How India can woo firms leaving China

Nomura Group Study found that in 2019, out of the fifty-six companies which shifted their production out of China, only three of these invested in India; while 26 went to Vietnam, 11 to Taiwan, and 08 to Thailand.

In April 2020, Nikkei noted that out of the 1,000 firms which were planning to leave China and invest in Asian countries, only 300 of them were seriously thinking of investing in India.

At a time when companies across sectors are either leaving or mulling to exit China, India must invest in policy and administration, infrastructure, legal system and implementation to make the most of the exodus, a research paper suggests.

Titled 'FDI Value Proposition Framework: Six interventions to attract MNCs to India', the paper looks at why companies are opting for destinations like Vietnam and Taiwan when leaving China, and what could India do about it.

Prashant Salwan, professor of strategy and international business, as well as chairman of executive education at Indian Institute of Management (IIM) Indore, is the lead researcher and main author the paper.

It has been co-authored by Yorum Wind, professor of management, Wharton School, University of Pennsylvania and reviewed by Amlendu Dubey, faculty member at Indian Institute of Technology (IIT) Delhi.

"As companies started leaving China, Indian policy makers were quite upbeat that they would come to India. But sadly, that wasn’t the scenario.

"Nomura Group Study found that in 2019, out of the fifty-six companies which shifted their production out of China, only three of these invested in India; while 26 went to Vietnam, 11 to Taiwan, and 08 to Thailand.

"In April 2020, Nikkei noted that out of the 1,000 firms which were planning to leave China and invest in Asian countries, only 300 of them were seriously thinking of investing in India," the paper states.

Foreign Direct Investment (FDI) helps in creation of jobs, economic boost by getting foreign exchange, exports of products, and gives access to best technologies which are very critical for a developing country.

What's more, Indian cost of production is half of China, but still China has more FDI than India.

Vietnam market is 1/4th the size of India, but still around 46 per cent of companies leaving China went to Vietnam and only 5 per cent came to India, the paper points out.

Further, manufacturing FDI in India is quite low at 0.6 per cent of GDP as compared to Indonesia (manufacturing FDI is one per cent of its GDP.

"These examples show that market size or labor cost are not the only variables to decide on global location decisions.

"There are other factors and combinations of these factors which firms take into consideration before taking any decision," the paper further states.

For attracting FDI as a nation, one needs to look into the decision-making steps a firm deliberates while deciding FDI in a host country.

According to Salwan, country policy makers need to link the understanding of firm’s requirements in creating Customer Value Proposition (CVP) to the competitive advantage a country has.

A country should help a firm develop unique value proposition and simultaneously help reducing cost of producing the latter as well.

After due analysis of numerous FDI frameworks and the four factors which are used by a firms in deciding location choices or FDI investment to create and capture value, namely firm fit, location characteristics, government incentives and competitive effects; which help a firm decide on its location decision and further discussion with 31 MNCs, the research team came up with the ‘Value Proposition Model of FDI’.

With six pillars and 20 sub-factors segmented in pull and push factors, the research paper looks at how the Indian government needs to take a "structured approach in attracting FDI".

The six pillars include government policy & administration, infrastructure, economy, business ecosystem, legal system & implementation, and location advantages.

The paper has gone on to create a FDI value proposition index based on these six pillars which shows that while India may have advantage over destinations like Vietnam and Taiwan in terms of infrastructure and economy, the latter score over India in government policy & administration, legal system & implementation as well as location advantages.

"India has taken positive steps like allocating huge chunk of land and policy changes regarding land acquisition.

"But Indian government need to take a structured approach in attracting FDI India needs to work on government policy and administration , infrastructure  and legal systems and implementation on a war footing.

"Developing policy and facilitating strategies using these six pillars will help India attract FDI to a ratio of 1.5 per cent to 2 per cent of its GDP," the paper further states.