Can India Adopt Strategic Flexibility Like China Did?

Some emerging markets have been leaders in the world and have grown at a higher rate benefiting from higher Foreign Direct Investments (FDI) by Trans National Corporations (TNCs) and some have been laggards and have not able to attract as much FDI and grow that efficiently. Why China gets 60 billion dollars FDI annually as compared to India that does not even get 6 billion dollars is an intriguing question? This paper explores the determinants of FDI in such emerging economies to answer the above question. What has India done till now to attract FDI? What has been China's strategy to become the most FDI attracting country in the world? What lessons India can learn from China and improve its FDI inflow? The study attempts to theorize what lessons emerging markets that are laggards in attracting FDI, such as India, can learn from leader countries in attracting FDI, such as China in the global economy.

This study fills the gap in the literature by analyzing the Indian data at the relevant micro state level for the period 1992–2005 and comparing it with the Chinese data for period of 1978–2005 at the relevant economic zone level. Indian FDI attraction model was tested using OLS and autoregressive models and it was found that India has grown due to its human capital, size of the market, rate of growth of the market, and political stability. For China, congenial business climate factors comprising of making structural changes, creating strategic infrastructure at SEZs, and taking strategic policy initiatives of providing economic freedom, opening up its economy, attracting diaspora, and creating flexible labor laws were identified as drivers for attracting FDI. The model using these variables was tested with OLS regression and autoregressive regression analysis and was found significant. There are lessons that India can learn from China. Emulating and replicating successful infrastructural stories such as DMRC, DVP, and Golden Quadrilateral will help develop infrastructure. Structural Shift in terms of moving idling labor in agriculture to ‘skill-neutral mass manufacturing’ will employ millions from ‘seven-up’ BIMAOR UT UP CHA JA (sick get up and conquer) states, instead of current trend of just developing the service sector core competence only. Few but large world class SEZ's in ‘seven-up’ states on the east coast will help leverage ‘demographic-realities’. Privatizing oil sector and banks to reduce government intervention and provide economic freedom, opening economy to level playing field to TNCs by reduced tariff and taxes, proactively engaging diaspora, and flexible labor laws to permit free entry and exit to TNCs will help India attract higher FDI. This study might help countries such as PIN (Pakistan, Indonesia, and Nigeria) which, will follow the BRIC economies in growth, want to grow, to broaden their understanding and formulate policies to attract FDI. At the enterprise level, it might help TNCs in understanding markets and formulating entry and growth strategies in these markets.