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India: A New Player in Asian Production Networks

Case study by ESCAP, 2011

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While the IPN phenomenon has accelerated trade and investment linkages between countries in East and South-East Asia, the remainder of the region has not matched those countries in this process. The objective of the study is to explore the reasons for this by using India's performance in the Asian IPNs as a case study for other countries that are trailing behind in this area. The study seeks to identify the reason why India has performed below its potential in this new form of international division of labour, even though that country possess several supportive factors including: (a) the sheer size of the economy and population; (b) a large pool of engineers; (c) relatively sound intellectual property protection; and (d) an increasingly open trade and investment climate resulting from progressive economic reforms.

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ESCAP is the regional development arm of the United Nations and serves as the main
economic and social development centre for the United Nations in Asia and the
Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate
members. ESCAP provides the strategic link between global and country-level
programmes and issues. It supports Governments of the region in consolidating
regional positions and advocates regional approaches to meeting the region’s unique
socio-economic challenges in a globalizing world. The ESCAP office is located in
Bangkok, Thailand. Please visit our website at www.unescap.org for further
information.




The shaded areas of the map are ESCAP Members and Associate members.




 
 







 


STUDIES IN TRADE AND INVESTMENT 75












INDIA: A NEW PLAYER
IN ASIAN PRODUCTION NETWORKS?



Edited by Witada Anukoonwattaka and Mia Mikic


 




IN COLLABORATION WITH THE ASIA PACIFIC RESEARCH AND TRAINING
NETWORK ON TRADE














 
 







ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC








India: A new player
in Asian production networks?


STUDIES IN TRADE AND INVESTMENT 75






United Nations Publication

Copyright © United Nations 2011
All rights reserved
ISBN-13: 978-92-1-120639-5
E-ISBN-13: 978-92-1-055288-2
ST/ESCAP/2624











The opinions, figures and estimates set forth in this publication are the responsibility
of the authors, and should not necessarily be considered as reflecting the views or carrying the
endorsement of the United Nations.


The designations employed and the presentation of the material in this publication do
not imply the expression of any opinion whatsoever on the part of the Secretariat of the
United Nations concerning the legal status of any country, territory, city or area, or of its
authorities, or concerning the delimitation of the frontiers or boundaries.


Mention of firm names and commercial products does not imply the endorsement of
the United Nations.


All material in this publication may be freely quoted or reprinted, but
acknowledgment is required, together with a copy of the publication containing the quotation
or reprint.


The use of the publication for any commercial purposes, including resale, is
prohibited, unless permission is first obtained from Secretary of the Publications Board,
United Nations, New York. Request for permission should state the purpose and the extent of
reproduction.


This publication has been issued without formal editing.




iii




Preface and acknowledgments


Attention given to the international production networks (IPNs), alternatively
referred to as “value chains”, and their significance for the economies in the Asia-
Pacific region has grown in recent years, especially since the onset of the global
economic crisis in 2008. The sharp reductions in exports and imports have made it
very clear that IPNs make economic activities of countries interlinked and
interdependent, thus playing a significant role in national economic development.
This study of the position of India in this context clearly demonstrates the importance
of understanding what drives the establishment and expansion of IPNs.


This publication is not intended to provide comprehensive coverage of the
topic; instead, it presents mainly what are known as the views of “trade economists”
rather than “international business”.


The editors are grateful to Professor Sisira K. Jayasuriya for the inspiration to
undertake this study as well as the authors for the dedicated way in which they
delivered their inputs, despite serious time and resource constraints. Professor
Biswajit Nag read through the entire manuscript and provided detailed comments,
while Mr. Rajan S. Ratna provided valuable comments on the status and future
approaches to preferential trade liberalization by India. Neither one should be
responsible for the errors and omissions that may remain. Special appreciation is due
for the fast but thorough work of our copy/format editor, Mr. Robert Oliver. In
addition, the assistance provided by Mr. Gandhip Rai in preparing chapter four of this
book as well as Mr. Teemu Puutio during the final phase of preparing the manuscript
and Ms. Chaveemon Sukpaibool in designing the cover page is gratefully
acknowledged.


The views in this book are those of the authors and do not represent any
endorsement by the United Nations or the authors’ organizations or affiliations.















iv




Abbreviations and acronyms




ACMA Automotive Component Manufacturers Association of India


AFTA ASEAN Free Trade Area


APTA Asia-Pacific Trade Agreement


APTIR Asia-Pacific Trade and Investment Review


APTIAD Asia-Pacific Trade and Investment Agreement Database


ARTNeT Asia-Pacific Research and Training Network on Trade


ASEAN Association of Southeast Asian Nations


AUT Auckland University of Technology




BEA United States Bureau of Economic Analysis




CAGR compound annual growth rate


CEPT Common Effective Preferential Tariff




DIPP Department of Industrial Policy and Promotion




ESC Electronics and Computer Software Export Promotion Council


ESCAP Economic and Social Commission for Asia and the Pacific


EU15 European Union member countries prior to 1 May 2004




FDI foreign direct investment


FTA free trade agreement




GATT General Agreement on Trade and Tariffs


GDP gross domestic product




v




G-L Grubel-Lloyd


GNI gross national income


GVC global value chain




H-O Heckscher-Ohlin


HS Harmonized Commodity Description and Coding System




IAFTA India-ASEAN Free Trade Agreement


IBEF Indian Brand Equity Foundation


IIT intra-industry trade


ICT information and communication technology


IDE Institute of Developing Economies


ILO International Labour Organization


IMF International Monetary Fund


IMV international multipurpose vehicle


IIT intra-industry trade


IPN international production network


IT information technology




JBIC Japan Bank of International Cooperation


JETRO Japan External Trade Organization


JFDI Japan foreign direct investment




LEP Look East policy




METI Ministry of Economy Trade and Industry


MFN most-favoured nation




vi




MNC multinational corporation


MNE multinational enterprise


MIIT marginal intra-industry trade




NAFTA North-American Free Trade Agreement


NEG new economic geography


NIEs newly industrialized economies


NTB non-tariff barrier




OBAJF overseas business activities of Japanese firms


OECD Organisation for Economic Co-operation and Development


OEMs original equipment manufacturers




P&C parts and components


P&CB printed circuit boards


PPP purchasing power parity


PTA preferential trade agreement




RBI Reserve Bank of India


R&D research and development


RIETI Research Institute of Economy, Trade and Industry


RoO rules of origin


RTA regional trade agreement




SAARC South Asian Association for Regional Cooperation


SAFTA South-Asian Free Trade Area


SEZ special economic zone




vii




SITC Standard International Trade Classification


SME small and medium-sized enterprise




TKAP Toyota Kirloskar Auto Parts


TRIPS Agreement on Trade-Related Aspects of Intellectual Property
Rights


UNCOMTRADE United Nations Commodity Trade Statistics Database


USD United States dollar


USFDI United States foreign direct investment




VAT value added tax




WEF World Economic Forum


WITS World Integrated Trade Solution


WTO World Trade Organization







viii




List of contributors



Witada Anukoonwattka, Economic Affairs Officer, Trade and Investment


Division, United Nations Economic and Social Commission for Asia and the Pacific,
Bangkok. E-mail: anukoonwattaka@un.org


Mia Mikic, Economic Affairs Officer, Trade and Investment Division, United
Nations Economic and Social Commission for Asia and the Pacific, Bangkok. E-mail:
mikic@un.org


Rahul Sen, Lecturer in Economics, Faculty of Business and Law, Auckland
University of Technology , New Zealand, E-mail: rahul.sen@aut.ac.nz


Sadhana Srivastava, Lecturer in Economics, Faculty of Business and Law,
Auckland University of Technology, New Zealand, E-mail:sadhana.srivastava@
aut.ac.nz


Nobuaki Yamashita, Lecturer in Economics, School of Economics and Finance,
La Trobe University, Melbourne, Australia, E-mail: n.yamashita@latrobe.edu.au


































ix




Contents
Page


Preface and acknowledgments .................................................................................. iii
Abbreviations and acronyms ..................................................................................... iv
List of contributors .................................................................................................. viii


Introduction .......................................................................................................................1
Chapter I ............................................................................................................................7


Driving forces of Asian international production networks: A brief history and
theoretical perspectives


Chapter II ........................................................................................................................ 23
Comparative overview of economic profiles and roles of China and India in
Asian international production networks 


Chapter III ...................................................................................................................... 53
Can India become an export platform for global operations of MNCs?
Perspectives from Japanese and United States MNCs


Chapter IV ...................................................................................................................... 78
Integrating into Asia’s international production networks: Challenges and
prospects for India 


Chapter V ...................................................................................................................... 120
Are the Indian trade agreements deep enough to support production networks?


Chapter VI .................................................................................................................... 137
Prospects for India and lessons for latecomers


Appendix I Lists of parts and components (based on the 5-digit SITC Revision 3).... 177
Appendix II India’s trade of top 10 items of manufacturing parts and components,
1994-2008 .................................................................................................................. 188


Appendix III Overview of India’s preferential trade agreement, 2011 .................... 193
 







List of tables


Page


Chapter II


Table 1. Economic profiles of China and India ........................................................... 24


Table 2. Shares of goods and services in trade by China and India ............................. 30


Table 3. Distribution of manufacturing exports by China and India ........................... 31


Table 4. Distribution of manufacturing imports by China and India ........................... 33


Table 5. Share of parts and components in manufacturing trade of selected economies ..... 46
Chapter III


Table 6. Country distribution of USFDI and JFDI stock, 1996-2010 ......................... 58


Table 7. USFDI stock in China and India, 1991-2010 ................................................ 60


Table 8. Employment of Japanese and United States MNC affiliates in India and China .... 66


Table 9. Local sales and export orientation of U.S. and Japanese MNC affiliates in
manufacturing, 1989-2005 ........................................................................................... 69


Table 10 Sales and exports by Japanese and US MNC affiliates, by industry in India
and China, 2005 ........................................................................................................... 72
Chapter IV


Table 11. Marginal intra-industry trade in top 10 products involving P&C trade in 2008 ..... 89


Table 12. Export shares and major destinations for India’s auto-parts, 2008 .............. 92


Table 13. India’s exports of auto-parts to major countries involved in Asian IPNs,
1994-2008 .................................................................................................................... 93


Table 14. India’s exports of electronics-parts: Value and share in major destinations,
2009-2010 .................................................................................................................... 98


Table 15. Tariff structure of non-agricultural goods in India and selected developing
Asian economies ........................................................................................................ 101


Table 16. Average MFN applied tariffs by selected product groups of India and
selected developing Asian economies in the non-agricultural sector, 2009 .............. 102


Table 17. Enabling trade index comparisons of India and selected Asian developing
economies .................................................................................................................. 103


Table 18. Doing Business Rank 2012 comparisons of India and selected Asian
developing economies ................................................................................................ 105


Table 19. Recent regulatory reforms undertaken by India to improve its business
environment rankings ................................................................................................. 106
Chapter V


Table 20. Rules of origin under preferential trade agreements .................................. 126


Table 21 Taxonomy of India’s PTAs ......................................................................... 128


Table 22. Progression from shallow to deep integration ........................................... 130







 


List of figures


Page
Introduction
Figure 1. Exports of parts and components by the Asia-Pacific region and the rest of the world ... 1


Figure 2. Hourly compensation costs in Chinese manufacturing sectors, 2003-2008 .. 3
Chapter I


Figure 3. International production network of a hard disk drive made in Thailand ...... 7


Figure 4. Production network of automotive components in ASEAN ........................ 10
Chapter II


Figure 5. Growth rates of real GDP: China and India, 1990-2009 .............................. 23


Figure 6. Shares in GDP by economic sectors ............................................................. 25


Figure 7. Growth of production by economic sector ................................................... 26


Figure 8. Distribution of employment and GDP by sector, China and India, 2000 ..... 28


Figure 9. Shares of exports in GDP ............................................................................. 29


Figure 10.Machinery and ICT products in manufacturing exports .............................. 32


Figure 11.Shares of intraregional trade in total trade of China, 1998-2009 ................ 34


Figure 12.Shares of intraregional trade in total trade by India, 1998-2009 ........... 35-36


Figure 13. Intraregional trade of Chinese manufacturing sector, 1995-2010 .............. 37


Figure 14. Chinese exports of manufactures, by destination ....................................... 38


Figure 15. Intraregional trade by Indian manufacturing sector, 1995-2010 ................ 39


Figure 16. Manufacturing exports from India, by destination ..................................... 40


Figure 17. FDI net inflows to China and India, 1990-2009 ......................................... 41


Figure 18. Distribution of FDI inflows to China and India by sector, 2005-2008 ...... 42


Figure 19. Distribution of FDI inflows by country of origin ....................................... 44


Figure 20. Share of parts and components in intraregional manufacturing trade ........ 47


Figure 21 Parts and components vs Final goods in China’s manufacturing trade ....... 48


Figure 22. Parts and components vs. final goods in China’s trade in manufacturing
and transport equipment by destination ....................................................................... 49


Figure 23. Parts and components vs. final goods in India’s manufacturing trade ....... 50
Chapter III


Figure 24. Employment of Japanese MNC affiliates in India and China by sector,
1992-2005 .................................................................................................................... 63


Figure 25. Employment of United States MNC affiliates in India and China ............. 64







by sector, 2008 ............................................................................................................. 64


Figure 26. Local purchase and import of Japanese MNCs in India and China, 2005 .......... 74
Chapter IV


Figure 27. India’s shares in merchandise trade with developing Asia and China ....... 81


Figure 28. India’s share of inward FDI inflows in the top 10 sectors, April 2000-
September 2011 ........................................................................................................... 82


Figure 29. The four phases of industrial development through utilizing IPNs ............ 84


Figure 30. Growth in India's merchandise exports, 1994-2008 ................................... 86


Figure 31. Growth in India's merchandise imports, 1994-2008 .................................. 86


Figure 32. Patterns of India's parts and components trade, 1994-2008 ....................... 88


Figure 33. Exports of gearboxes (SITC 78434) from selected Asian countries, 1994-2008 . 95


Figure 34. Trends in India's electronics components production and exports, 2004-2010 .... 96
Chapter V


Figure 35. India’s “noodle bowl” .............................................................................. 122


Figure 36. Areas covered by PTAs in force ............................................................... 129








1


Introduction



Witada Anukoonwattaka


Asian international production networks (IPNs) started by the changes of
MNCs’ strategies on international fragmentation of production in responding to rapid
globalization, technology changes, and increasingly open trade and investment
environments in Asian countries in the 1980s.1 The phenomenon was fuelled in the
1990s by the opening of China which has emerged as a global centre for
manufacturing assembly. Currently, the growing IPNs have a significant impact on
merchandise trade patterns and regional integration among Asian economies. The
phenomenon has led to dramatic expansion in trade in parts and components with a
notable development in exports by Asia-Pacific. The share of the Asia-Pacific region
in total world exports of parts and components has been increasing since the 1990s,
especially during the past 10 years (figure 1)



Figure 1. Exports of parts and components by the Asia-Pacific region


and the rest of the world2


0


200


400


600


800


1,000


1,200


1,400


1,600


1,800


2,000


19
90


19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


Bil
lio


ns
of


US
do


lla
rs


Asia-Pacific


Rest of the world


World total


Source: UNCOMTRADE data downloaded from WITS database.


                                                            
 
1 International fragmentation of production generally refers to the spreading of production stages across
countries. In public debates, the terms “international product fragmentation”, “offshoring” and “vertical
specialization” have been used interchangeably. Slicing up the value chain allows production cost
savings through cross-country differences in factor prices, resources, market sizes, infrastructures and
institutional factors. The geographic dispersion of the value chain creates international production
networks (IPNs) between countries where different stages of the production are located. IPNs can be
organized within a single firm (vertically integrated) or can involve different companies (outsourcing).
In both cases, the fragmentation of production requires a sophisticated organization, and involves trade
in parts and components and/or trade in tasks.
2 Data on parts and components is based on the 5-digit SITC Revision 3, and follows the descriptions
of parts and components given by Athukorala (2010). The list of parts and components is provided in
the annex to this chapter.  







2



During this process, China emerged as a pivotal assembling centre for a wide


range of manufactured products by importing parts and components from other East
and South-East Asian countries such as the Republic of Korea, Malaysia, the
Philippines, Singapore and Thailand. It appears that the phenomenon has provided
tremendous trade and investment opportunities for developing Asian economies
participating in IPNs. The fact that countries in East and South-East Asia have
benefited from the expanding IPNs has been widely documented, especially in terms
of gaining access to world market, employment creation, and technology transfer.3
Available evidence also indicates that there would be a sizable benefit for late-comer
countries if and when they were to increase their presence in existing IPNs of Asian
manufacturing industries.



While the IPN phenomenon has accelerated trade and investment linkages


between countries in East and South-East Asia, the remainder of the region has not
matched those countries in this process. Chapter II discusses the fact that India, the
second-most populous economy in the world, remains a tiny participant in the global
production networks of manufacturing industries. Although India’s emergence as a
world-class IT-services hub has proved that a developing country can achieve high
economic growth without following the IPN-driven development strategy, concerns
are mounting over the low-employment generation of India’s growth model. Heavy
reliance on relatively skill-intensive service sectors created somewhat limited
prospects for employment growth in India during the past two decades. An average of
13 million people is expected to enter into India’s labour force annually for the next
four decades, most of whom will be unskilled workers.4 To absorb such a massive
expansion of the workforce, India will need to develop more manufacturing sectors
that are labour-intensive.



However, recent trends indicate that the factors shaping the manufacturing


landscape of IPNs in Asia are changing. Overall, China is facing growing competition
from other low-wage countries. The costs of assembly activities in China have been
increasing rapidly during recent years, especially in the highly-concentrated
manufacturing centres in the coastal regions. According to the United States Bureau
of Labour Statistics, the estimated hourly compensation in the Chinese manufacturing
sectors more than doubled from US$ 0.62 per hour in 2003 to US$ 1.36 per hour in
2008 (figure 2). In addition, investment incentives for the majority of new
manufacturing activities near the coast have been eliminated or dramatically reduced
due to the efforts of the Government of China to encourage manufacturing activities


                                                            
 
3 See, for example, Borrus, Ernst and Haggard, 2000; Ernst, 1997; and Gauiler, Lemoine and Ünal-
Kesenci, 2004.
4 See, for example, Acharya, 2006; Kochhar and others, 2006; and Mehta, 2005. 







3


to locate in other parts of the country (Timberlake, Schneider, and Terry, 2009). Will
these dynamics create an opportunity for a low-income country to fill the labour-
intensive activity gaps in Asian IPNs? What are the challenges and prospects for a
country that has been lagging behind in this process?



Figure 2. Hourly compensation costs in Chinese manufacturing sectors,


2003-2008


0.62


0.66


0.73


0.81


1.06


1.36


0 0.25 0.5 0.75 1 1.25 1.5


2003


2004


2005


2006


2007


2008


United States dollars per hour


Source: United States Bureau of Labour Statistics, 2011.

The objective of this study is to clarify these issues by using India’s


performance in the Asian IPNs as a case study for other countries that are trailing
behind in this area. The study seeks to identify the reasons why India has performed
below its potential in this new form of international division of labour, even though
that country possess several supportive factors including: (a) the sheer size of the
economy and population; (b) a large pool of engineers; (c) relatively sound
intellectual property protection; and (d) an increasingly open trade and investment
climate resulting from progressive economic reforms.5 In addition, continuing efforts
towards the “Look East Policy” (LEP) have been made by forming preferential trade
agreements (PTAs) with East and South-East Asian countries, including Japan, the
Republic of Korea, Malaysia, Singapore and Thailand as well as the push for the
India-ASEAN Free Trade Agreement (IAFTA).



It has been argued that the emphasis on PTAs with the important players in


Asian IPNs may provide a stepping stone for India to increase its integration into the
                                                            
 
5 Based on indicators from various institutions and various years (e.g., World Bank, 2011; and A.T.
Kearney’s FDI confidence index, 2004 and 2010).







4


Asian IPN process. However, the effectiveness of using PTAs to increase India’s
integration with Asian IPNs will depend on the features of each PTA as well as
India’s ability to engage in the division of labour in the production networks.
Therefore, this study also considers PTA features that are necessary for the
development of IPNs.



The reason for focusing on India is not only because that country is a gigantic


emerging economy that is expected to become another growth centre of the region
within the next two decades; more importantly, it is because such a study holds
important policy messages for other low-income countries that have been missing out
on the opportunities offered by the IPN phenomenon. If integration of the Indian
economy into Asian IPNs occurs, it may have trade opportunity implications for
peripheral countries in South Asia through their trade with India.6 In a policy context,
India’s growth and trade patterns are an illustration of adverse impacts generated by
inward-looking policies as well as tight controls on foreign and domestic investment.
The efforts of India to sign a number of PTAs with players in Asian IPNs can provide
a very useful case study for countries seeking to use PTAs as a vehicle for integrating
their production and trade with production networks in the region.



Chapter I of this study presents a brief review of the appearance and expansion


of the Asian IPN phenomenon, followed by a literature survey that explores key
drivers of this phenomenon from theoretical perspectives. Theories point to important
conditions that countries must meet in order to be successfully integrated into IPNs.
These conditions highlight policy implications for creating trade and investment
climates that are favourable to IPN development.



Chapter II and III undertake a comparative analysis between China and India,


with a view to understanding the divergence in the performances of the two countries.
Chapter II begins with a comparative overview of the differences in the economic
structures of the two countries, followed by a detailed examination of the roles of the
two countries in the current landscape of Asian IPNs. Due to the fact that the IPN
phenomenon has been driven by decisions of multinational corporations (MNCs)
regarding operations and locations of their production systems, chapter III provides an
insightful background aimed at understanding the issues involved. It examines the
operational characteristics of Japanese MNC affiliates in comparison to United States-
based MNCs, using affiliate-level data.




                                                            
 
6 See, for example, United Nations (2011) exploring prospects of Sri Lanka’s integration into the
global electronics value chains.


 







5


Chapters IV and V analyse more closely the constraints and challenges facing
the integration of India into the Asian IPNs in the future. Chapter IV includes case
studies of the automotive components and electronics sectors in order to illustrate the
potentially successful example of India emerging as an important regional player in
Asian IPNs. The policy challenges and key recommendations for India to integrate
into Asian IPNs are analysed. Chapter V specifically emphasizes India’s recent
initiatives towards entering into PTAs with East and South-East Asian countries. The
chapter critically analyses the depth of PTAs between India and important players in
IPNs in order to decide whether they contain the necessary coverage and institutional
depth to provide a vehicle for the integration of India into the value chain of Asian
IPNs.



Chapter VI synthesizes the findings and key messages emerging from this study


and presents policy recommendations with regard to fostering IPN participation by
countries that are still lagging behind. The recommendations hold important
implications for India and other developing Asian countries that have been missed out
in the growing phenomenon of IPNs, given their similarity in terms of the constraints
and challenges that they face.







6


References

Acharya, S. (2006). Essays on macroeconomic policies and growth in India. Oxford


University Press, New Delhi.
A.T. Kearney (2010). Investing in a Rebound – The 2010 A.T. Kearney FDI


Confidence Index. Available from
http://www.atkearney.com/images/global/pdf/Investing_in_a_Rebound-FDICI_2010.pdf


——— (2004). Foreign Direct Investment (FDI) Confidence Index 2004. Chicago,
United States. Available from


http://www.atkearney.com/index.php/Publications/2004-foreign-direct-investment.html.


Athukorala, P. (2010). “Global production sharing, trade patterns, and determinants of
trade flows in East Asia”, Asian Development Bank Working Paper Series on
Regional Economic Integration, No. 41. Manila.


Borrus, M., D. Ernst, and S. Haggard (2000). International production networks in
Asia: Rivalry or riches? Routledge, London and New York.


Bureau of Labour Statistics (2011). “International comparisons of hourly
compensation costs in manufacturing, 2009”, economic news release USDL-11-
0303, United States Department of Labour. Available from
http://www.bls.gov/news.release/archives/ichcc_03082011.pdf


Ernst, D. (1997). “Partners for the China circle? The Asian production networks of
Japanese electronics firms”, in B. Naughton (ed.), The China Circle, The
Brookings Institution, Washington, D.C.


Gaulier, G., F. Lemoine and D. Ünal-Kesenci (2004). “China’s integration in Asian
production networks and its implications”, RIETI Discussion Paper Series 04-E-
033. Research Institute of Economy, Trade, and Industry, Tokyo.


Kochhar, K., U. Kumar, R. Rajan, A. Subramanian and I. Tokatlidis (2006). “India’s
pattern of development: What happened, what follows?” IMF Working Paper
WP/06/22. International Monetary Fund, Washington. D.C.


Mehta, P. B. (2005). “How India lost the will to reform”, Financial Times, 1
November 2005. London.


Timberlake, J., P. Schneider and S. D. Terry (2009). “China: Still manufacturing’s
shining star?” Deloitte Review, No. 5; pp. 105-119.


United Nations (2011). Enabling Environment for SMEs’Productive Integration in
Global Value Chains: Studies of Bangladesh, Nepal, and Sri Lanka. Studies in
Trade and Investment No.70. Economic and Social Commission for Asia and the
Pacific, Bangkok.



World Bank (2011). Doing Business 2012: Doing Business in a More Transparent


World. World Bank and International Financial Corporation, Washington, D.C.
Available from
http://www.doingbusiness.org/~/media/fpdkm/doing%20business/documents/annua
l-reports/english/db12-fullreport.pdf









7



Chapter I



Driving forces of Asian international production networks:


A brief history and theoretical perspectives


Witada Anukoonwattaka


During the past three decades, the process of global production sharing has
created a new form of division of labour between Asian economies, especially in East
and Southeast Asia. The rapid growth of production networks has dramatically
transformed patterns of production and international trade in the region, with a notable
expansion of intra-regional trade “through multiple border crossings of parts and
components” (figure 3).


Figure 3. International production network of a hard disk drive made in
Thailand




Hong Kong, China


United 
States



Source: Baldwin, 2010.




This chapter provides a brief review of the development process of the IPN
phenomenon in Asia, followed by a literature survey, with the objective of providing
an analytical framework for discussing the necessary conditions for the successful
integration of a country into IPNs. It conveys important policy implications for setting
trade and investment climates that encourage IPNs.







