FDI slump in China is not headed towards India

Instead of India making gains at the cost of China by attracting FDI, the rest of the world is making gains at the cost of both China and India

The World Investment Report (WIR 2023) published foreign direct investment (FDI) inflow data for the calendar year 2022. The Organization for Economic Cooperation and Development (OECD), which brings out FDI data quarterly, recently released the FDI data for January-October 2023. The OCED report had many startling developments.

FDI inflows have begun reversing from developing to advanced countries. China received 90 per cent less FDI inflows in 2023. Scooting out of FDI investment flows from China did not land in India. FDI inflows to India were also down by 54 per cent.

Is India also getting out of favour for FDI investment flows?

Global FDI inflows are declining, reversing

Global FDI was $1.69 trillion in 2019 and $1.79 trillion in 2021 (2020 being the Covid-19 pandemic year is ignored). In 2022, global FDI declined to $1.25 trillion, indicating the maturity of old manufacturing global value chains and developed countries investing within their economies.

In January-September 2022, global FDI was $1.21 trillion; in 2023, it further declined to $0.90 trillion (by 26 per cent). FDI to OECD countries declined from $591.41 billion to $442.36 billion, a fall of 25 per cent; FDI inflows to non-OECD countries declined from $662.27 billion to $452.81 billion (by 26 per cent) — indicating not much of a difference overall.

FDI in the non-OECD developing world fell precipitously to $110.42 billion from $166.38 billion in the April-June quarter; a decline of 34 per cent. FDI to OECD countries, on the reverse, zoomed from $80.42 billion to $168 billion — a big increase of 109 per cent.

FDI has traditionally flowed from OECD countries to developing countries. Is this reversal of FDI inflows indicative of major trouble brewing up, especially for countries like India?

China becoming FDI pariah

FDI started flowing in a big way into China in the 1990s. China received a whopping $241.21 billion FDI in 2012 and $187.17 billion in 2019 (~15 per cent and ~11 per cent of the total global FDI) making China the factory of the world.

In 2020, despite a global slump in the wake of Covid-19, FDI into China shot up to $253.1 billion (almost 25 per cent). The year 2021 witnessed a humungous $344.08 billion FDI (~20 per cent).

Things began to change for the worse from the April-June quarter of 2022 with FDI declining to $38.05 billion from $101.27 billion in January-March. In July-September 2022, FDI flows into China declined to a measly $13.11 billion. FDI for 2022 was down to $180.17 billion (~14 per cent of global FDI).

The year 2023 has likely marked a complete about-turn of FDI from China. FDI was only $20.51 billion in the January-March quarter and declined further to $6.75 billion in April-June. Reinvested earnings from the earlier stock of FDI are counted as FDI. Fresh FDI flows (inflows excluding reinvested) in the first six months of 2023 were most likely negative.

The October-December quarter left no such doubt. FDI in China in this period was (-) $11.75 billion. For January-September 2023, FDI in China totalled only $15.50 billion.

For China, 2023 will most likely mark the end of the FDI era.

India is missing FDI flows

Global FDI has moved away from a China-plus one strategy (from 2015 to 2022) to a minus-China (from 2023) FDI world.

India could not become one of the ‘plus one’ countries to attract FDI. Unfortunately, India is also nowhere in the game as far as the minus-China FDI flows.

FDI in China declined by a whopping $135 billion in January-September 2023. FDI into India also declined severely by $22.86 billion to $19.75 billion (by (-)54 per cent).

Like China, India’s quarterly FDI inflows also declined rapidly — from $9.32 billion in January-March to $7.35 billion in April-June, and only $3.08 billion in July-September.

Instead of India making gains at the cost of China in attracting FDI, it seems, the rest of the world is making gains at the cost of both China and India.

FDI flowing back to OECD countries

The United States is providing massive subsidies to attract investment in semiconductors, solar, and other futuristic industries. FDI to the US at $265.07 billion during January-September 2023 was only 9 per cent less than in 2022.

Europeans surprisingly did well with FDI increasing from $38.75 billion during January-September 2022 to $85.34 billion in 2023, which is an increase of 120 per cent. Investment is returning to Germany. During this period, FDI in Germany increased from $5.26 billion to $18.62 billion, an increase of 254 per cent. France saw an increase of 74 per cent in FDI flows during this period. Some other European countries also had positive flows.

Are FDI flows signalling a different manufacturing world?

The US and other OECD countries have technology, investment, and an efficient private sector for investing in manufacturing semiconductors, electric cars, green energy, and other environmental and digital machinery and goods. They might as well get the global talent to build these futuristic manufacturing value chains.

China has also developed an enormous technology prowess. It also has critical materials and an industrial base. While FDI inflows into China might disappear, FDI from China is still quite strong. China might not need FDI and build futuristic industries on its strength.

India does not have the technology, capital, and production systems. It only has talent. The reversal of FDI flows will hurt India the most.

Let us get our act together.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of The Ten Trillion Dream and We Also Make Policy.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.