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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 168 February 29, 2016
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Maree Newson ([log in to unmask])
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Can
India emulate China in attracting and benefitting from FDI?
by
Karl P. Sauvant and Daniel Allman*
Just four months after his election in May 2014, Prime Minister Narendra Modi launched the “Make-in-India” campaign. The event was broadcast across the globe, with a clear message to foreign investors: India was ripping up the red tape and rolling out the
red carpet. The campaign is aimed at “transform[ing] India into a global design and manufacturing hub,” measuring its success by the “opening up of key sectors … to dramatically higher levels of Foreign Direct Investment [FDI].”[1]
How is India doing in this respect, compared to China, which achieved remarkable success through a similar strategy?
In 1980, China’s FDI inflows (US$57 million) were less than three-quarters of India’s inflows (US$79 million).[2] By 2014, China’s FDI inflows (US$129 billion)
outstripped India’s (US$34 billion) by almost four times.[3] Measures of inward FDI stock tell the same story: by 2014, India’s (US$252 billion) was about a quarter of
China’s (US$1,085 billion) and, for that matter, of Singapore’s (US$912 billion).[4]
The three key FDI determinants explain the story:
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China’s economy and infrastructure grew much faster than India’s, making China much more attractive to foreign investors and initiating a virtuous cycle: FDI contributes to
growth, and growth attracts FDI. It is indicative that foreign affiliates generate over half of China’s exports.
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This combined with a progressively more welcoming FDI framework: China ranks higher than India on the World Bank’s “doing business” index, the World Economic Forum’s “global
competitiveness” index and the Milken Institute’s “global opportunity” index.[5]
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China established an extensive investment-promotion infrastructure, with investment promotion agencies (IPAs) at all levels of government, to attract FDI and provide various
aftercare services to foreign investors. Increasingly, red carpet replaced red tape, while, simultaneously, efforts were made to improve FDI’s contribution to China’s development.
Given the size and growth of its market, India has the potential to attract considerably more FDI than it has in the past—as reflected in the fact that India has ranked among the top 10 (if not top five) countries in seven of the eight “FDI confidence” indices
prepared by A.T. Kearney since 2004.[6] Since these indices are based on the assessment of corporate executives, the business community clearly sees India’s
FDI potential.
How to realize this potential? What can India learn from China’s experience?
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As always, the economic determinants are fundamental. As India promotes growth and improves its infrastructure, it too can initiate a virtuous cycle.
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This needs to be supported by quickly improving the regulatory setting. The Make-in-India campaign recognizes this, promising a growing economy alongside a more welcoming
investment climate. (On the OECD’s “regulatory restrictiveness” index, India is already assessed as being somewhat less restrictive than China toward FDI—although it remains considerably more restrictive than the OECD average.[7])
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India’s investment-promotion infrastructure needs to be strengthened.
As to investment promotion, three signal actions ought to be taken by India immediately:
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Establish a powerful, unified central IPA, reporting directly to the Prime Minister. Functions should include systematically attracting FDI (and especially FDI exhibiting
sustainability characteristics), targeting investors in sectors important to India’s development, providing aftercare services, boosting investor trust and perception, and undertaking policy advocacy. Since, in the end, all investment is local, strong IPAs
are also desirable at the state level. Proper coordination between the central and state IPAs—admittedly, a challenge—is essential to ensure follow-up and avoid incentive wars among states. As in China, these measures would establish the institutional infrastructure
for attracting FDI and benefitting from it. Regular reports to the Prime Minister should detail progress made.
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Create an independent Investment Ombudsperson Office, headed by a person well respected in the private and public sectors. The Office would mediate where issues arise between
governmental authorities and foreign investors, including to prevent conflicts escalating into costly international investor-state arbitrations. This becomes all the more important as, inevitably, rising FDI inflows increase the potential for conflicts.
The Prime Minister should be informed through a fast-track procedure about problems that require immediate attention at the highest levels. Establishing such an Office (which worked well in the Republic of Korea) would go beyond China’s investment-promotion
efforts, sending a powerful signal to the world’s investment community.
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Launch an independent annual
Indian Investment Report. Such a report should monitor issues regarding FDI in India (placing them also in an international context), assess the impact of FDI on the local economy, examine
matters of special interest to India (e.g., technology transfer, tax issues, linkages with global value chains), and recommend ways to increase FDI inflows and their contribution toward sustainable development.
There is no reason why India should not be able to attract as much FDI, and benefit from it to the same extent, as China. It is up to the government of India to accelerate action.
*
Karl P. Sauvant ([log in to unmask]) is Resident Senior Fellow, Columbia Center on Sustainable Investment (CCSI), Columbia University; Daniel Allman ([log in to unmask])
is an LL.M. candidate at Columbia Law School and a legal intern at CCSI. The authors are grateful to Ravi Kant, Premila Nazareth Satyanand and Harsha Singh for their helpful peer reviews.
The views expressed by the author of this
Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters.
Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
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The material in this Perspective may be reprinted
if accompanied by the following acknowledgment: “Karl Sauvant and Daniel Allman, ‘Can India emulate China in attracting and benefitting from FDI?,’
Columbia FDI Perspectives, No. 168, February 29, 2016. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).”
A copy should kindly be sent to the Columbia Center on Sustainable Investment at
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For further information, including information regarding submission to the
Perspectives, please contact: Columbia Center on Sustainable Investment, Maree Newson,
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Most
recent Columbia FDI Perspectives
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No. 166, Eric Neumayer and Peter Nunnenkamp, “Democracies conclude more and stricter international investment agreements – but why?” February 1, 2016.
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No. 165, Henry Loewendahl, “A new foreign direct investment accounting methodology for economic development organizations,” January 18, 2016.
All previous
FDI Perspectives
are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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Copyright © 2016 Columbia Center on Sustainable Investment (CCSI), All rights reserved.
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