8



1. Brief overview of the development of Asian IPNs



International product fragmentation has been an important feature of the


international division of labour since about the mid-1960s (Athukorala, 2008).
Electronics MNCs based in the United States started the process in response to
increasing pressure created by domestic real-wage increases and rising import
competition from low-cost sources. The Government of the United States facilitated
the process by introducing an outward processing tariff scheme under which
companies were allowed to export material for processing overseas and to re-import
the finished products, paying tariffs only on the value-added abroad (not the exported
intermediates).



The growth of IPNs led to international division of labour between countries


along the value chain, in which the term “vertical specialization” is used
interchangeably to describe the same phenomenon as documented by Hummels, Ishii
and Yi (2001). Consequently, intra-industry trade in parts and components has been
growing rapidly between countries participating in IPNs as intermediate inputs are
imported and used in goods that are subsequently exported (so called outward
processing trade).



Using the Asian input-output table maintained by Japan’s JETRO, Baldwin


(2008) concludes that international production sharing in Asia has developed from a
simple North-South outward processing trade to a much broader phenomenon, for
which the term “Factory Asia” is widely used. The process of linking Asia to global
supply chains began in the 1960s in the electronics industry with the arrival of two
United States companies, National Semiconductors and Texas Instruments, which set
up plants in Singapore to assemble semiconductor devices (Athukorala, 2008 and Goh,
1993). From around the late 1970s, MNCs with production facilities in Singapore
began to relocate some low-end assembly activities to neighbouring countries
(particularly Malaysia, the Philippines and Thailand). Many MNCs that were
newcomers to the region also set up production bases in those countries. Singapore
has since become a regional centre for component design and fabrication as well as
providing headquarter services for production units located in neighbouring countries.



Although the United States electronics MNCs started their IPNs in Asia in the


1960s, the vertical specialization form of trade was more important in North-North
trade among European and North American nations up until the early to mid-1980s
(Amador and Cabral, 2008). Initially, the United States MNCs explored opportunities
for North-South offshoring in neighbouring countries in Latin America, but the
unfavourable investment climate in those countries – macroeconomic instability,
political tensions, trade union upheavals and uncertainty – led American producers to
switch to sub-suppliers located in Asia (Feenstra, 1998; Grunwald and Flamm, 1985;







9


and Helleiner, 1973). Consequently, a rapid increase in North-South intra-industry
trade occurred, especially in Asia, after the mid-1980s.



By the 2000s, rapid development of IPNs led to countries in East and South-East


Asia becoming important players in the global supply chain system. Amador and Cabral
(2008) found that the group of first-tier newly industrialized economies (Republic of
Korea, Singapore, Taiwan Province of China and Hong Kong, China) accounted for 24.5
per cent of global vertical intra-industry trade between 2001 and 2005. The most
impressive increase took place in China; while China’s share of global vertical intra-
industry trade between 1986 and 1990 was 2 per cent on average, this share increased to
an average of 15 per cent between 2001 and 2005.



Corresponding to the growth of IPNs in the region, South-South trade in parts


and components became more significant. In the mid-1980s, developing nations in
East and South-East Asia had little trade among themselves.7 They either supplied
their own intermediates or imported intermediates from technologically advanced
nations, mostly Japan, the United States and members of the European Union. In the
1990s, the importance of local sourcing declined, while imports of intermediates from
Japan, the United States and Asia’s newly industrialized economies (NIEs) increased.
More recently, the emergence of China as the “global assembly centre” has
strengthened the linkages between countries in IPNs, as the success of China’s
manufacturing exports appear to rely significantly on parts and component imported
from other countries in the region particularly those in East and South-East Asia. 8



The evolution of Asian IPNs during the past two decades appears to


correspond to dynamic decisions of MNCs in responding to changes in trade and
business environments. Prior to the 1990s, operations of MNCs could be divided into
two categories: “vertical” and “horizontal” FDI (Markusen, 1995). Vertical FDI
corresponds to international fragmentation of production on a factor-cost saving basis
(such as labour), while horizontal FDI occurs when MNCs follow a “build-where-
you-sell” strategy for seeking markets. In the context of Asia, vertical FDI by the
United States electronics MNCs in the 1970s was documented as the beginning of
IPNs in Asia. Meanwhile, investment by Japanese MNCs in the South-East Asian
automotive sector during the same period is an example of horizontal FDI responding
to high tariff protection in the host countries.



Since the late 1990s, MNC operations in Asia have progressively adopted an


international product fragmentation strategy; as a result, the division between the two
types of investment has become unclear. Both horizontal and vertical operations of


                                                            
 
7 Parts and components are intermediate products. The list of parts and components is given in Appendex I.
8 This is discussed in more detail in chapter II.  







10


MNCs are increasingly able to coexist as declining tariffs and transportation costs
allow for more flexibility in sourcing components from various countries. For
example, Japanese automobile assemblers are taking advantage of regional trade
liberalization programmes to consolidate duplicated production facilities in ASEAN
countries and facilitate the division of labour within the region, in order to achieve a
regional scale of production (figure 4).9 In addition, during the past two decades,
many MNCs have significantly upgraded technical activities of their regional
production networks in ASEAN, and assigned global production responsibilities to
affiliates located in Singapore and, more recently, to those located in Malaysia and
Thailand (Athukorala, 2008, Borrus, Ernst and Haggard, 2000; and McKendrick,
Doner and Haggard, 2000). Overall, the ASEAN experience appears to support the
view that MNC affiliates have a tendency to become increasingly embedded in host
countries the longer they are present there (Rangan and Lawrence, 1999; and
Athukorala and Yamashita, 2006).



Figure 4. Production network of automotive components in ASEAN




Malaysia
Instrumental panel assembly


Bumper
Drive shaft


Indonesia
Cylinder head assembly


Cylinder block
Engine valve


Steering handle
Automatic transmission


Philippines
Engine fuel system


Emission dress parts
Engine electronic parts


Suspension parts
Manual transmission


Thailand
Press parts


Frame panels
Electronics parts


Interior parts
Engine parts


AFTA-CEPT


Malaysia
Instrumental panel assembly


Bumper
Drive shaft


Indonesia
Cylinder head assembly


Cylinder block
Engine valve


Steering handle
Automatic transmission


Philippines
Engine fuel system


Emission dress parts
Engine electronic parts


Suspension parts
Manual transmission


Thailand
Press parts


Frame panels
Electronics parts


Interior parts
Engine parts


AFTA-CEPT





Source: Hiratsuka, 2010.





                                                            
 
9 For details see, for example, Legewie, 1999a and 1999b, and Hiratsuka, 2010.







11


2. Theoretical perspectives of international production network

This section reviews the literature that is relevant to this area of research with


the objective of identifying the key determinants in the successful integration of a
country into IPNs. This will be built into an analytical framework for providing
guidelines for policy reform aimed at enhancing IPN-friendly trade and business
environments.



IPNs are driven by firm-level decisions regarding the organization and


locations of their production system. When factor-cost savings are large relative to the
costs of fragmenting business activities across countries, a multinational firm will
decide whether or not to fragment the production into stages as well as where to locate
those fragmented units. The firm will optimize these decisions, given a set of
exogenous factors.



Two elements of the relevant literature are of particular relevance: (a)


offshoring literature that models the process of international fragmentation of
production; and (b) new economic geography (NEG) literature that discusses how
industrial locations are shaped in general equilibrium.10 The focus of the offshoring
literature is on factors driving a firm to split its production process into stages and
locate them between countries, while the focus of the NEG literature is on discussing
simultaneously the centripetal forces that cause economic activities to cluster together
in particular locations and the centrifugal forces that push it apart. In the context of
Asian IPNs, these two elements of literature coexist. The offshoring literature helps us
to understand important factors driving rapid growth of IPNs in Asia. Meanwhile, the
NEG literature completes the picture by helping to clarify the reasons for the
concentration of a particular industry in a certain country (for example, why assembly
activities are concentrating in China whereas manufacturing parts and components are
clustering in South-East Asia).



Offshoring literature contains comparative-advantage elements of international


trade theory. This is a large area of research that could be divided into groups. One is
the literature on international fragmentation of production, such as Jones (2000),
Jones and Kierzkowski (2001), and Feenstra and Hanson (1996a and 1996b). The
literature directly discusses the vertical specialization in the international supply chain.
A general conclusion is that the division of labour between countries in an IPN is


                                                            
 
10 Another branch of literature looks at a firm’s organization issues arising from the fact that production
networks can be organized within the boundary of a single firm or take place between different firms.
However, such organization decisions of MNCs are not a focus of this study. Literature in this area
looks at microeconomic decisions of MNCs regarding organizations governing IPNs, i.e., the literature
on outsourcing versus vertical integration. Antràs and Rossi-Hansberg (2009) provide a comprehensive
review of this intersection of organizational economics and international trade.







12


determined by factor intensity of production stages and differences in factor prices
between countries. An implication of this proposition is that relative abundance of
labour was an important factor driving China to become a major assembly centre in
the past decade.



A comparative advantage element is that studies of international fragmentation


of production share a common feature with a branch of the FDI literature that models
vertical investment of MNCs. In general, vertical FDI models assume that activities of
a multinational firm differ in factor intensities, while host countries differ in factor
proportions. Early general equilibrium trade models of vertical firms include Helpman
(1984) and Helpman and Krugman (1985). Recently, attempts to integrate vertical and
horizontal FDI models have led to a modern view of multinational firms. In recent
models, parent firms are exporters of services that are produced using knowledge-
based assets to foreign subsidiaries (Markusen, 1995, 1998, 2002 and 2005). These
models are referred to as “knowledge-capital” models. They assume that firm-specific
knowledge assets are geographically mobile and are a joint input to multiple
production facilities. An important implication of these FDI models is that reducing
trade barriers will enable location advantages to be more easily realized and will allow
MNCs more greater flexibility in sourcing components across countries.
Consequently, trade liberalization is expected to increase intra-firm trade within the
production network of MNCs.



A recent attempt to discuss the growing phenomenon of trade in tasks and


components in the literature led to development of modelling the production process
as combining a continuum of components or tasks (Baldwin and Robert-Nicoud, 2010;
Deardorff, 2001; Dixit and Grossman, 1982; Feenstra and Hanson 1996a; Grossman
and Rossi-Hansberg, 2008; and Yi, 2003). The literature discusses trade in tasks or
components between that stand at different levels of development, i.e., countries that
differ in factor endowments or disparate technological capabilities. Motivated by the
fact that trade in intermediate goods largely take places between advanced industrial
countries, more recent literature in this area started to discuss trade in tasks between
countries with similar characteristics by sharing the “new trade theory” features of
(external) economies-of-scale at the task level (Grossman and Rossi-Hansberg,
forthcoming).



The NEG literature covers several levels of agglomeration. At one extreme,


the literature discusses a core-periphery structure of production where factor mobility
in some areas results in a great deal of economic activity while in other areas there is
almost no such activity. 11 Another form of agglomeration is industrial concentration,
                                                            
 
11 An example of this type of agglomeration is the fear about crowding-out effects resulting from the
rise of China.







13


where different sectors cluster in different countries This form of agglomeration is
particularly related to internationalization and trade in IPNs. Of the large number of
studies that deal with this area, Fujita, Krugman and Venables (1999) provided a
comprehensive framework for the agglomeration mechanisms. As shown by Venables
(1996) and Krugman and Venables (1995), there are backward and forward linkages
that tend to draw the upstream and downstream producers of an industry to
concentrate in a single location.



The forward linkages, which depend on market size issues, form an important


force for agglomeration of firms in a country with a relatively large domestic market.
Firms want to locate where they will have good access to a large demand, thus
enabling them to reduce trade costs. When a large firm or many firms doing so, their
suppliers then move to nearby areas in order to serve their customers and minimize
trade costs. As a result of this circular mechanism of forward linkages, agglomeration
may begin.



The second driver of industry agglomeration is through the backward


linkages.12 Firms buy inputs such as raw materials, intermediate goods, machinery
and equipment as well as services (e.g., financial and logistic services) from service
providers. The cost linkages work by encouraging firms to locate near their suppliers
to save transport costs and trade-related costs. When many firms move to a low-cost
location for intermediates, the cost of intermediates in that location reduce even
further because suppliers of intermediates can enjoy economies–of-scale. As final
products of some firms are also intermediates for other firms, an additional benefit for
these upper-stream producers comes from increases in demand for their final goods.



Key messages from the NEG literature are that:
(a) The input-output linkages form a key driving force for industries to choose


particular regions within which to become concentrated;
(b) Economies-of-scale, transportation costs, and mobility of factors can cause


spatial structure of industrial sectors to emerge and changes;
(c) The landscape of industrial concentration may change in response to trade


cost reductions in a non-linear manner. Trade cost reductions from high to
intermediate levels will lead to a concentration of manufacturing activities
in a country already having many firms located there because firms want
to be located near their major markets to save trade costs while reductions
in trade costs allow them to export their goods to peripheral markets. If
trade costs are reduced further to a very low level, production cost savings
start to dominate trade-cost saving. Consequently, firms will disperse their


                                                            
 
12 See, for example, Grossman and Helpman, 2002, 2003 and 2005. 







14


manufacturing activities out of the core location to peripheral countries in
order to exploit benefits arising from differences in factor prices and other
advantages in those latter countries.




3. Key factors driving integration of a country into IPNs


On the basis of the literature reviewed above, this section summarizes
important factors for countries to successfully integrate into the IPNs, which are:



(a) Factor-cost advantages


Theory suggests that international fragmentation of production allows firms to
reduce production costs as some intermediate inputs are cheaper to produce in some
countries. Therefore, given that trade costs are relatively small, interactions between
factor-intensity of fragmenting tasks and factor-price differences between potential
host countries will determine the division of labour between countries participating in
IPNs. The emergence of China as a major assembly centre during the past decade, and
the division of labour in IPNs between countries in East and South-East Asia, appear
to support this view. Empirically, MNCs tend to spread production stages over
different countries due to production-cost savings. For example, Kimura (2006)
reveals a fact about IPNs in East Asia that wage differential plays a crucial role for
multinational firms when taking location decisions. Meanwhile, Athukorala (2008)
indicates that significant differences in wages among the countries within the East and
South-East Asian regions have provided the basis for rapid expansion of intraregional
product-sharing systems, giving rise to increased cross-border trade in parts and
components.



China’s emergence as a major assembly centre in Asian IPNs appears to


support this supposition. However an ongoing transition of industrialization in China
that has led to rapid increases in real wages could change the location advantages of
China. In this context, relative abundance of labour of an emerging economy such as
India appears to be a supportive factor for participation by such a country in labour-
intensive activities in IPNs, including assembly activities.



(b) Economies-of-scale



Certain stages of production that involve high fixed costs require scale


economies from specialized providers (Abraham and Taylor, 1996). According to the
new trade theory, a country will export goods for which it has a large home market,
which is called “the home market effect”. Large domestic industries serve as a base
for exports because the operation of increasing returns-to-scale makes manufactured
products cheaper in a country that has a large domestic market. In addition, the NEG
literature points out that for firms clustering in a single location positive externality







15


emerges from knowledge spillovers and backward- and forward-linkages, called “the
agglomeration effect”.



In the context of domestic market size, China appears to have the location


advantage for scale-intensive activities such as automotive manufacturing due to its
large and rapidly growing home market. The apparent consolidation of Japanese
operations in the ASEAN automotive sector in order to use benefits of regional trade
liberalization programmes to overcome the limitations on domestic market sizes of
ASEAN countries also appears to be consistent with the literature. In the case of India,
the country offers the advantage of a huge and fast-growing economy even though the
level of per capita income is still relatively low. Therefore, the country appears to
offer a supportive environment in this regard, especially in the medium to long term.

(c) Thickness of markets



One implication of the NEG literature is that for an industry having a vertical


production structure, the input-output relationships create forward and backward
linkages between firms, and lead to industry concentration in a particular country or
region. Such linkages rest on issues concerning thickness of markets, which implies
ability to access to downstream customers and upstream suppliers.



In this context, early establishment appears to be an important factor


determining location decisions of firms. Based on experiences of ASEAN and China,
Athukorala (2008) indicated that site selection decisions by MNCs operating in
assembly activities were strongly influenced by the presence of other key market players
in a given country or in neighboring countries. In this context, late establishment of
manufacturing industries as well as poor development of supporting industries and
supply-chain networks appears to put late entry into global production networks by
countries such as India and other South Asian nations at a serious disadvantage.

(d) Low international trade costs



International fragmentation of production requires intermediate inputs to be


manufactured in one or more countries and then shipped to another destination for final
assembly. In addition, operating international supply chain requires sophisticated
management and the use of infrastructure services, such as telecoms, the Internet, air
freight and trade-related finance, in order to coordinate the production process and
flows between production units in different locations. Costs related to those operations
are commonly termed as “international trade costs”. A broad definition of trade costs
includes: policy barriers from tariffs; non-tariff barriers; transportation, communications







16


and information costs; exchange rate costs; legal, regulatory and enforcement costs, and
local distribution costs (WTO, 2008).13



Trade in IPNs involves multiple cross-borders trading of a good-in-process


during different stages of production. As international trade costs are incurred each
time a good-in-process crosses a border, even a minor reduction in trade costs can
result in the cost of a vertically-integrated good being reduced considerably below the
initial trade cost reduction.



An obvious precondition for the international unbundling production process


is that such international trade costs must be low enough to enable firms to utilize
location advantages of countries arising from factor-price differences and economies-
of-scale. A trade cost reduction may make it profitable for firms that previously
concentrated all of their production stages in one country to move some stages of the
production overseas. Firms that have already been internationally fragmenting their
production are also likely to increase their flows of component trade when trade costs
decline.



Several factors can result in reductions in trade costs, including: eliminating


trade and investment barriers; trade facilitation; deregulation; infrastructure
improvements; technological advances in communications; transportation and
logistics services; increased automation; and standardization of production
technology.14 Except for technology factors, all of these factors can be influenced by
policy and its implementation. The next section considers policy implications for
countries that have been missed out on taking advantage of the IPN phenomenon in
order to create a more IPN-attracting environment.


4. The way forward: Creation of IPN-attracting environments


To benefit from the opportunities for trade and employment expansion through
the international fragmentation of production in IPNs, policymakers need to create IPN-
attracting environments, which will require major reforms. The implications drawn
from theoretical debates on policy reforms are discussed below.

                                                            
 
13 Kimura and Ando (2005) termed the costs of coordinating production units over different locations
as “service link costs”. Therefore, service link costs are a subcategory of trade cost in broad terms.
14 The rapid development in automation of production technology has allowed an increasing number of
tasks to be standardized. These tasks can easily be offshored. An implication is that the development of
automation and specialized software that allows workers to follow a set of routine procedures has been
a driving force in IPN development (for example, in the automotive industry). Evidence supporting this
argument is found in the changes in distribution of tasks performed in the United States. Since the
1970s, the share of routine tasks has been falling, while that of non-routine tasks has been rising (WTO,
2008). 







17


(a) Promote comprehensive trade liberalization


Trade barriers – not only tariffs but also non-tariff barriers – are an important
element of international trade costs. 15 Trade within IPNs is postulated as being
relatively more sensitive to changes in trade barriers because it involves multiple
cross-borders trading in parts and components. Tariffs have been progressively
reduced globally, especially in most Asian countries, because of unilateral
liberalization, multilateral commitments, and preferential trade agreements (PTAs).
However, most trade barriers are in forms of non-tariff barriers (NTBs) that include
quantitative restrictions, subsidies, anti-dumping and countervailing duties, customs
valuations, standard and technical regulations.



The comprehensiveness of liberalization is highly important, because trade in


IPNs involves international trading in extensive areas, not only manufacturing (such
as final and intermediate goods) but also agricultures (such as primary and
intermediate inputs), and services (communications, finances and logistics, and other
related services). In addition, tariff escalation in favour of domestic production in
final goods should be avoided because it creates a bias against domestic
manufacturers of parts and components.



At the national level, several approaches to trade liberalization are available:


(a) a regional approach to liberalization through PTAs; (b) multilateral liberalization
through WTO; and (c) unilateral liberalization. In theory, the trade-stimulating effects
of preferential trade liberalization would be high for trade of participants in IPNs,
which require multiple border crossings in the trading of parts and components.
However, in practice, the actual benefits of PTAs with regard to increasing the trade
of participants in IPNs depends much on the nature of the rules of origin built into
PTAs. Trade-distorting effects of rules of origin can be more detrimental to trade in
IPNs than the conventional style of trade in which firms only trade in final goods
because trade costs arising from the bureaucratic process of utilizing tariff preferences
will be accumulated over multiple cross-border trading in parts and components at
different stages of production. Moreover, maintaining trade barriers against non-
members may distort the natural expansion of fragmentation trade across countries. In
the policymaking context, it is difficult to define products giving tariff preferences
because vertical specialization in IPNs may need a very fine level of product
categorization.



Under multilateral liberalization, trade diversion is supposed to be


insignificant since the liberalization tends to cover almost all important trading


                                                            
 
15 For more details on trade cost calculation, see the comprehensive ARTNeT trade cost database
available at www.unescap.org/tid/artnet/trade-costs.asp.







18


partners in IPNs. Furthermore, transaction costs associated with multilateral
liberalization are expected to be lower than those under preferential trade
liberalization. However, the complexity of the nature of trade within IPNs has already
gone beyond the current scope of multilateral trading rules designed under
GATT/WTO. Doing business abroad and connecting international production
facilities means that IPN-type trade barriers are now not only tariffs and other border
measures, but also threaten tangible and intangible property rights, discriminatory
treatment of foreign investment, restricted movement of capital, and anticompetitive
practices. Currently, the multilateral system still lacks deeper disciplines in these
regulatory measures.



Unilateral liberalization with comprehensive and deep coverage appears to


cause fewer distortions than other approaches to liberalization, ceteris paribus. The
non-reciprocal approach of unilateral liberalization also makes the process associated
with low transaction costs. Under this approach, a country also has full control over
the pace and sequence of liberalization measures. On the other hand, because of the
absence of reciprocity in the opening of market access, in reality it is the least
favoured road to take.



(b) Combine trade and investment liberalization



Based on experience of East and South-East Asian countries, direct investment


by global producers is a necessary starting condition for developing countries to
become integrated into the global value chain. Vertical (efficiency-seeking) FDI has
been a major driver of the growth of IPNs. The type of FDI attracted by a country is
mainly governed by the characteristics and policy environment of that country; for
example, trade barriers and protection given to domestic producers will create
incentives for market-seeking FDI rather than efficiency-seeking FDI. An open
investment climate is more necessary for efficiency-seeking operations than for
market-seeking operations, because efficiency-seeking MNCs rely not on economic
rents created by protection but on profit margins, which are determined by the cost
competitiveness of a vertically-integrated good. To establish an investment-friendly
environment, restrictions on investment have to be relaxed in an effort to simplify
investment procedures, remove investment bottlenecks on a national treatment basis,
and capital and financial market openness to inward and outward investment flows.



(c) Spend on infrastructure improvement



Coordinating international production requires assurances of world-class


telecommunications and goods transportation as well as efficient financial services
and customs clearance. These “infrastructure” services are necessary in order to
facilitate international business transactions that are highly intensive in the IPN
operations. In much the same way as trade barriers, the costs of those infrastructure
services penalize goods produced in multiple stages across different countries,







19


because producers need to pay for moving goods at each stage of the production
process. A reduction in costs and the time required for those services will therefore be
beneficial to trade in IPNs.



Although investment in infrastructure and technological advancement has


played an important role in reducing costs and the time required for shipping and
communications, infrastructure services are still state-monopolized in many
developing countries. However, state monopolization results in distortions in trade
and investment, and the often inefficient operation of the services providers.



Therefore, comprehensive policy reforms to promote trade and investment in


services are needed in order to minimize trade costs arising from inefficiency of
service sectors. As pointed out by ESCAP (2011), FDI can play a key role in
improving the efficiency of service sectors, especially infrastructure services which
are characterized as capital- and technology-intensive. International service providers
are a major source of capital, technology transfer and improved managerial skills for
host developing economies.







20


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Money, Factor Mobility and Trade: The Festschrift in Honor of Robert A.
Mundell. MIT Press, Cambridge, MA, United States.


Kimura, F. (2006). “International production and distribution networks in East Asia:
18 facts, mechanics, and policy implications”, vol. 1, No.1; pp. 346-347.







22


Kimura, F. and M. Ando (2005). “Two-dimensional fragmentation in East Asia:
Conceptual framework and empirics”, International Review of Economics &
Finance, vol. 14, No. 3; pp. 317-348.


Krugman, P. and A. J. Venables (1995). “Globalization and the inequality of nations”,
Quarterly Journal of Economics, vol. 110, No. 4; pp. 857-880.


Legewie, J. (1999a). “Manufacturing strategies for Southeast Asia after the crisis:
European, US and Japanese firms”, Business Strategy Review, vol. 10; pp. 55-64.


——— (1999b). “Driving regional integration: Japanese firms and the development
of the ASEAN automobile industry”, Working Paper No. 99/1, Philipp Franz von
Siebold Stiftung, German Institute for Japanese Studies, Tokyo.


Markusen, J. R. (2005). “Modelling the offshoring of white-collar services: From
comparative advantage to the new theories of trade and FDI”, NBER Working
Paper No. 11827. National Bureau of Economic Research, Cambridge, MA,
United States.


——— (2002). Multinational Firms and the Theory of International Trade. MIT
Press, London.


——— (1998). “Multinational firms, location and trade”, The World Economy, vol.
21, No. 6; pp. 733-756.


——— (1995). “The boundaries of multinational firms and the theory of international
trade”, Journal of Economic Perspectives, vol. 9; pp. 169-189.


McKendrick, D. G., R. F. Doner and S. Haggard (2000). From Silicon Valley to
Singapore: Location and Competitive Advantage in the Hard Disk Drive industry.
Stanford University Press, Stanford, California.


Rangan, S. and R. Z. Lawrence (1999). A Prism on Globalization. Brookings
Institution, Washington, D.C.


Venables, A. J. (1996). “Equilibrium locations of vertically linked industries”,
International Economic Review, vol. 37; pp. 341-335.


WTO (2008). “Trade, the location of production and the industrial organization of
firms”, World Trade Report 2008 – Trade in a Globalizing World. Geneva.


