International

Trade and Policy

Framework
Assignment

Pratishtha Kumar
ROLL NO. 46
SUBMITTED TO- ASST. PROF MEGHA RAWAT
MBA (IB), Batch of 2019
INTERNATIONAL TRADE POLICY AND FRAMEWORK ASSIGNMENT

Compare the trends in FDI in India, China and Japan. Find out the differences in the
investment patterns.

Trends in FDI
India
Foreign Direct Investment in India increased by 1921 USD Million in January of 2018. Foreign Direct
Investment in India averaged 1284.13 USD Million from 1995 until 2018, reaching an all-time high of
8579 USD Million in August of 2017 and a record low of -1336 USD Million in November of 2017.
Recent Major Investments
India has become the fastest growing investment region for foreign investors in 2016, led by an increase
in investments in real estate and infrastructure sectors from Canada, according to a report by KPMG.
Some of the recent significant FDI announcements are as follows:
•In February 2018, Ikea announced its plans to invest up to Rs 4,000 crore (US$ 612 million) in the state
of Maharashtra to set up multi-format stores and experience centres.
•In November 2017, 39 MoUs were signed for investment of Rs 4,000-5,000 crore (US$ 612-765 million)
in the state of North-East region of India.
•In December 2017, the Department of Industrial Policy and Promotion (DIPP) approved FDI proposals
of Damro Furniture and Super Infotech Solutions in retail sector, while Department of Economic Affairs,
Ministry of Finance approved two FDI proposals worth Rs 532 crore (US$ 81.4 million).
•The Department of Economic Affairs, Government of India, closed three foreign direct investment (FDI)
proposals leading to a total foreign investment worth Rs 24.56 crore (US$ 3.80 million) in October 2017.
•Singapore's Temasek will acquire a 16 per cent stake worth Rs 1,000 crore (US$ 156.16 million) in
Bengaluru based private healthcare network Manipal Hospitals which runs a hospital chain of around
5,000 beds.
•France-based energy firm, Engie SA and Dubai-based private equity (PE) firm Abraaj Group have
entered into a partnership for setting up a wind power platform in India.
•US-based footwear company, Skechers, is planning to add 400-500 more exclusive outlets in India over
the next five years and also to launch its apparel and accessories collection in India.
•The government has approved five Foreign Direct Investment (FDI) proposals from Oppo Mobiles India,
Louis Vuitton Malletier, Chumbak Design, Daniel Wellington AB and Actoserba Active Wholesale Pvt Ltd,
according to Department of Industrial Policy and Promotion (DIPP).

India Foreign Direct Investment - Forecast

Foreign Direct Investment in India is expected to be 1762.66 USD Million by the end of this quarter,
according to Trading Economics global macro models and analysts’ expectations. Looking forward, we
estimate Foreign Direct Investment in India to stand at 2918.74 in 12 months’ time. In the long-term, the
India Foreign Direct Investment is projected to trend around 2785.99 USD Million in 2020, according to
our econometric models

Distribution of foreign direct investment

Distribution of foreign direct investment (FDI) equity inflows in India for FY 2017, by sector (in billion
U.S. dollars)

Types of Investors
Individual:
1. FVCI (Foreign Venture Capital Investors)
2. Pension/Provident Fund
3. Financial Institutions
Company:
1. Foreign Trust
2. Sovereign Wealth Funds
3. NRIs (Non-Resident Indians)/ PIOs (Persons of Indian Origin)
Foreign Institutional Investors:
1. Private Equity Funds
2. Partnership / Proprietorship Firm
3. Others

Entry Structures
1. Incorporating a company in India:
It can be a private or public limited company. Both wholly owned & joint ventures are allowed.
Private limited company requires minimum of 2 shareholders.
2. Limited liability partnerships:
Allowed under the Government route in sectors which has 100% FDI allowed under the
automatic route and without any conditions.
3. Sole proprietorship/partnership firm:
Under RBI approval. RBI decides the application in consultation with Government of India.
4. Extension of foreign entity:
Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the
activities specified by the RBI. Approvals are granted under the Government and RBI route.
Automatic route is available to BO/PO meeting certain conditions.
Other structures:
Foreign investment or contributions in other structures like not for profit companies etc. are also subject
to provisions of Foreign Contribution Regulation Act (FCRA).
 China
Foreign direct investment in China edged up 0.3 percent year-on-year to CNY 80.36 billion in January
2018. That compares with December's figure of CNY 73.94 billion, which was down 9.2 percent from a
year earlier. In 2017, China FDI rose 7.9 percent. Foreign Direct Investment in China averaged 432.16
USD HML from 1997 until 2018, reaching an all-time high of 1343.03 USD HML in December of 2017 and
a record low of 18.32 USD HML in January of 2000

