Diasporas and Foreign Direct Investment in China and...

Diasporas and Foreign Direct Investment in China and India

This book offers a comparative and historical analysis of foreign directinvestment (FDI) liberalization in China and India and explains how thereturn of these countries’ diasporas affects such liberalization. It exam-ines diasporic investment from Western FDIs and finds that diasporas,rather than Western nations, have fueled globalization in the two Asiangiants. In China, diasporas contributed the lion’s share of FDI inflows. InIndia, returned diasporas were bridges for, and initiators of, Westerninvestment at home. Min Ye illustrates that diasporic entrepreneurshelped to build China into the world’s manufacturing powerhouse andthat Indian diasporas facilitated their homeland’s success in softwareservices development.

Min Ye is an assistant professor of international relations and thedirector of the East Asian Studies Program at Boston University. Shehas served as a visiting scholar and professor in China, Japan, SouthKorea, Singapore, and India and has given lectures at Fudan University,Zhejiang University, and the Chinese University of Broadcasting andMass Media. Her publications include The Making of Northeast Asia(with Kent Calder, 2010) and various articles published in such journalsas the Journal of East Asian Studies, Modern China Studies, and ChinaPublic Affairs Quarterly. In China, Ye also serves as a consultant onglobalization for private and state-run companies and development ofspecial zones in various localities.

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Diasporas and Foreign Direct Investmentin China and India

MIN YEBoston University






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© Min Ye 2014

This publication is in copyright. Subject to statutory exceptionand to the provisions of relevant collective licensing agreements,no reproduction of any part may take place without the writtenpermission of Cambridge University Press.

First published 2014

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication DataYe, Min, 1975–Diasporas and foreign direct investment in China and India / Min Ye.pages cm

ISBN 978-1-107-05419-6 (hardback)1. Investments, Foreign – China. 2. Investments, Foreign – India. I. Title.HG5782.Y425 2014332.67030951–dc23 2013048109

ISBN 978-1-107-05419-6 Hardback

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To my parents

Ye Jianxin and Xia Aiyu

for the lives they live and the life they gave me






Contents

List of Illustrations page ix

List of Abbreviations xi

Preface xiii

part i. introduction and theory

1. Foreign Direct Investment in China and India 3Diasporas and Social Network Theory 4FDI and FDI Policies in China and India 7Political Theories of FDI Liberalization 12Chapter Outlines 18

2. Social Network Theory: Diasporas, Domestic Industry,and the Diffusion of FDI Liberalization 20SNT as a New Policy Framework 22Social Networks and Diffusion of FDI Liberalization 23External Networks and Domestic Resistance 28Comparative Cases and Hypothesized Explanations 35Empirical Materials 39Conclusion 40

part ii. reform stage i

3. Diaspora Entrepreneurs and Diffusion of FDI Liberalizationin China 45The New Government and Policy Options 48The Rise of Diaspora Networks in Post-Mao China 51Special Economic Zones and the Initiation of FDI Liberalization 55Open Coastal Cities Overcame Challenge to FDI Liberalization 60Reasserting FDI Liberalization after the Tiananmen Crisis 64Conclusion 67

vii






4. Deregulation without Openness in India 69India Started Reform in the 1980s 70Indira Gandhi’s Business Networks and Deregulation 72Rajiv Gandhi’s Diaspora Networks and Their Role in Liberalization 79Rajiv’s Social Networks: Why FDI Liberalization Failed to Stay 84Quiet Change in India’s Government–Business Relations 89Conclusion 90

part iii. reform stage ii

5. Deepening Diffusion: “Zone Fever” and SOE Reform in China 95Expanding Diaspora Networks 96Diaspora Investment and “Zone Fever” 99SOE Reform Deepened FDI Liberalization 110Conclusion 117

6. Indian Indigenous Industry and FDI 119Continual Divergence in FDI between China and India 120Crisis, Reform, and Blowback in India 121The Evolving New Social Basis of India’s FDI Liberalization 132Conclusion 144

part iv. foreign direct investment in sectors

7. China’s Electronics and Automobiles 149The Electronics Industry: From SEZs to High-Tech Clusters 152The Auto Sector: From Protectionism to Industrial Policy 161FDI in Other Sectors 174Conclusion 175

8. FDI Liberalization in India’s Informatics and Autos 177India’s Diaspora and Informatics 177Indigenous Industry and Auto Sector Liberalization 191Other Sectors: Continuity or Change 203Conclusion 204

