The volume of FDI in China has been about ten times that into India.The FDI boom in the early '90s was due to a stock shift of factories from Hong Kong and Taiwan and may be a one-time movement. Most of it came as plant and machinery and not as cash flows. Some 15 per cent of FDI into China may be rerouted domestic investment to take advantage of the more favourable taxation and trading privileges for foreign enterprises in mainland China.

While FDI into China has been slowing down since 1993, especially in terms of FDI approved, actual inflows have increased from about 25 per cent of approvals in 1993 to about 90 per cent in 1997. In India, approvals have been rising steadily and have increased after 1993. Inflows as a percentage of approvals were about 20 per cent in 1993 and about 30 per cent in 1997.

Even accounting for declining non-resident Chinese investment into China, can India match this performance? It does not have neighbours as dynamic as Hong Kong or Taiwan. The Indian diaspora consists mainly of manual workers and professionals. By contrast the diaspora ofChina consists of businessmen with a strong representation of billionaire tycoons in Asia.

The high FDI in China was a product of favourable taxation policy, good infrastructure in special economic zones and the delegation of investment approvals to the local level. India has no special zones for FDI. Its investment clearance procedures remain cumbersome. Tax norms are complicated and infrastructure is poor. According to investors there are three main reasons why China has been preferred to India: its non-state sector pays almost no taxes; its labour market regime is more flexible; and its imports of intermediates are virtually tariff-free as long as they fall under the class of inputs for exports. China also emphasised infrastructure ahead of economic growth whereas India's policy on infrastructure is ambiguous.

Market structures are also very different. In China there is excess demand for a mix of both high and low priced products whereas in the initial stages of liberalisation there was excess demandin India only for high priced products. This made China a much more attractive destination for FDI.

Other problems in India relate to its high budget deficit, unfinished reform agenda and political uncertainty. Its productivity growth of 3 per cent per annum pales besides China's 8 per cent. The high budget deficit implies that government demand for resources will dampen economic activity, leading to higher taxation. Its disinvestment programme is yet to be completed. FDI has crowded out domestic investment in some sectors causing loss of domestic competitiveness. But this impact is not significant in macro terms as the proportion of FDI in total investment is just 2 per cent.

Much of the FDI into China has come into the coastal regions creating visible imbalance in growth and resources. A lot of it has been directed to real estate and trade with little emphasis on infrastructure. While export growth has been significant, FDI has had negative consequences for the competitiveness of the state sector.Reforming state enterprises and addressing regional imbalance may become major policy objectives of future reform processes. This may decrease the state's capacity to absorb FDI, unless it can be channelled to areas which address these objectives.

Technologies transferred through FDI are likely to have been standardised or intermediate technology whose development spinoffs in terms of generating innovation and further technological development are uncertain. This could dampen its absorptive capacity for future inflows. Finally FDI flows from Hong Kong and Taiwan may have reached a plateau or may loose momentum as the transfer of labour-intensive production to China reaches completion.

India has been a relatively insignificant recipient of FDI. But the quality of investment is very important. Investment approvals in India have been mostly in high-technology industries. FDI inflows have however been in consumer goods sector, but these have revolutionised the retail and service culture. In the 21st centurya nation's strength is going to be determined by its human capital. This is where India scores and may have a competitive edge for at least a decade. Other positive aspects include effective and familiar legal systems, a large market potential and adequate institutional capacities. India can play a key role in information technology and other such sectors. Its educated middle class of 300 million can sustain rapid industrial growth. It also has an impressive industrial base and a tradition of private enterprise with 7,000 listed companies. It is accustomed to the rule of law, English is widely used, and financial and accounting systems conform to international standards. India's capacity to absorb FDI specially in knowledge-based products makes it an attractive destination for exports.

India and China's prospects on FDI are not mutually exclusive. The progress of the Asian economies will spur FDI and growth in both. While export oriented growth of manufactured goods have been the primary focus of TNCs inChina, export-oriented production in India has been focused in sectors such as software. For low priced manufactures, India's vast market potential lies in its domestic markets.

Policy responses would necessarily be different. In India the process of approval has to be simplified, decentralised and infrastructure improved. In China sectoral focus and regional imbalances need to be addressed. According to Jeffrey Sachs ``with proper reform steps, India could match or even outpace China in attracting FDI, given India's superior conditions regarding the rule of law and political democracy and stability''.

The writer is a consultant to the United Nations Development Programme