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Ankit Avasthi 043011

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

 
  

is the process whereby residents of one country (the source country) acquire ownership of
assets for the purpose of controlling the production, distribution, and other activities of a firm in
another country (the host country). The international monetary fund¶s balance of payment manual
defines 
as an investment that is made to acquire a lasting interest in an enterprise operating in
an economy other than that of the investor. The investors¶ purpose being to have an effective voice
in the management of the enterprise¶. The united nations 1999 world investment report defines 

as µan investment involving a long term relationship and reflecting a lasting interest and control of a
resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident
in an economy other than that of the foreign direct investor ( 
enterprise, affiliate enterprise or
foreign affiliate).

 

ndia is the second largest country in the world, with a population of over 1 billion people. As a
developing country,
ndia¶s economy is characterized by wage rates that are significantly lower
than those in most developed countries. These two traits combine to make
ndia a natural
destination for 
and foreign institutional investment (

). Until recently, however,
ndia has
attracted only a small share of global 
and 

primarily due to government restrictions on
foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000,

ndia has liberalized its investment regulations and actively encouraged new foreign investment, a
sharp reversal from decades of discouraging economic integration with the global economy.
The government of
ndia (GO
) has also recognized the key role of the 
and 

in its process of
economic development, not only as an addition to its own domestic capital but also as an important
source of technology and other global trade practices.
n order to attract the required amount of 

and 

it has bought about a number of changes in its economic policies and has put in its practice
a liberal and more transparent 
and 

policy with a view to attract more 
and 

inflows
into its economy. These changes have heralded the liberalization era of the 
and 

policy
regime into
ndia and have brought about a structural breakthrough in the volume of 
and 


inflows in the economy.
n this context, this report is going to analyze the trends and patterns of

and 

flows into
ndia during the post liberalization period that is 2006 to 2009 year.

 
By almost all accounts, foreign direct investment (
) in China has been one of the major success
stories of the past 10 years. Starting from a base of less than $19 billion in 1990, the stock of 
in
China rose to over $300 billion at the end of 1999. Ranked by the stock of inward 
, China thus

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has become the leader among all developing nations and second among the APEC nations (only the
United States holds a larger stock of inward 
). 
has contributed significantly to Chinese
economic development: much and perhaps most of the growth of China¶s exports can be attributed
to foreign-invested enterprises and per capita income growth in those regions of China where 
is
concentrated has been significantly higher than in other regions. China has been boasting the largest
amount of 
inflow of all developing countries, with about 90 percent of it brought in by
Greenfield investments.




 

     
ü Through financial collaborations.
ü Through joint ventures and technical collaborations.
ü Through capital markets via Euro issues.
ü Through private placements or preferential allotments.



  

yc Arms and ammunition

yc Atomic Energy
yc Coal and lignite
yc Rail Transport
yc ^ining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper,
zinc.

 
    


ndian companies are allowed to raise equity capital in the international market through the issue of
Global epository Receipt (G Rs). G R investments are treated as 
and are designated in
dollars and are not subject to any ceilings on investment. An applicant company seeking
Government's approval in this regard should have consistent track record for good performance
(financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for
infrastructure projects such as power generation, telecommunication, petroleum exploration and
refining, ports, airports and roads.

 
!
There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year. A company engaged in the manufacture of items covered under
Annex-


of the New
ndustrial Policy whose direct foreign investment after a proposed Euro issue

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is likely to exceed 51% or which is implementing a project not contained in Annex-


, would need
to obtain prior 
PB clearance before seeking final approval from ^inistry of inance.

D 
The proceeds of the G Rs can be used for financing capital goods imports, capital expenditure
including domestic purchase/installation of plant, equipment and building and investment in
software development, prepayment or scheduled repayment of earlier external borrowings, and
equity investment in JV/WOSs in
ndia.

 
^auritius invested Rs.19,18,633 million in
ndia Up to the August 2009, equal to 44.01 percent of
total 
inflows. ^any companies based outside of
ndia utilize ^auritian holding companies to
take advantage of the
ndia- ^auritius ouble Taxation Avoidance Agreement ( TAA). The
TAA allows foreign firms to bypass
ndian capital gains taxes, and may allow some
ndia-based
firms to avoid paying certain taxes through a process known as ³round tripping.´
The extent of round tripping by
ndian companies through ^auritius is unknown. However, the

ndian government is concerned enough about this problem to have asked the government of
^auritius to set up a joint monitoring mechanism to study these investment flows. The potential
loss of tax revenue is of particular concern to the
ndian government. These are the sectors which
attracting more 
from ^auritius Electrical equipment Gypsum and cement products
Telecommunications Services sector that includes both non- financial and financial uels.

!
China has aggressively shaped a relatively complete range of laws and regulations governing
foreign investment. They include the Law of the People¶s Republic of China upon oreign wholly
Owned Enterprises, Law of the People¶s Republic of China upon Sino-oreign Joint Ventures, Law
of the People¶s Republic of China upon Sino-oreign Cooperative Enterprises, and the Guiding
irectory on
ndustries open to oreign
nvestment. China¶s laws and regulations on 
also
include related preferential policies and stipulations for SEZs in the country.
China has designated certain parts of the country as special economic areas and each is governed by
different policies. China has also enforced two policies called evelop China¶s West at ull Blast
and Strategy of reviving Rusty
ndustrial Bases to encourage 
into its western and northeast
regions.

