Foreign direct investment is set to rise in India provided economic reforms and the government's commitment to attracting FDI continue, a new United Nations report says.

The prospect for increase in inward flows are promising for both India and China assuming that they want to accord FDI a role in their development process, it says, emphasising that Beijing would continue to be New Delhi's biggest competitor in this field.

The large market size and potential, the skilled labour force and low wage cost will remain the key attraction for foreign investors, the World Investment report, produced by the United Nations Conference on Trade and Development, stresses.

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Comparing the performance between India and China in attracting FDI, the report says China has done much better than India for variety of reason including opening up its economy in 1979 much earlier than India did in 1990s and the Chinese overseas contributing much more than Indians.

China's policies better than India's

China, it says, has "more business-oriented" and more FDI-friendly policies than India and Beijing's FDI procedures are easier and decisions taken rapidly. Besides, China has more flexible labour laws, a better labour climate and better entry and exit procedures for business, it adds.

The role of Chinese business networks abroad and their "significant" investments in mainland contrasts with much smaller Indian networks and investment in India, the report says.

According to the report, overseas Chinese are more in number, tend to be more entrepreneurial, enjoy family connections and have interest and financial capability to invest in China and when they do, they receive red-carpet treatment.

In contrast, overseas Indians are fewer, more of a professional group and, unlike the Chinese, often lack the family networks and connections and financial resources to invest in India.

Growth prospects for India, China bright

Describing India and China as "giants of the developing world," it says both enjoy healthy rates of growth.

But it notes that there are "significant differences in their FDI performance. FDI flows to China grew from $3.5 billion in 1990 to $52.7 billion in 2002. If round-tripping is taken into consideration, China's FDI inflows could fall to around $40 billion.

But those to India rose from $0.4 billion to $5.5 billion during the same period, according to the report.

"Even with the adjustments, China attracted seven times more FDI than India in 2002, 3.2 per cent of its GDP compared with 1.1 per cent for India."

In UNCTAD 'S FDI performance index, China ranked 54^th and India 122nd.

On basic economic determinants of inward FDI, the report says, China does better than India.

China's total and per capita GDP are higher, making it more attractive for market-seeking FDI. It higher literacy and education rates suggest that its labour is more skilled, making it more attractive to efficiency-seeking investors.

Besides, it has large natural resources endowment and its physical infrastructure is more competitive, particularly in coastal are as, the report adds.

Both China and India, according to the report, are good candidates for relocation of labour-intensive activities by transnational corporations, a major factor in the growth of Chinese exports.

But in case of India, it says, the relocation has been primarily in services, notably information and communication technology. Almost all major US and European information technology firms have presence in the country, mostly in Bangalore.

However, 80 per cent of Fortune 500 companies have presence in China while 37 per cent of these firms outsource to India.

"Despite the improvement in India's policy environment, TNC investment interest remains lukewarm with some exceptions such as information and communication technology," the report adds.

FDI drives China growth

FDI, it finds, has contributed to the rapid growth of China's merchandise exports at an annual rate of 15 per cent between 1989 and 2001. In 1989 foreign affiliates account for less than 9 per cent of total Chinese exports but by 2002, they provided half.

In some high-tech industries in 2000, the share of foreign affiliates in total exports was as high as 91 per cent in electronic circuits and 96 per cent in mobile phones.

About two-thirds of FDI flows to China went to manufacturing in 200-2001, the report says.

In India, by contrast, FDI has been much less important in driving export growth except in information technology. FDI in Indian manufacturing has been and remains domestic market seeking, it finds.

FDI accounted for only 3 per cent of India's export in early 1990s and even today, it is estimated to account for less than 10 per cent of India's manufacturing exports.

For China, the report says, the lion's share of FDI inflows in 2000-2001 went to a broad range of manufacturing industries. For India, most went to services, electronic and computer industries.

The two countries, it notes, focused on different types of FDI and pursued different industrial strategies.

India, it says, long followed an import substitution policy and relied on domestic resource mobilisation and domestic firms, encouraging FDI only in higher technology activities.

It notes that following the Chinese model, India recently took steps to establish special economic zones.

"China's special economic zones have been more successful than Indian export processing zones in promoting trade and attracting FDI," it stresses.

The report also notes that India is planning to open some more industries for FDI and further relax the foreign equity ownership.