FDI Policies in China and India: Evidence from Firm Surveys

Abstract

This paper builds on the idea that economic reforms in China were designed to attract foreign direct investment (FDI), while the opposite happened in India. We empirically examine how these different reform approaches affect foreign‐invested enterprises’ (FIE) and domestic firms’ perceptions about the host country’s business environment. Using World Bank survey data, we find that FIEs in India perceive more obstacles to business operations and development relative to domestic firms, especially on issues related to government regulations and legal institutions. On the contrary, FIEs in China find government officials more helpful in promoting business development and perceive legal and financial constraints similar to their domestic counterparts. These differences in perceptions between firm ownership types are consistent with the underlying diverging approaches of FDI policies adopted by the two largest developing nations.