C

CHAPTER NO: 1
INTRODUCTION

ROLE OF FOREIGN CAPITAL

Foreign Capital has played an important role in the early stages of industrialisation of most of the advanced
countries of today like countries of Europe and North America. There is a general view that foreign capital if
properly diverted and utilised, can assist economic development of developing countries.
These countries need resources to finance investment in health, education, infrastructure and so on. It can
supplement a country's domestic saving effort and foreign exchange earnings.
A number of studies have confirmed that international capital flows can contribute significantly to promote
growth in developing countries by augmenting domestic savings, reducing cost of capital, transferring
technology, developing domestic financial sector and fostering human capital formation.
Foreign capital can contribute to economic development of developing countries in the following ways:
1. Supplements domestic capital formation:
Economic development depends on, among other things, capital formation. The domestic capital formation is
inadequate in LDCs.
The foreign capital can supplement the domestic resources to achieve the critical minimum investment to
break the vicious circle of low income-low saving-low investment.
If more domestic capital is to be created by a countrys Own efforts, resources will have to be diverted from
the production of goods required for current consumption, this may lead to a cut in present living standards,
thus, foreign capital can help to supplement the domestic capital.
2. Accelerates economic development:

Foreign capital helps to accelerate the pace of economic development by facilitating imports of capital goods,
technical know-how and other imports which are required for carrying out development programmes.
3. Improve trade balance:
It may help to increase a country's exports and reduce the import requirements if such capital flows into
export oriented and import competing industries.
4. Transfer of Technology:
The foreign capital may facilitate transfer of technology to LDCs. It may help to modernise the production
techniques in industry, agriculture and other sectors.
5. Realisation of external economies:
If the foreign capital is allowed to flow into the development of infrastructure it may lead to realisation of
external economies which may stimulate domestic investment in the country.
6. Income and Employment:
If it flows into real sectors in the form of direct investment it helps to increase productivity, income and
employment in the economy.
7. Balance of payments adjustment:
Inflow of foreign capital, especially the short-term, may be able to provide a breathing space to a deficit
country to cover the deficit until a complete adjustment is achieve to correct the balance payments deficit.
However, such capital movement should be seen as a temporary phenomenon.

CHAPTER NO: 2
CONCEPTUAL FRAMEWORK

IMPACT OF FOREIGN CAPITAL

1. Economic growth :
Capital flows and economic growth are positively related to each other. High surge of capital flows influences
the domestic saving, investment and productivity of the country.
Impacts of international capital flows on economic growth during post liberalization into India are very
significant.
It is argued that capital inflows influences growth and growth influences capital flows. International capital
flows make a direct contribution to economic growth. The potential benefits from the flows are realized
improving productivity.
Globalization allows capital to move I attractive destination and it can fuel higher growth.
2. Affects a range of economic variables :
Capital flows affect a range of economic variables such as exchange rates, interest rates, foreign exchange
reserves, domestic monetary condition and financial system in the country.
Capital inflows induce real exchange rate appreciation, stock market and real estate boom, and monetary
expansion.
Appreciation of exchange rate can lead to loss of competitiveness. Inflows of foreign capital have a significant
impact on domestic money supply and stock market growth, liquidity and volatility.
3. Inflation :

Large capital flows can spark off inflation due to its impact on monetary expansion.
4. Trigger bubbles :
Capital inflows may trigger bubbles in asset market and stock market.
5. Volatility :
Portfolio flows are likely to render the financial markets more volatile through increased linkage between the
domestic a foreign financial markets.
Capital flows expose the potential vulnerability of the economy to sudden withdrawals of foreign investor
from the financial market, which will affect liquidity and con to financial market volatility.
6. Balance of payments :
Foreign direct investment inflows tend to worsen the current account in the short run.
The long-term effects on the balance of payments depends, among other things, on the operating
characteristics of FDI enterprises, notably their export propensity, the extent to which they rely on imported
inputs, including technology imports, and on the volume of profit-repatriation.
Of course, there are indirect effects too.
Multinationals can conceivably increase the export-propensity of domestic firms through spillover effects.
Further, if domestic production by multinationals substitutes for previously imported goods, FDI can reduce
the total import bill.

DRAWBACKS OF FOREIGN CAPITAL

Foreign Capital may give rise to serious problems in the recipient Countries. It has been recognised that
sudden and large surges in capital flows cause several problems.

