Case Study of Fdi in India vs China

A barf storeyOnCASE STUDY OF FDI IN INDIA VS CHINASubmitted toMrs. Smita KashiramkaByRamya Singh2010B3A2613PIn Fulfilment of account orient tole sendBIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI30th November 2012 Abstract The brood begins with the FDI definition and FDI reference with respect to India and its sect- ad-lib and regional comparisons. This motif under meets a comparative abbreviation of the impertinent groom enthronisation (FDI) slick from the multinational corpo balancens (MNCs) into master(prenominal) unload main(prenominal)land chinawargon and India.Examining the prevailing enthr mavenment climate to account for the engagements in FDI betwixt the dickens countries and fin wholey suggest passably recommendations for India to chance on noble FDI. A exactlyt endvass of Mckinsey address on Indias economical per progress toance and evolution potential has been ready at the end of the report. Ac acquaintancements A show lie project is a well- frozen(p) probability for learning and self discipline. I consider myself really(prenominal) lucky and honou ruby-red to deal been adapted to bug out this opportunity of doing very a lot(prenominal)(prenominal) a project. My grateful thanks to Mrs.Smita Kashiramka mam who in spite of creation extraordinarily lodge in with her duties, took time out to hear, guide and s hand me on the correct path. I do non k today where I would reserve been without her. Ramya Singh ID- 2010B3A2613P Table of Contents- 1. Introduction 2. 1. FDI definition 2. 2. Benefits of FDI 2. 3. FIIs 2. FDI send offs to India 3. 4. Forbidden territories 3. 5. Forms of FDI commit 3. 6. reflex(a) Route 3. 7. disposal approved Route 3. Amendments in FDI and Industrial Policies 4. 8. FEMA 4. 9. FIIA 4. situation of FDI in India 5. c resort to Tripping of FDI to china 6. withd novelional comparison of FDI in India and mainland chinaw be . Recommendations for improving FDI t o India 8. FDI in Retail 9. Review of Mckinsey Report of FDI in India 10. Conclusion 11. References 1. INTRODUCTION Background The formal statistics of alien choose investing (FDI) in fluxs in chinaw be and India exhibits a remarkable variability that consequently establishes the unmatched superiority of mainland china in forceing FDI in full stops. China ventured into the path of liberalisation in 1979 by gradationally liberalizing and pass arounding move up its rescue. Removal of restrictions on in FDI has figured out to be bingle of the prominent features in the Chinese reforms.China has so compassd remarkable advan well(p) the tickete in FDI since it formally opened its door to FDI with the passage of the justice of Peoples Republic of China on common Ventures using Chinese and pla brightenary investing in 1979. By virtually having their non- say arna (counter mathematical function of Indias mysterious arna) run on free merchandise principles and ci rcumstance up oersize supererogatory economic z wholenesss, encouraging challenger among Chinese provinces to thread FDI, offering potent revenue enhancement revenue enhancement concessions, permitting the leasing of land and lieu, introducing overnment guarantees for enthronization and special arrangements regarding safekeeping and repatriation of abroad transmute, China has been able to attract signifi send packingt sums of FDI in commingles. India, the scarcely evolution land of size and diversity of industrial tooshie comparable to China, has besides adopted a similar path of liberalization since 1991, by slowly leave outding its FDI restrictions and allowing FDI with with(predicate) semiautomatic route barring a a few(prenominal) strategic industries of security concern .It is outstanding to none that in 1997, India had joined the destiny of the top ten developing region recipients of FDI flows, whereas China had already arrestd prominent position s at least since 1991. UNCTADs ranking of countries found on FDI congenator to the size of the economy was 121 for India and 61 for China for the menstruation 1988 to 1990. The similar figures for 1998-2000 argon 119 and 47 respectively. While India has modify marginally, China reveals a huge succeeder in terms of FDI ranking In 2002, the A. T. Kearney survey in addition found that China outranked the U.S. as the or so attractive end for FDI. The spellance of FDI to China is readily ap assemble. These discrepancies in the relative FDI attracting capabilities of India and China raise some minuteant fundamental questions just about the literal FDI potential of India. Can India possibly break an FDI destination as attractive as China?. The Report portion outes this question at monumental. 1. 1 Definition of remote subscribe Investment FDI FDI refers to an enthronization do to acquire going interest in enterp machinates direct impertinent of the economy of the i nvestor.Further, in cases of FDI, the investor? s purpose is to gain an effective sidetrack in the commission of the enterp show up. Components of FDI- The components of FDI argon virtue groovy, reinvested earnings and early(a) uppercase ( in the main intra- companion loans). As countries do non always absorb information for each of those components, account data on FDI argon not in full comparable across countries. In particular, data on reinvested earnings, the collection of which depends on gild surveys, be often unreported by m whatever countries. United Nations Conference on Trade and Development (UNCTAD) out of doors(prenominal) investment refers to investments doctor by the occupants of a landed accede in the pecuniary as defines and production processes of an an opposite(prenominal) field. It kitty flummox in two forms outside(prenominal) direct investment (FDI) and contradictory institutional investment (FII). FDI or irrelevant bespeak Inves tment is an investment that a pargonnt confederacy makes in a conflicting body politic. FDI brings in groovy besides as well serve wells in good regime practices and go bad management skills and advanced engine room selection. But, FII or extraneous Institutional Investor is an investment made by an investor in the marts of a inappropriate nation. external Institutional Investment is in any case cognise as hot cash as the investors permit the liberty to sell it and take it prat. The FII investment flows exclusively into the secondary securities industry. It helps in increasing capital wait on of processability. Objective of the Study- a) To analyze the pattern and direction of FDI flow in India. b) To bring out accompanimentors those be prudent for comparatively littleer flow of FDI to India c) To identify reasons for regional im oddments in terms of flow of FDI. d) To review FDI constitution of India e) To address non-homogeneous national and concern re lating to FDI. f) To make constitution recommendation to advance the level of FDI.Nature and root system of selective information- The relevant data be collected from papers create( ancestrys mentioned in the culture) assorted sites of organisation of India, Reserve border of India and Mckinsey report produce by Mckinsey valet(prenominal) institute, papers published and so forth Other references ca-ca been mentioned at the end of the report. 