ABSTRACT
During 2016 China accounted for 7.66% of the world’s foreign direct investment (FDI) inflow whereas India reported just a 2.55% share. Why is China able to attract more inward FDI than India? How do government policies and incentive packages secure FDI? What determines FDI inflow in China and India? This chapter is based on time-series data from 1991 to 2017 and uniquely focuses on institutional variables to measure the determinants of FDI. Our results show that trade openness, control of corruption and investor confidence in the existing rule of law are highly significant factors in determining inward FDI to China; while the exchange rate is found to be negatively affecting it. We also find that trade openness, control of corruption and political stability significantly and positively affect FDI inflow to India, while an increase in the inflation rate, GDP per capita and economic fitness discourage it. Our results reveal that China is able to attract more FDI compared to India mainly due to institutional variables such as government effectiveness, rule of law and control of corruption and political factors such as political stability rather than any other policy variable.
