INSTITUTE FOR INTERNATIONAL MANAGEMENT AND TECHNOLOGY, GURGAON

Subject Topic
FDI in India and China

SUBMITTED TO Dr.

SUBMITTED BY

AVINASH KUMAR
PGPM (2012-2014)

FDI
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture.

The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is 10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company.

An example of foreign direct investment would be an American company taking a majority stake in a company in China. Another example would be a Canadian company setting up a joint venture to develop a mineral deposit in Chile. Foreign inflows are considered to be an important fuel for any countrys economic engine. India has taken several initiatives in terms of Government policies, liberal reforms and investorfriendly business environment, to attract foreign direct investment (FDI) into the country. In its recent policy initiatives, the Government has allowed FDI in multi-brand retail, power exchanges and boosted FDI cap in single brand retail and broadcasting.

Foreign investors are looking for viable options across the industries in India. A study titled Indian Retail Market-Opening More Doors, by Deloitte Touch Tohmatsu India, has stated that mass grocery and apparel are the two most favored segments for FDI in multi-brand retail.

Definition:
FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.

According to the IMF and OCED definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy in an enterprise that is resident in another economy. The lasting interest implies the existence of a long term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter. Direct investment involves both the initial transaction establishing the relationship between the investor and the enterprise and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. It should be noted that capital transactions which do not give rise to any settlement, e.g. an interchange of shares among affiliated companies, must also be recorded in the Balance of Payments and in the IIP. So in the end of introduction in FDI we can say FDI is Foreign Direct Investment. It is an investment by a foreign company into other country than origin. This investment can be done through acquisition of local company or establishing a new business operation. That means it is the capital/funds inflow from foreign entities invested in allowed segments/sectors.

Environmental content- developed and emerging economy Genesis of FDI- Pros and cons
What does mean by FDI in Retail? Currently: 1. FDI up to 51% in single brand retail store with prior government approval. 2. FDI up to 100% for cash and carry wholesale trading and export under automatic route. 3. FDI is not allowed in multi brand retail sector retail segment. As per the recent developments and reports: The cabinet of Government of Bharat has approved 51% FDI in multi-brand retail. Also FDI ceiling for single brand retail is increased to 100% from current 51%. State of Retail Business in Bharat today: Organized retail is just 3% of total trade in Bharat today. Whereas organized retail sector in developed economies makes over 70-80% of total trade. Even in the Asian developing economies these figures are around 20-25% of total trade. There are more than 1.2 Crore retail outlets operating in Bharat and only 4% of them operate in larger than 500 square feet in size. There were 11 retail outlets per 1000 people in 2001 as per the estimates of AC Nielsen and KSA Technopak.

Pros:
The Indian Retail sector has witnessed a gradual albeit steady metamorphosis over the last decade alone. Despite the myriad advances over the years, the sector continues to remain highly fragmented; still primarily dominated by the unorganized segment the quintessential traditional family run stores.

Foreign Direct Investment (FDI) in the retail sector has always been a contentious issue per se, courtesy the well documented proclivity of our policy makers to dither and delay decision making on key aspects stemming from political risks at large. The retail FDI policy has been burning smoke every now and then with the hungry government trying hard to buy it off the shelves before it expires. What are the various issues curbing it?

When asked this to Amities, I got a lot of reasons for the same. Eklavya , pursuing MBA in Marketing says ,"Firstly, Political Consideration is a real set back. These regional satraps in the name of protecting the interests of poor oppose liberalizations of policies which might lead to increase in foreign investment. Government which is dependent on support of these outfits is hence forced to slow down liberalization of FDI policies. Secondly, despite the importance being accorded to infrastructure by the government it continues to be a reason to not invest in India. India's roads still continue to be one of the worst in the world. The power cuts remain a way of life. Existing infrastructure projects often do not get adequate government support leading to withdrawal of foreign investment. Enron faced such situation when it pulled out of the Dabhol power project which had an FDI of $2.9 billion citing government opposition to the project.

Thirdly, India needs to upgrade its labor laws to attract foreign investors which in the long run will prove beneficial to labors also. The inflexible nature of labor laws often makes investors shy away from India. Lastly, in India corruption is the norm, not an exception. International reports on transparency rank India as one of the most corrupt country every year. A combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making and the allegations of corruption at the top has turned foreign investors away from India." The way India is expanding and impacting the world after liberalization, we need to improve our lifestyles as compared to other countries. We need to improve infrastructure and many more things.