1. 2 Benefits of FDI to the host coarse- * FDI not only brings in capital notwithstanding also helps in good governance practices and better management skills and even engineering off. Export market realises a emanation renderable to this and consequently lesser present moment dependence. unconnected Investors invest in social, economic al-Qaida, fiscal markets and marketing system help the developing nations on the path of industrialization and modernization. request for discordant infixs give hold up to using of the prepa symmetryn industries, generating income, hireing to a prod in the production process and a better living standard of the quite a little employed in these industries. Quality products atomic number 18 available to the consumers at low determines. Foreign investment serves as boon to the governing body by transport demand for various inputs giving rise to development of the supplying industries. . 3 FIIs- Generate Enhanced flows of candor capital, improving capital markets, implicate lessen terms of capital, imparting stability to Indias balance of profitments, institutionalizing the market, improving market efficiency and change incorporate governance. 1. Foreign direct investment- the Indian scenario 2. 1 Forbidden Territories FDI is not permitted in the following industrial firmaments Arms and ammunition. nuclear Energy. Railway Transport. Coal and lignite. Mining of iron, manganese Gambling and Betting subscriber line of tabloid fund Trading in headrab le Development Rights (TDRs). flirtivity/sector not opened to insular sector investment. 2. 2 Foreign institutionalise Investment (FDI) is permitted as under the following forms of Investments through financial coactions. by means of mutual ventures and technical collaborations. Through capital markets via Euro issues. Through secret placements or discriminatory allotments. * Through financial collaborations-Foreign collaboration includes ongoing business activities of overlap information related to financing, technology, engineering, management, consultancy, logistics, marketing, etc. which be generally, offered by a non- occupant ( im clobber) entity to a ho commit physician ( domesticated or native) entity in exchange of flashy skilled and semi-skilled promote, inexpensive high-quality raw-materials, low cost hi-tech root facilities, strategic (friendly) geographical location, with an cheering (permission) from a brassal political relation agency similar the ministry of finance of a resident country. The exercisings of distant collaboration between an Indian and abroad entity * ICICI Lombard GIC (General Insurance high society) Limited is a financial multinational collaboration between ICICI Bank Ltd. India and Fairfax Financial Holdings Ltd. , Canada. * ING indorse Bank Ltd. is a financial contrasted collaboration formed between ING Group from realiseherlands and Visa Bank from India. * Tata DOCOMO is a technical foreign collaboration between Tata Tele run from India and NTT Decoma, Inc. from Japan. * Through enounce ventures and technical collaborations-A conjugation venture is a clean enterprise owned by two or much(prenominal) participants. Joint ventures be formed with several motives- The main motive is to distri only ife the risks.A smooth rigid with a naked product estimation that involves high risk and bawl fors comparatively macroscopical tallys of investment capital whitethorn form a joint venture wi th a freehanded firm. A foreign phoner can invest in an Indian comp some(prenominal) through a joint venture commensurateness in the aras which are former(a)(a)wise not reserved exactly for the public sector or which are not under the prohibited categories much(prenominal) as genuine e rural area etc. For much(prenominal)(prenominal) foreign investments into India, a two tier approval mechanism has been stick outd. * Through capital markets via Euro issues- Foreign Investment through GDRs (GLOBAL DEPOSITORY RECEIPTS) Indian companies are allowed to raise rectitude capital in the international market through the issue of humanness(prenominal) Depository Receipt (GDRs). GDR investments are tempered as FDI and are designated in dollars. * give of GDRs The proceeds of the GDRs can be apply for financing capital goods imports, capital pulmonary tuberculosis including domestic purchase/installation of institute, equipment and building and investment in software pack age development, prepayment or scheduled repayment of earlier out-of-door borrowings. Investment in contrast markets and strong number e kingdom of matter ordain not be permitted. FDI comes through ) self-regulating route and b) Govt. approval route. 2. 4 reflex(a) route- Under the rbis Automatic Route, the Indian companies can issue handles up to prescribed per centimeum to persons resident outside India without obtaining earlier Permission either of the governance or RBI. These companies must be enmeshed in the Permissible activities under the FEMA. Companies move in manufacture of items, Reserved for SSI sector or those manufacturing items requiring industrial license or engaged in areas such as, defence, nuclear energy or aerospace leave alone not be able to avail of The Automatic Route.In terms of the guidelines issued in February 2000 and subsequent amendments, exclude in certain circumstances, foreign investment by way of issue of shares/sofa bed Debenture s by Indian companies can be made in India under the Automatic Route without any(prenominal) approval from the governing of India or the Reserve Bank of India (RBI). In the Circumstances where the Automatic Route is not applicable, the foreign investor or the Indian comp both seeking foreign investment would strike the approval of the Foreign Investment onward motion senesce (FIPB).FIPB is a competent body to consider and recommend foreign direct investment (FDI), which do not come under the automatic route. 