Large capital flows could push up monetary aggregates, engender inflationary pressures, destabilise exchange
rates, exacerbate the current account position, adversely affect the domestic financial sector and disrupt
domestic growth trajectories if and when such flows reversed or drastically reduced.
Some of the drawbacks associated with international capital flows are discussed below.
1. Inefficient allocation of resources and production distortions:
Foreign capital has a tendency to flow to high profit areas rather than the priority areas.
The international capital inflows may be devoted to consumption which has a low social value or maybe
invested in projects that generate low social returns.
Thus, the use of foreign capital may involve inefficient allocation of resources and may create distortions in
production structure.
Therefore, it may not help to increase productivity, output and employment.
2. Destabilise the economies:
Since the international capital flows are generally unstable, uncertain, unsustainable and quickly reversible
they have a tendency to destabilise the economies of recipient countries.
The volume, timing and composition of capital flows are uncertain. Changes in internal factors such as loss of
creditworthiness, etc. may tend to stop the inflows or even lead to outflows.
The inflows may tend to increase money supply and lead to domestic inflation when the capital inflows are
reversed there may be rise in interest rates, fall in liquidity, depreciation of currency, etc.
All of these may lead serious balance of payments crisis.
3. Highly volatile in nature:
International capital flows are inherently unsustainable, volatile and unstable in nature. They are subject
external shocks and the internal policies. The increases instability in the recipient countries.

4. Reduces the effectiveness of monetary policy:

International capital flows reduce the effectiveness of monetary policy. The pressures against the exchange
rate can quickly become very large and the central banks may be faced with the possibility of a run on their
currencies.
The central banks may no. be effect to prevent it.
5. High cost of foreign capital:
Foreign currency borrowings may imply alot of uncertainties due to floating interest rates.
There are many non-economic costs associated with foreign capital such as problems related to foreign
ownership and control, dumping of outdated technology, loss of autonomy of domestic policies, dependence,
and so on.
Foreign equity capital also gives rise to drain of resources in the form of dividends and so on.
Foreign borrowings give rise to the problem of debt trap.
6. Inappropriate technology:
The technologies brought in by the foreign capital may not be adaptable to the consumption needs, size of
domestic market, and availability of resources and stage of economic development in the country.
.

Policy Framework of Investment Inflows in India

Realizing the important contribution of foreign investment to economic development, India has introduced
many policy reforms to attract them.
Restrictive investment regimes have been liberalized.
In addition, various types of incentives are being offered to attract foreign direct investment.

Greater attention is also being paid to create macroeconomic environment for foreign conducive investors.
Changes in foreign investment policy framework of India are being studied in being four Phases viz.
(a) Cautious welcome policy from independence to the emergence of crisis in the late sixties (1948-66).
(b) Selective and Restrictive policy from 1967 till the second oil crisis in 1979.
(c) Partial liberalization policy from 1980-1990 with progressive attention of regulation.
(d) Liberalization and open door policy since 1991 onwards signifying liberal investment environment.

Reasons for High FDI Inflows into China than India

There has been late initiation of economic reforms in India in the year 1991, however market based reforms
in China were started in 1978.
China has concentrated heavily on different issues such as banking sector, state-owned enterprises, tax
reforms, insurance and sound financial system.
In India, continued reform actions are lacking in the areas of fiscal consolidation, openness of the economy,
tax reforms, foreign investment policy, and the financial sector.
Chinas entry into the world trade organization (WTO) has made it very attractive to foreign investors.
China has committed to relax the restrictions on foreign participation in terms of equity share in a number of
industries by entering the WTO.
This has enabled foreign joint ventures to increase its equity in shares in existing affiliates.
China has enjoyed the fastest sustained economic development by registering high real per capita growth
over the past decade in comparison to India.