Yi, K-M (2003). “Can vertical specialization explain the growth of world trade?”
Journal of Political Economy, vol. 111; pp. 52-102.























23


Chapter II


Comparative overview of economic profiles and roles of China and
India in Asian international production networks



Witada Anukoonwattaka



Despite the fact that China and India have gone through the period of high


growth in the 2000s (figure 5), there are considerable differences in terms of
economic structure, sources of growth and trade patterns. The differences have
resulted in divergent performances by the two countries in Asian IPNs. This chapter
provides a comparative overview of the economic structure and participation of China
and India in Asian IPNs to enable the current position of India to be evaluated, with
China being used as a benchmark.


Figure 5. Growth rates of real GDP: China and India, 1990-2009


0.0


2.0


4.0


6.0


8.0


10.0


12.0


14.0


16.0


19
90


19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


China
India



Source: Based on data from the ESCAP Statistical Yearbook, 2011.



1. Macro comparisons of economic structures



China and India are the world’s two most populous countries. In 2010, China


accounted for nearly 20 per cent of the global population, while for India it was
approximately 18 per cent. Output and income per capita of China was significantly
higher than that of India (table1). Based on real GDP per capita, adjusted for
purchasing power parity (PPP) to reflect the actual purchasing power of a country,
real income per capita of China is more than double that of India.







24





Table 1. Economic profiles of China and India


1990 1995 2000 2005 2008 2009 2010


Population
(million
people)


China 1 142 1 211 1 267 1 312 1 337 1 346 1 354
India 862 953 1 043 1 131 1 181 1 198 1 214


Share of world
population (%)


China 21.6 21.2 20.7 20.2 19.8 19.7 19.6
India 16.3 16.7 17.0 17.4 17.5 17.5 17.6


GDP
(million US$ )


China 404 494 756 960 1 192 836 2 302 719 4 416 104 4 984 426
India 326 796 369 240 467 788 840 470 1 281 330 1 287 292


GDP per
capita
( 2005 US
dollars)


China 469 790 1 141 1 755 2 429 2 633


India 409 475 576 743 897 953


GDP per
capita
(2005 PPP US
dollars)


China 1 094 1 840 2 658 4 088 5 658 6 134


India 1 230 1 426 1 731 2 235 2 697 2 864


Source: Based on data from the ESCAP Statistical Yearbook, 2011.

(a) Structure of GDP


China and India experienced a significant decline in agricultural production
during the past two decades (figure 6). In the case of China, output has been shifting
towards the industrial and services sectors. The industrial sector of China increased its
share in total value-added from 40 per cent in 1990 to 48 per cent in 2009, while its share
of the service sector increased from 34 per cent to 41 per cent during the same period. In
contrast, India’s production has shifted toward services. India’s share of services in total
value-added increased steadily from 42 per cent in 1990 to 55 per cent in 2009, while its
share of the industrial sector was below 30 per cent throughout that period


















25


Figure 6. Shares in GDP by economic sectors
(Unit: Per cent of GDP)




China


0.0


10.0


20.0


30.0


40.0


50.0


60.0


1990 2000 2008 2009


Agriculture Industry Services


India


1990 2000 2008 2009


Agriculture Industry Services


Source: Based on data from the ESCAP Statistical Yearbook, 2011.


In terms of growth, the service sector of India grew notably faster than the
industrial sector, especially during the late 1990s (figure 7). In China, by contrast, the
industrial sector grew slightly faster than the services sector. The performance of
India’s service sector led to the praise that Indian’s growth pattern had revealed an
alternative growth model that was driven by services and which skipped the phase of
a typical labour-intensive industrialization exemplified by the rapid growth of East
and South-East Asian economies. However, employment in the economic sectors
shows that India’s rapidly growing service sectors may have a limited impact on
employment creation.







26



Figure 7. Growth of production by economic sector


(Unit: Average annual growth rates in per cent)


China


0.0


2.0


4.0


6.0


8.0


10.0


12.0


14.0


16.0


18.0


1990-1995 1995-2000 2000-2005 2005-2009


Agriculture Industry Services


India


0.0


2.0


4.0


6.0


8.0


10.0


12.0


14.0


16.0


18.0


1990-1995 1995-2000 2000-2005 2005-2009


Agriculture Industry Services


Source: Based on data from the ESCAP Statistical Yearbook, 2011.







27


(b) Employment16


While the agricultural sector represents a minor part of total value-added of
China and India, in terms of employment that sector is still the most important one for
both countries, the employment share of China was 50 per cent while that of India was
60 per cent in 2000 (figure 8). The industrial sector accounted for 23 per cent of
employment in China, and contributed 46 per cent of Chinese GDP in the same year.
The service sector contributed 28 per cent of total employment, and accounted for 39
per cent of the Chinese GDP. 17 Despite a commonality in agriculture, India’s
employment and production structure appears to be the reverse of that in China: in 2000,
India’s services sector generated more than 50 per cent of the country’s GDP, while
accounting for only 24 per cent of total employment. The industrial sector generated 16
per cent of employment and accounted for 27 per cent of India’s GDP. 18


In terms of wages, labour costs in India appear to be lower than in China. For
example, according to Kalish (2006), International Monetary Fund (IMF) data reveals
that the monthly wage of a typical manufacturing worker in India was US$ 23.80 in
2002, while for China the figure was US$ 110.80. Thus, it appears that India has not
yet utilized its labour cost advantage to create more employment opportunities in the
manufacturing sector.19


                                                            
 
16 Data related to employment and wage in China and India should be taken cautiously. The data for
unregistered sectors are usually not reported.
17 Chinese employment data show that the agricultural sector accounted for 40 per cent of Chinese
employment in 2008, followed by the services sector (33 per cent) and industrial sector (27 per cent).
For India, the latest employment data are available only up to 2000 (see figure 8).
18The sectoral distribution of India’s employment and output appears to support the argument by some
reports, such as Gordon and Gupta (2004), that rapid increases in Indian output were related to IT
services, which are relatively skills-intensive and have small impact on job creation.
19 Recognizing the importance of the manufacturing sector with regard to employment creation, India
plans to increase the share of manufacturing in total value-added and employment. A draft national
manufacturing policy was approved in 2011. For more details, see chapter IV of this book. 







28


Figure 8. Distribution of employment and GDP by sector, China and India, 2000


China


50.0


22.5


27.5


15.1


46.0


38.9


Agriculture Industry Services


Inner circle: Share of employment
Outer circle: Share of GDP




India


59.8
16.1


24.1


23.2


26.4


50.4


Agriculture Industry Services



Sources: Based on data from the ESCAP Statistical Yearbook, 2011 and the International Labour
Organization.









29


(c) Trade


In 2010, China’s trade value was more than quadruple that of India. China’s
total exports (merchandise and services) amounted to US$ 3,335 billion versus US$ 765
billion for India. The export dependency of the Chinese economy is considerably higher
than it is in India. Before the impact of the global economic crisis significantly affected
export figures, the share of China’s exports in GDP was more than 35 per cent in 2008,
while for India it was less than 25 per cent (figure 9).



Figure 9. Shares of exports in GDP


(Unit: Per cent)


China


20.9


33.1 32.4


24.1


2.5


3.2 3.3


2.6


0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


40.0


2000 2005 2008 2009


Merchandise exports Service exports
India


9.1
11.9


15.2 12.8


3.4


6.2


8.1
7.0


0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


40.0


2000 2005 2008 2009


Merchandise exports Service exports


Source: Based on data from the ESCAP Statistical Yearbook, 2011.

Exports of goods by China now account for more than 90 per cent of that


country’s total exports, while the figure for India is still well below 70 per cent (table
2). Services play a more important role in trade by India than trade by China,
especially on the export side. The services sector share of Indian exports rose from 27







30


per cent in 2000 to a peak of 35 per cent in 2008, while the sector’s share of Chinese
exports remained at about 10 per cent throughout that period. During the economic
crisis in 2009, services trade was relatively resilience compared to trade in goods
(Asia-Pacific Trade and Investment Review, 2011). As a result, since most of China’s
exports are goods, the country was hit harder by the adverse impact of the global
economic crisis than India as a considerable proportion of Indian exports comprise
services.


Table 2. Shares of goods and services in trade by China and India
(Unit: Per cent)


Year China India
Exports Imports Exports Imports
Goods Services Goods Services Goods Services Goods Services
2000 89.2 10.8 86.3 13.7 72.6 27.4 73.2 26.8
2005 91.2 8.8 88.8 11.2 65.6 34.4 75.3 24.7
2008 90.3 9.7 87.8 12.2 64.6 35.4 78.5 21.5
2009 90.3 9.7 86.4 13.6 66.4 33.6 76.2 23.8
2010 90.3 9.7 87.9 12.1 66.4 33.6 73.4 26.6



Source: Based on data from the ESCAP Statistical Yearbook, 2011.


2. Manufacturing sector20


Many empirical studies have documented the fact that machinery and transport
equipment (SITC 7) are predominant sectors in terms of international fragmentation
of production.21 Trade patterns of countries that have been extensively involved in the
product fragmentation process are likely to have a considerable share of machinery
and transport equipment. Therefore, the share of those sectors in trade sometimes has
been used as a general indicator for IPN participation in empirical studies, apart from
indicators that focus specifically on trade in parts and components.22



According to the World Bank (2011), manufacturing currently accounts for 32


per cent of China’s output while for India the figure is 16 per cent. Within the
manufacturing sector, machinery and transport equipment account for 25 per cent of
Chinese manufacturing output, but less than 20 per cent in India.



The difference between the two countries is more notable when it comes to the


role of the manufacturing sector in exports. Exports of manufacturing products have


                                                            
 
20 The manufacturing sector is defined as SITC (Rev.3) 5 to 8, excluding SITC 68.
21 See, for example, Ando, 2006; Ando and Kimura, 2005 and 2009; and Athukorala, 2010a and 2010b.
22 Other chapters in this publication provide disaggregate indicators that are based on trade in parts and
components.  







31


been growing in importance in China’s export structure, and currently account for 85
per cent of total exports (table 3). The share of the manufacturing sector in Indian
exports is significantly lower than its share in Chinese exports, and has declined from
56 per cent to 42 per cent during the past decade.



There has been a noticeable shift in the composition of China’s exports, from


conventional labour-intensive product lines such as apparel, footwear, toys and sports
goods to more sophisticated goods in machinery product lines.23 From 2000 to 2010,
the share of miscellaneous manufactures (SITC 8) – a miscellaneous group
encompassing most of the traditional labour-intensive products – in total exports of
manufactures declined from 39 per cent to 26 per cent, while the share of machinery
and transport equipment increased from 38 per cent to 53 per cent. By contrast, Indian
manufacturing exports are characterized by resource-based materials such as primary
and fabricated metals (SITC6-68). The share of machinery and transport equipment
remains small, although it increased significantly from 9 per cent to 23 per cent
between 2000 and 2010.


Table 3. Distribution of manufacturing exports by China and India
(Unit: Per cent)


SITC China India
Rev.3 2000 2005 2008 2009 2010 2000 2005 2008 2009 2010


5 Chemicals 5.5 5.1 6.0 5.5 5.9 13.2 16.1 18.1 15.8 17.1
6


Minus 68
Resource-


based products
17.8 16.9 18.2 15.4 15.7 50.3 45.2 40.9 34.0 40.1


7 Machinery and
transport
equipments


37.6 50.3 50.6 52.6 52.9 9.4 14.9 21.8 23.0 23.1


8 Miscellaneous
manufacturing
articles


39.1 27.7 25.2 26.6 25.5 27.1 23.7 19.3 27.2 19.7


All
manufacturing
products


100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Shares of
manufacturing
sector in total
exports


78.7 83.8 84.4 84.6 84.5 56.4 46.7 37.9 46.0 42.4


Source: Calculation based on United Nations COMTRADE data downloaded from WITS database.


A closer examination of the machinery and transport equipment subsector
reveals that information and communications technology (ICT) products (SITC77-
                                                            
 
23 See Athukorala, 2009; Bergesten and others, 2006; and Sung, 2007.


 







32


772-776) has been a major driver of the remarkable growth of China’s machinery
exports. The share of ICT products in exports of manufactures by China increased
from less than 15 per cent in 1994/95 to nearly 33 per cent in 2007/08. In the case of
India, it appears that the country’s export success in IT services has not been
associated with ICT hardware sector. The share of ICT exports remains very small
(below 3 per cent of manufacturing exports) throughout the same period (figure 10).


Figure 10. Machinery and ICT products in manufacturing exports


0


5


10


15


20


25


30


35


40


45


50


1994/95 2007/08 1994/95 2007/08 1994/95 2007/08


Developing Asia China India


Pe
r c


en
t o


f e
xp


or
ts


Machinery (SITC7) ICT (SITC 75+76+772+776)


Source: Based on data from Athukorala, 2011.
Note: In Athukorala (2011), developing Asia covers 12 developing Asian economies including China, Hong
Kong, China, India, Indonesia, Republic of Korea, Malaysia, Pakistan, the Philippines, Singapore, Taiwan
Province of China, Thailand and Viet Nam.





A relatively similar pattern is found on the import side. Manufacturing
accounts for one-half of Chinese imports, but only one-third of Indian imports.
Machinery and transport equipment dominate imports of manufactures by both
countries (table 4).
















33



Table 4. Distribution of manufacturing imports by China and India


(Unit: Per cent)
SITC China India
Rev.3 2000 2005 2008 2009 2010 2000 2005 2008 2009 2010


5 Chemicals 18.3 17.4 18.1 18.6 18.6 20.8 20.2 24.7 21.4 22.4
6 -68 Resource-


based products
20.5 13.6 10.9 11.1 9.7 35.7 30.1 23.2 25.2 31.1


7 Machinery and
transport
equipment


53.7 57.0 58.1 57.8 59.1 34.7 42.0 46.4 45.7 40.0


8 Miscellaneous
manufacturing
articles


7.5 12.1 12.8 12.4 12.6 8.8 7.7 5.7 7.7 6.6


All
manufacturing
products


100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0


Shares of
manufacturing
sector in total
imports


62.5 59.1 49.8 50.7 49.7 31.9 35.4 34.0 37.7 28.3



Source: Calculated based on United Nations COMTRADE data downloaded from WITS database.


The trade patterns reviewed above indicate that the manufacturing trade of
China is largely characterized by two-way trading in the machinery and transport
equipment sector on an aggregate level (at 1-digit SITC Rev.3). For India, the trade
pattern is largely characterized by traditional inter-industry trade. Manufacturing trade
by India is more about exporting resource-based manufacturing materials, and
importing machinery and transport equipment. According to Kochhar and others
(2006), India’s industrial development policy from independence until the early 1990s
focused on import substitution more than export orientation. Consequently, Indian
manufacturing production has emphasized industries that are capital-intensive and
large-scale, rather than labour-intensive; in fact, such distorted industrial structures
remain despite the regulation reforms that have taken place. One implication that can
be drawn from observing the trade patterns of India is that sophisticated
manufacturing industries in India have not been associated with the country’s export
competiveness.


3. Intraregional trade

Participation in Asian IPNs is partly reflected in high involvement in


intraregional trade because parts and components at different stages of production will
be traded back and forth between countries in the production networks. From 1998 to
2009, the shares of intraregional imports ranged between 51 per cent and 57 per cent







34


of total Chinese imports, while the share of intraregional exports was between 45 per
cent and 52 per cent (figure 11).



Intraregional trading by China is largely dominated by trade with ASEAN,


Japan and the Republic of Korea. China’s trade with these countries is skewed
towards imports more than exports. This asymmetry in the intraregional trade
structure partly reflects the fact that East and South-East Asian countries are
supplying inputs for China’s exports to the rest of the world.


Figure 11. Shares of intraregional trade in total trade of China, 1998-2009


Intraregional exports of China


0.0


10.0


20.0


30.0


40.0


50.0


60.0


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Pe
r c


en
t o


f t
ot


al
e


xp
or


ts


Intra Asia-Pacific ASEAN+Japan+ Republic of Korea


Intraregional imports of China


0.0


10.0


20.0


30.0


40.0


50.0


60.0


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Pe
r c


en
t o


f t
ot


al
im


po
rts


Intra Asia-Pacific ASEAN+Japan+ Republic of Korea


Source: Based on data from the ESCAP Statistical Yearbook, 2011.







35


Compared to China, India’s trade is significantly less integrated with
intraregional markets (figure 12).24 Intraregional exports by India remained at around
30 per cent throughout the past decade. However, India has been increasingly
sourcing from countries within the region. The share of India’s intraregional imports
increased from less than 30 per cent in the early 2000s to 39 per cent in 2009.
Throughout the study period, India’s trade with other members of the South Asian
Free Trade Area (SAFTA) was negligible.



Figure 12. Shares of intraregional trade in total trade by India, 1998-2009




Intraregional exports of India


0.0


10.0


20.0


30.0


40.0


50.0


60.0


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Pe
r c


en
t o


f t
ot


al
e


xp
or


ts


Intra Asia-Pacific Intra-SAFTA














                                                            
 
24 Eight member States of the South Asian Free Trade Area include Afghanistan, Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka.







36


Figure 12. Shares of intraregional trade in total trade by India, 1998-2009
(Continued)


Intraregional imports of India


0.0


10.0


20.0


30.0


40.0


50.0


60.0


1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


Pe
r c


en
t o


f t
ot


al
im


po
rts


Intra Asia-Pacific Intra-SAFTA


Source: Based on data from the ESCAP Statistical Yearbook, 2011.



4. Intraregional trade in manufacturing products


Participation in Asian IPNs will result in a larger proportion of intraregional
trade particularly in manufacturing products. Consistent with the view that China has
been increasingly acting as a centre of final assembly and an export platform for
Asian IPNs, the shares of intraregional exports and imports in Chinese manufacturing
exports and imports have been large but asymmetric (figure 13). Currently, more than
60 per cent of Chinese manufacturing imports are sourced within the region, while
intraregional manufacturing exports account for about 50 per cent of Chinese
manufacturing exports.


Japan and the Republic of Korea, account for the major share of China’s
manufacturing imports, while ASEAN increased its share from 5 per cent of China’s
manufacturing imports in 1995 to 16 per cent in 2010. South Asia (including India)
accounted for a negligible share throughout the same period.














37



Figure 13. Intraregional trade of Chinese manufacturing sector, 1995-2010




Intraregional manufacturing exports of China


0.0


10.0


20.0


30.0


40.0


50.0


60.0


70.0


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
ex


po
rts


Asia-Pacific ASEAN+Japan+Republic of Korea ASEAN SAFTA




Intraregional manufacturing imports of China


0.0


10.0


20.0


30.0


40.0


50.0


60.0


70.0


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
im


po
rts


Asia-Pacific ASEAN+Japan+Republic of Korea ASEAN SAFTA


Source: Based on United Nations COMTRADE data downloaded from WITS database.







38



In recent years, manufacturing exports by China have been increasingly moving away


from intraregional markets towards markets outside the region. Although the United States and
the European Union remain the most important extra- regional destinations, the shares of these
traditional markets for manufacturing exports have been declining; at the same time, the share
of Chinese manufacturing exports in the rest of the world increased steadily from 10 per cent in
1995 to 17 per cent in 2010 (figure 14).



Figure 14. Chinese exports of manufactures, by destination




0


10


20


30


40


50


60


70


1995 2000 2005 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
ex


po
rts


Asia-Pacific Developing Asia-Pacific United States European Union 25 Rest of the world



Source: Calculated by author based on United Nations COMTRADE data downloaded from WITS
database.



Although India‘s manufacturing sector has been slowly engaging with intraregional


markets, it has been increasingly turning to the Asia-Pacific region (particularly East Asian
countries) as a source of its manufacturing imports. India’s share of intraregional imports in
total manufacturing imports nearly doubled from 22 per cent in 1995 to 42 per cent in 2010
(figure 15). The increases in India’s intraregional sourcing were largely dominated by imports
from East and South-East Asia. Since 1995, ASEAN countries have accounted for about 10
per cent of India’ manufacturing imports, while the share of imports from China, Japan and
Republic of Korea more than doubled in the same period from 16 per cent to 34 per cent.


While India is increasingly sourcing more manufacturing imports from within the
region, export linkages have not grown in the same manner and remain significantly less than
those of China. Intraregional markets account for less than 30 per cent of Indian manufacturing
exports throughout the period of the study. The United States and the European Union are still







39


major export destinations for India. However, the share of those traditional markets declined
from 52 per cent in 1995 to 37 per cent in 2010, while exports to the rest of the world increased
from 17 per cent to 37 per cent during the same period (figure 16).



Figure 15. Intraregional trade by Indian manufacturing sector, 1995-2010




Intraregional exports of Indian manufacturing sector


0


10


20


30


40


50


60


70


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
ex


po
rts


Asia-Pacific ASEAN+China+Japan+Republic of Korea ASEAN SAFTA


Intraregional imports of Indian manufacturing sector


0


10


20


30


40


50


60


70


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
im


po
rts


Asia-Pacific ASEAN+China+Japan+Republic of Korea ASEAN SAFTA


Source: Calculated by author based on United Nations COMTRADE data downloaded from WITS
database.







40


Figure 16. Manufacturing exports from India, by destination


0


5


10


15


20


25


30


35


40


1995 2000 2005 2008 2009 2010


Pe
r c


en
t o


f m
an


uf
ac


tu
rin


g
ex


po
rts


Asia-Pacific developing Asia-Pacific United States European Union 25 Rest of the world



Source: Calculated by author based on United Nations COMTRADE data downloaded from WITS
database.



5. Foreign direct investment25



Many studies have documented the fact that the growth of IPNs has been associated


with FDI inflows because MNCs have primarily built their international production
networks through FDI.26 IPN-driven FDI is usually vertical FDI in nature (or so-called
efficiency-seeking FDI) (Markusen, 2002, and Navaretti and Venables, 2006).27 This type
of FDI will lead to an increase in trade within and between firms at different stages of
production. The manufacturing sector is a primary target for the IPN-driven FDI, because
that is the sector for which IPNs are growing rapidly.28


                                                            
 
25 FDI data should be accepted with caution. There is some opinion that FDI data for China and India
are inflated as they include a substantial amount of round-tripping FDI through Hong Kong, China in
the case of China, and through Mauritius in the case of India (Rao and Dhar, 2011; Wei, 2005; and
Xiao, 2004). In addition, Chinese and Indian FDI data may not be directly comparable due to variations
in definitions, coverage and availability of the data.
26 See, for example, Feenstra and others, 2000; Hanson and others, 2001 and 2005; Kleinert, 2003; and
Swenson, 2004.
27 See chapter 1 of this book for additional details.
28 Manufacturing FDI is not always aimed at production for export. A certain (but unfortunately not
quantifiable) share of FDI may be for market-seeking purposes and circumvention of high import
duties. Therefore, an analysis based on firm-level data is required. In chapter III of this book, Yamashia







41



Regarding FDI inflows, China has attracted more FDI than India throughout the


past two decades. FDI net inflows to China increased from US$ 3.5 billion in 1990 to
US$ 108.3 billion in 2008. For India, FDI net inflows to the country increased from a
negligible level in the early 1990s to US$ 40.4 billion in 2008. In particular, FDI inflows
have been increasing rapidly since 2005. However, both China and India recently
experienced a slowdown of about 10 per cent in FDI inflow in 2009 due to the global
economic crisis (figure 17).


However, comparing FDI inflows relative to GDP reveals that India is now
outperforming China if economic size is equal. FDI inflows relative to GDP in India
increased steadily from 0.9 per cent of GDP to 2.7 per cent of GDP during the past five
years. The figure for China declined continuously from 3.1 per cent to 1.9 per cent during
the same period.


Figure 17. FDI net inflows to China and India, 1990-2009


0


20


40


60


80


100


120


19
90


19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


FD
I i


nf
lo


w
s


(b
ill


io
n


Un
ite


d
St


at
es


d
ol


la
rs


)


0.0


1.0


2.0


3.0


4.0


5.0


6.0


7.0


FD
I i


nf
lo


w
s-


to
-G


DP
(p


er
c


en
t)


FDI inflows to China FDI inflows to India


FDI inflows-to-GDP (China) FDI inflows-to-GDP (India)


Source: ESCAP Statistical Yearbook, 2011, based on data from UNCTAD.


Sectoral distribution of FDI inflows reveals that MNCs directly investing in China
have focused on manufacturing activities. The manufacturing sector received about 60 per


                                                                                                                                                                          
 
(2011) uses recent firm-level data on the operation of Japanese and United States MNCs in China and
India in order to deal with these issues. 







42


cent of total FDI in China between 2005 and 2008 (figure 18). Recent studies by Dullien
(2005), and Liu and Dalley (2011) indicated an ongoing transition in manufacturing FDI in
China from the low-tech manufacturing sector to the high-technology manufacturing sector.


In contrast, the services sector of India attracted much more FDI than the
manufacturing sector. India’s manufacturing sector accounted for only 21 per cent of FDI
inflow while services related to finance, infrastructure, IT, real estate and construction, and
telecommunications accounted for 68 per cent of FDI inflow.


Figure 18. Distribution of FDI inflows to China and India
by sector, 2005-2008


(Unit: Per cent)


China's FDI by sector, 2005-2008


R&D, 1.1
Agriculture and


mining, 1.8


IT and IT-enabled
services , 2.2


Electricity, gas and
water, 1.9


Transport, storage
and post, 3.0


Trading, 3.4


Other services, 2.7


Finance , 6.3


Real estate and
construction, 17.9


Manufacturing,
59.7



Source: Based on National Bureau of Statistics data.




India's FDI by sector, 2005-2008


Trading , 2.1


Other services, 3.9


Energy, 4.6


Agriculture and
mining, 1.0


Telecommunications,
7.4


Real estate and
construction, 16.7


IT and IT-enabled
services , 10.9


Manufacturing, 20.9Other infrastructue
services, 13.8


Finance , 18.8



Source: Based on data from Rao and Dhar (2011).







43


Existing studies, such as Aggarwal (2001) and Kumar (1990), indicate that
much of the FDI inflow into India’s manufacturing sector has been largely driven by
market-seeking and the need to circumvent high import duties. This is consistent with
a firm-level analysis by Anand and Delios (1996) which found that investment by
Japanese MNCs in India was largely characterized as market-seeking, while Japanese
investment in China was more efficiency-seeking and more connected to export
activities.




