Foreign Direct Investment Pro

8/2/2019 Foreign Direct Investment Pro

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Foreign direct investment

Foreign direct investment (FDI) is direct investment by a company in production located in

another country either by buying a company in the country or by expanding operations of an

existing business in the country. Foreign direct investment is done for many reasons including to

take advantage of cheaper wages in the country, special investment privileges such as tax

exemptions offered by the country as an incentive for investment or to gain tariff-free access to

the markets of the country or the region. Foreign direct investment is in contrast to

portfolio which is a passive investment in the securities of another country such

as stocks and bonds.

As a part of the national accounts of a country FDI refers to the net inflows of investment to

acquire a lasting management interest (10 percent or more of voting stock) in an enterprise

operating in an economy other than that of the investor. It is the sum of equity capital, other

long-term capital, and short-term capital as shown the balance of payments. It usually involves

participation in management, joint-venture, transfer of technology and expertise. There are two

types of FDI: inward foreign direct investment and outward foreign direct investment, resulting

in a netFDI inflow (positive or negative) and "stock of foreign direct investment", which is the

cumulative number for a given period. Direct investment excludes investment through purchase

of shares. FDI is one example ofinternational factor movements.
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History

The figure below shows net inflows of foreign direct investment in the United States. The largest

flows of foreign investment occur between the industrialized countries (North America, Western

Europe and Japan).

US International Direct Investment Flows:

Period FDI Inflow FDI Outflow Net Inflow

196069 $ 42.18 bn $ 5.13 bn + $ 37.04 bn

197079 $ 122.72 bn $ 40.79 bn + $ 81.93 bn

198089 $ 206.27 bn $ 329.23 bn $ 122.96 bn

199099 $ 950.47 bn $ 907.34 bn + $ 43.13 bn

200007 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn

Total $ 2,950.72 bn $ 2,703.81 bn + $ 246.88 bn

Types

1. Horizontal FDI arises when a firm duplicates its home country-based activities at thesame value chain stage in a host country through FDI.

2. Platform FDI3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in

different value chains i.e., when firms perform value-adding activities stage by stage in a

vertical fashion in a host country.


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Whereas Horizontal FDI decrease international trade as the product of them is usually aimed at

host country, the two other types generally act as a stimulus for it.

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through

any of the following methods:

by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise...Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates

tax holidays other types of tax concessions preferential tariffs special economic zones EPZExport Processing Zones Bonded Warehouses investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation
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infrastructure subsidies R&D support

Global foreign direct investment

The United Nations Conference on Trade and Development said that there was no significant

growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The

figure was 25 percent below the pre-crisis average between 2005 & 2007.

Foreign direct investment in the United States

The United States is the worlds largest recipient of FDI. U.S. FDI totaled $194 billion in 2010.

84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United

Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. The $2.1 trillion

stock of FDI in the United States at the end of 2008 is the equivalent of approximately 16 percent

of U.S. gross domestic product (GDP).

Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new jobs

have been created by foreign companies, resulting in close to $314 billion in investment.US

affiliates of foreign companies have a history of paying higher wages than US corporations.

Foreign companies have in the past supported an annual US payroll of $364 billion with an

average annual compensation of $68,000 per employee.

Increased US exports through the use of multinational distribution networks. FDI has resulted in

30% of jobs for Americans in the manufacturing sector, which accounts for 12% of all

manufacturing jobs in the US.
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Affiliates offoreign corporations spent more than $34 billion on research and development in

2006 and continue to support many national projects. Inward FDI has led to higher productivity

through increased capital, which in turn has led to high living standards.

Foreign direct investment in China

FDI in China, also known as RFDI (Renminbi foreign direct investment), has increased

considerably in the last decade reaching $185 billion in 2010. China is the second largest

recipient of FDI globally. FDI into China fell by over one-third in 2009 due the Global Financial

Crisis (global macroeconomic factors) but rebounded in 2010.

Foreign direct investment in India

Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected

India as the second most important FDI destination (after China) for transnational corporations

during 20102012. As per the data, the sectors which attracted higher inflows were services,

telecommunication, construction activities and computer software and hardware. Mauritius,

Singapore, the US and the UK were among the leading sources of FDI. According to Ernst and

Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an

increase of 25% to $50.8 billion. The worlds largest retailerWal-Mart has termed Indias

decision to allow 51% FDI in multi-brand retail as a first important step and said it will study

the finer details of the new policy to determine the impact on its ability to do business in India.

However this decision of the government is currently under suspension due to opposition from

multiple political quarters.
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Foreign direct investment and the developing world

FDI provides an inflow of foreign capital and funds, investment in addition to an increase in the

transfer of skills, technology, and job opportunities. Many of the Four Asian Tigers benefited

from investment abroad. A recent meta-analysis of the effects of foreign direct investment on

local firms in developing and transition countries suggest that foreign investment robustly

increases local productivity growth. The Commitment to Development Index ranks the

"development-friendliness" of rich country investment policies.
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WHAT IS FII?

Foreign Institutional Investor (FII) is used to denote an investor - mostly of the form of an

institution or entity, which invests money in the financial markets of a country different from the

one where in the institution or entity was originally incorporated.

Foreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary capital

markets in India through the portfolio investment scheme (PIS).

FIIs are involving in all sort of investments such as Bonds,equities,Mutual funds and various

bills.FII is nothing but Foreign Institutional Investors. Below entities are called FIIs

1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Funds

7. Endowments

8. Foundations

9. Charitable Trusts

10. Asset Management Companies

11. Institutional Portfolio Managers

12. Trustees

13. Power of Attorney Holders
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FDI VS FII

FDI

FDI is an investment that a parent company makes in a foreign country FDI cannot enter and exit that easily Foreign Direct Investment targets a specific enterprise Foreign Direct Investment is considered to be more stable.

FII

FII is an investment made by an investor in the markets of a foreign nation. FII can enter the stock market easily and also withdraw from it easily.

FII increasing capital availability in general

FII is considered to be less stable.


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TYPES OF ENTRY IN FOREIGN MARKET

Exporting

Exporting is the process of selling of goods and services produced in one country to other

countries.

There are two types of exporting: direct and indirect.

Direct exports

Direct exports represent the most basic mode of exporting, capitalizing on economies of scale in

production concentrated in the home country and affording better control over distribution.

Direct export works the best if the volumes are small. Large volumes of export may trigger

protectionism. Types of Direct Exporting.

Sales representatives represent foreign suppliers/manufacturers in their local markets foran established commission on sales. Provide support services to a manufacturer regarding

local advertising, local sales presentations, customs clearance formalities, legal

requirements. Manufacturers of highly technical services or products such as production

machinery, benefit the most form sales representation.

Importing distributors purchase product in their own right and resell it in their localmarkets to wholesalers, retailers, or both. Importing distributors are a good market entry

strategy for products that are carried in inventory, such as toys, appliances, prepared

food.
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Advantages of direct exporting:

Control over selection of foreign markets and choice of foreign representative companies

Good information feedback from target market

Better protection of trademarks, patents, goodwill, and other intangible property

Potentially greater sales than with indirect exporting.

Disadvantages of direct exporting:

Higher start-up costs and higher risks as opposed to indirect exporting Greater information requirements

Longer time-to-market as opposed to indirect exporting.

Indirect exports

An indirect export is the process of exporting through domestically based export intermediaries.

