INTERNATIONAL BUSINESS

FINAL REPORT
COMPARATIVE STUDY OF FOREIGN DIRECT
INVESTMENT (FDI) IN INDIA AND CHINA

INDEX

1. EXECUTIVE SUMMARY
METHODOLOGY
2. FDI SCENARIO IN INDIA
3. DATA ANALYSIS FOR INDIA
4. FDI SCENARIO IN CHINA
5. DATA ANALYSIS FOR CHINA
6. RECOMMENDATIONS
7. CONCLUSION
8. LIMITATIONS
9. ANNEXURE I
10.

ANNEXURE II

EXECUTIVE SUMMARY
Foreign direct investments in any country represent the long-term
sustainable inflows having a direct impact on the growth of the
economy as a whole. So far Indias effort to attract FDI have not been
too successful. Actual investments have fallen short of the potential
and the requirements of the economy, leaving India far behind many
other emerging markets such as China. One reason for the slack
response of foreign capital seems to be the inability of the foreign
direct investors to gain even a toehold in many key sectors of the
economy.
As far the sector wise distribution of FDI goes, in India the FDI
inflows have focused in just three or four segments of the economy.
Figures for the latest years show that Engineering, chemicals and
services amounted for more than half the FDI flowing into the country.
Whereas, in China the majority of inflows have been received in
Electricals, Textiles, chemicals and the latest emerging sector is IT.
The major factors that affect the FDI flows into India are Real interest
rate, exports, government debt, external debt, GDP and international
reserves. On the other hand there are very few but very influential

factors, which affect FDI in China. They are export, external debt and
international reserves. A multiple-regression model was developed in
order to identify the above factors.
Indias inability to improve the flow of FDI is reflected also in the
restricted sources of foreign funding. The figures clearly show that
despite all the efforts to liberalize FDI over the last decade most of the
investments continue to be cleared on an ad hoc basis. Although many
sectors have opened up for the automatic approval route but the latest
numbers indicate that less than five percent FDI have been cleared
through it. Thus we see that right policies are being framed but their
implementation is faulty and are not able to serve their purpose.
India should now follow a two-pronged approach. Firstly, access more
funds from the west focusing on knowledge based industries and
services sector in which India has a comparative advantage. Secondly,
attract more investments from Asian countries, which account for most
of the funds flowing into China.

What lead to the growth of foreign capital in India?

As of the end of the 1980s, India's balance of payments was vulnerable
to external shocks, as the reserves had declined from a peak of $5.97
billion in 1985-86 to $4.23 billion in 1988-89 and further to $3.37
billion in 1989-90. The current account deficit, which was traditionally
less than two per cent of GDP, had climbed to more than two per cent
of GDP during the second half of the 1980s. In 1988-89, it reached
2.93 per cent of GDP.
For a better part of the 1980s, the rising trade deficit was offset by a
rising surplus on the invisibles front. Remittances from Indians abroad
and earnings through tourism were the major sources of invisibles
income.
However, the end of the 1980s, income from tourism had stagnated and
those from remittances had declined sharply. Simultaneously, as shortterm borrowings had increased in the preceding years, the interest
burden increased quite significantly. These nearly doubled from $2,128
million in 1988-89 to $4,120 million in 1990-91.
In 1989-90, reserves accounted for 1.6 months of imports. The Gulf
war of August 1990 and the subsequent rise in crude prices rudely

exposed the in adequacy of reserves. Crude oil and petroleum products

accounted for more than one-sixth of India's total import bill. And
crude prices more than doubled after Iraq attacked Kuwait in mid1990.
The consequent rise in India's import bill further depleted reserves and
as of the end of 1990-91, at $2.24 billion the reserves covered less than
a month's imports.
International rating agencies downgraded Indian paper between August
and October 1990. This fuelled the crisis further as commercial
borrowings dried up soon thereafter. A balance of payments crisis soon
turned into a crisis of confidence. as the United Front government fell
within a year of its formation.
A substantial outflow of deposits held by Non-resident Indian during
1990-91, added its contribution to the crisis. These outflows
accelerated from $59 million a month in October-December 1990 to
$76 million a month in January-March 1991 and then to $310 million
per month during April-June 1991. Reserves declined further to a low
of $0.9 billion on 16 January 1991. The current account deficit as per
cent of GDP shot up to 3.24.

