De-Coupling Or De-Risking: India Poses Challenges To China And South East Asia For Alternative Destination Of FDI – Analysis


The US-China face off and the Ukraine war added a new layer of FDI culture in the world. Economic factors, like, low cost production and global network of supply chain, are outweighed by political conflict and a currency war. De-dollarization is emerging as an additional shine for the FDI boost in the world. China poured substantial investment in Russia in Chinese yuan and India opened the gate for local currency investment by UAE, the third largest trade partner of India. 

A new dynamism in currency predominance is taking shape in the global market. The US dollar is eroding pre-eminence and the Chinese yuan or local currencies are gaining steam. According to an IMF survey, the dollar share in central bank foreign exchange reserves declined from 71 percent in 1999 to 59 percent in 2021. The US dollar has been alleged as a political weapon than trading purposes. Eventually, de-dollarization become an additional factor for FDI diversification. 

Given this, de-coupling and de-risking are gaining prominence in making a new trend in FDI, leaving behind economic factors. Till now, China was one of the main destination for USA, Japan and EU investment. Chinese hegemony is in retreat and outplaced by India in East and South East Asia with the advent of de-coupling and de-risking. FDI growth in China nosedived to 4.5 percent in 2022, after a spurring growth by 21.2 percent in 2021

De-coupling and de-risking do not have any academic or institutional definition by UNTACD, WTO, the World Bank or IMF. In colloquial term, “de-coupling” means exiting investment from China and “de-risking” refers to China+1 investment strategy.

Morgan Stanley – the global leader for financial services and investment banking – portrayed India as the most attractive destination for foreign investment in Asian emerging markets. It upgraded India from the 6th position to top in the region. The factors attributed to the increase in the ranking were macro economic stability, which was supportive for better earnings. The analysts were upbeat with India emerging as the next global destination for FDI, in contrast to China witnessing an eroding in attraction.     

On June 21, the US announced multiple policy challenges – all centered on downplaying China. The most important gesture  the US made, according to global political and economic analysts, was to acknowledge India ‘s leadership in Indo-Pacific area. President Joseph Bidden rolled out the red carpet to Prime Minister Narendra Modi, despite India’s stance on neutrality in the Ukraine war. India was hailed as a game changer in the US’ new foreign strategic policy to counter China and regain hegemony in South East and East Asia. Global analysts murmured, the “USA needs India more than India needs” the US. 

The US was the second biggest foreign investor in India during 2021-22 and 2022-23 and third biggest in 2022-23. The US and India signed several agreements covering defence procurement, joint weapon production and development of several  critical technologies. Given this, India should reap benefits, luring US investors, in the wake of de-coupling and de-risking strategies.

India ranked 8th in global FDI inflow, according to World Investment Report. It emerged the second most attractive destination for FDI flows in South East Asia and third in the whole of South East Asia and East Asia in 2021. The main drivers for FDI flows in India were the USA, Singapore and Japan. Together, these three nations accounted for nearly 50% of FDI flows in India

It is difficult to assess how much of a shift was made by American and Japanese investors, due to de-coupling and de-risking. Some cases may exemplify the significance of shift. 

Apple of USA, decoupling from China and shifting to India, has been featured in the headlines. Apple’s decision of shifting its production base to India signifies the country’s challenge to China. It also raised concern over China’s hegemony in the global supply chain for the next decade. China has been the global powerhouse for supply chain manufacturing. Nearly, one fourth of global supply chain is accounted by China. Half of China’s exports are included in the supply chain.     

Japanese investors also pose a challenge to China by prioritizing India, after sagging for two years in post -COVID. In 2022, amidst an overall fall in Japanese investment abroad, investment in China witnessed a drastic fall of 34.4 percent, as compared to the marginal drop in investment in India by 14.1 percent . 

In 2020, the Japanese government provided a big subsidy to diversify offshore investment from China, and to reduce over-dependence. Focuses were made for South East Asian countries for diversification from China. Even though attempts were given for shifting to Thailand, Vietnam, Malaysia, Indonesia by the Japanese government, India emerged as the preferred destination by that country’s investors. 

China has been the biggest source for supply chain for Japan. Nevertheless, in 2020 Japan’s policy for reducing overdependence on China through de-coupling and de-risking raised hope for diversification of  Japan’s investment in India. Already, the Japanese tilt to China was in retreat, due to frequent face offs between the two countries, triggered by “Abe diplomacy.” According to a survey, there were 13,934 Japanese companies in 2016, dropping to 13,685  in 2019. Furthermore, the share of parts and components from China was already in a declining trend, according to an estimation.  It declined from 29.5 percent in 2015, to 26.1 percent in 2021.  

Furthermore, even though Vietnam was focussed on as a coveted destination, Japanese investment in India increased more than Vietnam. This advocated  Japanese investors tilt towards India. In 2022, Japanese investment in Vietnam declined sharply by 28.9 percent, as compared to 14.1 percent in India.  

In summing up, though India was not hyped as better alternative to China globally, the recent developments in Indian economy and foreign policies, including political stability, ensures its potential for a sustainable FDI growth. 

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

2 thoughts on “De-Coupling Or De-Risking: India Poses Challenges To China And South East Asia For Alternative Destination Of FDI – Analysis

  • August 9, 2023 at 5:44 am

    Ok, we moved FDI from China into focus on eliminating your corruption, caste and communal politics…otherwise we will go somewhere else.

    • August 10, 2023 at 9:42 am

      Do you think China is less corrupted laden nation? Caste driven social structure and communal politics , are indispensable in a country like India, owing to wide diversity in language and culture. Nevertheless, are in retreat with the advancement of education and are no more barriers to growth or domestic demand. Had they been major barriers, India would not have achieved highest GDP growth, surpassing China and become the fourth biggest digitized economy .

      S. Majumder


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