FDI story in India and China.

FDI Story in China & IndiaEffect of Government Regulations

Agenda:

- China FDI History

- India FDI History & Government

Regulations

- Main Differences in FDI between India and

China

- FDI Discrepancy Argument

- Facts & Conclusions

China FDI History

TransitionTransition Chinese Foreign Join Venture Law

(1979)

Wholly Foreign Owned Enterprises (1986)

Economic Zones: Four Zones in 1980

Shantou, Shenzhen, Zhuhai and Xiamen

Fourteen cities by 1984 Whole China by late 1900’s

Rapid Growth in FDIRapid Growth in FDI Rapid economic growth in reform

period

Abundance of labor and its low costs

Rapid expansion of China’s domestic market

Role of overseas Chinese

Increasing integration with world economy

Rapid Growth in FDIRapid Growth in FDI

Why FDI?Why FDI? Offsetting the capital deficiency

Acquiring advanced technology

Gaining production know-how

Promoting exports

India FDI History

& Government

Regulations

1947-1948 British owned private foreign capital-Swadeshi movement & Industrial policy resolution

1949-1953 Trio of Domestic business houses, foreign capital and the government-nationalist sentiments in policies kept away foreign investment

1957-Second Economic Plan, launched “Industrialization though import substitution” encouraged private investment

1960s-Selective industries got foreign collaboration and JV mostly manufacturing –Indian participation retained

After 1960s-Devaluation of Rupee encouraged socialist idealism banks and foreign oil majors nationalized

1968 introduction of Foreign investment board –encouraging investments on own terms and conditions

FDI History in IndiaFDI History in India

1973-Foreign Exchange Regulation Act (FERA) new clause introduced “all firms dilute their foreign equity holdings to 40% to be treated as Indian companies” exit of IBM, Coca Cola

1980s-restrictive licensing procedures softened, technology transfer and royalty payments relaxed, wherever possible foreign investment was encouraged

1990s-Rupee devalued, NRI money withdrew, India turned to IMF, Trade regime and regulatory frame work was liberalized, FDI invited in wide range 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

Source-www.ems.bbk.ac.uk/faculty/kapur/personal/fdi.pdf retrieved on 29th Oct 2008

FDI History in IndiaFDI History in India

114,303 US

million$ till now

Source-www.dipp.nic.in/fdi_statistics/india_fdi_index.htm retrieved on 29th Oct 2008

FDI India InflowFDI India Inflow

Source-www.dipp.nic.in/fdi_statistics/india_fdi_index.htm retrieved on 29th Oct 2008

FDI LandscapeFDI Landscape

Restricting product market reform Politically sensitive areas like retailing, news media

and defense not deregulated yet 830 products reserved for firm below certain size

specially in clothing and textiles- can not receive FDI and can not even expand

Makes harder for local companies to innovate and be efficient ,local supply chains remain inefficient and unexposed to worldwide markets and skills

Loss for consumers and whole economy Examples to be considered liberalization of

automotive industry and air line industry

Government Government Regulations affecting Regulations affecting

IndiaIndia

Infrastructure Lack of infrastructure biggest hurdle for growth Physical infrastructure is state controlled, regional

differences in infrastructure concentrate FDI to some specific regions only

Multiple regional parties bring in political instability in state as well as central government making development projects slow and implementation of reforms inefficient

Also a major hurdle for India “electricity shortage”-Electricity act 2003 aimed to provide electricity continuously at low cost to businesses however only 8 states implemented the act

Sector itself good for FDI attraction, upgraded telecommunication highways and ports but power, railways, water and swage still major areas to be looked upon

Government Government Regulations affecting Regulations affecting

IndiaIndia

Large Bureaucratic structure –a ground for corruption Difficult to manage

overlapping government agencies and tedious paper work-system very complex

Foreign investment perceived as slow, difficult way of doing business in such bureaucratic structure

Foreign investment done at the cost of delaying projects

Main hurdle corruption at every stage , this together with other reason added to less likeliness of FDI inflows

Sign of improvement now!!

