India can attract more FDI and can compete with China, if it can create a favorable environment similar to that of China.With the rapidly changing world economy, every country around the globe is trying to integrate its economy with rest of the world. This process is known as globalization. Globalization, as a process of integration of economies around the globe, usually goes through various ways and one such visible way is the inflow of Foreign Direct Investment (FDI). In recent times, FDI has emerged as a buzzword in international business and has received substantial consideration in the policy analysis circles. It represents long-term movement of capital in and out of a country with the purpose of buying physical assets to start a business. It specifies the transfer of a package of resources across the countries, which not only includes capital, but also technology, management, and marketing expertise. Although the process of FDI is a universal phenomenon, the developing countries, however, have strived hard to attract more of it to fill the resource gaps for their economic development.
The global FDI inflows have been on an increasing trend and have increased from a low of US$ 209 bn in 1995 to US$ 612 bn in 2005. Though the major share of FDI inflows was always into developed countries, but an important feature was that all developing regions including Africa lately saw an increase in inflows. Among the individual countries, China has been particularly active and successful in attracting large FDI inflows since the beginning of its economic reforms in 1979. On the contrary, India has been successful in attracting large inflows of FDI, though at a slower rate in comparison to China, since the reforms that began in 1990. One of the most visible reasons for China having an upper hand in attracting FDI is that the country started its reform process much earlier than India. During the beginning of 1990s, India had only US$0.097 bn FDI inflows while China had US$3.5 bn and the ratio of FDI inflows between the two countries was about 36:1. Both the Asian neighbors were progressing at a faster rate during the 1990s for attracting more and more FDI inflows into the economy. In the turn of the century, China attracted an amount of US$40.7 bn FDI, while India attracted US$2.3 bn only but substantially high in comparison to its earlier period. The increase in the FDI inflows led to the decline of FDI ratio between the countries to about 17:4. At present, China’s FDI inflows have increased to US$62 bn, while India’s FDI inflows are in the region of US$6 bn and have, in the process, contributed to the decline of the ratio between the two countries to 10:3. It is predicted that if this declining ratio continues, India can level its FDI inflows with China within a couple of years. But the question is why is China very successful in attracting FDI inflows and how can India level its position with China? |
