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Chasing the dragon: Accounting for the under-performance of India by comparison with China in attracting foreign direct investment

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  • John S Henley

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    Abstract

    This paper compares and contrasts the performance of India and China in attracting foreign direct investment (FDI). Both economies are large emerging markets that had rather similar profiles in 1978. Today, China ranks number one as the world’s preferred foreign investment destination. Closer examination of the FDI statistics suggests that India’s performance has been significantly understated while China’s performance continues to be overstated. However India still lags for a number of reasons. These include a high tariff regime, poor infrastructure (power, ports, roads and railways), a regulatory system that is too often not business-friendly, a policy of reservation of many potentially export-oriented sectors for small businesses and inflexible labour laws. The government’s large budget deficit is preventing investment in necessary physical infrastructure yet India needs to increase the rate of private investment to enhance the economic growth rate and reduce poverty. The paper concludes that based on China’s experience of promoting FDI, further economic devolution to state level is the best way forward. While this is likely to exacerbate inter-state income inequality in the short term, it does offer the possibility of redistribution in the longer term. [DSA, Annual conference 2003: Globalisation and Development]

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    Paper provided by eSocialSciences in its series Working Papers with number id:756.

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    Date of creation: Dec 2006
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    Handle: RePEc:ess:wpaper:id:756

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    Keywords: foreign direct investment; investment; india; china; deficit; growth;

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    1. Elena Ianchovichina & Terrie Walmsley, 2005. "Impact of China's WTO Accession on East Asia," Contemporary Economic Policy, Western Economic Association International, vol. 23(2), pages 261-277, 04.
    2. Shatz, Howard J. & Venables, Anthony J., 2000. "The geography of international investment," Policy Research Working Paper Series 2338, The World Bank.
    3. Albuquerque, Rui & Loayza, Norman & Serven, Luis, 2003. "World market integration through the lens of foreign direct investors," Policy Research Working Paper Series 3060, The World Bank.
    4. A. Thillai Rajan, 2002. "Restructuring State Owned Power Utilities: Qualitative Observations from an Indian Experience," Global Business Review, International Management Institute, vol. 3(1), pages 77-96, February.
    5. Edward M. Graham & Erika Wada, 2001. "Foreign Direct Investment in China: Effects on Growth and Economic Performance," Working Paper Series, Peterson Institute for International Economics WP01-3, Peterson Institute for International Economics.
    6. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
    7. Prathivadi Bhayankaram Anand, 1999. "India’s economic policy reforms: a review," Journal of Economic Studies, Emerald Group Publishing, vol. 26(3), pages 241-257, September.
    8. Harm Zebregs & Wanda Tseng, 2002. "Foreign Direct Investment in China," IMF Policy Discussion Papers 02/3, International Monetary Fund.
    9. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
    10. Helm, Dieter, 2001. "Royal Bank of Scotland/Scottish Economic Society Seventh Annual Lecture: Making Britain More Competitive: A Critique of Regulation and Competition Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(5), pages 471-87, November.
    11. Hallward-Driemeier, Mary & Wallsten, Scott & Lixin Colin Xu, 2003. "The investment climate and the firm : firm-level evidence from China," Policy Research Working Paper Series 3003, The World Bank.
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