China and India Jockey for Most Attractive Foreign Direct Investment Destination Globally While U.S. Is Challenged b

15 October 2004

New Delhi: China and India rival one another and are aggressively challenging the United States as the world's most favored destinations for foreign direct investment, according to the latest Foreign Direct Investment Confidence Index, an annual survey of executives from the world's largest companies, conducted by global management consulting firm A.T. Kearney.

For the first time since 2000, a sizable majority (69 per cent) of executives are more optimistic about the global economy, compared to only one in 10 expressing more pessimism. Corporate investors expressed an increased willingness to make overseas investments compared to 2003 — the first positive year-to-year increase in overall FDI confidence in since 2001. Helping spur likely future FDI, corporate investors see macroeconomic and political risks as less threatening and perceive greater profit opportunities and reduced risk, in the world's leading emerging markets.

Global executives are more likely to invest in China and India than at any time since 1998. China maintained its top ranking as the most attractive FDI destination, while India rose from sixth to third most likely FDI location globally — the country's highest ranking ever, just behind the U.S. Although the United States remained the second most attractive FDI location, the gap between the U.S. and India may be closing. As China and India forge their leading positions in the global economy, the United States and the rest of the world will face severe competitive pressures from these two dynamic and rapidly evolving economies.

India and China spar over FDI like David and Goliath
China and India dominate the top two positions for most positive investor outlook, likely first-time investments, and most preferred offshore investment locations for business processing functions and IT services. Compared to other large emerging markets, China and India are cited by CEOs as the most attractive FDI destinations in the short-term (next three years) and well into the future, beating markets like Brazil, Mexico and Poland for medium-term attractiveness 10 years out.

However, global investors view these two destinations as distinctly different markets: China as the world's leading manufacturer and fastest-growing consumer market and India as the world's business process and IT services provider, with longer-term market potential. When asked what kinds of activities will be offshored to China and India, investors indicated that China leads for manufacturing and assembly, while India leads for IT, business processing and R&D investments. Investors favor China over India for its market size, access to export markets, government incentives, favorable cost structure, infrastructure and macroeconomic climate. However, these same investors cite India's highly-educated workforce, management talent, rule of law, transparency, cultural affinity, and regulatory environment as more favorable than China's. China's FDI flows are larger ($53.5 billion) and primarily capital-intensive, while Indian FDI flows are smaller ($4.3 billion) and skill-intensive, concentrated in information and technology areas.