Opportunities And Challenges In FDI Relationship Between .
The 12th India-Korea Dialogue Forum , Oct.24-25, 2013 New DelhiOpportunities and Challenges in FDI Relationshipbetween Korea and India after CEPA2013. 10. 25Dr. Chang-ho KwagManaging Director, POSRI
21. Introduction Trends of Trade and FDI b/w India and Korea before/after CEPA Trade & FDI between both countries has increased significantlyTrades b/w India & KoreaFDI from Korea to India 18.8 B 215 MFDI from India to Korea 10.9 M 34% 55% 167 M 12.1 B 230% 3.3 MFY2009FY2012FY2009Source: Ministry of Commerce, IndiaFY2009FY2012FY2012Source: Ministry of Trade, Industry & Energy, KoreaNote: the figure of FDI from Korea to India in FY 2012 covers 2011.Apr to 2012.Feb
32. FDI determinants: literature surveys Four Factors of FDI Determinants Host country factors and regional integration factors are gaining significance① Home Country Factors② Host Country Factors-FDI amount depends on the economic size ofhome countries1) Economic Determinantsa. Market b. Efficiency c. Resources2) Policy Framework : rules, policy, stability etc.3) Biz Facilitations: investment promotion and etc.③ Bilateral Linkage Factors④ Regional Integration Factors-Distance and openness decides the amount of FDI-The more distant, the less FDI inflow-As host countries are more open,the more FDI inflows-BIT(Bilateral Investment Treaty) & FTA enhance FDI-3 channels: Commitment effect Signaling effect Substitute to institutional qualitySource: Liu(2008)
4 Host Country Determinants Host country economic determinants remain dominant factors (Nunnenkamp & Spatz, 2002) However, for the economic determinants are to be fully effective, they should be in combination withpolicy framework or business facilitation (UNCTAD, 2007) The Impact of BIT and FTA on FDI BITs do not change the key economic determinants of FDI, they stimulate FDI through improvement ofpolicy and institutional frameworks FTA can have positive impact on vertical FDI rather than horizontal FDIHorizontal FDIVertical FDIPurposeMarket entry(Market Seeking)Low cost production(Efficiency Seeking)FTAImpactNegative impact on FDI(lower tariff enhance export rather than FDI)Positive impact on FDI(lower tariff on parts can enhance FDI)(Moon, 2009)
5 Empirical Studies and Investor Surveys The findings of early empirical studies were ambiguous Recent studies: BITs have positive effects on FDI inflows into developing he annual growth rate of FDI of US on Vietnam was 27% from 2002 to 2004since both signed BIT while the growth rate from 1996 to 2001 was just 3%USMexicoAccording to Buckley et al(2004) and Waldkirsch(2010), FDI of US on Mexicoincreased since 1994 (NAFTA ) BITs are important to TNCs in terms of investment protectionand enhancing stability and predictability of FDI projects BITs are taken into account when they decide where to invest(UNCTAD survey on 602 TNCs, 2007)
63. Case Studies: (1) CECA between Singapore & India* CECA: Comprehensive Economic Cooperation Agreement, signed in 2005 The Effect of CECA on Trade and FDI Trade volume of two countries increased from 8.7 billion in 2005 to 21.3 billion in 2012 The FDI of Singapore into India hiked since 2007, which shows the positive impact of CECA on FDIChange in trade volumeSingaporean FDI flows into India(million US ) 21.3B 145%60005,25750004000 8.7B3,0733,45430002,3791,705200010002,308706578'00 05'060FY2005FY2012'07'08'09Source: DIPP, Ministry of Commerce, GOI'10'11'12
7 Sector-wise Break-up of Singaporean FDI Inflows into India Most of them come into Service, Telecommunication and Computer SW&HW sectors(from January 2000 to December 2010)Amount of FDI equity inflowsRankSectorRs. In crore1Service Sector2US in million%age of FDIequity inflowsfrom 5112.53Petroleum & natural gas5,0341,25110.74Computer software & hardware4,4381,0128.75Construction activities3,3807386.3Total of Above34,3297,72166.3Source: DIPP, Ministry of Commerce, GoI
8 Country-wise FDI Equity Inflows into India Singapore is the second largest FDI investor into India(from April 2000 to June d Grand TotalSource: DIPP, Ministry of Commerce, GoIAmount of FDI equityinflows%age with totalUS inFDI inflowsRs. In 5852,4721.2926,942198,800100.0
9 Top Ten Country-wise Overseas Investments by India Singapore is the most important destination of outgoing Indian FDIs(amount in billion US dsUSAUAEBritish Virgin IslandsUnited KingdomCayman IslandsHong KongSwitzerlandOther CountriesGrand TotalSource: RBINote: * April 2011 to February 20122008-09 13.712010-11 4114.71
