DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY,
LUCKNOW
2018-19

INVESTMENT LAW
(FINAL DRAFT)
On

“FOREIGN DIRECT INVESTMENT

IN INDIA”

Submitted to: Submitted by:

Mr. MANAUJ KUMAR Abhishek Kumar Singh, Section-B

Associate Professor (law) Enrollment No. 130101004
TABLE OF CONTENTS

SUMMARY…………………………………………………………. 3
RESEARCH DESIGN………………………………………………………… 4
INTRODUCTION TO FDI…………………………………………………… 5
TYPE OF FDI……………………………………………………………… ...5-7
METHODS OF FDI…………………………………………………………… 8
FOREIGN DIRECT INVESTMENT POLICY IN INDIA……………...10-19
FDI AND ECONOMIC DEVELOPMENT………………………………20-23
CONCLUSION…………………………………………………………….24-26
SUMMARY

Foreign direct investment (FDI) has played an important role in the process of globalisation during
the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-
eighties may be attributed to significant changes in technologies, greater liberalisation of trade and
investment regimes, and deregulation and privatisation of markets in developing countries like
India.

The title of the empirical study is “FDI inflows and its impact in India” during 2007 to 2011. The
present study aims at providing detailed information about FDI inflows in India during the
subsequent years. The analysis is fully based on secondary data collected through different website
and journals.

The project aims at providing information of present FDI policy, year wise FDI inflows, sector
wise FDI inflows, countries contribution to maximum of FDI inflows, state wise FDI inflows,
trends and patterns of FDI inflows in different sector, FDI comparison between India and China
and so on.

From the study it has been found out that total FDI inflows are estimated at US$19.43 billion
during April 2010 to March 2011 and cumulative FDI inflows from 1991-2011 was $146319
million. The services sector, computer hardware & software, telecommunications, real estate,
construction received maximum FDI inflows in India and Mauritius is the main source followed
by Singapore, the US, the UK, the Netherlands and Japan for FDI inflows in India. From the
hypothesis it has been found out that there is a positive relationship between FDI and economy
growth of India.

And thus different suggestion and recommendation are given to improve the present condition of
FDI in India.
Research Design

Statement of the problem:

There are many factors that influence the economic condition. One of them is FDI. Hence there is
a need to study the impact of FDI on the change in economy.

Objectives of the research:

The study covers the following objective
1. To study the trends and patterns of flow of FDI.
2. To evaluate the impact of FDI on the economy.

Methodology and Data collection:

AIM: To establish the relationship between FDI and growing trends in the Indian economy.
PRIMARY SOURCE: Not Applicable in this research
SECONDARY SOURCE:
The present study is of analytical nature and makes use of secondary data. The relevant secondary
data has been collected from reports of the Ministry of Commerce and Industry, Government of
India, Centre for Monitoring Indian Economy, Reserve Bank of India, World Investment Report.
It is a time series data and the relevant data has been collected for the period 2007-2011.

Hypothesis:
The study has been taken up for the period 2007-2011 with the following hypothesis
Ho: FDI doesn’t affect the economic growth of the country (India).
H1: FDI affect the economic growth of the country (India).

Scope of the study:

1) The study is aimed to understand the flow of FDI in the Indian economy.
2) Finding out the reason for the difference in FDI inflows
3) How FDI is affecting various sector of economy.
INTRODUCTION TO FDI

Foreign Direct Investment (FDI) broadly encompasses any long-term investments by an entity that
is not a resident of the host country. Typically, the investment is over a long duration of time and
the idea is to make an initial investment and then subsequently keep investing to leverage the host
country’s advantages which could be in the form of access to better (and cheaper) resources, access
to a consumer market or access to talent specific to the host country - which results in the
enhancement of efficiency. This long-term relationship benefits both the investor as well as the
host country. The investor benefits in getting higher returns for his investment than he would have
gotten for the same investment in his country and the host country can benefit by the increased
know how or technology transfer to its workers, increased pressure on its domestic industry to
compete with the foreign entity thus making the industry improve as a whole or by having a
demonstration effect on other entities thinking about investing in the host country.

Types of FDI’s

BY DIRECTION

Outward FDI: An outward-bound FDI is backed by the government against all types of associated
risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk
coverage provided to the domestic industries and subsidies granted to the local firms stand in the
way of outward FDIs, which are also known as 'direct investments abroad.'

