Comparing the Legal Foundations of Foreign Direct Investment in India and China: Law and the Rule of Law in the Indian Foreign Direct Investment Context

Abstract

Although China and India share similar economic and demographic characteristics, China has outstripped its neighbor in attracting foreign direct investment (FDI) since their respective “liberalizations” in 1979 and 1991. Scholars have offered a number of superficially convincing explanations for the persistent divide, which tend to focus on China’s excessive use of “round-tripping,” the prevalence of bureaucracy and corruption in India, and China’s decade-long “head start” in reforming. A closer evaluation of these justifications, however, suggests that they are only partial explanations at best. The purpose of this Note is twofold. First, it raises and explores a fundamental issue that has not received adequate attention: whether China’s legal regime is more conducive to attracting, maintaining, and increasing FDI inflows than India’s. This Note compares the legal foundations that support the inward FDI frameworks in these countries to determine whether the differences in their governing laws and procedural mechanisms contribute to the statistical discrepancies in FDI inflows. Second, this Note attempts to identify those elements of the rule of law that are present (and absent) in each country’s FDI regime and how those elements encourage or deter FDI. This Note’s conclusions are revealing but not unexpected. India’s statutory governance of FDI is comparatively more convoluted and more antiquated than China’s, and therefore, it is less conducive to attracting, processing, and retaining FDI inflows. In addition, China uses distinct legal vehicles that prove more transparent and more comprehensible for foreign investors than India’s outdated legislation. Furthermore, India excludes local and state authorities from the federal approval process, ultimately lengthening the FDI implementation process and deterring investment. China, on the other hand, has a vertically integrated FDI approval process, which generates significant tension between state and national authorities but is nevertheless comparatively more facilitative of FDI inflows. This analysis reveals that a country’s (in this case, China’s) disregard of the “rule of law” in political governance may, ironically, allow it more effectively (1) to grant rule of law protections to investors and (2) to implement more efficient approval processes than a country such as India, which preserves rule of law at the highest levels of governance, yet at the expense of streamlined FDI statutory governance and approval procedures. As a result, China can tailor more effectively its FDI governance to foreign direct investors’ interests and assist them in circumventing red tape and procedural delay.