" !#

East Asia, particularly Hong kong, is the most important origin of China¶s 
.
n 2002, Hong
Kong¶s accumulated paid-in 
amounted to $204.9 billion. Based on official statistical data,

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Taiwan is also a pivotal origin of China¶s 
with an accumulated $33.1 billion.
n fact, wuite a fe
Taiwanese businessmen invested in mainland China via such springboards as Hong Kong, the
virgin
slands, and the Cayman
slands in order to avoid the multiple restrictions exerted by the
incumbent Taiwan authority.
ndeed, the actual amount of Taiwan-originated investment in
mainland China may be two to three times the amount publicly acknowledged. Therefore, it is
unsurprising that Taiwan ranks as the second most important place of origin of 
in China.
n
addition, the US, Japan, and some developed countries in Europe have also contributed to 
in
China.
t is worth pointing out that renowned 

s from developed countries have been the primary
investors in China, and the fund largescale capital and technology intensive projects. The presence
of these 
Ws, such as
B^, GE, G^, ^otorola, Sony, Samsung are particularly significant for
china since its signals the greater possibility of even more future foreign investment.

"$ $%!

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1.c China and
ndia, also known as CH
N
A, are the two largest developing countries in the
world. China and
ndia have created an
mage in the world of being provider of Low cost
labor for various industries.
2.c Both countries are showing tremendous potential of their domestic industries. Large
populations in both the countries provide good domestic market potential which steer their
respective economies on the basis of strong domestic consumption only.
3.c Strength of middle class citizens in both the countries have convinced the foreign investors
that in future growth is not possible if they are not present in CH
N
A markets.
4.c As mentioned above, both China and
ndia have almost 50% of 
coming from a single
source country.
n the case of China, it is Hong Kong and for
ndia, it is ^auritius.


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´!&! !'

n 2004 alone, China received US $60.3 billion in 
.
ndia, the next most popular destination

, received a paltry US $5.3 billion. The yawning gap in figures is of course standard and well
known. No other country attracts as much foreign direct investment (
) as China does. Last year
some US $60 billion poured in, about twelve times the amount that flowed into
ndia. Between
1979 (the first year of the China Economic system reform) and 2004, China absorbed a total of
about US $560 billion in 
1.
ndia, the next most popular destination for foreign investment in
manufacturing2 received almost US $200 billion less in 
than China.
n 1979, when China
kicked off its reform process,
ndia was not too far behind. The quantum leaps it has made since
then has been attributed largely to this non debt-creating, less volatile form of investment which
transfers not just money but also managerial and technological know-how. Exports have been
directly impacted, with China exporting 4.152 times more in 2000 than in 1978 and per capita G P
growing by 3.8 times. 
has also created more jobs for the Chinese. uring 1993-1999, when

really shot up, China added about 20 million jobs.

%!!(! 

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"  # 

rom 1985 to 1996, two-thirds of foreign investment in China came from HongKong, ^acau, and
Taiwan. There China has some 30 million ethnic Chinese, many of them with close ties to the
mainland. This Chinese iaspora pioneered export-led growth with labour intensive manufacture in
Taiwan, Hong Kong and Singapore and once wages rose sharply they relocated these
manufacturing operations to mainland China when the economy was opening up in 1980's bringing
with it the huge volumes of 
that the country is now known for9. As of the end of 1992, Hong
Kong investors had brought in US $10 billion, starting 25000 factories in Guangdong alone, while
the Taiwanese made an estimated 6000 investments worth US $4 billion10.
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  $"   

The fact that
ndia is increasingly building from the ground up while China is still pursuing a top-
down approach reflects their contrasting political systems:
ndia is a democracy, and China is not.
But the different strategies are also a function of history. China's Communist Party came to power
in 1949 intent on eradicating private ownership, which it quickly did.
ndia, on the other hand,
developed a softer brand of socialism, abian socialism, which aimed not to destroy capitalism but
merely to mitigate the social ills it caused. China has formalized federal/state infighting by
integrating state and local authorities into the federal approval procedures. oreign investors can

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obtain simultaneous approval from authorities at both levels. While China has, in effect, usurped
the state role in granting approvals,
ndia democratically adheres to the principle of states' rights
inherent in federalism.

‰    
  

Chinese has created a hospitable environment for investment ± non resident or otherwise. China not
only offers a low wage rate (one third of ^exico; one fifteenth of the US), but a largely literate
population (85% literacy rate of the population above 15 years), a disciplined labour market, a
stable exchange rate in dollars with infrastructural facilities and tax incentives for foreign
enterprises.

  "    

China, once known for its red tape and bureaucratic wrangles, has acted nimbly when it has come to
foreign investment.
ndia still remains caught up in a warp. A simple setting up of a restaurant
requires 38 clearances . The number shoots up when it comes to factories and bigger capital
investments. While China despite its famed shyness of anything foreign has opened up,
ndia still
remains mired in political debates on caps on foreign investment.

%  

  
China opened its doors to 
in 1979 and has been progressively liberalizing its investment
regime.
ndia allowed 
long before but did not take comprehensive steps towards liberalizing
until 1991. Also, two countries focused on different types of 
and pursued different strategies
for industrial development.
ndia long followed an import substitution policy and relied on domestic
resource mobilization and domestic firms, encouraging 
only in Higher-technology activities.
espite the progressive liberalization, imposition of joint venture technology activities. espite the
progressive liberalization, imposition of joint venture requirements and restrictions on 
in
certain sectors, China has since its opening favored 
, especially export oriented 
, rather than
domestic firms.

& 
& 

Having said about the attractiveness of China as a lucrative 
destination, there are also some
pitfalls. China¶s figures of 
are a little inflated. Last year stat shows that China attracted 12
times more 
than
ndia, but the real figure would be closer to 4 to 5 times only. As there is huge
difference in 
policies of both the countries, what might be recorded as 
in China might just
not be the case in
ndia.
ndia is a little more conservative in acknowledging foreign money as 

but China aggressively publishes almost every foreign inflow of money as 
.

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