FDI inflows to India declined 31% to $25 billion in 2010, a UN report said on Wednesday. This is worse than even Pakistan, where also FDI fell, but just 14% to $2 billion in a year when FDI to all other major destinations rose. In the same year, inflows to mainland China rose 11% to $106 billion and that to Hong Kong (China) an even sharper 32% to $69 billion. Bangladesh, which is yet to rid itself of the least developed country (LDC) tag, enhanced its status as a low-cost production location, especially for low-end manufacturing, by posting a 30% increase in FDI inflows to $913 million.

Countries like Indonesia and Vietnam seem to benefit from rising production costs in China.

But India is left high and dry with delays in land and environmental clearances holding up large greenfield projects like Posco’s steel plant in Orissa. India’s policymakers never fail to call FDI as an important source for capital formation and productivity gains, but they don?t seem to able to walk their talk. Delays in the approval of large FDI projects have taken a toll on the country’s ability to attract this external source of finance.

Cross-border M&A deals involving FDI inflows deals like BP-Reliance and Vedanta-Cairn have remained caught in regulatory labyrinth for too long. As reported by FE recently, India is also one of the worst-performing markets in the world with a policy paralysis impacting sentiments of foreign institutional investors. FIIs have pulled out substantial funds from India in the first six months of 2011, making the Indian market significantly more volatile and unstable than even Pakistan’s.

Stock market returns in India were at an abysmal level (? 14.18 %) up to June this year, compared with better figures of China (? 3.96%), Indonesia (10.27%), South Korea (8.07%), Russia (2.58%), Brazil (5.93%) and Malaysia ( 4.42%). Developed markets fared better ? US (1.93%); Germany (11.5%), France (11.46%). China, on its part, managed to improve its standing as an FDI destination by addressing the negative fallout of the slowing of widespread offshoring of low-cost manufacturing to that country with a structural shift to high-technology sectors and services. While China (mainland) retained the second position in FDI in 2010 after the US, Hong Kong even managed to quickly recover from the shock of the global financial crisis and climbed from fourth position in 2009 to third in 2010. India’s poor show came despite the fact that during 2010, global production and consumption shifted more decisively towards developing countries, enabling them to post a 12% rise in FDI inflows to $574 billion, as against a modest 5% increase in global inflows to $1.24 trillion.

East (read China) and South East Asia (notably Indonesia and Vietnam), along with Latin America showed strong growth in inflows, while Africa, LDCs and land-locked countries continued to languish. Indonesia which was No.43 among FDI-attracting nations in 2009 moved up to No.20 in 2010, with inflows of $13 billion. Brazil climbed from No.15 in 2009 to become fifth-largest FDI destination in 2010 with inflows of $48 billion. While Europe suffered a sharp fall in inflows, the US bucked the trend in the developed world with a 40% spike in inflows. Global FDI flows in 2010 were still 15% below the pre-crisis average and 34% below the 2007 peak. Developing economies absorbed close to half of global FDI inflows in 2010 and also generated record levels of FDI outflows, much of it attributable to burgeoning south-south flows. Relatively fast economic recovery in these countries and the strength of their domestic demand also helped developing countries to increase their share of FDI inflows. FDI inward stock rose 7% in 2010 reaching $19 trillion on the back of improved performance of global capital markets, higher profitability and healthy economic growth in developing countries, the report said. The downward trend in outward FDI from developed countries reversed in 2010, with a 10% increase in 2010 over 2009. However, this took it to only half the level of its 2007 peak. According to the Unctad report, FDI outflows from developing Asia grew 20% to $230 billion in 2010, driven by increased investments coming out of China, Hong Kong, Malaysia and Korea. In 2010, China exceeded Japan for the first time in outward FDI. India assumed the 20th position in terms of FDI outflow in 2010 with outward investments of $15 billion. In 2009, it stood 21st with FDI outflows of $16 billion.