The exporter has no control over its products in the foreign market.

Types of indirect exporting:

Export trading companies (ETCs) provide support services of the entire export processfor one or more suppliers. Attractive to suppliers that are not familiar with exporting as

ETCs usually perform all the necessary work: locate overseas trading partners, present

the product, quote on specific enquiries, etc.

Export management companies (EMCs) are similar to ETCs in the way that theyusually export for producers. Unlike ETCs, they rarely take on export credit risks and


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carry one type of product, not representing competing ones. Usually, EMCs trade on

behalf of their suppliers as their export departments.[8]

Export merchants are wholesale companies that buy unpackaged products fromsuppliers/manufacturers for resale overseas under their own brand names. The advantage

of export merchants is promotion. One of the disadvantages for using export merchants

result in presence of identical products under different brand names and pricing on the

market, meaning that export merchants activities may hinder manufacturers exporting

efforts.

Confirming houses are intermediate sellers that work for foreign buyers. They receivethe product requirements from their clients, negotiate purchases, make delivery, and pay

the suppliers/manufacturers. An opportunity here arises in the fact that if the client likes

the product it may become a trade representative. A potential disadvantage includes

suppliers unawareness and lack of control over what a confirming house does with their

product.

Nonconforming purchasing agents are similar to confirming houses with the exceptionthat they do not pay the suppliers directlypayments take place between a

supplier/manufacturer and a foreign buyer.
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Advantages of indirect exporting:

Fast market access

Concentration of resources for production

Little or no financial commitment. The export partner usually covers most expensesassociated with international sales

Low risk exists for those companies who consider their domestic market to be moreimportant and for those companies that are still developing their R&D, marketing, and

sales strategies.

The management team is not distracted

No direct handle of export processes.

Disadvantages of indirect exporting:

Higher risk than with direct exporting

Little or no control over distribution, sales, marketing, etc. as opposed to direct exporting

Inability to learn how to operate overseas

Wrong choice of market and distributor may lead to inadequate market feedbackaffecting the international success of the company

Potentially lower sales as compared to direct exporting, due to wrong choice of marketand distributors by export partners.


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Those companies that seriously consider international markets as a crucial part of their success

would likely consider direct exporting as the market entry tool. Indirect exporting is preferred by

companies who would want to avoid financial risk as a threat to their other goals.

Licensing

An international licensing agreement allows foreign firms, either exclusively or non-exclusively

to manufacture a proprietors product for a fixed term in a specific market.

Summarizing, in this foreign market entry mode, a licensor in the home country makes limited

rights or resources available to the licensee in the host country. The rights or resources may

include patents, trademarks, managerial skills, technology, and others that can make it possible

for the licensee to manufacture and sell in the host country a similar product to the one the

licensor has already been producing and selling in the home country without requiring the

licensor to open a new operation overseas. The licensor earnings usually take forms of one time

payments, technical fees and royalty payments usually calculated as a percentage of sales.

As in this mode of entry the transference of knowledge between the parental company and the

licensee is strongly present, the decision of making an international license agreement depend on

the respect the host government show for intellectual property and on the ability of the licensor

to choose the right partners and avoid them to compete in each other market. Licensing is a

relatively flexible work agreement that can be customized to fit the needs and interests of both,

licensor and licensee.


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Following are the main advantages and reasons to use an international licensing for expanding

internationally:

Obtain extra income for technical know-how and services

Reach new markets not accessible by export from existing facilities

Quickly expand without much risk and large capital investment

Pave the way for future investments in the market

Retain established markets closed by trade restrictions

Political risk is minimized as the licensee is usually 100% locally owned

Is highly attractive for companies that are new in international business.

On the other hand, international licensing is a foreign market entry mode that presents some

disadvantages and reasons why companies should not use it as:

Lower income than in other entry modes

Loss of control of the licensee manufacture and marketing operations and practicesdealing to loss of quality

Risk of having the trademark and reputation ruined by a incompetent partner

The foreign partner can also become a competitor by selling its production in placeswhere the parental company is already in.


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Franchising

The Franchising system can be defined as: A system in which semi-independent business

owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the

right to become identified with its trademark, to sell its products or services, and often to use its

business format and system.

Compared to licensing, franchising agreements tends to be longer and the franchisor offers a

broader package of rights and resources which usually includes: equipments, managerial

systems, operation manual, initial trainings, site approval and all the support necessary for the

franchisee to run its business in the same way it is done by the franchisor. In addition to that,

while a licensing agreement involves things such as intellectual property, trade secrets and others

while in franchising it is limited to trademarks and operating know-how of the business.

Advantages of the international franchising mode:

Low political risk Low cost

Allows simultaneous expansion into different regions of the world

Well selected partners bring financial investment as well as managerial capabilities to theoperation.
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Disadvantages of the international franchising mode:

Franchisees may turn into future competitors

Demand of franchisees may be scarce when starting to franchise a company, which canlead to making agreements with the wrong candidates

A wrong franchisee may ruin the companys name and reputation in the market

Comparing to other modes such as exporting and even licensing, international franchisingrequires a greater financial investment to attract prospects and support and manage

franchisees.

The key success for franchising is to avoid sharing the strategic activity with any franchisee

especially if that activity is considered importance to the company. Sharing those strategic

activities may increase the potential of the franchisee to be our future competitor due to the

knowledge and strategic spill over.

Turnkey projects

A turnkey project refers to a project in which clients pay contractors to design and construct new

facilities and train personnel. A turnkey project is way for a foreign company to export its

process and technology to other countries by building a plant in that country. Industrial

companies that specialize in complex production technologies normally use turnkey projects as

an entry strategy.


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One of the major advantages of turnkey projects is the possibility for a company to establish a

plant and earn profits in a foreign country especially in which foreign direct investment

opportunities are limited and lack of expertise in a specific area exists.

Potential disadvantages of a turnkey project for a company include risk of revealing companies

secrets to rivals, and takeover of their plant by the host country. By entering a market with a

turnkey project proves that a company has no long-term interest in the country which can

become a disadvantage if the country proves to be the main market for the output of the exported

process.

Wholly owned subsidiaries (WOS)

A wholly owned subsidiary includes two types of strategies: Greenfield

investment and Acquisitions. Greenfield investment and acquisition include both advantages and

disadvantages. To decide which entry modes to use is depending on situations.

Greenfield investment is the establishment of a new wholly owned subsidiary. It is often

complex and potentially costly, but it is able to full control to the firm and has the most potential

to provide above average return. Wholly owned subsidiaries and expatriate staff are preferred in

service industries where close contact with end customers and high levels of professional skills,

specialized know how, and customizations are required. Greenfield investment is more likely

preferred where physical capital intensive plants are planned. This strategy is attractive if there

are no competitors to buy or the transfer competitive advantages that consists of embedded

competencies, skills, routines, and culture.

Greenfield investment is high risk due to the costs of establishing a new business in a new

country. A firm may need to acquire knowledge and expertise of the existing market by third
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parties, such consultant, competitors, or business partners. This entry strategy takes much time

due to the need of establishing new operations, distribution networks, and the necessity to learn

and implement appropriate marketing strategies to compete with rivals in a new market.

Acquisition has become a popular mode of entering foreign markets mainly due to its quick

access Acquisition strategy offers the fastest, and the largest, initial international expansion of

any of the alternative.