103. Case Studies: (2) CEPA between Japan & IndiaCEPA: Comprehensive Economic Partnership Agreement The Effect of CEPA on Japan’s FDI into India Since CEPA 2011, FDI flows have increased, but not so much as expected But with data over such a short term period, it is too early to confirm CEPA effectsTrend of Japan FDI into India(equity investment only)(in million )4,470 (Daiichi Sankyo’s acquisition of Ranbaxy worth 3.3B 628502006Source: DIPP, GoI200720082009201020112012
11 Sector-wise Break-up of Japanese FDI Inflows into India Most of them come into Manufacturing sector Service sector such as insurance and banking ranks at 3rd(from April 2000 to February 2013)RankSectorAmount of FDI equityinflowsUS inRs. In croremillion20,6204,230%age of FDIequity inflowsfrom Japan1Drugs & Pharmaceuticals2Automobile Industry11,2662,33916.23Services Sector*10,3862,07714.44Metallurgical Industries6,1211,3349.25Electrical Equipment2,9066514.551,30010,63273.7Total of AboveSource: DIPP, Ministry of Commerce, GoINote: * Services sector includes Financial, Banking, Insurance, Outsourcing, R&D, and etc.29.3
123. Case Studies: (3) CEPA between Korea & India Bilateral FDI flows from Korea to India Since 2009 CEPA, FDI seems to have increased, but not quite significantly It seems a little early to confirm CEPA effect on FDI flowsTrend of Korean FDI into India(equity investment only)(in million urce: DIPP, GoI2009201020112012
13 Sector-wise Break-up of Korea FDI Inflow to India Manufacturing sectors are main destinations- 84.8% of total FDI (The EXIM Bank of Korea, 1980 2013.6) FDI inflows into service sector are not substantial(from April 2000 to February 2013)Amount of FDI equity inflowsRankSectorRs. In crore1US in million%age of FDIequity inflowsfrom Korea3Metallurgical IndustriesPrime Mover (other thanElectrical Generators)Machine Tools4Automobile 56.72Total of AboveSource: DIPP, GoI1,584317.025.9571125.210.248299.48.1
14※ Details of Top FDI Inflows Received from Korea (Remittance-wise)(from April 2000 to February 2013)No.(in million )Name of Indian CompaniesInvestorLocation1POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products80.22POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products46.33POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products52.54POSCO India Pvt.POSCOBhubaneswar Iron & Steel48.95POSCO India Pvt.POSCOBhubaneswar Iron & Steel41.16POSCO India Pvt.POSCOBhubaneswar Iron & Steel50.27POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products36.48MOBIS (I) Ltd.MOBISChennaiPiston Engine & parts34.79Mirae Asset Global InvestmentMirae AssetMumbaiReal Estate Activities27.810Samsung India ElectronicsSamsung Elec.N.AElectronics products23.911POSCO Electrical Steel India Pvt.POSCOMumbaiRe-rolled steel products20.912Doosan Chennai Works Pvt.Doosan HeavyIndustriesChennaiBoilers and steamgenerating plants20.013Pioneer Gas PowerKorea WesternPowerN.APower Plants20.0Doosan HeavyChennaiBoilers and prime movers18.614Doosan Chennai Works Pvt.Source: DIPP, GoIItemAmount
15(Continued)(from April 2000 to February 2013)No.Name of Indian CompaniesInvestorItemPOSCO India Pvt.16Hyundai Construction EquipmentIndia Pvt.HyundaiHeavy Ind.MumbaiConstruction machinery21.317Mirae Asset Global InvestmentMirae AssetMumbaiReal Estate Activities17.518POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products14.819Parry Confectionery Ltd.LotteN.AConfectionery sales14.020POSCO India Chennai SteelProcessing CenterPOSCOChennaiFabricated structuralmetal products11.821Samsung India ElectronicsSamsung Elec.New DelhiElectronics products12.522POSCO Maharashtra Steel Pvt.POSCOMumbaiRe-rolled steel products10.323Hyundai Construction EquipmentIndia Pvt.HyundaiHeavy Ind.MumbaiConstruction machinery9.124Samsung India ElectronicsSamsung Elec.New Delhi25LancoLancoInfratech Ltd.N.ASource: DIPP, GoIBhubaneswar Mining of Iron OreAmount15TotalPOSCOLocation(in million )20.310.2Generator of Power9.8673.3
16 Bilateral FDI flows from India into Korea Total FDI inflows from 2000 through 2012 are US 467 million(from 2000 to 2012)(in million )Mahindra&Mahindra’s acquisition ofSsangyong Motors40035037130025020015010050Tata’s acquisitionof DaewooCommercialVehicle532000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: The Ministry of Trade, Industry and Energy, Government of Korea
4. Performances of Korea & India in attracting FDI Trend of FDI Inflows into Korea, India and China(in million )(in million China(R)25,543 ChinaSource: UNCTAD, UNCTAD stat, Foreign Direct Investment17