Inward FDIs: Different economic factors encourage inward FDIs. These include interest loans,
tax breaks, subsidies, and the removal of restrictions and limitations. Factors detrimental to the
growth of FDIs include necessities of differential performance and limitations related with
ownership patterns.

Horizontal FDI- Investment in the same industry abroad as a firm operates in at home.

Vertical FDI
 Backward Vertical FDI: Where an industry abroad provides inputs for a firm's domestic
production process.
 Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's domestic
production.

BY TARGET

Greenfield investment: - Direct investment in new facilities or the expansion of existing facilities.
Greenfield investments are the primary target of a host nation’s promotional efforts because they
create new production capacity and jobs, transfer technology and know-how, and can lead to
linkages to the global marketplace. The Organization for International Investment cites the benefits
of Greenfield investment (or in sourcing) for regional and national economies to include increased
employment (often at higher wages than domestic firms); investments in research and
development; and additional capital investments. Disadvantage of Greenfield investments include
the loss of market share for competing domestic firms. Another criticism of Greenfield investment
is that profits are perceived to bypass local economies, and instead flow back entirely to the
multinational's home economy. Critics contrast this to local industries whose profits are seen to
flow back entirely into the domestic economy.

Mergers and Acquisitions

Transfers of existing assets from local firms to foreign firm takes place; the primary type of FDI.
Cross-border mergers occur when the assets and operation of firms from different countries are
combined to establish a new legal entity. Cross-border acquisitions occur when the control of
assets and operations is transferred from a local to a foreign company, with the local company
becoming an affiliate of the foreign company. Nevertheless, mergers and acquisitions are a
significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the
United States. Mergers are the most common way for multinationals to do FDI.
BY MOTIVE

FDI can also be categorized based on the motive behind the investment from the perspective of
the investing firm:

•Resource-Seeking
Investments which seek to acquire factors of production those are more efficient than those
obtainable in the home economy of the firm. In some cases, these resources may not be available
in the home economy at all. For example seeking natural resources in the Middle East and Africa,
or cheap labour in Southeast Asia and Eastern Europe.
•Market-Seeking
Investments which aim at either penetrating new markets or maintaining existing ones.FDI of this
kind may also be employed as defensive strategy; it is argued that businesses are more likely to be
pushed towards this type of investment out of fear of losing a market rather than discovering a new
one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s
Accounting, Advertising and Law firms.

•Efficiency-Seeking
Investments which firms hope will increase their efficiency by exploiting the benefits of economies
of scale and scope, and also those of common ownership. It is suggested that this type of FDI
comes after either resource or market seeking investments have been realized, with the expectation
that it further increases the profitability of the firm
Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the 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 income tax rates
 Tax holidays
 Preferential tariffs
 Special economic zones
 Investment financial subsidies
 Soft loan or loan guarantees
 Free land or land subsidies
 Relocation & expatriation subsidies
 Job training & employment subsidies
 Infrastructure subsidies
 R&D support
Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or Investment Routes for
Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been
formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has
prescribed the administrative and compliance aspects of FDI. A foreign company planning to set
up business operations in India has the following options:

1. Automatic approval by RBI:

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to
compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and
100% is allowed depending on the category of industries and the sectoral caps applicable. The lists
are comprehensive and cover most industries of interest to foreign companies. Investments in high-
priority industries or for trading companies primarily engaged in exporting are given almost
automatic approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases:

FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach
is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for
foreign investors to have a local partner, even when the foreign investor wishes to hold less than
the entire equity of the company. The portion of the equity not proposed to be held by the foreign
investor can be offered to the public.
FOREIGN DIRECT INVESTMENT POLICY IN INDIA

FDI is prohibited in sectors like

(a) Retail Trading (except single brand product retailing)
(b) Lottery Business including Government /private lottery, online lotteries, etc.
(c) Gambling and Betting including casinos etc.
(d) Chit funds
(e) Nidhi Company
(f) Trading in Transferable Development Rights (TDRs)
(g) Real Estate Business or Construction of Farm Houses
(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway
Transport (other than Mass Rapid Transport Systems).
Foreign technology collaboration in any form including licensing for franchise, trademark, brand
name, management contract is also prohibited for Lottery Business and Gambling and Betting
activities.