6. Intra-regional foreign direct investment

Intraregional investment has played an important role in China. High-income


East Asian countries are all on the list of top-10 investors in China. Altogether they
accounted for almost 70 per cent of total FDI inflow into China from 2008 to 2010
(figure 19). Although there is some debate about round-tripping FDI through Hong
Kong, China, even after adjusting for round-tripping intraregional FDI is still ahead of
FDI from outside the region. 29 , 30 Singapore, Japan, and the Republic of Korea
together accounted for more than 16 per cent. Other countries on the top-10 list
included the United States, the United Kingdom and some other European countries.



In the case of India, only 15 per cent of FDI inflows between 2005 and 2009


originated from Asian countries. Apart from round-tripping FDI from Mauritius, other
top-10 investors in India during that period were the United States, the United
Kingdom and other countries in Europe. Only Singapore and Japan were well-
positioned on the list.














                                                            
 
29 The estimated magnitude of round-tripping FDI varied from about 30 per cent of total FDI inflows
from Hong Kong, China to only 7 per cent. For details see, for example, Huang (2003), Naughton
(1996), Tseng and Zebregs (2002) and UNCTAD (2007). According to Wei (2005), the magnitude of
round-tripping FDI in China is supposed to be declining because since 1996 there have been
continuous reforms in Chinese FDI tax preferences and in the FDI statistical methodologies.
30 Hong Kong, China is the most important FDI investor in China, accounting for more than a half of
all FDI inflow. Kalish (2006) pointed out that China’s diaspora in Hong Kong, China has played an
important role in funding export-related manufacturing in southern China. 







44



Figure 19. Distribution of FDI inflows by country of origin




FDI inflows to China, 2008-2010


4.9
3.9 4.5 3.4 2.8


1.3 1.0


25.7


0.0


5.0


10.0


15.0


20.0


25.0


30.0


Ho
ng


K
on


g,
C


hi
na


Ta
iw


an
P


ro
vin


ce
o


f C
hi


n


Ja
pa


n


Si
ng


ap
or


e


Un
ite


d
St


at
es


Re
pu


bl
ic


o
f K


or
ea


Un
ite


d
Ki


ng
do


m


G
er


m
an


y


O
th


er
s


P
er


ce
nt


ag
e


sh
ar


e
in


F
D


I i
nf


lo
w


s


52.4



Source: Based on data from the United States-China Business Council, and China’s Foreign
Investment Department of the Ministry of Commerce.


FDI inflows to India, 2005-2009


11.3


7.3
5.6 4.4 3.8 3.2 2.6 1.8 1.2


9.1


0


5


10


15


20


25


30


Ma
uri


tiu
s


Si
ng


ap
or


e


Un
ite


d S
tat


es


Un
ite


d K
ing


do
m


Cy
pru


s


Ne
the


rla
nd


s


Ja
pa


n


Ge
rm


an
y


Un
ite


d A
ra


b E
mi


ra
tes


Fr
an


ce


Ot
he


rs


Pe
rc


en
ta


ge
s


ha
re


in
F


D
I i


nf
lo


w
s


49.6



Source: Based on data from Rao and Dhar (2011).



The firm-level data on global operations of MNCs in China and India


discussed in chapter 3 reveals that intraregional FDI from Japan appears to contribute
to manufacturing production in India more than extraregional FDI from the United
States. Based on the size of employment, operations of Japanese MNCs in India are
concentrated in the transport equipment sector; operations of United States MNCs are







45


concentrated in professional services including IT, scientific and technical services. In
the case of China, there are no such patterns. Investment in China by Japanese and
United States MNCs appears to be concentrated in the manufacturing sector, with
computers and electronics capturing the largest share of employment by MNCs.31


7. Participation by China and India in the current Asian IPNs


An analysis of exports and imports of parts and components provides a more
detailed view of the roles of the two countries in Asian IPNs. The best available
indicator for intensity of an IPN is the share of parts and components in total
manufacturing trade, because IPN activities normally involve multiple border
crossings of components. Athukorala (2011) carried out a comprehensive compilation
of data on trade in parts and components, based on the 5-digit SITC Rev3. He found
that the rapid development of global production networks in Asian economies was
concentrated in East and South-East Asian economies.32, 33



During the past two decades, there has been a sharp increase in the share of


components in world manufacturing trade. The share increased from a two-year
average of 19 per cent for 1992/1993 to 27 per cent for 2006/2007. The share has
increased at a much faster rate in developing Asian economies, from 17.3 per cent to
34 per cent. 34 The share of components is particularly high among ASEAN
countries.35 The component share in manufacturing exports from the six ASEAN
countries combined amounted to 44.2 per cent in 2006/2007, up from 22.7 per cent in
1992/1993. In countries such as Malaysia, the Philippines and Thailand, components
account for a large share of total manufacturing exports (table 5).










                                                            
 
31 See Chapter III of this book for additional details.
32 Henceforth, for the sake of brevity, the term “components” is used in place of “parts and
components”.
33 Data on parts and components shown in this section are based on Athukorala, 2011.
34 Developing Asia in Athukorala (2011) covers 12 developing Asian economies including China,
Hong Kong, China, India, Indonesia, the Republic of Korea, Malaysia, Pakistan, the Philippines,
Singapore, Taiwan Province of China, Thailand, and Viet Nam.
35 Among the South-East Asian nations, only the six largest economies – Indonesia, Malaysia, the
Philippines, Thailand, Singapore and Viet Nam – are integrated into global production networks.
Brunei Darussalam, Cambodia, the Lao People’s Democratic Republic and Myanmar are not covered
and lack data. 







46



Table 5. Share of parts and components in manufacturing trade of


selected economies
(Unit: Two-year average percentage share)


Economy Exports Imports
1992/1993 2006/2007 1992/1993 2006/2007
World 19.3 27.1 19.6 27.3
Developing Asia 17.3 34.0 29.0 44.2
China 7.4 25.6 20.4 44.0
Hong Kong, China 15.8 33.3 24.1 48.5
Republic of Korea 18.1 47.3 30.1 31.9
Taiwan Province of
China


24.7 44.2 29.5 38.9


ASEAN 6 22.7 44.2 36.0 47.9
Indonesia 3.8 21.5 27.0 21.8
Malaysia 27.7 53.6 40.5 50.0
Philippines 32.9 71.7 32.6 61.3
Singapore 29.0 49.3 39.9 60.4
Thailand 14.1 29.9 30.6 36.1
Viet Nam n.a. 11.0 n.a. 19.1
India 3.0 10.4 17.5 22.9



Source: Based on 5-digit SITC Rev.3 data from Athukorala, 2011 (table 9).



The importance of components in intraregional trade of Asia is higher than in


intraregional trade of the European Union and NAFTA. In 2006/2007, components
accounted for 54 per cent of intra-developing Asian exports, but only 31 per cent and
22 per cent of intraregional exports of NAFTA and EU15, respectively (figure 20). A
similar picture is found for intraregional imports of components. This reflects the fact
that the intensity of IPNs has been more prominent in developing Asia than in
NAFTA and the European Union 15.





















47



Figure 20. Share of parts and components in intraregional


manufacturing trade


Intraregional manufactuirng exports


0 10 20 30 40 50 60 70


Intra-developing Asia


IntraASEAN6


Broader developing
East Asia*


IntraNAFTA


Intra-European Union
15


Per cent


1992/93 2006/07


Intraregional manufacturing imports


0 10 20 30 40 50 60 70


Intra-developing Asia


IntraASEAN6


Broader developing
East Asia*


IntraNAFTA


Intra-European Union
15


Per cent


1992/93 2006/07


Source: Based on 5-digit SITC Rev.3 data from Athukorala, 2011 (table 9).
Note: * Broader devloping East Asia includes four East Asian developing economies (China, Republic
of Korea, Hong Kong, China,and Taiwan Provice of China) and six ASEAN countries (Indonesia,
Malaysia, the Philippines, Singapore, Thailand, and Viet Nam).







48



China has been at the centre of the IPN phenomenon. Components have


dominated manufacturing imports of China, while final goods have dominated the
country’s export composition (figure 21). In 2006/07, components accounted for 44
per cent of Chinese manufacturing imports. The component share in intraregional
imports by China was much higher at nearly 60 per cent. In contrast, final goods (total
exports minus components) outpaced China’s manufacturing exports, especially
exports destined for extraregional markets. Final goods accounted for 75 per cent of
China’s total manufacturing exports in 2006/07, while the corresponding share of
intraregional exports was significantly lower at 60 per cent.



Figure 21 Parts and components vs Final goods in China’s manufacturing trade




China's manufacturing imports (2006/07)


44%


59%
56%


41%


0%


10%


20%


30%


40%


50%


60%


70%


Total imports Intraregiona imports


components final goods


China's manufacturing exports (2006/07)


26%


41%


74%


59%


0%


10%


20%


30%


40%


50%


60%


70%


80%


Total exports Intraregiona exports


components final goods


Source: Based on 5 digits SITC Rev.3 data from Athukorala, 2011 (table 9).


The production linkages between China and East and South-East Asian countries in
IPNs are reflected by China’s the components trade, which is particularly high with
countries in East and South-East Asia. Developing East and South-East Asia accounts for
about one-half of China’s exports and imports of components for machinery and transport
equipment. Meanwhile, the central role of China as a major export platform for Asian IPNs
is reflected in the fact that more than 50 per cent of China’s final goods exports in that
corresponding category are to extraregional markets, particularly the OECD countries
(figure 22).







49



Figure 22. Parts and components vs. final goods in China’s trade in machinery


and transport equipment, by destination


Trade in components , 2004/05


0 10 20 30 40 50


Developing East Asia


ASEAN6


Japan


OECD (exc.Japan)


Rest of the world


Per cent of global exports/imports


Exports Imports


Trade in final goods, 2004/05


0 10 20 30 40 50


Developing East Asia


ASEAN6


Japan


OECD (exc.Japan)


Rest of the world


Per cent of global exports/imports


Exports Imports


Source: Based on 5-digit SITC Rev.3 data from Athukorala, 2009 (table 4).







50



In the case of India, the low level of the components trade clearly illustrates


that India has not participated in the new form of international production sharing
within the supply chain. As shown in table 5, the share of components in
manufacturing exports by India remains small, although it increased from 3 per cent
in 1992/03 to 10 per cent in 2006/07. The corresponding import share increased from
18 per cent to 23 per cent during the same period; however, the figures were far
behind those of East and South-East Asian economies.


India’s trade is still largely characterized by a traditional form of international
trade in finished products (figure 23). In terms of both total and intraregional trade,
final goods accounted for about 90 per cent of manufacturing exports and nearly 80
per cent of manufacturing imports in 2006/07. The share of components in India’s
intraregional trade is trivial. Components accounted for only 14 per cent of
manufacturing exports to the rest of the region, while imports from the region
amounted to 25 per cent.


Figure 23. Parts and components vs. final goods in India’s manufacturing trade


India's manufacturing imports (2006/07)


23% 25%


77% 75%


0%


10%


20%


30%


40%


50%


60%


70%


80%


90%


Total imports Intraregiona imports


components final goods


India's manufacturing exports (2006/07)


10%
14%


90%
86%


0%


10%


20%


30%


40%


50%


60%


70%


80%


90%


100%


Total exports Intraregiona exports


components final goods
Source: Based on 5 digits SITC Rev.3 data from Athukorala (2011), table 9.


8. Conclusion

As a precursor to further analysis of the potential of India to become the next


assembly centre, this chapter evaluates current positions of India in the Asian IPNs,
using China as a benchmark. The comparative overview shows that the performance
by China has been ahead of that of India, especially with regard to the manufacturing
sector and participation in the global IPNs. Patterns of production, employment and
trade reflect the fact that India has not become significantly integrated into the rapid
development of IPNs in which the manufacturing of parts and components has been a
critical element.








51


Currently, India’s trade has been focused narrowly on parts of the services
sector. Consequently, India has failed to capture the benefits of the dynamism of
Asian IPN growth. India remains an insignificant participant in intraregional trade and
under-performs in exports of labour-intensive manufactures.



Based on the experience of China, encouraging the integration of India into


IPNs will need to include an extensive effort to expand the country’s manufacturing
sector. Evidence shows that IPNs are primarily driven by efficiency-seeking FDI, in
which factor-cost saving is a prime determinant. Thus, priority should be given to
supporting export-oriented manufacturing industries that utilize the country’s labour-
cost advantages. Increasing competitiveness will enhance the country’s potential for
participating in IPNs and, more importantly, employing a larger proportion of the
population.



In addition, the experience of major countries involving in Asian IPNs reveals


that the IPN process involves extensive intraregional trade in parts and components.
This implies that policy priority should be given to reducing trade and transaction
costs that stand as a major obstacle to multiple cross-border sourcing, which is a vital
element of the IPN process.








52


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Anand, J., and A. Delios (1996). ”Competing globally: How Japanese MNCs have
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Ando, M. (2006). “Fragmentation and vertical intra-industry trade in East Asia”,
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——— (2005). “The formation of international production and distribution networks
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Athukorala, P. (2011). “Asian trade flows: Trends, patterns and projections”, ANU
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——— (2010a). “Global production sharing, trade patterns, and determinants of trade
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——— (2010b). “Production networks and trade patterns in East Asia:
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——— (2009). “China’s impact on foreign trade and investment in other Asian
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Bergsten, C. F., B. Gill, N. R. Lardy, and D. Mitchell (2006). China: The Balance
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Dullien, S. (2005). “FDI in China: Trends and macroeconomic challenges”, in China
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Feenstra, R. C. and G. H. Hanson, and D. L. Swenson (2000). “Offshore assembly
from the United States: Production characteristics of the 9802 Program”, in R.C.
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Gordon, J., and P. Gupta (2004). “Understanding India’s services revolution”, IMF
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Hanson, G. H., R. J. Mataloni, Jr. and M. J. Slaughter (2005). “Vertical Production
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Huang, Y. (2003). Selling China: Foreign Direct Investment during the Reform Era.
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Kalish, I. (2006). “China and India: The reality beyond the hype”. Deloitte Research,
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Kleinert, J. (2003). “Growing Trade in Intermediate Goods: Outsourcing, Global
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54


Chapter III


Can India become an export platform for global operations of
MNCs? Perspectives from Japanese and United States MNC affiliates


Nobuaki Yamashita


One of the most important developments in international trade and foreign
direct investment (FDI) in Asia during recent years has been the rapid growth of
cross-border production networks, driven by widespread multi-plant operations of
multinational corporations (MNCs), and their extensive use of outsourcing and intra-
firm trade in parts and components (Athukorala and Yamashita, 2006; Jones and
Kierzkowski, 2001; and Jones, 2000).



In this context, China and India, the two most dynamic emerging economies,


have so far had contrasting experiences in attracting MNCs engaged in global
production networks. On the one hand, China has emerged as a prime export base for
assembling a wide range of manufactured goods. As a result, the bulk of China’s
manufacturing exports contain imported parts and components. This suggests that
China’s participation in production networks has been high (Dean, Fung and Wang,
2011) India, on the other hand, has a poor track record of attracting this type of FDI,
which is possibly one of the reasons for its lacklustre export performance during past
years (Athukorala, 2008; and Srinivasan, 2004). Despite India’s huge potential for
hosting larger-scale FDI, the country is still generally lagging behind China and other
Asian countries in this area with the exception of its success in attracting FDI for
back-office business processing and software service industries.



Although the literature at large has pointed out possible reasons for India’s


under-performance in attracting FDI (Srinivasan, 2004; Athukorala, 2008), these studies
mainly draw inferences from a macro-view of FDI statistics. Instead, this study explores
a uniquely constructed operation-based dataset of Japanese and United States MNC
affiliates in India from an international comparative perspective, using China as a
comparison. Specifically, this study compares and contrasts various indicators of
economic operations of Japanese and United States MNC affiliates in order to capture
any systematic differences. An analysis is conducted in the context of India’s ongoing
economic and business reforms since 1991. In particular, the recently signed Japan-
India Free Trade Aagreement is seen as an important step that may help to change the
perceptions of India among Japanese investors. In fact, the latest survey conducted by
the Japan Bank of International Cooperation (JBIC), ranks India for the first time as the
most promising country for the next 10 years or so for Japanese manufacturing MNCs.



This chapter is organized as follows. Section 1 develops the analytical context


of the distinctive specialization and operations of MNC affiliates in a host country,







55


followed in section 2 by an overview of trends and development of United States and
Japanese FDI patterns in China and India. Section 3 takes a closer look at the
operational characteristics of United States and Japanese MNC affiliates in India and
China. Section 4 summarises the key findings and puts forward policy implications.



1. Overview of Japanese and United States MNCs in production networks



While the rise of production networks is a general phenomenon, it has been


suggested that the nationality of MNCs characterises the functions of production
networks (Sturgeon, 2003). For example, in the electronics industry the Japanese
electronic networks have been a relatively closed system with a tightly controlled
buyers-suppliers linkage excluding outsiders (Hackett and Srinivasan, 1998). Japanese
production networks have developed based on the social relationship of “trust” and
“reputation”. Product and process specification remain relatively tacit, and involve
intensive information flows between firms and suppliers; this leads to greater asset
specificity and relation-specific investment. In electronics, this form of inter-firm
production network relies heavily on technology-intensive components (sound
display, memory chips, microprocessors, power and mechanical components, or
advanced design and development) supplied by related Japanese suppliers; simpler
and non-strategic components are sourced from unaffiliated suppliers, usually for the
previous generation model (Borrus, Ernst, and Haggard; 2000). This procurement
arrangement essentially blocks outside vendors from becoming involved with
Japanese production networks and supply chains.



On the other hand, United States electronic firms are often characterised by the


full integration of modularity and the heavy use of contract manufacturers (Sturgeon,
2003).36 This system is facilitated by highly standardized inter-firm links that require
less frequent and less intense interactions. The functions of contract manufacturers are
highly modular in nature, being accessed and shared by a wide array of “lead firms”,
                                                            
 
36 Development of modular production has been one of the most notable changes in the United States
electronics machinery industry during the past 15 years. The modular production network is driven by
contract manufacturers who provide traditional and standardized manufacturing functions, product
(re)design, component processing and purchasing, inventory management, routine tests, and after-sales
services and repairs. The use of contract manufacturers may bring cost and flexibility advantages to
“lead firms” (Borrus and others, 2000; Sturgeon, 2003). As a result of the widespread use of modular
technology, major firms such as Hewlett Packard and Ericsson have been able to sell most of their
worldwide manufacturing infrastructure to contract manufacturers Solectron and Flextronics (Sturgeon,
2003). The modular production network has also spread into semiconductor and other heavy industry in
the United States. In the United States automotive industry, Ford and General Motors (GM) have
retained vehicle design and final assembly while relying on an increasing supply volume of
components (such as entire automotive interior systems, headlights, carpets, cockpits, interior panels
and module design) from Leair, Johnson Contrils, Magna and TRW.







56


thus increasing flexibility (Borrus and others, 2000). While acknowledging this
difference in characteristics, it has been argued that, with the passage of time,
operations of MNCs of different nationalities become similar as the ongoing process
of globalization forces MNCs to emulate international best practices in global
business operations. Hence, a common evolution between Japanese and United States
MNCs in a given host country should be expected (Encaration, 1993; and Dunning
and others, 2007).



In sum, these contrasting structures between Japanese and United States


production networks may contribute to the distinctive specialization and operations of
MNC affiliates in a host country. They may also be influenced by the development
process of global business operations.


2. Trends and development of Japanese and United States FDI in China
and India37



A notable difference between the patterns of outward investment by Japan and


the United States is the importance attached to developing Asian economies. Table 6
shows country/regional distribution of United States FDI (USFDI) and Japanese FDI
(JFDI) outward stock between 1996 and 2010. In 2010, developing Asia accounted
for 25.6 per cent of total JFDI stock, but only 8.9 per cent of USFDI stock. The
majority of USFDI stock is still in Europe; in fact, 56 per cent of all outward USFDI
stock in 2010, up from 49 per cent of the total in 1996.



China has been an important FDI destination, especially for Japanese MNCs.


The total value of Japanese direct investment in China increased from US$ 8 billion in
1996 to US$ 67 billion in 2010. Accordingly, the share of China in outward JFDI
stock rose from 3.1 per cent in 1996 to 8 per cent in 2010, the largest share among
developing Asian economies. During the same period, the accumulated value of the
United States’ direct investment in China increased from US$ 3.8 billion to US$ 60.5
billion, which accounted for 1.5 per cent of the total outward USFDI stock.



                                                            
 
37 Some issues concerning the quality of FDI data are in order. First, it is well-known that FDI data
reported from China and India are inflated somewhat, because of round-tripping FDI through Hong
Kong, China to China and through Mauritius to India. (Wei, 2005). Second, FDI outflows from Japan
and the United States may not be comparable. According to the standard definition, the three
components of FDI are (a) equity capital, (b) retained earnings and (c) intra-company loans or intra-
company debt transactions. The majority of FDI reporting countries do not include retained earnings as
a part of FDI (Lipsey, 2003; Athukorala, 2007). Only the Government of the United States consistently
reports all three components of FDI in official publications. In1996, Government of Japan also started
reporting all three components of FDI (UNCTAD, 2001). Thus, to increase compatibility between
JFDI and USFDI data, the data are tabulated from 1996 onwards in table 6. Last, it should be noted that
the Reserve Bank of India broadened the definition of FDI to include retained earnings in 2003 only
with effect from 2000/01 fiscal year (Athukorala and Hill, 2010).







57


Relative to China, India attracted much less FDI. However, its importance in
the investment stock of MNCs has been rising rapidly. The share of India in outward
JFDI stock increased from only 0.3 per cent in 1996 to 1.6 per cent in 2010. A similar
increase can be seen for the share of India in outward USFDI stock, from 0.2 per cent
to 0.7 per cent during the same period.












58


Table 6. Country distribution of USFDI and JFDI stock, 1996-2010


Source: United States Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc
and JETRO at http://www.jetro.go.jp/indexj.html


JFDI outward stock
(US$ billion)


Annualized growth rate
(%)


Share in total FDI outward
stock ( %)


1996 2000 2010 1996-2010 2000-2010 1996 2000 2010
Developing Asia 79.2 49.3 212.7 7.3 15.7 30.6 17.7 25.6
China 8.1 8.7 66.5 16.2 22.6 3.1 3.1 8.0
India 0.8 1.2 13.6 22.6 27.7 0.3 0.4 1.6
Hong Kong, China 9.4 6.5 15.5 3.7 9.0 3.6 2.3 1.9
Taiwan Province of


China
4.0 3.6 10.4 6.9 11.2 1.6 1.3 1.2


Republic of Korea 3.5 4.2 15.0 11.1 13.6 1.3 1.5 1.8
Singapore 11.4 8.9 27.5 6.5 12.0 4.4 3.2 3.3
Thailand 15.8 4.8 27.8 4.1 19.3 6.1 1.7 3.3
Indonesia 17.2 4.8 11.9 -2.6 9.6 6.6 1.7 1.4
Malaysia 5.8 4.0 10.0 4.0 9.6 2.2 1.4 1.2
Philippines 2.9 2.0 8.7 8.3 15.6 1.1 0.7 1.0
Viet Nam 0.0 0.0 4.5 0.5

North America



97.9



138.5



262.3



7.3



6.6



37.8



49.7


31.6


Latin America 12.0 21.0 107.0 16.9 17.7 4.6 7.5 12.9
Europe 47.7 56.8 193.5 10.5 13.0 18.4 20.4 23.3
Middle East 1.0 0.8 4.9 12.3 20.0 0.4 0.3 0.6
Total 258.7 278.4 830.5 8.7 11.5 100.0 100.0 100.0

United States FDI stock


(US$ billion)
Annualized growth rate


(%)
Share in total FDI


Outward Stock (%)
1996 2000 2010 1996-2010 2000-2010 1996 2000 2010
Developing Asia 68.0 108.2 349.5 12.4 12.4 8.6 8.2 8.9
China 3.8 11.1 60.5 21.7 18.4 0.5 0.8 1.5
India 1.3 2.4 27.1 23.9 27.5 0.2 0.2 0.7
Hong Kong, China 14.4 27.4 54.0 9.9 7.0 1.8 2.1 1.4
Taiwan Province of


China
4.5 7.8 21.0 11.7 10.3 0.6 0.6 0.5


Republic of Korea 6.5 9.0 30.2 11.6 12.9 0.8 0.7 0.8
Singapore 14.9 24.1 106.0 15.0 16.0 1.9 1.8 2.7
Thailand 5.0 5.8 12.7 6.9 8.1 0.6 0.4 0.3
Indonesia 8.3 8.9 15.5 4.5 5.7 1.0 0.7 0.4
Malaysia 5.7 7.9 16.0 7.7 7.3 0.7 0.6 0.4
Philippines 3.5 3.6 6.6 4.5 6.1 0.4 0.3 0.2

North America 89.6 132.5 296.7 8.9 8.4 11.3 10.1 7.6
Latin America 155.9 266.6 724.4 11.6 10.5 19.6 20.3 18.5
Europe 389.4 687.3 2185.9 13.1 12.3 49.0 52.2 55.9
Middle East 8.3 10.9 36.6 11.2 12.9 1.0 0.8 0.9
All countries, total 795.2 1316.2 3908.2 12.0 11.5 100.0 100.0 100.0







59


(a) Industrial composition of FDI


Traditionally, JFDI in India is concentrated in the automobile industry. Among
the early entries by Japanese firms in India was Suzuki Motors (Suzuki-Marui, now
Marui Udyog). In the reform year (1991), India also saw the entrance of Honda into
the automobile industry and Sony into the electronics industry (Choundhury, 2009).
According to FDI data from the Department of Industrial Policy and Promotion in
India, approximately 41 per cent of JFDI in India went to the automobile industry, 18
per cent to electrical equipment and about 6 per cent to the service and
telecommunications sectors from 2000 to 2007.



Table 7 shows industry composition of USFDI stock in India and China from


1990 to 2010. Manufacturing FDI in India declined from 59 per cent in 1990 to 14.4
per cent in 2010 while the share of service sector, especially professional, scientific
and technical services and information, has been rising. The rise of FDI in the service
sector is closely linked to an impressive export performance of information
technology and software services (Saxsenian, 2002). In the early period of reforms in
India, USFDI was heavily concentrated in the capital goods sector, with chemical and
machinery accounting for 31 per cent and 15 per cent, respectively, of total USFDI
stock. However, as the reforms progressed, these shares started to decline. In 2010,
the chemical industry accounted for 4.7 per cent and the machinery industry for 3.2
per cent. Export-oriented MNC production of electronic products has been rapidly
growing. Yet, this category only accounts for 1.7 per cent of USFDI.