FDI Stocks in India and Korea, 1991-2012(Millions of 001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012IndiaKoreaSource: UNCTAD, UNCTAD stat, Foreign Direct Investment18
19 Country-wise FDI Inflows into India(from April 2000 to June ted South KoreaGrand TotalAmount of FDI equity inflows%age with totalFDI inflowsRs. In croreUS in 4721.25,9741,2590.6926,942198,800Note: in case of Korea, 563 mil US worth of Korean FDI which flowed into India during 1990s are excludedSource: DIPP, Ministry of Commerce, GoI
20 Country-wise FDI Inflows into Korea(from 2000 to ted KingdomGermanySingaporeHong KongCanadaFranceChinaIndiaGrand TotalAmount(US in 164,4464,388467154,468Source: The Ministry of Trade, Industry and Energy, Government of Korea%age with totalFDI inflows22.516.09.66.95.34.43.33.22.92.80.3
Comparison: FDI Inflows as a Percentage of Gross Capital 990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011IndiaKoreaWorldSource: UNCTAD, UNCTAD stat21
Comparison: Inward FDI Stock as a Percentage of Gross Domestic KoreaWorldSource: UNCTAD, UNCTADstat22
Bilateral FDI Intensity The definitions of FDI intensity Intensity: a ratio that compares the actual value of the FDI stock of country i incountry j with what might be expected given the world position of each of them ashome and host economies respectively Definition of FDI Intensity ratio (R):FDI intensity ratio(R) FDIij / ExpFDIijFDIij Actual amount of FDI stock from country i to j.ExpFDIij Expected value of FDI stock from country i to country j. ** FDIwwshare of outward FDI of country i * share of inward FDI into country j * FDIww23
24 Bilateral FDI Intensity between India and Korea2007200920102012Intensity of FDI from Korea to India2.081.060.920.92Intensity of FDI from India to Korea0.230.160.710.62 FDIij : cumulative sum of FDI inflow is used as a proxy for FDI stock variable(Korean FDI into India: Aug. 1991-Feb 2013, Indian FDI into Korea: 1986-2012) The bilateral FDI data sourced from DIPP, Ministry of Knowledge and Economy2.502.001.501.000.500.00200720082009KOR to IND2010IND to KOR20112012
5. Why Korea & India need to intensify bilateral cooperation ? Main Challenge for India: fast increasing trade balance, current account deficits fundamental cause : manufacturing sector lack of competitiveness Needs huge amount of FDI inflows, particularly in manufacturing sector(unit: mil US 00-250,000trade balanceinvisible netSource: The Reserve Bank of India, Database on Indian Economycurrent account
Sector-wise break-up of FDI inflows into India (2000.4 2013.7)(unit: mil US )05000 10000 15000 20000 25000 30000 35000 40000 45000service Sector38,255construction develop22,439telecommunications12,868computer ource : Govt. of India, Depart of Commerce, Fact Sheet on FDI
Key Opportunities for win-win cooperation b/w Korea & IndiaWeak Manufacture: Jobless growth, uneven distribution of growth fruitsIndiaYoung demographic structure: need to create more job opportunitiesTrade deficits: need to develop manufacturing base for world marketSaturated market, loosing momentum needs a new catalystKoreaneeds new markets with huge potential purchasing powerneeds manufacturing bases for EU, Middle East, African markets Korea is one of the few manufacturing powerhouses27
6. What to do ? Comparison of “Doing Business India132173182105942349152127184116Note: Indicators on business regulations and the protection of property rights across 183 economiesSource: “Doing Business 2013”, World Bank, data: www.doingbusiness.org/rankings28
Areas to Reform: India/KoreaIndicatorsStarting a Biz(173/24)Dealing with licenses(182/26)Enforcing Contracts(to resolve a dispute)(184/2)IndiaKoreaOECDProcedures (number)Time (days)Cost (% of income/capita)Min capital (% income/capita)Procedures (number)Time (days)Cost (% of 7.2511.8413.314143.578.7Procedures (number)Time (days)Cost (% of claim)46142039.63323010.331.4510.520.1Source: “Doing Business 2013, World Bank29
What should be done to intensify bilateral FDI relationship ?Korea- More flexible labor marketIndia-Develop industrial parks, SEZs (state govt.)-Develop incentive systems as China does(State governments in China are paying 0.6 1.0% of investmentamount as an incentive to the govt. officials)India & Korea- Exchange govt. persons to facilitate bilateral FDI flows
Thank You ! chkwag@posri.re.kr 02) 3457-812031
12 Doosan Chennai Works Pvt. Doosan Heavy Industries Chennai Boilers and steam generating plants 20.0 13 Pioneer Gas Power Korea Western Power N.A Power Plants 20.0 14 Doosan Chennai Works Pvt. Doosan Heavy Chennai Boilers and prime move
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