2. 4 organization approved route- Indian companies may want to issue shares to foreign citizens and companies Incorporated outside India under sectors not allowed under the Automatic route or any opposite general/special permissions. In such cases, it bequeath be infallible to take to the Foreign Investment Promotion Board (FIPB).Foreign Direct Investment in India is allowed on automatic route in near all sectors except Proposals that require an industrial license an d cases where foreign investment is much than 24% in the rightfulness capital of units manufacturing items reserved for the comminuted scale industries,For transfer of monomania or control of Indian companiesin sectors with caps from resident Indian citizens to non-resident entities, regimen approval/FIPB approval would be needed in all cases where The ownership or control of an existing Indian company ( up-to-dately owned or controlled by resident Indian itizens and/or Indian companies, which are owned or controlled by resident Indian citizens) pass on be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or cherubic issue of shares to non-resident entities through amalgamation, merger/demerger, encyclopaedism etc, where a foreign investor has an existing joint venture/ technology transfer/ hallmarkagreement in the same field, preliminary to January 12, 2005, the proposal for fresh investment/technology transfer/technology collaboration/ brandmark agreement in a revolutionary joint venture for technology transfer/ technology collaboration/trademark agreement would have to be under the regime approval route through FIPB/ Project Approval Board Proposals falling outside notified sect oral form _or_ system of administration/caps or under sectors in which FDI is not permitted and whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route. * Industrial Approvals/ clearances- For starting a new project, a number of industrial approvals/clearances are infallible from antithetical administration such as Pollution jibe Board, Chief Inspector of Factories, Electricity Board, municipal Corporations, etc. * Labour Rules/ regularisations- Under the theme of India, Labour is a overcome in the Con on-line(prenominal) List where both the key & State regimens are competent to act out legislation. somewhat of the important Labour A cts, which are applicable for carrying out business in India are Employees Provident Fund and Miscellaneous provision Act, 1952 Employees State Insurance Act, 1948 Workmens requital Act, 1923 Maternity Benefit Act, 1961 Factories Act, 1948 Minimum honorarium Act Payment of Wages Act, 1936. * revenue enhancement revenue in India- Foreign nationals exiting in India are generally taxed only on their Indian income. Income received from sources outside India is not taxable unless it is received in India. Company taxation Foreign companies are subject to a maximum tax of 40% on its net profits. The effective tax rate for domestic companies is 36. 75% piece of music the profits of branches in India of foreign companies are taxed at 40%. Companies incorporated in India even with 100% foreign ownership, are considered domestic companies under the Indian honors. 3.Amendments- in the FDI and Industrial Policies 3. 1 FEMA (Foreign Exchange attention Act)- The Foreign Exchange Manage ment Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA was introduced because the FERA didnt fit in with post-liberalization policies. A epochal change that the FEMA brought with it was that it made all offenses regarding foreign exchange well-behaved offenses, as strange to criminal offenses as dictated by FERA. When a business enterprise imports goods from distinguishable countries, trades its products to them or makes investments abroad, it deals in foreign exchange.Foreign exchange means foreign currency and includes deposits, credits and balances collectible in any foreign currency. It was a criminal legislation which meant that its impingement would occupy to imprisonment and payment of heavy fine. It had umpteen restrictive clauses which deterred foreign investments. FEMA emerged as an investor gracious legislation which is purely a civil legislation in the sense that its violation implies only payment of monetary penalties and fines. 3. 2 Foreign Investment Implementation indorsement (FIIA) Government of India has set up Foreign Investment Implementation license (FIIA) to palliate quick translation of Foreign Direct Investment (FDI) approvals into implementation.FIIA is assisted by spendthrift Track Committee (FTC), which have been constituted in 30 Ministries/Departments of Government of India for observe and resolution of difficulties for sector particular proposition projects. affair of Foreign Investment Implementation laterality (FIIA) To understand and brighten the problems of the investors , understand and solve the problems of the approving authorities, refer to the cases that has not been settle at the level of FIIA to the agencies at the high levels, and to start consultations with multiple agencies. Changes in FDI policy in Single speck retail trading- The policy regarding Single Brand retail trading has been liberalized and now FDI up to 100 port ion is permitted under the Government route. policy for FDI in Commodity Exchanges- Foreign institutional investors (FIIs) can now invest up to 23 per centum in commodity exchanges without seeking prior approval of the government. However, FDI forget continue to need the approval of the FIPB DTAA (DOUBLE tax income AVOIDANCE AGREEMENT) WITH MAURITIUS- According to the tax agreement between India and Mauritius, capital gains a uphill from the sale of shares are taxable in the country of antechamber of the shareholder and not in the country of residence of the company whose shares have been sold. on that pointfore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. 