Why there may be greater potential for FDI activity in China rather Essay

Why there may be greater potential for FDI activity in China rather than India - Essay Example theories therefore inform that FDIs may be attracted to India as a result of its relatively lower labour costs, lower political risks and its closer proximity to developed OECD states. China on the other hand, may appeal to FDIs as a result of its large consumer market and its more impressive trade with developed OECD countries.3 This paper conducts a comparative analysis of FDI appeal in India and China with a view to demonstrating that there may be greater potential for FDI activity in China rather than India. In order to demonstrate the greater potential for FDI activity in China, this paper analyses TNC theories and the determinants of FDI inflows and outflows and examines these determinants in the context of India and China’s economy. This paper is therefore divided into three parts. The first part of this paper provides an analysis of TNC theories and the determinants of FDIs. The second part of this paper examines India’s economy and the final part of this paper examines China’s economy. Since the 1960s several theories of TNC have emerged helping to explain the factors that weigh in favour of or against TNCs investing abroad.4 Traditional neoclassical theory usually represented by eclectic or OLI theories (ownership, localization and internalization advantages) are typically used to explain and predict the â€Å"determinants of FDI†.5 The eclectic theory arose out of J. Markusen’s reconceptualization of John Dunning’s neoclassical theory of investment and trade. Dunning’s neoclassical theory takes the position that FDIs are selected by TNCs as a result of a â€Å"combinations of transport costs, factor endowments and country size.†6 Eclectic theory explains why a company would elect FDI as opposed to producing locally and exporting locally produced goods abroad and where the TNC would most likely direct its FDI. In this regard, Dunning’s eclectic theory identifies the â€Å"why, where and when/how decisions in terms of ownership,