PERMITTED SECTORS
In the following sectors/activities, FDI up to the limit indicated against each sector/activity is
allowed, subject to applicable laws/ regulations; security and other conditionalities. In
sectors/activities not listed below, FDI is permitted upto 100% on the automatic route, subject to
applicable laws/ regulations; security and other conditionalities.
Wherever there is a requirement of minimum capitalization, it shall include share premium
received along with the face value of the share, only when it is received by the company upon
issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue
transfer of shares beyond the issue price of the share, cannot be taken into account while
calculating minimum capitalization requirement;
Infrastructure
10% of India's GDP is based on construction activity. Indian government has invested $1 trillion
on infrastructure from 2012–2017. 40% of this $1 trillion had to be funded by private sector. 100%
FDI under automatic route is permitted in construction sector for cities and
townships.[17][18][non-primary source needed][19]

Automotive
FDI in automotive sector was increased by 89% between April 2014 to February 2015.[20] India
is 7th largest producer of vehicles in the world with 17.5 million vehicles annually. 100% FDI is
permitted in this sector via automatic route. Automobiles shares 7% of the India's GDP.[21]

Pharmaceuticals
Indian pharmaceutical market is 3rd largest in terms of volume and 13th largest in terms of value.
Indian pharma industry is expected to grow at 20% compound annual growth rate from 2015 to
2020.[22] 100% FDI is permitted in this sector.[23][24][25]

Service
FDI in service sector was increased by 46% in 2014–15. It is US $ 1.88Bl in 2017. Service sector
includes banking, insurance, outsourcing, research & development, courier and technology
testing.[26] FDI limit in insurance sector was raised from 26% to 49% in 2014.[27]

Railways
100% FDI is allowed under automatic route in most of areas of railway, other than the operations,
like High speed train, railway electrification, passenger terminal, mass rapid transport systems
etc.[28][29] Mumbai-Ahemdabad high speed corridor project is single largest railway project in
India, other being CSTM-Panvel suburban corridor. Foreign investment more than ₹90,000 crore
(US$13 billion) is expected in these projects.[30]

Chemicals
Chemical industry of India earned revenue of $155–160 billion in 2013.[31] 100% FDI is allowed
in Chemical sector under automatic route. Except Hydrocynic acid, Phosgene, Isocynates and their
derivatives, production of all other chemicals is de-licensed in India.[32] India's share in global
specialty chemical industry is expected to rise from 2.8% in 2013 to 6–7% in 2023.[33]

Textile
Textile is one major contributor to India's export. Nearly 11% of India's total export is textile. This
sector has attracted about $1647 million from April 2000 to May 2015. 100% FDI is allowed under
automatic route.[34] During year 2013–14, FDI in textile sector was increased by 91%.[35] Indian
textile industry is expected reach up to $141 billion till 2021.[36]

Airlines
Foreigner investment in a scheduled or regional air transport service or domestic scheduled
passenger airline is permitted to 100,with FDI up to 100% permitted under automatic route and
beyond 49% through poor existing airport under automatic route.
Analysis of sector wise inflows of FDI in India