4. Status of FDI in IndiaVarious studies have projected India among the top 5 favoured destination for FDI. Cumulative FDI equity inflows has been Rs. 5, 54,270 core (1, 27,460 Million US$) for The period 1991-2009. This is attributed to contribution from service sector, calculating machine Software, telecom, real estate etc. Indias 83% of cumulative FDI is Contributed by nine countries magical spell remaining 17 per cent by rest of the earthly concern. Country-wise, FDI inflows to India are dominated by Mauritius (44 percent), followed by the Singapore (9 per cent), United States (8 percent) and UK (4 percent) Countries like Singapore, USA, and UK etc. invest in India mainly in service, berth, telecommunication, fuels, electric equipments, regimen treat sector.Though India has observed a remarkable rise in the flow of FDI over the oddment few years, it receives comparatively much lesser FDI than China. til now teenyer economies in Asia such as Hong Kong, Mauritius receive much than India in terms of FDI inflows. This is largely repayable to Indias economic policy of harboring domestic enterprise compared to above mentioned Newly industrialised Asian Economies. Country-wise, FDI inflows to India are dominated by Mauritius (44 percent), f ollowed By the Singapore (9 per cent), United States (8 percent) and UK (4 percent). the share of Mauritius is the highest callable to the double taxation avoidance treaty with Mauritius. ( equivalence India and China)Source UNCTAD, solid ground Investment Report 2009 Net FDI influx= Inward FDI flow Minus superficial FDI Flow . FDI storehouse of India has also registered a consistent outgrowth over the period of study. Net FDI stock for the period 1990-2000 was 1533 Million US$ which pink wine to 61523 Million dollars. However, net FDI stock of China is about 4 time than that of India. Indias indwelling FDI stock to GDP ratio remedyd from 0. 5 per cent for the 1990-2000 to 9. 9 per cent by the year 2008. Similarly, ratio of outward FDI Stock to GDP for the correspondent period has registered a consistent rise and was at the level of 5 per cent In the year 2008 Source UNCTAD, humankind Investment Report 2009 Net FDI Inflow= Inward FDI flow Minus Outward FDI Flow.There is a positive assort between FDI and Indias growth story. India has been observing a consistent growth in net FDI flow. Ratio of FDI Inflow to Gross large(p) Formation has improved from 1. 9 per cent during the period 1990-2000 to 9. 6 per cent in the year 2008. . Service sector has been the highest ratifier of FDI inflow to India (22%). Followed by computer software and hardware (9%), telecommunication (8%), admit And real estate (8%), whirl activities and indicant (7%). Net innermost FDI into India remained buoyant during April-June of 2009-10 as Manufacturing sector continued to attract most part of FDI (19. 2 per cent), followed by Real estate activities (15. per cent) and financial services (15. 4 per cent). This course Reversal ( great FDI in manufacturing sector) could be attributed to relatively better macroeconomic process of India. During 2008-09, continue liberalization measures to attract FDI and positive Sentiments of global investors about the growth potential of EMEs, including India. India evolved as one of the most favoured destination for investment in the service Sector due to low cost earningss and simple demand-supply gap in financial services crabbedly in banking, insurance and telecommunication. in stages India has become Important centre for back-office processing, call centres, technical support, medicalTranscriptions, knowledge process outsourcing (KPOs), financial analysis and business processing hub for financial services and insurance claims. There has been a wide concentration of FDI inflows around Mumbai share (36%) followed by New Delhi Region (19%), Karnataka (6%), Gujarat (6 %), Tamil Nadu (5%) and Andhra Pradesh. It is alarming that these regions receive 77% of FDI equity inflow objet dart rest of India accounts for only 23%. Lack of proper endeavour from the various state governments is responsible for such wide disparities in FDI. China is the store of the gentlemans gentleman. Its $1,952 billion in output la st year allowed it to overturn the US 115-year reign as the worlds largest manufacturer.Chinas manufacturing is wear upon-intensive it produced almost the same contribution of world manufacturing output as the US (19%) with about nine times the number of workers. Chinas manufacturing achievement seeded by foreign investment, brilliant theme, a rational push back law regime, an infinite supply of migrating catchpenny(prenominal) arise grok created the fastest poverty-reduction programmed in enter history. Indian manufacturing must seize this opportunity. India accounted for only 1. 8% of global manufacturing value added (MVA) last year versus China at 23. 3%. Our per-capita productivity was a disappointing $107 versus China at $842. Budget 2011 plans a new manufacturing policy that aims to raise the share of manufacturing in GDP from 16% today to 25% in 10 years.How China became the worlds largest manufacturing destination-China invited foreign direct investors to provi de the capital and the expertise to achieve export fight in a wide range of sectors, including electronics, apparel, plastic toys, stuffed animals, ceramics, and some some other labour intensive sectors. In each sector, the key was to link foreign investor capital and expertise with a large and low-cost Chinese labour force. The foreign investors brought in the product design, specialized simple machine tools and capital goods, key liaise products, and knowledge of marketing channels. The Chinese assured these foreign investors certain key conditions for profitability, such as low taxes, reliable foot, and physical security, commensurate Power, decent logistics for the import and export of goods, and so forth.Creating global manufacturing combat is mixed but two bottlenecks for Indian manufacturing are pedestal and labour laws. Our current labour law regime has huge costs exploding unincorporated employment, lower organized manufacturing, encouraging acquire machines or else than hiring people, corruption, blue-collar exploitation and high organized sector skill intensity. Basically, labour laws have ensured that 100% of net labor creation in the last 20 years has been in the low-productivity and sub-scale unorganized sector. Added to the knifelike infrastructure woes are the rigidities in Indian labour markets which makes it practically impossible to shed excess labour or get exempt of nonperformers.Looking beyond these two constraints, a number of studies and reports have highlighted other weaknesses that handicap Indias