The Big Picture Question When global companies set up factories in developing countries, some become major export powerhouses (think China), while others mainly serve the local market. Why has India historically struggled to attract export-oriented foreign investment, and what needs to change?
Understanding Export-Oriented FDI: Why It Matters
- Brings advanced technology and management practices
- Creates stronger links with local suppliers
- Generates valuable foreign exchange
- Helps domestic firms learn about global markets
- Less likely to crowd out local companies (since focused on global markets)
Tale of Two Countries: India vs China The Export Gap (as of 2001):
- China: Foreign companies contributed 50% of exports
- India: Foreign companies contributed just 5% of exports
- China’s journey: Started at 17% → reached 50%
- India’s journey: Started at 3% → stuck at 5%
What’s Holding India Back? The Four Key Challenges
1. The Skills Story
- India lags in general workforce skills
- Average schooling years: 5.06 years (India) vs 6.35 years (China)
- Skills gap particularly affects export competitiveness
2. The Infrastructure Bottleneck
- Ranked lowest among 11 competing countries
- Key problems:
- Power supply (73% foreign investors rate as ‘bad’)
- Road quality (71% rate as ‘bad’)
- Ports and airports need modernization
3. The Policy Puzzle
- Recent improvements:
- Automatic approvals introduced
- FDI caps raised
- Trade barriers reduced
- Remaining challenges:
- Complex state-level regulations
- Ground-level implementation issues
- Need for more bilateral investment treaties
4. The SEZ Challenge
- China’s success with Special Economic Zones
- India’s response: Converting EPZs to SEZs
- Need to address:
- Infrastructure within zones
- Labor regulations
- Administrative procedures
Signs of Change: The New Wave
- Rising global interest in India as manufacturing base
- Success stories:
- Hyundai: From skepticism to 30,000 vehicle exports
- Philips: $150 million investment for export hub
- Same Deutz-Fahr: Using India as tractor export base
What’s Working? The Company-Level Insights
- Companies with moderate foreign ownership showing better export performance
- Success factors:
- Investment in R&D
- Focus on productivity
- Marketing investments
- Government export incentives
The Road Ahead: Policy Prescriptions
- Urgent infrastructure modernization
- Skill development programs
- Streamlined regulations
- Better investment promotion
- Focus on bilateral investment treaties
- Enhanced export incentives
Key Takeaways
- India has strong potential but needs to address fundamental challenges
- Infrastructure and skills are the biggest hurdles
- Recent success stories show the potential
- Need coordinated action at both central and state levels
Academic Abstract:
This paper examines the attractiveness of India as a host to export-oriented FDI (EFDI) in terms of a host of location-specific factors such as labour cost, skill, infrastructure, natural resources, openness and bilateral investment treaties (BITs). The study found that low level of general skills, infrastructure bottlenecks, and failures to use BITs as tools for attracting EFDI are main factors lowering the attractiveness of India as compared to others. The study with the purpose of better understanding the factors that are important at the firm level also have analyzed the role of various firm-specific factors that are important for export performance of foreign affiliates in Indian manufacturing.
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Full citation: Pradhan, Jaya Prakash and V. Abraham (2005), ‘Attracting Export-Oriented FDI: Can India Win the Race’, GIDR Working Paper, No. 156, Ahmedabad: Gujarat Institute of Development Research.
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