Academic journal article China: An International Journal

Chinese Success with FDI: Lessons for India

Academic journal article China: An International Journal

Chinese Success with FDI: Lessons for India

Article excerpt

In 1947, China and India were on the same footing in terms of main economic indicators such as per capita income. But today, the picture of the two countries is very different. For instance, China's GDP growth rate reached 10.7 per cent in 2006, while India's was 9.2 per cent. (1) It was estimated that China would grow by 10 per cent in 2007 and 9.5 per cent in 2008, while India's growth for these two years would be 8.4 and 7.8 per cent, respectively. In 2005, China's GDP, at about USD2.2 trillion, was roughly thrice that of India; its trade amounted to 7.4 per cent of world trade, as against one per cent in India's case. The other key parameters of both economies suggest that the Chinese dragon is flying ahead of the Indian elephant. (2) Clearly, both countries are the star growth performers among the world's major economies, though a major difference in scale between the two countries exists (see Table 1). China's economy is three times larger than India's and contributes significantly more to global economic growth. It has emerged as a production hub and export market for the region. These are the key factors in boosting intra-regional trade and investment in China. Meanwhile, India has also grown rapidly following reforms in the early 1990s and more recently, has become a global leader in service exports, even though its impact on the regional and global economies has so far been more or less limited. (3) Both the Asian giants are on their way to becoming economic super powers, but both have different strength and weaknesses. They also follow different economic models and political systems. (4) While China is a closed society run by a tightly knit communist party, India is an open democratic society, with an independent judiciary and free press. (5)

Despite their differences, there are many lessons these countries can learn from each other. Chinese success in attracting foreign direct investment (FDI) may prove very useful to other countries, especially India which aims to become a global economic power by 2020. Hence, the main objective of this article is to examine the lessons which India can learn from China's success in attracting FDI on a large scale.

Economic Miracle

China is continuing to grow rapidly. GDP growth was over 10 per cent in 2005 and 2006, and was projected to grow more or less at that level in 2007 and 2008. Net exports and investment continue to expand rapidly. Strong world demand and China's increasing role in global processing trade have propelled the export growth. A slowdown in import growth resulted in a current account surplus of more than 7 per cent of GDP, up from 3.5 per cent in 2004 (see Table 2). China's economy continues to rely heavily on fixed asset investment. However, excess liquidity is a problem. It is fast becoming a market economy.

India's GDP growth exceeded 8 per cent during the past few years, reaching over 9 per cent in 2006 despite several weaknesses in policy and institutions. Its industrial production has grown over 10 per cent in the same period and the country accumulated a foreign exchange reserve of more than USD175 billion. Over the past three years, the ratio of exports of goods and services to GDP shot up from 14.6 per cent to 20.5 per cent, India's share in global merchandise exports doubled from 0.5 per cent in 1990-1 to one per cent in 2006, and its share of global services exports also doubled in recent years to 2.5 per cent. The growth in the various sectors of the economy has, in turn, made India a very attractive destination for international investors. The flow of investments has been on the increase and this is reflected in a sharp rise in the benchmark stock indices like the Bombay Stock Exchange (BSE) Sensex. The overall economic scenario is quite bright and provides ample scope for optimism. Its expansion is primarily led by domestic demand.

China, whose growth has been driven by manufacturing, has tapped into domestic savings and foreign investment to build impressive infrastructure, whereas India's strength is its service industry. …

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