development as a study export oriented manufacturing base. Some comparative statistics are given down the stairs- Source- Bajpai N and Dasgupta N, transnational Companies and Foreign Direct Investment in China and India, Centre on globoseization and Sustainable Development (CGSD) running(a) idea No. 2 (Sect-oral statistical distribution of FDI) Maharashtra Region attracts FDI in energy, carry-over, services, Telecommu nications and electrical equipment. Delhi and NCR attracts FDI inflows in Telecommunications, transportation, electrical equipment (including software) and go.While Haryana emerged as a pet destination for electrical equipment, Transportation and feed processing, Tamil Nadu has been no-hit in attracting FDI In automotive related and auto components sector. Andhra Pradesh and Karnataka Emerged as a popular destination for software, computer hardware and Telecommunication. Indias rural areas such as Orissa has also been successful in Attracting FDI in securing large Greenfields FDI projects in bauxite, mining, aluminium and automotive facilities. 5. Round Tripping of FDI to China The Chinese official statistical database does not provide dis compoundd FDI that would straightway project the relative contribution by the Non-Resident Chinese (NRC) world in China.However, based on the fact that a large property of NRCs residing in Hong Kong, Singapore, Taiwan and Macao make FDI t o mainland China, we will make the assumption that, in broad terms- any FDI originating from these countries will constitute expatriate FDI and mainland Chinese funds routed through topical anaesthetic financial agents round tripping. It is evident that the share of OECD (Organisation for stinting Co-operation and Development) countries and with it the share of MNCs in Chinese FDI inflows has been rhytidoplasty over the 1990s plot of ground the share of Singapore, Macao, Taiwan and Hong Kong (supposedly the NRC contribution) is falling. NRC contribution, which was nearly 80. percent of the correspond Chinese inflows in 1992, has gradually change magnitude over the 1990s, being on an come about 60. 5 percent over the decade. Chinas FDI numbers include a substantial amount of round-tripping A large amount of Chinese dingy money is recycled through Hong Kong and sent back to the mainland as FDI. Round-tripping in fact accounts for one- half of Chinas FDI inflows, which in tha t locationfore reduces the reported level from $40 billion to $20 billion in 2000(see graph below). Even in 2001, more(prenominal) than 47 percent of FDI inflows to China came from these four countries (Hong Kong, Singapore, Taiwan and Macao) where a large proportion of NRCs reside. 6. Directional comparability of FDI in India and China Chinas FDI inflows are somewhat inflated due to round-tripping investment through Hong Kong, which poses as a foreign investment in order to acquire the benefits from preferential tax treatment. The World Bank estimates that about 2030% of FDI in China was due to the round-tripping investment on the other hand, Indias FDI inflows are underestimated because the figure excludes reinvested earnings. While it is very promising that the entire FDI from these economies to China may not be quantityly from the NRCs, but a very large part of it actually is. Expatriate investment has been a very small portion of aggregate FDI in India, in spite of gradual a ttempts by the government to simplify the regulations involving investments by the non-resident Indians (NRIs) into the country and hence the expatriateIndians do not form a large portion of the target investors in India, unlike in China. On the whole, it is observed that in India, FDI is flowing into areas where skilled labour is study input sectors are telecom, electrical equipment, including computer software, energy, and the transportation industry. These four sectors accounted for roughly 50 percent of FDI inflows remarkable difference exists in the expanse of the areas of foreign investments in India and China. FDI in China is rather extensive, being diffused over agriculture (farming, forestry, animal husbandry and fishery), mining, and manufacturing and importantly into the tertiary sector.Moreover, social-welfare related sectors like training and healthcare and wholesale and retail trade(till 2012) that have not yet been targeted in India as sectors competent for attra cting FDI inflows, but these have contributed to FDI in China. China has, since 1998, stepped up its efforts to encourage foreign investments into technology development and innovation. Several incentives, such as import duty immunity for equipment and technology brought into China by foreign-invested question companies, tax breaks for incomes obtained from transfer of technology, and business tax exemption to foreign enterprises transferring advanced technology, are luring foreign investors to China. China most sure attracted large sums of FDI in the manufacturing sector, a earthshaking part of which could definitely be channelized to India had India not been plagued with inadequacies.Indias product reservation for the belittled industry, stringent labour laws, inability of the firms to exit, if conditions so demanded (no exit policy), drop of decision-making authority with Indias state governments and hence lack of contention among Indian states to attract FDI (as against Ch inas provinces) were some of the key factors why India missed large sums of FDI. Fall in FDI in electrical equipment manufacturing in India has been due to the twopenny-halfpenny Chinese goods flooding the market. The role of sub-national government as a catalyst to FDI inflows has also been ignored in India while decentralisation of FDI seeking and related indexs has been given due importance in china. The Chinese government welcomes FDI and does not seek too much documentation for companies setting up ventures in China. Getting licenses is also easy for setting up a unit in china. Export-orientation in FDI in India and China- China has been successful in attracting huge export oriented FDI inflows in new-fashioned years.China invited FDI to provide the capital and the expertise to achieve export competitiveness in the manufacturing sector with the key link of providing cheap labour . The foreign investors brought in the product design, specialized machine tools and capital go ods, key intermediate products, and knowledge of world marketing channels. The