Question 1

Part a
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It
can provide a firm with new markets and marketing channels, cheaper production facilities,
access to new technology, products, skills and financing. For a host country or the foreign firm
which receives the investment, it can provide a source of new technologies, capital, processes,
products, organiational technologies and management skills, and as such can provide a strong
impetus to economic development. Foreign direct investment, in its classic definition, is defined
as a company from one country making a physical investment into building a factory in another
country (!liber " #lick, $%%&). 'he direct investment in buildings, machinery and e(uipment is
in contrast with making a portfolio investment, which is considered an indirect investment. In
recent years, given rapid growth and change in global investment patterns, the definition has
been broadened to include the ac(uisition of a lasting management interest in a company or
enterprise outside the investing firm)s home country (!liber " #lick, $%%&).
Foreign Direct Investment can have important positive effects on a host country)s development
effort. In addition to direct capital financing its supplies, FDI can be a source of valuable
technology and know*how while fostering linkage with local firms, which can help +umpstart an
economy (!lfaro, $%%&). ,ne of the most important positive externalities of FDI is that the
foreign companies share their technologies and special knowledge which in the long run benefits
productivity and efficiency. It also aids in the growth of the host nation)s economy over time as
more money is in+ected into the market and therefore results in greater production. !dditionally,
the multinational firms bring about a diverse corporate work culture which helps employees to
grow and be more professional in their field of work.
Part b
-ource. UNCTAD.ORG >> Annex Tables - Excel
Part c
/oth, India and #hina are two of the fastest growing economies in the world. #hina is also
ranked as the second largest economy of the world. 0hen looking at the data it is obvious that
#hina)s FDI statistics are much higher as compared to India (shown in Figure 1). ,ver the last
ten years, the FDI inflow in #hina had steadily increased from $%%1 till mid $%%2, where it
peaked at 1%2&1$ (millions34-D). 'his trend was followed by a sharp decrease in the amount if
FDI and continued to drop till mid $%%5. 'he most likely reason behind that was the 6lobal
financial crisis which induced investors to lose confidence but it picked up the pace again since
then. 'he outflow of FDI has also seen steady increase since the #hinese government became
more liberal over time and allowed #hinese citiens to invest abroad.
Table 1.0 FDI Inflows and Outflows for India and China, 2001 2010 (Millions of Dollars)
Year FDI Inflow (CHINA) FDI outflow (CHINA) FDI Inflow (INDIA) FDI outflow(INDIA)
2001 46 878 6 885 5 478 1 397
2002 52 743 2 518 5 630 1 678
2003 53 505 2 855 4 321 1 876
2004 60 630 5 498 5 778 2 175
2005 72 406 12 261 7 622 2 985
2006 72 715 21 160 20 328 14 285
2007 83 521 22 469 25 350 17 234
2008 108 312 52 150 42 546 19 397
2009 95 000 56 530 35 649 15 929
2010 105 735 68 000 24 640 14 626
,n the other hand, India)s FDI inflow has also been increasing for the past decade but
not at the rate of #hina. India also reached its peak in mid $%%2 at 7$879 (millions34-D) but it
has started going down since then and has yet to recover the trend. India)s FDI outflow has been
closely related to the inflow with both inflow and outflow rising and falling at the same time and
at an almost identical rate (Figure 1.%).
Figure 1.0 FDI Inflow and Outflow for China and India
Part d
China
'he economy of #hina has improved by leaps and bounds in large part due to the FDI)s. In
155&, :8%% billion in FDI)s had been accumulated by #hina (;oran, 6raham " /lomstrom,
$%%8). /ut back then the government of #hina only allowed investments if there was an influx
of new technology into the country. 'hese restrictions were removed slowly in order to attract
more investments and by $%%1, all kinds of investments were allowed in #hina. <ighest amount
of FDI)s into #hina came from 4-! and =apan (!ppendix 1.%). 0orld*famous companies such
as !pple, >ike " Ford ;otors have invested in #hina thus proving that the FDI environment
has actually improved after the restrictions (?pstein " ;eredith, $%1%).
In !pril $%1%, the -tate #ouncil, #hina@s cabinet, introduced a series of innovative measures to
optimie foreign investment structures. 'he measures included encouraging more foreign
investment in high*end manufacturing industries, high*tech industries, modern services
industries, new energy, and energy*savings and environmental protection industries (Ainhua,
$%1%). 'hese measures indicate a friendly government who is trying to provide incentives for
increased FDI)s and reduced regulations. #ommerce ministry spokesperson Bao had this to say
CForeign*invested companies, as long as they are established in #hina, are all regarded as
#hinese companies, as they pay tax, hire staff and carry out research and development in
#hina,C. C!s long as their operations comply with relevant policies, #hina@s economic stimulus
program also applies to them (Dow+ones newswires, $%1%). #hina is dedicated to creating a
Cmore open and optimiedC investment environment for foreign businesses, and will strive to
remain the world@s most attractive destination for foreign direct investment (FDI), Dice*
Eresident Ai =inping said (Fingfen, $%1%). !lso development of less affluent parts of the
country is high on the priority list with policies such as GDevelop #hina)s 0est at Full /lastH to
revive FDI into the 0estern and >ortheast regions of #hina where there is less development
(Iong, $%%9). 'he government also is part of the 0orld 'rade ,rganisation (0',) and this has
reduced trade restrictions (0',, $%1%). Eolitical corruption however is seemingly high with a
sub+ective corruption index of 9.8 (0ei, $%%%). ;ost FDI)s choose #hina over other countries
due to the low cost of production which is made possible by the cheap labour, cheap land and
easily available raw materials are cheap prices. ?ven though labour is cheap they are efficient
and well*skilled after training.