9. Conclusion: The State, Diasporas, and Development 205History and Geography, Networks, and Policies 206Regime, State Autonomy, and Embeddedness 210FDI and Diaspora Investment: A Missing Distinction 212Diaspora Differences and Consequences across China and India 213Lessons and Trends 216Conclusion 218

Bibliography 219

Index 239

viii Contents






Illustrations

maps

1 Domestic Distribution of Foreign Direct Investment (FDI) Inflowsin China (2011) page xiv

2 India and Regional Concentration of Foreign Direct Investment(FDI) Inflows (2011) xv

3 Foreign Direct Investment (FDI) in Automobiles and Electronics inChina and India (2011) 150

figures

1.1 ForeignDirect Investment Inflows inComparative Perspective ($Mi) 102.1 Occurrence and Nonoccurrence of Foreign Direct Investment

Liberalization 242.2 The Diffusion Model of Foreign Direct Investment

Liberalization: Stages and Steps 252.3 Industries and Foreign Direct Investment Liberalization 383.1 China’s Diaspora Networks and Foreign Direct Investment

Liberalization, 1978–1992 463.2 Shekou Industrial Export Zone, Guangdong, January 1979 574.1 Volatile External Sectors (Share of GDP %) 725.1 Sources of Major Foreign Direct Investment (FDI) Projects in

Pudong, 1993 1025.2 Diasporas’ Contributions to China’s Foreign Direct Investment 116

6.1 Continual Gap: Foreign Direct Investment (FDI) in China andIndia ($Mi) 121

ix






6.2 Foreign Capital in India: Foreign Direct Investment (FDI) versusPortfolio Investment ($Mi) 124

6.3 Economic State in Reformist India: Worsening Accounts ($Mi) 1276.4 Protectionism in India: Use of Antidumping Clause (1993–2001) 1306.5 The Shares of Diaspora Investment in India (%) 1428.1 Differential Performance of India’sHardware and Software Exports 1898.2 The Protection of Passenger Vehicles in India, 1993–2007 202

tables

1.1 Ranking China and India’s Foreign Direct Investment (FDI)Liberalization (of 141 countries) 8

1.2 Comparing Foreign Direct Investment (FDI) in China and India 122.1 Foreign Direct Investment (FDI) Liberalization in China and

India (1980–2010) 352.2 Cross-Time Analysis of China and India’s Foreign Direct

Investment (FDI) Liberalization 373.1 Sources of Foreign Direct Investment (FDI) in the People’s

Republic of China (PRC), 1978–1993 Combined 473.2 China’s Developmental Policy Options in 1979 493.3 Foreign Direct Investment (FDI) in the Shenzhen and Shekou

Zones in the Early Period (%) 604.1 Annual Growth Rates of Public and Private Companies in India,

1961–1996 (%) 714.2 Indira’s Pro-Business Deregulation 79

4.3 Rajiv Gandhi’s Economic Team and Diaspora Networks 805.1 Foreign Direct Investment (FDI) in China’s Regions by Source

(%, 1993) 1005.2 Shanghai’s First Foreign Collaborations during Reform Era

[Shanghai diyi] 1045.3 Major Foreign Investments in Kunshan (1992–1993) 1076.1 India’s ForeignDirect Investment (FDI) Liberalization, 1991–1994 1236.2 Foreign Collaborations in India: Automobiles and Electronics 1336.3 Shareholding Structure of Tata Group (%, 2007) 1386.4 Infosys’s Revenues by Area 1397.1 The Development History of the Electronics Industry in China 1537.2 The Development History of China’s Auto Sector 1537.3 China’s Auto Sector Joint Ventures in the 1990s 1688.1 Policy Developments in India’s Informatics Sector 1798.2 Indian Software Exports in Global Markets, 1999–2000 1848.3 India’s Policy Frameworks in the Auto Sector 1918.4 India’s Auto Manufacturers before Reform 1938.5 India’s New Automakers in the 1990s 196

