Foreign Direct Investment
By The Expatriate To India - Lesson From The Chinese Story


Vertical: Finance
Team Name: Neuron
Institute Name: Mudra Institute Of Communications, Ahmedabad
Team Member: Abhijit Dutta


One story that has occupied business headlines for sometime now is the bizarre billions that seemed to be flowing into China as foreign direct investment. In 2004 alone, China received US $60.3 billion in FDI. India, the next most popular destination FDI, received a paltry US $5.3 billion. The yawning gap in figures is of course standard and well known. What's interesting is the fact that a significant chunk of this FDI comes not from multinational corporations in US or Europe but from overseas Chinese located in the Hong Kong, Macau and Taiwan. While this may seem like a "secret of success" to many, there is more to it than meets the eye. There is ample literature (presented in this paper) that indicates that the improbably high ratio of investment by overseas Chinese to investment by multinational corporations maybe more about obstacles faced by MNCs rather than any systematic offering to attract Non Resident Chinese investment. Socio-culturally, the Chinese were an insular society where familiarity with language and 'ways of the land' mattered. Also, what is counted as FDI, is often domestic capital making its way through nearby countries to exploit the preferential tax treatment. Such kind of round tripping capital, completely nullifies one of the most important aspect of FDI – transfer of technological and managerial know-how.

Further, emerging trends indicate that investment by the overseas Chinese may have been an anomaly that will get rationalized over time. From a share of 80% in 1992, the overseas component averaged out to 60% and is expected to further go down over the next few years. Also as China becomes less of a black box, multinational corporations would, as they are already, rush to the China Opportunity. Already, 400 of the Fortune 500 companies are present in china.

There is no theory or literature that suggests that Non Resident investment is fundamentally better (or 'stable') than investment by MNCs. Instead we should be looking at a larger context. The lesson from china is that ideology should be kept separate from business, red tape should be snipped, and infrastructure ramped up. A general investment climate is necessary to encourage investment – MNC or Non Resident.


The China-FDI story has been in the limelight for some time now. The bucketful of billions that the world seems to be pouring down the dragon definitely makes good copy. No other country attracts as much foreign direct investment (FDI) as China does. Last year some US $60 billion poured in, about twelve times the amount that flowed into India. Between 1979 (the first year of the China Economic system reform) and 2004, China absorbed a total of about US $560 billion in FDI1. India, the next most popular destination for foreign investment in manufacturing2 received almost US $200 billion less in FDI than China.

Source: UNCTAD World Investment Report (2001), RBI Annual Report, various Issues, ISI Emerging Markets

It is only fair to add here that Chinese data is often seen as a bloated one while India's are understated. India FDI statistics exclude reinvested earnings, subordinated debt, and overseas commercial borrowings (included in FDI calculations of other countries).

Including these would take India's FDI figure to US $8 billion (1.7% of GDP). At the same time, much of (about half) FDI inflows to China is 'round tripping'3. Therefore, honest FDI is about US $20 billion only (2% of GDP)4. The way China calculates its FDI has also been questioned and there are discrepancies between investment figures reported by investing countries and those reported by China5 (Chart).

*Only top 10 economies (France, Germany, Hong Kong, Japan, Malaysia, Netherlands, Thailand, UK, US)

However, what remains a fact is that China attracts, overall, more FDI than India and has benefited immensely in terms of employment and growth. In 1979, when China kicked off its reform process, India was not too far behind. The quantum leaps it has made since then has been attributed largely to this non debt-creating, less volatile form of investment which transfers not just money but also managerial and technological know-how.

Exports have been directly impacted, with China exporting 4.152 times more in 2000 than in 1978 and per capita GDP growing by 3.8 times. FDI has also created more jobs for the Chinese. During 1993-1999, when FDI really shot up, China added about 20 million jobs. Corresponding figures for India are starkly deficient (Table).

