India Among Top 3 Investment Draws
India has emerged as the worlds third most preferred destination for foreign direct investment (FDI) in the medium term of five to ten years, behind only China and the United States, according to a survey of global executives conducted by the World Economic Forum in its Global Competitiveness Report 1997.
China is a big pull for multinational corporations owing to its phenomenal economic growth and the rapid expansion of its domestic market, the survey indicated.
The United States is the second favourite country to invest in and is the only advanced industrial nation in the top-five list, which also includes Indonesia and Brazil. The US economy is rated high as it is open to inward foreign direct investment, either in the form of merger or acquisitions, or as a greenfield investment.
India has emerged as a top choice as an investment location mainly because of its market size and expectations of further liberalisation of capital movement across its border, improvement in domestic institutions and rationalisation of economic policies to foster a favourable climate for MNCs, the report indicated.
The opening up of vast countries such as China and India has provided unprecedented opportunities for investors from advanced industrial and newly industrialised countries to seek better returns by investing in those capital-starved, emerging market economies, the report said.
The report said the expansion of FDI in these markets was caused by their commitment to market-oriented structural reform, which has improved the trade and investment climate and raised the expected rate of return on capital in those countries.
The flow of FDI increased rapidly during the 1990s and its level in the emerging markets grew by more than 170 per cent from 1991-1995, while investment in the advanced industrial countries increased by less than half that rate. China received $42.3 billion foreign direct investment in 1996, which is 38 per cent of the total FDI inflows into the emerging markets, the report said.
Drawing a parallel between China and India in their efforts to attract foreign direct investment , the report pointed out: The comparison between China and India is specially startling. These are two giant Asian neighbours that had exactly identical initial incomes in 1980, both at 4 per cent of the United States level. China opened up and launched economic reforms about a decade earlier than India did, however.
The report says that between 1980 and 1996, China received huge foreign direct investment inflows and enjoyed an unprecedented export boom, whereas India only received modest amount of foreign direct investment and had no export boom.
During this period, both countries grew faster than the US, in part because they were much poorer than the United States. But there was a large growth differential between India and China during this period.
As a result, while India managed to increase its per capita income to 6 per cent of the United States level by 1996, China tripled its per capita income during the same period, to 12 per cent of the US level. If both India and China maintain their respective growth rates in 1990-1996, then it would take less than a generation for the average Chinese to have an income about half of the United States level.
But it would probably take 5 or 6 generations for the average Indian to have an income at half of the United States level, the report said.