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Diasporas and Foreign Direct Investment in China and India This book offers a comparative and historical analysis of foreign direct investment (FDI) liberalization in China and India and explains how the return of these countries’ diasporas affects such liberalization. It examines diasporic investment from Western FDIs and finds that diasporas, rather than Western nations, have fueled globalization in the two Asian giants. In China, diasporas contributed the lion’s share of FDI inflows. In India, returned diasporas were bridges for, and initiators of, Western investment at home. Min Ye illustrates that diasporic entrepreneurs helped to build China into the world’s manufacturing powerhouse and that Indian diasporas facilitated their homeland’s success in software services development. Min Ye is an assistant professor of international relations and the director of the East Asian Studies Program at Boston University. She has served as a visiting scholar and professor in China, Japan, South Korea, Singapore, and India and has given lectures at Fudan University, Zhejiang University, and the Chinese University of Broadcasting and Mass Media. Her publications include The Making of Northeast Asia (with Kent Calder, 2010) and various articles published in such journals as the Journal of East Asian Studies, Modern China Studies, and China Public Affairs Quarterly. In China, Ye also serves as a consultant on globalization for private and state-run companies and development of special zones in various localities. Diasporas and Foreign Direct Investment in China and India MIN YE Boston University 32 Avenue of the Americas, New York, N Y 10013-2473, U S A Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781107054196 © Min Ye 2014 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission 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 Data Ye, 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 2014 332.670 30951–dc23 2013048109 ISBN 978-1-107-05419-6 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of U R L s for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate. To my parents Ye Jianxin and Xia Aiyu for the lives they live and the life they gave me Contents List of Illustrations List of Abbreviations Preface page ix xi xiii part i. introduction and theory 1. 2. Foreign Direct Investment in China and India Diasporas and Social Network Theory FDI and FDI Policies in China and India Political Theories of FDI Liberalization Chapter Outlines 3 4 7 12 18 Social Network Theory: Diasporas, Domestic Industry, and the Diffusion of FDI Liberalization SNT as a New Policy Framework Social Networks and Diffusion of FDI Liberalization External Networks and Domestic Resistance Comparative Cases and Hypothesized Explanations Empirical Materials Conclusion 20 22 23 28 35 39 40 part ii. reform stage i 3. Diaspora Entrepreneurs and Diffusion of FDI Liberalization in China The New Government and Policy Options The Rise of Diaspora Networks in Post-Mao China Special Economic Zones and the Initiation of FDI Liberalization Open Coastal Cities Overcame Challenge to FDI Liberalization Reasserting FDI Liberalization after the Tiananmen Crisis Conclusion 45 48 51 55 60 64 67 vii viii Contents 4. Deregulation without Openness in India India Started Reform in the 1980s Indira Gandhi’s Business Networks and Deregulation Rajiv Gandhi’s Diaspora Networks and Their Role in Liberalization Rajiv’s Social Networks: Why FDI Liberalization Failed to Stay Quiet Change in India’s Government–Business Relations Conclusion 69 70 72 79 84 89 90 part iii. reform stage ii 5. Deepening Diffusion: “Zone Fever” and SOE Reform in China Expanding Diaspora Networks Diaspora Investment and “Zone Fever” SOE Reform Deepened FDI Liberalization Conclusion 6. Indian Indigenous Industry and FDI Continual Divergence in FDI between China and India Crisis, Reform, and Blowback in India The Evolving New Social Basis of India’s FDI Liberalization Conclusion 95 96 99 110 117 119 120 121 132 144 part iv. foreign direct investment in sectors 7. China’s Electronics and Automobiles The Electronics Industry: From SEZs to High-Tech Clusters The Auto Sector: From Protectionism to Industrial Policy FDI in Other Sectors Conclusion 149 152 161 174 175 8. FDI Liberalization in India’s Informatics and Autos India’s Diaspora and Informatics Indigenous Industry and Auto Sector Liberalization Other Sectors: Continuity or Change Conclusion 9. Conclusion: The State, Diasporas, and Development History and Geography, Networks, and Policies Regime, State Autonomy, and Embeddedness FDI and Diaspora Investment: A Missing Distinction Diaspora Differences and Consequences across China and India Lessons and Trends Conclusion Bibliography Index 177 177 191 203 204 205 206 210 212 213 216 218 219 239 Illustrations maps 1 2 3 Domestic Distribution of Foreign Direct Investment (FDI) Inflows in China (2011) page xiv India and Regional Concentration of Foreign Direct Investment (FDI) Inflows (2011) xv Foreign Direct Investment (FDI) in Automobiles and Electronics in China and India (2011) 150 figures 1.1 2.1 2.2 2.3 3.1 3.2 4.1 5.1 5.2 6.1 Foreign Direct Investment Inflows in Comparative Perspective ($Mi) Occurrence and Nonoccurrence of Foreign Direct Investment Liberalization The Diffusion Model of Foreign Direct Investment Liberalization: Stages and Steps Industries and Foreign Direct Investment Liberalization China’s Diaspora Networks and Foreign Direct Investment Liberalization, 1978–1992 Shekou Industrial Export Zone, Guangdong, January 1979 Volatile External Sectors (Share of GDP %) Sources of Major Foreign Direct Investment (FDI) Projects in Pudong, 1993 Diasporas’ Contributions to China’s Foreign Direct Investment Continual Gap: Foreign Direct Investment (FDI) in China and India ($Mi) 10 24 25 38 46 57 72 102 116 121 ix List of Illustrations x 6.2 6.3 6.4 6.5 8.1 8.2 Foreign Capital in India: Foreign Direct Investment (FDI) versus Portfolio Investment ($Mi) Economic State in Reformist India: Worsening Accounts ($Mi) Protectionism in India: Use of Antidumping Clause (1993–2001) The Shares of Diaspora Investment in India (%) Differential Performance of India’s Hardware and Software Exports The Protection of Passenger Vehicles in India, 1993–2007 124 127 130 142 189 202 tables 1.1 1.2 2.1 2.2 3.1 3.2 3.3 4.1 4.2 4.3 5.1 5.2 5.3 6.1 6.2 6.3 6.4 7.1 7.2 7.3 8.1 8.2 8.3 8.4 8.5 Ranking China and India’s Foreign Direct Investment (FDI) Liberalization (of 141 countries) Comparing Foreign Direct Investment (FDI) in China and India Foreign Direct Investment (FDI) Liberalization in China and India (1980–2010) Cross-Time Analysis of China and India’s Foreign Direct Investment (FDI) Liberalization Sources of Foreign Direct Investment (FDI) in the People’s Republic of China (PRC), 1978–1993 Combined China’s Developmental Policy Options in 1979 Foreign Direct Investment (FDI) in the Shenzhen and Shekou Zones in the Early Period (%) Annual Growth Rates of Public and Private Companies in India, 1961–1996 (%) Indira’s Pro-Business Deregulation Rajiv Gandhi’s Economic Team and Diaspora Networks Foreign Direct Investment (FDI) in China’s Regions by Source (%, 1993) Shanghai’s First Foreign Collaborations during Reform Era [Shanghai diyi] Major Foreign Investments in Kunshan (1992–1993) India’s Foreign Direct Investment (FDI) Liberalization, 1991–1994 Foreign Collaborations in India: Automobiles and Electronics Shareholding Structure of Tata Group (%, 2007) Infosys’s Revenues by Area The Development History of the Electronics Industry in China The Development History of China’s Auto Sector China’s Auto Sector Joint Ventures in the 1990s Policy Developments in India’s Informatics Sector Indian Software Exports in Global Markets, 1999–2000 India’s Policy Frameworks in the Auto Sector India’s Auto Manufacturers before Reform India’s New Automakers in the 1990s 8 12 35 37 47 49 60 71 79 80 100 104 107 123 133 138 139 153 153 168 179 184 191 193 196 Abbreviations ACMA AIEI AMC ASSOCHAM BJP BOP BPO CASI CCP CII CKD CNAIC CPE DOE EEPC EHTP EPZ FAW FDI FERA FICCI FIF GIC GM HCL HK HKSE IFC IMF Automotive Component Manufacturers Association of India Association of Indian Engineering Industry American Motors Company Associated Chambers of Commerce and Industry of India Bharatiya Janata Party Balance of payments Business process outsourcing Center for