Selected Economic Indicators




China               India

China                       India

GDP Per Capita (Constant US $)





Exports of Good (in pc of own GDP)





Net FDI Inflows (in pc of own GDP)





Total Investment (in pc of own GDP)





Source: Tseng & Zebregs (2002)

A substantial portion of the FDI to China comes from overseas Chinese living in arc of Pacific Rim. And therein lies an interesting aspect of the China-FDI story. The foreign investment boom in China was started by the overseas Chinese. From 1985 to 1996, two-thirds of foreign investment in China came from HongKong, Macau, and Taiwan. There China has some 30 million ethnic Chinese, many of them with close ties to the mainland6.

This phenomenon has had economists and Indians in a tizzy. How can we get our NRIs to invest here? Where are we losing out? Why are the overseas Chinese stealing a march over us? What are the lessons for us?


This paper looks at this phenomenon from scratch, evaluating whether overseas Chinese investment is indeed the book that India should be taking a leaf out of. It also contextualizes overseas Chinese investment by tracing its origins and motivations. In later parts it also looks at evolving trends and the role of MNCs and comments on the implications of extreme ratios of non resident investment to MNC investments.

The Dragon Who returned home: Fable of the Overseas Chinese

China opened its doors to FDI with the passage of 'Law of People's Republic of China on Joint Ventures Using Chinese and Foreign Investment' in 1979. Due to China's chequered history, MNCs were quite tentative about China in the first 10 years of reform. Year 1980 saw only $596 million in investment7. Foreigners were not sure of the long term implications of Chinese reform. Most were not willing to make major equity investments and those who wanted to participate in the Chinese market chose to do so by licensing their technology to Chinese companies or by product imports8. During this time, most of the 'foreign investment' came from overseas Chinese. This Chinese Diaspora pioneered export-led growth with labour intensive manufacture in Taiwan, Hong Kong and Singapore and once wages rose sharply they relocated these manufacturing operations to mainland China when the economy was opening up in 1980's bringing with it the huge volumes of FDI that the country is now known for9. As of the end of 1992, Hong Kong investors had brought in US $10 billion, starting 25000 factories in Guangdong alone, while the Taiwanese made an estimated 6000 investments worth US $4 billion10.

Fable or Fib: Putting it in context

On the face of it, investments by overseas Chinese, is somewhat of a Chinese triumph. Indians often respond by blaming NRIs for not having enough 'heart' while the government goes out and puts up an annual jamboree called the 'Pravasiya Bharatiya Diwas' intended to show off India and attract NRI investment.

However, there is reason to believe that the disproportionately high ratio of overseas FDI to total FDI may be more to do with MNC shyness and hesitation to invest in China in the early days than anything else. In fact, some studies have found that foreign industrial investors faced specific obstacles when entering China's economy. China's industrial infrastructure and administration were relatively backward as a result of its underdevelopment which was mainly caused by the country's self exclusion from the world economy before 1979.

Also the economy had communist remnants from China's planned economic system, including the 'family register' labour system, the collectivization programme and the large but dysfunctional bureaucracy11. Also, local managers were unfamiliar with so called western or international managerial techniques or reluctant to adopt them. Corruption was rampant and opportunistic individuals were hoping to take advantage of their positions for personal profit and gain from foreign countries.

What added to the discomfort of the multinationals was a perception that the Chinese not only prefer to do business with other ethnic Chinese but also dislike doing business with non-Chinese. In China, who you know is important and ancestral connection go a long way towards gaining local co-operation12.

These were the main reasons why overseas Chinese capitalists penetrated China's market more quickly than any other economic agent in the period 1979-1990.13

Profit or Patriotism

Also, there seems to be an aura of 'noble' and 'patriot' around the investing overseas Chinese. This may stem from the narratives that the Chinese government churns out. Sample this:-

" The Chinese government sincerely welcomes overseas Chinese to participate in the country's construction and promote trade and economic co-operation between China and the countries they live in" – Chinese vice Premier Wu Yi 14

Such pronouncements systematically aid the image of a group whose intentions may be highly deviant from those attributed to them. The implication is a public-private partnership (nexus?) of a different kind altogether. It would be naοve to believe that the overseas Chinese invest in China because they are patriotic. In 'Flexible Citizenship', Aihwa Ong, author, talks about "opportunists and parvenus who are eager to enrich themselves while incidentally benefiting China." The official view is that in practice one cannot count on the loyalty of overseas Chinese, only on their desire to make a profit off China. This seems to be a well accepted view. Andrea Louie in her book 'Chinese Across Borders: Renegotiating Chinese identities in China & US' points out that "Overseas Chinese often return from Taiwan and HongKong, to invest in China primarily for profit, without any charitable motivations. Such a person may invest in a particular region for reasons more out of convenience than sentiment."