In contrast, the bulk of USFDI in China still remains concentrated in the


manufacturing sector despite a decline from 63.5 per cent of FDI stock in 2000 to 49
per cent in 2010. In particular, computers and electronic products accounted for 31.4
per cent in 2000, although by 2010 that figure had declined to 13.2 per cent.







60


Table 7. USFDI stock in China and India, 1991-2010
(Unit: Per cent)


India China
1991 1999 2000 2010 1991 1999 2000 2010
All Industries, total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Manufacturing 50.6 48.7 46.2 14.4 46.0 61.6 63.5 48.8


(US$ million) (210) (1 163) (1 098) (3 886) (196) (5 787) (7 076) (29 477)
Food 0.2 2.3 2.6 0.2 2.8 3.0 2.6 5.4
Chemicals 30.8 10.5 10.8 4.7 12.7 10.6 10.1 10.7
Primary and fabricated metals 2.7 3.8 3.3 (D) -0.2 2.4 1.4 2.1
Machinery 11.1 10.7 13.0 3.2 2.8 2.3 2.0 2.1
Computers and electronic products 1.4 -0.5 -0.5 1.7 (D) 25.6 31.4 13.2
Electrical equipment, appliances and components 0.0 1.3 2.0 0.5 0.0 4.2 4.1 1.0
Transportation equipment 0.7 5.0 2.4 1.8 (D) 6.7 5.9 6.9
Other manufacturing 3.9 n.a. n.a. (D) 8.9 n.a. n.a. 7.5
Petroleum -0.2 27.5
Wholesale trade (D) 12.6 11.0 12.2 22.1 4.1 3.4 6.6
Information 0.0 -1.2 -6.1 23.0 0.0 0.5 0.7 1.3
Depository institutions 38.6 (D) 14.6 (*) 0.7 0.6 22.2
Finance (except depository institutions) and insurance (D) 12.3 12.0 11.5 0.2 0.1 0.4 3.1
Professional; scientific and technical services 6.5 6.6 18.5 3.3 2.2 1.5
Holding companies (non-banking) 0.0 n.a. n.a. 1.4 0.0 n.a. n.a. 5.7
Services 2.7 (D)
Other industries 5.1 8.9 (D) (D) 15.3 11.4 4.8


Source: United States Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc
Notes: Negative values of FDI net outflows show that the value of direct investment made by domestic investors to external economies was less than the value of
repatriated (disinvested) direct investment from external economies.
(D) indicates suppression to avoid disclosure of data of individual companies; n.a. = unavailability of data.







61


3. Operations of Japanese and United States MNCs in India and China


This section examines in detail the operational characteristics of Japanese and
United States MNC affiliates in India and China. The Japanese MNC affiliate data
were taken in 2010 from the online database of Research Institute of Economy, Trade
and Industry (RIETI), which stores various indicators of MNC affiliates in a
breakdown of industries from 1989.38 The data for the United States MNC affiliates
was taken from the survey, “U.S. Direct Investment Abroad”, which is maintained by
the United States Bureau of Economic Analysis (BEA).39 The BEA data, which are
known for their high quality and reliability of estimates, have been used in many
important studies on United States MNC activities. BEA maintains publicly accessible
electronic versions of the survey data, aggregated up to industry level. Two of the key
differences between Japanese and United States MNC data are that (a) the BEA data
coverage of variables is more comprehensive, and (b) high quality is maintained due
to mandatory reporting. In contrast, Japanese MNC data reporting is not mandatory
and the survey response rate varies across years.40

(a) Employment by Japanese MNCs in India and China


Table 8a presents employment data for Japanese MNC affiliates in India and
China for 1992-2005. Japanese MNC employment in India increased from 14,500
persons in 1992 to almost 40,000 persons in 2005. The annual average growth rate
was 8.1 per cent, although there was some slowing down between 2000 and 2005
(upper panel of table 8a).



The industry with the largest employment rate is the transport equipment


industry, accounting for around 60 per cent of total jobs created by Japanese MNCs in
India (upper panel of figure 24). This focus on transport equipment is underlined by a
long history of Japanese automakers in India (e.g., in 1983, Suzuki Motors partnered
with the indigenous firm of Maruti established an assembly factory in New Delhi).
Japanese MNCs also create employment in more skills-intensive manufacturing
industries such as chemicals, accounting for some 9 per cent of total employment by
                                                            
 
38 See http://www.rieti.go.jp/en/database/FDI2010/index.html . The original data source was the
survey, “Overseas Business Activities of Japanese Firms (OBAJF)”, conducted by the Ministry of
Economy, Trade and Industry (METI), Tokyo. This annual survey is designed to trace the scale and
functions of foreign affiliates of Japanese MNCs operating overseas.
39 See www.bea.gov/ .
40 The quality of the METI survey has been questioned from time to time. The response rate varied
from 33 per cent in 1980 to 51 per cent during 1983-1992. However, in more recent years the response
has increased somewhat. For example, in 2005, the questionnaire was sent to 4,564 Japanese firms;
3,176 firms returned the questionnaire, giving a return rate of 69.6 per cent. Information on foreign
affiliates operating in developing host countries is far less satisfactory than that on those operating in
developed host countries.
 







62


Japanese MNCs in 2005. While most sectors experienced some employment
reductions between 2000 and 2005, non-manufacturing employment actually
registered a healthy 10 per cent increase during the same period, led by the service
sector. Employment by Japanese MNCs in this category stood at 1,600 persons in
1995 but climbed to 5,500 persons in 2005, accounting for a 14 per cent share in total
employment created by Japanese MNCs in India.



While employment by Japanese MNCs in India is concentrated in transport


equipment, it is more concentrated in the electronics and computers sectors in China.
In 2005, computers and electronics alone attracted 289,000 workers for Japanese
MNCs, which have experienced a 15-fold increase in employment since 1992 (lower
panel of table 8a). Similarly, computers and electronics achieved a 10-fold increase in
employment during the same period. These industries added together accounted for
around 40 per cent of total employment created by Japanese MNCs in China in 2005
(lower panel of figure 24). However, the employment shares of these industries have
not changed drastically since 1992. For example, the employment share of electronic
equipment was recorded at 12 per cent in 1992 and in 2005.



In contrast, the transport equipment industry grew steadily from 2,600 workers


in 1992 to 181,000 workers in 2005, with an annual employment average growth of
38 per cent. In 2005, transport equipment accounted for 19 per cent of employment by
Japanese MNC affiliates in China, up from only 3 per cent in 1992. This increasing
share for transport equipment is particularly noteworthy when compared with the
stagnant contribution of Japanese FDI to the employment share of electronic
equipment during the same period.



Overall, the employment distribution of Japanese MNCs in India is


concentrated in medium-skill, labour-intensive industries in transport equipment while
in China the employment distribution is broadly consistent with the overall transition
of the Chinese economy from more labour-intensive to more skills-intensive
industries. It has yet to be seen whether India will follow in the steps of East Asia
where industrialization started from relatively labour-intensive export-oriented
manufacturing industries (Panagariya, 2006).


















63


Figure 24. Employment of Japanese MNC affiliates in India and China
by sector, 1992-2005




India


60 60
69


60


15
7


9


15


16


8
9


5
3


3


5


6 4


7 7
14


0


10


20


30


40


50


60


70


80


90


100


1992 1995 2000 2005


P
er


c
en


t


Non-manufacturing


Other manufacturing


Primary and fabricated metals


Industrial machinery and
equipment


Computers and electronics


Electronic equipment


Chemicals and allied products


Transportation equipment




China


20
26 29 30


3


8
8


19


12


9
11


1134
29 21


12
6


6 9
10


15
8 6 8


0


10


20


30


40


50


60


70


80


90


100


1992 1995 2000 2005


Pe
r c


en
t


Non-manufacturing


Food and related products


Primary and fabricated metals


Chemicals and allied products


Industrial machinery and
equipment


Other manufacturing


Electronic equipment


Transportation equipment


Computers and electronics



Source: RIETI FDI data, 2009, Available from www.rieti.go.jp/en/database/FDI2010/index.html.



(b) Employment of United States MNCs in India and China



Table 8b shows the employment distribution of United States MNC affiliates


in India and China from 1992 to 2008. In India, United States MNC employment







64


increased from 11,000 persons in 1992 to 313,000 persons in 2008. Employment
distribution of United States MNCs in China appears similar to that of Japanese
MNCs, with more weight given to computers and electronics. Employment in this
area by United States MNCs increased from 70,000 persons in 2000 to 140,000
persons in 2008, achieving an average annual growth rate of 9 per cent during that
period. A notable difference from Japanese investment is seen in India.



Relatively speaking, employment by United States MNCs in India is more


concentrated in non-manufacturing sectors, such as information and professional,
scientific and technical services, generating around 140,000 jobs, meaning that these
sectors accounted for close to 50 per cent of total employment by United States
MNCs in India in 2008 (figure 25). Between 2000 and 2008, the average annual
employment growth of the information sector was 54 per cent, with a similar growth
rate being recorded for the professional, scientific and technical service sectors. This
is a stark difference compared with the more skewed employment distribution of
Japanese MNCs in transport equipment. In 2008, employment in transport equipment
only accounted for 5 per cent of total employment by United States MNCs in India
(versus 60 per cent by Japanese MNCs); however, employment in transport
equipment has been growing.


Figure 25. Employment of United States MNC affiliates in India and China
by sector, 2008




35


16


38.5


11


6


8


5


5


18


5


5


6


3


5


8


6


7


0


10


20


30


40


50


60


70


80


90


100


India China


Pe
r c


en
t


Finance and insurance


Primary and fabricated metals


Food


Electrical equipment, appliances,
components
Other manufacturing


Transportation equipment


Machinery


Computer and electronic products


Wholesale trade


Chemicals


Information


Other industries


Professional, scientific and
technical services


Source: US Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc.







65


A fuller analysis of the implications of the difference in employment emphasis
by Japanese and United States MNCs for the future growth strategy of India is beyond
the scope of this chapter. However, the employment pattern of United States MNCs in
India appears to fit in well with the emerging view that the prospects for India’s future
growth are largely driven by the expansion of high-skilled service sectors, led by
innovative software and information- technology-related services (Eichengreen and
Gupta, 2010). Some commentators have praised the emerging Indian growth model,
driven by skills-based service sectors, for bypassing the phase of a typical labour-
intensive export industrialization as exemplified by East Asian countries (e.g., Rodrik
and Subramanian, 2005). However, many point out that India’s intrinsic comparative
advantages rest on labour-intensive industries, given its abundance of relatively cheap
labour. Therefore, the employment pattern of Japanese MNCs in India may be relatively
more accord with India’s comparative advantages than that of United States MNCs.







66


Table 8. Employment of Japanese and United States MNC affiliates in India and China


Table 8a. Employment of Japanese MNC affiliates in India and China, 1992-2005
Employment (’000) Annual average growth (%)


India 1992 1995 2000 2005 1992-2005 1992-2000 2000-2005
Food and related products 0 X X X
Chemicals and allied products 2.1 0.3 3.4 3.6 4.2 6.0 1.3
Primary and fabricated metals X X 0.8 X
Industrial machinery and equipment 0.8 1.3 1.4 1.8 6.5 7.6 4.8
Electronic equipment 2.2 3.7 4.2 3.7 3.8 8.3 -2.9
Computers and electronics X 1.2 1.6 1.0 -8.2
Transportation equipment 8.6 13.7 35 23.9 8.1 19.1 -7.4
Other manufacturing 0.7 1 0.9 0.4 -3.6 3.4 -13.7
Non-manufacturing X 1.6 3.4 5.5 10.1
Total 14.5 22.8 50.8 39.9 8.1 17 -4.7

China 1992 1995 2000 2005 1992-2005 1992-2000 2000-2005
Food and related products 2.2 12.7 38.3 32.5 22.8 42.6 -3.2
Chemicals and allied products 3.5 14.7 21.6 31.6 18.4 25.4 8
Primary and fabricated metals 2.4 12.1 26.2 34.8 22.8 34.8 5.9
Industrial machinery and equipment 5.7 18.6 49.4 98.6 24.5 31 14.8
Electronic equipment 10.8 26.8 61.5 104.8 19.1 24.3 11.3
Computers and electronics 18.4 74.8 156.2 289.0 23.6 30.6 13.1
Transportation equipment 2.6 23.5 43.8 181.1 38.4 42 32.8
Other manufacturing 30.8 86.1 115.4 120.4 11.1 18 0.9
Non-manufacturing 13.7 22.7 31.4 74.3 13.9 10.9 18.8
Total 90.2 292 543.6 967.1 20 25.2 12.2


Source: RIETI FDI data, 2009, Available from http://www.rieti.go.jp/en/database/FDI2010/index.html
Notes: X indicates suppression to avoid disclosure of data of individual companies.







67


Table 8b. Employment of US MNC affiliates in China and India, 1992-2008
(Unit: ‘000)


1992 2000 2005 2008 Average
growth,


2000-2008


1992 2000 2005 2008 Average
growth,


2000-2008
  India   China  


Petroleum 0.2         0.2        
Mining   0.6 0.4 0.9 5.2   1 1.2 1.5 5.2
Utilities   0.1 (*) (*)     0.4 G 0.2 -8.3
Total manufacturing 10.4 48 62.8 92.2 8.5 13.4 193.6 319.6 409.9 9.8
Food 0.4 2.4 2.8 5.4 10.7 0.5 7.6 17.1 22.8 14.7
Chemicals 2.9 8.8 11.2 18.7 9.9 2.7 24.1 39.3 56 11.1
Primary and fabricated metals 0 G 1.8 0.3   0.3 8 15.2 18.6 11.1
Machinery I 15.5 14.6 16.9 1.1 0.5 17.7 33.6 38.9 10.3
Computer and electronic products 3.5 8.5 14.0 18.9   70.1 112.2 139.9 9.0
Electrical equipment, appliances, components 0 2.8 G 4.4 5.8 I 38.8 41.4 45.8 2.1
Transportation equipment 0 7.3 9.8 17.5 11.5 0 9.8 18.1 26.2 13.1
Other manufacturing G         F        
Wholesale trade 0.6 12.2 19.5 24.2 8.9 2 9 25.5 40.9 20.8
Information 1.1 14.4 34.9 54.1   2 8.8 9.8 22.0
Finance and insurance (*) 1.2 3.5 2.2 7.9 0 G H H  
Professional, scientific and technical services 5.7 66.1 109 44.6   4.4 7.7 13.6 15.1
Other industries 0 1.7 18.6 50.0 52.6 0 K 154.0 M
All industries 11.4 70.8 185.2 313.4 20.4 15.8 252 521.8 774.2 15.1


Source: US Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc.
Notes: G indicates an employment range of 1,000-2,499; H indicates an employment range of 2,500-4,499; G indicates an employment range of 1,000-2,499; M indicates an


employment range of 100,000 or more; Finance excludes depository institutions.







68



(c) Local sales and exports


Table 9 reports local sales and export orientation of Japanese and United States MNC
affiliates in India and other developing Asian countries in total manufacturing from 1989/90-
2004/05. MNC affiliates of both countries in India are predominantly local-market oriented.
In 2004/05, the local sales rate of Japanese MNC affiliates in India was 78 per cent, whereas
that of United States MNCs stood at 86 per cent. In 2000/01, 91 per cent of sales by United
States MNC affiliates went to local Indian markets and the figure remained at 86 per cent in
2004/05. Among the economies listed in table 9, the local sales rate is the highest for India for
MNCs of both countries. This is consistent with the view that MNCs mainly came to India
driven by the ‘tariff-jumping’ nature of investments (Athukorala, 2010).



Exports to Japan accounted for only 0.6 per cent of sales by Japanese MNC


affiliates in India in 2004/05, compared with 36 per cent in China, 32 per cent in
Malaysia and 37 per cent in Thailand. As discussed in the previous section, the
creation of production networks by Japanese MNCs usually revolves around
developing close linkages with parent firms in Japan. This is especially the case when
it comes to the initial stage of developing production networks and supply chains.
Therefore, as discussed above, the weak linkage of MNC affiliates to parent firms in
Japan shows the immature stage of Japanese production networks in India.



However, the rate of exports to other countries by Japanese MNCs in India actually


increased from 6 per cent in 2000/01 to 22 per cent in 2004/05. It is also interesting to note
that this rate is comparable to that of other MNC export-platform economies such as
Singapore (28 per cent), Taiwan Province of China (16 per cent) and Thailand (27 per cent).



As pointed out by Greaney and Li (2009), Japanese MNC affiliates in China are


more export-oriented compared to United States MNC affiliates. Some 34 per cent of total
sales of Japanese MNC affiliates went to local markets in China, and the remaining sales
were exported either to Japan (36 per cent) or other countries (30 per cent) in 2004/05. In
contrast, 64 per cent of total sales of United States MNC affiliates in China were directed
towards the domestic market in 2004/05. Contrary to popular perception (Branstetter and
Foley, 2010), there is no evidence to suggest that United States MNC affiliates in China are
primarily export-oriented, and in 2004/05, 27 per cent of sales were exported to other
countries, up from 14 per cent in 1989/90; 9 per cent of sales were exported back to the
United States in 2004/05, up from less than 1 per cent in 1989/90. The relatively lower sales
share that is exported back to the US reflects differences in distance-related trade costs.
Compared to Japanese MNC affiliates, export orientation of United States MNC affiliates
was generally lower with the exception of Malaysia, from where 42 per cent of sales by
United States MNC affiliates in Malaysia were exported back to the United States and 29
per cent of sales were exported to other countries in 2004/05. This unique position of
Malaysia reflects the dominant presence of major United States electronics producers such
as Intel Corporation, whose assembling operations are closely connected with headquarters.







69


Table 9. Local sales and export orientation of U.S. and Japanese MNC affiliates in manufacturing, 1989-2005
(Unit: Per cent of sales)


Japanese MNCs 1989/90 2000/01 2004/05 1989/90 2000/01 2004/05 1989/90 2000/01 2004/05
Local sales Exports to home Exports to other countries
India 100 93.3 77.8 0.0 0.6 0.4 0.0 6.1 21.8
China 59.6 40.4 33.8 20.6 38.0 36.0 19.8 21.5 30.2
Hong Kong, China 77.1 44.3 56.5 14.0 21.9 21.3 8.8 33.8 22.2
Indonesia 64.4 71.3 76.9 16.1 15.7 11.4 19.4 13 11.6
Republic of Korea 27.1 26.5 48.6 18.4 29.4 20.5 54.5 44.1 30.9
Malaysia 45.1 17.0 23.7 17.5 45.1 31.5 33.9 37.9 44.8
Philippines 44.0 47.6 39.1 14.4 17.5 13.3 41.6 34.9 47.6
Singapore 68.5 45.6 52.6 10.4 30.2 19.8 21.0 24.2 27.6
Taiwan Province of China 45.4 51.1 55.3 18.8 28.4 28.8 35.8 20.4 16.0
Thailand 0.0 47.1 36.6 0.0 21.7 36.5 0.0 31.2 26.8
Viet Nam 57.5 66.1 69.5 17.7 19.3 14.2 24.8 14.6 16.3


US MNCs 1989/90 2000/01 2004/05 1989/90 2000/01 2004/05 1989/90 2000/01 2004/05
Local sales Exports to home Exports to other countries
India 90.6 86.0 4.1 5.4 5.3 8.6
China 84.9 63.5 63.9 0.6 13.2 8.7 14.1 23.3 27.4
Hong Kong, China 32.2 37.3 50.7 38.8 31.4 18.6 29.0 31.3 30.7
Indonesia 46.2 83.9 84.2 0.0 1.3 1.5 0.0 5.8 14.2
Republic of Korea 65.2 79.4 72.4 27.7 9.1 7.4 7.1 11.5 20.2
Malaysia 23.9 19.7 29.2 47.9 32.8 42.1 28.3 47.5 28.7
Philippines 66.4 35.1 30.3 16.1 16.1 25.7 17.6 14.7 44.0
Singapore 14.5 30.8 39.0 54.7 34.5 15.1 30.9 34.6 45.9
Taiwan Province of China 56.2 54.8 60.7 27.2 23.2 17.8 16.6 22.0 21.5
Thailand 13.4 40.1 55.0 17.1 10.9 11.9 37.9 48.9 33.1
Viet Nam - - - - - - - - -


Source: United States Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc. and RIETI at http://www.rieti.go.jp/en/database/FDI2010/index.html







70



(d) Industry level


Table 10 summarizes local sales, exports to home and exports to other
countries as a percentage of sales at the industry level by Japanese and United States
MNCs in China and India. Although the industries are not strictly comparable because
of the different industry classifications across the two countries, the data do reveal
some similarities and differences.



Overall, Japanese MNC affiliates in India are predominantly local-market


oriented, with little going to the export markets (especially to Japan). However, some
variations occur across industries. Around 50 per cent of sales by Japanese MNC
affiliates in the machinery industry were exported to other countries (other than
Japan) in 2005. In the transport equipment industry, while the bulk of sales went to
local markets, around 23 per cent of sales were still exported to third countries
(Maruti-Suzuki is a primal example, as discussed above).



In general, there are two possible explanations for the larger share of local


sales in transportation equipment. First, most of emerging countries are continuing to
use high import protection to nurture the domestic automobile industry, especially in
China and India. Therefore, FDI in this sector is naturally local-market oriented.
Second, compared with parts and components of electronics, automotive parts (body
parts, vehicle bumpers and vehicle engines) are much heavier and bulkier, resulting in
higher transportation costs relative to the export value of goods (i.e., a higher value-
to-weight). Consequently, there is a tendency for producers of automotive parts to
locate their plants in the proximity of the assembly plants in a host country.



Geographical distance is a crucial factor in transportation costs of automotive


products. Therefore, it is still unclear whether Japanese automobile MNCs in India
will become integrated more with parent firms in Japan, even though the Japan-India
FTA should benefit such a process, particularly in the context of the growing presence
of middle-incomes in local markers and intensified domestic competitions in India.

A similar pattern can also be observed for computers and electronics, with 23
per cent exported to other countries and 76 per cent going to local markets. Hence,
there is some indication that Japanese MNCs in India export to third countries, but are
not integrated with the FDI home country.

The export proportion of sales by Japanese MNC affiliates in China is
relatively higher than in India, especially in electronics-related industries. This is
consistent with available evidence that Japanese MNCs use China as the assembly
export point in their global operations in the world electronics markets (Athukorala
and Yamashita, 2006). In 2005, 48 per cent of sales in the electronic equipment
industry were directed towards local markets in China, whereas 36 per cent of sales







71


were exported to Japan and 16 per cent to other countries, with a similar pattern
observed in computers and electronics. In comparison, Japanese MNC affiliates in
transport equipment are more local-market oriented, with about 70 per cent of total
sales going to local markets. In addition, some 26 per cent of transport equipment
sales were exported to Japan in 2005 (compared with less than 1 per cent for India),
again suggesting differences in production networks in the automobile sector.

United States MNC affiliates in the computers and electronics industry in India
are relatively less export-oriented, compared to Japanese counterparts (table 10.b), with
10 per cent of sales exported to other countries (versus 23 per cent for Japanese MNCs)
in 2005. In the case of transport equipment, 8 per cent of sales were directed to other
countries by United States MNCs (versus 23 per cent for Japanese MNCs) in 2005,
while 86 per cent of sales went to local markets. In addition, exports to the home
country have accounted for a relatively smaller share of exports, compared with their
Japanese counterparts, especially in transport equipment, with United States MNC
affiliates in India exporting only 4 per cent of sales to the United States; the figure for
Japanese MNCs stood at 26 per cent in 2005. Perhaps, as discussed above, geographical
distance, associated with transportation costs, is an impediment to exporting to the
United States. In comparison, United States MNCs in professional, scientific and
technical services, which enjoy free transport costs, exported a significant amount (48
per cent) of sales to the United States in the same period.







72


Table 10 Sales and exports by Japanese and United States MNC affiliates, by
industry in India and China, 2005



Table 10a. Sales and exports by Japanese MNC affiliates


(Unit: Per cent of sales)
India China
Local


sales
Exports
to Japan


Exports to
others


Local
sales


Exports
to Japan


Exports
to others


Food - - - 73.3 20.4 6.2
Chemicals 98.0 0.0 2.0 78.6 14.8 6.6
Primary and fabricated metals - - - 72.3 11.8 15.8
Machinery and equipment 49.2 2.3 48.5 47.0 32.2 20.7
Electronic equipment 95.7 1.8 2.5 47.9 35.7 16.4
Computers and electronics 75.4 1.6 23.0 33.0 33.2 33.8
Transportation equipment 76.6 0.4 23.0 69.5 26.0 4.6
Other manufacturing 94.7 3.9 1.4 52.1 38.1 9.7


Source: RIETI at http://www.rieti.go.jp/jp/database/d08.html



Table 10b. Sales and exports by United States MNC affiliates
(Unit: Per cent of sales)


India China
Local


sales
Exports to


United States
Exports
to others


Local
sales


Exports to
United States


Exports to
others


All industries 78.4 11.9 9.8 67.9 9.3 22.8
Mining 98.8 0.8 0.4 (D) (D) 1.3
Utilities (D) 0.0 0.0 100.0
Manufacturing 84.9 5.6 9.4 59.7 9.9 30.3


Food 97.9 0.3 1.8 91.1 0.7 8.1
Chemicals 94.4 0.2 5.4 86.7 3.5 9.8
Primary and fabricated
metals


(D) (D) 8.9 71.6 12.5 16.0


Machinery 58.9 19.7 21.5 64.8 9.8 25.4
Computers and electronic


products
87.1 2.8 10.1 45.2 11.6 43.2


Electrical equipment,
appliances and
components


(D) (D) (D) 39.4 25.4 35.2


Transportation equipment 85.5 6.6 7.8 84.4 3.9 11.7
Wholesale trade 93.6 3.2 3.2 90.0 4.8 5.2
Information (D) 19.2 (D) (D) (D) 2.3
Finance and insurance 90.6 7.3 1.9 (D) (D) (D)
Professional, scientific and


technical services
34.2 47.8 18.0 67.7 24.0 8.3


Other industries (D) 17.0 (D) (D) (D) (D)
Source: United States Bureau of Economic Analysis at http://www.bea.gov/international/index.htm#omc.
Notes: (D) indicates suppression to avoid disclosure of data of individual companies.







