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India and China: Lands of Investment Opportunity

Remarks delivered by the Hon. David Kilgour,

Secretary of State (Asia-Pacific) & MP for Edmonton Southeast

Confederation of Indian Industries Partnership Summit

Hyderabad, India

January 7, 2003

Honoured guests, ladies and gentlemen,

On behalf of my colleague Derek Lee, Member of Parliament for Scarborough-Rouge River in Toronto, it is a great honour for us to be here at the Partnership Summit. The size, scope, and reputation of this event are a testament to the importance of India and its industry in global economic affairs. Personally, I’m delighted to be part of a panel comprised of such distinguished individuals on such a timely topic.

India and China in the World

Many of you may be asking, “Why two Members of Parliament from Canada in a session on FDI in India and China?”. Fair question! Our answer is that India and China are of enormous political, economic, and cultural importance to Canadians; our national and provincial governments and business people put a great deal of energy into learning how we can successfully penetrate both markets.

There are good reasons why Canadians are doing so. We’re a G-8 country, and the world’s sixth largest trading nation. According to the IMF, our economy will outpace all others in the G7 in 2003. Our federal government’s budget is in surplus for the 5th year in a row, and we are the only G7 nation that did not fall into deficit last year. We offer the most generous research and development tax incentives in the world. Such factors have led to a virtual explosion in Canada’s ICT and bio-technology sectors, and have made Canada an excellent place to invest. Our companies are therefore looking to grow; they are searching for new partners and devising strategies of how they can take advantage of opportunities in India’s and China’s huge markets.

Although comparisons between India and China are inevitable, they do not do justice to the successes both countries are having, or to the importance they and other emerging economies around the world already have and increasingly will have, and to the challenges both face. With that in mind, my goal here will be to try to set the stage for my fellow panelists by drawing on Canadian experiences with both countries in order to provide a context for discussion.

India and China currently hold one third of the world’s population; within a generation, the middle income communities in each could be over half a billion people.. Both countries, particularly China, are already magnets for global trade and investment. According to the World Bank, India is the world's 13th largest economy, but if the relative costs of living are taken into account, it is already the world's fourth largest economy – just behind China.

Politically, the world’s future over the next 50 years will be decided to a very considerable degree by decisions made in Delhi and Beijing.

Culturally, Indians and Chinese for centuries were the world’s greatest travelers and explorers, not to mention being centres of humankind’s greatest innovations and cultures to name only two points in common.

India/China relationships with Canada

Nowhere is this truer than in Canada. China and India have for a long time been our top two sources of immigrants. Last year alone, approximately 40,000 Chinese nationals and 27,000 Indian nationals were accepted into Canadian society. Our population of Indo and Chinese-Canadians are both over one million strong and are leaving an indelible mark on Canada in many spheres They are doctors, lawyers, teachers, politicians and in virtually every other occupation; indeed, they are also our voters.

Indo and Chinese Canadians are also our business people, investors, and traders. This is particularly important in Canada given that our economic vitality is based on trade. We have become a classic trading nation; some say we are becoming modern Phoenicians. Up to one in three Canadian jobs and 46% of our GDP today are directly related to trade.

A closer look at our trade statistics, however, reveals one glaring fact: almost 87% of our merchandise exports go to our immediate southern neighbour. As business people, you’ll recognize that this is hardly a well-diversified investment portfolio! The U.S. will always represent our single most important relationship, reflecting our similar and dynamic economic structures. We know, however, that trade is not a zero-sum game; it is everyone’s best interests to ‘widen and deepen the pie’.

The government and business community in Canada are very upbeat about the trade and investment potential in India and China. Both offer huge economies with the potential to become even bigger very quickly; both are expanding rapidly because of skilled workforces, low costs and path-breaking economic reforms, including privatization, deregulation and openness to FDI; both economies are investing heavily in infrastructure–a fact which is particularly attractive to Canadian companies generally.

Diverging FDI in India and China

How has all this translated to Canadian trade and investment in China and India? The statistics are admittedly quite divergent. Last year, China was our 4th largest trading partner, 3rd if one includes Hong Kong. India, however, is only our 19th largest. In 2001, two-way trade between China and Canada amounted to about $US12 billion, while the same figure for India is $US1.3 billion. Canadian total investment in China is almost $US 600 million and about $US 220 million in India.

Our trade statistics are reflective of the wider FDI trend in India and China. In the last ten years, India has attracted $US30billion in investment, evenly split between direct and institutional investment in equity markets. China in the same period, on the other hand, has attracted an awesome $US300billion in FDI alone, second only to the US itself as a destination for foreign investment.

