Investment from Indian Diaspora is getting special attention today with the Government extending several facilities to overseas Indians to invest in the Indian economy. Right through the 1980s and 1990s China has been way ahead of India in terms of attracting diasporic investment. Apart from policy constraints what had handicapped India’s diasporic investment vis-à-vis China?
China as low-cost manufacturing base
Diaspora investment in China has from the very beginning been limited to low wage manufacturing operations. China attracted investors to put their money in a wide variety of manufacturing sectors at very small scale, averaging US$2.4 million. China’s concentration was less on the $50 million investor with local influence and connections, and more on the $6 million nearby Hong Kong Chinese.
This doorstep Diaspora had unique motivations to invest in China. Chinese entrepreneurs in peripheral areas of Taiwan and Hong Kong found much value in China as a low cost manufacturing base for exports.
In India the policy of reservation of several products for small and medium enterprise ran counter to the Chinese policy. Items reserved for medium and small sectors cannot be produced by the larger entrepreneurs. Moreover, the existing small-scale units are not allowed to upgrade or expand through additional investment in plant and machinery.
Parallel in Indian IT sector
While projecting itself as a low cost manufacturing base and having extensive international trade ties helped China boost its diasporic investment, a parallel Indian example is the IT and ITES sector.
India’s professional IT and management oriented Diaspora realized the cost arbitration offered by offshoring IT and ITES work to India. Given the diasporic expertise in this sector and the strong linkages amongst the diasporic community in the Silicon Valley, it did not take long before several startups took place in Bangalore and Hyderabad followed by rest of India.
Indian Diaspora: Mostly professionals or traders
Moreover, the Indian Diaspora, unlike their Chinese counterpart, has very few small and medium entrepreneurs. A significant reason that explains India’s failure to tap diasporic investments may be attributed to the fact that most Indian expatriates are either professionals or traders (i.e. retailers, wholesalers or other type of service providers) and lack the expertise in managing export oriented labor intensive manufacturing.
In the US, UK and other parts of the developed world, many Indian are successful retailers. But since FDI in retail is allowed only in single brand entities, it forms a major impediment to diasporic FDI investment. And the Indian economy in unable to use its expertise and capital.
As pointed out earlier, Chinese diasporic investment was on average very small (USD 3-2 million), who invested in export industries and the export industries in the SME sectors specializing in labor intensive low cost production. The majority of the entrepreneurial class of Indian Diaspora does not have the capacity like the large MNC’s to invest in large-scale production units.
However, they definitely have the managerial expertise and capital to try and venture into small-scale manufacturing.
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What are the leading small-scale manufacturing areas or examples the India Diaspora is investing in?