China, India pursue different FDI strategies


  • Business
  • Thursday, 12 Aug 2004

BY KATHY FONG

FOREIGN direct investment (FDI) has certainly played a vital role in the economic progress of most developing countries in Asia. 

One good example is China, which absorbed US$53bil worth of FDI in 2002. The growing inflow of FDI has helped fuel economic growth over the past decade. 

However, India - another economic giant in Asia - has lagged behind China in terms of attracting FDI. In 2002, only US$4.7bil worth of FDI flowed into India - worlds apart from the amount of FDI received by China. 

Economists and policy makers have said that the Indian government should learn from China in attracting FDI so that the continent could also achieve the impressive economic growth that China enjoys. 

But to Professor Tarun Khanna from Harvard Business School, the two countries have pursued radically different development strategies and thus a comparison between the two might show that FDI was not the only path to prosperity. 

Speaking at a seminar organised by the Harvard Business School Alumni Club of Malaysia in Kuala Lumpur yesterday, Khanna said the Chinese authorities had created an environment that was conducive for multinational companies (MNCs) to set up their manufacturing base there. 

Prof Tarun Khanna

India, on the other hand, did not have the necessary infrastructure and labour force that the MNCs needed for mass production, he added. 

“The Indian government has massive problems with blue-collar labour,'' he said, but added that India was a “liquid market for highly talented labour''. 

As a result of this, he said, the development of that country's knowledge-based industries had been much faster than its labour-intensive industries.  

Khanna said FDI to China had effectively substituted its domestic entrepreneurs as the drivers of the country's economic progress, which had in turn resulted in the absence of world-class Chinese companies that could rival the MNCs in the global market as the country's private sector had been left out. 

The situation is, however, different in India. Khanna said India had spawned a number of companies that could now compete internationally.  

Last year, Forbes 200 - an annual ranking of the world's best small companies - included 13 Indian firms but only four from China made it. Among the well-known India-based companies that have global presence are software firms Infosys and Wipro, and pharmaceutical and biotechnology powerhouse Ranbaxy. 

In Khana's view, India has developed a much stronger infrastructure to support private enterprise.  

He said the capital markets in India operated with greater efficiency and transparency than the ones in China. 

This, he added, provided the avenue for local entrepreneurs in India to raise the capital required for business start-ups and expansion.  

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