Case Study - International Finance

7/30/2019 Case Study - International Finance

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FDI-India China

Comparison

Abhishek Sharma

Aditi Singhal

Aditya Arora

Ankita Jain

Isha Lamba

Harangad Singh Chadha


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Introduction

Foreign direct investment (FDI) refers to long term participation by

country A into country B. It usually involves participation in

management, joint venture, transfer of technology and expertise

IMF defines FDI as The acquisition of at least ten percent ofthe

ordinary shares or voting power in a public or private enterprise by non

resident investors. Direct investment involves a lasting interest in the

management of an enterprise and includes reinvestment of profits


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FDI is considered to be the most attractive type of capital flow for

emerging economies as it is expected to bring latest technology

and enhance production capabilities of the economy.

The economic developments of China and India, two of the

largest developing countries in the world have been very

impressive recently, but FDI policy and real FDI inflow in the two

countries are different


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India and China Comparison-

Statistics For FDI

China's track record in attracting foreign direct investment (FDI)

is far superior to that of India even after having a complex

approval process

The policy of china has been to rely heavily on FDI for theinvestment made in China.

For example: FDI as a % of total investment in the year 2007

CHINA- 42%of total

investment

INDIA- 21%of total

investment


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FDI net Inflows

1990-$0.4

billion

2002-$52.7billion

FDI NET INFLOWS

OF CHINA

1990-$0.07billion

2002- $2.6

billion

FDI NET INFLOWS

OF INDIA


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In fact, India has been considered an "underachiever" inattracting FDI. In the year 2007 china attracted FDI of, $134billion against only $ 34 billion by India.

This huge difference between the ability of the two countries

to attract FDI can be directly attributed to the economic

policies adopted by them and the steps taken by them to

attract FDI.

Financial Assets-220% of GDPChina

Financial Assets-160% of GDPIndia


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Capital Structure


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Wasted Capital

Majority of financial capital of both countries going to

lessproductive areas.

Chinas fund going to State Own Enterprises ratherthan the private sector

Indias major share taken over by government to

finance budget deficit.

Much of whats left goes to Agriculture, tiny

Households, etc.


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Comparison between the approach followed by

two countries

China provides many facilities to foreign investors to set up

manufacturing plants in China, particularly for export of goods

manufactured by them. In comparison, India has not

differentiated very much between FDI for export and that for

domestic consumption

Thus though, India offers better environment to foreign

investors to set up manufacturing plants for local sales, it did not

offer substantial incentives for export oriented industries


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As a result, FDI has contributed in driving Chinas economic

growth due to the rapid growth of Chinas merchandiseexports. In India, by contrast, FDI has been much less

important in driving export growth except in information

Technology

For China, the share of FDI inflows in 20002001 went to a

broad range of manufacturing industries. For India, most went

to services, electronic and computer industries


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Difference in Definition

The IMF definition of FDI includes as many as 12 different elements,namely: equity capital, reinvested earnings of foreign companies, inter-company debt transactions, short-term and long-term loans, financialleasing, trade credits, grants, bonds, non-cash acquisition of equity,investment made by foreign venture capital investors, earnings data of

indirectly held FDI enterprises and control premium, non-competition fee,and so on

However, with the singular exception of equity capital reported on thebasis of issue/ transfer of equity/preference shares to foreign directinvestors, Indias current definition of FDI does not include any of the other

above elements. China instead includes all these in its definition of FDI

China also classifies imported equipment as FDI while India captures theseas imports in the trade data


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Why is China performing better on the basis ofeconomic determinants

Chinas total and per capita GDP are higher, making it more attractive formarket seeking FDI

Its higher literacy and education rates suggest that its labour is more skilled,making it more attractive to efficiency-seeking investors

China also has large natural resource endowments. In addition, Chinasphysical infrastructure is more competitive. But, India may have anadvantage in technical manpower, particularly in information technology

China has a gigantic domestic market with a system of mass production.This reduces the cost of production considerably. India has yet to evolve asystem of bulk production at the scale prevalent in China


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China has more business-oriented and more FDI-friendly policies

than India. Chinas FDI procedures are easier, and decisions can be

taken rapidly. The World Bank Group survey found that, on average,

it teaks 10 permits compared to 6 in China, and 90 days in Indiarelative to 30 days in China, to start up a new business

