In a recent survey of 300 Japanese companies conducted by Chicago-based global management consultancy firm A T Kearney, India has moved from the seventh to the second place over the last three years as the preferred destination of foreign direct investment (FDI) in the long term.
China has retained the number one spot, while Vietnam has fallen from the second place to third, Thailand has fallen from the third place to share the fourth spot with Indonesia, while Malaysia has fallen from the fifth to the sixth place.
The source of the survey conducted as part of a comparative study of India and China conducted by AT Kearney is Japan Ex-Im Bank.
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According to the firm, the reason for the improved perception of India is that the playing field is beginning to level out and India is beginning to catch up with and even outspace China.
According to the study:
FDI flows into India are growing at a faster rate than those into China;
FDI inflows are twice as high as they were in China at the same stage of liberalisation;
Non-resident Indians are now leading the charge to invest in India;
India now boasts of a more stable macro-economic environment than China.
The longer duration of Chinas liberalisation accounts for most of its lead over India in both exports and domestic demand, says the study.
At the firm level, the A T Kearney survey of clients investing in the region found that most investors and export customers prefer doing business with Indian firms, rather than Chinese firms. This comparison is divided under the following heads:
Marketing and sales: Indian firms understand concepts of marketing and customer service, and partners have established brand equity. In China, traditionally, production units never had the responsibility of marketing and sales.
Distribution: In India, partners have established national distribution networks, but in China, traditionally, production units never had the responsibility of distribution.
Management: India has a long tradition of management education, extensive knowledge of latest management theories and techniques, and Indian firms recognise the value of soft investments, such as, brand, management and processes. China has a limited history of management education and a particular shortage of managers with marketing, sales, distribution and finance skills.
Innovation: India has some indigenous product/process innovation skills, but in China there is no history of indigenous product/process improvement.
However, the study points out that even today Indian firms face higher government-induced hurdles than their Chinese competitors.
The first of these is red tape, under which comes decentralised (and hence slow and unreliable) approval processes for both investors and exporters. The study quotes Bob Bryan, head of overseas development for Enserch Corp as saying: Getting a project through the governmental maze in India is unbelievably slow. In China, there is less system.
The second is inadequate and costly infrastructure. In terms of telephone mainlines, kilometres of paved roads and electricity output per capita, India lags behind China. According to the World Bank, insufficient port infrastructure alone imposes an incremental cost burden of Rs 875 crore on Indian exporters. The study quotes Martin Posth, head of Asia-Pacific of Volkswagen, as saying: The cost of brown-outs and black-outs exceeds by far the benefits of cheap labour.
The third is tax and tariff rates. Even after the recent budget, Indias corporate tax rate of 35 per cent compares unfavourably with the rate of 24 per cent for foreign-funded enterprises in China, says the study, adding that investors in China enjoy numerous tax breaks, including a two-year tax holiday and a 50 per cent tax reduction for a further three years for enterprises that contract to operate for at least 10 years. Besides, says the study, India still levies import tariffs on key imported inputs such as electronic components and the high import tariffs in general act as a negative tax on exports by increasing domestic margins.
The fourth is high credit costs. Even at 15 per cent, Indias interest rates are among the highest in the world.
The last government-induced hurdle, according to the study, is inflexible labour and bankruptcy laws.
As the panacea for these ills, the study suggests that Indian firms should continue their efforts to shape government policies to streamline decision-making and approval processes, open up infrastructure sectors to competition and investment, further reduce tax and tariff rates, reduce credit costs and liberalise labour and bankruptcy laws.
However, the most important thing that Indian firms can do is to focus on competitiveness at the firm level, says the study.
In A T Kearneys survey of multinational firms seeking partners and suppliers in emerging markets, two factors were consistently identified as the key to competitive differentiation: total customer focus and continuous product innovation.
Under the first, the study lists unerring market focus throughout the value-delivery system, zero-tolerance product quality and service reliability, and seamless supply chain management. Under the second comes capability to independently adapt/re-design a product to meet changing customer demand, capability to continuously re-engineer processes to stay competitive and very rapid product development cycle times.