Its rapid economic growth has made China more attractive to market oriented FDI.
Chinese government formulated laws and regulations specially to attract foreign investment.
China offered many incentives like an exemption of income tax for the foreign firms over the last two
decades.
Such benefits were not available to domestic Chinese firms. The government initiatives in this concern are
lacking in India.
China has better infrastructure like highly developed banking network, power sector, transport and
communication, improved commercial and financial services, excellent legal framework and democratic
values ingrained in society.
But India failed to provide such kind of infrastructure to the potential foreign investors.
There have been influential business pressure groups against foreign investment in India, which are
powerful political backers as well.
Many domestic Firms are in favour of checking the entry of foreign firms in India due to their inability of
facing the competition likely to prevail in the free market mechanism.
However Chinese government devised policy framework regarding foreign investment without any external
pressure of large business entities.
One of the important factors to attract FDI in China is the comparative advantage in availability of
competitive production factors like developed human resources, land, natural resources, unutilized production
potential, marketing facilities, sources of raw material, financial resources, cheap and skilled labour force etc.
In China, there is a continuous, logical, and chronological flow of policies and events, whereas in the
Indian case, there is a series of spurts followed by contractions.

The Chinese five year plans were well framed and aimed at designing effectives policies with rational
strategic choices, whereas in India the decisions to accept new foreign investor were taken on a case by case
basis, a practice that leads to unnecessary procedural complexities which discouraged foreign investments.
Technology imports and Technology Transfer (TT) has been strongly encouraged in China in order to foster
industrial upgrading and restructuring.
China has been spending heavily on imports of Technology, advanced machinery, and equipment but serious
efforts toward this factor on part of India seem to be lacking.
The Chinese polity is a monolithic dictatorship of one party with a single individual wielding vast power.
The Indian political system is a complex federal democracy with power so widely diffused among different
political parties at centre and state level.
That is why, it is comparatively easier in China to formulate and implement policies and practices regarding
FDI while in India it is very difficult in lieu of coalition govt often at centre level to bring general consensus
among all the political parties with varied ideologies to except and implement the idea of liberalised policy
framework in order to attract foreign investors (Keshava, 2007).
The failure of India to adopt international guidelines on measuring FDI statistics implies that aggregate
FDI data for India are not directly comparable to the other countries, especially with China. Chinas reinvested
earnings and intra-company loans together accounted for about 30% of total FDI inflows during 1997.
Accounting for these components in FDI statistics would bring Indias FDI figure much closer to those in
China (Srivastava, 2003).

Hindrances to FDI Inflows in India and China

Progressively liberal foreign investment policies in India and China have emphasised a greater encouragement
and mobilisation of foreign investment inflows.

However both the economies still suffer from some weaknesses and constraints either in terms of policy and
regulatory framework or in terms of accelerating the reform process which restrict the flow of FDI in these
economies.
The factors which limit the growth of FDI in India are outdated laws and their inefficient implementation,
reservation of items for small scale industries, outmoded and inflexible labour regulations, weak credibility of
regulatory system and conflicting role of various agencies and government, corruption and red tapeism,
Inadequate, inefficient and poor quality infrastructural facilities, political instability and defective marketing
structure.
However, in case of China these factors are business regulations, anti competitive practices, Corruption,
inefficiencies in tax administration and procedural complexities due to government monopolies and
unnecessary control.

India and China

From the stand point view of inter-sectoral economic growth, China is a fast industrializing country whereas
India seems to be entering the post-industrial phase without having industrialized.
We need to reverse the trend by stimulating industrialization, especially since it create more jobs and has
greater multiplier effects on the economy.
This calls for far greater investments in infrastructure especially since civil projects such as dams, canals and
building construction require not only large amounts of material such as steel and cement, but they will also
employ large number of least skilled workers.
The controlled growth of this segment of our population poses our greatest economic challenge and gainful
employment is its only solution.

Quite clearly government must spend less on itself and more for the people Chinese GDP was lower than that
of India in absolute terms in 1978 but caught up with India in the very next year. The size of Chinese economy
(in 1991) now was 1.47 times that of India. In 2008, the size of Chinese economy now is 3.58 times that of
India.
Growth rate,%
Pre-reform period(10years)
Post-reform period(10years)