The Sector wise Analysis of FDI Inflow in India reveals that maximum FDI has taken place in the
service sector including the telecommunication, information technology, travel and many others.
The service sector is followed by the computer hardware and software in terms of FDI. High
volumes of FDI take place in telecommunication, real estate, construction, power, automobiles,
etc.
The rapid development of the telecommunication sector was due to the FDI inflows in form of
international players entering the market and transfer of advanced technologies. The telecom
industry is one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom
industry has the highest growth rate in the world. During the year 2009 government had raised the
FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth
of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared
to previous fiscal.
FDI inflows to real estate sector in India have developed the sector. The increased flow of foreign
direct investment in the real estate sector in India has helped in the growth, development, and
expansion of the sector. FDI Inflows to Construction Activities has led to a phenomenal growth
in the economic life of the country. India has become one of the most prime destinations in terms
of construction activities as well as real estate investment.
The FDI in Automobile Industry has experienced huge growth in the past few years. The increase
in the demand for cars and other vehicles is powered by the increase in the levels of disposable
income in India. The options have increased with quality products from foreign car manufacturers.
The introduction of tailor made finance schemes, easy repayment schemes has also helped the
growth of the automobile sector. The basic advantages provided by India in the automobile sector
include, advanced technology, cost-effectiveness, and efficient work force. Besides, India has a
well-developed and competent Auto Ancillary Industry along with automobile testing and R&D
centres. The automobile sector in India ranks third in manufacturing three wheelers and second in
manufacturing of two wheelers. Opportunities of FDI in the Automobile Sector in India exist in
establishing Engineering Centres, Two Wheeler Segment, Exports, Establishing Research and
Development Centres, Heavy truck Segment, Passenger Car Segment.
The increased FDI Inflows to Metallurgical Industries in India has helped to bring in the latest
technology to the industries. Further, the increased FDI Inflows to Metallurgical Industries in India
has led to the development, expansion, and growth of the industries. All this has helped in
improving the quality of the products of the metallurgical industries in India.
The increased FDI Inflows to Chemicals industry in India has helped in the growth and
development of the sector. The increased flow of foreign direct investment in the chemicals
industry in India has helped in the development, expansion, and growth of the industry. This in its
turn has led to the improvement of the quality of the products from the industry. Based upon the
data given by department of Industrial Policy and Promotion, in India there are sixty two (62)
sectors in which FDI inflows are seen but it is found that top ten sectors attract almost seventy
percent (70%) of FDI inflows. The cumulative FDI inflows from the above results reveals that
service sector in India attracts the maximum FDI inflows amounting to Rs. 106992 Crores,
followed by Computer Software and Hardware amounting to Rs. 44611 Crores. These two sectors
collectively attract more than thirty percent (30%) of the total FDI inflows in India.

The housing and real estate sector and the construction industry are among the new sectors
attracting huge FDI inflows that come under top ten sectors attracting maximum FDI inflows. Thus
the sector wise inflows of FDI in India shows a varying trend but acts as a catalyst for growth,
quality maintenance and development of Indian Industries to a greater and larger extend. The
technology transfer is also seen as one of the major change apart from increase in operational
efficiency, managerial efficiency, employment opportunities and infrastructure development.
Trends and Patterns of FDI in different sectors

Service Sector:
India stands out for the size and dynamism of its services sector. The importance of the services
sector can be gauged by looking at its contributions to different aspects of the economy. The share
of services in India’s GDP at factor cost (at current prices) increased rapidly: from 30.5 per cent
in 1950-51 to 55.2 per cent in 2009-10. The overall growth rate (compound annual growth rate) of
the Indian economy from 5.7 per cent in the 1990s to 8.6 per cent during the period 2004-05 to
2009-10 was to a large measure due to the acceleration of the growth rate (CAGR) in the services
sector from 7.5 per cent in the 1990s to 10.3 per cent in 2004- 05 to 2009-10. The services sector
growth was significantly faster than the 6.6 per cent for the combined agriculture and industry
sectors annual output growth during the same period. In 2009-10, services growth was 10.1 per
cent and in 2010-11 it was 9.6 per cent. India’s services GDP growth has been continuously above
overall GDP growth, pulling up the latter since 1997- 98, It has also been more stable. An
international comparison of the services sector shows that India compares well even with the
developed countries in the top 12 countries with highest overall GDP.
The two broad services categories, namely trade, hotels, transport, and communication; and
financing, insurance, real estate, and business services have performed well with growth of 11 per
cent and 10.6 per cent, respectively in 2010-11(with reference to table 4.3). Only community,
social and personal services have registered a low growth of 5.7 per cent due to base effect of fiscal
stimulus in the previous two years, thus contributing to the slight deceleration in growth of the
sector. Among the subsectors of services sectors, financial services attract of total FDI inflows
followed by banking services, insurance and non- financial services respectively. Outsourcing,
banking, financial, information technology oriented services make intensive use of human capital.
The trend in this sectors first declines till 2011 and increases in 2012 due to strong RBI policy and
increase in consultancy services and devaluation of rupees against dollar.

