Economic Growth Models of China and India: Role od Foreign Direct Investment

India has been growing about 6 percent annually, compared to China’s much more impressive10 percent average annual growth rate. India has achieved its growth through a combination of improvement of skill sets, diversification of the economy, stimulation of consumer demand, entrepreneurship and competition. China’s growth comes from almost twice the amount of domestic investment in new factories and equipment, and almost ten times higher (compared to India) foreign direct investment (FDI). China has adopted the model of investing resources to propel growth and India has adopted a model of efficiency and productivity to stimulate growth.

Empirical studies have shown that the relationship between economic growth and the amount of foreign direct investment (FDI) is ambiguous at best. Foreign Direct Investments in primary sector appear tend to have a negative effect on growth but investments in manufacturing sector appears to be positive. But the impact on the service sector is ambiguous. There are several macro-economic illustrations of the tenuous relationship between FDI and growth. For example, Japan, Korea, Taiwan and others achieved remarkable growth with relatively low FDIs. On the other hand, Brazil which was the darling of FDIs in 1960s stumbled. In the 1980s, China received very little FDI, and yet the country grew faster and more virtuously than its later growth.

Thus FDI appears to be neither strongly correlated to nor be causative of the economic growth. Generally, FDI is a result of growth. In summary, China may have achieved substantial growth in 1990s and in the last decade through huge (but not so efficient) infusion and utilization of FDI.