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Annexure 1

Cultural Dimension Scores of India and China

Before discussing the above chart it is important to understand the reason why companies invest and what are the handicaps involved in having myopic vision while investing.

In some industries myopic rules may be reasonable. The concept of what works today will work tomorrow may suffice, however most industries do not fall in this category, and myopic biases will hurt when it matters most. Let us take the example of two firms in the same industry, one myopic and the other farsighted. The myopic firm will look at net cash flows to forecast the future while the latter accepts the fact that the decision to invest creates a platform to expand in the future. Let us take an example of a myopic and far-sighted firm. Shown in Fig 2 the relationship between volatility of net cash flow and market share is graphed. Setting the volatility to 0, there is no difference in market share, as the volatility of the net cash flows is allowed to increase the penalty attached to myopia curves dramatically upwards. With a volatility set to 50% the myopic firms are eliminated and the farsighted firms quickly come to dominate the market. (Kogut B, Kulatilaka.N.1994)

National cultures distinguish similar people, institutions and organizations in different countries. (http://kubnw5.kub.nl/web/iric/hofstede/page4.htm). FDI allows capital accumulation and capital intensity immediately. It leads the economy to higher output and consumption. Investment has a multiplier effect - $1 invested today will lead to $2 tomorrow. FDI also provides foreign exchange to bridge the balance of trade deficit and helps the host country improve export performance. As a result of FDI, both China and India has better access to foreign markets. (http://www.blonnet.com/catalyst/2002/07/18/stories/2002071800050200.htm)

The above is a paradox, which both India and China face. On the one hand taking care of the economy, while on the other hand balancing local sentiments. Before Jun 1997, most Asian countries had made a tremendous progress in their economic achievement. Most economic experts around the globe had labeled the economic scenario in Asia at that period as "gold mines" and to some of them; they labeled certain countries in Asia as "the Asian Tigers". The estimated volume of foreign direct investment (FDI) was as huge and estimated at AS$107 billion invested in the Asia's economy. The positive phenomenon was recognized by several international organizations such as the World Bank, International Monetary Fund (IMF), Standard and Poor Rating Agency and Moody's Investor's Services. If the United States took hundred years to progress in their economy, Asia would only take thirty years to do so.

However, in Jun 1997, a signal of regional economic crisis was sensed after Thailand faced problem in her real estate economic management that suddenly affected her financial stability. A so called "contagion effect" was faced by many Asian countries and there was a sharp decline in all-regional currencies. Not only that, some countries were facing more catastrophic political experience due to the side effect of the economic crisis such as the downfall of Suharto's Administration in Indonesia. The blossom years suddenly turned into economic turmoil and the economic prosperity was vanished in just three months. (http://members.tripod.com/~azman97/essay2.html)

The currency crisis in South East Asia was a fall back to what had happened to the Sterling in the early 1970's with George Soros speculating heavily. The open market unregulated bonanza, that most Asian countries offered foreign fund managers, created a cultural divide where upon the desire to make bigger profits forced large amounts of risk taking. In a bid to overcome this crisis countries were forced to devaluate their currencies which at that point of time was most economist's favorite prescription to bail out and create a positive environment in a bid to attract more FDI, make exports more attractive and discourage imports. A drastic short fall in the balance of payment position pushed these economies towards global banking corporations in an effort to being bailed out. This opened up a Pandora's box with the nodal institutions imposing regulations and pre requisites as a pre condition.

Both India and China were hit by the Asian crisis but to a lesser extent. China was always selective in its entry norms while the financial sector was largely regulated in India. Both the countries devaluated their currencies in a bid to attract investment, although the sectors and modes were different. The Chinese government in a bid to improve its infrastructure invited MNC's to invest into that region on a Build Own Operate System (BOOT) there by creating synergy between its core competence of manufacturing and investment strategy. Good infrastructure backed by cheap labour and pro active policies proved to being a very attractive investment destination for corporations who were able to achieve economies of scale, provide local employment and shore up the sagging forex reserves for the country in general. With the BOOT system being pro active the long-term debt situation was also under control.

India on the other hand after opening its economy had to face a very strong anti FDI lobby which believed that inviting foreign firms into the country was equal to handing over the regions sovereignty. With a legacy of subsidies and protection to local industry being part of the country's ethos attracting FDI was a tough proposition. With mounting debt and an ever-growing oil bill, in the mid nineties the central government was left with no option but to offer its gold reserves as security to repay its obligations.

India's greatest strength has been its strong, educated neo rich middle class. This along with certain pro active government policies meant that investment was pre eminent although the move was more towards industries having intellectual property rights a tribute to the Indian brain. Although most of the forex coming into the country was very sector specific it created a new phase for Indian entrepreneurs who with limited capital exposure could leverage their skills and earn huge resources in the fields of IT and biotechnology. A reduction in subsidies, better forex management and the growth of home based MNC's has helped the country achieve record forex reserves and maintain a positive balance of payment situation.

Recommendations

Constraints that need to be addressed by India in order to attract FDI include a high corporate tax rate. India's tax rate is higher then China's 30%. India lacks adequate incentives for new business promotion, which is in place in China. For example, China offers super-national treatment to foreign firms through reduced or exempted taxes. India has been cautioned by the World Bank (Ibid) that if it wants to attract private investment in infrastructure, it critically needs to address regulatory and administrative issues, which are obstacles to investment. Furthermore, there is a lack of harmonization of government policies in India. Two events, which occurred in 1995, illustrate this lack of coordination and often-contradictory government policy and damaged India as an investor-friendly country. Firstly, Enron's project with the Maharashtra State government was scrapped after it had been approved by the government. Furthermore, Kentucky Fried Chicken's license in New Delhi, India's capital city was revoked as the company was accused of using ingredients that were harmful (Ibid).

Conclusion

There is no denying the fact that these two countries provide the biggest market and manpower capabilities in the world today. NAFTA and the EU were set up to allow regions to tap each others markets in a bid to discount stagnant domestic markets, where by these two countries offer all that and more on an individual basis. A notable factor is that there is no well known economic treaty between these two countries and barring the WTO where China has recently signed up to both these countries are not members of any other large political trade block with India not being a part of ASEAN and China for obvious reasons not being in the Commonwealth. But what is it that China is doing and India is not, which enables them to attract ten times the amount of FDI ($45 billion vs. $4.5 billion). Many writers have argued that China shall be the next economic super power and replace the US by year 2020.Many have counter argued that the business community are getting it wrong and that China could go the Japan way. A macro economic comparison between the two countries does point to the fact that China is head and shoulders above India but a micro level study reveals that although China is slightly ahead in GDP growth rate, India's population growth is double than that of the former there by proving that on a zero-zero level its actual GDP growth is higher. Both the countries have strong reserves and provide country specific advantages, but as on date the trade imbalance still exists, possibly because India is underperforming and China over performing although with the head start that it had that do not seem to be the case.

One of the pre eminent requisites of FDI is political stability, here on China with its mixture of republican based military backed autocracy shines over democracy and coalition based politics although if that were so then it would signal the end of most large economies of the world, although there is no doubt that good governance is at a premium in India, or is it where its stands with its relation to the sole super power of the world. In the mid eighties the then Prime Minister of India Late Mrs. Gandhi was visiting the US on an official visit. She was asked by the media as to where India stood, was it inclined towards the US or towards Russia, the reply was India stands upright. That legacy possibly still exists while on the other hand China has been offered the most favorite nation status by the US government. If so be the case then surely there are better ways of doing business and attracting foreign investment in countries.

Concluded.