Fdi Comparison B/W India and China

Topics: Investment, International economics, Foreign direct investment Pages: 5 (1734 words) Published: September 27, 2010
UNDOUBTEDLY, China's track record in attracting foreign direct investment (FDI) is far superior to that of India. In fact, India has been considered an "underachiever" in attracting FDI. However, within this otherwise firm conviction about unmatched Chinese superiority in attracting FDI inflows vis-à-vis India, there has occasionally been some scepticism about what all China includes while compiling its FDI figures and consequently about the actual intensity of the FDI gap between China and India as suggested by the official statistics of the respective countries. On the other hand, it has been pointed out in the FDI literature that Indian FDI is hugely under-reported because of non-conformity of India's method of measuring FDI to the international standards. As a rough approximation, we make the necessary adjustments in China's FDI statistics, that is, by excluding data under several heads that China includes in its FDI, but do not strictly fall under the purview of FDI. These heads include: The round-tripping of funds from Hong Kong, Taiwan, and Macao into mainland China; inter-company debt transactions; short and long-term loans; financial leasing; trade credits; grants; bonds; non-cash acquisition of equity (tangible and intangible components such as technology fee, brand name, etc.); investment made by foreign venture capital investors; earnings data of indirectly-held FDI enterprises; control premium; non-competition fee; and imported equipment. Having excluded data under these heads, net FDI inflows into China reduce from roughly $40.7 billion to $20.3 billion in 2000. On the other hand, India's adoption of a somewhat broader method of FDI computation would raise its net annual FDI inflow figures, as reported in the Reserve Bank of India's official balance of payment statistics, from around $3.2 billion to about $8.1 billion in 2000. While the alignment of the Indian FDI with the international norm narrows down the gap between FDI in China and India, merely accomplishing this is not enough to close the actual difference. Together with the ongoing attempts at the alignment of FDI statistics with the global standards, more importantly, there is an urgent need in India to create a conducive investment climate to attract larger sums of FDI from the multinational companies. Round-tripping of Chinese capital is common knowledge and a large body of literature has evolved around it. Such round tripping is often referred to as a phenomenon, which contributes to swelling of investment of neighbouring countries (mainly, Taiwan and Macao) as also of Hong Kong into mainland China. According to the `round-tripping' hypothesis, Chinese firms illegally transfer funds to these countries and that in turn gets invested in mainland China as FDI inflows in order to benefit from the preferential treatment given to FDI in terms of fiscal and other incentives. Since round-tripping is essentially clandestine, accurate data are practically impossible to obtain. Nevertheless, estimates suggest that round-tripping FDI accounted for one-fourth of China's total FDI. There are striking elements of non-conformance between the IMF definition of FDI and that used by the RBI for computational purposes. In fact, compared to the international standard, the Indian FDI statistics appears to be limited because it includes only one component — foreign equity capital reported on the basis of issue/transfer of equity or preference shares to foreign direct investors. Some of the principle components that India excludes from the IMF definition while estimating actual FDI inflows are: 1) Reinvested earnings by foreign companies (which are part of foreign investor profits that are not distributed to shareholders as dividends and are reinvested in the affiliates in the host country). 2) Proceeds of foreign equity listings and foreign subordinated loans to domestic subsidiaries as part of inter-company (short and long-term) debt transactions. 3) Overseas commercial...
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