China Foreign Direct Investment - ForecastForeign Direct Investment in China is expected to be 517.33
USD HML by the end of this quarter, according to Trading Economics global macro models and analysts’
expectations. Looking forward, we estimate Foreign Direct Investment in China to stand at 1300.00 in 12
months’ time. In the long-term, the China Foreign Direct Investment is projected to trend around
1290.00 USD HML in 2020, according to our econometric models.
Factors that lead to the increase in FDI in China
1. Capital Availability
In the early 2000s, China overtook the United States as the world's largest recipient of foreign
capital. FDI is comprised of capital that an outside investor is willing to place (and risk) within a
local region. Conditions in the global capital markets and general economic environment play a
role in determining the flow of FDI into China. A thriving global economy, capital markets and
business environment create large swaths of investable capital, a portion of which is converted
to FDI. Large amounts of investable capital that proportionately overwhelm the number of
sound local investment ideas can cause institutional, company and individual investors to invest
their wealth in emerging and developing markets.
2. Competitiveness
China's attractiveness as a destination for investment capital rests on its development of
infrastructure, resource availability (physical and labor), productivity and workforce skills, and
the development of the business value chain. The level of maturation of these elements can
make China more attractive for FDI relative to other nations, such as India, that compete and vie
for the same investment capital. A growing and developing economy requires infrastructure and
resources in order to facilitate the sale of goods and services. Lower transaction costs, due to
the maturation of these elements, enables investors to earn returns on their investments as
their enterprises are able to generate profits. Roads, highways, bridges and other forms of
physical infrastructure should be present, maintained and provide sufficient safety for the
transportation of goods as well as for the commute of employees.
Another component for attracting FDI involves the availability of low-cost, skilled employees
who possess the necessary aptitudes, experience and proficiencies to create, manufacture, and
provide goods and services that can compete in global markets.
3. Regulatory Environment
When a national government enacts and enforces rules and policies aimed at favoring state
entities at the expense of privately held firms, such an environment can be detrimental to
initiatives that aim to attract FDI. As such, the regulatory environment can either encourage or
impede foreign direct investment in China. Excessive regulations tend to hinder entrepreneurial
and commercial activities, as managers and employees must spend more time and money to
comply with rules and regulations. If an investor wants to set up a manufacturing facility in
China, high start-up costs, legal exposure and other cumbersome compliance items may
encourage that investor to set up the facility elsewhere, where the business climate is more
conducive to industry.
Other types of regulations include mandatory joint venture partnerships in which, together with
the foreign investor, the business is required to have a Chinese government agency or local
company as a partner. A judicial system that is biased toward protecting Chinese locals - who
conduct what are sometimes perceived as unfair, illegal, or unethical business practices - can
also contribute to making China a less favorable investment destination. Another regulatory
determinant involves the government's promotion of investment activities by providing
attractive financial incentives in the form of tax breaks, grants, low-cost government loans and
 subsidies. Government-sponsored financial inducements provide the possibility of making a
business more profitable and in a shorter amount of time.
4. Stability
Political and economic stability can facilitate an influx of FDI. Stability represents predictability
and the opportunity for enterprises to gain better foresight into the future. Alternatively,
constant social unrest, rioting, rebellions and social turmoil are settings not conducive to
business. Economic instability can also contribute to hyperinflation, which can render the
currency virtually obsolete. To encourage FDI, citizens/workers as well as businesses should
have a reasonable basis for respecting Chinese law and order. Violence, criminal activity,
blackmail, kidnappings, and counterfeit currency and products have all been problems in China
that serve to undermine the efficacy of conducting trade activities. The justice system should
also have effective mechanisms for reducing, or altogether eliminating, rogue and corrupt
elements of law enforcement agencies.
5. Local Chinese Market and Business Climate
The most glaring aspect of China is the sheer size of its population and market, and the
prospects for growth that result from this size. The ability of enterprises - backed by foreign
capital - to sell to a sizeable local market makes China an attractive destination for FDI. As the
Chinese economy continues to prosper, evolve and mature, higher-end industries such as
healthcare, information technology, engineering, robotics and luxury goods, among others, can
gain a bigger footprint in China as its local conditions, resources and other FDI determinants are
enhanced. Additionally, economic growth and FDI can start a "success domino effect." The more
the region attracts FDI, the more it grows. The more it grows and matures, the more investors
are willing to provide FDI. This point underscores the advantage of China's sizeable market,
which presents growth opportunities in current and prospective commercial activity. The more
