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FDI: India vs China


Code : ITF0008

Year :

Industry : General Business

Region : :India China

Teaching Note: Available

Structured Assignment : Not Available

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BACKGROUND NOTE After being ruled by a foreign company – the East India Company – for over 200 years, India seemed to have developed an aversion to foreign investment. Domestic enterprises were protected from foreign companies through licensing, import barriers and investment restrictions. As a result, instead of creating a lobby for foreign investment, development policy frameworks emerged that created bureaucratic mechanisms acting as a barrier to competitive environment in industries. This continued for a long time and as a result the image of the country as a destination for the FDI took a severe beating and foreign companies were slow to respond to the opening up of the economy...

ENCOURAGING FDI – THE CHINESE WAY In the formative years of reformprocess, China followed a selective approach towards FDI. While the sectors in which investments were being encouraged, incentives like tariff exemptions and fiscal reductions were provided and other sectors were subjected to severe constraints. However, China’s trade policy evolved and since themid-nineties, the level of protection had been progressively lowered...

THE INDIAN SCENARIO Renowned Harvard economist Jeffrey Sachs once commented,10 “The fact that India trails China so much in attracting FDI is a matter of significant policy concern for India, because India is missing a lot of markets and a lot of capital investment that should be going there and losing it to China...

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DEEPER REASONS Some differences between the performances of India and China could be attributed to the Chinese entrepreneurs in Hong Kong and Taiwan, who in order to escape rising wages in their respective home economies, moved to China. But the difference of compositions of GDP of the two economieswas also considered to be a critical factor in determining the FDI flows...

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