The government initially responded with some savage cuts on imports

and controls on consumption of petroleum products. Confidence
building measures were taken up after a new government was formed
in June 1991.
The rupee was devalued in two steps.
The Cash Compensatory Support Scheme was abolished and a new
instrument called Eximscrip was introduced. This provided import
entitlements against export earnings.
The rupee was partially freed in February 1992, wherein 40 per cent
of the foreign exchange earnings were to be surrendered at the
official exchange rate and the remaining 60 per cent could be
converted at market determined exchange rates. Import restrictions
on capital goods, raw materials and components were virtually
eliminated. Cash margins and interest surcharge on import credit
was abolished. It progressed further into an effective current
account convertibility in February 1993.
The IMF and the World Bank agreed to provide funds to India. The
IMF provided $5,676 million between 1990 and 1992 and the
World Bank provided a structural adjustment loan of $500 million.

The measures helped in international investors reposing faith in India

once again and as apart of liberalization process, the government took
steps to attract foreign capital.
The policy framework for the inflow of capital was liberalized in
pieces through the 1990s. Foreign institutional investments into
portfolios was permitted and Indian companies were permitted to raise
resources through the international capital markets in the form of
GDRs. Foreign direct investments were liberalized and multinational
companies were wooed by state governments to invest into
infrastructure and other projects. The dramatic change in the
environment led to a surge in capital flows during the mid 1990s.
Foreign investments into India shot up dramatically from $151 million
in 90-91 to $589 million in 1992-93, $5,763 million in 94-95 and then
to $12,121 million in 1999-00. The foreign direct investments
increased from $651 million to $2170 million in 1999-00..

What lead to the growth of foreign capital in China?

As a developing country, China considers it of great importance for the

economic development to absorb foreign investment and introduce
advanced foreign technology and scientific management methods.
In order to achieve remarkable growth in absorbing foreign investment,
China made effort to improve its foreign investment policy to a new
and higher stage under the guideline of utilizing foreign investment
actively, rationally and effectively.
According to the Ninth-Five-Year (1996-2000) State Economic
Development Program, China shall pay more attention in guiding
rationally the direction of foreign investment and improving the
structure of foreign-funded enterprises. For this purpose, in 1995, the
Chinese government promulgated "Provisional Regulations on the
Guidelines of Foreign Investment" and "Catalogue of Projects in which
Foreign Investment is Encouraged", which have increased the
transparency of state industrial policies and encouraged foreign
investors to invest in agriculture, infrastructure, backbone industry,

industry with high and new technology, as well as medium and lowgrade residence projects.
Furthermore, China shall gradually grant national treatment to foreignfunded enterprises. With a view to further create a favorable
environment for the equal competition between foreign funded
enterprises and domestic ones, china shall gradually abolish the
different treatment between foreigners and domestic residents in terms
of hotel fare standard, transportation and tourism charges. Meanwhile,
China has unified the tax system and personal income tax system for
foreign-funded and domestic enterprises, adjusted the domestic
enterprises income tax rate to 33%, which is the same as that of
foreign-funded enterprises. These policies and various steps taken by
the Chinese government lead to a phenomenal growth in FDI in china.
From here we would proceed to carry out an empirical study whereby
we shall examine all those macro-economic factors that would affect
FDI flows.
Methodology:
To determine the cause and effect relationship between the 15 variables
considered and FDI inflows, Multiple Regression was performed on

the time series data. A combination of variables was regressed together

to see how well they fit the equation. One by one variables were added
and subtracted and many permutation and combination were
considered remove multi-co- linearity. Through a trial and error
method the equation of best fit was chosen. The selection criterion is
based on the best combination of regression coefficients, R square, and
t-stats.

Empirical results:
INDIA
VARIABLE

COEFFICIENTS

T-STATS

Real Interest Rates

22.9708

1.7019

Exports

0.0672

9.9912

External Debt

-0.0175

-9.6669

GDP

0.0036

4.0913

Govt. Debt

-0.0059

-7.1222

Net Reserves

0.0676

5.0617

-1184.151

-6.7425

The above table shows the variables that have been included in the
multiple regression equation. The Adjusted R2 value is 0.9931. Thus,
all these factors considered could together explain 99.31% variation in
FDI. All the t-stats have absolute values near 2 or greater than 2
implying a good significance level. The Durbin-Watson stat at
2.8215 implies that we have successfully been able to remove any
positive collinearity between the independent variables considered.