;ultinational companies that want to succeed in #hina will also need to develop better
knowledge of #hinese local markets and government priorities. -ome of this knowledge can be
bought directly from sector consultancies, or, better yet, developed through relationships with
government officials ('se, $%1%).
India
India is a democratic, demand*driven economy and also has a legal structure that the 0estern
world is more accustomed to (Eark, $%1%). India)s economy has grown faster than ever,
considering that the amount of FDI has been gradually rising throughout the years. 'he gross
domestic product of India has en+oyed phenomenal growth, from J19bn in 152% to more than
J8%%bn today (-cott, $%%5). <ence, India as an emerging country seems to be attractive for the
potential investors for longer*term investment. ! new 4> survey clearly showed that India is
the second most preferred country for investment for Foreign Direct Investment (FDI) after
#hina (,neIndia news, $%1%). In recent years FDI has mostly been in terms of roads and
highways and electricity. #onstruction of bridges and tunnels are also done by outside countries.
India received :8.& billion in FDI in the year $%%7 and the FDI system in India has a much
simpler system compared to that of other countries (?conomy 0atch, $%%9). 'he 4nion
6overnment has introduced various financial incentives for investments in core and
infrastructure sectors as also high priority industries such as information technology and through
specific schemes such as 6rowth #entre -chemes, ?lectronic <ardware 'echnology Eark
(?<'E), the 'ransport -ubsidy -chemes, the >ew Industrial Eolicy for the >orth ?astern -tates,
-oftware 'echnology Eark (-'E), ?xport Erocessing Kones (?EKs), -pecial ?conomic Kones
(-?Ks), etc. Foreign direct investment is freely allowed in all sectors including the services
sector, except where the existing and the notified sectoral policy do not permit FDI beyond a
ceiling. Dirtually FDI for all items or activities can be brought in through the automatic route
under powers delegated to the Leserve /ank of India (L/I) and for remaining activities through
6overnment approval. 6overnment approvals are accorded on the recommendation of the
Foreign Investment Eromotion /oard (FIE/). <owever FDI is not allowed under the following
sectors. !rms and ammunition, !tomic ?nergy, #oal and lignite, Lail 'ransport, ;ining of
metals like iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper and inc
(#ompany !dvice, $%%8). Eolitical corruption is higher than #hina with a sub+ective corruption
index of M.1 (0ei, $%%%). India too, is a member of the 0',, so trade restrictions are not a
problem to be worried about. >umerous manufacturers have indicated that the raw materials are
affordable and labor in India is cheap. ?ntrepreneurship is also intelligent in India with a very
strong intellectual property regime. 'he government has also invested heavily in the education
and management system (/ains, $%%M). 'echni(ues taught to various employees leads to more
skilled workforce thus resulting in more foreign companies investing for a higher efficiency and
much productive workforce. !dditional costs such as training can be cut down on.
<owever large companies like #oke entered the markets created a monopoly by eliminating
competition, this leads to the public of India having lesser choice and having to pay a greater
price than previously. ,ther than technological hub /angalore, other parts of India are not so
technologically advanced. 'his is slowly but surely changing with the increasing FDI)s coming
into the country (4ttoransen, $%%2). Furthermore an ordinary Indian)s income does not compare
favorably of someone living in a more affluent country such as 4nited !rab ?mirates, this
means that they +ust have enough to pay for necessities and investments by foreign companies
end up +acking up prices resulting in consumers not being able to afford the goods or services
they provide.
Recommendation
#hina and India were two countries which muscled out almost all the countries in terms of
attracting FDI)s in $%%5 view appendix $. Foreign investors) confidence of investing in India is
high as the government of India provides guarantees to foreign investors in pro+ects found viable
unlike in #hina where some investors are beginning to lose confidence (;c6regor " =enkins,
$%1%). /oth countries are heavily populated but India has power supply problems with (uite a
significant proportion of the country still not able to en+oy the benefits of having continuous
electricity. In other words there is an electricity shortage (Indiaonestop, $%%$). In regards of
power generation plant, the electrical energy is essential for any industrial growth in all
countries. 'he availability of good power supply benefits almost every sector of a nation. <ence,
6overnment of India has given high priority to the power sector of the nation. India has a
flourishing power sector that is meeting most of the energy needs of the country.
(;apsofindia.com, $%1%). Furthermore, with the amount of various electric power plants listed
publicly all over the Internet, India has sufficient technology and expertise to generate electricity
through the use of coal power, wind power, water power and nuclear power. ,verall, with the
availability of various sources of investment, India seems to indicate a better investing
destination for -ingapore Eower Iimited rather than #hina in terms of power generation plant.
,n the other hand, #hina is certainly not a bad choice to be invested in. #hina challenges the 4-
for world economic leadership. -ince the end of 155% the -hanghai -tock ?xchange #omposite
Index has risen more than $,7%% percent, for an annual return of almost 15 percent a year
(Dorfman, $%1%).
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Appendix 1.0
Appendix 2