In Brief

The Indian and Chinese economies have both been resilient and well-positioned in the face of the effects of the global financial crisis. An important driver of both China’s and India’s growth has been foreign direct investment (FDI) and the entrenchment of policy regimes that are open to FDI. Global FDI slumped sharply in 2008 and remains stagnant this year. India came later to reform and openness and its approach to welcoming foreign direct investment has been more cautious. The huge flows of FDI through the 1990s not only underpinned rapid export-oriented growth in China and other East Asian economies but also saw the development of highly integrated production networks throughout the region and East Asia’s rise as a major centre of global trade and economic activity. This trade shrunk sharply during the crisis, but provides the platform for a rebound. There is as yet no equivalent development of production networks in South Asia – partly a consequence of the political barriers to regional integration, partly a consequence of the earlier caution in the approach to opening up to foreign investment. As Geethanjali Nataraj’s lead piece this week makes clear, all this is changing very rapidly in India. India’s open strategy towards FDI is reaping its reward and FDI inflows have held up remarkably well through the early phases of the crisis as FDI inflows have grown considerably or held up against the global trend. The promise of further Indian foreign investment liberalisation is important not only to India but, if East Asian experience is any guide, to India’s effective integration into the Asian economy more broadly.