Advanced Study of India Chinese Communist Party Confederation of Indian Industry Completely knocked down China National Automobile Industry Corporation Comparative political economy India’s Department of Electronics Engineering Export Promotion Council Electronics hardware technology parks Export processing zones China’s First Auto Works Foreign direct investment Foreign Exchange Regulations Act Federation of Indian Chambers of Commerce and Industry Foreign-invested firm General Insurance Corporation General Motors Hindustan Computers Ltd. Hong Kong Hong Kong Stock Exchange International Finance Corporation International Monetary Fund xi xii IO IPE IPO IT JV LIC MEI MNC MOFTEC MOU MRTP NASSCOM NRI OCC PMO PRC QR RSS SEZ SIAM SJM SKD SNT SOE SSI STP TCS UNCTAD UNESCAP WTO List of Abbreviations International organization International political economy Initial public offering Information technology Joint venture Life Insurance Corporation Ministry of the Electronics Industry Multinational corporations Ministry of Foreign Trade and Economic Cooperation Memorandum of understanding Monopolies/istic and Restrictive Trade Practices Act National Association of Software and Services Companies Nonresident Indian Open coastal city Prime Minister’s Office People’s Republic of China Qualitative restriction system Rashtriya Swayamsevak Sangh Special economic zone Society of Indian Automobile Manufacturers Swadeshi Jagran Manch Semi–knocked down Social network theory State-owned enterprises Small-scale industry Software technology park Tata Consultancy Services United Nations Conference on Trade and Development United Nations Economic and Social Commission in Asia and the Pacific World Trade Organization Preface Confucius once said, “Fumu zai, bu yuanxing” [When parents are alive, do not travel afar]. Generation after generation of Chinese, however, have gone to all corners of the world to seek better lives. They left, but they kept strong emotional and social ties to their homeland, and they returned to contribute to homeland development. Indians also have emigrated to many places to better their livelihood. In various historical junctures, those who left returned to play critical parts in forging a modern India. The transformation of the economies of China and India from socialism to capitalism, from isolationism to globalism, from backwaters of the globe to the world’s engines of growth, has drawn on immigrant networks, with the Chinese entrepreneurial diasporas returning to shape liberal foreign direct investment (FDI) policies and Indian professional diasporas coming back to create policies that have resulted in the enormous divergence in the two giants’ economic transitions – one heavily reliant on FDI, the other domestic industry-centric. Diasporas’ developmental impact is most effective when domestic politics is open to their influence. When China initiated economic reform, the government made remarkable efforts to build ties to the diaspora, provided incentives for their return, and availed opportunity for their success in their homeland. India’s reformist leaders likewise placed diaspora professionals at key positions of apex economic agencies. Diasporas are most developmental if they possess advanced ideas, technology, and resources. The Chinese diaspora entrepreneurs occupied key manufacturing niches in the global market. When they circulated investment home, they made China a “world factory.” Many Indian immigrants worked at Western multinational corporations (MNCs), connected their homeland with global funds and technology, and supported the global success of indigenous Indian firms. In short, diasporas are not miracle workers, but they are critical to economic miracles in 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 Preface xiv Kazakhstan Heilongjiang Mongolia Nei Mongol Kyrgyzstan Xinjiang Gansu Tajikistan Ningxia Qinghai Pakistan Shanxi Jilin Liaoning Beijing DalianNorth Korea Tranjin Hebei Shaanxi Henan Shandong South Korea Japan Jiangsu Anhui Suzhou Hubei Wuhan Kunshan Sichuan Chongqing ZhejiangWenzhou Hunan Jiangxi Bhutan 2011 FDI (100 mil USD) Guizhou Fujian Data Not Included Xiamen Yunnan 1–1200 Bangladesh GuangxiGuangdong Taiwan Macau 