Foreign Direct Investment - China & India

Table of content

I. Executive Summary.........................................................................5 II. FDI Defined....................................................................................5 III. Factors that influence FDI decisions......................................................7

1. FDI and Economic risk.....................................................................8 2. FDI and Political risk........................................................................9 3. FDI and Financial risk......................................................................9

IV. Recommendation and Country Analyses................................................11 V. India..........................................................................................12 VI. Republic of China..........................................................................15 VI. Conclusion..................................................................................18

Table of citations

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I. Executive Summary

An American MNC seeking to set up production and assembly facilities as well as sales and distribution outlets in two countries needs to carefully analyze which economies would be best suited for their foreign expansion needs. Of the four countries to be assessed, we felt that China and India offered the best economic conditions for foreign direct investment (FDI). In order to appreciate how and why we selected these two countries, a clear understanding of what drives FDI, the forms in which investment can take place, and the factors need to be considered when investing in foreign countries is necessary.

II. FDI Defined

The process of FDI is defined as "investment made to acquire lasting interest in enterprises operating outside the economy of the investor." This form of investment into a foreign country is different than simply putting money into an economy, since the parent company must retain 10% of shares or voting power for the investment itself to qualify as FDI. The entity that emerges between the investor company and foreign affiliate is a known as a transnational or multinational corporation (MNC). Increasing access to new markets, access to strategic assets and maximizing production efficiency are all motivators for FDI. Most frequently, FDI is driven by "market-seeking" motives, i.e. where companies seek to invest in countries that have positive macroeconomic indicators and a growing economy and demand for their products. In this context, a countries' participation in free trade agreements and other trade integration schemes would increase its appeal to an investor company. Other firms may be motivated to consider FDI in order to gain access to cheaper labor resources that may not be available in their home-country. Such investment is referred to as "efficiency-seeking" and is most common in countries with attractive productivity-adjusted labor costs. A third driver for investing in a foreign country is the access to strategic assets, such as natural resources. FDI can take place in the form of greenfield investment which is the "direct investment in new facilities or the expansion of existing facilities." This