Now the Committee of Secretaries, Coos, had given their nod to 51% FDI in multi-brand retail.

It means Rs. 450 Crores in multi-brand retail, but with stringent conditions like mandatory investment of at least 50% in the back-end infrastructure, minimum sales of 30% to come from small traders, and 30% mandatory sourcing from small and medium enterprises. Therefore firstly, with 50% investment in back-end infrastructure, it will not improve our country's infrastructure but also generate the employment to the country. So, it is a valid point. Second, minimum sales of 30% to come from small traders, it will create a very good opportunity for small traders and they will competitive enough. To this Ana hit, an aspiring entrepreneur has to say, The 30% sales for the small traders is good because it is going to create a great impact on the market. It will provide an incentive for better performance to maintain the position." Third, 30% mandatory sourcing from small and medium enterprises will give an opportunity to small and medium enterprises to be competitive and improve their quality because whoever will come in India they will be very quality conscious.

The question here arises of how do the domestic players react to it? The answer to this is FDI in Retail Sector is a very good sign for consumers because they will get lots of varieties in a reasonable price, employment generation for 2nd largest populated country, and competition increase.

Aarav, a student has to say ,"With companies like Wal-Mart or Tesco, the largest private employers of the world at our doorsteps, there is more chance of employment rather than job losses. According to stats, at least 10 million jobs will be created in the next three years in the retail sector." Thus, being a student, there seems to be a bright scope of advancement in terms of modernization and globalization as there would be handful of foreign investments in various parts of market. Alpika further adds, Foreign retail majors will ensure supply chain efficiencies, as they will include cold chains, refrigeration, transportation, packing, sorting and processing. This will lead to lower prices of products, benefiting consumers at large, minimum wastage of food resources due to present poor infrastructure, lesser inflation rate due to the efficiency in the supply chain and hence a step towards the speedy growth of the country."

With 50% of the Indian workforce reaping profits and the common man dodging the weight of inflation, the policy promises a sound future and better living for people.

FDI in India

India has been ranked at the second place in global foreign direct investments in 2010 and will continue to remain among the top five attractive destinations for international investors during 2010-12 period, according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012'. The 2010 survey of the Japan Bank for International Cooperation released in December 2010, conducted among Japanese investors, continues to rank India as the second most promising country for overseas business operations. A report released in February 2010 by Leeds University Business School, commissioned by UK Trade & Investment ranks India among the top three countries where British companies can do better business during 2012-14. According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the 4th most attractive foreign direct investment (FDI) destination in 2010. However, it is ranked the 2nd most attractive destination following China in the next three years. Moreover, according to the Asian Investment Intentions survey released by the Asia Pacific Foundation in Canada, more and more Canadian firms are now focusing on India as an investment destination. From 8 per cent in 2005, the percentage of Canadian companies showing interest in India has gone up to 13.4 per cent in 2010.

India attracted FDI equity inflows of US$ 2,014 million in December 2010. The cumulative amount of FDI equity inflows from April 2000 to December 2010 stood at US$ 186.79 billion, according to the data released by the Department of Industrial Policy and Promotion (DIPP). The services sector comprising financial and non-financial services attracted 21 per cent of the total FDI equity inflow into India, with FDI worth US$ 2,853 million during April-December 2010, while telecommunications including radio paging, cellular mobile and basic telephone services attracted second largest amount of FDI worth US$ 1,327 million during the same period. Automobile industry was the third highest sector attracting FDI worth US$ 1,066 million followed by power sector which garnered US$ 1,028 million during the financial year AprilDecember 2010. The Housing and Real Estate sector received FDI worth US$ 1,024 million. During April-December 2010, Mauritius has led investors into India with US$ 5,746 million worth of FDI comprising 42 per cent of the total FDI equity inflows into the country. The FDI equity inflows in Mauritius is followed by Singapore at US$ 1,449 million and the US with US$ 1,055 million, according to data released by DIPP.

