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Rediff.com  » Business » Why China is favoured over India

Why China is favoured over India

By T N Ninan
October 01, 2005 14:23 IST
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China signed power purchase agreements with private companies some years ago, committed itself to a specific rate of return on capital, then lowered the rate once the plants had been built. It did the same on some road projects.

So why don't we hear about these cases in the same way that we have heard endlessly about Dabhol? One answer seems to be that the Chinese are always offering fresh carrots to foreign investors, and the promise of jam tomorrow is so great that there are plenty of new (and even old) guys willing to come in with dollars. The other, of course, is that it isn't much use trying to fight the government in a Chinese law court.

These thoughts come to mind when going through the latest World Investment Report, released by Unctad. We are told something we already knew: that China ranks as the favourite destination for foreign direct investment.

How has China managed to play by its own rules and win, when India is always being told to be the good boy -- and gets rapped hard on the knuckles when it doesn't?

FDI: China got $61 bn; India $5 bn

Everyone knows, for instance, that while it may be difficult to get into India with FDI, it is easy to take your money out when you want. In China, the reverse seems to be true -- it is easy to get in, not so easy to get out.

Yet, you don't hear war stories about the experiences that companies have had. Nor do you hear stories about corruption in China quite as often as you hear the "C" word mentioned in India -- though the Chinese system is more corrupt.

Most international businessmen will believe an Indian balance sheet more than a Chinese one, and Indian statistics more than Chinese ones (four international estimates recently of the size of the private sector in China varied all the way from 25 per cent of GDP to 75 per cent!). It seems fair to ask, therefore, why there is this conspiracy of silence about the problems in dealing with China, and loud complaints about India.

India is China's equal: Bah!

There is a parallel in the nuclear field: China violated specific international treaties when it passed on forbidden nuclear and missile technology and equipment to Pakistan. Yet no one said a word against China, while India's saying boo to a treaty it had not even signed invited sanctions.

The only plausible explanation can be that the Chinese simply pack too much punch to be caged in by rules and agreements; they are the rising world power and set their own rules.

In the economic field, their market is now so attractive that international companies will put up with anything in order to get in there -- gross patent violations, the lack of legal redress, the unilateral rewriting of contracts, corrupt party bosses.

One is reminded about the Mughal emperor disdainfully asking the visiting representative of a European trading company to kiss his feet, and getting his wish fulfilled.

Another possible answer is that the Chinese are more businesslike in whatever they do, even when they create problems. Companies learn to live with that and perhaps factor the risk into their costs, whereas the frustration of dealing with India's bureaucracy and rules (waywardly applied) can prove to be more frustrating, less definable, and therefore more painful.

A third possibility, of course, is that India's is an open system, so there is room for public complaint -- in the media, in various business fora and elsewhere. China in contrast is a closed system. Perhaps it is a combination of all three.

In the final analysis, though, India may finally be getting some recognition for being the more rule-bound system, with superior corporate governance standards, better regulated markets, and a greater willingness to play by the rules.

This, plus the new thought that India may be at or near a tipping point in its economic performance, must be the explanation for the surprising discovery that the Unctad report puts India third in the list of preferred investment destinations, and why it also scores very well on the preferred list of countries for research and development activity. Certainly, the FIIs are voting for the Indian system in a way they have never done before.
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T N Ninan
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