For two decades now, China has attracted the lion’s share of FDI flows into the developing world. However, doing business in the world’s second largest economy no longer appears to be as attractive a proposition with wages rising sharply and the renminbi also appreciating in a big way—according to a BCG-CII study, Chinese wages grew 15% per annum in the last 3 years and its currency appreciated against the dollar by around 18% per annum in the last 5 years. Needless to say, that’s a huge hit to the bottom line for those investing in China, even though the average Chinese worker still earns less than 8% of his counterpart in the US. It’s not surprising then that, despite the advantages that China enjoys, among them strong linkages with the global supply chain, MNCs with people-intensive business models are looking to re-locate their operations elsewhere; while China was the world’s largest recipient of FDI in the first half of 2012, the flow of funds has fallen in 11 of the last 12 months.
Within Asia, as a recent HSBC report (The great migration: How FDI is moving to Asean and India) points out, Indonesia, India and Vietnam appear to be among the more attractive destinations. In India’s case, the lure of a huge consuming population—led by a 350-million-strong earning middle class—is complemented by the abundance of both skilled and unskilled labour. However, despite these advantages, FDI flows to India as a share of GDP are currently one of the lowest in Asia. The fact that India has FDI caps as well as outright bans in some sectors is partly responsible, but the larger reason lies elsewhere. India’s rising wage rates and labour shortages, apart from the usual complaints about the difficulty of doing business, may soon begin to hurt India’s prospects. RBI data pointing to sharp wage increases in India is important given that Indonesia and Vietnam—two countries HSBC lists as competitors to India—have lower wages. In other words, if India wants to retain its allure in the FDI market, it needs to match the runaway wage increases with large productivity hikes—that means, above all, a lot more investment in education and skilling. Keep in mind that, given India’s savings-investment gap of 2-3% of GDP, FDI inflows into India will have to at least double from the current $30 billion or so over the next 5 years. On a treadmill,