According to sources, "We have cheap labour in China. The same is also available in Phillipines too, that is one of the main reasons why US is having trade relations with China." When asked why not India, he said - "Political stability is not present in the country."

Traditionally, China has been the largest recepient of FDI among the emerging markets in the last five years, with inflows of around $45 billion, second only to the US, globally. India has never received more than $3 billion in similar investments,typically equivalent to the Chinese city of Shanghai. During the last two decades, FDI of over $260 billion came into China (compared to contracted amount of $560 billion). Foreign direct investment may have reached 3 per cent of GDP in 1998 in China, compared to less than one per cent in India.

The scale of foreign investment is huge in China, even when adjusted for its immense population and large GDP. Annual FDI inflows now account for about 15 per cent of total fixed investment in China and nearly 20 per cent of the total value of industrial output. Foreign ventures pay around 15 per cent of the total taxes received by the Government from industry, commerce, compared to only 4 per cent in 1992 and employ 18 million people and about 10 per cent of the urban labour force. They account for about half the country's export and about 60 per cent of its exports of machinery and electronic products.

Since biginning it reforms in 1978, China has successfully integrated itself into the global production chainof multinationals. First to enter were overseas Chinese, many of whom already had business in Hong Kong or in the other parts of Asia and were looking for cheaper production sites.

The early investment were typically labour-intensive sectors to take advantage of the country's cheap wages. The generally positive experience of these investors gradually encouraged other foreign investors with no ethnic ties with China to invest. Rough estimates suggest that overseas Chinese companies account for nearly 3/4th of the FDI ventures in China (but less of the value) but they are increasingly being replaced by multinationals from OECD countries. The Government's generally permissive policies for capital-goods imports facilitated the rapid transfer of textile and light consumer goods production into China from the rich countries. Beijing, generally did not interfere with mundane business decisions (such as technology imports) and allowed local officials wide discretion in negotiating with investors. As a result, theless than commanding heights of the Chinese economy are now dominated by foreign investments, that is, toys, shirts, pens, electronic items. India has outrightly rejected this approach, partly by laws and partly by discretionary policy. Production of many of these products is still reserved to the "small scale sector" in India. Even after gradual de-reservation in recent years, India's policy regime does not encourage FDI into this sector (partly because it is not high technology but is labour intensive).

Like India, China has sought to import high technology through FDI but it has also actively sought FDI in consumer goods and export industries. Both potato chips and computer chips were and still are welcome. Over time, the government has opened consumer goods sectors to foreign and private competition while focussing its attention and money more on the capital-intensive state-owned sectors. India has slow to do the former and lacks the resource to do the letter. The general prosperity and export earningsgenerated by this strategy have helped China modernise the rest of the economy, including infrastructure. Much of China's infrastructurel has been built by local funds or by borrowings from abroad, not through FDI.India's FDI policy has been inconsistent, despite the Government's clear and growing desire to expedite inflows. "Resistance from bureacracy, nationalists, and some domestic business houses continues to stall inflows," said the source. The ratio of actual inflows to investment commitments has been around 20 per cent, about half the level of other emerging markets in the world.

Prior to their reforms, both India and China were extremely isolated countries with high trade barriers and a strong commitment to protect domestic industry at almost any cost. China's reforms, thirteen years prior to that of India (India started its reforms in 1991), has successfully raised its share of world exports to three per cent from around one per cent over this period. India, by contrast has marginally raised itsshare of to 0.6 per cent. Exports now account for about twice the share of GDP in China than in India. China's greater integration with external markets has given it better balance of payments flexibility and a lower debt burden than India. Gross external debt could reach 180 per cent of India's export this year, compared to 73 per cent of China.

The most striking contrast between the two countries is the role of FDI in exports. Chinese exports are increasingly dependent on FDI, which now accounts for about 60 per cent of all exports, compared to only 20 per cent in 1992 (and only 2 per cent in 1980), by contrast more than half of foreign investment proposals in India are in the non-tradeable sector (i.e. power and telecommunications) and much of the rest is aimed at the domestic consumer market. "About 50 per cent of India's total exports are by small-scale sector, most of which rely on cheap labour and low technology," added the source. He further said that Government policies still effectively reservethe production of low cost consumer goods largely for the unorganised sector. Mean tariff rates in India remain higher than China and have recently been on the rise. "They had fallen to 34 per cent after the last budget compared to 10 per cent in China," added the source.However, the hope is that with the opening-up of the market by 2003, as India has been signatory to the WTO's agreement, the tariff barrier would come down.

Interestingly, the country's non-tariff barriers still cover over 60 per cent of imported products. Most consumer goods imports remain either banned or subject to licensing requirements in India. China, which has not joined the WTO club, applies non-tariff barriers on around 10 per cent of imported products.