Column : Woo Japan for FDI

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SummaryThe recent tension between Japan and China triggered by the dispute over the Senkaku islands has revived distrust between the two countries and will have far-reaching consequences on trade and investment flows between them.

As the islands dispute with China takes its toll, India’s attractiveness grows

Pradip Shah

The recent tension between Japan and China triggered by the dispute over the Senkaku (or Diaoyu for the Chinese) islands has revived distrust between the two countries and will have far-reaching consequences on trade and investment flows between them. It also offers an opportunity for India to woo Japanese direct investment into India.

Japan was amongst the earliest countries to start investing in China in the 1980s after China liberalised foreign direct investment into the country. Japan had some unhappy experiences initially but accelerated its investment plans after China joined the World Trade Organisation in 2001. Japanese investment went into China with many strategic goals—finding an alternate market for Japanese products, given the trend of ageing and shrinking of Japan’s domestic population; manufacturing products at Chinese costs to address the Chinese buyer with affordable prices; and creating lower-cost production bases to address world markets more competitively with its technology-intensive products.

But the emotional Chinese reaction to the islands dispute, with calls for boycotting Japanese products, has shaken Japanese confidence in China as a growing market for Japanese products. Further, Chinese companies have sought to copy, adopt and improve on Japanese technologies, and can become a competitive threat for Japanese companies in the future. And with China’s workforce expected to shrink from 2017 onwards, its rising wage costs, coupled with a strengthening renminbi, will reduce the competitiveness of Japanese production bases in China.

This is an opportunity for India to warmly welcome Japan to invest in India—in India, for India; and in India, for the world.

We need to position India for Japanese decision-makers. India will add in the decade from 2010 about 136 million to the workforce, a source of potential competitive advantage versus China, which will see only about 23 million additions; China benefited in the earlier decade with additions of 118 million. India will turn out 5.7 million university graduates in 2015 and 7.2 million in 2020, the world’s largest number; additionally, the lack of global free trade in services keeps service sector costs relatively attractive vis-a-vis the developed world. India thus offers an opportunity to blend blue collar and white collar skills for global competitive advantage. Further, private consumption is 57% of the GDP in India versus 35% for China, which has depended on unsustainable investment demand for growth; India offers a more dependable domestic market. China saw

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