Inward FDI and economic growth: A comparative analysis of China versus India

Abstract

What makes foreign direct investment (FDI) inflows more beneficial to economic growth in China than in most other developing countries? This chapter aims to shed light on this question by conducting an analytical review of the literature with a focus on comparing FDI’s estimated effect on growth in China versus that in India. Our literature review indicates FDI inflows have positively affected economic growth in both China and India, but that this positive impact was larger in China than in India. Our analysis suggests that there are two key reasons for this difference. First, China has better transportation and communication infrastructure, therefore better business efficiency. Second, China’s higher level of human capital means Chinese employees learn new technology and managerial know-how brought in by FDI more quickly, speeding up the spillover of technology and improving productivity rapidly in China.