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Why India is mainly engaged in offshore service activities, while China is disproportionately engaged in manufacturing?

  • LO, Chu-Ping
  • LIU, Bih Jane
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    We extend the model of Antràs and Helpman (Antràs, P., Helpman, E., 2004. Global Sourcing. Journal of Political Economy 112(3), 552-580) by incorporating the merits of Zhang and Markusen (Zhang, K.H., Markusen, J.R., 1999. Vertical Multinationals and Host-country Characteristics. Journal of Development Economics 59(2), 233-252.) to demonstrate why China has been so successful in disproportionately attracting foreign offshore manufacturing activities, while India has been engaged mainly in offshore service activities. We argue that the host country's industry-specific technology capabilities make the difference in FDI composition between China and India. In addition to incomplete contract frictions, the host country's technological capabilities, which affect technology transfer costs, are essential to FDI inflows. We also find that, after excluding overseas Chinese investment, India is almost on par with China in terms of the market size it offers to marketing-seeking FDI.

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    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 20 (2009)
    Issue (Month): 2 (June)
    Pages: 236-245

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    Handle: RePEc:eee:chieco:v:20:y:2009:i:2:p:236-245
    Contact details of provider: Web page: http://www.elsevier.com/locate/chieco

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    1. repec:hrv:faseco:4784029 is not listed on IDEAS
    2. Pol Antras, 2004. "Incomplete Contracts and the Product Cycle," Econometric Society 2004 North American Summer Meetings 62, Econometric Society.
    3. Zhang, Kevin Honglin & Markusen, James R., 1999. "Vertical multinationals and host-country characteristics," Journal of Development Economics, Elsevier, vol. 59(2), pages 233-252, August.
    4. Zhang , Kevin Honglin, 2000. "Human Capital, Country Size, and North-South Manufacturing Multinational Enterprises," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 53(2), pages 237-260.
    5. Pol Antràs & Elhanan Helpman, 2003. "Global Sourcing," NBER Working Papers 10082, National Bureau of Economic Research, Inc.
    6. Wei, Wenhui, 2005. "China and India: Any difference in their FDI performances?," Journal of Asian Economics, Elsevier, vol. 16(4), pages 719-736, August.
    7. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
    8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    9. Magnus Blomstrom & Ari Kokko, 1993. "Policies to Encourage Inflows of Technology Through Foreign Multinationals," NBER Working Papers 4289, National Bureau of Economic Research, Inc.
    10. Ethier, W.J. & Markusen, J.R., 1993. "Multinational Firms, Technology Diffusion and Trade," ISER Discussion Paper 0303, Institute of Social and Economic Research, Osaka University.
    11. Bruce Kogut & Udo Zander, 1993. "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies, Palgrave Macmillan, vol. 24(4), pages 625-645, December.
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