In India there are more obstacles to business operations and

development relative to domestic firms, especially on issues relatedto government regulations and legal institutions

China has more flexible labour laws, a better labour climate and

better entry and exit procedures for business


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Round tripping

It has been widely acknowledged that Chinas FDI inflows aresomewhat inflated

Reported flows are thought to be overestimated due toovervaluation of capital equipment contributed to joint ventures by

foreign investors (the value of which is translated into equityinvestment and recorded as FDI) whereas Round-tripping in India asa part of the total FDI is almost insignificant, maybe as low as 23%

China is a large recipient of FDI mostly because of the investments

from her non-resident Chinese (NRC). Whereas Non-resident Indian(NRI), which have mostly preferred to invest in bank deposits intheir country as opposed to FDI and hence the low levels of FDI inIndia


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Government Regulations affecting India

1) Restricting Product Market Reforms

Politically sensitive areas like news media and defence still

not regulated. There are also issues with the recent FDIregulations in multi brand retailing.

Makes harder for local companies to innovate and be

efficient, local supply chains remain inefficient andunexposed to worldwide markets and skills.

Loss for consumers and whole economy.


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2) Infrastructure

Lack of Infrastructure is the biggest hurdle for growth

Physical Infrastructure is state controlled, regional differences

in infrastructure concentrate FDI to some specific regions only

Multiple regional parties bring in political instability in state as

well as central government making development projects slow

and implementation of reforms inefficient.


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Also a major hurdle for India- Electricity shortage- Electricity

Act 2003 aimed to provide electricity to businesses at low cost

but only 8 states implemented it.

Sectors themselves attract FDI and have upgraded

telecommunication highways and ports but there is a need for

improvement in power, railways and water.


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3) Large Bureaucratic structure- a ground for

Corruption

Difficult to manage overlapping government agencies and

tedious paper work-system very complex.

Foreign investment is perceived as slow. It is difficult way of

doing business in such bureaucratic structure.

The main hurdle is corruption at every stage, this together with

other reason added to less likeliness of FDI inflows.


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Steps taken to improve FDI inflow in the

past decade In the overall, inflows of FDI have increased substantially

compared to the earlier regime in which the scope for FDI was

quite restricted.

Stock of FDI in India

1990

$1.6billion

2000

$17.5billion

2009

$164billion


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In the nineties, the government adopted a selective approach to

foreign investments with emphasis on transfer of high technology

and promotion of exports.

India has gradually expanded the scope for FDI by progressively

increasing the number of eligible sectors. Further, it has also the

limits for FDI in an enterprise.

The steps taken to improve FDI inflow are :

removing the general ceiling of 40% on foreign equity under the

Foreign Exchange Regulation Act, 1973 (FERA)

lifting of restrictions on the use of foreign brand names in the

domestic market

removing restrictions on entry and expansion of foreign direct

investment into consumer goods


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abandoning the phased manufacturing programme (PMP)

diluting the dividend balancing condition and export

obligations,

liberalising the terms for import of technology and royalty

payments and

permitting foreign investment up to 24% of equity of small scale

units

reducing the corporate tax rates.

The parallel process of virtual withdrawal of the Industrial

Licensing System and the retreating from the primacy given to

public sector also enhanced the scope for FDI participation inIndia.

As a result of the many steps that have been taken, Indias FDI

policy is now quite open and comparable to many countries.


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Current News on FDI

Foreign direct investment (FDI) by overseas Chinese will slow down in 2012due to the policy curbs on the real estate industry

Investment from overseas Chinese grew at the highest place in the propertysector among all industries in the past decade, among to the report publishedby the Overseas Chinese Affairs Office of the State Council. The Mainland drew

a record $116 billion in FDI in 2011, of which 20% went to the property sectorand mainly came from overseas Chinese

Foreign direct investment in India slid by 78 percent in June 2012, as reportedon 25th August 2012, amid mounting worries about corruption, bureaucraticdelays and lack of economic reforms.

The major drop is in construction, mining, real estate and business andfinancial services. There is a dire requirement to make changes in the currentFDI policies. According to the central bank, this decline in investment can bereversed by shortening investment approval times and sorting out landacquisition issues


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THANK YOU!!!

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Case Study - International Finance