China
5.5
10.1

India
5.7
5.9

it is clear indicates from the table given above that China has almost doubled the growth rate within the ten
years period ever since it put itself on the economic reformation.
Reformation measures that are initiated by China on Macro Economic level (globalization and liberalization)
and desired volume of inward FDI flows have brought a great change on the economic growth unlike India
which accounts for negligible marginal growth rate.
A study in contrasts: its true both countries have transformed themselves after they embarked on the path of
economical reform. But the transformations were entirely different.
In 1980, the sect oral break up of Chinas economy was as follows; Agriculture 30%, Industry 49% and
Services sector 21% as table given shows, over the next 20 years until 2003, the share of Agriculture fell while
Industry and Service sector grew. Especially remarkable was the growth of Industry from 1990 to 2003, it
grew from 42% to 53%.
The Indian sectoral picture makes for a study in contrast, while the share of Agriculture fell from over 40% to
23% from 1980 to 2003 it was not the Industry that took this share ; instead the Service sector become
dominant sector contributing over half of Indias income. This is a sharp contrast with China where over half
the present income accrues from Industry.
China and India are the most important countries in the world in sense of population and economy.
Both countries have an ancient cultural heritage. Both countries did much more practical for bringing
economic reform and liberalization China in the late 1970s and India in the early 1990s. Both countries are
now trying to more liberalizing their economies as they open up to foreign direct investment (FDI).

FDI has increasingly been considered as a catalyst to market growth for the developing countries, particularly
in countries such as China and India.
More importantly, besides supplementing capital, FDI, as a principal conduit of technology upgrade, knowhow transfer and managing skills exchange, heralds the globalization of host economies (United Nations
Conference on Trade and Development. 2005; UNCTAD 2006).
From last two decades foreign direct investment well knows by business world, it receives more attention
from all over the world. It is accepted all over the world that foreign direct investment (FDI) plays a positive
role in the process of economic growth.
According to Thomas et al. (2008) foreign affiliates of transnational corporation (TNCs) succeed in
developing new products and technologies faster than local firms, thereby exerting competitive
Factors affecting FDI: (Conditions of those factors in China and India)
a) Economic Activity
Economic activity of a country effect on the flow of FDI, better conditions definitely have positive effect on
Foreign Direct Investment.
Different researcher proved in their researches that favorable and growing economic activities convince the
foreign investors to make investment in host country.
According to Shatz and Venables (2000) market size determines the foreign markets in which firms invest.
Fung et al. (2002) examine the determinants of FDI from the United States and Japan in China using a
regional data set.
They find that the GDP level has a significant positive impact on inflows of FDI. Zhang and Daly (2011)
proof the same result in the opposite flow direction. Billington (1999) stresses that in addition to a high GDP,
economic growth positively effects FDI inflow.
Chinese gross domestic product (GDP), adjusted for purchasing power parity, ranked number 2 after USA,
whereas Indian adjusted GDP ranked number 4 after Japan. Over the past two decades, Chinas average annual
growth rate was above 9 percent, and the average annual inflation rate was kept below 3 percent.

The Chinese economy continues its robust development, total growth in 2005 exceeded expectations at nearly
10 percent.
In contrast, the Indian rate also jumped from about 3 percent a year during 1950-79 to between 5-6 percent a
year during 1980-2004 (Chai and Roy 2006) the contribution of GDP growth to FDI by Hsiao and Shen, the
elasticity of a 1 percent increase in GDP raises FDI by 2.117 percent (Hsiao and Shen 2003).
Hryckiewicz and Kowalewski (2010) note that size and growth is not only important for FDI of industrial
firms. Besides that size or growth factors there are also many other which influence the pattern of FDI.
According to Addison and Heshmati (2003) openness to trade is a significant FDI parameter, especially for
Latin America. In (2002) Asiedu reveals that in developing countries, openness to FDI depends on the type of
investment. She also finds that openness to trade has a positive impact on FDI flows.
Pantulu and Poon (2003), Janicki and Wunnava (2004) argue that openness to trade is an important
determinant and explain that trade and investments complement each other.
Nonnenberg and Cardoso de Mendona (2004) stress that the openness of an economy is a proxy for the
willingness of a country to accept FDI and that it is an important factor in attracting capital.
Al Nasser (2007) and Torrisi et al. (2008) find similar results and conclude that the openness of an economy
enhances FDI. Zhang and Daly (2011) reveal that Chinas FDI are flowing to open economic regimes and to
countries with high volumes of export from China.
Baniak et al. (2005) explore important factors that determine the flow of FDI into transition countries and
show that macroeconomic instability reduces inward FDI.
In conclusion we can say china has big and structured market and well established and more liberalization
oriented polices and have large numbers of customers for attracting foreign direct investment.
However India has also a big market with huge customers but not like China a well established foreign
connections and economic stability for attracting FDI.
b) Infrastructure
Infrastructure of a host country also plays an important role for attracting of foreign Direct Investment. Al
Nasser (2007) supports these findings for FDI decisions in Latin America.

