Sunil Jain: Technology drives FDI

PERSPECTIVES

While most have regarded the size of the domestic market in India as a reason why FDI is pouring into the country, new research by ICRIER puts this in perspective "� the home market is important, but the level of R&D, the IT infrastructure and the availability of trained manpower is far more important. ICRIER's model of what determines FDI flows into India gives both a lower coefficient as well as a lower t-value for the size of the economy as a determinant of FDI versus indicators such as R&D and skilled manpower. ICRIER's analysis for other countries in Asia, though, finds the size of the domestic economy is not a significant determinant of FDI, something in keeping with the fact that these countries have had 'export-oriented' FDI. But what is the reason behind the declining attractiveness of once popular destinations like Indonesia, Malayasia and Thailand? ICRIER found that technological strength was a major determinant of FDI inflows "� an area in which most of the new south-east Asian tigers have lagged behind. So, if India wants to retain its new-found attractiveness as an FDI-location, it needs to constantly improve its technology advantage. Which is, of course, why, despite its vastly high costs, the US remains such a preferred global destination for FDI. 
 

FDI Inflows into East, Southeast and South Asian Developing Economies:1991-2005                                                    (in US$ million, per annum)
Region/Time period	1991-95	1996-2000	2001-05
China	22,835	42,696	57,232
Hong Kong, China	5,176	24,619	23,402
Korea, Republic of	857	5,600	5,145
Taiwan	1,200	2,438	1,906
India	797	2,906	5,551
Indonesia	2,342	843	745
Malaysia	5,064	4,803	2,964
Singapore	6,373	12,762	13,653
Thailand	1,889	4,631	2,377
Source:  ICRIER