Acquisition has been increasing because it is a way to achieve greater power. The market

share usually is affected by market power. Therefore, many multinational corporations apply

acquisitions to achieve their greater market power require buying a competitor, a supplier, a

distributor, or a business in highly related industry to allow exercise of a core competency and

capture competitive advantage in the market.

Acquisition is lower risk than Greenfield investment because of the outcomes of an acquisition

can be estimated more easily and accurately. In overall, acquisition is attractive if there are well

established firms already in operations or competitors want to enter the region.

On the other hand, there are many disadvantages and problems in achieving acquisition success.

Integrating two organizations can be quite difficult due to different organization cultures,control system, and relationships. Integration is a complex issue, but it is one of the most

important things for organizations.

By applying acquisitions, some companies significantly increased their levels of debtwhich can have negative effects on the firms because high debt may cause bankruptcy.
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Too much diversification may cause problems. Even when a firm is not too overdiversified, a high level of diversification can have a negative effect on the firm in the

long term performance due to a lack of management of diversification.

Joint venture

There are five common objectives in a joint venture: market entry, risk/reward sharing,

technology sharing and joint product development, and conforming to government regulations.

Other benefits include political connections and distribution channel access that may depend on

relationships. Such alliances often are favorable when:

The partners' strategic goals converge while their competitive goals diverge

The partners' size, market power, and resources are small compared to the Industryleaders

Partners are able to learn from one another while limiting access to their own proprietaryskills

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing,

technology transfer, local firm capabilities and resources, and government intentions. Potential

problems include:

Conflict over asymmetric new investments

Mistrust over proprietary knowledge

Performance ambiguity - how to split the pie
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Lack of parent firm support

Cultural clashes

If, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the jointventure, but they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to developand protect its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, whileeach firm would like to have hierarchical control.

Strategic alliance

A strategic alliance is a term used to describe a variety of cooperative agreements between

different firms, such as shared research, formal joint ventures, or minority equity

participation. The modern form of strategic alliances is becoming increasingly popular and has

three distinguishing characteristics:

1. They are frequently between firms in industrialized nations

2. The focus is often on creating new products and/or technologies rather than distributing

existing ones

3. They are often only created for short term durations


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Advantages of a strategic alliance

Technology Exchange

This is a major objective for many strategic alliances. The reason for this is that manybreakthroughs and major technological innovations are based on interdisciplinary and/or

inter-industrial advances. Because of this, it is increasingly difficult for a single firm to

possess the necessary resources or capabilities to conduct their own effective R&D

efforts. This is also perpetuated by shorter product life cycles and the need for many

companies to stay competitive through innovation. Some industries that have become

centers for extensive cooperative agreements are:

Telecommunications

Electronics

Pharmaceuticals

Information technology

Specialty chemicals


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Global competition

There is a growing perception that global battles between corporations be fought betweenteams of players aligned in strategic partnerships.[35]Strategic alliances will become key

tools for companies if they want to remain competitive in this globalized environment,

particularly in industries that have dominant leaders, such as cell phone manufactures,

where smaller companies need to ally in order to remain competitive.

Industry convergence

As industries converge and the traditional lines between different industrial sectors blur,strategic alliances are sometimes the only way to develop the complex skills necessary in

the time frame required. Alliances become a way of shaping competition by decreasing

competitive intensity, excluding potential entrants, and isolating players, and building

complex value chains that can act as barriers.[36]

Economies of scale and reduction of risk

Pooling resources can contribute greatly to economies of scale, and smaller companiesespecially can benefit greatly from strategic alliances in terms of cost reduction because

of increased economies of scale.

In terms on risk reduction, in strategic alliances no one firm bears the full risk, and cost of, a

joint activity. This is extremely advantageous to businesses involved in high risk / cost activities

such as R&D. This is also advantageous to smaller organizations which are more affected by

risky activities.
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Alliance as an alternative to merger

Some industry sectors have constraints to cross-border mergers and acquisitions, strategicalliances prove to be an excellent alternative to bypass these constraints. Alliances often

lead to full-scale integration if restrictions are lifted by one or both countries.

Disadvantages of strategic alliances

Some strategic alliances involve firms that are in fierce competition outside the specific scope of

the alliance. This creates the risk that one or both partners will try to use the alliance to create an

advantage over the other. The benefits of this alliance may cause unbalance between the parties,

there are several factors that may cause this asymmetry:

The partnership may be forged to exchange resources and capabilities such astechnology. This may cause one partner to obtain the desired technology and abandon the

other partner, effectively appropriating all the benefits of the alliance.

Using investment initiative to erode the other partners competitive position. This is asituation where one partner makes and keeps control of critical resources. This creates the

threat that the stronger partner may strip the other of the necessary infrastructure.

Strengths gained by learning from one company can be used against the other. Ascompanies learn from the other, usually by task sharing, their capabilities become

strengthened, sometimes this strength exceeds the scope of the venture and a company

can use it to gain a competitive advantage against the company they may be working

with.


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RECENT TRENDS IN FDI

The fall in foreign direct investment (FDI) since 1999, and Chinas growing share, worries most

developing countries. But an in-depth look reveals new and promising trends. The decline is

largely a one-time adjustment following the privatization boom of the 1990s. FDI is coming

from more countriesand going to more sectors. The conditions for attracting FDI vary by

sector : in labor-intensive manufacturing, for example, efficient customs and flexible labor

markets are key, while in retail access to land and equal enforcement of tax rules matter most.

Sorting out the microeconomic issues by sector will be good not only for FDI but also for

domestic investors.

The flows of foreign direct investment (FDI) to developing countries have declined by 26

percent since 1999, while Chinas share has increased from 21 percent to 39 percent (figure

1). The large flows of FDI to banks and utilities dwindled following a series of disappointments

for both investors and governments. China now has a commanding lead in manufacturing, with

a large, qualified, low-cost, and flexible workforce. India seems to be following suit in the

promising offshore services sector.

As a result of all this, many developing countries regard their prospects for FDI as bleak.

The gloom is particularly strong among Latin American and Southeast Asian countries, once

the darlings of foreign investors. FDI levels in

Africa, the Middle East, and South Asia have remained low. Eastern European countries are

counting on integration with the European Union to help renew FDI flows.


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Reasons for hope

But a more in-depth look suggests a more complex and hopeful story. Despite the decline in

FDI since 1999, its growth over the past 13 years has been phenomenal, averaging more than 17

percent annually in dollar terms. The decline since 1999 is due mostly to the drop in FDI

following the boom in huge (one-time) privatization deals in the infrastructure, financial, and

petroleum sectors in the 1990s. FDI in other sectors remained fairly constant (figure 2). This

cyclical effect is confirmed by the much starker rise and fall pattern in FDI flows to industrial

countries over the same period. Another (hopefully one-time) factor driving the decline has been

the macroeconomic crisis and uncertainties affecting Latin America.