73


(d) Local purchases and imports

Figure 26 presents sourcing patterns of Japanese MNCs (as a percentage of
total purchases) in India and China in 2005. (Similar data for United States MNCs are
unfortunately unavailable). In his study of auto-component supply chains in India and
China, Sutton (2004) found that as supply chains further developed, key components
(cylinder heads and blocks) were manufactured either in-house or outsourced within a
host country, gradually creating less dependency on imported components from the
FDI home country.


The local purchase ratio by Japanese MNCs in India is quite high in chemicals
(87 per cent of total purchases), computers and electronic products (64 per cent) and
transport equipment (60 per cent), even though they also depend on imports from
Japan. In transport equipment, imports from Japan accounted for 38 per cent of total
purchases. An interesting case is a sourcing pattern in computers and electronics, with
64 per cent of purchases locally sourced and 33 per cent imported. It is also notable
that Japanese MNC affiliates in other areas of manufacturing (mainly labour-intensive
industries such as clothing and footwear) heavily depend on imports from Japan; 72
per cent of total purchases came from Japan. Interestingly, Japanese MNC affiliates in
transport equipment in China still depend extensively on imports (84 per cent) from
Japan, while only 15 per cent was locally sourced.



In sum, the high ratio of local purchases reflects the fact that Japanese MNCs


in India appear to be developing supply chains in local markets in India, consistent
with the findings of Sutton (2004).






















74



Figure 26. Local purchase and import of Japanese MNCs in India and China,


2005 (as a percentage of purchase)


India


0 20 40 60 80 100


Non-manufacturing


Other manufacturing


Industrial machinery and equipment


Electronic and other electric
equipment


Transportation equipment


Computers and electronic products


Chemicals and allied products


Per cent


Local purchase


Import from Japan


Import from others




China


0 20 40 60 80 100


Transportation equipment


Computers and electronic products


Primary and fabricated metals


Industrial machinery and equipment


Non-manufacturing


Other manufacturing


Food and related products


Electronic and other electric
equipment


Chemicals and allied products


Per cent


Local purchase


Import from Japan


Import from others



Source: RIETI, http://www.rieti.go.jp/jp/database/d08.html











75


4. Conclusion


This chapter examines the economic operations of Japanese and United States
affiliates in India and China, using previously little exploited MNC affiliate-level data.
The main findings suggest that while Japanese and United States MNC affiliates in
China are relatively more concentrated in computers and electronics, their investment
focus is quite different in India. The United States MNCs are concentrated more in
information technology-related service sectors, thus strengthening the service-led
growth of the Indian economy. In contrast, Japanese MNCs hold the predominant
position in the transport equipment industry (automotives), with the bulk of sales
going to local markets as well as being exported to other countries. Given that the
transport equipment sector is quite skills-intensive and focused on the domestic
market more than on exports, it has yet to be seen whether India is following pattern
of East Asia in integrating into the IPNs.


In addition, it appears questionable whether Japanese MNCs in automobiles
will further develop export orientation while incentives are becoming greater for
focusing more on local markets due to India’s increasing number of middle-income
households and current weak links with parent firms in Japan. In the author’s view,
improvements in infrastructure and the investment climate will be necessary to
connect India with global production networks. If the Japan-India FTA covers broad
areas and can facilitate cross-border transactions between the two countries, it may
have positive impacts on India’s participation in IPNs. This is particularly the case,
given the fact that Japanese-style IPNs usually start by establishing strong supply-
chain linkages between affiliates and parent firms in Japan.







76


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——— (2007). Multinational Enterprises in Asian Development. Edward Elgar,
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Athukorala, P. and H. Hill (2010). “Asian trade and investment: Patterns and trends”,
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78



Chapter IV



Integrating into Asia’s International Production Networks:


Challenges and prospects for India41


Rahul Sen and Sadhana Srivastava



During the past three decades, IPNs were created by multinationals in labour-


intensive manufacturing industries among East and South-East Asian countries. This
phenomenon, in which FDI played a major role, was fuelled by the adoption of
export-led outward-oriented growth strategy by Asian countries since the 1980s
decade. In stark contrast, India, one of the world’s currently emerging and rapidly
growing economies in terms of GDP growth adjusted for purchasing power parity
(PPP), has been largely left out of such global division of labour.42 A plausible reason
is that India strictly followed a self-reliance and import-substitution growth until
about 1991, when it adopted major policy reforms towards a more outward orientation.



The “stop-go” economic reforms during the past two decades have reduced


trade barriers and produced “relatively” open trade and investment environments in
India. The economy grew very rapidly at an annual average of 7.2 per cent between
2000 and 2009, with the merchandise trade-to-GDP ratio doubling from about 21 per
cent in 2000 to 42 per cent in 2008, compared with just 13 per cent in the pre-reform
period in 1990. However, the Indian manufacturing sector has so far not played an
important role in the Indian growth process. When benchmarked with rapidly-growing
countries in East and South-East Asia, Indian manufacturing industries have lagged in
development and have not integrated into the growing IPNs in Asia.



In this context, integrating into global manufacturing markets through


participation in IPNs is viewed as a key driver in providing development opportunities
for the Indian manufacturing sector through technology transfers and access to global
markets. It is therefore important to analyse whether India is beginning to integrate into
IPNs in Asia and globally, and whether that potential has been successfully utilized by
the manufacturing sector. It is also important to identify the policy challenges that
businesses are likely to face while aiming to connect India with the Asian IPNs. This
chapter aims to shed light on these issues.



Against the above backdrop, this chapter analyses the current state of


participation of India in IPNs of manufacturing industries in Asia, and identifies the
                                                            
 
41 This chapter draws on existing literature on this subject by Srivastava and Sen (2011).
42 In 2010, India’s GNI at PPP was about US$ 4.2 trillion (World Bank, 2010).
 







79


constraints and challenges for India’s deeper participation in the near future. The
changing directions of India’s trade policy and that of FDI are critically analysed with
regard to their role in fostering greater participation by India in Asian IPNs. This
includes India’s recent initiatives towards Asian economic integration by entering into
regional and bilateral PTAs, with ASEAN, the Republic of Korea and Japan. This
chapter includes case studies of two industries (auto-components and electronics) to
illustrate potentially successful examples of India emerging as an important regional
player in Asian IPNs. The emerging policy challenges and key recommendations for
India to integrate into Asian IPNs are analysed, thus highlighting the implications for
other countries in South Asia.


Section 1 of this chapter presents the ongoing economic reforms of India.
Section 2 analyses the current status of India in the Asian IPN process. Section 3
expands on Srivastava and Sen (2011) by analysing the trends, extent and patterns of
production fragmentation in India’s merchandise trade in parts and components (P&C)
for manufacturing products during two distinct sub-periods. The first sub-period was
1994-2004, which covered the first phase of calibrated globalization of the Indian
economy. The second sub-period, 2005-2008, covered the effect of the ongoing
integration of India into the global economy, and the events running up to the global
economic crisis of 2008-2009. This period was chosen in order to capture the effect of
economic reforms in India during the previous decadal period and more recent years.
The Athukorala (2005) and Athukorala and Yamashita (2005) framework is applied in
analysing the extent and trends in trade in P&C in India’s manufacturing sector trade,
separately from that of total trade flows, for which disaggregated product level data is
used from the United Nations COMTRADE database at the 5-digit level based on the
Standard Industrial Trade Classification (SITC) Revision 3.



Section 3 estimates the extent of intra-industry trade in these P&C trade


sectors in the Indian economy. Intra-industry trade estimates provide indirect evidence
of the role of FDI in the process of production fragmentation, especially when the
sector concerned is more producer-driven.43 It also uses estimates of marginal intra-
industry trade in India’s manufacturing trade in P&C, which provide useful insights to
the nature and magnitude of product fragmentation.



Section 4 provides a case study of the industry experience of India’s integration


into Asian IPNs. Following Srivastava and Sen (2011) and Nag (2009), the auto-
components and electronics components industries emerge as the two potentially most
important sectors wherein there is evidence of international product fragmentation and,
hence, scope for participating in global and Asian IPNs.



Section 5 analyses the policy challenges that are impeding India’s strong


participation in Asian IPNs, and focuses on the unilateral measures that have been
                                                            
 
43 Producer-driven commodity chains are mainly led by multinationals that play a central role in
coordinating production networks (Gereffi, 2001).
 







80


undertaken as a part of economic reforms as well as those within a select group of
countries/regions through regional and bilateral PTAs. The unilateral measures
analysed relate to India’s overall direction of trade policy, involving (a) the reduction
of tariffs and non-tariff barriers as well as steps to improve trade facilitation, and (b)
the state of infrastructure that has been identified as one of the biggest structural
bottlenecks towards integrating India into IPNs.



In conclusion, section 6 provides policy recommendations derived from the


analysis, highlighting implications for India and South Asia in general.


1. Ongoing economic reforms of India

In July 1991, India adopted wide-ranging economic policy reforms in areas


such as trade, investment, financial sector, industrial deregulation and reformation of
the public sector. These reforms were aimed at achieving macro-economic
stabilization through improved fiscal management, reduced distortions in the
production structure, and increased competitiveness of India’s external sector through
the reduction of trade barriers and encouragement of private capital flows (of which
FDI was a major constituent).



Rajan and Gopalan (2011) observed that after a decade of the ongoing


reforms, India had experienced an international trade renaissance with its merchandise
exports (including re-exports) with revenue than doubling from about US$ 95 billion
in fiscal year April 2005-March 2006 to nearly US$ 220 billion in 2011. India’s
exports grew at an average of almost 20 per cent between 2000 and 2009, averaging
US$100 billion annually. Its merchandise imports more than doubled from about US$
138 billion to US$ 327 billion in the same period.



From being among the relatively insignificant players in global trade in 1990


(ranked below fortieth position globally, and constituting a share of 0.5 per cent of
global merchandise exports and a share of 0.7 per cent in global merchandise imports),
India moved rapidly up the global trade rankings. It was ranked twentieth in world
exports in 2010, with its share of global merchandise exports increasing to 1.4 per
cent, and thirteenth in world imports, with merchandise import shares increasing to
2.1 per cent. In the area of trade in commercial services, India’s performance was
highly impressive in 2010, when the country gained seventh position among world
exporters and importers of commercial services – constituting a share of 3.3 per cent
for that year, compared with thirty-fourth and twenty-eighth, respectively, in 1995
(WTO, 2011a). Among developing countries globally, India was ranked as the second
largest exporter and importer of commercial services in 2010, next to China (WTO,
2011a).



India’s “Look East policy” and its integration with South-East and East Asia is


a significant policy development. China has emerged as the most important Asian
trade partner of India during the past decade (figure 27). India’s trade with Singapore
have also expanded considerably after the signing of the India-Singapore
Comprehensive Economic Cooperation Agreement. During the fiscal year from April
2009 to September 2010, Asia was India’s largest export destination, accounting for







81


55 per cent of total exports, compared with just 40 per cent in 2001-2002;44 during
that period China accounted for 10 per cent of India’s total exports.

Figure 27. India’s shares in merchandise trade with developing Asia and China




0.0


5.0


10.0


15.0


20.0


25.0


30.0


35.0


1996-97 1997-98 1998-99 1999-
2000


2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11


Pe
r c


en
t


Developing Asia (exports) Developing Asia (imports)


China (exports) China (imports)



Source: Reserve Bank of India, 2011.



The FDI regime in India has also been significantly liberalized, with the
opening up of its economy to foreign investors in industries such as power and fuels,
electrical equipment, transport, chemicals, food processing, metallurgical, drugs and
pharmaceuticals, textiles, and industrial machinery as well as in a range of
commercial service activities. Besides liberalizing inward FDI inflows, procedures for
outward FDI were also liberalized in the 1990s. This has resulted in a number of
Asian countries investing in India as well as Indian companies investing in Asia. India
attracted a cumulative total of FDI inflow worth US$ 150 billion during April 2000-
September 2011, with Singapore (10.1 per cent), Japan (4.8 per cent) and the Republic
of Korea (0.6 per cent) being ranked as second, fifth and fourteenth foreign investors
in India during the same period (Department of Industrial Policy and Promotion, 2011).


Figure 28 presents the share of cumulative inward FDI inflows in the top 10
industrial sectors of India from April 2000 to September 2011. The figure suggests that


                                                            
 
44 See Rajan and Gopalan, 2011.







82


foreign investors have focused on the services sector of India; thus, the role of FDI in
stimulating the IPN development process in India is still insignificant. The services
sector (including financial and non-financial services) was the largest FDI-recipient
sector, attracting nearly 20 per cent of India’s inward FDI inflow. In contrast, industries
such as automobiles and electronics, which are an important part of Asian IPNs
accounted for a small share in FDI inflows to India. The automobile industry (including
automobile parts and components manufactures) was the seventh largest sector in terms
of attracting inward FDI in India (constituting just 4 per cent of the share of FDI equity
inflows over this period). The electronics industry was not even among the top 10
industry sectors attracting FDI inflows during this period.



Figure 28. India’s share of inward FDI inflows in the top 10 sectors,


April 2000-September 2011


0.0 5.0 10.0 15.0 20.0


Services sector


Computer software and hardware


Telecommunications


Housing and real estate


Construction activities


Automobile industry


Power


Metallurgical industries


Petroleum and natural gas


Drugs and pharmaceuticals



Source: Department of Industrial Policy and Promotion (2011); FDI sectoral data revalidated in
line with Reserve Bank of India data that reflect minor changes in the FDI figures compared
with sectoral data published earlier.



Recognizing that the manufacturing sector has to play a key role in sustaining


India’s rapid growth, the Government has approved the draft national manufacturing
policy for increasing the share of manufacturing in the gross domestic product (GDP)
from the current share of 16 per cent to 25 per cent by 2025. In order to provide the
necessary environment for India to emerge as a global manufacturing hub, the
Government plans to build mega-industrial zones that contain world-class infrastructure







83


facilities. The project is expected to improve connectivity within the country and create
100 million new jobs for the Indian workforce.


2. Current state of India in IPN process

In the global context, the value chains are controlled by MNCs that play the


central roles in coordinating production networks, which includes backward- and
forward-linkages. Industries that are subject to design, research and development, and
significant economies-of-scale such as semiconductors, automobiles and heavy
machinery, are likely candidates for the creation of IPNs controlled by MNCs. In Asia,
IPNs of these industries have enabled different countries to participate along the
global value-added chain of a good. As a result, expansion of intra-firm and intra-
industry (IIT) trade transactions between countries participating in the production
networks has been rapid.



Kimura (2007 and 2009) developed an analytical framework based on the
spatial nature of production networks and applied it to the Asian context, particularly
ASEAN. He identified four phases of industrialization based on current participation
in production/distribution networks (figure 29). The first phase essentially consists of
countries that need to get into the production networks, and which are building a
business-friendly investment climate in order to attract new production blocks.
Typically, these are low-income developing economies, which face significant policy
challenges in attracting efficiency-seeking or export-platform FDI. 45 The second
phase requires development of industrial agglomeration to support the existing
production blocks. For countries in the second phase, 46 it is important to attract
foreign small and medium-sized enterprises (SMEs) that form into industrial clusters
of vertical production network by removing investment bottlenecks and improving
service link arrangements. The third and forth phases comprise countries that are
industrialized and whose firms are already internationally competitive and have
become multinationals developing their own production and distribution networks.
Thus, developing international competitiveness of indigenous firms is crucial to
moving towards the last two phases of industrialization in IPNs.










                                                            
 
45 The lesser developed ASEAN economies (Cambodia, Lao People’s Democratic Republic and
Myanmar) are placed currently in this category (Kimura, 2009).
46 According to Kimura (2009), Viet Nam has already moved into this phase, with most of the other
low-income South-East Asian countries trying to develop capabilities to enter the phase. 







84






Figure 29. The four phases of industrial development through utilizing IPNs




Source: Based on Kimura, 2009.




In the Indian context, it seems that FDI inflows have apparently not made a


significant contribution to the development of IPNs, as the FDI inflows have been
more market-seeking in nature. Veeramani (2009) analysed IIT of 75 Indian industries
and found that India’s IIT was negatively influenced by the market-seeking nature of
its inward FDI in the domestic industries.47 This view of market-seeking motives
driving Indian FDI in manufacturing has been empirically established by studies such
as Aggarwal (2001), Kumar (1990), Kumar and Siddharthan (1994), Pailwar (2001)
and Pant (1993 and 1995), among others.



Based on the framework proposed by Kimura (2007) illustrated above, India


would probably be characterized as having entered the first phase of integrating into
IPNs. There are some modest signs that show India might gradually get involved in
the IPN process after ongoing economic reforms have been pursued for more than a
decade. Veeramani (2002) found that India’s IIT grew significantly and responded
positively to economic reforms that have unleashed a series of trade and investment


                                                            
 
47 Veeramani (2009) analysed the effect of trade barriers and multinationals on India’s IIT in 75
industries through panel regressions. The study estimated IIT using 4-digit data based on the
International Standard Industrial Classification (ISIC). The Grubel-Lloyd (G-L) index as well as an
additional measure of marginal IIT, as suggested by Brülhart (1994), was used to understand changes
in the levels of India’s IIT


Phase 1 
Getting into IPN: 
Attracting  production 
blocks through 
efficiency‐seeking FDI. 


Phase 2 
Development of industrial agglomeration to support and 
strengthen the existing production blocks. 


Phase 4 
Fully industrialized and developed, 
firms become multinationals and 
create their own IPNs. 


Phase 3 
Become newly industrialized 
economies upgrade industrial 
structure and climb up the value 
chain developing indigenous 
competitiveness.







85


liberalization measures since the 1990s.48 Kumar (2003) noted that reforms prompted
foreign multinationals to begin exploring the potential of India as an export-
production platform in a modest manner. Srivastava (2007) observed that India was
indeed becoming attractive to export-oriented FDI, with a greater potential in services
than in the manufacturing sector. According to Banik and Gilbert (2010), one of the
major reasons that IPNs had yet not flourished in South Asia was that manufacturing
activities of countries in that subregion placed emphasis on low-level technology,
labour-intensive exports such as textiles, leather products, in which there was little
scope for production fragmentation. If India is to participate in global and Asian IPNs,
diversification towards exporting parts and components of vertically-fragmented final
products is essential.


3. Production fragmentation in India’s manufacturing trade:
Trends and patterns



This analysis compares patterns of trade in P&C by India for 1994, 1999, 2004


and 2005-2008.49 Following the definition and methodology of Athukorala (2005),
parts and components are defined at the 5-digit SITC Revision. 3. Data were
downloaded from the United Nations COMTRADE database. The dataset for this
study contains 231 products from SITC 7 and 8, i.e., 172 products belonging to SITC
7 (machinery and transport equipment) and 59 belonging to SITC 8 (miscellaneous
manufactured articles).50



In 2008, global P&C exports were worth US$ 1,118 billion. India’s


contribution to global exports was only about 0.8 per cent, which is quite insignificant
when compared with other developing economies in East and South-East Asia.51
However, the growth of India’s P&C exports has been significantly higher than the
growth of merchandise exports in general as well as manufacturing exports (figure 30).



The structure of India’s exports has been highly concentrated. The top 10


export items constituted more than 60 per cent of total exports in the P&C categories.
Parts and accessories of automobiles and other vehicles (categories 784 and 785 in
SITC Rev. 3) constituted the bulk of India’s P&C exports, followed by parts and
components for electrical, electronic and telecommunications equipment (categories
SITC 75 to 77). 52



                                                            
 
48 Veeramani (2002) analysed trends in India’s overall intra-industry trade (IIT) and with its 51 trading
partners in three years: 1988, 1995 and 2000.
49 The merit of using trade in parts and components as evidence of the intensity of IPN activities is
discussed in chapter 3 of this book.
50 The merit of using SITC Revision 3 classification is noted comprehensively in Athukorala and
Yamashita, 2005.
51 See Athukorala, 2010. 
52 For details see Appendix II to this book, tables 1a and 1b.







86


Figure 30. Growth in India's merchandise exports, 1994-2008


‐10


0


10


20


30


40


50


1994‐1999 1999‐2004 1994‐2004 2004‐2008 2007‐2008


Pe
r c


en
t


Total exports Manufacturing exports P&C exports


Source: Computed by authors from United Nations COMTRADE data.

India contributed about 1.5 per cent to world imports of parts and components.


Unlike the export side, India’s growth of P&C imports was less than that of total
merchandise imports and manufacturing imports; the difference was particularly large
during recent years (figure 31).


Figure 31. Growth in India's merchandise imports, 1994-2008


0


5


10


15


20


25


30


35


40


45


50


1994‐1999 1999‐2004 1994‐2004 2004‐2008 2007‐2008


Pe
r c


en
t


Total imports Manufacturing imports P&C imports



Source: Computed by authors from United Nations COMTRADE data.







87



The import composition was slightly less concentrated than that of exports.


The top 10 items constituted no more than 50 per cent of total P&C imports by India.
Parts and accessories for data processing machines (SITC 75997) have been among
the most important items in P&C imports by India.53



India’s intra-industry trade in parts and components



Parts and components trade in IPNs usually involves a higher degree of IIT.54


This study followed the methodology used by Rajan (1996) and Srivastava and Sen
(2011). Estimating IIT of P&C trade involves three steps.55 The first step separates
India’s total P&C trade into one-way trade (inter-industry trade explained by the
traditional comparative advantage theory) and two-way trade (IIT), which implies that
trade might involve fragmented production chains. The second step is an estimate
both of the value of IIT as well as the G-L index, which measure degree of IIT of
those products. The third step is an analysis of the estimates of marginal IIT (MIIT),
as suggested by Brülhart (1994), to ascertain whether the change in trade volumes in
these parts and components during the periods analysed are due more either to intra-
industry or to inter-industry trade.56



In the first step, the methodology applied is that of Abd-el Rahman (1991) and


Ando (2006), which breaks down India’s total P&C trade into one-way trade and two-
way trade. Figure 32 provides the results of this break-down for 1994-2004. The share
of two-way trade, which represents IIT, increased from 53.7 per cent to 79.4 per cent
during 1994-2008. This provides evidence that evolving international production
fragmentation in India has been increasingly felt through India’s trade in 231 parts
and components.









                                                            
 
53 For details see Appendix II of this book, tables 2a and 2b.
54 IIT has generally been estimated in the empirical literature by the Grubel-Lloyd (G-L) index (Grubel
and Lloyd, 1975). The later versions of the index havebeen modified to improve upon the downward
bias (Rajan, 1996).
55 Although several empirical studies on IIT among East Asian economies have attempted to
distinguish between horizontally and vertically differentiated products, this paper does not make such a
distinction with volume of India’s P&C trade in total trade being significantly lesser in magnitude. 
56 MIIT is a transposition of the G-L index using first differences of trade flows (Brülhart, 1994).
Similar to the Grubel-Lloyd (G-L) index, the MIIT index takes value from 0 to 1. The value close to 1
indicates the almost 100 per cent of the changes in trade over the time period is due to changes of
intra-industry trade, while the index is close to zero indicates that inter-industry trade explained most of
the trade changes. The derivations and interpretations of these indices are presented in Annex to this
chapter.







88



Figure 32. Patterns of India's parts and components trade, 1994-2008






0


10


20


30


40


50


60


70


80


90


100


Per cent


1994 1999 2004 2005 2006 2007 2008


One-way trade Two-way trade


Source: Author’s calculations, based on United Nations COMTRADE data.



There has been an increasing degree of IIT in parts and components for


machinery and electronic products as well as for automobile and other vehicles.
Specifically, auto-parts (SITC 78439) were always among the top three products that
involved a high amount of IIT throughout the period of the study.57 The results of
MIIT estimates for the top 10 P&C products involving the highest levels of IIT in
2008 are presented in table 11. It can be seen that from 1994 to 2008 intra-industry
trade accounted for more than 50 per cent of the changes in trading of eight products
in the top 10 P&C products. Automotive parts and accessories (SITC 78434 and
78439), parts for spark-ignition combustion piston engines (SITC 71391) and
photosensitive semiconductor devices (SITC 77637) showed relatively high levels of
MIIT in both periods covered by the study.









                                                            
 


57 The estimates for the top 10 P&C products involving product fragmentation due to IIT over the
period of the study are presented in Appendix II of this book, tables 3a and 3b.







89



Table 11. Marginal intra-industry trade in top 10 products involving P&C trade


in 2008
Commodity Code 2008 (over 1994) 2008 (over 1999)


78439 74.0 75.3


79295 48.4 70.4


77637 87.3 88.9


71392 78.4 88.6


77282 64.9 66.2


78434 95.5 94.6


76493 34.4 36.3


78537 71.2 40.4


72855 67.7 63.6


71391 82.6 99.5
Source: Calculated from United Nations COMTRADE data.
Note: See Appendix I of this book for commodity description.




4. Indian industries in IPNs: A case study


The previous section suggests that product fragmentation appears to emerge in
some Indian automotive components and electronics sectors. Anecdotal evidence
shows that automobile MNCs from Japan, the Republic of Korea, Europe and United
States (such as General Motors, Suzuki, Ford, Toyota, Hyundai, Daimler Chrysler
Fiat, Skoda, Mitsubishi, Honda, Volvo and Yamaha) have increasingly exported auto-
components from India to global markets. In the area of consumer electronics, MNCs
such as Samsung, LG, Nokia and Philips are strengthening their presence in India, and
increasingly outsourcing parts and components from their Indian suppliers (India
Brand Equity Foundation, 2011). India’s participation in Asian IPNs in each of these
industries is analysed below.



