FDI - China and India

I spent the evening discussing with a friend, Foreign Direct Investment (FDI) in India in comparison with China, was a great evening and I enjoyed doing what I do best, talking economics.

To start off with, the International Monetary Fund (IMF) has twelve criteria which can be included in FDI inflows,

Inter-company debt transactions
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
Earnings data of indirectly-held FDI enterprises
Control premium
Non-competition fee
Imported equipment
Foreign Equity Capital

Now out off these classifications, the Reserve Bank off India (RBI) considers only the last one, Foreign Equity Capital, as FDI. The rest appear in trade and debt statistics. But China considers all the twelve as FDI; hence the large gap on paper. Now china started their ‘Open Door Policy’ in 1979, as against 1991 for India. Therefore fourteen year lead on India which is a pretty big lead.

At the time, both India and china were traditional countries with basic economic models, china took the fast route, FDI Driven, mainly helped by their wealth expatriates who were more than happy to invest in their homeland and a totally export led market which was helped by cheap labour. This laid a foundation to the Chinese manufacturing industry, compulsory education and improvement off labour skills. With compulsory birth control, china was able to bring in a low dependency ratio which led to thrift in the savings ratio hence facilitating economic growth due to increased capital formation and investment in infrastructure to further boost productivity.

India on the other hand started in 1991, nearly a decade and a half after china did. But before they started, they were faced with many problems, a high dependency ratio, and low savings ratio. The Indian expatriates were cash poor but intellectually wealthy. India had to adopt a slower growth model, they developed institutions which would facilitate growth, market regulators and encouraged local entrepreneurs as against FDI.

China’s FDI consists off ‘round tripping’ off money into the country through Hong Kong and Macau due to the tax breaks and other benefits offered for FDI into the country, this accounts for nearly thirty percent off China’s FDI.

Another genuine reason for china’s higher FDI inflows are the Non Resident Chinese (NRC) , who are prepared to invest wholeheartedly into the motherland, as against Non Resident Indian’s (NRI’s) and PIO’s (Person off Indian Origin). The NRI’s and PIO’s alone could contribute USD 320 Billion to the GDP, but they are afraid due to poor governance, high regulation and taxation. Last year, NRC’s invested USD 70 Billion into China, NRI’s only invested USD 0.2 Billion. India needs to do something to funnel the money parked outside the country back to the homeland

India also has its many faults, a high traffic regime, poor infrastructure and a regulatory system unfriendly to businesses. Also, a reservation policy based on caste instead off class which creates inflexible labour laws. The government budged deficit prevents necessary investment in improving infrastructure.

According to Purchasing Power Parity (PPP) , India stands at fourth in the world and China at second. Naming India and China as the new tigers of Asia, the Morgan Stanley report says their economies have been growing twice as fast as the rest of the world over the past two decades. If the present trend of growth continues, China’s economy should leave that of the US far behind and India’s should be bigger than Japan’s (using PPP) in a decade

Tariff Reforms is the most obvious reason that China gets more FDI inflows than India. The average Most Favored Nation (MFN) tariff Rate is at about 15.3% in China as against 50% in 1980. India’s MFN is at about 32.3% as off date which is one off the highest in the world. India also has a Special Additional Duty (SAD) that increases the customs by nearly 35%. Tariff Reform would normally be very easy in a country off India’s size, but sadly the constant deterioration in the fiscal deficit.

In certain surveys carried out by the World Bank Group. It was found that takes 10 permits compared to 6 in China, and 90 days in India relative to 30 days in China, to start up a new business. The World Bank surveys estimate that in India it takes on average 16 per cent of senior manager’s time to deal with government officials compared with 9.9 per cent of management time in China.

The very rapid build up of FDI in the Chinese car industry is occurring within a framework of 50-50 joint ventures and illustrates some of the dynamics behind overproduction bubbles. Within this government-determined framework, each of China’s top four (state-owned) carmakers has ties with at least two global players. Such is the attractiveness of margins in the Chinese car market; foreign carmakers are willing to tolerate these very unusual arrangements. By 2006, China’s capacity will have risen to at least 4.5m passenger cars implying more than a trebling of current domestic demand. There are apparently few complaints about the lack of an efficient market for corporate control in China while domestic markets are growing rapidly; China’s lax intellectual property regime may also cause problems for companies unable to control the leakage of IP to their joint venture partners. “Shanghai International Automobile City” (SIAC), a 68 square kilometer corporate park that is already home to German auto maker Volkswagen and several major auto component suppliers, including TRW and Delphi of the US.
Apart from the manufacturing areas, the project – expected to cost at least USD 6 Billion – includes research & development facilities, a commercial centre, residential housing and even a new golf course. In short, SIAC hopes to offer everything a foreign investor needs to feel comfortable in China when it is finished in 2010.

India on the other hand, is very much similar to china except for the fact that the local car manufacturers are only growing at a very small scale. It is the larger Multi nationals that are making huge inroads into the ever growing automobile market. In automobiles, Suzuki, now fully in control of Maruti Udyog, decided to set up a diesel engine plant in Haryana, which will absorb no less than USD 800 million That as well as the steel projects signal the new-found confidence in India's competitiveness as a manufacturing base. Automobile companies have decided to open up an India presence, and companies like Hyundai are rapidly expanding capacity.

Telecommunications are highly developed in India, as compared to china. The spectacular growth in the Indian software and IT industry has enabled faster and more reliable growth in the telecom sector. FDI inflows into Indian telecom are varied and large, Bharti Tele-Ventures, a large private telecom player offering varied telecom services and the largest GSM cellular operator, currently has foreign partners holding a combined stake of 47.3 per cent in the company; these include SingTel (with 28.5 per cent), Warburg Pincus, International Finance Corporation, Asian Infrastructure Fund Group and New York Life Insurance. Hutchison Whampoa has a 49 per cent stake in Hutchison Telecom, the second largest GSM cellular operator in India. Distacom has a 42 per cent stake in Spice Communications.
AT&T Wireless has a 33.3 per cent stake in Idea Cellular. Resently , Maxis off Malasiya offered to take over Aircel , another leading GSM provider while France Telecom holds a 26 per cent stake in BPL Mobile. Meanwhile, the Chinese authorities have sold to foreign investors a small stake in the state-owned China Telecom and raised considerable funds to undertake network expansion, besides ensuring competition among state-owned telecom companies. In nine years of existence in China, wireless services, were able to garner about 6.8 million subscribers by 1996. In comparison, India starting late - in 1995, had managed to enroll 28 million wireless subscribers by the end of 2003.

Whatever said and done, India has a more business rich and well trained community than China’s. Knowledge off the art off business has been passed down generation after generation in India, whereas the Chinese only have liberty to do business on their own after 1979. Even then, the FDI inflows made the Chinese dependent businessmen, but India has more reliable businessmen to take care off the FDI’s and survive and do very well without foreign management. This can be seen , HOPE group, China’s largest business house is ten times smaller than the TATA group, India’s largest business family. India’s restrictive policies on FDI may in the end be more beneficial, after all what good is a country with money, but with no one to make proper use off that money and channel it in the right places?