Addison and Heshmati (2003) stress that level of information and communication technology strongly impacts
inward FDI. According to Borenzstein, De Gregoria and Lee adequate levels of education and infrastructure
are required to fully benefit from FDI (Borenzstein, De Gregoria and Lee, 1998).
By the following table we can see different provinces of china that receive FDI and their % of Total FDI in
India.
Table-1: Province-wise FDI Inflows in China 1979-2005. JBSQ 2013 56

Using Chinas provincial and municipal data, Hsiao and Shen found out that the development of cities and
infrastructure and easy access to markets are two of the primary factors often determining MNCs choice of
where to invest (Hsiao and Shen 2003).
Region-wise FDI Equity inflows in India, 2000-2006

Tamuli asserted that FDI inflows to these states seemed to respond to infrastructure availability, business
managers perception of investment climate, educational qualification of manufacturing workers and
productivity level of manufacturing industries (Tamuli 2006).
India needs to build and improve their infrastructure like china for attracting more FDI.
c) Legal and Political System
Legal and political system plays a vital role for attracting FDI. According to Ramcharran (1999), political
instability in terms of civil wars, illegal capital flight, financial-market instability and political corruption have
significant effects on FDI.
Ramcharran (2000) shows that regulatory and risk reduction factors contributed positively to FDI and that an
unaccommodating legal environment and country risks are the main deterrents of FDI.
Baniak et al. (2005) find that legal stability is crucial for stimulating FDI inflows, and increasing transparency
regarding the legal framework of a country affects FDI decisions.
Naud and Krugell (2007) confirm this and emphasize that the regulatory burden and the rule of law are
robust determinants of FDI. In addition, UNCTAD (2008b) finds that participatory, transparent, and
accountable governance systems that promote and enforce the rule of law are critical.
Naud and Krugell (2007) argue that, in addition to the quality of the legal system, political stability plays a
significant role in attracting FDI.

The lack of a well-structured and transparent legal system in China poses serious problems for foreign
investors. A clear and strict hierarchical system of norms does not really exist yet.
Moreover, different ministries and departments of the central and local governments have issued many diverse
regulations, which result in the failure of the foreign companies to find out which regulations exactly apply to
them.
In contrast, India enjoys a strong British-based legal and accounting system, which helps it to attract more
capital from Western countries.
Therefore, the absence of reliable legal and secure property rights and vast differences in culture help to
explain Chinas below par performance in attracting FDI from Western countries, compared with the
performance of India.
Meanwhile, Indias long history of private property, democracy and similar law system
Western countries should prove attractive for potential foreign investors. In other words, even if economic
policy is great and politics stable, if there are no property rights and contract enforcement in a country, there's
no way anyone can do business.
Here the china needs to improve their legal and political system for attracting more inflows of FDI.
d) Business Environment of the Host Country
Good Business environment of the host country prove a positive sign for attracting of Foreign Direct
Investment, and that is proved by many researcher in their articles.
Rodriguez and Pallas (2008) show that foreign investors are motivated by labor costs, but human capital, a
fundamental element of increased per-worker labor productivity, is likewise a significant determinant of FDI
inflows.
According to Janicki and Wunnava (2004) labor costs are a key determinant for FDI inflows in developing
countries.
According to Wei (2000) a rise in the tax rate on multinational firms reduces inward FDI. According to Wei
(2000) corruption affects both the volume and the composition of inward FDI flows.

Baniak et al. (2005) find that the time requirements and the complexity of bureaucratic procedures influence
the expected utility from profit, thereby affecting the results of FDI decisions.
Bnassy-Qur et al. (2007) confirm that bureaucracy is an important determinant for FDI inflow.
A survey of global executives was conducted by the Global Business Policy Council (GBPC) in 2005 and
published as FDI Confidence Index.
Both China (2.19) and India (1.95) are at the center of the FDI radar screen for they are considered as the 1st
and 2nd most attractive FDI locations globally.
This is the fourth year in a row that China held the top spot and India rose from 3rd to 2nd place, surpassing
the United States (GBPC 2005).
The results of survey of Global Business Policy Council (GBPC) revealed that those who were surveyed
regarded China as the most attractive location with 55% of the CEO surveyed were willing to invest the most
in China, followed by India (36%).
Again, both countries are considered as the most favored investment destination (United Nations Conference
on Trade and Development. 2005).
FDI and Economic Growth in China and India: Comparative Analyses
Following table consists of data world investment report 2006.
Table-2: Comparison of FDI inflows to China and India

