There is a presumption among many academics and policy makers that foreign direct investment (FDI) is somehow special. One common view is that FDI helps accelerate the process of economic development in host countries. Optimism about the economic consequences and the importance of new technologies for economic growth, has contributed to wide-reaching changes in national policies and emerging cultural dimensions on FDI. During the last two decades, many emerging economies have dramatically reduced barriers on FDI, and countries are continuously aligning their policies to attract multinational firms in mutuality of interests. Standard tactics to promote FDI include the extension of tax holidays, exemptions from import duties, and the offer of direct subsidies. Typically, these concessions are exclusive to MNCs and not to the local firms engaged in the same lines of activity.

This paper shall examine the FDI pattern in India and China given the fact that both are relatively new players in opening their 'protectionist economy', the cultural differences and challenges and critically analyze Geert Hofstede views 'The business of international business is culture'. Further, an insight on managing cultural integration in MNC subsidiaries in India and China and conclusions reached.

Many developing countries have made a remarkable transformation from being hostile to foreign direct investment (FDI) in the 1960s and 1970s to eagerly attracting it in the 1980s and 1990s. The transformation of India and China, who had virtually no foreign investment in the 1970s to 'super magnets for overseas investment' is remarkable and has been well documented. India and China, accounting for 40% of the world's population, are the two Asian giants whose sheer market size and diversity of economy is a great attraction for Multinational Corporation's growth and competition.

The academic literature acknowledges that in terms of developing countries FDI has a host of benefits. FDI plays an important role in encouraging economic growth in many ways: modern technology is transferred through investment flows to individual firms and this has a spill-over effect to the wider economy. International investment projects bring along management expertise, skills and a high level of training and it is much easier to access global markets and international sources of finance. Due to competition from multinational subsidiaries, FDI leads to an increase in productive efficiency. FDI benefits the host country on a macroeconomic level as well. The Balance of Payments (BoP) strengthens because of the inflow of investment funds and output and employment grows faster due to increased levels in savings and investment. Consumers also benefit from FDI as goods and services are competitively priced and there is a greater variety of goods and services offered with higher standards of quality. (Moran, 1998)

Dunning's (1988) OLI paradigm provides guidance for FDI activities. According to Dunning, ownership (O) and internationalization (I) advantages are gained through the exploitation of firm-specific resources and capabilities, and the reduction in transaction costs. Furthermore, a location (L) advantage has become increasingly important due to the extent of changes in MNE activity in the last two decades. Dunning points out that the location of FDI is driven by four key factors: markets, resources, efficiency and strategic assets (Dunning, 1993). In many respects, the selection of appropriate host country in which to operate is determined, at least in part, by the firm's motives, "for going international". These 'Push and Pull' factors relate to the FDI pattern of MNC in the form of joint ventures and wholly owned subsidiaries. The alternative servicing methods being exporting and licencing.

FDI in China has been a huge success story. From a modest base of $19 billion in 1990, China's FDI peaked at over $300 billion in 1999. The majority of FDI in China has originated from developing countries in Asia, such as Hong Kong. China, which started its economic reforms in 1978, increased annual growth rates to 6-7 percent in the mid-1990s and is expected to sustain annual gains of about 8 percent. Before 1979, to say that foreign investors were viewed with suspicion is a serious understatement. The Chinese government was downright hostile to private enterprises, including if not especially foreign-owned private enterprises. Under Deng Xiaoping, the promulgation of the 1979 'Law on Chinese-foreign equity joint ventures' together with the establishment of four special economic zones formally signaled the adoption of the 'open door' policy by the Communist Government.

India, where comprehensive economic reforms were introduced only in 1991, creates expectations of similar potential. However, the FDI comparison of both countries in absolute terms suggests that India's FDI is still one tenth of that into China. Indeed, relative to China, which has restricted foreign investment in targeted priority sectors, the Indian market could offer the greater possibilities.

Both China and India are convinced that FDI can and does play an important role in their aspiration for a sustained and fast economic growth. Both countries eagerly hope to attract ever more FDI. China, for example, offers super-national treatment of foreign firms in a variety of ways (e.g., benefits of reduced or exempted taxes that are not available to domestic firms). The pro reforms Indian government has been actively looking for ways to increase its inward FDI with similar sops to lure MNCs. Foreign Direct Investment is encouraged in priority infrastructure and manufacturing industries; and is approved through ' single window' system.

India and China do share some common features. Both countries (are perceived to) have relatively high levels of red tapism and corruption arising from relatively High Power Distance, collectivist organizations/societies. According to Transparency International Corruption Perceptions Index 2002, India and China rank at 71 and 59 respectively in a cluster of 102 countries. Viewed from Hofstede argument, trust is at premium in a society characterized by uneven power distribution and hierarchy. The problem is further compounded by plethora of Rules and Regulations- leading to cronyism and corruption. Moreover, where trust is in short supply, it can be bought for money and/ or gratification. Low trust and corruption often go together. The rush to get rich under the recent economic reforms further breeds crime and unethical business practices.

Both India and China also have a Byzantine maze of bureaucratic red tape. According to a survey of firms around the world by the World Bank (1997), on a 1-7 scale where 7 indicating the highest level of regulatory burden, India and China stood at 5.1 and 4.58 respectively. (In comparison, Singapore's bureaucratic burden received a score of 2.08). This is another reflection of high power society where' Power corrupts and absolute Power corrupts absolutely'. Corruption is a major obstacle for FDI (Habib and Zurawicki, 2002). Corruption hampers a country's growth since it directly impacts the level of FDI, a measure of a nation's potential for development. According to Transparency International, 'FDI in a country is directly linked to its perceived levels of corruption. Every one percent rise in corruption levels decreases FDI upto five percent". Foreign investors may avoid corruption as they may believe that it is morally incorrect. In addition, corruption is avoided because it is very risky, difficult to manage and costly.

While China is gearing up to stem this menace and bring order and transparency in business, India's response has been tardy. Politicians have paid lip service to the crusade against corruption to break the vicious circle of poverty and graft. The Indian arm of Transparency International has successfully convinced the Government for creation of Ombudsman (Vigilance Commissioner) in Public and private sectors to control graft and for reforms at all levels of public life.

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*Contributed by -
Sauvik Banerjee, Anusha Makka and Ratnesh Kumar
MBA
Leeds University Business School, UK.