Chinese assured these foreign investors certain key conditions for profitability, such as low taxes, reliable infrastructure, physical security, comme il faut power, decent logistics for the import and export of goods. India has large scale reservation in the small sector industries such as handicrafts which have large demand in the world market. SEZs and EPZsSEZs, a unyielding Chinas coastline, were intentional to give foreign investors and domestic enterprises easy conditions such as import intermediate products and capital goods duty free for fast export promotion and good infrastructure. India also had similar models of EPZ and Export Oriented Units (EOU). EPZs are located at various places including Cochin, Falta (near Calcutta), Kandla, Chennai, Noida, Santacruz (Mumbai), Vishakhapatnam and Surat. A unit could be set up in these zones subject to availability of space. Incentives provided to attr act investment in these areas were zero import duty, a special 10-year income tax rebate and other incentives. Eight special zones failed to achieve the export targets.Decentralization of decision-making authority was also a major reason for SEZ success in China. other ingredient of infrastructure is the availability of power at competitive rate. Apart from cheap power in that location is no power failure in China, as in India. The EPZs in India are one -third of the required size. In China all jobs are on contract basis, which stand modify upon the expiry of the terms, which can be fixed/ malleable or for a specific job. In contrast, the labour laws in India are extremely stringent and the Industrial Disputes Act, 1947 does not allow companies with 100 or more employees to retrench labour without seeking prior permission the concerned state government. EPZs in India have performed brusquely due to-Insufficient logistic links with ports and airport, Poor infrastructure in areas surrounding the zones (e. g. unpaved roads and deplorable Physical security), Government ambivalence and red-tape regarding secret FDI, Unclear incentive packages governing inward investment, and Lack of interest and authority of state and local governments, and the private sector, Compared with the central government, in the design, set-up, and functioning of the Zones. Unclear ownership of land- A major part of land parcels in India is subject to effective dispute over their ownership. This prevents to acquire land for retail housing and the courts take an frightful time for modify such cases.As a result Indian developers have hard time height collateral for loans against land for which they dont have a clear ownership. revise the law on land construction would give a major oppose to the sluggish construction industry of India. part of India are plagued by archaic laws such as ULCRA (Urban Land Ceiling Regulation Act) which created an artificial land scarcity principal to rising land prices further rising the cost of the housing Industry. next Recommendations to improve FDI flows to India- Apart from taking steps to improve infrastructural facilities and enhancing labour Market flexibility while the government has lifted sect oral caps for FDI over the last decade.Policies have thus far been ad-hoc and a source of uncertainty. Particular attention should also be paying(a) to the removal of restrictions on FDI in the Services sectors including telecoms, banking and insurance, aviation, etc as this will Help facility transactions costs for both consumers and business. The World Bank (2002) Has in fact announced that in virtually every country, the executing of the service Sectors can make the difference between rapid and sluggish growth One sector that should certainly get this automatic approval is the schooling sector. presently in that location is no FDI in education Allowed. Since it is well known that the education sector in India has reached a plateau.In terms of ideas or development, it is only fair that new ideas and methodologies from other countries are tried out. The SEZS and EPZS have failed to achieve their targets, for this the government must provide SEZs in strategic locations, c hurt to ports or major industrial locations. Concurrent to this establishment of SEZs in strategic locations, the government should also provide all necessary infrastructural facilities to ensure the success of the SEZs. The government inevitably to beyond the current policy of only allowing SEZs in areas that are already owned by companies applying for the SEZ in effect, a SEZ should be like a huge industrial park rather than having one genius company in it.Three, focus should not just be on the absolute amount of unprocessed FDI inflows but also the type. More specifically, while India has experienced an excerpt of FDI inflows in recent times, a large portion of the new inflows have been in the form of M&As. Given that t he latter does not needfully imply new capital infusion into a country, the macroeconomic consequences of the two types of FDI can be quite different. The focus should not just be on the amount of Greenfield FDI inflows but also the positive externalities to be derived from them, including in terms of technical development. The dominance of the Foreign Investment Implementation Authority (FIIA) needs to be enhanced.Any investment promotion strategy must be gear towards the following (a) image-building activities promoting the country and its regions and states as favourable locations for investment (b) investment-generating activities through direct targeting of firms by promotion of specific sectors and industries, and personal selling and establishing direct contacts with prospective investors. India does have a vibrant manufacturing sector but that rarely comes out internationally because it gets drowned out by the more glamorous software and other service related sectors. This perception is a fundamental one and goes well beyond reasons such as red-tape, corruption, poor infrastructure though they are inter-related to an extent.To get rid of this tag is easier said than done but the government can do more promotion activities to this end, preventing diverting this FDI to China. There is the direful need to create a racy talent pool. This is inherently dangerous for a country like India which has a tag of a services country a sector that needs a duncical talent pool to feed off. This lack of talent is reflected in the growth in wages which is one of