Positive impact on development

While many observers believe that much of the FDI in the financial and infrastructure sectors

yielded little impact, this perception does not stand up to in-depth analyses such as those by Luis


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Guasch (2002), Clive Harris (2003), and the McKinsey Global Institute (2003). These studies

have shown that in almost all cases FDI had a largely positive impact on productivity

(the key criterion for assessing long-term economic performance) and on the coverage of

services. But ill-designed privatization processes, contracts, and regulations have often led to

poor returns on investments or, in some cases, to excessive returns. The financial and

infrastructure sectors are tricky to regulate as quasi natural monopolies, but FDI is not to blame

for government shortcomings.In sectors where competition is stronger, FDI has had a much more

obvious positive impact. A study of India by the McKinsey Global Institute (2001) showed that

the removal of FDI restrictions in the automotive sector unleashed competition and investments,

resulting in a threefold increase in productivity that translated into a threefold increase in output

due to falling prices (figure 3). Employment also rose. So, once adjusted for the one-time events

and government shortcomings, the fundamental picture of FDI is quite positive.

China in perspective

Chinas commanding FDI performance also should be put into perspective. While China

accounts for 39 percent of the FDI to developing countries, it also accounts for almost 30 percent

of the developing worlds population. Infact, relative to GDP, Chinas performance in attracting

FDI is good but not extraordinary, with FDI at 3.8 percent of GDP in 19992002.

Nineteen developing countries did better over the same period. Chinas performance looks even

less extraordinary if adjusted for the round-tripping of FDI through Hong Kong (China), which

some estimates suggest may account for as much as 30 percent of total FDI to China.


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New diversity in sources and destinations

Another reason for hope is that the sources ofFDI are increasingly varied. South-south FDI

flows are expanding rapidly; they now account for more than 30 percent of FDI to developing

countries, up from 17 percent in 1995. China and South Africa are becoming major players in

Africa, for example, with about US$2.7 billion and US$1.6 billion of FDI there by 2001, the

latest year for which statistics are available. That developing country are growing sources of FDI

is doubly good news because these new players tend to be better equipped to invest in difficult

and remote markets and to develop products and services better adapted to


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developing country consumers. The Turkish conglomerate Koc was the first company toopen

hypermarkets in the Russian Federationwith great success. Chinese electronics producers

such as TCL know how to produce US$50 color televisions in India and Vietnam, while

Maruti Suzuki in India is ready to export cars for US$2,000. These are low-spec products, but

they are exactly what consumers in developing countries need, as they often face the unhappy

choice between high-spec but unaffordable Western products and very low-spec but relatively

expensive traditional products. Yet another reason to be hopeful is that the destination sectors of

FDI also are becoming more varied. FDI has evolved from focusing primarily on natural

resources, infrastructure, and manufacturing (export-driven or tariff jumping investment) to

also covering banking, retail, construction, tourism, and offshore services. Cumulative FDI flows

to the retail trade sector in the 20 largest developing countries amounted to US$45 billion in

19982002 (about 7 percent of the total to these countries). That too is good news, since more

and more countries can hope to develop comparative advantages in a few of these new sectors.

Moreover, FDI is increasingly market seeking rather than efficiency seeking (that is, export

driven), offering opportunities to any country willing to open its markets or integrate with its


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neighbors. These encouraging FDI trends in the developing world should be expected to

continue, since they mirror what has happened in the industrial world.

Implications for governments

So there is no reason for developing countries to despair. But in an increasingly competitive

market, getting their fair share of FDI flows and benefits will be hard work. Attracting FDI will

require a shift in mind-set for most developing country governments.

Broadening the scope of FDI

To start with, the scope of efforts to attract FDImust encompass all economic sectors. The

tendency in the past was to focus almost exclusively on infrastructure and on efficiency-seeking

and tariff-jumping FDI in manufacturing. In the future more and more FDI will be market

seeking investment in service sectors as well as Investment in tourism and offshore services.

Most developing countries continue to restrict FDI in service sectors (for example, India does

not allow FDI in retail), yet are ready to waste fortunes to attract efficiency-seeking FDI for

manufacturing in an uphill battle against China. There is a general misconception that

Market-seeking FDI in domestic sectors such as retail yields little development impact. The

opposite is true. FDI in retail has been a key driver of productivity growth in Brazil, Poland,

and Thailand, resulting in lower prices and higher consumption. Large-scale foreign retailers

are also forcing wholesalers and food processors to improve. And they are now becoming

important sources of exports: Tesco in Thailand and Wal-Mart in Brazil are increasingly turning

to local products to feed their global supply chains. Retail also happens to be a pillar of the

tourism industry. The misconceptions about FDI are made worse by political economy factors:

while attracting efficiency-seeking FDI does not affect incumbents, attracting market-seeking

FDI usually does.


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Tackling microeconomic issues

In addition to broadening the scope of efforts, countries must recognize that the battle for FDI

will increasingly be fought at the microeconomic level sector by sector. Of course, foreign

investors will continue to insist on basic political and macroeconomic stability, but this should

become less important as a differentiating factor. Investors will look increasingly at

microeconomic conditions, and what they look for will vary significantly from one sector to

another. The requirements for efficiency-seeking investment in manufacturing are increasingly

well understoodlow factor costs, a flexible labor market, a small regulatory burden, efficient

infrastructure and customs. Less obvious factors include easy access to a competitive supplier

base and business service providers. The factors required to attract FDI in domestic services are

vastly differenta stable and smart regulatory environment for quasi-natural monopolies (a

hard-won lesson from the 1990s), functioning land markets for retail, hotels, and construction. In

addition, unfair competition from tax-evading, low-productivity informal players has been found

to be among the biggest constraints to FDI growth in domestic services in most developing

countries, and it tends to get worse over time. Resolving the microeconomic issues sector by

sector will be good for FDI as well as fordomestic private investorsand thus key to boosting

growth and reducing poverty. But most developing countries have a long way to go.


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ECONOMIC STRUCTURE OF INDIA

Indias economy: growing rapidly and unequally

In 2010, Indias GDP in PPP terms was $3.92 trillion. By this reckoning, India.

Citi Investment Research and Analysis estimates that in a decade India will be the third-largest

economy. Between 200001 and 200708, Indias real GDP growth averaged 7.3 per cent per

annum. Growth rates have recently been around 9 per cent and sometimes in excess of 9 per

cent, except for the period since 200809. In that year, GDP growth fell to 6.7 per cent in the

face of the global financial crisis. GDP growth rate picked up the following year to 8 per cent.

In 201011, real GDP growth is estimated to be 8.6 per cent and in 201112, to return to 9 per

cent. With a population growth rate of about 1.7 per cent per annum (according to the latest

Census of India), real GDP growth per capita has been in excess of 7 per cent per annum for

several years. At this rate, real GDP per capita will double in about 10 years. Since the 1970s,

average decadal growth rates of real GPD have gone up, even as the standard deviation of year-

to-year growth has gone down (Table 1).


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TABLE 1

Decade

Average growth

rate (% per

annum) YtoY SD of growth rate

1960-61 to 1969-70 4.0 3.674007803

1970-71 to 1979-80 3.0 4.185225336

1980-81 to 1989-90 5.6 2.289323044

1990-91 to 1999-2000 5.7 1.841768474

2000-01 to 2009-10 7.3 2.08019764

Source: Computed from Reserve Bank of India: Handbook of Statistics on the Indian Economy.

Structure of economic growth in India

The structure of Indias GDP has undergone immense transformation in the face of such rapid

economic growth and has, in turn, contributed to it. During the 1960s, agricultural value added,

as a percentage of GDP, was 42.5 per cent. Corresponding magnitudes for industry,

manufacturing and services were, respectively, 20.3 per cent, 14.3 per cent and 37.2 per cent. In

2008, agriculture contributed 17.6 per cent of GDP, whereas the contributions of industry,

manufacturing, and services were 29 per cent, 16 per cent and 53.4 per cent, respectively.