Interpretation of the results:

1. The factor that seems to affect FDI the most in case of India is Real
interest rates. This has a high positive correlation of 22.97. This
means that the real interest rates significantly influence FDI. This
result conforms to the general principal of capital mobility towards
higher rates of return. This argument can further be supported by
the fact that India has its major FDI inflows are from US and UK
where historically low interest rate were prevailing. The higher
interest rate gave incentive to the foreign investor in invest in
emerging market like India.
2. Another variable affecting FDI is the level of exports. This could
mean that most investors pumping money into India are
incentivised by the possibility of greater exports. The government
in order to encourage export has allowed foreign firms higher
equity thresholds if they exported a significant portion of their
output. Considering the availability of cheap labor in India, it is an
attractive location to manufacture at low cost and thereby export
competitively. A lot of analysts believe that the foreign investor is
attracted by the huge market made available by India and exports
come into the picture only later. However it seems that in the long

run the investor is interested in tapping the export market,

particularly the neighbouring market in Asia.
3. External debt and Government Debt have also entered the multiple
regression equation. As expected, these variables are negatively
correlated with the dependent variable. Thus they act as a deterrent
to FDI. Those countries, which have high debt burden, are
perceived to be having high risk as far as the repayment of the
investment is concerned. So, a foreign investor shall always invest
in those countries where the default risk is minimum.
4. GDP is another important variable affecting the flow of FDI into the
Indian economy. Economic expansion would generally be
associated

with

increasing

demand,

increasing

corporate

bottomlines, increased exports and greater capital investments.

5. Lastly, the net international reserves held by the government also
affect FDI. A high reserve instills a greater confidence in the
foreign investor whereby he is assured of the repayment of his
investment.
6. Apart from the above factors, which effect FDI inflows in India,
there are some more factors, which may affect FDI. The same may

be Political Risk Index of a country, procedural complexities,

social factors and others.

These factors together explain 99.3% of the variation with an adjusted

R2 value of 0.993136. However it is seen that the intercept value, C is
very high at 1184.151. an explanation for this could be that there are
some other factors apart from those considered that could be affecting
FDI. A large part of this could be explained by policy changes of the
government during the period considered. The multiple regression that
has been carried out does not factor in the effect of governments
liberalization policy initiated in 1991 and carried out in a phased
manner ever since. The status of structural and infrastructural factors in
a country that come into play while deciding to invest in that country
have also not been considered. Another factor that could be responsible
for changes in FDI is the exchange rate fluctuations.
CHINA
The regression results for China are quite different from those
observed for India. The following table shows the result of the stepwise regression.

VARIABLES COEFFICIENTS

T-STAT

External Debt

-0.3541

-4.6779

Exports

0.5043

7.22376

Net Reserves

0.1280

3.5907

-8296.992

-6.8454

The adjusted R2 value is 0.9746 i.e. 97.46% of the variation in FDI is

explained by the above factors. All the t-stats have absolute values near
2 or greater than 2 implying a good significance level. The DurbinWatson stat at 2.1257 implies that we have successfully been able to
remove any positive co-linearity between the independent variables
considered.

Interpretation of the results:

1. External debt is one of the factor that effect FDI. As expected, this
variable is negatively correlated with the dependent variable. Thus
it acts as a deterrent to FDI. Those countries, which have high debt
burden, are perceived to be having high risk as far as the repayment

of the investment is concerned. So, a foreign investor shall always

invest in those countries where the default risk is minimum.
2. Further, exports affect FDI positively. As far as china is considered,
its shares same condition as prevailing in India in terms of cheap
labour and locational advantage. . A lot of analysts believe that the
foreign investor is attracted by the huge market made available in
china and exports come into the picture only later. However it
seems that in the long run the investor is interested in tapping the
export market, particularly the neighboring market in Asia.
3. Lastly, the net international reserves held by the government also
affect FDI. A high reserve instills a greater confidence in the foreign
investor whereby he is assured of the repayment of his investment.
4. Apart from the above factors, which effect FDI inflows in China,
there are some more factors, which may affect FDI. The same may
be Political Risk Index of a country, procedural complexities, social
factors and others.

The above three factors are similar to those observed in the case of
India. However the other factors such as GDP, real interest rates and

Government debt, which influenced FDI in India, seem to play an

insignificant role in China.

What causes the difference in FDI flows into India and China?
1. Political stability: When India and China are compared on the
platform of political stability, china is more stable than India as
far as the stable government is considered. China always had a
stable government, which gave clear-cut and structured policies
regarding foreign investments. Thereby, it could build credibility
in the minds of the foreign investors to take a long-term
perspective for making investments in the country. As far as
India is concerned its policies have always been unstructured
because of political instability. As and when there was a new
government its policies towards foreign investments changed.
Thereby in case of India the foreign investors were unable to
take any long-term view for their investments in India. The
procedural complexities even in the sector where foreign
investment was readily allowed has lowered its credibility
amongst investors.
2. Lack of Infrastructural Facilities: Compare to China the
infrastructural facilities available in India are very low. The
facilities like ports, railways, power generation, highways and
others are still underdeveloped in India.