x List of Illustrations






Abbreviations

ACMA Automotive Component Manufacturers Association of IndiaAIEI Association of Indian Engineering IndustryAMC American Motors CompanyASSOCHAM Associated Chambers of Commerce and Industry of IndiaBJP Bharatiya Janata PartyBOP Balance of paymentsBPO Business process outsourcingCASI Center for Advanced Study of IndiaCCP Chinese Communist PartyCII Confederation of Indian IndustryCKD Completely knocked downCNAIC China National Automobile Industry CorporationCPE Comparative political economyDOE India’s Department of ElectronicsEEPC Engineering Export Promotion CouncilEHTP Electronics hardware technology parksEPZ Export processing zonesFAW China’s First Auto WorksFDI Foreign direct investmentFERA Foreign Exchange Regulations ActFICCI Federation of Indian Chambers of Commerce and IndustryFIF Foreign-invested firmGIC General Insurance CorporationGM General MotorsHCL Hindustan Computers Ltd.HK Hong KongHKSE Hong Kong Stock ExchangeIFC International Finance CorporationIMF International Monetary Fund

xi






IO International organizationIPE International political economyIPO Initial public offeringIT Information technologyJV Joint ventureLIC Life Insurance CorporationMEI Ministry of the Electronics IndustryMNC Multinational corporationsMOFTEC Ministry of Foreign Trade and Economic CooperationMOU Memorandum of understandingMRTP Monopolies/istic and Restrictive Trade Practices ActNASSCOM National Association of Software and Services CompaniesNRI Nonresident IndianOCC Open coastal cityPMO Prime Minister’s OfficePRC People’s Republic of ChinaQR Qualitative restriction systemRSS Rashtriya Swayamsevak SanghSEZ Special economic zoneSIAM Society of Indian Automobile ManufacturersSJM Swadeshi Jagran ManchSKD Semi–knocked downSNT Social network theorySOE State-owned enterprisesSSI Small-scale industrySTP Software technology parkTCS Tata Consultancy ServicesUNCTAD United Nations Conference on Trade and DevelopmentUNESCAP United Nations Economic and Social Commission in Asia

and the PacificWTO World Trade Organization

xii List of Abbreviations






Preface

Confucius once said, “Fumu zai, bu yuanxing” [When parents are alive, do nottravel afar]. Generation after generation of Chinese, however, have gone to allcorners of the world to seek better lives. They left, but they kept strong emotionaland social ties to their homeland, and they returned to contribute to homelanddevelopment. Indians also have emigrated tomany places to better their livelihood.In various historical junctures, those who left returned to play critical parts inforging a modern India. The transformation of the economies of China and Indiafrom socialism to capitalism, from isolationism to globalism, from backwaters ofthe globe to the world’s engines of growth, has drawn on immigrant networks,with theChinese entrepreneurial diasporas returning to shape liberal foreign directinvestment (FDI) policies and Indian professional diasporas coming back to createpolicies that have resulted in the enormous divergence in the two giants’ economictransitions – one heavily reliant on FDI, the other domestic industry-centric.

Diasporas’ developmental impact is most effective when domestic politics isopen to their influence. When China initiated economic reform, the governmentmade remarkable efforts to build ties to the diaspora, provided incentives for theirreturn, and availed opportunity for their success in their homeland. India’s reform-ist leaders likewise placed diaspora professionals at key positions of apex economicagencies. Diasporas are most developmental if they possess advanced ideas, tech-nology, and resources. The Chinese diaspora entrepreneurs occupied key manu-facturing niches in the global market. When they circulated investment home, theymade China a “world factory.” Many Indian immigrants worked at Westernmultinational corporations (MNCs), connected their homeland with global fundsand technology, and supported the global success of indigenous Indian firms. Inshort, diasporas are not miracle workers, but they are critical to economic miraclesin the historic renaissances of the two Asian giants and ancient civilizations.

This book began as my dissertation project at Princeton University.Professors Lynn White, Atul Kohli, Kent Calder, and Thomas Christensen

xiii






have provided unending guidance, support, and encouragement at Princetonand beyond. Friends I made at Princeton continue to lift my spirits and offercompanionship in the United States and in Asia. They are Ian Chong, ChunmeiDu, Todd Hall, Scott Kastner, NingMa, Lanjun Xu, and Enhua Zhang. Most ofthe research and writing were done in Boston. Thanks to Boston University’sleave policies, my colleagues, and the Princeton-Harvard China and the WorldProgram fellowship, I was able to complete the research, write the book, andraise a new family. At Harvard’s Fung Library, Nancy Hearst helped withcollecting key archives and statistics used in the book.

