2004 Articles

Multinational Companies and Foreign Direct Investment in China and India

Bajpai, Nirupam; Dasgupta, Nandita

This study undertakes a comparative analysis of the foreign direct investment (FDI) flowing from the multinational corporations (MNCs) into China and India over the period 1992 to 2001. On the whole, the yawning gap between China and India in attracting the non-debt creating FDI flows raises some important fundamental questions about its actual FDI potentials. What could be the possible reasons behind China’s success in attracting FDI inflows? Has the Chinese FDI been said to take place at least partially, at India’s expense? Can India possibly become an FDI destination as attractive as China? Who are the target groups of foreign investors for India? What lessons can India possibly derive from China to attract these investors? An effort is made in this study to answer these questions. We attempt to explore the patterns of FDI inflows by the
MNCs into these two countries and analyze their differences. We also examine the prevailing investment climate to account for these differences and finally suggest possible lessons for India. The study mainly focuses on areas where it is possible for India to attract larger FDI inflows provided appropriate specific and generic MNC-friendly policies are put in place. These are the retail-trade sector, export-oriented manufacturing, the creation of sufficient number of Special Economic Zones of quality and the proactive role of the state governments in aiding the FDI process in conjunction with the Central government and the private sector. On the basis of an extensive examination of the Indian and Chinese data, the paper concludes that India falls short of China in all these respects. This
study recommends the Indian government to redesign its policies in each of these directions. Some of the other recommendations include, desirable infrastructure facilities, relaxation of small-scale industry regulations, lower commodity and utility prices, lower indirect taxes, lower import duties on raw materials, fiscal and other fillips to encourage some specific types of investment, incentives for new business promotion, harmonization
of government policies and reduction of red-tapism.