Tuesday, May 5, 2009

India and China: Foreign Investment and Venture Capital

RBI/2008-09/ RBI/2008-09/

The Asian Journal of Comparative Law has just published an interesting article that compares foreign direct investment (FDI) and venture capital investment in the two Asian economic giants.


In Unraveling the Puzzle of Differing Rates of FDI and FVCI in India and China the authors Haitian Lu, Hong Huang and Swati Deva find that when it comes to FDI, China scores better than India, while on venture capital the trend is in the opposite direction, with India scoring better than China. The authors examine various legal, regulatory, policy and other factors that may possibly provide reasons for this trend. The abstract is as follows:

This study seeks to unravel the puzzle underlying China’s and India’s differing experiences in attracting two types of foreign investment: namely foreign direct investment (‘FDI’) and foreign venture capital investment (‘FVCI’). Complementing the law and finance literature, we argue that foreign investors prefer the direct investment mode in China despite its poor governance environment because direct investment provides private means of control over the business, and China’s institutional environment provides a more facilitating arena for FDI than India’s. In contrast, India’s legal infrastructure and related institutional settings prove to be better than China’s in accommodating foreign portfolio (indirect) investment especially in the form of venture capital. The conclusion of this article has implications for the two countries’ legal reform in the direction of the desired type of foreign investment. It also provides comparative insights into the legal institutions of China and India in fostering national innovative capacity and entrepreneurship.

On a related note, readers (particularly those of you interested in comparative law in the Asian region) my wish to visit the website of the Asian Journal of Comparative Law that carries academic articles on various topics including (and even beyond) corporate and commercial law. The journal is an open online resource that does not require any subscription.

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