Inflow of FDI in India

In this table how inflow of FDI in India happened:-

Amount of FDI In Crores

Mid 1948 256

March

March

March

March

March

March

565.5

916

933

2705

18486

123378

There is a considerable decrease in the tariff rates on various importable goods. The table shows FDI inflows in India from 1948 2010. FDI inflows during 1991 1992 to March 2010 in India increased manifold as compared to during mid 1948 to march 1990. The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure investors from every corner of the world. There were just few major countries like United Kingdom, USA, Japan, Germany etc. investing in India during the period mid 1948 to march 1990 and this number has increased to fifteen in 1991. India emerged as a strong economic player on the global front after its first generation of economic reforms. As a result of this, the list of investing countries to India reached to maximum number of 120 in 2008. Although, India is receiving FDI inflows from a number of sources but large percentage of FDI inflows invested with few major countries. Mauritius, USA, UK, Japan, Singapore, Netherlands constitute 66 percent of the entire FDI inflows to India. FDI inflows are welcomed in 63 sectors in 2008 as compared to 16 sectors in 1991. The FDI inflows in India mid 1948 were RS, 256 Crores. It is almost double in March 1964 and increases further to Rs. 916 Crores. India received cumulative FDI inflows of Rs. 5385 Crores during mid 1948 to march 1990 as compared to Rs. 141864 Crores during August 1991 to March 2010 this is showed in the table which is given above. It is observed from that there has been a steady flow of FDI in India after its independence. But there is a sharp rise in FDI inflows from 1998 onwards. U.K. the prominent investor during the pre and post independent era stands nowhere today as it holds a share of 6.1 percent of the total FDI inflows to India.

FDI in China:China's absorption of foreign investment is an important content of China's fundamental principle of opening up to the outside world, and also an important component of Deng Xiaoping Theory, and is one of the great practices of building up socialist economy with Chinese characteristics. The Third Session of the Eleventh Central Committee of the Party in 1978 confirmed over again the ideological line of emancipating the mind and seeking truth from facts, and realized the historical transformation of key work for the entire Party. It also established the basic line of focusing on the central task of economic construction, and made up the great decision of reform and opening up to the outside world. The Law of

the People's Republic of China on Chinese-Foreign Equity Joint Ventures was promulgated by the National People's Congress in 1979, then the work of utilizing foreign capital as an important content of opening up to the outside world initiated as China's fundamental principle. After twenty years of great efforts, the scale of absorbing foreign capital increasingly expanded as well as the level was increasingly upgraded when China's law and managerial system on foreign investment have been gradually perfected. The achievements won the whole world's attention, which effectively promoted the continuous, fast and healthy development of national economy.

The basic means of China's absorption of foreign investments

The foreign investments are basically divided into direct investment and other means of investment. The direct investment, which is widely adopted, includes Sino-foreign joint ventures, joint exploitation and exclusively foreign-owned enterprises, foreign-funded share-holding companies and joint development. The other means of investment includes compensation trade and processing and assembling.

1. Sino-foreign joint ventures

Sino-foreign joint ventures are also known as share-holding corporations. They are formed in China with joint capitals by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The main feature is that the joint parties invest together, operate together, take risk according to the ratio of their capitals and take responsibility of losses and profits. The capitals from different parties are translated into the ratios of capitals, and in general the capital from foreign party should not be lower than 25%. The Sino-foreign joint ventures are among the first forms of China's absorption of foreign direct investment and they account for the biggest part. At present they are still a great part in the absorption of foreign investments.

2. Cooperative businesses
Cooperative business is also called contractual cooperation businesses. They are formed in

China with joint capitals or terms of cooperation by foreign companies, enterprises, other economic organizations and individuals with Chinese companies, enterprises, other economic organizations and individuals. The rights and obligations of different parties are embedded in the contract. To establish a cooperative business, the foreign party, generally speaking, supplies all or most of the capital while Chinese party supplies land, factory buildings, and useful facilities, and also some supply a certain amount of capital, too.

3. Exclusively foreign-owned enterprises

Exclusively foreign-owned enterprises, which are totally invested by foreign party in China by foreign companies, enterprises, other economic organizations and individuals in accordance with laws of China. According to the law of foreign-funded enterprises, the establishment of foreign enterprises should benefit the development of our national economy and agree with at least one of the following criteria: the enterprises must adopt international advanced technology and facility; all or most of the products must be exportoriented. The foreign funded enterprises often take the form of limited liability.

4. Joint exploitation
Joint exploitation is the abbreviation of maritime and overland oil joint exploitation. It is a widely adopted measure of economic cooperation in the international natural resources field. The striking features are high risk, high investment and high reward. The joint development is often divided into three steps: exploitation, development and production. Compared with the other three means mentioned above, joint cooperation accounts for a small ratio.

