition at home Chinese manufacturers are looking not only in African markets with diverse strategy but also in developed countries for generating more revenue and output. For instance In 2002 Schneider Electronics (Germany) goes bankrupt and then bought by TCL another Moltech Power Systems USA bought by Huayi Group of

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Shanghai Group when it became bankrupt. To access in natural resources encourages Chinese state owned companies to go abroad. Most of the Chinese companies aremotivated by “Pull” factor but also by “Push” factor likehost country investment policies, tariffs & specific advantages of location (UNCTAD, 2004).

Outline of study results for 100 Chinese TNCs

WHY INVEST OVERSEAS?

WHAT IS MOST EFFECTIVE REASONIN HOST COUNTRY?

WHERE IS THE PRIORITY REGION?

47.1% Escalatingoverseas market

16.9% better profit margins

14.5% slothful demand in China in last few years

12.5%Export to third nation

9.3% Competitionin China

32% Host countrypolicies

28.7% Comparatively need small amount of investment

22.5% Cheap labour

8.4 Cheap land and raw materialavailable

32% Africa

20% South east Asia

18% Latin America

9.3% Middle East

8.7% Eastern Europe

8 % Central Asia

4% Others

Source: Research Team of MOFTEC’s Offshore Plant Project

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In millions, US Dollars at current prices and current exchange rates Inflows

Source: UNCTAD.org

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In millions, US Dollars at current prices and current exchange rates outflows

Source: UNCTAD.org

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Determinants of FDI

Source: (Houde, 2000: 3-15)

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FDIGDPLABOUR PRODUCTI-VITYResearch & DevelopmentCOUNTRY RISKMARKET SIZEINFRASTR-UCTUREM & A'sTRADE OPENNESS


ANALYSIS ON FDI DETERMINANTS

China growth rate is close to 10% in last three decades while overtaking Japan (world 2nd largest economy)in 2010 & China is projected to overtake US by 2016.When Open Door Policy was adopted, Chinese economy was 1% of world GDP, in 2010, It was 10.4%of world’s GDP (UKTI, 2013). While if we look at India’s average growth in last few decades it is around 5%, with record low of 5.20 percent in 1979.

Figure 2.1

Figure 2.2

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Source: www.tradingeconomics.com

As shown in the Figure 2.1 and 2.2, India’s GDP never touched the mark of 10% in last 5years, while Chinese GDPwas even doing better than India, before financial crisesand even gained the momentum in 2010. In last one year, Chinese GDP is growing with more than 7.5% rate while India GDP is struggling with 5% and recently collapsed to4.3% only. China inflation rate from 1986 to 2013 averaged 5.88 %. In figure 3.1 and 3.2 China’s Inflation rate is less than 3.5 % in last one year and India’s inflation rate averaged 7.74% and recorded 6.84% in February 2013 (Economic Growth Analysis, 2013) .

Figure 3.1

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Figure 3.2

Source: www.tradingeconomics.com

In infrastructure, India have 13 major ports to handle the trade with largest in Mumbai. However, if we look at port container traffic for modern manufacturing china has18 times greater than India freight traffic and 12 times airfreight the volume. Even in railways, in1945 China had27000km railways network where as India had 53596 km network, thanks to British rule. China had almost half the network what India had but how they comparing with today, china overtaken India somewhere in mid of 1990 with 78000 km and India stagnated at 65327km (Rangaswamy,

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2008). In December 2010, it also opened longest rail network between Beijing and Guangzhou. In road comparisonIndia had 41.10 lakhs km in 2008. On the other hand, china was having 3.6million of kilometre of roads in which 60.3 thousand are express way in 2008 (Pucher et al., 2008).India has 19 international airports. China is planning to built some 45 more airports, by the end of 2015 china would be having 220airports operating around the globe and planning to invest some $228billion till 2015 (Dyer, 2011). Beijing international capital airport & Hong Kong international airport ranked fifth & fourth in 2013 in world’s top airports respectively (Skytrax- The world Airport Awards, 1989-2013).