Source-http://en.wikipedia.org/wiki/Corruption_Perceptions_Index retrieved on 29th Oct 2008

Government Government Regulations affecting Regulations affecting

IndiaIndia

Main Difference in FDI between

India & China

India could not attract foreign investment in both products and services market, only seen as a service industry specially in IT.

To eliminate this difference, three steps can be taken to stimulate domestic demand RBI to keep interest rates regionally

competitive Implement Value Added Tax (VAT) Government to reduce budget deficit

India & China – The India & China – The DifferenceDifference

Depth of NationsDepth of Nations China’s Financial Assets

– 220% of GDP

India’s Financial Assets – 160% of GDP

China’s Financial system shows a greater strength in countries savings & investment

India’s Savings and Investment occur outside the formal financial system

Credit Distribution – Credit Distribution – Effect on Demand and Effect on Demand and

SupplySupply

Majority of financial capital of both countries going to less-productive areas

China’s fund going to State Own Enterprises rather than the private sector

India’s major share taken over by government to finance budget deficit

Much of what’s left goes to Agriculture, tiny Households, etc

Reason for this skewed type of lending in both countries is preserving jobs

Wasted CapitalWasted Capital

FDI-Discrepancy

Argument

Over reporting of FDI by China in terms of its alleged ‘Round Tripping’ of FDI

What is ROUND TRIPPING?

Chinese firms illegally transfer domestic (unaccounted) money to other foreign countries and then invest it in the mainland as FDI inflows in order to benefit from the preferential treatment given to FDI in terms of taxation, labor policy, etc.

Under reporting of FDI by India because of non-conformity of India’s method of measuring FDI to the international standards.

FDI-Discrepancy FDI-Discrepancy ArgumentArgument

Facts & Conclusions

Source: CEIC data Grant Thornton International Business Report 2008 retrieved on 28 th Oct 2008

FDI ComparisonFDI Comparison

Micro foundation India – Not overly depend on commodities and US

FDI vs. FII

Exchange Rate Policy

Democracy vs. CommunalismIndia - POSCO,ARCELORMITTAL,NUCLEAR DEAL,TATA NANOState + Center FD - 10% GDPLarge Subsidies, Rewarding failuresChina - Fiscal Surplus, No Debt, $2 T Cash

Source: http://www.ndtv.com/convergence/ndtv/video/video.aspx?id=42447 retrieved on 28th Oct 2008

Brief Important FactsBrief Important Facts

Projected GDP US – 3%, INDIA – 7%, CHINA – 8%

0

5

10

15

20

25

30

35

40

45

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

GD

P in

Trl

lion

Dol

lars

US

INDIA

CHINA

Projected GDPProjected GDP

High FDI potential

Low FDI potential

Low FDI performanceHigh FDI performance

India

China China

India

Position in 2003-2005

position in 2004-2006

Source:http://www.unctad.org/sections/dite_dir/docs/ retrieved on 28th Oct 2008

Matrix of Inward FDI Matrix of Inward FDI performance and performance and

potentialpotential

Conclusion

Source-http://www.indexmundi.com/g/g.aspx?v=66&c=in&l=en retrieved on 30th Oct 2008

China in a stronger position compared to India

But INDIA can do better if It opens more sectors for FDI

Eliminate barriers in foreign investment

Improve productivity and population control to increase Per Capita Income

More efforts to decouple economy and equity market’s over dependence on FII

Should make Efforts to reduce bureaucracy

ReferencesReferences www.McKinsey Quarterly.com

Article 1: China’s and India’s financial systems: A barrier to growth

Article 2: Why believe in India

Article 3: China and India: The race to growth

Article 4: Making foreign investment work for China

World Fact Book

http://www.financialexpress.com/news/fii-vs-fdi/127133/

http://www.youtube.com/watch?v=7zmzw5WV-RA

http://www.youtube.com/watch?v=VFPx1iLEGn8

http://www.ndtv.com/convergence/ndtv/video/video.aspx?id=42447

http://www.ser.tcu.edu/2003-Pro/SEP2003%20Yallapragada%20Paruchuri%2027-