All FDI is good FDI?

Overseas Chinese capital wouldn't have been invested in China unless the policies chosen made it advantageous for them to do so15 . A significant amount of Hong Kong money flowing into China is not foreign capital but round tripping domestic capital – money routed by mainland companies through joint ventures set up to obtain preferential tax treatment offered to foreign investors in China16. Many of the Hong Kong investments may represent fronts for Taiwanese who cannot legally invest directly in China. According to the UNCTAD World Investment Report 2003, round tripping could be as much as US $15-20 billion.

Expatriate FDI in China is guilty of more that just round tripping. Often, expatriate-invested firms produce exports by seizing control of export-oriented businesses from indigenous Chinese. Two ratios tell the story. One is the export/GDP ratio, which rose from 15% in 1990 to 20% in 1999, an increase of 5%. The other is the share of exports by foreign firms of total Chinese exports: this rose from 15% to almost 40% during the same period. So, foreign firms may create exports for China, but they also divert a big slice of the export pie away from indigenous Chinese entrepreneurs17.

This also indicates a fundamental failing of the Chinese financial system. The inefficient SOEs (State Owned Enterprises) crowd out investments for local entrepreneurs. Expatriate money then becomes the only source for business expansion making them sell out cheap. This investment is predominantly just an input of money without the concomitant managerial/technical know how transfer.

Emerging Trends

While the share of overseas Chinese investment has traditionally been high, it is interesting to see it come down over the years. From 80% in 1992, it averaged out to about 60% over the decade. It is expected to further go down by another 10% by 201018. And while China attracts investment from its expatriates, it also, at the same time, attracts 80% of the Fortune 500 Companies.

Since joining the WTO in 2001, China has made significant commitments. These range from opening sectors that were hitherto closed to foreign investment, raising caps on sectors that already allow FDI, to improving the general investment climate. China joined the TRIMs19 and TRIPS20, which would provide more favorable/equitable treatment to foreign investment21.

Lessons for India

The learning in the China story is not about blindly comparing how China generates so much more investment from the expatriate Chinese community compared to what India is able to generate from NRIs.

The first lesson is to rationally understand why China is the favored destination of investment for Chinese businessmen and individuals particularly in Asia. Overseas Chinese are more in number, tend to be more entrepreneurial, enjoy family connections in China and have the interest and capability to invest in China – and when they do, they receive red carpet treatment. Overseas Indians are fewer, more a professional group and, unlike the Chinese, often lack the family network connections and financial resources to invest in India22.

India also needs to take heed of the fact that the Chinese has created a hospitable environment for investment – non resident or otherwise. China not only offers a low wage rate (one third of Mexico; one fifteenth of the US), but a largely literate population (85% literacy rate of the population above 15 years), a disciplined labour market, a stable exchange rate in dollars with infrastructural facilities and tax incentives for foreign enterprises.

India should try and take a leaf out of the Chinese ability to separate politics from business. China, once known for its red tape and bureaucratic wrangles, has acted nimbly when it has come to foreign investment. India still remains caught up in a warp. A simple setting up of a restaurant requires 38 clearances23 . The number shoots up when it comes to factories and bigger capital investments. While China despite its famed shyness of anything foreign has opened up, India still remains mired in political debates on caps on foreign investment.

It is however important to note that things are changing and recommendation to remove sectoral caps for FDI by the NK Singh report on foreign investment is being seriously taken. Government will also need to learn to resolve political ideology and pragmatic economic considerations like privatization (currently on the backburner) as it is a huge driver of FDI.


