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The Study On The Utilization Of Foreign Direct Investment In India

Posted on:2009-05-22Degree:DoctorType:Dissertation
Country:ChinaCandidate:W W ZhangFull Text:PDF
GTID:1119360245464521Subject:World economy
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With the adjustment on foreign investments policy and the improvement of investment environment in India, FDI flowing into India has increased continually since 1991. In recent years, India has become the most attractive FDI host country after China. It should be noted that India has much uniqueness on the utilization of FDI, especially on the environment and the policy of attracting foreign investments and the absorption capacity, etc. In-depth study on this issue not only helps to understand the advantages of attracting foreign investments in India, but also helps to recognize the certain deficiencies of utilizing FDI in China, so as to provide some references on the policy establishment and adjustment for China.In this article, normal and empirical methods have been used to analysis the above issue from the following aspects: (1) Investment environment in India; (2) FDI policy and its evolution in India; (3) The determinative factors of utilizing FDI in India; (4) The impact of FDI on the growth of Indian economy; (5) The comparison on utilizing of FDI between India and China.At present, the overall investment environment in India is not quite considerable. Such as the poor quality of infrastructures, too higher tariffs, complex tax structure, low work efficiency of the government and a high degree of corruption and bureaucracy, which all can prevent FDI to inflow deeply in India. But what I want to stress is that India is a country that has great potential for investment, for there are rich natural resources, the continuous expanding domestic market, skilled and well-educated workforce in India. Furthermore, financial system in India is perfect for investors to provide more facilities, and strong intellectual property protection is an important guarantee when attracting TNCs to invest in the field of science and technology and to carry out R & D activities in India. And the much more important thing is that the Indian Government has pursued a pragmatic economic reform on optimizing the investment environment.The most unique on the utilization of FDI in India is its policy of attracting investment. Since independence, India's FDI policies have kept on basing on national conditions. Concretely, under the premise of adapting to the country's overall economic strategy, those policies have been adjusted in accordance with the national economy especially the different development stages of the industrialization. India's FDI policy attaches great importance to technology transfer and technical cooperation. On this basis, India laid emphasis on the digestion and absorption to adapt to their national conditions, so as to realize the goal of localization. India's FDI policy has obvious tendencies. For instance, India's key industries on attracting foreign investments include those that India is priority to develop, knowledge and technical trades, especially those that are prone to produce technology spillovers. Similarly, the backward areas are the focus where India government advocates that FDI should flow. The government of India provides special support on the FDI policy to those above industries and regions. In addition, India's FDI policy paid a great attention to Indian economic security. India government has either restricted or prohibited FDI to flow into the sectors which are related to the lifeline of the national economy, the people's livelihood or the national defense and security for a long time.In recent years, with the adjustment of the policy of attracting foreign investments and the improvement of investment environment, the utilization of FDI in India has changed largely both number and structure. Judging from the quantity aspect, India's FDI inflows have increased gradually, which make FDI more important in the use of foreign capital and make India improve its position in the countries that FDI inflow into; judging from the structure, the developed countries in Europe and America become India's largest FDI sources and these FDI inflows into India's main capital-intensive and technology-intensive industries. At the same time, the states which own the largest number of FDI approval have generally a higher degree of urban.In order to investigate the determinative factors of FDI inflows and the impact of FDI on the Indian economy, multiple regression and co-integration test have been used to carry out the empirical study. Empirical studies showed that the stock of human capital, the real exchange rate fluctuations and the average tax rate in India are the decisive factors to attract FDI. Though the inflow of FDI is to promote the growth of India's GDP, FDI has not played an obvious role on improving India's exports.Next, this article compared and analyzed the differences in the use of FDI between China and India on the volume and the structure of foreign investments. In volume terms, FDI that India attracts is equivalent to only one tenth that China attracts. Judging from the structure, FDI that China attracts is mainly from East Asian and flowing into China's major labor-intensive industries, then these industries will be taken as an export processing base to promote China's labor-intensive products exports. By contrast, the majority of FDI that India attracts is from developed countries and mainly flowing into capital and knowledge-intensive industries, which pay more attention to Indian domestic market. In fact, there are many reasons leading to the differences in the number and structure of using FDI, which include resource endowments, cultural background, development strategy and policy, etc. Different models to attract investment make China and India receive different economic performance from FDI inflows. What China benefits from the process of using FDI includes the increase in employment effect, the capital accumulation effect, trade and increasing efficiency effect , economic growth effect, while India get more obvious benefits from technology spillover effect and the industrial upgrading effect . Compared to China, India obtains less negative effects from FDI.We can get some inspiration from the contrast of using FDI between India and China as followings: during the short term, various economic performances that a country can gain from the inflow of FDI are difficult to meet the maximum and sometimes even constrict with each other. Under such conditions, the goal of using FDI for a country should have its essential points. In the short term, since we can conclude from the Barrel Theory that the benefits that a policy brought us usually depend on the initial weaker restrictions which restrain the issues urgently needed to solute, FDI should mainly address the problems that must be faced immediately in term of national development. In the long term, the goal of using FDI is to increase national competitiveness, so as to make a country maintain economic growth in the long-term. Since China's current domestic and international environment is different from the early stage before reform, the author believes that the adjustment of the foreign investment policies in China is imperative. In details, China's domestic environment has undergone tremendous changes. After 30 years of reform and opening-up, China has achieved rapid economic growth and national income expansion significantly. The funding issue is no longer the most important constraint on economic growth and China has become the world's third largest trading nation. The trade surplus grows year after year and foreign exchange shortage problem has been resolved already. In addition, China has also eased the unemployment problem. However, when the above-mentioned pressures are reduced, some other issues are becoming prominent, such as the relatively small benefits from export processing trade, the inefficient use of capital; the immature labor skills; the weak industry competition, and so on. Obviously, the only way to solve above issues is to improve the technological level of China continuously. Moreover, considered from the international environment, the focus of international industrial has transferred from the manufacturing to the service industries. Nevertheless, Low-cost labor force, which is continually disappearing though has been taken as an advantage, attracts little high-quality FDI. On the whole, China's short-term goal of using FDI has been consistent with the long-term goal, which is to attract more high-technology FDI and actively improve national absorptive capacity in order to gain more technology overflow, and then enhance China's industries competitive power. Therefore, China must learn from India's experience of using FDI. Starting with the increase of the quality and absorptive capacity of using FDI, we should adjust policies of attracting investment, so as to make China obtain more benefits from the process of using FDI.
Keywords/Search Tags:FDI, Investment environment, Absorption capacity Technology overflow, Economic performance
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