In times of uncertainty, such as the Covid-19 pandemic, policymakers are compelled to make high-risk and quick decisions that may go against their broader policy mandates. At the onset of the pandemic, the Indian government mandated a clearance requirement for new FDI projects from land-border sharing economies. It was widely understood that these new FDI rules were intended to evade opportunistic takeovers by Chinese firms. A study by ACI finds evidence that the 2020 FDI restrictions dented the inflow of China’s greenfield FDI projects to India.
After 2014, the Indian government passionately promoted Make in India, Digital India, and Start-up India initiatives, which aimed to strengthen the country’s manufacturing sector and foster entrepreneurial innovation. The post-2014 era was marked by India’s vehement reformation of its economy. Sending ripples across borders, firms in countries like China grew confident in the Indian economy and its manufacturing capacity as they set up factories there. “India witnessed massive FDI inflows to the tune of USD 1.8 billion from China between April 2014 and March 2019”. As a result, several Indian unicorn start-ups sit atop Chinese investments. This has played a critical role in funding and bolstering technological innovation in the country.
At a time when the FDI inflows from China to India were at unprecedented levels, the Indian government decided to suspend the ‘automatic route’ for investments from border-sharing economies. The major affected economies included China, Bangladesh, and Pakistan. Investments from the latter two already required government approval. The revised policy, therefore, affected Chinese firms the most. It was done to prevent any opportunistic takeovers of Indian firms during the pandemic. Using cross-border investment data from January 2019 to April 2021, the authors find that the FDI restrictions caused a decline in the project value from China relative to the rest of the world by 0.28%. Figure 1 graphically captures the impact of the restrictions on India’s inbound China investments. The blue line shows the dip in the difference between the average value of projects from China and rest of the world to India after the policy revision. Several robustness checks were done to verify the sensitivity of the baseline results.
Further, the study finds that the policy affected various industries differently. Driven by the Make in India program, Chinese investments were heavily concentrated in automobile and smartphone manufacturing. As a result, the manufacturing of metals, electrical equipment, and motor vehicles industry suffered the bulk of the decline in investments. Moreover, it was found that China – facing roadblocks in India – reallocated to its established economic partners such as Malaysia, Mexico, Vietnam, etc. These economies were similar to India in terms of China’s investment presence.
During such episodes of economic downturn, policymakers are faced with tough decisions. In India, national interests took precedence, and restrictions were placed on incoming FDI. In fact, India was not the only country to do so. Other economies like the European Union and Australia too introduced similar policy measures to prevent opportunistic takeovers of domestic firms. Conversely, some markets stand to gain from such restrictive policies. In this case, these included Malaysia, Mexico, and Vietnam, among others. This merits further research to explore whether these reallocated investments to the aforementioned economies aided in their post-pandemic economic recovery.
Researchers: CHEUNG, Paul, GEORGE, Ammu, GUPTA, Shubhangi, ZHENG, Huanhuan