FDI flows into the country, the greater the economic chain reaction, providing a positive effect
to sustain such growth.
6. Openness to Regional and International Trade
Market openness serves several important roles in attracting FDI. Of critical importance is a
business' ability to sell its products and services to both local and foreign markets. If Chinese-
based enterprises have limited or no access to foreign customers - particularly the United
States, Western Europe, Japan and others - then the local market may not be enough to warrant
a significant investment in money and energy. Trade barriers such as tariffs are typically viewed
as disincentives by other nations. An American product that is subject to high tariffs in China will
be less in demand in the Chinese market due to the artificially inflated price. Such actions
typically prompt retaliatory tariffs from the U.S. on Chinese products, or in certain extreme
cases, an outright ban on certain goods and services.
Export-friendly policies, then, can play a major role in deciding whether to invest in China,
especially for enterprises that have a large portion of their anticipated market shares located
outside of the local market. In efforts to create a more business-friendly environment, regional
and international free trade agreements are typically initiated by market-progressive
governments as reasonable mechanisms for inducing economic activity and growth.
Measures on Further Opening up and Actively Utilizing Foreign Investment
On January 17, 2017, the State Council of China issued a “Circular Concerning Measures on Further
Opening up and Actively Utilizing Foreign Investment,” which lays out new measures to further open up
its economy, improve the business environment, and boost foreign investment in the country. The new
policy listed 20 specific measures in three areas.
First, China will revise the Catalogue for the Guidance of Industries for Foreign Investment, and further
open the service, manufacturing, and mining sectors to foreign investment. China encourages foreign
investment to take part in the implementation of its innovation-driven development strategy. Under the
“Made in China 2025” initiative, foreign invested enterprises are encouraged to invest in high-end,
intelligent, and green manufacturing. At the same time, foreign investors are encouraged to take part in
infrastructure construction in energy, transportation, water conservancy, and environmental protection
through franchising.
Second, China has indicated that it will enhance the openness and transparency of its investment
environment. It has indicated that intellectual property of foreign invested enterprises should be
protected. The circular requires equal treatment for foreign and domestic enterprises on business
licence and qualification applications.
Third, the circular allows local governments to form favourable policies to support foreign invested
projects that can facilitate employment, economic development, and technology innovation. It
continues tax or land-use preferential policies to support foreign investment in China’s central, western,
and north eastern regions.
Revision of the Catalogue for the Guidance of Foreign Investment Industries
China’s Ministry of Commerce and the National Development and Reform Commission revised the 2015
Catalogue for the Guidance of Foreign Investment Industries and began soliciting public comments on
December 7, 2016. The soliciting was closed on January 6, 2017, and the revised catalogue is expected
to go public soon.
The catalogue provides guidance on sectors open to foreign investment and originally divided industries
into three types – namely, “encouraging,” “restrictive,” and “forbidden” for foreign investment. In the
revised edition, the industries are divided into two types – “encouraging” industries and industries
“subject to special administration,” often referred to as the positive list and the negative list.
The revised catalogue reduces the number of restrictive measures from 93 to 62 and relaxes restrictions
on market access of foreign capital in services, manufacturing, and mining sectors.
For the services sector, categories entitled to foreign direct investment (FDI) restriction relaxation
include bank-type financial institutions, securities companies, stock and investment fund management
companies, futures companies, insurers, and insurance intermediate agencies. Categories entitled to FDI
restriction elimination include accounting and auditing as well as architectural design and rating
services. Categories entitled to orderly and progressive liberalization include telecom services, Internet,
culture, education, and transport.
For the manufacturing sector, restrictions will be eliminated on FDI in the production of rail transit
equipment and motorcycle and fuel ethanol, as well as on grease processing.
For the mining sector, restrictions will be relaxed on FDI in the development of non-conventional oil and
gas resources such as oil shale, oil sand, and shale gas, as well as in minerals and resource industries.
Revision of Laws on Foreign Invested Enterprises
In addition, China revised its laws on foreign invested enterprises (FIEs), effective October 1, 2016. The
revisions replaced the previous Ministry of Commerce approval requirements with filing requirements
for all FIEs, provided they are not subject to national market access restrictions on the negative list. The
revisions build on the practice of national treatment plus the negative list system for FIEs, piloted in four
free trade zones in China.
The revisions will shorten the processing time and enhance the certainty of transactions, providing much
more convenience to FIEs in China. The revisions also state that China will enforce stricter supervision
and inspection on FIE operation after FIEs’ investment in China.

