Millennium Post

Hopes raised for more FDI

It is perceived that any setback in anyone of these countries leverages FDI growth in other two countries. The explanation suggests that decline in FDI in China should gear up shifting of FDI to Singapore and India. Since Singapore is shackled by low domestic demand and when global slump in export has throttled Singapore’s potential, India has emerged as the safer bet for better destination for foreign direct investment. India is thronged with big domestic demand and its slow growth in GDP has bottomed out.

China is now the world’s biggest manufacturing powerhouse. Manufacturing was the main driver for burgeoning FDI in China. But, there was a turnaround in the power of manufacturing in attracting FDI. Now, China faces new challenges for its manufacturing power with the slow growth in economy, rise in wages, global export slump and aging of working population. The power of manufacturing to attract FDI ebbed and non-manufacturing turned vibrant for FDI growth in China. Data suggest that share of manufacturing in FDI flow in China plunged from 56 per cent in 2007 to 35 per cent in 2011. Manufacturing growth is slowing more quickly than aggregate economic growth. Evidence suggests that the country is already loosing some new factory investment to low cost countries, such as Vietnam and Bangladesh.

For years, China’s low salaries, strong supply base, high investment in port, road and rail infrastructure provided a strong platform for manufacturing for export. The slump in export demand after Lehman crisis and European recession on the one hand and the rise in Chinese wages on account of appreciation of renminbi on the other hand dampened the manufacturing export of China. Most multinationals, which produce labour-intensive goods, are actively seeking to diversify beyond China to reduce cost. For example, Bangladesh emerged a textile garment hub for the foreign investors.

The slip in the viability in low cost manufacturing centre unleashes ample opportunities to India to woo the foreign investors. At present, India is reckoned a low manufacturing base for GDP growth. Manufacturing accounts for only 15 per cent of GDP. Large domestic demand and non-aging society provide a strong base for FDI attraction in India. The new NMIZ (New Manufacturing Investment Zone) targets the country to elevate its manufacturing share in GDP to 25 per cent. In contrast, China is reeling under excess manufacturing capacity. There is little room for foreign investors to pour their money gainfully in manufacturing in China.
There are seven reasons which crippled FDI attraction in manufacturing in China.

High labour cost due to rise in wages
Minimum wages surged in many provinces in China. During 2010-2012, minimum wages increased by over 30 to 35 per cent. In Shenzen and Guangzhou – world’s biggest manufacturing zones – minimum wages increased by 36 and 18 per cent respectively. In Beijing and Shanghai, minimum wages increased by 32 and 30 percent respectively. In contrast, the minimum wages increased by 10-15 per cent in India. The minimum wages for semi-skilled workers in automobile sector in Haryana and Maharashtra hover around $120 to $150 per month.

Weak base to spur consumption oriented growth
Chinese economy turned vulnerable with excessive dependence on export and investment and low domestic consumption. In post-Lehman crisis period, the downturn in Europe and USA led to a cascading impact on Chinese exports – the base for Chinese miracle growth in the economy. China shifted to consumption-base model growth in 12th Five Year Plan. But, it was no more than a lip service, according to Prof. Minxin Pei of Keck Centre for International and Strategic Studies, California.
Pessimistic opinion suggests that the weak institutional set up dampens the consumption base growth. Excessive dependence on export and investment caused macroeconomic imbalances in the domestic economy. By doing so, it neglected domestic demand growth by splurging less in welfare activities for the middle class society. Being a low cost production base and middle-income group country, China lacks the purchasing power to consume the goods that it produces.

Institutional weakness to do business in domestic market

Multiple complexities of doing business in China compelled the foreign investors to export. Payment delay is one such important barrier, which looms large in the domestic market. Customers and local governments are asking for 6-9 months payment terms after Lehman shock, rather than 2-3 months earlier. Official corruption, widespread counterfeits, stifling regulatory measures, weak payment discipline, poor logistic system and the distribution network are enhancing the transaction cost and make it difficult for the foreign investors to thrive in the domestic market.  Further, it is tough for private sector to compete against state-owned enterprises, which enjoy implicit subsidies and politically encouraged bank loans.  

Drying up of working-age class

China’s workforce is aging in a few years of time. The Economist survey revealed the alarming situation of depletion of Chinese work-age population. Chinese dependency ratio on working-age class population (between 15 -64 age) declined to 30 per cent. With the one-child policy launched in 1979, only five million Chinese will enter in working age group of 34-54 in this decade, according to Ruchir Sharma of Morgan Stanley. In contrast, India has advantage over China by demography. India scores for higher ratio for dependency on working-age population. According to UN estimates, India will add 136 million people in the global population by 2020 and will account for 26 percent of the global population. In comparison, China will add only 23
million population.

Saving ratio to dwindle
China is holding a high saving ratio – 51 per cent of GDP. It is feared that a high domestic saving, which is one of the pillars for strong in the economy, will wane with the increase in aging population and workers becoming more expensive.

Weak SMEs after the global downturn
SMEs played a significant role in China’s miracle growth.  SME accounts for 58.5 per cent of GDP and 68 per cent of exports. With the US economy yet to get rid of recession and EU being swamped by stagflation, SMEs plunged into a fragile health. Every fourth of SMEs is sinking into losses after the global downturn, according to China’s Industry and Information Ministry. The weak SMEs impaired the employment opportunities in China.

Democracy outpaces Communism in doing business in global environment

India’s growth thrives on global growth. Even though, domestic investment is predominant in driving India’s growth, foreign investment is playing a major role in spurring India’s growth trajectory since mid-2000s. Democracy provides better legal environment and protection for doing business to the foreign investors, such as protection from counterfeits and level playing field for procurement of bank finances.

India is yet to capitalise the benefits, emerged from sloth in FDI in manufacturing in China. A slew of reforms in FDI were made since last September. But the chasm between policy liberalisations and ground reality raised more dust than clean air. FDI should be investment friendly and free from foreign xenophobia. It will be a big supplement to investment oriented manufacturing growth. Unlike China, India is in dearth of manufacturing capacity.
The author is Adviser, Japan External Trade Organisation, Delhi
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