Computer Software and Hardware:

Over the past few years the computer software industry has been one of the fastest growing sectors
in Indian economy. FDI Inflows to Computer Software and Hardware Industry in India have been
significant. 100 percent FDI is permitted under automatic route to the E-Commerce activities in
India. Software Technology Parks (STP) have been a major initiative in India to drive in Foreign
Direct Investment in the computer software industry. These Software Technology Parks provide
highly developed infrastructure and facilities that attract foreign investors. Regulatory measures
by the Indian government have also played a positive role in this regard. Measures like increased
freedom of recruiting and laying-off employees, tax benefits and easing of export producers have
contributed to the growth of FDI in this sector.
FDI is permitted under automatic route in the computer hardware
industry in India. The huge market for computer hardware in India, coupled with the availability
of skilled workforce in this sector has boosted the inflow of FDI. High growth prospects, in terms
of increased consumption in the India as well as increasing demand for exports are expected to
lead to more Foreign Direct Investments in this sector. Computer Software and Hardware sector
received US$ 564 million which constitute 11% of the total FDI inflows during the period
Jan2000-Dec2011 (with reference to table 4.3). The maximum of FDI in this sector was received
from Mauritius which was followed by USA and so on. Among Indian locations Mumbai received
of investment followed by Bangalore, and Chennai. However the trend in this sector is declining
from 2008 due to economy crisis, recession and due to greater oppurtunity in countries like China
and Korea in respect of labour and technology.

Telecommunication:
Telecom is one of the fastest growing industries in India, and everyone, including foreign players
and investors, are eager to be a part of this growth. The last few years have witnessed many
activities on the foreign direct investment front with world's leading telecom operators picking up
large stakes in domestic operators.
The telecom services industry registered a growth of 20.7 percent clocking revenues of 1, 57,542
crore in 2008-09 compared to Rs 130561 Crore in the previous year. During the year 2005,
government had raised the FDI limit in telecom sector from 49 percent to 74 percent, which has
contributed to the robust growth of FDI in the sector. In February 2009, the Government has further
revised the methodology of calculation of indirect foreign investment, according to which FDI of
less than 50% in investing company is not counted in the licensee company if the investing
company is ‘owned’ and ‘controlled’ by resident Indian citizens. This change of methodology of
calculation of indirect foreign investment from earlier proportionate basis to ‘owned’ and
‘controlled’ basis has brought down composite FDI in some of the licensee companies and have
given more room to bring in further investment. However, actual foreign investment requirement
of a licensee company depends on its business case. FDI in Indian Telecommunications Industry
is one of the most crucial parts that have caused such a hike in the telecom market so far. Inflow
of FDI into India’s telecom sector during April 2000 to Dec. 2010 was about US $ 57035 million
which constitute 8% of total FDI inflows and is second after FDI in services (with reference to
table 4.3). The trend in telecom sector due to above reasons remains almost stable in 2008-10 but
declines in 2011 due to 2G scam and again increases in 2012.

Housing and Real Estate:

The housing and real estate sector in India witnessed foreign direct investment (FDI) of US $ 5600
million in April-September 2010-11, according to the Department of Industrial Policy and
Promotion (DIPP). Housing and real estate sector including Cineplex, multiplex, integrated
townships and commercial complexes etc, attracted a cumulative foreign direct investment (FDI)
worth US $ 48819 million from April 2000 to Dec 2010 (with reference to table 4.3).
Foreign investors have so far contributed significant capital to India’s real estate market.
Aggregate FDI inflows into the real estate sector are recorded at approximately 7% of the total
inflows. The relaxed FDI rules implemented by India last year has invited more foreign investors
and real estate sector in India is seemingly the most lucrative ground at present. Private equity
players are considering big investments, banks are giving loans to builders, and financial
institutions are floating real estate funds. Indian property market is immensely promising and most
sought after for a wide variety of reasons. However the trend in this sector is declining from year
2010-12 due to current FDI regulations for the sector stipulate certain conditions, such as minimum
area of 50000 square metres to be developed, minimum capitalisation requirements, lock-in period
of 3 years, due to economic debt crisis in Europe and America and also due to higher interest rate
on loans that have been put in place from the perspective of preventing growth in the sector. Such
conditions, however, pose challenges for FDI inflows into various projects, where given the nature
of projects, it may not be possible to comply with such conditions.