While it is interesting to note that China's treasure trove of foreign direct investment comes mainly from overseas Chinese we must recognize that this may be manifestation of negatives in the system rather than another China stamped way of manufacturing success. Further, there is no literature or theory to support the premise that non resident investment is fundamentally more 'stable' than investment by multinational corporations. If anything, MNC investment typically comes with significantly superior managerial and technological know-how and is thus to be more preferred. Non resident Indians can be counted more among the professionals than entrepreneurs. So while it may not have been able to put in as much FDI as its Chinese counterparts who are businessmen, if convinced about the Indian story, they can dramatically boost FDI in India through their corporations. And this investment may truly be the key to unlocking India's potential as the most favoured investment decision. What India needs to learn from China is how to go about ramping up the infrastructure, lose the red tape and create an environment conducive to investment. Rest is just statistics.


1. 'The Dragon Millennium: Chinese Business in the coming world economy' by Frank Jurgen Richter
2. 'China Business' by Edward Hinkelman & Christine Genzberger
3. 'State Collaboration and development strategies in China' by Alexius Pereira
4. 'Agrarian Questions – Essays in Appreciation
5. 'Flexible Citizenship'
by Aihwa Ong
6. 'Chinese Across Borders: Renegotiating Chinese identities in China & US' by Andrea Louie
7. Project Syndicate, China
8. UNCTAD World Investment Report, 2003
9. A report on Foreign Investment by the NK Singh Commission, 2002
10. 'The Insidious Charm of foreign investment', The Economist, 2005, Vol. 347, Issue 8416
11. 'Foreign Direct Investment & Exports', James Gordon, September, 2002
12. 'The Role of Foreign Direct Investment in China's post-1978 Economic Development', Chen C, Chang I, Zhang L., 1995
13. ' Multinational Companies and Foreign Direct Investment in China and India', Bajpai N and Dasgupta N., 2004
14. 'Why Overseas Chinese dominate China's Exports', Yasheng Huang, June 2001
15. ' China's role in the world economy', Dr. Song Hong, July 2005
16. F&D Magazine
17. The Economist, various issues
18. Business World, various issues
19. RBI Bulletin and Annual Report, various  issues

1. 'The Insidious charm of foreign investment', Economist 2005, Vol.374, Issue 8416
2. According to AT Kearney, a management consultancy
3. Domestic capital, to take advantage of the preferential tax treatments, get routed through foreign joint ventures, typically overseas Chinese (relatives of the local partner)
4. Pfefferman, 2002, cited in a paper by James Gordon, presented at IIFT on Sept 20, 2002
5. UNCTAD FDI Statistics cited in BusinessWorld, 24th October, 2005
6. 'The Insidious charm of foreign investment', Economist 2005
7. 'The Role of Foreign Direct Investment in China's post-1978 Economic Development', Chen C, Chang I, Zhang L., 1995
8. 'The Dragon Millennium: Chinese business in the coming world economy' by Frank Richter,
9. 'Multinational Companies and Foreign Direct Investment in China and India', Bajpai N and Dasgupta N., 2004
10. 'China Business' by Edward Hinkelman & Christine Genzberger
11. 'State Collaboration and development strategies in China' by Alexius Pereira
12. 'China Business by Edward Hinkelman & Christines Genzberger
13. 'State Collaboration and development strategies in China' by Alexius Pereira
14. China Daily, 10th January, 2003
15. Agrarian Questions – Essays in Appreciation
16. Business China, Vol. 31, Issue 6
17. 'Why overseas Chinese dominate China's exports', Yasheng Huang, June 2001
18. Project Syndicate, China
19. Trade-Related Investment Measures agreement
20. Related Aspects of Intellectual Property Rights agreement
21. 'China's role in the world economy', Dr. Song Hong, July 2005
22. UNCTAD World Investment Report, 2003
23. NK Singh Commission on Foreign Investment, 2002

Vertical: Finance
Team Name: Neuron
Institute Name: Mudra Institute Of Communications, Ahmedabad
Team Member: Abhijit Dutta

Source : E-mail December 3, 2005




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