This is an indicator both of Indias potential for further economic growth as well as that ofa

fundamental problem facing the economyhow does one sector (agriculture), which contributes
http://www.eastasiaforum.org/2011/03/16/food-inflation-in-india/http://www.eastasiaforum.org/2011/03/16/food-inflation-in-india/http://www.eastasiaforum.org/2011/03/16/food-inflation-in-india/http://www.eastasiaforum.org/2011/03/16/food-inflation-in-india/


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less than 18 per cent of GDP, support more than 60 per cent of Indias population? Within

manufacturing, India has increasingly specialized in higher value added manufacturing.

Contributors to Indias higher economic growth

In a growth accounting sense, capital, labour and productivity growth have all contributed to

enhanced rates of economic growth in India. Savings rates have gone up to about 34 per cent and

investment to about 36 per cent, particularly since the 1990s. There is a very strong

demographic dividend as the median age of the Indian population is around 25, indicating that

the country is home to more than 600 million people below the age of 25. Further, this labour

force is getting better trained (literacy rates are up to 74 per cent in the 2011 census).

There is evidence that Total Factor Productivity in the production of aggregate GDP and in the

manufacturing and services sectors has gone up, particularly since 1994. Agricultural

productivity has not grown very quickly. Openness to trade and investment went up sharply,

particularly during the period 200207. Even after the global financial crisis, India continued its

policy of trade liberalization, with average manufacturing sector tariffs now down to 12 per cent

or less.

All these factors imply that economic growth rates in India will stay high and, given the

increasing demographic dividend, may even accelerate.


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Short-term issues with economic growth

Drought in 200809, following the sharp global rise in food prices in 2007, led to high food

inflation, which has now been passed on to the general price level, particularly in light of

recurrent commodity price shocks. Anti-inflation policy in the form of higher lending rates has

tended to dampen investor sentiments.

Economic growth and poverty alleviation in India

High rates of economic growth in India imply that there has been a substantial reduction in levels

of poverty. But the elasticity of poverty reduction with respect to economic growth is lower in

India than in many Asian countries, essentially because of the structure of economic growth.

This implies that inequality (both personal as well as spatial) has increased, particularly of

incomes (as opposed to consumption where inequality is lower), but is still well below that of

many emerging economies.
http://www.eastasiaforum.org/2010/07/30/india-controlling-inflation-without-hurting-growth/http://www.eastasiaforum.org/2010/07/30/india-controlling-inflation-without-hurting-growth/http://www.eastasiaforum.org/2010/07/30/india-controlling-inflation-without-hurting-growth/http://www.eastasiaforum.org/2010/07/30/india-controlling-inflation-without-hurting-growth/


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ECONOMIC STRUCTURE OF CHINA

Structural changes in Chinas economy gave more authority to local officials and plant

managers, and permitted a wide variety of small-scale enterprises in the service and light

manufacturing sector to boom.

Due to its increasing openness to foreign trade and investment, in 1999, China became the

second largest economy of the world after the USA.

Since 1978, China has been moving towards a market oriented economy. China de-collectivized

agriculture, yielded tremendous gains in production. Driven by a sharp rise in the procurement

price paid for crops and what amounted to the semi-privatization of agriculture. The share of

agricultural output in total GDP rose from 30 percent in 1980 to 33 percent three years later.

However, the share of agriculture started falling shortly after, and by 2002 it accounted for only

15.4 percent of GDP. In 2010, the agriculture sector accounted for 10.9 percent of GDP, 48.6

percent from industry and 40.5 percent from services. 39.5 percent of the 812.7 million labor

force is employed in agriculture, 27.2 percent in industry and 33.2 percent in services.

Most of China's agricultural production is restricted to the east of the country. China is the

world's largest producer of rice and wheat - for cash crops, China ranks first in cotton and

tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and

sugar beets.

China also ranks first in world production of red meat (including beef, veal, mutton, lamb, and

pork). Due to improved technology, the fishing industry has grown considerably since the late

1970s.


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Apart from crops and food products, China is one of the world's major mineral-producing

countries. Coal is the most abundant mineral (China ranks first in coal production). There are

also extensive iron-ore deposits in China; the largest mines are at Anshan and Benxi, in Liaoning

province.

Oil fields were discovered in the 1960s and turned China into a net exporter, and by the early

1990s, China was the world's fifth-ranked oil producer. Growing domestic demand beginning in

the mid-1990s however, has forced the nation to import increasing quantities of petroleum.

Coal is the single most important energy source; coal-fired thermal electric generators provide

over 70 percent of the country's electric power. China also has extensive hydroelectric energy

potential.

ROLE OF STATE vs MARKET IN CHINA

Until 1978, industrial output was dominated by large state-owned enterprises (SOEs). Gradually,

the share of state-owned and state-holding enterprises in gross industrial output value had

shrunk; in 2002 it was around 41 percent. However, state-owned companies, controlled by

economic ministries in Beijing (Capital of China), represented only 16 percent of industrial

output. State-holding enterprises may control large numbers of state firms, and are not 100

percent state-owned.

The changes in economic policy, including decentralization of control and the creation of

"special economic zones" to attract foreign investment, led to considerable industrial growth,

especially in light industries that produce consumer goods.


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2010 Chinas Economic Indicators at a Glance:

Geography: Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South

China Sea, between North Korea and Vietnam

Terrain: mostly mountains, high plateaus, deserts in west; plains, deltas, and hills in east

Climate: extremely diverse; tropical in south to subarctic in north

Natural Resources: coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony,

manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, rare earth elements,

uranium, hydropower potential (world's largest)

Population: 1.341 billion

Age groups: 0-14 years: 19.8%; 15-64 years: 72.1%; 65 years and over: 8.1%

Labor Force: agriculture: 39.5% industry: 27.2% services: 33.2%

Unemployment: 4.1 %.


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ECONOMIC STRUCTURE OF MEXICO

Mexico is the 12th largest economy in the world, with an estimated GDP (PPP) of US$1.567

trillion in 2010. Throughout history, Mexico has gone through several crisis, but the most

notable ones that they suffered greatly is during the 1994 Mexican Peso crisis, and the 2008

global financial crisis.

The Mexican Peso crisis in 1994 was caused by the Mexico's government decision to devalue the

peso. This resulted in a financial crisis that cut the value of peso into half, create high inflation

and set forth a severe recession in Mexico. The country is hit with massive lay-offs and loss of

foreign investments. GDP (Constant Prices, National Currency) in 1995 contracts by 6.22

percent, the worst decline in the country history. Mexico's economy recovered with the aid of a

US$50 billion bailout from the United States, the IMF and the Bank for International

Settlements.

In 2008, the global financial crisis caused severe economic downturn in many countries, with

Mexico one of the greatest hit country in Latin America. GDP (Constant Prices, National

Currency) contracted by 6.11 percent, the highest contraction since the 1994 Mexican Peso

crisis. As the Mexico's economy is heavily depended on U.S.'s, with 45 percent of Mexico's

foreign investment come from US and 80.5 percent of Mexico's exports going to US, a fall in US

demand for exports results in decreasing exports and rising unemployment in Mexico.