3. Inflated Accounting of FDI flows: Although, about 200 of the

worlds largest multinationals have established operations in
China, the bulk of the realized investment, 58 per cent according
to official Chinese data, has come from Hong Kong and Macau.
In fact, an unknown proportion of this investment, especially
before 1991, represents funds originating in Taiwan. Another
significant and again unknown proportion of the total consists of
funds that originated in mainland China, found their way to
Hong Kong and thence back to China, under a practice known as
"roundtripping" in order to claim the tax and duty privileges
accorded to "foreign" investment. Thus, the available data may
exaggerate the contribution of foreign investment for a number
of reasons. First, an unknown proportion of the FDI flows are in
fact moneys that originated in China and have returned, via
Hong Kong, to seek the privileges afforded only to foreign
investment under the prevailing investment regime. Second, the
overvaluation of capital equipment contributed to joint ventures
by foreign investors may contribute to overestimation of FDI
inflows. About 70 per cent of FDI inflows into China are in
kind, and the translation of these investments into cash tends to
overvalue the amount of FDI. The motives behind overvaluation

include a larger share of dividends vis-a-vis local partners, lower

taxes arising from larger capital expenditures and depreciation
credits, and greater management control. In case of India, their
has been no double counting.

Recommendations:
From the above results certain conclusions can be drawn regarding
efforts to attract FDI.

A roadmap for Indias progress towards greater FDI flows whereby it

can compete with China and get a competitive edge:
India is lagging far behind the other developing countries with respect
to FDI. This is because the foreign investor finds neighbouring
destinations like Thailand, Indonesia, Malaysia and China far more
attractive than India. Not only do these countries have investor-friendly
policies but also they have the necessary infrastructure for the investor
to maximise his profits.

What can India do?

1. Considering that exports affect FDI to some extent, it becomes
important to take account of the countrys international
competitiveness. For this it becomes important to encourage
freer trade. A move towards this is being made, as India is
moving towards a regime of no tariffs.

It is very necessary to

simplify administrative regime and procedures of imports and

exports. Regulations need to be streamlined and rationalized at
both the national level as well as in the states.
Exports showed a strong recovery in 1999, growing by
12.9 per cent in April-December 1999 in US $ value.
From an international comparative perspective, the
export performance of India in 1998 (decline of about
4 per cent in US $ value) was worse than Chinas
(0.4%) and the Worlds (-1.6%) but better than that of
the developing countries (-6.3%).
The government has rightly tried to copy the Chinese
model of stressing on export processing zones (EPZs)

and special processing zones (SPZs) to help bridge the

export gap.
FDI inflows have been further liberalised in the power
and e-commerce sectors. China attracts around $40
billion FDI per year of which around 40-45 per cent
goes to export -oriented industries which does not
happen in India.
The target for exports for the next year has been set at
20%, which shall have the greatest impact on the FDI
flows but it yet to be seen how successful the Indian
government would be to achieving this target.

2. Another factor, which has been empirically seen to be affecting

FDI, is the GDP. Thus, India should try and increase the GDP
growth to be able to attract more and more FDI in the future.
The recent economic survey shows that:
There has been sharp upturn in GDP growth in 199899, which reversed the deceleration in growth seen in

1997-98. GDP (at factor cost) growth accelerated to

6.8 per cent in 1998-99 from 5 per cent in 1997-98
3. External debt also plays a very important role in influencing the
FDI flows. As it is negatively co-related, India should try and
keep it at low levels. The present scenario is as follows:
The external debt to GDP ratio has been declining
continuously from a high of 41 per cent in 1991-92 to
23.5 per cent in 1998-99. At the end September 1999 it
was lower at 22.3 per cent.
4. It is also imperative that infrastructure for industry and trade is
vastly improved. The government itself has impressed the need
for an urgent revamp and enhancement of infrastructural
facilities,

including

energy

supply,

transport

and

telecommunication. As a result, a vast improvement can be

observed in all fronts: roads, highways, ports, bridges, railways
and power. And rightly enough, in the latest Exim policy the
government has set up a separate Rs 250 crore infrastructure
fund to help accelerate the trade movement across the country.