Construction Activities:
Construction activities Sector includes construction development projects viz. housing,
commercial premises, resorts, educational institutions, recreational facilities, city and regional
level infrastructure, township. The amount of FDI in construction activities during Jan 2000 to
Dec. 2011 is US$ 46216 million which is 6% (with reference to table 4.3) of the total inflows
received through FIPB/SIA route, acquisition of existing shares and RBI’s automatic route. The
construction activities sector shows a steep rise in FDI inflows from 2007 onwards. Major
investment in construction activities is received from Mauritius which is accounted for maximum
of total FDI inflows during 2000-2010. In India Delhi, Mumbai, and Hyderabad receives
maximum amount of investment. The trend in this sector has declined from 2010-11 due to RBI
policy, financial debt crisis and there has been increase from 2011 because of the Government
acceded to a long-pending demand and permitted 100 percent foreign direct investment (FDI) in
construction housing and commercial premises, including hotels, resorts, hospitals, educational
institutions, recreational facilities, and city and regional level infrastructure. According to the new
norms, the existing 100-acre minimum area stipulation has been reduced to 25. As of now, all such
projects needed mandatory clearance from the Union Government. With the power to approve
being vested with the local Governments, FDI projects will now be treated on par with any other
project. Also India has several joint construction agreements with Japan and Russia to develop
infrastructure and transportation facilities in India.
FDI and Economic Development

FDI is considered to be the lifeblood and an important vehicle of for economic development as far
as the developing nations are concerned. The important effect of FDI is its contribution to the
growth of the economy.
FDI has an important impact on country’s trade balance, increasing labour standards and skills,
transfer of technology and innovative ideas, skills and the general business climate. FDI also
provides opportunity for technological transfer and up gradation, access to global managerial skills
and practices, optimal utilization of human capabilities and natural resources, making industry
internationally competitive, opening up export markets, access to international quality goods and
services and augmenting employment opportunities.

Comparison of FDI between India and China

China has been receiving substantial FDI compared to India. Although prior to 1980s India
received higher FDI than China but because of the liberalization policy adopted by China in 1978,
turned the tables in favour of China. Since late eighties and throughout nineties China has been in
forefront of the developing world in terms of FDI inflows and hence economic development.

Foreign Direct Investment (FDI) Confidence Index

The Foreign Direct Investment Confidence Index is a regular survey of global executives
conducted by A.T. Kearney. The Index provides a unique look at the present and future prospects
for international investment flows. Companies participating in the survey account for more than
$2 trillion in annual global revenue
FDI Confidence Index examines future prospects for FDI flows as the world seeks to recover from
the global recession and continued economic uncertainty in Europe and the United States.
The Asia Pacific region remains the top destination for investors, attracting about one-fifth of
global FDI in 2010. Supported by strong growth and political stability, China tops the Index once
again. India moves up a spot to second place. Southeast Asia performs particularly well on the
back of soaring inflows, with its five major economies ranking in the top 20.
CHINA
China has held the top position since 2002, when it took the spot from the United States. Rising
incomes, urban migration, and increased demand for consumer goods in the world's most populous
consumer market are surely contributing to continued increased foreign investment. Inflows rose
6 percent to $185 billion in 2010, $10 billion above the previous peak in 2008.
With this growing emphasis on domestic consumption comes a shift toward services, FDI flows
into China's services sector grew faster than any other industry. China has also shown strong
leadership and the ability to move up the value chain in the technology sector. It has improved
R&D capabilities and better educated its workforce while also successfully creating vast
technology clusters that are important nodes in the global technology supply chains.

INDIA
India moves up one spot to 2nd place this year, passing the United States, as investors return to
India after a few years of soft inflows. In 2008, India attracted $43 billion in overseas investment.
The following year FDI dipped to $36 billion, and then to $25 billion in 2010. A significant portion
of this decline was due to weak inflows into service spaces such as computer software and
hardware, financial services, banking, and construction, industries where the global economic
crisis led firms to scale back their overseas operations.
Persistent local challenges, including the slow pace of reform and poor governance, may also be
at play. Senior government officials have acknowledged that the country needs to improve its
business climate, particularly as other emerging markets craft investor-friendly policies.

India vs. China Economy

Making an in depth study and analysis of India vs. China economy seems to be a very hard task.
Both India and China rank among the front runners of global economy and are among the world's
most diverse nations. Both the countries were among the most ancient civilizations and their
economies are influenced by a number of social, political, economic and other factors. However,
if we try to properly understand the various economic and market trends and features of the two
countries, we can make a comparison between Indian and Chinese economy.
Going by the basic facts, the economy of China is more developed than that of India. While India
is the 11th largest economy in terms of the exchange rates, China occupies the second position
surpassing Japan. Compared to the estimated $1.3123 trillion GDP of India, China has an average
GDP of around $4909.28 billion. In case of per capital GDP, India lags far behind China with just
$1124 compared to $7,518 of the latter. To make a basic comparison of India and China Economy,
we need to have an idea of the economic facts of the countries.