1201–1700 Hong KongShenzhen 1701–4500 Myanmar 4501–5800 Laos Hainan Xizang (Tibet) Nepal India map 1. Domestic Distribution of Foreign Direct 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 dark shade, making this region the export hub of the nation. These are places that had substantial out-migration before reform and maintained strong ties to diaspora communities overseas, particularly in Hong Kong, Macao, Taiwan, and Southeast Asia. have provided unending guidance, support, and encouragement at Princeton and beyond. Friends I made at Princeton continue to lift my spirits and offer companionship in the United States and in Asia. They are Ian Chong, Chunmei Du, Todd Hall, Scott Kastner, Ning Ma, Lanjun Xu, and Enhua Zhang. Most of the research and writing were done in Boston. Thanks to Boston University’s leave policies, my colleagues, and the Princeton-Harvard China and the World Program fellowship, I was able to complete the research, write the book, and raise a new family. At Harvard’s Fung Library, Nancy Hearst helped with collecting 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 the Chinese University of Hong Kong (CUHK), the Chinese Academy of Social Sciences, the Indian Council for Research on International Economic Relations (ICRIER), and the National University of Singapore. Ms. Jean Hung at CUHK availed me of the Universities Service Center’s rich collection on China’s economic reform. In India, I am indebted to two nameless women librarians at ICRIER and the Jawaharlal Nehru University library who compiled archives on Indian reform. Preface xv China Afghanistan Jammu & Kashmir Himachal Pradesh Punjab Pakistan Chandigarh Haryana Gurgaon Delhi Arunachal Pradesh Nepal Sikkim Bhutan Uttar Pradesh Rajasthan Madhya Pradesh Gujarat Assam Nagaland Meghalaya Bihar Bangladesh Manipur Tripura West Bengal Mizoram Kolkata Myanmar Orissa Dadra and Nagar Haveli Mumbai (Bombay) Maharashtra Thailand Hyderabad Andhra Pradesh Karnataka Bangalore Chennai 2011 FDI US $ (million) Data Not Included 10–300 301–6000 6001–9001 9000–55000 Andaman and Nicobar Islands Pondicherry Tamil Nadu Kerala Lakshadweep Sri Lanka 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 is most vibrant in South India. Since the 1990s, FDI inflows in India have concentrated in areas with strong indigenous capital such as Mumbai, Bangalore, New Delhi, Chennai, Hyderabad, and the state of Gujarat. Diaspora networks seem to facilitate FDI inflows in Gujarat, Andhra Pradesh, and Tamil Nadu, but not in West Bengal or Kerala. Over the long years, the project has benefited from advice offered by Thomas Berger, Susan Eckstein, Joseph Fewsmith, Kevin Gallagher, and Williams Grimes at Boston University (BU); Iain Johnston, Tarun Khanna, William Kirby, and Liz Perry at Harvard; and Yongnian Zheng at the National University of Singapore and Devesh Kapur at the University of Pennsylvania. xvi Preface At Cambridge University Press, I am thankful for senior editor Lew Bateman’s interest in acquiring the manuscript and supervision of the review process. I also deeply appreciate Shaun Vigil for guidance throughout the production and the two anonymous reviewers of the manuscript for their comments to improve the book. My research assistants at BU, Sarah Chung, Joshua Lacey, and Damin Zhu, have helped with maps, figures, and statistics used in the book. Best wishes for their careers after BU. A book project, in the midst of a ticking tenure clock, can be stressful, yet the births of my two daughters, Claire and Sophia (who inevitably delayed the project’s completion), somehow made the long process a hopeful and enjoyable journey filled with laughter. My husband Yunrong Chai, a microbiologist, has played a central part in balancing my career and family life. An academic profession ultimately requires persistence and deep commitment, for which I am grateful to my parents who endured the havoc under Mao’s rule, experienced dramatic change during reform, and still carry on with unyielding morality, discipline, gratitude, and a strong sense to serve their family and community. To them, I dedicate this book. part i INTRODUCTION AND THEORY
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