FDI is often employed as the criterion for evaluating a country?s economic integration with the rest of the world. Both FDI inflows and outflows are presumed to have positive relationships with globalisation. The more these flows, the more globalised countries are taken to be. Going by the FDI indicator, China and India are two of the most globalised economies in Asia.
Unctad?s World Investment Report shows China having received $95 billion FDI in 2009 when India got $34.6 billion. China and India accounted for 8.5% and 3.1% of world FDI inflows, 19.9% and 7.2% of FDI into developing economies, and 31.5% and 11.5% of FDI into Asia, respectively. China was the 2nd largest recipient of FDI after the US. India figured among the top 10 recipients and came after China, Hong Kong and Saudi Arabia in Asia.
The corresponding ratios for FDI outflows were a little lower. Outward FDI from China and India were $48 billion and $14.9 billion, respectively, in 2009. The two countries accounted for 4.4% and 1.4% of world FDI outflows, 20.9% and 6.5% of FDI flowing out of developing economies, and 27.2% and 8.4% of FDI outflows from Asia. China was the 6th largest origin for outward FDI, while India was 17th. Hong Kong was the largest source of outward FDI from Asia, followed by China and India.
China and India, therefore, dominate capital traffic in and out of Asia. There is little doubt that they are heavily embedded in the global matrix of long-term capital flows represented by FDI. A corollary is to assume that FDI is critical to economic prospects of both.
Investment profiles of both economies are likely to surprise many. Incoming FDI was only 4% of gross fixed capital formation (GFCF) in China in 2009. For India, it was 8.4%. But outward FDI were 2% and 3.6% of GFCF in China and India. FDI is hardly a key variable in investment profiles of both economies. The situation is not much different if looked at from the perspective of stocks. The stock of inward FDI is 12.9% of GDP in India and 10.1% of GDP in China. For outward FDI, the proportions are 6.1% and 4.9%, respectively.
Back-of-the-envelope calculations show the volume of FDI to be rather marginal compared with domestic investment. Given China?s GDP of roughly $5 trillion, annual domestic investment, or GFCF, at 43% of GDP, is approximately around $2.2 trillion. For India, with a GDP of $1.3 trillion and GFCF at 33% of GDP, annual investment is roughly $430 billion. These numbers almost dwarf annual FDI inflows of $108 billion (China) and $34.6 billion (India).
Notwithstanding China and India becoming dominant players in cross-border FDI flows, the latter are yet to assume significance in their economies. Domestic investment remains the bigger driver of growth. Current proportions of FDI vis-?-vis GDP and GFCF suggest that domestic investment will continue to remain the key driver.
The marginal role of FDI in both economies also indicates that even though in terms of the FDI indicator they have considerably globalised, foreign capital occupies far less space in economic domains of both. The two economies can be optimistic of maintaining economic momentums even if FDI inflows dry up. For both, the main economic challenge is to ensure that domestic investment momentum is maintained for sustaining overall growth.
The unutilised potential for FDI in both countries is enormous. Inward FDI stocks are more than 50% and 45% of GDP, respectively, in the UK and EU. For developed economies overall, such stocks are more than 30% of GDP. China and India are at roughly one-third of developed economy levels as far as the proportions of their stocks of inward FDI to their respective GDPs are concerned. Both countries can still do a lot in getting more FDI. From an FDI perspective, they are well-globalised; but by their own standards, their globalisations are still minuscule.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views