If we make the analysis of the India vs. China economy, we can see that there are a number of
factors that has made China a better economy than India. First things first, India was under the
colonial rule of the British for around 190 years. This drained the country's resources to a great
extent and led to huge economic loss. On the other hand, there was no such instance of colonization
in China. As such, from the very beginning, the country enjoyed a planned economic model which
made it stronger.

Top sectors that attracted FDI equity inflows (from April 2000 to January 2011), from China,
are:

 Metallurgical industries (76%)

 Chemicals (other than fertilizers) (7%)
 Trading (3%)
 Industrial machinery (3%) and
 Computer software & hardware (2%)

Agriculture
Agriculture is another factor of economic comparison between India and China. It forms a major
economic sector in both the countries. However, the agricultural sector of China is more developed
than that of India. Unlike India, where farmers still use the traditional and old methods of
cultivation, the agricultural techniques used in China are very much developed. This leads to better
quality and high yield of crops which can be exported.
IT/BPO
One of the sectors where Indi enjoys an upper hand over China is the IT/BPO industry. India's
earnings from the BPO sector alone in 2010 are $49.7 billion while China earned $35.76 billion.
Seven Indian cites are ranked as the world's top ten BPO's while only one city from China features
on the list.

Liberalization of the market

In spite of being a Socialist country, China started towards the liberalization of its market economy
much before India. This strengthened the economy to a great extent. On the other hand, India was
a little slow in embracing globalization and open market economies. While India's liberalization
policies started in the 1990s, China welcomed foreign direct investment and private investment in
the mid-1980s. This made a significant change in its economy and the GDP increased
considerably.

Difference in infrastructure and other aspects of economic growth

Compared to India, China has a much well developed infrastructure. Some of the important factors
that have created a stark difference between the economies of the two countries are manpower and
labour development, water management, health care facilities and services, communication, civic
amenities and so on. All these aspects are well developed in China which has put a positive impact
in its economy to make it one of the best in the world. Although India has become much developed
than before, it is still plagued by problems such as poverty, unemployment, lack of civic amenities
and so on. In fact unlike India, China is still investing in huge amounts towards manpower
development and strengthening of infrastructure.

Company Development
Tax incentives are one area where China is lagging behind India. The Chinese capital market lags
behind the Indian capital market in terms of predictability and transparency. The Indian capital or
stock market is both transparent and predictable. India has Asia's oldest stock exchange which is
the BSE or the Bombay Stock Exchange. Whereas China is home to two stock exchanges, namely
the Shenzhen and Shanghai stock exchange. As far as capitalization is concerned the Shanghai
Stock Exchange is larger than the BSE since the SSE has US$1.7 trillion with 849 listed companies
and the BSE has US$1 trillion with 4,833 listed companies. But more than the size what makes
both these stock exchanges different is that the BSE is run on the principles of international
guidelines and is more stable due to the quality of the listed companies. In addition to this the
Chinese government is the major stake holder of most of its State-owned organizations hence the
listed firms have to run according to the rules and regulations lay down by the government. Hence
India is ahead of China in matters of financial transparency.

Company Management Capabilities

It is said that Indians have great managerial skills. India also leaves China behind as far as
management abilities are concerned. As compared to China India has better managed companies.
One of the major reasons for this is that management reform training in China began 30 years ago
and sadly the subject has still not picked up as a matter of interest by the citizens of the country.
Another important factor behind China not doing well in the business forefront is that most of the
countries came to China and manufactured their goods. It was not Chinas exports that drove the
economy instead it were the export products of outsiders. Even in the case of mergers and
acquisitions China still has not managed to do too well. On the other hand Indian companies are
rapidly expanding mergers and acquisitions. Some of the recent examples include; Tata Steel's
$13.6 Billion Acquisition of Corus, Tata Tea's purchase of a controlling stake in Britain's Tetley
for US$407 million, Indian Pharmaceutical giant Ranbaxy's acquisition of Romania's Terapia etc.
CONCLUSION

