In Recent Time, Outward Fdi Has Been Significantly Increased from China and India. Discuss the Factors Responsible for Such a Growth. Do You Think Ib Theories (Oli and Idp) Adequately Explain the Reasons for Outward Fdi

Topics: Economics, Economic growth, Macroeconomics Pages: 10 (3349 words) Published: August 22, 2012
Assignment 2:
“In recent time, outward FDI has been significantly increased from China and India. Discuss the factors responsible for such a growth. Do you think IB theories (OLI and IDP) adequately explain the reasons for outward FDI.”


In the recent time, significant rise of outward foreign direct investment (FDI) was witnessed from developing countries like China and India. The Organisation for Economic Co-operation and Development (OECD) defines FDI as an investment that reflects the objective of establishing a lasting interest or long-term relationship by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor and a significant degree of influence on the management of the enterprise (OECD, 2011). According to EconomyWatch (2011), FDI can be classified as inward FDI and outward FDI depending on the direction of money flow as inward FDI occurs when foreign capital invest in local resources while outward FDI also known as direct investment abroad is backed by government against all associated risk (EconomyWatch,2011). Alam (2011) stated that FDI theory is firms expand across borders seeking opportunities like resource seeking, marking seeking, knowledge, security and risk minimisation and factor advantages like cheap labour to earn profit.

According to Central Intelligence Agency (CIA), China was leading civilization outpaced the other countries in arts and science but beset by civil unrest, major famines, military defeats and foreign occupation. After World War II, communist under Mao Zedong established an autocratic socialist system ensuring China’s sovereignty but imposed strict control over everyday life then in the 1978, Deng Xiaoping focused on market-oriented economic development increasing standard livings but political control remain rigid. China has now open its door to global outreach and participated in international organizations like WTO since 1990s. Although there is economic downturn in 2009 that reduced foreign demand for China export but China rebounded with 10% GDP growth in 2010. The government has a five-year plan in March 2011 to reform the economy and emphasizes the need to increase domestic consumption to be less dependent on exports for GDP growth (CIA,2011). China has increasing GDP growth from 2008 – 2009 in terms of GDP real growth rate [2008 - 9.6%, 2009 - 9.2% and 2010 - 10.3%] and GDP – per capita (PPP) [2008 - $6400, 2009 - $6900, 2010 - $7600] (CIA, 2011). China began OFDI in 1980s but 1990s started to accelerate growth surpassing net inward FDI (Figure 1) due to market-oriented reforms and opening-up process where firms gained greater operational autonomy and matured during the 2000s making OFDI a strategic need to expand production and market space like China becoming part of WTO in 2001 enabling conducive international environment for China’s firms to go abroad (Hong, 2010).

Economist Intelligence Unit (2011) showed a background on India after gaining independence in 1947 after two centuries under British colonial rule. India is the second most populous state in the world with almost 1.2 billion people in 2009 and its economic is the 11the largest in the world while its purchasing power is the fourth-largest. Although India is opening their market economy, traces of autarkic policies still remains. Economy liberalization like industrial deregulations, privatization of state-owned enterprises, and reduced controls on foreign trade and investment in the early 1990s that accelerated the country growth which averaged more than 7% per year since 1997 but services are the major source of economy growth accounting more than 50% of India’s output with only 1/3 of its labour force which capitalized on its large educated English-speaking population to become a major exporter of information technology services and software workers. India rebounded from...
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