In the early seventies, the Malaysian Industrial Development Authority (Mida) led investment missions to capital-exporting countries and focused its attention on the electronics sector in the United States.
Ahead of these sojourns, Mida conducted some extensive research and identified fast-growing companies in the semi-conductor industry in the US. These companies were then targeted by Midas investment promotion missions.
Today, Malaysia has become the worlds largest exporter and the third largest producer of semi-conductors.
Extreme focus economic development programmes such as these show why Malaysia today is among the front-runners where attracting foreign investment is concerned. Today, foreign direct investment accounts for nearly a quarter of its gross domestic product (GDP).
They also explain the kind of competition that India is up against in its bid to build economic resurgence through foreign and private capital. Today, economic development programmes to attract foreign investment Mida-style have spread to Latin America, Eastern Europe and, to some extent, to Africa.
Between 1991-94, on an average, 45 countries introduced changes in their investment regimes every year. This roughly covers the period when Indias reform programme was launched. Yet, Indias success on this score does not put it high in the rankings as a host for foreign direct investment (FDI).
In 1994, global FDI was approximately $ 230 billion. Developing countries of the south, east and south-east Asia attracted about $ 59 billion of this investment. Indias share in this pie was a meagre $ 947 million.
As would be expected, China led the developing countries and attracted huge investments of $ 34 billion. Forget about China, India was far behind Indonesia, Hong Kong, Malaysia, Philippines, Singapore and Thailand as well.
Indias FDI flows are so small that, not surprisingly, they have had little effect on the economy. FDI accounted for only 1 per cent of Indias GDP in 1995 compared with 7.3 per cent for China, a high 24 per cent of Malaysia and as much as 43 per cent for Singapore.
To be sure, it would be unfair to give too much importance to such comparisons. This is because most of the these countries started their economic reform programmes way before India. China, which is generally praised worldwide for its economic programme, adopted its open-door policy way back in 1978. Most other east-Asian economies started in the mid-eighties, which is about the time India started making a few token moves toward partial liberalisation.
But putting comparisons aside, it is clear that Indias attempts at attracting foreign investment have not been a signal success even on domestic policy-makers terms. And many of the reasons for this performance lie in comparing Indias reform programme with competing countries, especially in south-east Asia.
Unusually perhaps, the principal fault does not lie with the policy package toward foreign investment. This is something that was highlighted in a recent report by the Reserve Bank of India entitled Foreign Collaboration Under Liberalisation Policy: Patterns of FDI and Technology Transfer in Indian Industry since 1991.
It says, Indias policy compares perhaps better than those of her major competitors like China and Malaysia to the extent that in a large number of manufacturing industries (including some service industries) foreign majority ownership is freely allowed without any restrictions.
In India, FDI proposals are given automatic approval upto 51 per cent
foreign equity in listed priority industries, which cover most of the manufacturing activities including software development. On January 1, 1997, the government extended this and opened nine industries for automatic approval upto 74 per cent foreign equity. There is no upper limit on foreign investment and even 100 per cent equity is allowed on a case-to-case basis.
These terms are more generous than those in many other countries. Apart from South Korea, no other country gives automatic approval. Malaysia does not allow more than 49 per cent foreign equity in non-export projects. Hundred per cent equity is allowed only in those projects that export 80 per cent of their turnover.
By and large, the incentives provided by India match the incentives given by China, Malaysia, Indonesia and Thailand.
By that reasoning, then, India should have overtaken all these countries
at the FDI stakes. The caveat: incentive packages in themselves do not
work. The World Investment Report for 1995 notes, There is overwhelming evidence that, relative to other factors, incentives are only a minor element in the locational decisions of transnational companies. Factors such as market size and growth, production costs, skill levels, political and economic stability and the regulatory framework remain the most important.
So it can safely be said that India has a reasonably good policy. But the truth is that despite liberal policies and the economic opportunities that the country offers India has not been able to match the FDI flows of its chief competitors.
A look at the sectors that have attracted investment shows that India has not been able to exploit its advantages. India may not match most of these economies in terms of natural resources but it is cost competitive and has a much bigger domestic market than almost all these countries other than China.
Most of the foreign investment that has come in is market-driven. The size of the market has attracted a large number of the consumer goods companies (see page 3). But India has not been able to exploit its formidable cost advantage. Most of the areas, like food processing in which the cost advantages are significant, are reserved for small scale industries. As a result, foreign investment has not flooded into these areas because they lack the advantage of economies of scale.
India definitely loses out on the taxation issue. On an average, the corporate tax on the companies in India works out to 43 per cent to compared to 33 per cent in China and between 30 and 35 per cent for Indonesia, Malaysia and Thailand.
What has hurt investments the most is that, despite the broad policy decisions, the government has often overlooked the smaller details. The RBI study notes, Indian policies are regarded as relatively less favourable at the margin in specifics.
Add to this the lack of transparency in approvals, delays, regulations and bureaucratisation at the state government level to access operating facilities and frequent changes in policy and it is not surprising that many multinationals have put India on their wait-and-watch lists.
In China, a time frame is fixed for granting approval. All objections can be raised in this period. If there are no objections, then the project is approved. We can match the FDI inflow of most countries without any policy change through speedy examination, speedy decisions and if we adhere to our decisions, says Sumitra Chishti, professor, School of International Studies, Jawaharlal Nehru University.
It is also important to look at the profile of the companies that are investing. The bulk of the investment in China is from the diaspora. They are business people with great ethnic solidarity towards China, says Chishti. In contrast, she adds, most non-resident Indians are professionals and can make limited investment in India (see page 2).
FDI figures for east and south-east Asia shows that intra-regional investments are on the rise. This has mostly been the result of some strenuous effort by the the Association of South East Asian Nations (ASEAN). India is not yet a member of any of the important blocs. This means that India has to fight it out on its own. Some improvements are expected once India becomes a full dialogue partner of ASEAN.
The role of promotion in attracting investments has been highlighted by Hong Kong. The Hong Kong Trade Development Council has been operating in 43 offices in 20 countries. Similarly, South Korea has established 81 trade promotion centres in 65 countries. Indias record: nil.
Part of the explanation for Indias performance does, however, lie in the relative youth of its reform programme. A look at the FDI inflows of China and India shows that in the initial phases of reforms in China the actual inflow was about 20 per cent of approvals. This compares favourably with current 21 per cent actual inflows of India.
Similarly the amount of investment in the early years of Indias liberalisation shows similar trends. Malaysia had an average inflow of $ 731 million in the period 1983-88. It is only after 1991 that the investments picked up. With the advantage of an open policy, a bit of streamlining would ensure that India attracts substantial foreign investment.
Also the domestic economy needs to be geared up to meet the challenge. The destiny of a country is linked to its ability to perform by itself. It is not necessary for a country like India to totally depend on FDI. South Korea has done it with out much help from FDI, Chishti points out.
The clincher could lie in Indias political future. Unlike China our liberalisation programme has taken place under democratic process and measures have not been harsh as in Mexico and some of the countries of the former USSR, says S K Mitra, secretary, India Investment Centre.
Chishti goes a step further. She says, Why compare only one element. Follow the Chinese example in all fields. Have military rule for 30 years. We have a different history and political set up. It is not right to be selective in comparison. The bigger point, however, is how fast
latecomer India can catch up with its feisty rivals.
