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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