Mexico has signed numerous free trade agreements with more than 40 countries, with the most

important FTA is the North American Free Trade Agreement (NAFTA) signed with the U.S. in

1994, that increased significant trade between Mexico and North America countries, the United


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States and Canada. Mexico is also a member of the World Trade Organization (WTO), G-20,

Organization for Economic Cooperation and Development (OECD), Asia Pacific Economic

Cooperation (APEC) and the Caribbean Community (CARICOM).

Economic Geography

Mexico has a land area of 1.943 million square kilometers, with 12.66 percent of arable land.

With only a small percentage of arable land, Mexico generates significant revenue from the

production of crops such as corn, tomatoes, sugar cane, dry beans and avocados, and also the

production of beef, poultry, pork and dairy products too.

Mexico is also the world's 7th largest oil producer in 2009, with 3.001 million barrels produced

per day, and they are the 2nd largest oil supplier to US. The country is also rich in natural

resources, namely silver, copper, gold, lead, zinc and timber.

Population and Labour Force

Mexico has a population of 108.627 million people as of 2010, with a labor force of 46.99

million people. In 2010, the unemployment rate in Mexico is 5.373 percent.

Mexico's labour force includes a growing informal sector, which is mostly poor workers, is

estimated to make up 28.8 percent of the total labour force. It is observed that there is an

increasing trend of growth in the informal sector, even with a decline in unemployment rate.

Hence, it is likely that due to the economic crisis in 2008 that more people have moved from the

formal to the informal sector.


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Mexico also has a net emigration rate at negative 3.24 migrants/1,000 population. The figure

reflects the excess number of persons leaving the country. It is estimated that 10 percent of

Mexico's population and 15 percent of its labor force is working in the United States. The high

migration rate has also generated a huge inflow of foreign income into Mexico. In 2009,

Mexicans working in the United States have sent a total of US$21.5 billion back home,

contributing to 2.4 percent of Mexico's GDP.

Industry Sector

The industry of Mexico contribute 33.3 percent of the country's GDP in 2010. One of the most

important sector in Mexico's industry is the automotive industry. Many major car manufactures

set up their operations in Mexico, including General Motors, Ford, Chrysler, BMW, Toyota,

Honda, Volkswagen and Mercedes Benz. Instead of just functioning as an assembly

manufacturer, the automotive industry also functions as a center for research and development

for car manufacturing companies.

Electronics is one of the fastest growing sector in Mexico and it is the 2nd largest supplier of

electronics to the U.S. after China. In 2007, Mexico is the largest producers of televisions, ahead

of China and South Korea, and also became the world's largest producer of smartphones. In

2009, the Mexican government's initiative of the PCIEAT, Program for the Electronics and High

Technology Industry Competitiveness, aims to make Mexico one of the top 5 global exporter of

electronic goods.

In 2010, services in Mexico contributes 62.5 percent to the nation's overall GDP, with two of its

most important sectors coming from the tourism and financial and banking services.


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Mexico came in the first in the number of foreign tourists among Latin America countries,

second in the Americas, and tenth in the world, with more than 21.45 million visitors in 2009.

Tourism in Mexico is supported by 3.254 million jobs in the country, which makes up 7.3

percent of total labour force, and expects to contribute 13 percent to the overall GDP in 2011.

Mexico has a banking system which is financially strong with banks which are well-capitalized.

More foreign companies are entering its banking sector with an increasing number of foreign

institutions merging with local companies. The acquisitions and mergers of foreign institutions

with local companies have helped Mexico recover from its currency crisis in 1994.

The Mexican Stock Exchange is the second largest stock exchange in Latin America, and forth

largest in North America, with a value estimated at US$700 billion. It's stock exchange is also

closely related to the US market. Hence, Mexico's stock exchange is highly influenced by any

movements and developments in the New York and Nasdaq stock exchanges, as well as any

interest rate changes in the US.


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INDIA

RECENT TRENDS IN INDIA

Indias FDI Trends and Analysis

India has emerged as the preferred destination for many foreign international enterprises due to

constructive factors such as high economic growth, fast population growth, English speaking

people, and lower costs for workers.

Location determinants of foreign direct investment

Location-specific rewards are further classified by three types of FDI motives.

1. Market-seeking investment is undertaken to uphold existing markets or to exploit newmarkets. For example, due to tariffs and other forms of barriers, the firm has to relocate

production to the host country where it had previously served by exporting

2. When firms invest abroad to obtain resources not available in the home country, theinvestment is called resource- or asset-seeking. Resources may be natural resources, raw

materials, or low-cost inputs such as labor

3. The investment is streamlined or efficiency-seeking when the firm can gain from thegeneral governance of organically dispersed activities in the presence of economies of

scale and scope

The host country factors or fundamentals can be grouped in two categories: the first group

comprises of natural resources, most kinds of labor, and proximity to markets. The second group

include of a range of environmental variables that act as a function of political, economic, legal,

and infra-structural factors of a host country.


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Indias inward investment rule went through a series of changes since economic reforms were

escorted in two decades back. The expectation of the policy-makers was that an investor

friendly command will help India establish itself as a preferred destination of foreign investors.

These expectations remained largely unfulfilled despite the consistent attempts by the policy

makers to increase the attractiveness of India by further changes in policies that included opening

up of individual sectors, raising the hitherto existing caps on foreign holding and improving

investment procedures. But after 200506, official statistics started reporting steep increases in

FDI inflows. Portfolio investors and round-tripping investments have been important

contributors to Indias reported FDI inflows thus blurring the distinction between direct and

portfolio investors on one hand and foreign and domestic investors on the other. These investors

were also the ones which have exploited the tax haven route most.

Inward investments have been constantly rising since the sharp drop witnessed in 2009,

following the global financial crisis. Hiccups apart, foreign investors see huge long-term growth

potential in the country. As much as 75 percent of global businesses already present in the

country are looking to considerably expand their operations going forward according to the

Indian attractive survey by Ernst & Young. This also confirms that India is undergoing a

changeover, both in terms of investor perception of its market potential, and in reality.

With GDP growth anticipated to surpass 8 percent yearly and the number of people in the Indian

middle class set to triple over the next 15 years, with an equivalent impact on disposable income,

domestic demand is expected to grow exponentially. Indias young demographic profile also

helps it in providing an increasingly well-educated and cost-competitive labor force. These

factors put India in a good position to attract an increasing proportion of global FDI.


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As project numbers and jobs created are still some way off highs reached in 2008, which saw

971 projects, the trend over the last decade has shown a steady, if not dramatic, upward

movement. Generally project numbers in 2010 were up 60 percent over 2003 and the number of

jobs created up 30 percent.

The strong domestic market enabled India to deliver a flexible performance during the global

economic slowdown. India today is rising as a manufacturing destination, both for the domestic

and global markets. As business leaders battle for growth in the new economy, there is a sense of

urgency among leading players to grab the prospects offered by the Indian market.

With the liberty of the simplified compendium on foreign direct investment, numerous processes

on FDI and associated routes of investment too are being ratified with a view to speed up the

process of inflows into India.

The out of the country Indian investors too would find it simpler to entry nodal bodies and invest

in India. Though, a note of cautionthe Reserve Bank of India too is attempting to legalize

certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to

invest in India. Its argument is that NRIs tend to invest much more than the cap allowed in the

sectors through these other routes, thereby exceeding allowed limits for FDI. The government

may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc.