Outside the United States, I drew on expertise and collections in China,India, Hong Kong, and Singapore while serving as a visiting scholar at theChinese University of Hong Kong (CUHK), the Chinese Academy of SocialSciences, the Indian Council for Research on International Economic Relations(ICRIER), and the National University of Singapore. Ms. Jean Hung at CUHKavailed me of the Universities Service Center’s rich collection on China’seconomic reform. In India, I am indebted to two nameless women librariansat ICRIER and the Jawaharlal Nehru University library who compiled archiveson Indian reform.

SuzhouKunshan

Wenzhou

Jiangsu

Shenzhen

Data Not Included1–12001201–17001701–45004501–5800

Kazakhstan

Kyrgyzstan

Tajikistan

Pakistan

Xizang (Tibet)

NepalBhutan

QinghaiNingxia

Sichuan

YunnanGuizhou Fujian

HunanJiangxiZhejiang

WuhanAnhui

Shandong

Hebei

BeijingTranjin

LiaoningDalianNorth Korea

South Korea

ChongqingHubei

HenanShaanxi

Shanxi

Nei Mongol

Heilongjiang

Jilin

IndiaBangladesh

Myanmar

Laos Hainan

Guangxi

Hong Kong

GuangdongMacau

Xinjiang

Mongolia

Gansu

Taiwan

2011 FDI (100 mil USD)

Xiamen

Japan

map 1. Domestic Distribution of ForeignDirect Investment (FDI) Inflows in China (2011)Note: China has twenty-seven provinces and four provincial-level municipalities.

Foreign direct investment has concentrated in the coastal areas, marked in the darkshade, making this region the export hub of the nation. These are places that hadsubstantial out-migration before reform and maintained strong ties to diasporacommunities overseas, particularly in Hong Kong, Macao, Taiwan, and Southeast Asia.

xiv Preface






Over the long years, the project has benefited from advice offered byThomas Berger, Susan Eckstein, Joseph Fewsmith, Kevin Gallagher, andWilliams Grimes at Boston University (BU); Iain Johnston, Tarun Khanna,William Kirby, and Liz Perry at Harvard; and Yongnian Zheng at theNational University of Singapore and Devesh Kapur at the University ofPennsylvania.

Mumbai (Bombay)

Thailand

Myanmar

Bhutan

Bangladesh

Nepal

2011 FDI US $ (million)

Data Not Included10–300301–60006001–90019000–55000

Dadra and Nagar Haveli

Maharashtra

Karnataka

Andaman and Nicobar Islands

Afghanistan

Pakistan

Jammu & Kashmir

China

HaryanaGurgaon

Rajasthan

Gujarat

Hyderabad

Andhra Pradesh

Bangalore Chennai

Pondicherry

Tamil NaduKerala

LakshadweepSri Lanka

Madhya Pradesh

Uttar Pradesh

Himachal Pradesh

Delhi

TripuraMizoram

Manipur

NagalandAssam

Meghalaya

Arunachal Pradesh

Kolkata

Orissa

Bihar

Sikkim

West Bengal

PunjabChandigarh

map 2. India and Regional Concentration of Foreign Direct Investment (FDI) Inflows(2011)

Note: India has twenty-eight states and seven union territories. Its private economy ismost vibrant in South India. Since the 1990s, FDI inflows in India have concentrated inareas with strong indigenous capital such as Mumbai, Bangalore, New Delhi, Chennai,Hyderabad, and the state of Gujarat. Diaspora networks seem to facilitate FDI inflows inGujarat, Andhra Pradesh, and Tamil Nadu, but not in West Bengal or Kerala.

Preface xv






At Cambridge University Press, I am thankful for senior editor LewBateman’s interest in acquiring the manuscript and supervision of the reviewprocess. I also deeply appreciate Shaun Vigil for guidance throughout theproduction and the two anonymous reviewers of the manuscript for their com-ments to improve the book. My research assistants at BU, Sarah Chung, JoshuaLacey, and Damin Zhu, have helped with maps, figures, and statistics used in thebook. Best wishes for their careers after BU.

A book project, in the midst of a ticking tenure clock, can be stressful, yet thebirths of my two daughters, Claire and Sophia (who inevitably delayed theproject’s completion), somehow made the long process a hopeful and enjoyablejourney filled with laughter. My husband Yunrong Chai, a microbiologist, hasplayed a central part in balancing my career and family life. An academicprofession ultimately requires persistence and deep commitment, for which Iam grateful tomy parents who endured the havoc underMao’s rule, experienceddramatic change during reform, and still carry on with unyielding morality,discipline, gratitude, and a strong sense to serve their family and community. Tothem, I dedicate this book.

xvi Preface






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