Competitiveness in India and China: The FDI Puzzle

Given their growth records, large markets, and reformed economic systems, both China and India appear to be equally likely candidates for foreign direct investment (FDI). Yet, China has received substantially more FDI. The literature comparing FDI in these two countries is small, and does not provide conclusive evidence to explain this puzzle. Applying the Porterian framework of the competitiveness of nations to compare China and India, we garner evidence that differences in demand, factor conditions and firm strategy, structure and rivalry are not sufficient to explain the differential in the two countries’ FDI flows. Differences in related and supporting industries, as well as Porter’s other two factors—government and chance factors—are more compelling. We identify China’s early entry into East Asian production networks in the 1980s as a key factor pushing China ahead of India in terms of FDI. We argue that this coincidental mix of timing and geography (Porter’s ‘chance’ factor), pushed forward in China by establishing special economic zones, gave China a sustainable competitive advantage for the following two decades. What is implied from these findings is that China’s FDI sources have been much larger and heavily slanted towards East Asia and manufacturing, while India, having missed this particular historical phase, needed to find an alternate route to development and global competitiveness.