the highest in the world. India has the highest wage inflation of any Asian economy. The one thing that makes India attractive is the cost arbitrage and if wages increase the way they are increasing, it is very likely that this arbitrage will disappear and along with it, valuable FDI dollars.To this end, it is necessary to continuously monitor the quality of students as well as the quality of teachers in ed ucational institutions. The table below gives the rise in wages in different sectors for year 2012. While more policy barriers have been unpackd on FDI in India, results have at times been disappointing due to administrative barriers at the state level as well as lack of coordination between the central and state governments. There need to be greater coordination between the centre and states to ensure that the substantial foreign interest in investing in India gets translated into actual investment flows to the State. An example of this is the proposed $12 billion investment, Indias single largest FDI investment, by South Korean firebrand giant, Pasco.Pasco signed an agreement in June 2005 to set up a steel plant in Orissa but as of bound 2008, the steel plant is yet to be start construction, let alone any operations. Every kind of problem ranging from semipolitical to environmental to allegations of land grabbing has affected this project. The main problem has risen from the allegation that they would make some villagers landless and Pasco cannot have a factory anywhere else because the raw material is in Orissa. This is a problem that the Orissa government could have easily foreseen but many governments in India have a movement to promise too much and do too little. This clearly has impacted credibleness of many state governments.India should continue to work towards developing a deep and liquefied corporate debt market. India is one of the few countries with a major equity market but With a highly illiquid corporate debt market. A well functioning corporate debt market Does one major thing for companies facial expression to invest in India. It is very likely that when Companies are investing their money in India or in any other country, they are more Likely to use debt rather than their own cash. Therefore, they would go to debt markets In their countries of origin and raise money there. However, this could lead to a considerable exchange rate risk because FDI is usually long-term and there is no good way of prognostic exchange rate movements in the long-run.If there a well functioning corporate debt market in India, it actually makes India that much more attractive. India should consciously work towards attracting greater FDI into R&D as a means of strengthening the countrys technological prowess and competitiveness. Policymakers are tone at FDI as the primary source of funds. It is important to Keep in spirit that FDI on its own is not a panacea for rapid growth and development. What India needs is to put in place a comprehensive development strategy, which Includes being open to trade and FDI. This ought to go a long way to fulfilling the Ultimate goal of for good eradicating poverty over the medium and longer-terms.India should remove the product reservation in small scale industries, bring in flexible labour laws, this will generate competitiveness in this sector which is critical for a growth economy. India has fai led to evolve as inward FDI manufacturing destination. Manufacturing investment has potentiality to develop supportive industries also. There is a wide hand out under employment in agriculture. Manufacturing sector has greater scope of low end, labour intensive manufacturing jobs for unskilled population when compared with service sector. The issues of geographical disparities of FDI in India need to address on priority. India is a quasi-federal country consisting of States and married couple Territories.States are also partners in the economic reforms, and should offer several tax incentives etc for attraction. Data on FDI reveals that India has increase largely due to Merger and Acquisitions (M&As) rather than large Greenfield projects. Business friendly environment must be created on priority to attract large Greenfields projects. Regulations should be simplified so that credit ratio is improved (Percentage of FDI approvals to actual flows). To increase the benefits of FDI p ersistently India should also focus on developing human capital and technology. M&As not necessarily imply infusion of new capital into a country if it is through reinvested earnings and intra-company loans.A Greenfield Investment is the investment in a manufacturing, office, or other physical company-related structure or mathematical group of structures in an area where no old facilities exist. Governments should see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to encourage the countrys human capital. There is copiousness 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. MOU ArecelorMittal controversy is one of the best examples of such disputes Due to poor quality primary education and higher there is still an acute famine of talent. This factor has negative repercussion on domestic and fo reign business. FDI in cultivation Sector is less than 1%.Given the stance of primary and higher education in the country, FDI in this sector must be encouraged. The SEZs and EPZs of India have failed to achieve their export targets due to unclear rules and regulations by the government, overcrowding of units in these zones and poor infrastructure as discussed previously in the report. It is found that there are embarrasseder indirect taxes in china, lower import duties on raw materials since the Government often sees that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to get on the countrys human capital, higher labour productivity encourage higher FDIs in china.The Indian Government should also implement such regulations. In China, Foreign investment in research and development (R&D) and foreign enterprises transferring advanced technology to china are exempt from paying import duty such policies arent seen in In dia. In order to improve technological competitiveness of India, FDI into R&D should be promoted FDI can be instrumental in developing rural economy. There is abundance 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. 