No less important is to clarify the future of labor policy, exit

policy and flexibility inherent in such a scheme.
5. Also many difficulties still exist in joint ventures, for instance:
convertibility is not yet complete, which implies difficult
procedures in transactions. Foreign collaborators cannot easily
import parts and components.
6. Greater automaticity should be provided in the clearance
process. In a bid to give a major thrust to FDI inflows in the
country, the government had recently placed all items under the
automatic route for FDI/NRI/OCB investment barring a small
negative list.
7. India is a vast country with a lot of investment opportunities.
But, bureaucratic hurdles and cumbersome procedural hassles
have made India the least favoured nation. Once bureaucracy
leaves the Indian system and more transparency enters that will
be the day when India shall emerge as the leader.
8. India has a very productive labour force and is richly endowed
with natural resources. But infrastructural bottlenecks and red
tapism are hindering the process of growth. Another lacunae is

that Indias trade is concentrated in selective countries only. It is

mostly to the East European countries. Thus, unless and until
India does not look at diversifying and grabbing trade
opportunities, it will be very difficult to improve its trade health
and enhance its share in world.
9. In China, most FDI inflows are into sectors that have an export
potential. This is not the case with India. Yes, the government is
liberalizing policies to attract more FDI into sectors like
infrastructure, which do not have an export potential. This
results in poor exports. What the government should do is to get
FDI into to those areas where there is export potential as we
have already seen that exports and FDI are linked together.
10.For setting up an open market policy, India will have to phase
out Quantitative Restrictions. The government needs to become
alert and draw up a tariff structure which will balance interests
of both the producers and the users or consumers. A step in this
direction has been taken with the government laying emphasis
on a more active role for the Tariff Commission.

11.The poor protection rights in intellectual property have reduced

incentives to transfer of technology in India and have acted a
deterrent to FDI inflows in some technology-intensive area. An
effort should be made in this direction by the government so that
protection can be given to technologies coming to India.
12.If the economic reforms are measured in terms of cumulative
foreign capital inflows, we see a satisfactory figure but if the
same is compared in terms of approvals granted for foreign
inflows, it is very disappointing. According the records, actual
inflows of FDI averaged no more than 1/5 of the total approvals.
Thereby government should ensure early clearance of the
proposal to boast investor perception.

Conclusion
Once investors have been attracted to a particular destination country,
they expect a high level of facilitation services. Governments all too
often give inadequate attention to servicing investors needs, even
though large sums of money may have been spent on promotion
activities and success has been achieved against fierce international
competition.
Thus the provision of assistance to potential investors out of public
funds is vital because bureaucratic barriers turn away would-be
investors. They can represent a significant start-up cost to investors and
are actively compared between alternative investment locations. The
quality of assistance is also usually the first real test for the investor of
whether the host authorities are genuinely friendly towards business.
Supposedly one-stop investment promotion agencies are now
virtually universal. However, the quality of the facilitation process
varies widely. While governments and provincial authorities may
proclaim that their agency has sole discretion in granting the variety of
licenses and permissions required to operate legally in their country,
many, in practice, do not have the power to do so.

A countrys domestic policy framework, combined with local

economic factors, including physical infrastructure provision, size of
the domestic market, and labour costs, all play a critical part in
influencing the transnational corporations choice of location for its
foreign investment and production activities. The challenge to policymaking is to develop a policy environment, which encourages and
facilitates FDI inflows, which ensures that the benefits flowing from
the foreign investment are shared between the investor and the
domestic economy in ways that are acceptable and to the mutual
advantage of both parties.
Limitations:
Most of the limitations faced by the group were with respect to
data inadequacies. For carrying out the regression analysis data
for the past 19 years has been used. Due to unavailability of time
series data before 1980, more data points could not be used. Also
as there is some missing data in the time series, the regression
results might not be very accurate.
Another limitation encountered was that FDI inflows seem to be
affected by some factor apart from those that were considered by

the group. However the group has tried to identify what these
factors could be and provide an explanation for these.
ANALYSIS OF DATA

INDIA
Variables
Exports
External Debt

Coefficients
0.0562
- 0.0167

GDP

0.0036

Real Interest Rates

22.97

Net Reserves

0.0676

Government debt

- 0.0059

Adjusted R Square = 0.994181

Showing that the variables we have taken explain 99.41% of variation
in FDI inflow in India. Thus showing a good significance level.

Durban Watson Stat = 2.9181

We found co linearity between individual factors and FDI inflow and
also the co linearity between all factors and FDI inflow. Though we did
not make an attempt to remove multiple co linearity.

Data Interpretation of India

1. Looking at the above given data it can be said that one major
factor affecting FDI inflow in India is its export level.
Investors are attracted by the huge Indian market firstly and
then to the neighboring export market in Asia. They are thus
incetivised by the greater export possibility available in India.
The India also encourages companies, exporting a significant
portion of their output thus earning India higher foreign
exchange.
2. External debt is negatively correlated with FDI inflow. Hence
a country with high external debt is never lucrative enough to

attract foreign investors as they are perceived to have a high

risk when comes to repayment of investment.
3. Another factor greatly affecting FDI inflow in India is the
GDP level. High GDP level shows high level of economic
activities in the economy, which is associated with increased
demand and increased capital investment.
4. Investors are attracted to invest in countries with high real
interest rate. The results we have conform this, showing a
high positive correlation between real interest rate and FDI
inflow. Investors would like to invest in India if the interest
rate here is higher than there home country.
5. Net Reserve level assures foreign investors, the repayment of
there investment. Thus showing a positive correlation
between reserve level and FDI inflow.
6. Other factors affecting FDI inflow are:
Political Stability, Procedural Complexity and other social
factors.