(a) Auto-components industry



The Indian auto-component industry has been growing at 20 per cent annually


since 2000. The value of the auto-components industry has been estimated at US$ 22
billion in 2009-2010, growing at a compound annual growth rate (CAGR) of 20.4 per
cent since 2004-2005. Technological shifts in the Indian automobile industry have been
the key drivers of growth and innovation. India is currently emerging as a hub for engine
components. Global original equipment manufacturers (OEMs) have been setting up
engine manufacturing units in the country. By 2012, India was expected to foresee the
increased deployment of IT-enabled automobile support systems that would promote







90


innovation in this industry, such as global positioning systems, anti-braking systems, and
automatic speech recognition and safety systems.58



The auto-component industry recorded a total investment of US$ 9 billion in


2009-2010, compared with US$3.8 billion in 2004-2005. During 2000-2011, the
automobile industry (including auto-components) has been the sixth-largest
recipient of FDI equity inflows into India, receiving a cumulative FDI inflow worth
US$ 6.4 billion from April 2000 to September 2011, constituting a 4 per cent share
of total FDI (Department of Industrial Policy and Promotion, 2011). According to
the Automotive Component Manufacturers Association (ACMA) (2011),
investment in the industry (both domestic and foreign) is expected to reach US$ 35
billion by 2020.



Rising domestic demand has been a major factor driving the strong growth.


In addition, the availability of low-cost skilled manpower is attracting foreign
OEMs to invest in India. According to the India Brand Equity Foundation (IBEF)
(2011), there are approximately 400,000 engineering graduates each year in India,
and the cost of entry-level engineers is as low as US$ 8,000 per year. Recently, the
Government provided investment incentives, such as lower excise duties, realization
of value-added tax (VAT), allowing FDI up to 100 per cent, which have strongly
contributed to the growth of this industry (ACMA, 2011).



Currently, MNCs play a minor role in India’s auto-component production. In


2010, MNCs such as Magna, Visteon, Federal-Mogul Corporation (North American-
based), Valeo, Bosch (European-based) and Denso (Japan-based) contributed only 15 per
cent of the production in the Indian auto-components market. 59 This suggests that
compared to South-East and East Asia, the role of Asian MNCs in India’s auto-
components industry has been minimal (IBEF, 2011). Data are unavailable for the
contribution of MNCs in this industry by country of origin, which makes it impossible to
ascertain whether Asian or non-Asian MNCs have been playing the dominant role in FDI
in this industry, and more particularly in the subsector of auto-components.60



India exported about 13 per cent of its auto-components in 2010-2011, at a


value of US$ 5.2 billion. This industry witnessed a CAGR of 21 per cent in its
exports from US$ 1.3 billion in 2003-2004. Principal export items included
replacement parts, tractor parts, motorcycle parts, piston rings, gaskets, engine
valves, fuel pump nozzles, fuel injection parts, filter and filter elements, radiators,


                                                            
 
58 India’s process-engineering expertise, applied to re-designing of production processes, has resulted
in the reduction in manufacturing costs of components. As a result, India, today, has become the
outsourcing hub for several global automobile manufacturers.
59 The organized sector of this industry contributed 58 per cent of total production, with Indian firms
contributing 43 per cent of total production while MNCs accounted for 15 per cent. The unorganized
sector contributed 27 per cent of production (IBEF, 2011). 
60 Monthly FDI statistics published by the Department of Industrial Policy and Promotion of India
provide detailed data on either aggregate country-wise FDI equity inflows or by industrial sectors, but
not both.







91


gears, leaf springs, brake assemblies and bearings, clutch facings, head lamps, auto
bulbs and halogen bulbs, spark plugs and body parts (ACMA, 2011). Nag (2009)
observed that India’s auto-components exports were growing notably but that the
growth rate was much smaller than that of China. He estimated that during 1995-
2006, India’s exports of auto-components increased from US$ 0.28 billion to US$
1.38 billion, while China’s auto-components exports increased from US$ 0.38
billion to US$ 8.93 billion during the same period.



Currently, India’s trade in auto-components is running at a deficit with Asia,


while it is in surplus with Europe and North America. Europe was the main
destination for Indian auto-component exports in 2010-2011 with a share of 36 per
cent. North America accounted for nearly 24 per cent of these exports, while the
share of Asia was 28 per cent. The majority of exports to Europe have comprised
sourcing of auto-parts by European-based automobile OEMs such as BMW,
Volkswagen, Fiat Renault and Mercedes Benz. During the same period, 54 per cent
of India’s auto-component imports were from Asia, followed by Europe (36 per
cent) and North America (8 per cent).



Table 12 presents the top 10 export destinations for Indian auto-components


in 2008, identified at the SITC 5-digit product level. With the exception of the
Republic of Korea and Thailand, no other East or South-East Asian country ranked
among the top three destinations for all auto-component exports during that year.
The majority of India’s auto-component exports were destined for the United
Kingdom, the United States, Italy, Germany, Mexico, Bangladesh, Sri Lanka and
Middle Eastern countries. Nag (2011) also found that in 2007-2008, IIT in auto-
components of India was higher for trade with the United States and Germany than
with any Asian country.61 He noted that while the majority of India’s auto-exports
were not destined for Asia, India was increasingly sourcing a significant amount of
auto-components from Asia. This suggests that India’s level of participation in
Asian IPNs involves more one-way than two-way trade in auto-components.



Although the current participation of India in Asian IPNs is relatively low, it


has been gradually increasing. Table 13 presents the trends in India’s automobile
P&C exports to major Asian countries involved in automotive IPNs during 1994-
2008. The share of India’s automobile P&C exports to eight major auto-component
producers in Asia increased from 6.3 per cent in 1994 to 10.8 per cent in 2008. The
table shows rapid expansion rates in exports to the Republic of Korea, Thailand,
China and Japan.


                                                            
 
61 Nag (2011) defined auto-components as within the 8-digit harmonized commodity description and
coding system classification. 







92


Table 12. Export shares and major destinations for India’s auto-parts, 2008


78425 78431 78432 78433 78434 78436 78439
Export


destination
Share


(%)
Export


destination
Share


(%)
Export


destination
Share


(%)
Export


destination
Share


(%)
Export


destination
Share


(%)
Export


destination
Share


(%)
Export


destination
Share


(%)
Senegal


19.14


United
States


28.9


Republic of
Korea


41.0


United
Kingdom


26.1


Hungary


27.9


Italy


40.5


United
States


28.4


United Arab
Emirates


17.1


Mexico


11.7


United
States


16.5


United
States


21.6


Thailand


14.3


Turkey


15.6


Italy


9.7


France 7.6 France 4.9 Germany 9.1 Mexico 11.9 South Africa 13.9 Sweden 15.2 Germany 6.7
Japan


5.7


China


4.4


United Arab
Emirates


5.4


Italy


6.7


Argentina


13.7


France


7.9


United
Kingdom


5.5


Australia


5.2


Italy


4.4


Australia


3.3


Egypt


4.6


Singapore


6.0


Germany


7.8


United Arab
Emirates


3.5


Israel


5.1


United
Kingdom


4.3


Spain


2.7


Poland


3.0


Germany


5.9


United
Kingdom


6.5


Belgium


3.5


Guinea


4.5


Germany


3.7


United
Kingdom


2.4


Netherlands


2.9


United
States


5.0


United
States


2.9


Republic of
Korea


2.8


Bahrain


4.5


South
Africa


3.4


Saudi
Arabia


1.9


China


2.6


Italy


4.3


Indonesia


1.3


Turkey


2.6


Nepal


3.2


Poland


2.9


Slovakia


1.4


United Arab
Emirates


2.4


China


2.1


Cameroon


1.0


France


2.6


Sri Lanka


3.2


Spain


2.8


Egypt


1.3


Japan


2.2


United
Kingdom


0.9


Sri Lanka


0.5


South
Africa


2.1


Source: Calculated from United Nations COMTRADE data.
Note: See Appendix I of this book for commodity description.












93



Table 13. India’s exports of auto-parts to major countries involved in Asian IPNs, 1994-2008



1994 1999 2004 2008



Value (US$


million)
Share in total


(%)
Value (US$


million)
Share in total


(%)
Value (US$


million)
Share in total


(%)
Value (US$


million)
Share in total


(%)
China 0.1 0.0 0.5 0.2 12.4 1.7 22.9 1.3
Thailand 0.8 0.3 0.4 0.2 10.8 1.5 50.1 2.8
Malaysia 2.9 1.1 2.8 1.1 11.5 1.6 11.7 0.7
Indonesia 3.9 1.6 2.7 1.1 5.7 0.8 12.3 0.7
Singapore 7.1 2.8 2.0 0.8 2.8 0.4 4.4 0.3
Viet Nam 0.0 0.0 0.1 0.0 0.7 0.1 0.6 0.0
Japan 0.9 0.4 3.8 1.5 7.6 1.1 18.6 1.1
Republic of


Korea
0.1



0.0



6.6



2.6



7.2



1.0



69.9



4.0



Hong Kong,


China
0.5



0.2



1.7



0.7



0.8



0.1



0.6



0.0



World 251.4 6.5 253.0 8.1 709.9 8.4 1 765.5 10.8


Source: Calculated from United Nations COMTRADE data.
Note: See Appendix I of this book for commodity description.







94


The economic reforms since the 1990s have significantly liberalized India’s
trade in auto-components. India’s tariffs on imported auto-components decreased
from 35 per cent to 10 per cent during 2001-2008. Manufacturing and imports in this
sector are now free from licensing and approval requirements. Tariffs on raw material
have been reduced from 10 per cent to between 5 per cent and 7.5 per cent. A
restriction on foreign equity has been lifted for investment in auto-component sector,
and foreign equity input is allowed up to 100 per cent. In addition, the Government
has initiated a number of investment incentives to encourage R&D, technology
upgrading and use of fuel-efficient technologies.62



Those measures are expected to allow Indian and India-based global auto-


manufacturers to source auto-components more efficiently, and to increase integration
of the Indian automobile sector into IPNs of MNCs. A case study by Nag (2011)
points to the evidence that India is beginning to be chosen as an export platform for
some auto-parts. Toyota Kirloskar Auto Parts (TKAP), a joint-venture between
Toyota and a local manufacturer, has been exporting gearboxes from India to its
assembly plants in different parts of the world, including Thailand, since 2004. In
addition, Toyota has included India as a part of the firm’s international multipurpose
vehicle (IMV) project, by designating India as its production base for gearboxes and
other auto-parts supplied to Indonesia and other countries in Toyota’s network. The
rapid rise of India’s gearbox exports (SITC 78434) appears to be associated with this
development (figure 33).63



Apart from Toyota, automotive manufacturers such as Hyundai, Renault-


Nissan, Ford, Chevrolet, Honda, Toyota and VW are investing in new capacity for
supplying local and overseas markets. Suzuki India has developed a global sourcing
policy and is trying to procure components from its suppliers throughout the world by
integrating them into its Asian IPNs (Nag, 2011). This is expected to increase two-
way trade of auto-components among China, India and Indonesia, where Suzuki’s
                                                            
 


62 The aim of the Automotive Mission Plan 2006-2016 by the Ministry of Heavy Industries as well
as public enterprises is aimed at increasing the auto-industry output from US$ 34 billion in 2006 to
US$ 160 billion by 2016, and export revenues to US$ 35 billion during the same period ( export
revenue was US$ 5 billion in 2010-2011). The Automotive Mission Plan recommended setting up a
technology modernization fund, with special emphasis on SMEs, and encouraging the establishment of
development centres as well as streamlining training research institutions around auto hubs. As part of
the national automotive testing and R&D infrastructure project, the Government planned to set up an
R&D fund of US$ 388.5 million to enable the industry to adopt and implement global standards of
vehicular safety, emission and performance standards. The recent Union Budget of 2010–2011 has also
given further impetus to the automotive industry by increasing weighted income tax deduction for in-
house R&D from 150 per cent to 200 per cent, and for outsourced R&D from 125 per cent to 175 per
cent; this is expected to reduce the upgrading costs of companies.


63 According to Nag (2011), exporting gearboxes is just the beginning of Toyota’s strategy to integrate
India into its Asian IPNs, and there may be possibilities for Toyota and other global automobile
manufacturers to source automotive hardware such as cast parts, metal components and sub-assemblies
as well as software from their Indian operations. 







95


plants are located. In the case of two-wheelers, Indian companies such as TVS and
Bajaj Auto are beginning to show a strong presence in Asian markets, particularly in
Indonesia. These two companies recorded export growth of more than 50 per cent in
2006 and have recently expanded manufacturing capacity in Asia, with TVS investing
US$ 55 million in establishing an assembly plant in Indonesia.


Figure 33. Exports of gearboxes (SITC 78434) from selected Asian countries,
1994-2008


0


100


200


300


400


500


1994 1999 2004 2005 2006 2007 2008


Va
lu


e
(m


ill
io


n
U


ni
te


d
St


at
es


d
ol


la
r)


China India Indonesia Malaysia Philippines Singapore Thailand
Source: Calculated from United Nations COMTRADE data.





At the national level, it is still challenging for India to develop production and
trade linkages with Asian IPNs to a scale that is comparable with China and ASEAN
countries. The current trade and investment structures of the Indian auto-components
industry are linked more with European and North American MNCs than with Asian
MNCs. Europe and North America together account for more than 60 per cent of
auto-component exports by India. Nag (2011) found that Indian auto-component
producers preferred to tie up with European or American MNCs more than with Asian
MNCs. A major reason is the higher flexibility in doing business, because Asian
MNCs usually do not allow their local partners to supply the same products to firms
outside their production networks

(b) Electronics component industry







96


The electronic components industry is a subsector of the electronics industry
that caters to the requirements of consumer electronics, telecom, defence and
information technology sectors. Some examples of electronic parts and components
exported from India are television picture tubes (black and white, and colour),
monitor tubes, diodes and transistors, power devices, integrated circuits, hybrid
microcircuits, resistors, capacitors (plastic film, electrolytic, tantalum and ceramic),
connectors, switches, relays, magnetic heads, printed circuit boards, crystals,
loudspeakers, and hard and soft ferrites. Most of the top global semiconductor
companies have set up chip design centres in India. With the introduction of the
Special Incentive Package Scheme announced by the Government, it is expected that
chip manufacturing will start in the near future.



Production of electronic components during 2009-2010 registered a growth of


17.7 per cent from 2008-2009. The rapid growth of India’s electronic components
industry has mainly been driven by growth in the consumer electronics industry. The
demand for electronic components such as printed circuit boards, semiconductor devices,
connectors, wound components and antennas increased due to demand from indigenous
manufacturing of mobile phones, set top boxes, DVD players etc. Shares of electronic
components in total production increased from an average of 43 per cent in 2004-2005 to
72 per cent in 2009-2010 (figure 34).





Figure 34. Trends in India's electronics components production and
exports, 2004-2010




0.0


0.5


1.0


1.5


2.0


2.5


3.0


2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Year


Va
lu


e
(b


ill
io


n
U


ni
te


d
St


at
es


d
ol


la
r)


Production Exports
Source: Electronics and Software Exports Promotion Council, 2011.








97



Table 14 presents the export values and shares of major export destinations of


the top 10 items of India’s electronics component exports in 2010, which also
corresponds to the SITC 77 broad product category in the trade data. The bulk of these
electronics component exports were destined for OECD countries, particularly the
United States and Germany. This suggests that India’s links with Asian IPNs on the
export side in this industry are also not so strong.



However, according to the Electronics and Software Exports Promotion


Council (2011), following the onset of the global economic crisis in 2008-2009, the
share of India’s electronics components exports to the European Union declined from
46 per cent in 2008-2009 to 37 per cent in 2009-2010, while exports to Japan, the
Republic of Korea and East Asia as well as Singapore, Hong Kong, China and South
Asian countries increased from 5 per cent to 11 per cent during the same period.







98


Table 14. India’s exports of electronics-parts: Value and share in major destinations, 2009-2010


Products



Export value in
2009-2010


(US$ million)


Major destinations during 2009-2010, with approximate percentage share of items in total export
value



Boards, panels, consoles, Desks,
cabinets etc.


454.1


United States (11 per cent), Germany (10 per cent), United Arab Emirates (9 per cent), United Kingdom (6
per cent), China (4 per cent), others (60 per cent)


Solar cells


320.2


Germany (55 per cent), Netherlands (12 per cent), Italy (7 per cent), Spain (4 per cent), Australia (4 per cent),
others (18 per cent)


Populated P&CB


204.6


China (23 per cent), United Arab Emirates (19 per cent), United States (17 per cent), the Netherlands (10 per
cent), Hong Kong, China (5 per cent), others (26 per cent)


Transformers


142.8


Ethiopia (12 per cent), Nigeria (9 per cent), Kenya (8 per cent),Djibouti (7 per cent), United Kingdom (6 per
cent), others (58 per cent)


Printed circuits boards – blank


94.1


United States (26 per cent), Austria (21 per cent), China (10 per cent),Germany (7 per cent), Spain (6 per
cent), others (30 per cent)


Antennas


91.9


Germany (24 per cent), Netherlands (15 per cent), Russia Federation (10 per cent), China (9 per cent), Hong
Kong, China (6 per cent), others (36 per cent)


Parts of transformers



66.3



United States (10 per cent), Islamic Republic of Iran (8 per cent), United Arab Emirates (8 per cent),
Germany
(5 per cent), Turkey (5 per cent), others (64 per cent)


Capacitors


61.6


Germany (26 per cent), HK (10 per cent), Nigeria (9 per cent), United States (9 per cent), Czech Republic (7
per cent), others (39 per cent).


Diodes


46.1


Germany (38 per cent), Spain (10 per cent), Italy (7 per cent), Singapore (6 per cent), United States (6 per
cent), others (33 per cent).


Parts of meters


40.7


Bahrain (72 per cent), United States (20 per cent), Singapore (1 per cent), Mauritius (1 per cent), Nigeria (1
per cent), others (5 per cent).


Source: Electronics and Software Exports Promotion Council, 2011.







99



Foreign investment in the electronic component industry has been facilitated


by the export promotion scheme that allows foreign investment of up to 100 per cent
in production exclusively for exports. The units set up under these programmes are
bonded factories that are eligible to import their entire requirements of capital goods,
raw materials and components, spares and consumables, office equipment etc. free of
import tariffs. As in case of auto-parts industry, this industry has also benefited from
economic reforms, reductions and elimination of tariff barriers, and the creation of
Special Economic Zones (SEZs) for electronics firms to manufacture for export
purposes as well as for the domestic market. In addition, tax incentives in SEZs, such
as (a) total income tax exemption on export profits for five years, (b) 50 per cent tax
exemption for the subsequent five years and (c) 50 per cent tax exemption on
ploughed-back profits for five years thereafter, has encouraged the growth and exports
of this industry.



However, the small amount of cumulative FDI inflows over the past decade


suggests that MNCs have not played a significant role yet in development of this
sector (IBEF, 2011). From 2000 to 2011, the electronics industry has been the
twenty-fifth largest recipient of FDI equity inflows in India, receiving a cumulative
FDI inflow worth US$ 1.1 billion from April 2000 to September 2011, constituting a
share of 0.7 per cent of the total FDI inflow (Department of Industrial Policy and
Promotion, 2011).64



It is evident that current trade and investment patterns of the Indian electronic


components industries are linked more with European and North American MNCs
more than with Asian MNCs. Contract manufacturing and sourcing of electronic
components is where India is currently playing a role in global IPNs, but the industry
needs to move up the value chain and acquire capabilities as a manufacturing base to
further strengthen its role in IPNs involving Asian countries in the near future.




5. Improving India’s participation in Asian IPNs: Policy challenges

The question is how can India strengthen its participation in Asian IPNs? As


argued by Kimura (2009) and Hew, Das and Sen (2009), creating a competitive and
business-friendly investment climate is the first step, with improvements in physical
infrastructure to reduce trade costs as the next step that will allow industrial
agglomeration and link it to the production blocks. The role of bilateral and regional
PTAs involving tariff and non-tariff barrier reduction, regulatory reform, and reducing
transaction and trade costs in an IPN are also of significance. In the Indian context
there are four policy challenges to effectively plugging into global and Asian IPNs:




                                                            
 
64 Again, data are unavailable on the contribution of MNCs, by country of origin, in this industry. This
makes it impossible to ascertain whether Asian or non-Asian MNCs have been playing the dominant
role in FDI in this industry, and more particularly in the subsector of electronic components.







100


(a) The need for continued unilateral trade and investment liberalization with
emphasis on regulatory reforms;


(b) The reduction of transactions costs of trade and improvement of the
physical and institutional infrastructure;


(c) Addressing factor market rigidities and making labour laws flexible;
(d) Utilizing PTAs effectively with countries that are already part of Asian


IPNs and supporting the PTAs with unilateral “second-generation” reforms.

The significance of each of these policy challenges and India’s position vis-à-


vis South-East and East Asian developing countries needs to be analysed in detail.


(a) Unilateral trade and investment liberalization with emphasis on regulatory
reforms



India’s development strategy has moved away from an inward-looking stance


towards a global and outward-oriented strategy during the past two decades. As a part
of its unilateral trade liberalization since the first generation of economic reforms of
1991, Indian policymakers have highlighted the need to expand the volume of trade
and use trade expansion as a policy tool to promote economic growth and
employment.65 One of the major objectives of the new foreign trade policy is to
enhance the process of diversification of India's export products and markets.



The shift to non-traditional markets has been actively aided by offering a


range of incentives to exporters to explore 39 new markets – 26 under the focus
market scheme and 13 under market-linked focus product schemes. 66 The focus
market scheme primarily aims to offset high freight costs involved in trade with
selected international markets in order to enhance India’s export competitiveness in
those countries. Measures include providing credit for payment of import duties and
other forms of export financial assistance for exporters – ranging from 2.5 per cent to
3 per cent of the value of exports. Under the focus product scheme, a number of
products (including automobiles and other engineering products) have been given
incentives. The objective is to encourage production and exports of those products
that possess high employment elasticity.67



As a result of policy shifts towards outward orientation, India’s simple average


applied MFN tariff rate declined from 15.1 per cent in 2006/07 to 12 per cent in
2010/11. The largest proportion of lines (8,042, i.e., 71 per cent) was subject to a tariff
rate of between 5 per cent and 10 per cent, while 12.8 per cent of total lines were
subject to a tariff rate greater than zero but lower than 5 per cent. This is a major shift
from 2006/07, when 65 per cent of all tariff lines were within the 10-15 per cent range,
                                                            
 
65 With the latest foreign trade policy of 2009-2014, Indian policymakers are hoping to achieve an
annual export growth of 15 per cent; with the long-term objective being to accelerate export growth to
25 per cent per annum and to double India's share in global trade by 2020 (WTO, 2011c).
66 See Rajan and Gopalan, 2011,,and WTO, 2011c..
67 See Rajan and Gopalan, 2011.. 







101


followed by 10.4 per cent of lines at 25-30 per cent. Overall, India is estimated to
have reduced its applied tariffs by an average 19.5 per cent during 2001-2009 (IDE-
JETRO and WTO, 2011b).



The above tariff reductions have narrowed the gap between the levels of


India’s trade protection and those of ASEAN and China. India’s trade-weighted MFN
tariffs are now at 6 per cent, which is lower than those of Brazil and the Russian
Federation, and not far from the Chinese and ASEAN levels (Sally, 2011). However,
table 15 shows that when compared to other developing countries in East and South-
East Asia, India’s tariff structure still has room for further liberalization.


Table 15. Tariff structure of non-agricultural goods in India and selected
developing Asian economies


Per cent of tariff lines 2009


Duty-free 0 <= 5 5 <= 10 10 <= 15 15 <= 25 25 <= 50 50 <= 100 > 100
India 2.4 12.7 76.3 1.1 2.2 4.4 0.6 0
China 7.8 19.9 46.5 14.3 10.5 1 0 0
Indonesia 23.7 41.6 17 15.7 1.4 0.5 0 0
Malaysia 56.9 7.7 8.5 3.6 16.3 6.9 0 0
Singapore 100 0 0 0 0 0 0 0
Thailand 24.2 43 15.2 0.2 6.2 10.8 0.4 0
Philippines 2.6 59.9 22.7 13.2 1 0.6 0 0
VietNam 37.8 19.6 7.3 9.3 11.5 13.6 0.3 0


Per cent of import values 2008


Duty-free 0 <= 5 5 <= 10 10 <= 15 15 <= 25 25 <= 50 50 <= 100 > 100
India 14.3 48.6 36.7 0 0.1 0.1 0.1 0
China 48.4 18.2 27.8 2.9 2.5 0.2 0 0
Indonesia 61.2 20 8.7 8.3 0.6 0.7 0.5 0
Malaysia 64.6 14.6 2.1 5 6.7 7 0 0
Singapore 100 0 0 0 0 0 0 0
Thailand 50.8 29.6 14.7 0 1.3 3.3 0.3 0
Philippines 22.2 60.8 9.1 4.5 0.7 2.6 0 0
VietNam 44.6 23.5 10.8 10.2 3.9 6.3 0.7 0
Source: WTO, 2011b.


Table 16 presents the average MFN applied tariffs, in 2009, of India and other
developing Asian economies in selected manufacturing sectors that constitute the bulk
of traded parts and components. This suggests that scope exists for India to reduce
tariffs further, especially in the transport equipment sectors, to match the Chinese
level.68 A recent study by IDE-JETRO and WTO (2011) found that India’s tariff


                                                            
 
68 These are sectoral averages.







102


levels for raw materials and semi-processed goods are higher than those of the
ASEAN and East Asian economies.69

Table 16. Average MFN applied tariffs by selected product groups of India and


selected developing Asian economies in the non-agricultural sector, 2009



Non-electrical


machinery
Electrical
machinery


Transport
equipment


Other
manufactures


India 7.3 7.2 20.7 8.9
China 7.8 8.0 11.5 11.9
Indonesia 2.3 5.8 10.6 6.9
Malaysia 3.6 4.3 11.6 4.8
Singapore 0 0 0 0
Thailand 4.1 7.5 20.3 10.2
Philippines 2.3 4.0 9.1 4.9
Viet Nam 4.0 10.9 18.9 12.1


Source: WTO, 2011b.