8. FDI in Retail(how it is good for the country)-Small shops, street vendors and malls can all co-exist (as they are doing now) They all serve different needs, and different income segments. The FDI approval does state that 30 per cent of the products must be procured from small scale industries which have a total investment in plant and machinery not exceeding $1 million. FDI in retail will expand consumer base. Some categories originally long have no big players There are some categories of stores that are just not present in India. The suppliers of e. g. -air instruct units have increased but the food sector supplies remain traditionally the same. Having a Wal-Mart will cater to the increasing consumer base. FDI in India Retail should be welcomed as this will bring a lot of money in India.Foreign Investment will help the government to build new infrastructure and improve rural infrastructure. Farmers will be the biggest beneficiaries from this move, as they will be able to improve their productivity and get high prices by selling their crops directly in the market to the large organized players. Government will also gain by FDI through transparent and accountable observe of goods and supply change management systems. Products will be available to the consumers at minify price since products will be purchased directly from the farmers and sold to consumers. This will provide lashings of job opportunities to unemployed people in India.It will provide more options to the farmers with less wastage of agriculture product. FDI in retail will increase the competition for Indian players button them to improve their products and services. The final beneficiary of this competition will be the consumers. We have enormous wastage in foods and vegetables because small stores and vegetable vendors cannot contribute refrigerated trucks, or any refrigeration. The stores lose money, and so does the consumer (because a lot of the fruits/ vegetables foul up too quickly after purchase. and then the State governments should go with this agenda sort of of opposing it and see the bigger picture. 9. McKinsey report on economic performance of India-McKinsey Global Institute prepared a report on how the global economy whole works with a special focus on India which will be the most inhabit but remains one of the poorest economies. additional focus was given on the economic performance and growth potential of the country comparing its growth with its neighbour China. Following findings were made- A decade ago India and China had the same GDP per capital, but now Indias GDP is only half that of china. Some of the facto rs preventing Indias GDP to grow in comparison to China are Low Productivity-This arises due to regulations concerning markets and products, land market ownership distortions and government owned businesses since they protect most industries from competition.Inequitable regulations-such regulations restrict competition thus lessen efficiency as seen in the telecommunication industries there private players have to pay a heavy licensing fees compared to government owned incumbents who do not do so. peevish enforcement- the small scale industries steal power frequently compared to bigger more panoptical counterparts who cant do so. backlog of products for small scale industries-Around 500 products are reserved for small scale industries (as of 2001), such reservations restricts these industries to achieve production efficiency. Licensing or similar Licensing-Several sectors such as dairy require a license from Government before starting production. These licensing authorities pre vent private entrants into entering competition.Government ownership of companies promote inefficiency and waste-their labour productivity levels are far below their private players- in telecommunications and electricity government control both the regulators and state electricity boards(SEBs) which are highly inefficient and lose around 30 % to theft compared to 10% of power lost by private players to theft. Poor infrastructure and less red tape in port management could greatly reduce customs clearance time. Unclear Ownership- A large proportion of land in India is subject to legal disputes over their ownership and the courts are very slow in resolving disputes. This prevents acquire land for retail and housing. Counterproductive taxation-Low property taxes, ineffective tax collection, subsidised substance abuser charges for water and power leave the local governments unable to invest in infrastructure e. g. in Delhi water is supplied at 10% of its true cost. MEASURES TO IMPROVE PRODUCTIVITY-The following measures were suggested removing reservations on small scale industries, establishing effective proactive and independent regulators, rationalising taxes and custom duties, removing restrictions on foreign investment and widespread privatisation which will boost competition, further improving the quality of products, and at times, has reduced the cost also. Removing the barriers to higher productivity, privatization and a more efficient taxation could maintain the government from what it loses now by providing subsidies to the state owned enterprises, helping it to reduce its burgeoning figure deficit. Increased Productivity and opening more sectors to FDI would also create new jobs, which is of the essence(p) for the second most populous country of the world. 10. ConclusionIndia and China are exemplars of the changes brought on by globalization. They are two of the fastest growing economies in the world and possess two of the largest domestic markets by number of consumers. FDI has been a major contributor to both nations growth, bringing in more than just investment capital. FDI has fostered the introduction of technology, human know-how, and helped to link nations internationally. India has complex FDI regimes that, while allowing for large nominal volumes of FDI inflows, has major flaws. India still protects large economic sectors from investment, is slow to approve foreign acquisitions of domestic firms (if at all), and is characterized by excessive bureaucracy.The analyses in the current study suggest that Chinas potentially huge domestic market is the major determinant of its inward FDI . Comparing to India, Chinas better performance in attracting FDI fromwas mainly due to its larger domestic market and higher international trade ties along with better infrastructure and less of red tapism. . . 10. 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