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).
As table-2 shows flow of FDI of china and India we see all over china is receiving more FDI as compare to
India, it is due to better climate and better business climate to the investors as compare to India. It is the result
of better policies for foreign direct investment by Chinese Government.
6. Economic growth
Figure-1 refers to the Gross Domestic Product per capita since 1980.
It is apparent that until the beginning of the 90s GDP per capita was similar in the two developing
countries. Since the mid 90s, Chinas growth has been much faster, so in the final year (2009) per capita GDP
in China was more than three times that of India.
Figure 1 - GDP per capita

By observing that above given figure we can say as FDI flows increased time to time then GDP of both
countries raised, so we see China received more FDI as compare to India so, GDP per capita of China is also
greater the India.

However we see in above figure that GDP per capita of India also increased with the passage of time as FDI
inflows in Table-2 increased.

An Overview of FDI in India and China

As a part of liberalization of economy in 1990s, fresh foreign investment was invited in a range of industries.
FDI inflows in India remained marginal in 1980s but rose steadily during 1990,s. India followed a fairly
restrictive foreign investment policy as compared to most industrializing economies.
Inward foreign direct investment was perceived essentially as a means of acquiring industrial technology that
was unavailable through licensing agreements and capital goods import (Ghoshal, 1990).
Chinas policy towards FDI has also been selective. It has included preferential treatment in areas in which
FDI has been encouraged, i.e. the export oriented sectors and the sectors targeted for import substitution
policies. Chinas policy towards FDI has met with remarkable success (Zhang, 2001).
Presently China is the largest recipient of FDI among developing countries with annual investment rising from
almost zero in 1978 to about 108 $ billion in 2008. Table 5.1 exhibits the trajectory of the realized flow of FDI
going into China and India every year from 1980 to 2008.
As compared to China, India is far behind on economic horizon as indicated in the Table 5.1.
Aggregate capital inflows into China grew steadily during the 1980s, but these have increased very rapidly
since the early 1990s.
FDI in India and China has grown exponentially and became 526 times and 722 times respectively in 2008 as
compared to the year 1980. The FDI flows in China were a mere 150 million $ in 1980. It grew to 3194
million $ in 1988, to 33767 million $ in 1994 and then peaked at 108312 million $ in 2008. FDI inflows in
China have shown a continuous tendency to increase over the period of time at a Compound growth rate of
39.4%.

However, FDI inflows into China were significantly below its potential both in economic and statistical
sense. It was because of the reasons that Chinas opening up to foreign investment started relatively late and
the Tiananmen Square incident temporarily diminished the FDI over 1989-90 (Wei, 1999).
Foreign direct investment in India is also increasing but this is too less as compared to China. It was less than
$ 0.2 billion per year from 1980 to 1990 except in the year 1989. It was merely 79 million $ in 1980 and grew
to become 121 million $ in 1987. It was recorded to be only $ 74 million $ in the year 1991 but after this year
it showed substantial increase in 1992 to reach at the level of 277 million $.
FDI dropped in India and China by 12% and 11% respectively during the year 1999 particularly due to Asian
crisis and the slow adjustment of domestic economies.
Tremendous rise in FDI inflows can be easily visualised from the Table in the year 2006 where it increased
nearly three times i.e 20336 million $ from 6598 million $ in the year 2005. There was shown a general
increasing trend in FDI inflows in India

After this
period to
become
41554
million $ in
2008. FDI
inflows have
shown
increase at
compound
growth rate
of 27.7% in
India and 39.4 % in China from the year 1980 to 2008.
As a part of liberalization of economy in 1991, fresh foreign investment was invited in a wide range of
industries.
FDI inflows in India remained marginal in 1980s but rose steadily after 1991 due to opening up of economy
by adopting liberal policy framework regarding inflows of foreign investment by the government of India.
A comparison of FDI inflows into India in relation to that of China has also been shown both in Table 5.1 and
fig 5.1 which clearly indicates the positions of China and India regarding FDI inflows in the year 1980 where
Indias FDI inflows as a percentage of Chinas FDI inflows were 52.6%.
China had just started the reforms in 1978; its FDI was significantly less during the period from 1980-82,
which represents the highest ratio of India and Chinas FDI.
As it is apparent in the Table and figure that. Chinas FDI grew at a much faster rate than India with the due
course of time.