CHINA
Variables

Coefficients

Exports

0.503

External debt

0.354

Net Reserves

0.12

Adjusted R square = 0.974

The variables studied explain 97.4 % of variation in FDI inflow in
china. Thus showing a good significance level.
Durbin Watson Stats = 2.1257
We found co linearity between individual factors and FDI inflow
and also the co linearity between all factors and FDI inflow. Though
we did not make an attempt to remove multiple co linearity.
Data interpretation of China
Factors not affecting FDI inflow in china unlike in India are Real
Interest Rates, GDP level and Government debt.

1. Export level is positively correlated to FDI inflow. As in case of

India, in china also investors are attracted by the huge home
country's market then the neighboring export market in Asia.
The investors are incentivised by the high export potential
available in china. Availability of cheap labors and convenient
location enables the investors to produce at low costs and
thereby export competitively.
2. External debt is negatively correlated with FDI inflow. Hence a
country with high external debt is never lucrative enough to
attract foreign investors as they are perceived to have a high risk
when comes to repayment of investment.
3. Net Reserve level assures foreign investors, the repayment of
there investment. Thus showing a positive correlation between
reserve level and FDI inflow.
4. Other factors affecting FDI inflow are:
Political Stability, Procedural Complexity and other social
factors.

LIMITATIONS
Adjusted R square for India and China is quite high thus implying that
variables considered justify the FDI flow, but with this we cannot see
the impact of: Changes in government policy during the time period
considered, status of infrastructural factors and rate fluctuations.

ANNEXURE 1
Macroeconomic determinants of Foreign Direct Investment Flows
into an economy:

It has generally been observed that the volume of FDI rises when the
broad economic conditions are favorable. Socio-political stability,
business operating conditions and various other macroeconomic
variables such as wage rates, market size, interest rates, BOP etc. are
believed to have a significant influence on the flow of FDI into an
economy.
Previously various researches conducted research acknowledges that
non-public policy factors (wage rate, raw materials, GDP/capita, cost
of capital, etc.) significantly influence foreign direct investment in
most of the countries.
Here an attempt has been made to examine the relationship between
various macroeconomic and socio-political variables and their impact
on FDI flows into the economy. Particularly the relationship is being
analyzed for the two economies of India and China to understand what
factors have affected the flow of FDI into these economies over the

years. Empirical data for the past 19 years (1980 to 1998) have been
used for the purpose. The variables used have been selected a priori
based on the general belief of what factors affect FDI flows into an
economy.
The variables considered are as follows:
Central government debt, total (% of GDP): Total debt is the entire
stock of direct, government, fixed term contractual obligations to
others outstanding at a particular date. It includes domestic debt (such
as debt held by monetary authorities, deposit money banks,
nonfinancial public enterprises, and households) and foreign debt (such
as debt to international development institutions and foreign
governments). It is the gross amount of government liabilities not
reduced by the amount of government claims against others.
Commercial service exports (current US$, WTO): Commercial
service exports are total service exports minus exports of government
services not included elsewhere. International transactions in services
are defined by the IMF's Balance of Payments Manual (1993) as the
economic output of intangible commodities that may be produced,
transferred, and consumed at the same time.

Commercial service imports (current US$, WTO): Commercial

service imports are total service imports minus imports of government
services not included elsewhere. International transactions in services
are defined by the IMF's Balance of Payments Manual (1993) as the
economic output of intangible commodities that may be produced,
transferred, and consumed at the same time.
Consumer price index: Consumer price index reflects changes in the
cost to the average consumer of acquiring a fixed basket of goods and
services that may be fixed or changed at specified intervals, such as
yearly. The Laspeyres formula is generally used.
Current account balance (% of GDP): Current account balance is the
sum of net exports of goods, services, net income, and net current
transfers.
External debt, total (DOD, current US$): Total external debt is debt
owed to nonresidents repayable in foreign currency, goods, or services.
Total external debt is the sum of public, publicly guaranteed, and
private non-guaranteed long-term debt, use of IMF credit, and shortterm debt. Short-term debt includes all debt having an original maturity
of one year or less and interest in arrears on long-term debt.

