Monday, February 14, 2005

FDI: China and India - Just a Difference in Definition!!!

This issue has often been discussed, though not in public forums and media: That the difference between the the FDI inflows between China and India is just due to different ways in which the two countries calculate their FDI.
A news item in Times of India (Feb 10, 2005) points out that:

"India is likely to get FDI of $15 billion in 2004-05, but even that is an under-estimation of what the actual figure would be if it alters its traditional method of calculating FDI inflows... India considers only equity capital as FDI. Since 2000-01, however, the FDI statistics have also included re-invested earnings. China in fact includes imported equipment in its FDI calculations, whereas India includes these in its trade data."

In fact, FDI inflow calculation appears to be an art. Though, India gets just about $5-6bn as FDI (compared to $60bn in China!), if India follows the same method of FDI inflow calculation as China, Indian FDI will be close to $50bn!!!

The IMF definition of FDI includes 12 different elements:

  • equity capital,
  • reinvested earnings of foreign companies,
  • inter-company debt transactions,
  • short-term and long-term loans,
  • financial leasing,
  • trade credits,
  • grants,
  • bonds,
  • non-cash acquisition of equity,
  • investment made by foreign venture capital investors,
  • earnings data of indirectly-held FDI enterprises,
  • control premium and non-competition fee.

    China includes all these in its calculation of FDI, while the Indian FDI reports only equity capital as FDI.

    Similarly, China reports improted equipments as FDI, while india includes these imports in its trade data.

    Moreover, China also includes domestic money coming through Macau, Taiwan and HK in calculating its FDI inflows (often called "round-tripping" - i.e., domestic money routed through these destinations to be reinvested in mainland China, to avail concessions, tax breaks etc.). Estimates show that this can be as large as 40-60% of China's total FDIs.

    These two research papers give more detailed picture of how this difference in accounting practices completely changes the reality:

  • FDI inflows in India: issues and Challenges - Comparison with China
    http://www.umbc.edu/economics/seminar_papers/dasgupta_paper.pdf
    And
  • What Constitutes FDI: Comparison of India and China
    http://tinyurl.com/4nqlj

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