Promoting FDI from China: Some issues

Assuming that Chinese investments in India will improve trade balance may be simplistic

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In the ongoing debate on the suggestion in the Economic Survey 2023-24 to promote foreign direct investment (FDI) from China, the following points may be worth further reflection.

First, developed economies contribute the majority share of global FDI outflows, with the US and Japan in the lead. Four-fifths of the top 100 multinational corporations (MNCs) undertaking investments in manufacturing abroad are from Europe, the US and Japan.

FDI outflows from China have been on the rise, in the last couple of years, with greenfield investments in critical minerals, global value chain (GVC)-intensive manufacturing sectors such as electronics, motor vehicles, and green energy.

Pushed by overcapacity and economic slowdown within, Chinese outbound FDI is guided by geopolitical factors, the necessity to avert higher tariffs in export markets, and to secure critical resources to ensure sustainable supply chains.

A significant proportion of investments by Chinese firms are in Southeast Asian economies. Other major host economies include member nations of the Belt and Road Initiative, where China has helped create prior facilitative soft and hard infrastructure.

Second, in the China+1 GVC diversification strategy of MNCs, India faces competition from other emerging market economies (EMEs). Alternative investment locations are being sought by MNCs as additional facilities while production in China is retained or even further enhanced.

While the Chinese facility caters to its large market, the additional production facility-re-shored, near-shored or friend-shored - provides necessary flexibility by allowing quick response to uncertainties emerging from the global economic, climate and political contexts, thereby ensuring GVC resilience.