1. Global foreign direct investment (FDI) inflows grew in 2007 to an estimated US$1.5
trillion, surpassing the previous record set in the year 2000. It was due to continuous rise
in FDI in all of three groups of economies - in developed countries, developing economies
and in South-East Europe.
2. However there was declining of global FDI in 2008 due to financial crisis in US but in
2010 FDI was $1,244 billion, where developing economies contributed to more than 50%
of the share in global FDI.
3. From 2004 onwards FDI in India increases tremendously and in 2006-2007 there was a
growth of 125% in FDI inflow. The subsequent year was again very good, where
investment inflows gained 97%, but due to global financial crisis FDI declined from 2008
onwards. In 2010-11 the decline was 25% due to decline in FDI in service sector because
of debt crisis in Europe and US.
4. Mauritius, Singapore, the US, UK, Netherlands, Japan, Cyprus, Germany, France and the
UAE, among other countries, are the major investors in India. Where India’s 83% of
cumulative FDI is contributed by ten countries while remaining 17 per cent by rest of the
world.
5. Service Sector contribute maximum of FDI inflow in India of about 20% of total inflow
which is followed by tele communications, computer hardware & software, housing and
construction activities.
6. The increase in service sector is because of increase in BPO services, consultancy services
and also devaluation of rupee against dollar resulting to more inflows of funds to software
industries.
7. In tele communication sector there has been increase in FDI inflows due to change in FDI
limit from 49% to 74%.
8. Due to various government policies as to maintain minimum capitalization requirement, 3
yrs lock in period minimum area requirement had led to decline in housing and real estate
sector.
9. However in construction activities due to relaxation of government policies and also due
to improvement in infrastructure through agreement between India and Japan there has
been increase in FDI inflows.
10. The three states together have accounted for nearly 62% of the total FDI inflows received
over the last 10 years, because of better infrastructure, more number of mergers and
acquisition of companies in these regions, more number of software companies.
11. More of FDI inflows are through automatic route because of government policies and
enactment of SEZ Act which attracted a lot of foreign companies to India.
12. This study states that policy makers should focus more on attracting diverse types of FDI.
Like the policy makers should design policies where foreign investment can be utilized as
means of enhancing domestic production, savings, and exports; as medium of technological
learning and technology diffusion and also in providing access to the external market.
13. Indian economy is largely agriculture based. There is plenty of scope in food processing,
agriculture services and agriculture machinery. FDI in this sector should be encouraged.
14. India has a huge pool of working population. However, due to poor quality primary
education and higher there is still an acute shortage of talent. This factor has negative
repercussion on domestic and foreign business. FDI in Education Sector is less than 1%.
Given the status of primary and higher education in the country, FDI in this sector must be
encouraged. However, appropriate measure must be taken to ensure quality. The issues of
commercialization of education, regional gap and structural gap have to be addressed on
priority.
15. Government should ensure the equitable distribution of FDI inflows among states. The
central government must give more freedom to states, so that they can attract FDI inflows
at their own level. The government should also provide additional incentives to foreign
investors to invest in states where the level of FDI inflows is quite low.
16. India has a well developed equity market but does not have a well developed debt market.
Steps should be taken to improve the depth and liquidity of debt market as many companies
may prefer leveraged investment rather than investing their own cash.
17. Though service sector is one of the major sources of mobilizing FDI to India, plenty of
scope exists. Still we find the financial inclusion is missing. Large part of population still
doesn’t have bank accounts, insurance of any kind, underinsurance etc. These problems
 could be addressed by making service sector more competitive. Removal of sectoral cap in
insurance is still awaited.
18. FDI should be guided so as to establish deeper linkages with the economy, which would
stabilize the economy (e.g. improves the financial position, facilitates exports, stabilize the
exchange rates, supplement domestic savings and foreign reserves, stimulates R&D
activities and decrease interest rates and inflation etc.) and providing to investors a sound
and reliable macroeconomic environment.
19. FDI can be instrumental in developing rural economy. There is abundant opportunity in
Greenfield Projects. But the issue of land acquisition and steps taken to protect local
interests by the various state governments are not encouraging.
20. It is also suggested that the government while pursuing prudent policies must also exercise
strict control over inefficient bureaucracy and the rampant corruption, so that investor’s
confidence can be maintained for attracting more FDI inflows to India.(According to JP
Morgan risk index of India)

Bibliography:

The necessary data were collected through following websites-

www.rbi.org.in
www.worldbank.org.in
www.dipp.nic.in
http://indiahighcom-mauritius.org
www.docs.google.com
www.imf.org
www.uscc.gov