We should ask ourselves what these figures really indicate. Do they mean that China has developed a successful economic model that offers foreign investors huge opportunities? Undoubtedly. Do they mean that it is a model that can and/or should be duplicated by India or any country for that matter? Not necessarily. Do they reflect some of the challenges inherent in doing business in China? Not at all. In the following section, I’d like to try and flesh out some of these ideas, based on Canadian experiences and observations.

China as an Economic Powerhouse: Canadian Lessons Learned

The reality of China’s economic ascendancy is nothing short of astounding. According to Nik Lardy, a Senior Fellow at the Brookings Institute and recognized China expert, fiscal revenue in China has grown about 90% since 1997. In the same period, imports have grown about 70%, largely attributable to income growth. China’s real trade expanded about 35 times since 1977, while total world trade grew only fivefold. China’s trade has in fact grown faster than any other country in the last ten years. China is expected to attract $USD50 billion in FDI this year, displacing the United States as the number one recipient of FDI on the planet

That China is outpacing every country in Asia is something I’ve heard in almost every capital I’ve visited, including those in the Western Hemisphere particularly Mexico. High-tech manufacturing jobs and investment capital are being moved out of South East Asia into South East China. Japanese firms are being “hollowed out,” as manufacturing facilities are moving off shore to China. This is part of the reality of China’s economic vibrancy, one that India and all economies have to contend with.

According to AT Kearney’s FDI Confidence Index, the key factors driving China’s high standing among investors include its relatively stable political environment, robust economic growth, and its recent entry into the WTO. Tariffs have come down to 15% from 43%; the number of goods facing non-tariff barriers has fallen from 40% to 4%. The establishment of special economic zones near major cities like Shanghai and Guangzhou, with their enormous skilled labour force, make them very attractive to foreign investment.

Canadian companies are no exception when it comes to taking advantage of these opportunities. In Guangzhou, which I visited last September, I saw first hand how foreign investment has energized the city, fuelled local economies, stimulated growth and created many local jobs. All over South China, Canadian firms are not only establishing manufacturing bases, but also investing in R&D. A perfect example in Guangzhou is Nortel's centre at Zhongshan University, which has grown to almost 200 mostly young staff within just a few years.

Challenges to doing business in China: Canadian Lessons Learned

Some Canadian companies have enjoyed success in China. Across all the key sectors, we are represented by some of our best-known firms. But reported successes don’t tell the whole story. There remain obstacles to further investment in China which are often overlooked by investors overwhelmed – some say blinded – by China’s opportunities. Three of these, and I’ll touch them only briefly, are: the misunderstood nature of Chinese accession to the WTO, the threat of intellectual property theft, and the enduring spectre of corruption. Of course, I would invite my fellow panelists to expand on these points further in their remarks.

While Chinese WTO accession has evidently reinforced business interest in China, the impact of accession is still not well understood. John Curtis, a long-time Asia watcher and the senior economist at Canada’s Department of Foreign Affairs and International Trade, argues that China’s accession may not change things as quickly as many observers suggest. Investors hope that in complying with WTO standards China will automatically create a better environment in which to do business by eliminating trade distorting requirements such as technology transfer, foreign exchange balancing, export performance, and the local content requirement. These will take time, and change might not be immediately forthcoming.

Many investors are also hoping China’s WTO accession will impact favourably on the Trade-Related Intellectual Property Rights, or TRIPS, Agreement. Essentially, China has made a commitment to improve the enforcement of intellectual property rights laws and regulations. Although major steps in this direction have been taken, a number of foreign businesses wouldn’t agree they’ve so far been effective.

This brings me to my final note of caution: unscrupulous business practices still exist in China; the laws don’t yet necessarily protect investors as they should. Transparency International has ranked China 59th out 102 countries in terms of the degree to which corruption is perceived to exist among public officials and politicians.

All this to say that foreign investors should approach China with their eyes open, recognizing both the potential for gain and the potential for pitfall. Yes, the opportunities are enormous -- perhaps greater than anywhere else in the world, and yes they are growing. But business needs to be aware that investment in China is a long-term investment; opportunities in alternatives should not be overlooked.

India: Land of Enormous Economic Potential

What the preceding hopefully has illustrated is that China, in Canada’s experience, is a very particular case in terms of economic development; it’s not always as simple as some of its breathtaking figures suggest. India, however, is a country whose economic figures belie its economic potential. Canadian investors are having success in India. Economic indicators and recent government steps here are encouraging. Our two governments’ officials are currently working on a Foreign Investment Protection Agreement (FIPA). Challenges and problems remain, but Canada’s message about India is simple: opportunities await.