5. ForeignForeign funded share-holding companies Foreign companies, enterprises, other economic

organizations and individuals can form foreign funded share-holding companies in China with Chinese companies, enterprises, and other economic organizations. The total capital of the share-holding company is formed by equal shares shareholders will take due responsibilities for the company according to shares purchased; company will take

responsibilities for all its debts through all its assets and the Chinese and foreign shareholders will hold the shares of the company. Among them, the shares purchased and held by foreign investors account for more than 25% of the total registered capital of the company. Limited company can be founded either by means of starting-up or raising, and the limited liability company invested by the foreigners can also apply to turn into shareholding companies. The qualified enterprises can also apply to issue A & B share and list abroad.

6. New types of foreign investment

While expanding areas and opening-up domestic market, China is also exploring and expanding actively its new types of utilizing foreign investment such as BOT, investment company and so on. Since multinational merger and acquisition has become the major type of international direct investment, Chinese government is now researching and enacting related policies so as to facilitate the foreigners to invest in China by means of merger and acquisition.

Comparison of FDI in India and China

This research examines and discusses the trends and patterns of FDI inflows into China from year 1991 to 2005 and India from August 1991to 2005. Based on published official data, it provides a clear picture about the longitudinal and latitudinal analysis of FDI inflows, the country of origin, spectral composition as well as regional distribution of FDI in both countries

China During the period 1979-2005, China has approved a total number of 552,942 foreigninvested companies with a cumulative foreign capital investment (contract value) Of US $1285.7 billion, of which US $622.4 billion was effectively invested. This Table show the FDI Inflows in China 1979-2005 (US $billions)

Year 1979-1991 1992

Contracted FDI 52.699 58.124

Paid in FDI 13.018 11.008

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total

111.36 82.680 91.282 73.276 51.003 52.102 41.223 62.380 69.192 82.768 115.07 153.479 189.065 1285.673

27.515 33.767 37.521 41.726 45.257 45.462 40.318 40.715 46.878 52.7 53.505 60.63 72.406 622.426

After Analyzing this Table reveals the FDI development in China can be divided into three stages: 1979 to 1991, 1992 to 2001, and 2002, the year after the Chinas entry into the World Trade Organization (WTO) to present. From late 1978, China cast off its self-reliance policy and adopted the policy of reform and open-up. FDI in China grew rapidly during the first half of the 1980s. Entering the second half of the 1980s, the growth rate in China leveled off and turned negative in the aftermath of the Tiananmen massacre According to Chen, the annually growth rate reached 20 percent at that period. Moreover, the paid-in FDI soared to US$4.36 billion in 1991, making it the largest FDI. (Chai and Roy 2006)

India
In accordance with the requirements of the economic development in different phases, the Indian governments policy toward FDI has evolved over time. (Kumar 1998)

In the 1950s, soon after the independence, the anti-FDI environment in India was largely based on two factors. The first was the strong nationalistic sentiments in the wake of independence. Second, whatever narrow industrial base the country had at that time, an overwhelming part of it, almost three-fourths, was British-owned. Political and business leaders wished for the day when such a large foreign ownership of industries could be contained and Indian industry and market became a place for Indian entrepreneurs. (Das 2006)

Therefore, FDI was discouraged by a) imposing severe limits on equity holdings by foreign investors and b) restricting FDI to the production of only a few reserved items. (Gakhar 2006) In the 1980s the attitude toward FDI began to change, adopting the policies of liberalization of industrial approval rules, a host of incentives and exemption from foreign equity restriction. In the middle of 1991, a package of economic reforms was introduced by the government, which had greatly affected the magnitude and pattern of FDI inflows received by India. (Gupta, Dahiya 2005) After the macroeconomic reform process began in 1991, the economy was gradually opened up to FDI and policy endeavors were made to attract it. This becomes clear from Table which is shown below that India is fast emerging as an attractive destination of foreign investors.

Table FDI Inflows in India, August 1991-2005 (US $millions)

Financial Year (April-March) August 1991-March 2000 2000-2001 2001-2002 2001-2003