More reforms to make investing in India a simpler process, such as FDI in multi-brand retail,

defense production, and agriculture, are in the discussion stage and the government intends to

bring out tangible policies in this direction. Proposals can also be sent to DIPP online. This

facility will allow all abroad investors to speed up their investment proposals.


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Tax incentives to SEZ developers

Income tax

Deduction from profits and gains from export of goods/services as follows (Section 10AA) 100 percent income tax exemption for first five years 50 percent income tax exemption for next five years Income tax exemption for next five years to the extent of profits Reinvested (maximum 50 percent) Capital gains tax exemption on relocation to SEZ (Section 54GA): This is a controversial

issue as to be eligible for income tax exemption; the unit should be a new unit. Further, a

press statement from Hon. Minister for Commerce and Industry, Mr. Kamal Nath, mentions

that SEZs are basically for fresh investments

No TDS by overseas banking units on interest on deposits/borrowings from non-resident orperson not ordinarily resident

No minimum alternate tax Transferee developer enjoys 100 percent income tax exemption for balance period of 10

assessment years

Indirect tax

SEZ units may import or procure from domestic sources duty free, all their requirements ofcapital goods, raw materials, consumables, spares, packaging materials, office equipment,

DG sets for implementation of their project in the zone without any license or specific

approval

No import duty on these goods imported


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No excise duty on these goods procured from domestic tariff area No service tax on services availed from domestic tariff area No value added tax and central sales tax on goods procured from domestic tariff area On goods procured from DTA, drawback under section 75 allowed to SEZ unit Goods imported/procured locally duty free could be utilized over the approval period of five

years

Other incentives

A foreign institutional investor investing in shares and securities in India would be accountable

to tax at 10 percent on its long-term capital gains and 30 percent on short-term capital gains. The

least amount period of investment in the case of equity shares would be more than one year to be

considered long term, and three years in the case of other securities. Dividends, interest or long-

term capital gains of an infrastructure capital fund or infrastructure Capital Company that earns

from investments made on or after June 1, 1998 in any venture engaged in the business of

developing, maintaining and working any infrastructure facility, and which has been permitted

by the central Government, is not liable from tax. Dividends paid by local players to their

shareholders are excused from tax. Though, the domestic corporation would have to pay an extra

taxtermed as tax on circulated profits which is computed at the rate of 10 percent of the

amounts spread as dividends by the local company.


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Current statistics

Indian has been attracting foreign direct investment for a long period. The sectors like

telecommunication, construction activities and computer software and hardware have been the

major sectors for FDI inflows in India. As per the fact sheet on FDI, there was Rs. 6,30,336 crore

FDI equity inflows between the period of August 1991 to January 2011.

Top 10 investing FDI investing countries in India are Mauritius, Singapore, United States, UK,

Netherlands, Japan, Cyprus, Germany, France and UAE. According to media reports, the decline

in the FDI inflows would be a major concern for the economy, as the Indian economy is heading

to reach the 9 percent growth rate.

The trend of declining FDI tells us very little about statistics of FDI as it refers to FDI equity

inflows. Though, equity inflow is a better indicator of portfolio investment (also known as FII

inflows) than of FDI. To understand this, it is essential to define FDI.

Definition of FDI is complex. The main reason is that unlike portfolio investment, FDI involves

a bunch of activities like managerial inputs, technology infusion etc which are not measured in

the equity definition of FDI.

For developing countries like India, the most important reason to attract FDI is the availability of

better technology. This does not mean that overseas companies transfer technology. All studies

stated that the presence of foreign companies which positively impacts productivity of domestic

firms through learning the use of new technologies. This is really important than obtaining

technology through purchases of drawings and designs. If we accept this, then a better indicator

of FDI interest is the long term trends of FDI in India.


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Real FDI is increasing in India

An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991-92 to

around US$9 billion in 2006-07. It then hiked to around US$22 billion in 2007-08, rising to

around US$37 billion by 2009-10. It is now clear that FDI was related to the recessionary

conditions in the western economies. In other words, the stock of FDI has jumped by almost

US$100 billion since 2006-07. The recent flattening of monthly FDI flows is a sign more of

recovery in the western economies than any loss of long term interest in the Indian economy.

The monthly figure only shows that the incremental FDI is going back to the prerecession years

rather than indicating decline of FDI into India. In fact, a monthly inflow of US$1.1 billion is

about 30 percent higher than pre-recession years.

Also, FDI is all about long term investment. Companies have already invested in to India and are

unlikely to move elsewhere. Unless any dramatic negative changes in policy, FDI will continue

to inch upwards.

The crucial test for India is how to move from US$10-12 billion FDI economy to one where

investment levels are US$30-40 billion.


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FDI INFLOWS IN INDIA FROM 1992-2010

TABLE 2

COUNTRY :-INDIA

YEAR Foreign direct investment, net (BoP, current US$)

1992 276,512,438.97

1993 550,019,384.37

1994 890,688,166.02

1995 2,026,439,031.09

1996 2,186,732,315.38

1997 3,464,411,051.97

1998 2,587,058,630.28

1999 2,089,233,597.06

2000 3,074,684,332.48

2001 4,073,961,343.30

2002 3,947,895,991.54

2003 2,444,138,426.16

2004 3,592,188,066.41

2005 4,628,652,265.34

2006 5,992,285,935.50

2007 8,201,628,957.62

2008 24,149,749,829.71

2009 19,668,790,288.40

2010 11,008,159,606.75


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TOTAL GDP OF INDIA YEAR WISE

TABLE 3

COUNTRY :-INDIA

YEAR GDP (current US$)

1992 245553170107.80

1993 276037365895.65

1994 323506143586.02

1995 356298991324.31

1996 388343910827.92

1997 410915167039.78

1998 416252442323.14

1999 450476199267.53

2000 460182031503.10

2001 477848859030.57

2002 507189954396.40

2003 599461389810.15

2004 721573248762.03

2005 834035801005.14

2006 951339358745.93

2007 1242426253335.13

2008 1215992812023.52

2009 1377264718250.63

2010 1727111096363.26


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GDP PER CAPITA INCOME OF INDIA

TABLE 4

COUNTRY :-INDIA

YEAR GDP per capita (current US$)

1992 278.1460456

1993 306.9370229

1994 353.2895091

1995 382.2212355

1996 409.3178258

1997 425.6299684

1998 423.8035786

1999 450.9198997

2000 452.9693998

2001 462.8195234

2002 483.6641802

2003 563.1925702

2004 668.2959016

2005 761.9667042

2006 857.2083286

2007 1104.58803

2008 1066.693175

2009 1192.078146

2010 1474.980824


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CHINA

RECENT TRENDS IN CHINA

An important part of the economic reform process in China has been the encouragement of

foreign direct investment (FDI). Over the past decade, China has established itself as the top

recipient of FDI among developing countries and second in the world after the United States.

In 2006, inflows to China reached an estimated $69 billion, which represented 10% of world

FDI flows. Investment began to pour into China after 1992, and annual inflows have been

over 40 billion dollars since 1996. Trending steadily upward, FDI inflows were at 63 billion

dollars in both 2004 and 2005. These inflows are by far the largest of any developing country

and have remained remarkably stable and robust despite substantial fluctuations in the Asian

and global economies. China has accounted for about one-third of total developing-country

FDI inflows in recent years.

