Weaning away foreign investment from China
Over the past few years, there has been much discussion about India attracting firms that might be seeking to exit China. Initially, these conversations were driven by changes in the Chinese economy, such as rising labour costs, shifting focus towards new technologies and declining productivity. There was a sense that these changes, coupled with improving infrastructure and ease of doing business in India, would make India an attractive option.
Sino-United States (US) trade friction then came as a shot in the arm. The imposition of tariffs by US President Donald Trump on Chinese imports began to disrupt global supply chains, with firms considering hedging their risk by investing in alternatives.
The situation had presented India with an opportunity. However, there were a few gains. The economic argument for firms to relocate to India remained weak, despite the size of the market. This was the case when they could relocate to any of the
East Asian economies of Vietnam, Thailand, Malaysia or Singapore, which generally ranked better than India on metrics such as export basket similarity, wages, investment climate and institutional strengths.
In a larger sense, however, what it underscored was that the philosophical threads in the fabric of economic globalisation were fraying. Conventional notions of comparative advantage and free trade binding states in a virtuous cycle of prosperity and peaceful coexistence were being severely strained. Three factors amplified this dynamic, i.e, China’s economic rise coupled with an authoritarian turn in its politics, the populist backlash in the West and intensified geopolitical competition over emerging technologies.
The pandemic accelerated these currents. Shutdowns prompted demands for supply chain resilience and redundancies. A wider array of sectors is now being viewed from a national security prism. China’s pandemic diplomacy added to anxieties about the vulnerabilities of dependence on any single market, along with the need to secure one’s own innovations. Essentially, politics has become more important in economic decision-making, with trust and not just efficiency being critical to the choices of states and firms.
Consequently, we have seen Japan offering financial incentives to companies to exit China. In the West, there has been talk about trust bubbles and democracies aligning on new technologies. In India, there have been efforts to incentivise firms by easing access to land, changing labour laws and offering financial benefits.
Yet, none of this has meant a mass exodus of foreign firms from China. It’s early days, but Japan’s subsidy programme has had mixed results. Surveys of American, European and British firms over the past year have revealed that an overwhelming number of them are unlikely to relocate. For instance, AmCham Shanghai’s September 2020 survey found that 78.6% of companies in China don’t plan to change their investment allocations. A European Chamber of Commerce in China’s survey in February reported that only 11% of firms were “considering shifting their current or planned investments to other markets.” It also said that most European firms were in China for China. Finally, a survey of British firms toward the end of the year said that only 3% were considering leaving China. This tells us that the allure of the Chinese market, its linkages to regional and global supply chains, supportive policy architecture and access to quality infrastructure among other factors remain key drivers for Western firms. Politics is important, but economics still matters. This is why many firms appear to be considering a China+1 strategy.
From an Indian perspective, there is a need to devise short- and long-term approaches in order to attract investments. The latter, of course, needs to focus on efficiency and improved governance, addressing issues such as policy predictability and stability, better infrastructure, factor market reforms and human capital development. Efforts in this direction are critical, but unlikely to bear fruit in the near term.
Capitalising on emergent geopolitical trends requires a geostrategic approach. This entails working with like-minded partners focusing on sectors with national security implications. Increasingly, countries concerned about China’s dominance are likely to prioritise strategic implications of investments over India’s economic inefficiencies. This could facilitate partnerships in fields such as telecommunications, artificial intelligence, health care, pharmaceutical APIs, rare earths etc. Such collaborations could aid innovation and the development of these sectors in India. This will require some trade-offs in terms of arriving at common rules and standards and deeper interdependence, but the upside is tremendous. Yet, the focus need not be limited only to national security priorities.
The government must make the case for foreign investment across sectors such as pharmaceuticals, auto, small gems and gem design, and biotechnology, in which India enjoys comparative advantages. These are areas in which the economic logic aligns with the political imperative, and where adopting targeted measures to incentivise investors could ensure the development of clusters of strength. This entails the State picking winners, but the upside is that success in these efforts can have a demonstration effect, which can catalyse further investment in other sectors.