FDI inflows in India were merely 0.93% of that of China in the year 1984.
There relative position remained almost at consistent level after this period as level of FDI inflows into India
was noticed to be low as a percentage of China i.e it ranged from 1.51% in the year 1984 to 17.27% till the
year 2005.

India marked 38.36% FDI inflows as a percentage of Chinas FDI in the year 2008.
Overall trends show that both India and China has shown improvement in their positions regarding FDI
inflows but the relative performance of China is quite better than that of India. China still holds a very sound
position as compared to India as far as inflows of FDI are concerned.

In an increasingly competitive market, getting a fair share of FDI flows and benefits will be tough work.
Attracting FDI will require a shift in mind-set for Indian government.
Having achieved a fair degree of political consensus on the need for economic reforms, India is now
vigorously pursuing its vision to become a developed nation by the year 2020 (Herrero and Simon, 2003).

While both China and India opted for a gradual approach to reforms, India had to begin with stabilization
measures due to the fiscal and balance of payments crisis of 1991.
Since Chinese reforms were initiated long before Indias, the latter country could benefit by drawing relevant
lessons from the former.
It is evident that FDI flows into India have increased steadily, but it is still less than China. China was a
decade ahead of India in terms of foreign investment.
This is due to several reasons as suggested by so many previous studies available on this issue.

CHAPTER NO: 3
CONCLUSION

Conclusion
FDI flows in China and India, as the China receiving more FDI flows as compare to India due to many
reasons like China opened its doors to FDI in 1979 and has been progressively liberalizing its investment
regime. India allowed FDI long before that but did not take comprehensive steps towards liberalization until
1991.

China adopting proactive approach for attracting more FDI, China providing low labor costs, potential foreign
market, favorable investment incentives that factors playing important role for attraction of FDI.
Chinese gross domestic product (GDP), adjusted for purchasing power parity, ranked number 2 after USA,
whereas Indian adjusted GDP ranked number 4 after Japan.
Over the past two decades, Chinas average annual growth rate was above 9 percent, and the average annual
inflation rate was kept below 3 percent. The Chinese economy continues its robust development, total growth
in 2005 exceeded expectations at nearly 10 percent.
In contrast, the Indian rate also jumped from about 3 percent a year during 1950-79 to between 5-6 percent a
year during 1980-2004, and also China has better infrastructure for attracting of FDI. But India is far better in
political and legal system as compare to China.
China has 5 to 6 time greater FDI inflows and economy then India and China is playing well in business
market so because of that Economic growth of India is also below from China as we see in figures and tables
in above our discussion; however India is also trying to improve their policies regarding FDI attraction and
brought many reforms like tax incentives to investors for doing more investment in their country. Pressure and
forcing local firms to imitate and innovate.

 This is the main reason because of why; the developing countries are trying to attract more foreign direct
investment.
It is accepted all over the world among policymakers that foreign direct investment (FDI) produce positive
productivity results for host countries.
In many developing countries which properly utilized FDI as a results more jobs created and peoples lives
definitely improved, their per capita income, country GDP has raised, which ultimately improve standard of
living.
These benefits, together with the direct capital financing it provides, suggest that FDI can play an important
role in modernizing a national economy and promoting economic development.
The main purpose of conducting that research is to find out the patterns and flow of Foreign Direct Investment
and economic growth in Chinese and Indian economies.
We conducted an exploratory qualitative research to find out flow, patterns and directions of FDI and
Economic Growth in these economies. We examined which country is in better position for attracting more
FDI and enhancing their economic growth.
We examined which country economy performing well as compare to other in term of FDI and Economic
Growth.
We examined Indian and Chinese economies to see patterns and flow of foreign direct investments in these
countries. We took two big economies because now day by day they are beating other economies, as we see
last few years china beat Japanese economy and Indian economy also trying to beat Chinese economy.

From last decade these two economies performed well. They expanded their business worldwide and able to
attract satisfactory foreign direct investments.

CHAPTER NO: 4
APPENDIX
BIBLIOGRAPHY
Economics Of Global Trade And Finance By Manan Prakashan

WEBLIOGRAPHY
www.jsbq.org