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