Human Capital and Foreign Direct Investment: India versus china: A Case Study

Chirjot kaur

Neha Khanna of IIM Ahmedabad and Yang Hui from Cheung Kong Graduate School of Business in Beijing are called to represent their countries in a Management fest in USA to represent their economies as the Next hub for global workforce. The judge David Arkless an executive board member, Manpower UK is called as a jury to conclude the session.

Neha Khanna: China is still what I would refer to as a more “inward looking economy” which can easily self fuel its growth from the domestic economy, where as India is essentially becoming an “ outward looking” economy which will generate more of its growth from foreign investment and by becoming one of the largest labour exporters in the world.

Yang Hui: Mam, I have different view point here In Foreign Direct investment, FDI, China + Hong Kong received US$106 billion in 2007[US$70billion from NRC's] vs US$3.6 billion [US$0.2b from NRI's for India! Only better Governance can attract FDI and Tourists. In exports, China is nearly +700% of India. Taking the exports of Hong Kong + Macau into account, China's exports would be +1000% of India! China?s GDP is 50% in manufacturing or $ 650 billion per year. India’s GDP is 25% in manufacturing or $110 billion per year. China’s manufacturing base is nearly 6 times of India.

Neha Khanna: I agree with your point but the data you have quoted was relevant two years ago when the view that India might have a more competitive economy than China was met with incredulity. Now a comparison of the two countries offers valuable insights for anyone studying economic growth. A fundamental distinction is that China’s growth stems from resource accumulation while India’s is rooted in increasing efficiency. Those who warned that India attracted too little foreign direct investment undervalued its business environment, characterized by entrepreneurship, healthy competition, and minimal political intervention.

I would also like to quote that another myth is that China’s rise was due to major investment in infrastructure, when economic liberalization and institutional reforms deserve more credit. Indeed, Yasheng Huang of MIT notes that single-minded development of infrastructure has its drawbacks, and China pursued this goal while giving less priority to education. India’s educational system, on the other hand, has steadily improved, especially in rural areas. For these and other reasons, he postulates, India could outperform China over the next 20 years - unless that is, the Chinese learn from their neighbor and rival.

Yang Hui: My friend has very rightly pointed out that China has focused primarily on Infrastructure development but let me tell her that Why China gets 60 Billion Dollars as FDI whereas India is unable to get even 6 billion dollar is an Intriguing question. For China Congenial Business climate factors comprising of making structural changes, Infrastrucal models, Developing SEZ strategically, providing economic freedom, opening up its economy and creating flexible labour laws has been one area where China has created an edge over India.

Neha Khanna: India has not lagged behind in any of the areas; we have opened our economy quite late that is in 1990 and have grown phenomenally due to our human capital, size of market, rate of grown of market and political stability. India is on the radar of global investors and has a lot of outsourcing and BPO services from US and EU.

Yang Hui: On the other hand, China has grown 10 times faster in terms of FDI inflows and has grown three times faster economy as compared to India.

Neha Khanna: Having a look at the latest data, we see that India appears to have permanently broken out of its leisurely “Hindu rate of growth”– an annual gross domestic product increase of around 2 to 3 per cent – and its performance is beginning to approach the East Asian level. From April to June 2005, India’s GDP grew at 8.1 per cent, compared with 7.6 per cent in the same period the year before. More impressively, India is achieving this result with just half of China’s level of domestic investment in new factories and equipment, and only 10 per cent of China’s foreign direct investment.

While China’s GDP growth in the last two years remained high, in 2003 and 2004 it was investing close to 50 per cent of its GDP in domestic plant and equipment – roughly equivalent to India’s entire GDP. That is higher than any other country, exceeding even China’s own exalted levels in the era of central planning. The evidence is as clear as ever: China’s growth stems from massive accumulation of resources, while India’s growth comes from increasing efficiency.

Source: China Could Learn From India’s Slow and Quiet Rise;Yasheng Huang;The Financial Times, 27 January 2006

An economic litmus test is not whether a country can attract a lot of FDI but whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention. In this regard, India has done a better job than China. From India emerged a group of world-class companies ranging from Infosys in software, Ranbaxy in pharmaceuticals, and Bajaj Auto in automobile components and Mahindra in car assembly. This did not happen by accident.

Yang Hui: I believe facts are a better witness to our country’s success:

1. FDI inflow (China + Hong Kong)

US$ billions/year 106 8

2. Forex Reserves (China+Hong Kong)

US$ billions 1017+122= 1,139

175

3. GDP (China+Hong Kong)

US$ billions 2102+179= 2,281

750

4. GDP Growth (2006) in % rate over last year 9.3 7.9

5. Labour Composition Agriculture %/Industry %/ Services %

49/22/29 60/17/23

6. Population millions 1,314 1,095

7. Population increase per millions 7.2 15.3

year

8. Unemployment rate % of workforce 20 30

9.. Labour force in millions 797 496

Neha Khanna: Yes China was able to Attract FDI but could provide very little efforts to nurture it. Not at FDI, It has grown very less on Human front. China made a costly mistake in the 1990s: it created many world-class facilities, but badly under-invested in education. Chinese researchers reveal that a staggering percentage of rural children could not finish secondary education. India, meanwhile, has quietly but persistently improved its -educational provisions, especially in the rural areas. Sector

China has a plethora of talent problems.

1. It has complex variations in cost of labour.2. Poor management skills in teamwork and leadership

3. Low wages in Industrialized hinterland

4. Higher wages in manufacturing and services along coast.

5. Talent retention has always been a problem for china.

Yang Hui: Even India has some basic imperatives to develop itself as a global workforce. It has to invest in basic education an develop an inclusive workforce. It has to reduce bureaucracy and make labour laws flexible.

Neha Khanna: India is expected to account for a fourth of the world's total skilled workforce by 2020 and the central government is according top priority to higher education, allocating Rs.275,000 crore (Rs.2.75 trillion) to the sector. India has the potential to create over 500 million trained people by the year 2020. That would be over a fourth of the global workforce. This

big and unique opportunity for India will come from an education revolution that we must undertake as our most important national Endeavour. India’s work force quality is superior. I will give you some examples: in India we have the largest English-speaking population The workforce is cost-effective, highly educated and has a high level of cross-border mobility.

It is projected in a survey by business edition that India to Contribute 12.2% to Global Economic Growth by 2020, and India alone making up 30% of the net increase in global employment with 142 million new jobs.

Yang Hui: World’s consumer spending will expand at an annual rate of 5.6% to US$ 62 trillion by 2020 compared to US$ 27 trillion today. Though US will continue to be the largest consumer market, China will emerge as the world’s second largest consumer market

Neha Khanna: But India will rival the bigger European markets. India’s share in world consumer spending will increase from 1.9% in 2005 to 3.1% in 2020. Also, 471 million net new workers will enter the global workforce, with India accounting for a remarkable 142.4 million, followed by China with 65 million and the United States with 12.5 million new workers.

The debate stops here and the Jury is called upon to conclude the discussion.

Q.1) which of the countries is expected to grow as the largest hub for attracting FDI in the coming times?

Q.2) What factors will be restraining and driving factors for India to emerge as global workforce?

Q3) Critically analyse the progress of India and China in terms of FDI and Human capital growth rate.

Reference for a case study:

1. http://www.wakeupcall.org/china_india_comparision/china_india_chart.php2. http://www.wakeupcall.org/china_india_comparision/china_india_chart.php3. http://yaleglobal.yale.edu/display.article?id=6887