Amount of paid in FDI 15,483 4,029 6,130 5,035

2003-2004 2004-2005 2005-2006 (up to Dec. 2005) Total

4,673 5,535 4,719

45,604

The above table presents the first high point of FDI inflows was reached in 2001, when it topped at US $4 billion. In 2004, with a total amount of US $4.6 billion FDI inflows, India was the fifth largest recipient of FDI in the developing world. China, Hong Kong SAR, Singapore and Korea were larger recipients than India. Compared to China, India appears to remain an underperformer in the global competition for FDI. However, conclusions based solely on those figures in both Tables need to be interpreted carefully, as the above indexes have used FDI data provided by official sources in each country whose definition and measurement methods vary significantly. The following Table using the data from World Investment Report elucidates a relatively accurate comparison based on international standards. Table 3.3 Comparison of FDI inflows to China and India. (Amount in US $millions) 19902000(annual average) China India Developing economies world 495391 617732 557869 710755 916277 30104 1705 134670 52743 5627 163583 53505 4585 175138 60630 5474 275032 72406 6598 334285 2002 2003 2004 2005

Indias share of global flows to developing countries appears to be very small, especially compared with those received by China. The reported inflows of US $6.6 billion in 2005 represented a mere 1.9 percent of total inflows to developing economies, in contrast to US

$72.4 billion inflows to china with a share of 21 percent. (Ray 2005)

Advantages and Disadvantages of FDI Advantages

Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under:

Economic growthThis is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

TradeForeign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels-

FDI have also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transferFDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firmsVarious foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

Disadvantages
Foreign direct investment may be very advantageous to the host country that is the country which receives the investment flows in terms of helping the country progress economically and financially. However, foreign direct investment can remain beneficial only when the governments of the host countries put in needed regulations so as to prevent the country from being exploited and used as a profit generating machine for such corporate giants. The past has given many examples of how foreign direct investment can also at times be detrimental to the economy of a country, some examples of which are highlighted below:

Political Lobbying:
In the past, there have been many instances in which MNCs have resorted to political lobbying in order to get certain policies and laws implemented in their favor. At times, these MNCs are so large that their revenues even exceeded the Gross Domestic Product (GDP) of some smaller nations and compel or threaten them to pass judgments and policies in their favor.

Exploitation of Resources:

Exploitation of natural resources of a host country is not an very uncommon phenomenon in the case of FDI. MNCs of other countries have been known to indiscriminately exploit the resources of hosts countries in order to get short run gains and profits and have even chosen to ignore the sustainability factors associated with the local communities and local habitat, very much like what happened in the 17th century colonialism.

Threaten Small Scale Industries:

MNCs have large economic and pricing power due to their large sizes. They do not have much problem with regards to financial capital and can hence resort to using advertising which is a costly affair. Also, these companies are global players who have their operations spread across countries and have effective supply chains which enable them to have economies of scale which smaller players in the domestic market of the host country cannot compete with. All this results in the MNC having cheaper products and more visibility due to the higher amounts of advertising and have been known to push out smaller industries out of business.

Technology:
Although, the MNCs have access to new and cutting edge technology, they do not transfer the latest technology to the host country with a fear that their home country may lose its competitive advantage; hence the maximum potential of the host economy cannot be achieved as a result of old technology transferred.

Conclusion
Economic reforms in India have deregulated the economy and stimulated domestic and foreign investment, taking India firmly into the forefront of investment destinations. The government, keen to promote FDI in the country, has radically simplified and rationalized policies, procedures and regulatory aspects. Foreign direct investment is welcome in almost all sectors; expect those strategic concerns. Since the initiation of the economic liberalization process in 1991, sectors such as automobiles, chemicals, food processing, oil and natural gas, petro-chemicals, power, services, and telecommunications have attracted considerable investments. Today, in the changed investment

climate, India offers exciting business opportunities in virtually every sector of the economy. Telecom, electrical equipment including computer software, energy and transportation sector have attracted the highest FDI. Despite its market size and potential, India has yet to convert considerable favorable investor sentiment into substantial net flows of FDI. Overall, India remains high on corporate investor radar screens, and is widely perceived to offer ample opportunities for investment. The market size and potential give India a definite advantage over most other comparable investment destinations. Indias investment profile, however, is also conditioned by factors that affect the flow of FDI, which are bureaucratic delays, wide spread corruption, poor infrastructure facilities pro-labor laws, political risk and weak intellectual property regime. A perceived slowdown in the process of reforms generates doubts about the markets long term potential. To capitalize on its potential for FDI, would seem that India needs to accelerate efforts to institutionalize government efficiency and advance the implementation of promised reforms. Other strategic efforts should include focusing the market on Indias relatively higher rates of return on existing investments and long-term potential, addressing the issue of transforming the country into a viable potential, addressing the issue of transforming the country into a viable export platform and encouraging strategic alliance with foreign investors. In short, this means accelerating Indias integration with the global economy.

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