Genuine domestic savings (% of GDP): Genuine domestic savings are

equal to net domestic savings, plus education expenditure and minus
energy depletion, mineral depletion, net forest depletion, and carbon
dioxide damage.
Gross domestic fixed investment (current US$): Gross domestic fixed
investment includes land improvements (fences, ditches, drains, and so
on); plant, machinery, and equipment purchases; and the construction
of roads, railways, and the like, including commercial and industrial
buildings, offices, schools, hospitals, and private residential dwellings.
Long-term debt (DOD, current US$): Long-term debt is debt that has
an original or extended maturity of more than one year. It has three
components: public, publicly guaranteed, and private non-guaranteed
debt. Data are in current U.S. dollars.
Overall budget deficit, including grants (% of GDP): Overall budget
deficit is current and capital revenue and official grants received, less
total expenditure and lending minus repayments. Data are shown for
central government only.
Real interest rate (%): Real interest rate is the lending interest rate
adjusted for inflation as measured by the GDP deflator.

Total consumption, etc. (current US$) : Total consumption is the sum

of private and general government consumption. This estimate includes
any statistical discrepancy in the use of resources.

CHINA (ANNEXURE 2)
INDIA (ANNEXURE 3)
1980
1981
1982
1983
1984
1985
1986
1987
1988
PARTICULARS
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
GDP at market prices (current US$) (mill)
201687 192952 202088 227375 256107 304912 295716 268217 307167 342292
Net international reserves (current US$) (mill) 2545
5058
11349
14987
17366
12728
11453
16305
18541 17960
Inflation, consumer
prices
(annual
%)
0
0
0
0
0
0
0
7
19
18
PARTICULARS
186,392
200,116
217,744
210,513
231,795
247,816
Real interest rate (%)
-1 193,525
3
8
6
2
-3
3
2277,912 -3 295,7182
Money Supply(mill)
114880 134520 148840 174890 244940 301730 385900 457400 548740 583420
GDP at of
market
(current (US$,mill)
US$) (mill)
Imports
goodsprices
and services
16067 15851 14848
17066
23855
43438
43789
36679
43376 46239
Net
international
reserves
(US$,mill)
6,944
4,693
4,315 18906
4,937 24054
5,842 30365
6,420 34782
6,396365686,454
Exports of goods and services (US$,mill)
15236 16517
17980
40084 4,899
43530
Inflation,
consumer
prices
(annual
%)
11.37
13.12
7.89
11.87
8.32
5.56
8.73
8.80
External debt, total (US$,mill)
0
5797
8358
9609
12082
16696
23719
35340
42439 9.38
44933
Real
interest
rate
(%)
4.43
5.66
8.44
7.39
8.38
8.39
9.37
7.31
7.81
Gross domestic fixed investment(US$,mill)
58839 49722 56992
65479
75914
89830
89797
83901
95144 87834
Moneynational
(currentsavings(current
LCU) (mill)
273,712
308,553
365,578 103773
412,414104437
478,66997156
543,174
632,754
Gross
US$) (mill) 204,582
0 232,469
0
71282
80030
89852
110154
120090
Imports
of
goods
and
services
(US$,mill)
17,378
17,248
16,271
16,974
17,774
19,422
19,962
22,843
Long-term debt (DOD, current US$) (mill)
0
4913
5220
5301
6179
9937
16571
25963
3262026,843
37118
Exports
of goods and
US$,mill)
11,276 148715
12,370 167744
13,216 202814
12,773193245
13,637
16,217
18,213
Total
consumption,
etc.services
(current( US$)
(mill) 11,265
131536 11,394
129549 131774
171423
197394
221620
Total consumption,
etc. (US$,mill)
154,458
161,150
177,529 256107
171,553-1219648
183,727-591432
198,094 0223,594
234,056
Current
account balance
(% of GDP)
0 154,521
0
606264 454750
-307167
-342292
Long-term
debt
(US$,mill)
18,333
19,454
21,587
23,943
25,683
31,761
38,410
45,827
51,546
Overall budget deficit,(US$,Mill)
0
0
0
0
0
0
0
0
0
0
Gross domestic
fixed investment (US$,mill)
36,984
39,003
40,715
40,247 1030
46,547 1425
50,950166958,446234462,130
Foreign
direct investment(current
US$) (mill) 34,951
0
0
386
543