Japan
Foreign Direct Investment in Japan increased by 18142 JPY Hundreds Million in January of 2018. Foreign
Direct Investment in Japan averaged 5884.50 JPY Hundreds Million from 1996 until 2018, reaching an
all-time high of 45202 JPY Hundreds Million in September of 2016 and a record low of -3825 JPY
Hundreds Million in January of 2010.

Japan's main strengths are its position as a leader in advanced technology and R&D. The potential
barriers to investment are linguistic and the differences of the country's business culture. The disaster
that hit Japan in 2011 (the devastating earthquake and tsunami), as well as the environmental and
health concerns related to the situation at the Fukushima Daiichi nuclear power plant, are holding back
future foreign investment. Nevertheless, Japan remains a key market for investors. Moreover, the
Japanese economy has been financing the reconstruction of the country without too much difficulty,
thanks to a surplus of savings accumulated in recent years. Prime Minister Shinzo Abe's growth strategy
aims to double the value of the FDI stock by 2020 compared to the end of 2012.
Japan Foreign Direct Investment – Forecast
Foreign Direct Investment in Japan is expected to be 15386.94 JPY Hundreds Million by the end of this
quarter, according to Trading Economics global macro models and analysts’ expectations. Looking
forward, we estimate Foreign Direct Investment in Japan to stand at 11260.38 in 12 months’ time. In the
long-term, the Japan Foreign Direct Investment is projected to trend around 12849.49 JPY Hundreds
Million in 2020, according to our econometric models.

Policies Towards Foreign Direct Investment

• The Government of Japan explicitly promotes inward FDI and has established formal programs
to attract it. Soon after taking office, the government of Prime Minister Shinzo Abe announced
its intention to double Japan’s inward FDI stock to JPY 35 trillion ($314 billion) by 2020 and
reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. At
the end of 2015, Japan’s inward FDI stock was JPY 24.4 trillion ($202 billion), a small increase
over the previous year. The Abe Administration’s interest in attracting FDI is one component of
the government’s strategy to reform and revitalize the Japanese economy, which continues to
face the long-term challenges of low growth, an aging population, and a shrinking workforce.
• In April 2014, the government established a new “FDI Promotion Council” comprised of
government ministers and private sector advisors. The Council remains active and continues to
release recommendations on improving Japan’s FDI environment. Its most recent report,
released May 2016, recommends a set of reforms to ease the entry of foreign firms into Japan,
including simplification of relevant regulation, expanded translation of Japanese law into
English, and simplification and centralization of business registration procedures.
• The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization
(JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan.
METI and JETRO have together created a “one-stop shop” for foreign investors, providing a
single Tokyo location—with language assistance—where those seeking to establish a company
in Japan can process the necessary paperwork. Prefectural and city governments also have
active programs to attract foreign investors, but they lack many of the financial tools U.S. states
and municipalities use to attract investment.
 • Foreign investors seeking a presence in the Japanese market or to acquire a Japanese firm
through corporate takeover may face additional challenges, many of which relate more to
prevailing business practices rather than to government regulations. These include an insular
and consensual business culture that has traditionally been resistant to unsolicited mergers and
acquisitions (M&A), especially when initiated by non-Japanese entities; a lack of independent
directors on many company boards (even though this is changing); exclusive supplier networks
and alliances between business groups that can restrict competition from foreign firms and
domestic newcomers; cultural and linguistic challenges; and labour practices that tend to inhibit
labour mobility.

• The Japanese Government established an “Investment Advisor Assignment System” in April

2016 in which a State Minister acts as an advisor to select foreign companies with “important”
investments in Japan. The system aims to facilitate consultation between the Japanese
Government and foreign firms. Of the nine companies selected to date, six are from the United
States.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private enterprises have the right to establish and own business enterprises and
engage in all forms of remunerative activity. Japan has gradually eliminated most formal restrictions
governing FDI. One remaining restriction limits foreign ownership in Japan's former land-line monopoly
telephone operator, Nippon Telegraph and Telephone (NTT), to 33 percent. Japan's Radio Law and
separate Broadcasting Law also limit foreign investment in broadcasters to 20 percent, or 33 percent for
broadcasters categorized as “facility-supplying.” Foreign ownership of Japanese companies invested in
terrestrial broadcasters will be counted against these limits. These limits do not apply to communication
satellite facility owners, program suppliers or cable television operators.

The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national
security or economic stability implications. If a foreign investor wants to acquire over 10 percent of the
shares of a listed company in certain designated sectors, it must provide prior notification and obtain
approval from the Ministry of Finance and the ministry that regulates the specific industry. Designated
sectors include agriculture, aerospace, forestry, petroleum, electric/gas/water utilities,
telecommunications, and leather manufacturing.