Source: World Bank website

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Currency fluctuations:

Indian national rupee from 2003-13

Source: Trading Economies website

According to Graph that shown above, Indian National rupee reached 57.1200 in June 2012 a record high and reached 7.1900 in March 1973 as record lowest. From last one decade rupee is fluctuating a lot with aspect of US dollar, which is always create a negative effect on FDI’s. Whereas below graph showing China’s Yuan fluctuation in last one decade which clearly resembles Yuan consistently falling and more consistent as compareto Indian rupee (Trading economies, 2012).

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Chinese Yuan from 2003-13

Source: Trading Economies website

Education & Illiteracy: China has average 6.4 years of schooling for adults whereas; India has 5.1 years of average study. Based on literacy rate India has percentage of 60 to 69% of rate in 2012 while china doingmuch had better with 90 to 100 % literacy rate (Adult AndYouth Literacy, 2012). The number of graduates in China increased with remarkable speed from 1.1 million to 6.1 million from 2001to 2009 respectively. The language schools in china are also mounting and experiencing more mergers & acquisitions activity by 2020 Chinese’s students graduation rate percentage would touch 95% with this entire broad concept (Education in China, 2010).

Mergers & Acquisitions & Labour Productivity A company can grow with three main strategies:

Generic Expansion & Internal Development Developing Trust : networks Mergers & Acquisitions

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China & India both holds a positive view of M&A benefiting shareholders, society and organisation (Peng, Luo and Sun, 1999). In recent years china came as a single global brand renowned around the globe which resulted in some M&A for instance Thomson & TCL in 2005,Lenevo & IBM same year, Nanjing Automotive & Rover etc with further argument in FDI more and more Mergers & Acquisitions are continuing (Ardley and McManus, 2011: 299-306). In 1990, the ASEAN countries output per workerwas US$5,860 approximately. This was about 80%greater than china but in 1992 the gap started diminishing and by1997 it was 57%.During financial crisis china growth was tremendous and it has overtaken ASEAN in output per worker. While India was about 70% lower than ASEAN in 1990 has also increased but still 30% lower than ASEAN and speechless when compared with china worker productivity (Labour and Social Trends in ASEAN, 2007: 31-34).

Country risk is another determinant for FDI’s. Political and economic stability are the key elements in country risk but it may be possible that other factors or sourcesof risk may trim down the total country risk. Country risk evaluated by measuring the factors like Political stability, currency stability, civil war, riots etc(Basu, 2011). Standard & poor, Moody’s, Fitch Rating are among the companies which rate countries taking consideration on economic and political environment. India is ranked at BBB- in Local currency rating & foreign currency rating respectively and BBB+ in T&C assessment while China is ranked better with AA- in all three aspects by S&P (Standard & Poor, 2013).

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Table 4.1List of major Insurgency in India where terrorism is a biggest issue.

Place

J&K Assam Tripura

Nagaland

Mizoram

Naxalism

Period

1980-on

1979-on

1980-on

1947-on

1966-76

1980-on

Style

Terrorism, Guerrilla

Maoist, Terrorism, Guerrilla

Maoist, Terrorism, Guerrilla

Maoist, Terrorism

Maoist, Terrorism

Terrorism, Guerrilla

Natureof Insurgency

ReligiousEthnicIdeology Linguistic

Source: (Mitra, 2007)

Research & Development: China primarily R&D companies aremostly software, Appliances pharmaceuticals & manufacturing .Two main cities of china Beijing and Shanghai are the hub of R&D (Serger, 2006). China has come up with number of good investment schemes since lastdecade. China, which used to spend 0.6 % of GDP in 1995; spend 1.6% of GDP in 2011on R&D (Grueber, 2011). India which is not even too dire as it is 14 companies made it in top 1500 globally and in 2013 R&D investment spending calculated to yield 12.2% over what spend in 2012 which follow a relatively 5% growth in 2011.Indian Pharmaceuticals are doing quite well in R&D specially Ranbaxy Laboratories (Grueber, 2012).