1124
2613
Gross national savings, (US$,mill)
33,395 38,974
38,611
39,590
37,877
46,266
47,642
51,810
57,385
External debt, total (US$,mill)
20,581
22,604
27,430
31,994
33,812
40,951
48,124
55,522
1990
1991
1992
1993
1994
1995
1996
1997
199860,477
Overall
budget
deficit,
(US$,Mill)
22503.1
25981
15632.59
23536.03
16510
11027.77
17339.41
17483
18656.92
GDP at market prices (current US$) (mill)
354644 376617 418181 431780 542534 700219 816493 898244 946316
Current
account
balance
(%
of
GDP)
2118382
2538100
1578371
2584382
1751799
1287749
2163637
2445261
2775245
Net international reserves (current US$) (mill) 29586 43674 20620
22387
52914
75377 107039 142762 149188
Central government
debt, total
(% %)
of GDP) 78918.4
58599.96
48617.11
35668.63
55839.96
56782.87
Inflation,
consumer prices
(annual
3 61547.7
4 34034.79
6
15
24
17
8
3
-145978.71
Foreign
direct
investment,
net
(US$,mill)
8
10
65
63
62
160
208
181
287
Real interest rate (%)
4
2
1
-3
-7
-1
4
8
8
Money Supply(mill)
700950 898780 1171430 1676110 2153990 2559680 3066260 3834330 4321700
1995
1996
1997
1998
Imports of goods and services (US$,mill) 1989507991990731721991
81553 1992
73943 1993
137632 1994
167960 171679
207251
207590
GDP
at
market
prices
(current
US$)
(mill)
296,539
322,737
272,104
263,715
279,524
330,533
363,982
397,132
420,783
430,024
Exports of goods and services (US$,mill)
62172 60588 75106
80291
127210 151870 155706 166754 165902
Net international
reserves
(US$,mill)
3,859
1,521
3,627 85928
5,757 100457
10,199 118090
19,698128817
17,922
20,170
24,688
27,341
External
debt, total
(US$,mill)
55301 60259
72428
146697
154599
Inflation,
consumer
prices
(annual
%)
6.16
8.97
13.87
11.79
6.36
10.21
10.22
8.98
7.16
13.23
Gross domestic fixed investment(US$,mill)
90478 103484 130565 161819 195575 243079 280679 303436 340399
Real
interest
rate
(%)
7.57
5.00
3.00
10.00
6.00
5.00
6.00
7.00
8.00
4.00
Gross national savings(current US$) (mill)
134186 143265 156813 178875 230126 287523 330390 374334
0
Money
(current
LCU)
(mill)
746,893
853,556
1,046,100
1,120,900
1,330,250
1,695,050..
2,148,910
2,419,250
2,703,490
Long-term debt (DOD, current US$) (mill)
45515 49479 58663
70632
82974
95764 103410 115233 126667
Imports
of goods and
23,288 251152
23,585 308642
27,947 398224
32,990477370
39,657
41,607
45,109
47,419
Total
consumption,
etc.services
(current(US$,mill)
US$) (mill) 27,934
220060 31,485
233075 260462
514462
550184
Exports
of
goods
and
services
(
US$,mill)
21,201
23,028
24,879
27,917
31,468
41,437
51,213
55,696
59,297
59,138
Current account balance (% of GDP)
1063932 1506468 836362 -1295340 542534
0
816493 2694732 2838948
Total consumption,
etc. (US$,mill)
233,473
206,203 -1085068
225,002-1400438
263,161
282,304
319,288 0 336,646 340,212
Overall
budget deficit,(US$,Mill)
-709288251,716
-753234 213,400
-836362 -863560
-1632986
-898244
Long-term
debt
(US$,mill)
66,340
72,550
74,901
79,126
85,676
93,907
86,964
85,431
93,616
Foreign direct investment(current US$) (mill)
2657
3453
7156
23115
31787
33849
38066
41673
4111788,610
Gross domestic fixed investment (US$,mill) 64,756 72,536
58,450
57,603
58,464
70,849
86,699
92,136
96,301
97,625
Gross national savings, (US$,mill)
58,224 64,692
54,936
53,778
52,679
72,354
83,826
85,104
85,538..
External debt, total (US$,mill)
75,407 83,717
85,421
90,264
94,342 102,483
94,387
93,470
94,320
98,232
Overall budget deficit, (US$,Mill)
12251.1 17852.8 27615.57 23481.3 12679.55 20361.73 20398.68 17918.29 14307.03 26435.34
Current account balance (% of GDP)
1826505 2895351 3774137 3108620 1778343 3375238 3721680 3565094 3014599 5689604
Central government debt, total (% of GDP) 23766.4
13645 50301.53 67863.9 64887.09 201151.2 183248.6 181069.9 176873.4 361742.1

Foreign direct investment, net (US$,mill)

350

97

129

315

586

1,314

2,144

2,821

3,557

2,380