Business Facilitation
The Japan External Trade Organization (JETRO) is Japan’s investment promotion and facilitation agency.
JETRO operates six Invest Japan Business Support Centres (IBSCs) across Japan that provide consultation
services on Japanese incorporation types, business registration, human resources, office establishment,
and visa/residency issues. Through its website, the organization provides English-language information
on Japanese business registration, visas, taxes, recruiting, labour regulations, and trademark/design
systems and procedures in Japan. While registration of corporate names and addresses can be
completed through the internet, most business registration procedures must be completed in person. In
addition, corporate seals and articles of incorporation of newly established companies must be verified
by a notary.

According to the 2017 World Bank “Doing Business” Report, it takes eleven days to establish a local
limited liability company in Japan. JETRO reports that establishing a branch office of a foreign company
requires one month, while setting up a subsidiary company takes two months. While requirements vary
according to the type of incorporation, a typical business must register with the Legal Affairs Bureau
(Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the
Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. In
April 2015, JETRO opened a one-stop business support centre in Tokyo so that foreign companies can
complete all necessary legal and administrative procedures in one location; however, this arrangement
is not common.

Investment Pattern
India
Sector Wise

FDI in India
Sector-Wise

Services Sector
Others 17%
Telecommunication
36%
s
8%

Computer Software
and Hardware
8%
Construction
Construction Development
Activities 7%
Drugs &
3% Power Chemicals Pharma Trading Automobile Industry
4% 4% 4% 4% 5%
(from April, 2000 to December, 2017)
*Source -www.ibef.org/download/FDI_FactSheet

As the Indian economy opened its door to foreign investments in 1991, in a move to get the domestic
market to stand back on its feet after a prolonged period of distress in the 80's, the foreign investors were
ready to invest in what is referred to as one of the most promising economies in the world. In a space of
less than 3 decades India has become the top FDI recipient in the world alongside the US and China.
India receives foreign investments in various industries, but the most prominent is the services sector.
The services sector is the key driver of India’s economic growth. The sector contributed around 53.8 per
cent of its Gross Value Added in 2016-17 and employed 28.6 per cent of the total population. Services
sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier,
Tech. Testing Analysis.
Other than services sector, Computer software, Telecommunications, and Automobile sectors receive
huge investments from abroad.

Country Wise

FDI in India
Country-Wise

UAE Others
2% 16%
France
2% Mauritius
34%
Germany
3% USA
6%

Netherlands
6%
UK
7% Singapore
Japan
17%
7%

(from April, 2000 to December, 2017)

*Source -www.ibef.org/download/FDI_FactSheet
China
Sector Wise

Source- http://blogs.worldbank.org/prospects/lewis-turning-point-and-chinas-fdi-prospects
On the back of its manufacturing sector, China scripted its rise to become the second largest economy in
the world. The manufacturing hub of the world with big steel, automotive , and chemical industries backed
by the government also received huge chunks of foreign investment. Even in the national FDI total,
manufacturing sector had the largest block of FDI up until China decided to focus on its services sector.
At the same time service sector became favourable with the foreign investors and the manufacturing
sector kept losing its total share in the FDI inflows to the service sector.

This trend is explained by increased production or operation costs in processing sectors due to rising labour costs
and land costs, appreciation of the Renminbi, the phasing out of preferential policies for foreign investment, and
China’s emphasis on environmental protection. As a result, the investment in processing sectors seen during
earlier days is no longer profitable or lucrative, and more investment is going to the advanced manufacturing or
service sectors, which create a higher added value.
Country Wise

FDI in China
Country-Wise

2%
2% Hong Kong
3% 6%
3% Singapore
3% South Korea
USA
3%
Macao
4%
Taiwan
5%
Japan
69% Germany
UK
Others

*Source- en.portal.santandertrade.com/establish-overseas/china/foreign-investment

JAPAN
Sector Wise

FDI in Japan Chemical

Sector-Wise 8%

Electric Machinery
Others 12%
18%
Real Estate
2%
Transport
Machinery
9%

Finance & Wholesale & Retail

Insurance 7%
44%

*Source- http://www2.jiia.or.jp/en/pdf/research
Japan's biggest FDI inflow source is its financial sector. Its Tokyo Stock Exchange is the third largest
stock exchange by market capitalization as well as the 2nd largest stock market in Asia, with 2,292 listed
companies. Japan is home to some of the largest companies in the world.
Other sectors which receives high FDI inflow for Japan are automobile, electric machinery, and
wholesale and retail.

Country Wise

FDI in Japan
Country-Wise

6% Singapore
16%
USA
4% Cayman Islands
5% 34% France
Netherlands

17% Germany
UK
9% 9% Others

Source- http://www2.jiia.or.jp/en/pdf/research