India has undergone significant change over the last number of years - the kind that makes it increasingly attractive to business and trade. Over the last decade alone, you have deregulated large components of your economy, created an enabling environment for business, increased growth to about 6% and, as already mentioned, become the fourth largest economy in the world in terms of purchasing power parity. The latest mid-year review of the Indian economy offered encouraging signs. Inflation has remained low, interest rates have been reduced, foreign exchange reserves are up; so is industrial production.

Canadian companies have taken notice. Long-time Canadian investors in India, including Bata Shoes (over 70 years) and Alcan (about 50 years), are still present. Other more recent entrants include the Bank of Nova Scotia, T-D Bank, Bombardier, Sun Life Insurance, Lombard Insurance, Nortel, Alcatel Canada, and CAE.

My country sent two large trade missions here within the past eight months alone, one headed by Pierre Pettigrew, our International Trade Minister, the other by Herb Dhaliwal, our Natural Resources Minister. The latter focused on the opportunities for Canada’s natural resource sector - for partnerships, products, investment, services, and Canadian expertise.

India’s Challenges

And yet, for all this potential, FDI evidently decreased in India from April to August of 2002, as compared to the same period in 2001. As everyone in this room is aware, there are numerous reasons for this. The uncertainty about the possibility of military confrontation on the sub-continent plays a role.

More of the problems are internal and are recognised by India’s government and its business community. Bureaucratic inertia results in serious delays in decision making, and if time indeed is money, every month or year of delay costs investors. India still maintains a high fiscal deficit, which entails significant real costs to the economy. Canadians are all too aware of this, as we suffered a similar problem in the early 1990s and were forced to get our house in order.

Foreign companies also don’t always find it easy to do business here either. Returning to Transparency International’s Corruption Index, whereas China was ranked 59th, India is in fact ranked 71st. Moreover, for as many companies face intellectual property theft in China, my understanding is that it still remains worse in India.

Finally, India’s current economic demographic, whereby agriculture accounts for a quarter of India’s GDP, while supporting over 60% of the labour force, presents another economic challenge. The result, according to a recent study released by the Mumbai- based Strategic Foresight Group, is that almost 70% of India’s population remains unaffected by India’s economic reforms. The report goes on to make some very interesting and valid recommendations. Extending government investment in infrastructure and loosening government controls on agriculture, according to the report, could potentially increase India’s growth three percentage points to 8-9%.

Although current real economic growth of 5-6% is excellent, tackling structural shortcomings would allow India to attract the foreign investment it requires for its people; investment that could push growth rates into double digits, thereby improving the lives of millions of Indians.

Conclusion

To conclude, I hope my discussion has illustrated: that India and China are countries of enormous importance and opportunity. Both face distinctive challenges when it comes to attracting investment from abroad. Canadian business recognizes this; we are eager to take advantage of business opportunities. To date, China has succeeded in attracting a diverse range of FDI in an unprecedented fashion. India, although behind in real number terms, also offers huge investment opportunities. Canada is encouraged by the government’s recent steps to reform, and respectfully urges you to continue.

Moreover, in the long run, India’s history of individual liberty and social diversity will position it well to reap economic benefits in an increasingly liberalised world. As Gurcharan Das’s wrote in his book India Unbound, quote:

“India embraces democracy first and capitalism afterwards and this has made all the difference. ... it is more likely to preserve its way of life and its civilization of diversity, tolerance and spirituality.”

India is showing the entire world that democracy and unity in diversity, where there is constitutional space for all in a climate of genuine pluralism, are possible outside the industrialized nations of the West. This will be a major contribution to the world of the 21st century; India can be a beacon for many others to imitate.

At the end of the day, ladies and gentlemen, this is precisely what it is about. As economic barriers continue to fall, governments must be ready to take the steps necessary to invigorate their economies, making them magnets for foreign investment, improving productivity and adopting new technologies. That’s how all of us can really improve the lot of our citizens.

I’ve just come from a lunch where I described how Canada is successfully doing this: by opening our economy, providing a transparent fiscal framework with balanced budgets, and by effectively using public funds to secure growth and provide a highly skilled workforce.

However, at the end of the day, FDI is about shareholders getting high rates of return on their investment, and I like to think they’re getting just that in Canada. The level of FDI in China, as compared to India and the rest of the world, would suggest that investors expect higher rates of return in China. Fair enough. But the real question for this plenary is: do current conditions explain China’s ability to attract 15 times more FDI than India? I look forward to fellow panelists insights on the matter.

Thank you.

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