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Trade openness in tariffs: The trade openness ratio defined as “the sum of merchandised imports and exports divided by GDP” (Tian and Yu, 2012: 27). China in it itself is a giant in trade with around the globe countries with it is share of international trade keep onincreasing from less than 1% to more than 8% in 1970 to 2006. It is estimated that china would be top exporter inworld trade after 2015. India has a unlike platform for trade it is trade first declined in beginning of 1970 to 1990 to 0.5% than it steadily starting increase to 1%.From 1990 to 2005commpound annual growth rate for goods & services was 14% (Greene et al., 2006-2008: 7-32).

Recently in 2013-14 budget(India) announced by finance minister P.Chidambaram didn’t clear the picture about double tax avoidance agreement & no clarity in retrospective tax amendments which further put burden on investors (Investors snub India's budget, 2013).

Porter’s Diamond

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Source: (Jin and Moon, 2006)

India China

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Factor conditions

Young population

86$ per month wages

Better English Increase in

telecommunication

Improvement ininfrastructure

Overall rating: 6

Young population

195$ per month wages

World largesttelecom market

Tremendous growth in Infrastructure

Overall rating: 8

Demand Conditions

Huge middle Class

Demand is highbut not betterthan china

GDP above 5 last five year(approx)

Illiteracy rate is high

Increase in working woman

Growth of FDI

Overall rating:5

About to become world largest luxury goods market

Huge developing middle class

GDP above 9 in last 5 years(apprx)

Favourable trend for foreign brands

Increase in skills and education with volunteer trainings

Overall rating: 9

Firm strategy, structure

Service industry is base

Manufacturingindustry is base

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& rivalry M&A are helpful hand

M&A are Helpful & supportive for companiesin loss

Related & supportingindustries

Huge It base in Bangalore

Pharmaceuticals industry

Textile Industries

Service industry is base

Overall rating6

Manufacturingis the base

Banking & Auto mobiles are supportive

Power industries Growing

Overall rating 7

Government Democratic Government

Restricted trade

Political structure instable

Insurgencies are big problem

Overall rating4

Communist Government

Less Barriersin trade

Strong political stability

Overall rating 8

Source: Asia Briefing ltd, Trading economies, (Bian, 2005), (Jin and Moon, 2006)

Conclusion

This study aimed to determine about potential of bothemerging markets, China & India with respect of FDI.China, with its potential and correct policies bycommunist government became a big country with hugeinflows and outflows. It is figure out that, both thecountries have potential for FDI but China alone it

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itself is a big giant and also sustain during financialcrisis and became single profitable market for investorswhich will also expected to surpass USA by 2016 & willcapture the spot of largest economy in world soon. Chinainflows and outflows gradually increased. Cities likeBeijing, Shanghai and Hong Kong became hub for world todo manufacturing, building, for research and many otherindustries with good infrastructure, cheap labour,relaxed taxes of trade & more stable political structure.

On the other hand, India is another Asian giant but needimprovement in infrastructure & political stability wherecorruption, high inflation rate and insurgencies are somebig challenges. India’s bureaucratic system of governanceis also keep on changing the trade & tariffs for foreigninvestors, India’s policy makers always tried to keeptheir taxation & tariffs relaxed to attract FDI’s but itdoes not work as per expectation.

It is concluded that although china is based onmanufacturing industries where as India is based onservice industries. While in FDI terms industries whichare based on manufacturing are more often choose china asit has cheap labour and better trade policies where asFDI’s based on service industries such as hospitalitymore often choose India as India has more skilled labourthan China and more English skills. It is clear thatAsian developing countries have wide range of scope andpotential to become world largest market for FDI’s. It isChina now, but India might be the future for Asia and forFDI’s. With shrinking of world into a more competitiveand demanding market China would be the great market forFDI for next few decades but some factors also favourIndia which might result in a change in FDI investments.Although this study did not cover about developed

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countries which are very important & under dark cloudssince eight years and affecting the Asian economies too.

Words: 3300

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