China is not just a magnet for FDI but it is increasingly also a source of FDI. Although its

outward investment is still small in absolute terms, especially compared to the huge inward

flow, Chinas overseas enterprises have been quietly gaining importance as new sources of

international capital. Chinas FDI outflows grew 32% to $16.1 billion in 2006. The recent

merger of the television and DVD operations of TCL and Thomson as well as the acquisition


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of IBMs personal computer division by Lenovo, highlight this trend.

This essay takes a closer look at the structure, determinants and effects of Foreign Direct

Investments into and from China. It traces the development of Chinas economic policy

regarding FDI and the resulting changes in both inflows and outflows. The objective is also to

discuss the determinants and impact of FDI on Chinas economic development.

The expansion of FDI into and from China has been accompanied by a rapid economic

growth and an increasing openness to the rest of the world. It is equally important to 2

understand why China has become one of the largest beneficiaries of FDI in the world and

what drives the more recent progress of Chinas outward FDI.

Trends and patterns of FDI

A. Inward FDI

1- Inward FDI: trends and policies

FDI flows to China have increased massively in recent years, reaching an estimated $69

billion in 2006, which represented 10% of world FDI flows (UNCTAD, 2006, p. 51).

Since economic reforms launching in 1979, China has received a large part of international

direct investment flows.China decided to accept foreign investment in 1978 and broke

sharply with socialist orthodoxy in establishing Special Economic Zones (SEZ) in 1979 and


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1980. Nationwide the impact of FDI was moderate until the early 1990s. As Figure 1 shows,

beginning in 19921993, the stream of incoming FDI turned into a flood.

China moved from restrictive to permissive policies in the early 1980s, then to policies

encouraging FDI in general in the mid-1980s to policies encouraging more high-tech and

more capital intensive FDI projects in the mid-1990s (Fung et al., 2004). During the

permissive period, the Chinese government established four Special Economic Zones (SEZs)

in Guangdong and Fujian provinces and offered special incentive policies for FDI in these

SEZs. While FDI inflows were highly concentrated within these provinces, the amounts

remained rather limited (Cheung and Lin, 2004). After 1984, Hainan Island and fourteen

coastal cities across ten provinces were opened, and FDI levels really started to take off. The

realized value of inward FDI to China reached US $3.49 billion in 1990. This kind of

For an in depth presentation of FDI trends in China, refer to OECD (2000). preferential regimes

policies resulted in an overwhelming concentration of FDI in the east. The expected spillover

effects from coastal to inland provinces failed to materialize. In reaction to the widening

regional gap, more broadly-based economic reforms and open door policies were pushed

forward in the 1990s. In the spring of 1992, Deng Xiaoping adopted a new approach which

turned away from special regimes toward more nation-wide implementation of open policies for

FDI inflows. New policies and regulations encouraging FDI inflows were implemented and

produced remarkable results. Since 1992 inward FDI in China has accelerated and reached the


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peak level of US$45.5 billion in 1998. After a drop due to the Asian crisis, FDI inflows into

China surged again, so that by 2003 China received US $53 billion in FDI, surpassing the

United States to become the world's largest single recipient of FDI. The peak of $72 billion

recorded in 2005 is partly related to changes in the methodology underlying Chinese FDI

statisticsfor the first time data on Chinese inward FDI include inflows to financial industries

(UNCTAD, 2006, p51). In 2005, non-financial FDI alone was $60 billion, and it registered a

slight decline after five years of increase. FDI into financial services surged to $12 billion,

driven by large-scale investments in Chinas largest State-owned banks. However, a significant

share of Chinas inward FDI might be the result of round-tripping. FDI to China may be

overstated by between 10% and 25%. The United Nations put Chinas stock of inward FDI close

to $400 billion, around 16% and 43% of Chinas GDP and Gross Fixed Capital Formation

respectively.

Inward FDI: main features

Naughton (2007) emphasizes that three distinctive characteristics have marked investment in

China over the past decade and that each of these characteristics reflects the dominant role

played by the cross-border restructuring of export-oriented production networks that

originally developed in other, neighboring East Asian economies. The first specificity stressed

by Naughton (2007) is that foreign direct investment has been the predominant form in which

China has accessed global capital (as opposed to portfolio capital or bank loans). Between

Round tripping refers to domestic investment in China (Mainland) being routed through Hong

Kong and back into the Mainland to take advantage of preferencial policies available only to


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foreign investors. After its accession to the World Trade Organization (WTO) in 2001, China

has removed many of the incentives, but there are still differences in treatment between

domestic and foreign investors; for example, the corporate tax is still levied at lower rates on

foreign firms than on domestic firms (normally 5%-13% on the former, compared with 25% on

the latter) (see UNCTAD 2006, p.12). Estimates vary from 25% to about 50% . 1979 and 2000,

Chinas actual usage of foreign capital amount to more than $500 billion of which more than

two third are in the form of direct investment .The second specificity is that an unusually large

proportion of Chinese FDI inflows are in manufacturing industry, as opposed to services or

resource extraction. The third specific characteristic of Chinas FDI inflows is the predominance

of other East Asian economies, especially Hong Kong, Taiwan and Macao as sources. An

additional important feature of Chinas FDI inflow is that they are mostly concentrated in the

eastern coastal regions. Some regions of China are in fact even more open to FDI than a

typical Southeast Asian nation. Inflows into Guangdong and Fujian, scaled to GDP, were of

course well above the Chinese national average. For the 11 years from 19932003 the average

annual incoming FDI/GDP ratio was 13% for Guangdong and 11% for Fujian. Other open

coastal areas were only a step behind Guangdong: Inflows to Shanghai averaged 9% of GDP,

and those to Jiangsu and Beijing averaged 7%. As noted by Naughton (2007), these inflows were

sufficiently large to transform these regional economies. The contractual forms in which FDI is

embodied in China have evolved steadily toward modes that permit the foreign investor a higher

level of control. In the early 1980s, FDI was dominated by contractual joint ventures (JVs) and

joint development projects. After the mid1980s, China began to strongly encourage the use of

equity joint ventures (EJVs), which became the dominant mode of investment. As China

evolved toward a market economy, the share of FDI in the form of wholly owned subsidiaries of


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foreign companies has climbed steadily, and in 2005 it accounted for exactly two-thirds of total

realized FDI inflows. Foreign-invested enterprises (FIEs) play a large role in China's economy,

accounting for 27% of value-added production, 4.1% of national tax revenue, more than 58% of

foreign trade in 2005, and 88% of high-technology exports, nearly all under Export Processing

arrangements. Companies from 190 countries and regions have invested in China, including 450

of the world's Fortune 500 companies. By the end of 2005, FIEs in China employed more than

24 million workers.

Manufacturing accounted for 63% of registered foreign capital at the end of 2005 To a large

extent, this emphasis is explainable in terms of the restrictions that China has

maintained on foreign entry into the most important service sectors .

While large proportions of FDI inflows in all developing countries typically go to wholesale

and retail trade, transport and telecommunications and finance, wholesale and retail trade,

they are clear underperformers in China. Naughton (2007) notes that these three sectors

together account for 27% of world developing-country inflows (including China) but only 4%

of inflows into China itself. In China, by contrast, incoming FDI in the service sector is highly

concentrated in real estate, specifically in property development. This sector accounted for

11% of total investment in 2005. The real estate industry has indeed become a hot spot for

Documents

Foreign Direct Investment Pro