Under what circumstances does Foreign Direct Investment help an economy (with respect to India and China)

Table of Content

INTRODUCTION3

Aim and Objective:5

Research Background5

CHAPTER 2: LITERATURE REVIEW6

FDI in China6

Three stages of FDI development7

Characteristics of FDI in China10

Macroeconomic impacts of FDI11

Economic reforms and the type of FDI in India13

The Opening Up of the Indian Economy and the Magnitude of FDI17

1. Foreign Investment Policy17

2. Magnitude of FDI Inflows20

India's Export Performance23

CHAPTER 3: METHODOLOGY25

Research Design25

REFERENCES26

Under what circumstances does Foreign Direct Investment help an economy (with respect to India and China)

Introduction

Interest in the study of foreign direct investment (FDI) has grown rapidly. Existing studies of FDI in the US help us to understand factors that are important to attracting foreign investments across different states. In this paper, we examine if these factors are also important for FDI distribution across different provinces in a developing country, China and India. For sure, there are many studies of FDI on developing countries but most of them are cross-country analyses. As such, the interwoven relationships between social, cultural, economic, and political factors are difficult to delineate. By focusing on only one country, we can make a cleaner study on the economic determining factors that attract FDI.

After China's successful talks with the US and the European Union on WTO and US granting China PNTR, China entering into the WTO is almost a sure thing. China's entering of the WTO would likely sparkle another round of FDI projects. MNCs in Shanghai and Tianjin have already planned to expand their investment scale in China. Erickson plans to double its current investment amount of US$3 billion by 2001. On the other hand, China has promised to open more of its servicing industries to foreign investments, especially on areas like financial sector, insurance, telecommunication, trade, and tourism. In fact, China has already been the second largest host of FDI in the world since 1994, next only to the US. An American credit-rating agency projects that by 2005, annual FDI in China will reach U$100 billion.

The stock of foreign direct investment (FDI) in India soared from less than US$ 2 billion in 1991, when the country undertook major reforms to open up the economy to world markets, to about US$ 45 billion in 2005 (UNCTAD, online database). Policymakers attach high expectations to FDI. According to the Minister of Finance, P. Chidambaram, “FDI worked wonders in China and can do so in India ” (Indian Express, November 11, 2005). Various economists, including Bajpai and Sachs (2000, p. 1), advise policymakers in India to throw wide open the doors to FDI which is supposed to bring “huge advantages with little or no downside.”

Yet, it is far from obvious that FDI in India will have the desired growth effects. Skepticism may be justified for several reasons. The recent boom notwithstanding, FDI inflows may still be too low to make a big difference ([Bhat et al., 2004] and [Kamalakanthan and Laurenceson, 2005]). Some observers doubt that economic reforms went far enough to change the character of FDI in India and, ...