However, there is concern that while tariff barriers may have declined
drastically in India over the past decade, significant non-tariff barriers exist that
include licensing requirements, provisional anti-dumping and safeguard duties, and
tighter standards restrictions. These non-tariff measures continue to affect trade and
investment relations of India with its major trading partners, including those in Asia.
Elements of such non-tariff barriers include: (a) complex and often non-transparent
administrative requirements as well as para-tariff measures involving customs
surcharges; (b) additional charges; (c) internal taxes and charges levied on imports;
and (d) decreed customs valuation.70



In the area of industrial and FDI policy, India has pursued unilateral


liberalization measures towards outward-orientation by abolishing industrial licensing
in most industries. This has encouraged private sector participation and opened up
most industries to inward FDI, while encouraging Indian companies to invest abroad
(Srivastava, 2007). After liberalization, the FDI attractiveness of India tended to
increase. From being ranked sixth in A.T. Kearney’s 2003 FDI confidence, India was
ranked third after China and the United States in 2010.71 Ahluwalia (2002) noted that
India’s economic reforms created a more competitive environment. He found that


                                                            
 
69 IDE-JETRO and WTO, 2011 (figure 8). 
70 The Research and Information Systems for Developing Countries institution (RIS) (2004) estimated
that for India-Bangladesh border trade, a consignment needs at least 22 documents, involving 55
signatures and 116 copies for final approval.
71 This index ranks 64 countries on the basis of their FDI attractiveness, computed from a survey that
tracks investor confidence among global executives to determine their order of preferences (A.T.
Kearney, 2010). 







103


States which create an investor-friendly business environment attract the majority of
inward FDI.



However, the need for further unilateral liberalization in trade and FDI,


focusing on domestic regulatory reforms, remains a major challenge for India. Studies
indicate much of inward FDI in India’s manufacturing sectors has been largely
undertaken as “market-seeking” to serve the large and growing domestic market in
India rather than the “efficiency-seeking” FDI that will link India with Asian IPNs in
China, Thailand, Malaysia, Singapore and other Asian countries. 72 Sally (2011)
estimated that although in terms of overall FDI regulatory restrictiveness India is on a
par with China, Indian services sectors such as insurance, aviation, construction, retail
and distribution are facing higher levels of protection. Based on the 2010 overall
enabling trade index, which measures factors, policies and services that facilitate the
trade in goods across borders, India lagged behind China in market access, border
administration, transport and communications infrastructure, and the business
environment (table 17). 73




Table 17. Enabling trade index comparisons of India and selected


Asian developing economies
Country Overall Market Border Transport and Business


market access administration communications
environment


Infrastructure
Rank Score Rank Score Rank Score Rank Score Rank
Score
Singapore 1 6.1 1 6.0 1 6.6 7 5.7 2
6.0
China 48 4.3 79 3.9 48 4.5 43 4.1 41
4.7
India 84 3.8 115 3.4 68 4.0 81 3.3 58
4.5
Indonesia 68 4.0 60 4.2 67 4.0 85 3.3 60
4.4
Malaysia 30 4.7 31 4.7 44 4.6 24 5.0 51
4.6
Philippines 92 3.7 64 4.1 74 3.8 83 3.3 103
3.6
Viet Nam 71 4.0 50 4.4 88 3.5 68 3.6 64
4.3
Thailand 60 4.1 113 3.5 41 4.6 40 4.2 71
4.2
Source: World Economic Forum, 2010.
                                                            
 
72 See Aggarwal (2001), Kumar and Siddharthan (1994), Kumar (1990), Pant (1993 and 1995), and
Pailwar (2001).
73 This index is made up of four sub-indexes that measure the degree of market access, border
administration, transport and communications infrastructure, and business environment that assesses
the overall environment created by a country to enable its trading partners to trade and invest more
among each other (World Economic Forum, 2010).







104



Another important issue is the pace of India’s liberalization, which has not kept


up its momentum. Sally (2011) observed that the process of India’s unilateral trade
liberalization had largely been witnessed in two reform bursts of 1991-1993 and 1998-
2004, after which it had slowed. The slowdown and stalling of multilateral liberalization
through WTO and rapid proliferation of “new regionalism” in Asia has further diverted
the energies of Indian trade policymakers away from unilateral liberalization and
domestic reforms.74 This indicates that while the Indian economy may have become
outward-oriented, the perception among trading partners of India as a preferred trade
and investment partner needs to improve further. An important challenge will be the
reduction of behind-the border restrictions on international trade and investment. Thus,
the proper institution and regulatory reforms and infrastructure improvement are crucial
to improving the business environment and reducing trade costs.



(b) Reducing transaction costs, and improving physical and institutional


infrastructure for cross-border trade and investment


India has high international trade costs. According to the World Bank (2010),
the average cost of export in India was US$ 945 per container, driven mainly by export
related documentation. The report estimated that in 2010, trade-related transaction costs
in India amounted to approximately US$ 17 billion, or 10 per cent of the nation's export
value. Banik and Gilbert (2010) noted that India has one of the highest logistics cost, at
13 per cent of GDP, arising from low quality infrastructure involving inefficient ports,
airports, very complicated bureaucratic procedures, frequent electricity outage and high
transportation costs. This complex business environment not only hampers the trade but
also creates a fertile environment for corruption.



Table 18 compares India with respect to other developing Asian countries


involved in IPNs, based on the World Bank (2011) “Ease of Doing Business Index
indicators for 2012”, where a smaller number indicates a better performance on each
sub-indicator and a higher ranking related to the creation of a business-friendly
environment. India is ranked lower than China for all measures of ease of doing
business except for electricity supply and protection of investors. India’s scores were
particularly low in starting and closing a business, dealing with construction permits,
paying taxes, trading across borders and enforcing contracts, all of which are critical
to reducing transaction costs of trade.75 Since these are important elements of the soft
“institutional” infrastructure that supports the development of IPNs, it is evident that
Indian policymakers will need to focus attention on reducing transaction costs of
doing business and to address regional disparities if India is to emerge as the next
assembly centre, when compared to China, in the near future.


                                                            
 
74 See Rajan, Sen, Siregar, 2001; and Rajan and Sen, 2004. 
75 Sally (2011) noted, however, that given the size of the Indian economy, there was a need to further
observe the considerable variation among the performance of Indian States, and that if only the top 10
performing States were counted, India would potentially jump 55 places in the ease-of-doing-business
rankings, making it almost comparable to China.







105



Table 18. Doing Business Rank 2012 comparisons of India and selected Asian


developing economies


Economy
Ease of doing


business
Starting
business


Dealing with
construction


permits
Getting


electricity
Registering


property
Getting
credit


Protecting
investors Paying taxes


Trading
across


borders
Enforcing
contracts


Resolving
insolvency


Singapore 1 4 3 5 14 8 2 4 1 12 2
Thailand 17 78 14 9 28 67 13 100 17 24 51
Malaysia 18 50 113 59 59 1 4 41 29 31 47
China 91 151 179 115 40 67 97 122 60 16 75
VietNam 98 103 67 135 47 24 166 151 68 30 142
Indonesia 129 155 71 161 99 126 46 131 39 156 146
India 132 166 181 98 97 40 46 147 109 182 128


Philippines 136 158 102 54 117 126 133 136 51 112 163
Source: World Bank, 2011.




Indeed, some effort has been made to introduce reforms in recent years in order


to improve India’s business environment. Compared to the 2011 rankings, when India
was ranked 139 overall in terms of doing business, it jumped seven places to 132 in the
2012 rankings.76 This was mainly due to some second-generation reforms introduced
during 2009-2011 in opening and closing a business, paying taxes and trading across
borders (table 19). The Government acknowledged the importance of minimizing high
transaction costs by creating a task force in October 2009 to identify ways of improving
“the functioning of export processes, and reducing time and money spent in export
transactions, with a view to enhancing the competitiveness of Indian exports”.77 This
task force has proposed measures such as round-the-clock customs clearance at selected
ports, reductions in levies, and electronic message exchange between the customs
authority and the director-general for foreign trade to facilitate faster clearances. Other
key proposals in line for implementation include the integration of all trade-related
agencies through a “single window e-Trade initiative” and the development of port-
related infrastructure. This demonstrates the commitment to further reforms aimed at
reducing transaction costs, but such reforms need to be speeded up and pursued with
greater conviction, as emphasized by Rajan and Gopalan (2011).




                                                            
 
76 During this period, China slipped four places from 87 in 2010 to 91 in 2011.
77 See Rajan and Gopalan, 2011. 







106


Table 19. Recent regulatory reforms undertaken by India to improve its business
environment rankings



Year Reform Area


2011/2012 Reduced the administrative burden of paying taxes by
abolishing fringe benefit tax and improving electronic
payment, and later by making electronic filing and
payment of VAT mandatory.


Paying taxes


2011 Eased business start-up by establishing an online
value-added tax (VAT) registration system and
replacing the previously required physical stamp with
an online version.


Starting a business


2010 Procedures under the 2002 Securitization Act have
become more effective, easing the processes and time
required to close a business.


Resolving insolvency


2009 Electronic data interchange implemented, allowing
exporters to submit documents to customs online.
This system also enables customs to automatically
assess export documents, making customs clearance
more efficient and reducing time needed to export.


Trading across borders


Source: Compiled by the author from World Bank, 2011.


The hard “physical” infrastructure is also absolutely crucial for MNCs when
considering efficiency-seeking FDI in manufacturing. Table 17 shows that India ranks
behind most developing Asian economies in terms of transportation and communications
infrastructure. However, India’s infrastructure development is at comparable levels with
Indonesia and Philippines, and far behind China.


Thus, to plug into IPNs, there is not only a need to reduce transport costs at the
border but also for information and communication technology (ICT) services, which
provide complementary support to growth of physical infrastructure such as roads,
railways and ports. Sally (2011) noted that India’s “hard” infrastructure as well as its
“soft” regulatory infrastructure needed improvement. In fact, this appears applicable to
most South Asian countries. Banik and Gilbert (2010) estimated that if the South Asian
Association for Regional Cooperation (SAARC) countries were to improve trade
facilitations to half of the East Asian levels, intraregional trade in South Asia could be
increased by as much as 60 per cent of current intra-regional trade. In the South Asian
subregion, port efficiency, customs environment, regulatory environment and service
sector infrastructure need urgent attention if intra-regional trade is to be increased.



(c) Address labour market rigidities


Most of the countries involved in Asian IPNs have witnessed a massive structural
change, with significant shifts in employment from agricultural sector to the
manufacturing sectors. Manufacturing development will be of particular importance for
India in increasing its potential to integrate into Asian IPNs. As suggested by Virmani
and Hashim (2009), India’s manufacturing sector holds a unique importance mainly for
two reasons. First, the ability of this sector to provide large-scale employment, and to be
a driver of structural change as a developing economy such as India grows, is increasing







107


because the contribution of the agricultural sector to GDP is shrinking. Second, it can
facilitate growth through forward and backward linkages with other sectors of the
economy, particularly the services sector that is currently the driver of economic growth
in the case of India.



India’s employment structure has not significantly shifted towards the


manufacturing sectors despite the fact that India possesses the advantages of low-cost
labour and availability of skilled and scientific manpower. According to Basu (2005), the
reason behind this is the fact that labour market rigidities78 through existing legislation
have resulted in India’s failure to deploy her large labour resources to compete more
strongly in the domestic and international markets. Relative to India, the East Asian and
South-East Asian countries appear to have fewer protective laws.


Existing rigidities constrain the effective redeployment of labour in response to
changes in demand and technology are acting as a disincentive towards employing workers,
thereby resulting in jobless growth in organized manufacturing as well as increasing use of
contract and temporary workers. 79 This also leads to capital-intensive methods in the
organized sector and adversely affects the manufacturing sector’s long-term demand for
labour. In the Indian context, state-level labour regulations are also an important
determinant of industrial performance. Therefore, labour market reforms both at national
and state levels are essential if India is to witness growth in productivity by labour-
intensive manufacturing and move away from the less productive agriculture sector.



Jha and Golder (2008) analysed the links between labour market reforms and


economic performance, and argued that policymakers needed to devote attention to
several aspects of labour market reformation. First, they need to simplify and streamline
existing laws.80 Second, there is a need to design these laws to encourage investment in
human capital as well as training and skills development of workers. Third, there is a
need to improve the social safety net, especially for unorganized workers. Fourth, the
implementation mechanism has to be strong, and dispute resolution should be quick and
transparent; this will also facilitate improvement of enforcement of contracts, which is
currently weak. All these reforms should perform in parallel with a long-term strategy to
create a more competitive skilled-labour market in India, in order to bring about strong
integration of India with existing IPNs in Asia.



The recently approved draft national manufacturing policy includes labour market


reforms and an exit policy as part of its objectives.81 It seeks to introduce policy measures


                                                            
 
78 These pertain to setting minimum wages above market clearing levels – especially in the organized sector
79 See Ahsan and Pagés, 2008, Dutta, 2003, Gupta Hasan and Kumar, 2008, Ramaswamy, 2003, and
Sharma, 2006.
80 Chandra (2006) stated that close to 50 central laws and about 175 state laws existed that were related
directly to labour, most of which were poorly designed and implemented. 
81 See www.indianexpress.com/news/govt-oks-national-manufacturing-policy/865186/.







108


to facilitate the expeditious redeployment of assets belonging to “sick” or non-performing
units, while giving full protection to the interests of the employees, with a focus on
making it easy to close a business and provide appropriate insurance for job losses. 82



(d) Effectively utilize PTAs as a tool to plug into global and Asian IPNs



The deadlock in multilateral trade negotiations and rise of new regionalism in


Asia has prompted Asian and Pacific countries, including India, to become very active in
negotiating and entering into bilateral and regional PTAs. India’s PTA activity is
comparable to that of the other major Asian countries that are strongholds of IPNs, viz.
China and Japan. India has already implemented regional PTAs involving ASEAN,
MERCOSUR and SAARC and bilateral PTAs with Afghanistan, Bhutan, Chile, the
Republic of Korea, Japan, Nepal, Singapore and Sri Lanka. India is a member of the
Asia-Pacific Trade Agreement (APTA) and is currently negotiating a PTA with the
European Union while the PTAs with China and the United States are proposed for the
not-too-distant future (ESCAP, 2011a and 2011b).83



Can India’s PTAs influence policies for supporting the formation of production


networks that provide links to other existing Asian IPNs? It can be argued that the impact
of PTAs on policies affecting the participation of countries in production networks is very
much dependant on the extent of comprehensive coverage of a PTA and its focus on areas
that would deepen regional integration through production networks (Hew, Das and Sen,
2009, and Orefice and Rocha, 2011).



PTA policies will have effective impacts on building IPNs if they remove cross-


border barriers as well as reduce behind-the-border impediments to trade and investment.
Based on the framework of Hew, Das and Sen (2009), which identifies three types of
costs related to IPNs (i.e., service link costs, network set-up costs and production costs),
PTAs that only emphasize the liberalization of trade in goods and tariff reductions will
reduce service-link costs, but will not be able to reduce network-set up and production
costs. Thus, they are not sufficient to induce the participation of India in IPNs.



Trade and investment facilitations, liberalization of trade in services and


investment, and strengthening competition policy and intellectual property protection are
                                                            
 
82The national manufacturing policy aims to increase manufacturing sector growth to 12-14 per cent in the
medium term in order to (a) make it the growth engine of the economy; (b) create 100 million additional
jobs by 2022; (c) create appropriate skill sets among the rural migrant and urban poor to make growth
inclusive; (d) increase domestic value addition and technological depth in manufacturing; (e) enhancing
global competitiveness of Indian manufacturing, particularly in the case of SMEs, through appropriate
policy support; and (f) ensure sustainability of growth, particularly with regard to the environment
(including energy efficiency, optimal utilization of natural resources and restoration of damaged/degraded
eco-systems). The policymakers also plan to reduce the compliance burden on industry, and to improve and
simplify procedural and regulatory formalities in order to make it easier for manufacturing industries to be
technologically competitive and globally innovative (Department of Industrial Policy and Promotion, 2011)
83 See www.unescap.org/tid/aptiad/agg_db.aspx 







109


desired characteristics for enabling PTAs to be an effective tool for IPN encouragement.
Trade facilitation initiatives, such as improving customs clearance and procedures, will
help to reduce all three types of costs involved in setting up a production network.
Liberalization of trade in services and investment, particularly the inclusion of MFN and
national treatment obligations in a PTA, are also likely to have a favourable impact on
policy in terms of reduction of investment costs, strengthening the competitiveness of
potential business partners as well as on overcoming geographical distance and border
effects. It is likely to significantly reduce network-set up costs and service link costs
within a production network.



The analysis by Orefice and Rocha (2011) of 200 countries during 1987-2007


confirmed that trade through IPNs was fostered by those agreements that aimed for
deeper integration. Their study captured such deeper integration through five measures.
Two of the measures are WTO+ in nature and therefore aim for strengthening discipline
on rules related to state trading enterprises and Trade Related Intellectual Property
(TRIPS), while the other three (competition policy, intellectual property protection and
movement of capital) are WTO-X in nature and therefore currently not under negotiation
in WTO. Orefice and Rocha argued that inclusion of such deep integration measures was
more likely among PTA partnerships involving developed and developing countries
rather than among just developing countries.



In the context of Indian PTAs, potential benefits from encouraging India’s


participation in IPNs might be limited. India’s PTAs with most Asian IPN members have
mainly served as a tool for foreign policy rather than trade policy, and have been on a
“trade-light approach to liberalization”. India’s PTAs with South Asian countries
currently focus only on tariff reduction of goods, and do not cover comprehensive
liberalization in services, investment and other non-border market-access issues. More
than half of intra-regional trade is excluded through “sensitive lists”, restrictive rules of
origin (RoO), and assorted NTBs. This indicates that India has been following a “trade-
light” approach to PTAs and that those PTAs are therefore unlikely to spur any IPN
activity, since they do not include the deepening of regulatory measures related to the five
measures identified above.



India’s recent bilateral PTAs with Japan and the Republic of Korea, Malaysia and


Singapore as well as its regional PTA with ASEAN are aimed at greater
comprehensiveness, including services and investments, but most of these PTAs have not
reached the stage of full implementation and are not supported by strong regulatory
measures for strengthening intra-regional trade through IPNs. While tariffs are being
eliminated in some cases for close to 90 per cent of products, there are long transition
periods and restrictive RoO. As an example, India’s recently concluded PTA with the
Republic of Korea covers only 66 per cent of Indian tariff lines that are subject to duty
elimination during an eight-year transition period, with agreements on services and
investment being weaker when compared to what has been agreed upon by these
countries in WTO. Sally (2011) noted that fear of Chinese competition was one of the
main factors driving product exemptions and restrictive RoO in India’s PTAs, resulting in







110


partial liberalization commitments that were unlikely to spur IPN activity, particularly on
the export side.84



Overlapping of PTAs and restrictiveness of RoO create concerns on actual


utilization of PTAs between India and Asian trading partners. Varieties of RoO in
overlapping PTAs makes it costly for businesses to comply with them, resulting in low
actual utilization.85 Nag and De (2011) analysed the impact of RoO on the development
of IPNs. They concluded that simpler RoO work better for parts and components and
intra-industry trade in an IPN.86 In addition, complex RoO provide increasing avenues for
corruption, since customs officials can exercise significant discretion in deciding on
which tariff or rules to apply to a certain product (Newfarmer, 2005). An overarching
East Asia-wide comprehensive regional PTA would have greater potential to improve the
coordination and linkages than individual bilateral PTAs, and perhaps reduce the costs of
compliance for the user if simpler region-based RoO are designed (ESCAP, 2011c).



Thus, PTA initiatives in India, as in rest of Asia, will need to be supported by


unilateral liberalization and important domestic economic reforms as argued by Sally and
Sen (2011). The engine of liberalization and regulatory reform by India and the rest of
South Asia have to be home-driven, with PTAs playing, at best, a supportive role.
Support will also be needed by institutional and infrastructural development that would
be critical for the development of regional production networks involving India, and East
and South-East Asia.



Some of these policy constraints are probably better addressed unilaterally


through domestic reforms rather than bilaterally through PTAs. These include policies
aimed towards institutional development in order to improve the business environment as
well as developing infrastructure to support the same. The establishment of
educational/occupational institutions for personnel training with the objective of securing
various types of human resources, together with (a) the establishment of stable and elastic
labour-related laws and institutions, (b) removing bottlenecks in infrastructure services
such as the supply shortages of electricity and other types of energy, (d) improving
industrial estate services (e) the establishment of institutional infrastructure such as
transparent investment rules and laws on intellectual property-rights, are examples of
                                                            
 
84 Studies in auto-component sector by Nag (2011) and Ghosh, Ray and Makkar (2010) found that PTAs
between India and Asian countries seem not enhancing greater participation of India in Asian auto-parts
IPNs. Ghosh, Ray and Makkar (2010) studied free trade agreements between India and ASEAN, Republic
of Korea, European Union, and Japan. They indicate that FTAs could harm Indian auto-part industries.
They point that the proposed PTA between Korea and the European Union has prompted Hyundai Motor
India Limited to suggest that the company may look to shift part of its production meant for export to the
European Union from India to the Republic of Korea and this could imply significant decline in exports for
suppliers based in India.
85 Businesses have to consider using these PTAs and therefore adjust their strategies for compliance, or else
continue to pay MFN tariffs for their goods, ignoring PTA preferences.
86 This study analyses sectoral impact of RoOs on integrated circuits, auto-components and textiles and
observes that ASEAN PTAs having simple RoOs have benefitted intra-industry trade in these products.







111


areas wherein domestic reforms would be crucial to supporting the introduction of a
business-friendly environment that could potentially be created by India’s PTAs.




6. Conclusion and policy recommendations

The analysis in this study has demonstrated that India has reoriented its growth


strategy towards outward orientation during the past two decades; however, the pace of
its reform has not caught up with this paradigm shift. As a result, the current levels of
participation of India, both in global and in Asian IPNs, are low. Most of the exports
comprise low-technology, labour-intensive goods that do not involve much fragmentation,
such as textiles, gems and jewellery, animal and leather products.



The case studies of auto-parts and electronics component sectors reveal that


integrating with global IPNs has begun emerging for some products, but the linkages of
production and trade with global MNCs are still minimal. Therefore, the business
environment needs improvement in several areas in order to encourage MNCs and SMEs
to integrate India further into global and Asian IPNs.



Thus, six key policy recommendations are proposed, based on the current state of


India’s participation in IPNs and the associated policy challenges. These are:


1. Step up the pace of unilateral trade and investment liberalization, and strive
towards further reducing trade and investment barriers, particularly in the area
of reducing behind-the border restrictions on international trade and
investment, with a focus on improving domestic regulation. This should
facilitate reduction of service link costs, network set-up costs and production
costs involved in setting up an IPN in India;


2. Reduce transaction costs of cross-border trade as soon as possible. This can be
done by improving customs clearance, developing port-related infrastructure
for faster customs clearance and creating a single window e-Trade initiative
that integrates all agencies responsible for trade facilitation with total
integrity;


3. Improve the current state of physical and institutional infrastructure for doing
business in India; this would have a significant impact on the reduction of
production and service-link costs involved in setting up an IPN. Private sector
participation through domestic and foreign companies in improving physical
infrastructure needs to be strongly encouraged. Elements of soft “institutional”
infrastructure that supports development of IPNs, such as starting and closing
a business, dealing with construction permits, paying taxes, trading across
borders and enforcing contracts, needs to be made easier by policymakers. So
far, reforms in this direction, although initiated recently, are still too few;


4. Develop an appropriate exit policy for labour in the manufacturing sector, and
address current rigidities to make it more competitive vis-à-vis South-East and
East Asian countries. Given the unionization of the organized workforce and
associated political compulsions, implementing this effectively could be







112


challenging. However, a strong commitment to achieving this objective will
have to be demonstrated if India is to be part of an IPN that selects it as the
next global assembly centre;


5. Implement comprehensive-broad based PTAs covering services, investment,
and the movement of labour, and allow them to play a supportive role with
ongoing unilateral liberalization. There is also a need to design RoO that are
simple and which do not increase the transaction costs of trade for PTA
members. The current state of India’s PTAs does not appear to be designed
with the objective of reducing all costs involved in setting up an IPN.
Therefore, a critical review is required of India’s current PTAs, including
more inputs from businesses to identify specific areas of gains from PTAs in
order to create a business environment that makes India a potential assembly
centre for global manufacturing activities in the near future.



The above recommendations also hold important implications for South Asia in


general as most of the region’s countries face policy challenges similar to those identified
above and have yet to connect with global and Asian IPNs.



Given the size of the Indian economy, efforts to address the existing policy


challenges to plug India into global and Asian IPNs will have to be pursued and
coordinated at the national and State levels. With implementation integrity of these
policies being the key to economic success, it is important that Indian policymakers do
away with obsolete systems of governance and the compartmentalization mindset.87 This
will go a long way towards boosting India’s position further in terms of its business
environment, and to firmly establishing the country as one of the world’s fastest-growing
economies, making it attractive for both large and small MNCs to create a global
manufacturing base as part of an IPN.




                                                            
 
87 See Asher, 2009.







113


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Annex


Estimating indices of trade overlap and intra-industry trade


1. Trade overlap


Abd-el Rahman (1991) and Ando (2006) broke down the trading of commodity j
in terms of one-way trade or intra-industry trade. Trading of commodity j is regarded as
one-way trade when equation (1) holds, while it is regarded as intra-industry trade if
otherwise and intra-industry trade otherwise:



Min(Xkj , Mkj ) / Max(Xkj , Mkj )  0.1


(1)

where Xkj represents country k ’s exports of commodity j to the world, and Mkj
country k ’s imports of commodity j from the world.


2. Intra-industry trade


The Grubel-Lloyd (G-L) index measures the ratio of net exports in a product
category to its total trade in an index that takes values from 0 to 100. It also calculates the
part of balanced trade (overlap between exports and imports) in all trade in a given
industry i. The index is calculated by the following formula, with the G-L index for a
given industry j denoted as



GLjx= Xj+Mj- | Xj-Mj| = 1- |Xj – Mj



(2)


Xj + Mj Xj + Mj

This index takes a value of zero if either Xi or Mi equals zero, implying no IIT,


and if Xi=Mi, it implies a value of 100 and signifies complete IIT in that industry.
However, this index is observed to measure an incorrect level of IIT, especially if trade
imbalances are higher. Studies such as that by Rajan (1996) have argued that G-L is a
degree of measure of IIT rather than the absolute amount. Distinction needs to be made
between the level of IIT and the actual amount of IIT that takes place, and the degree or
extent of IIT. Therefore the level of IIT is estimated separately for these two-way P&C
manufacturing products as



Li=2 * min (Xi, Mi,)


(3)


for the i’th industry where Xi is the amount of exports and Mi is the amount of imports in
the same industry.







119



Brülhart (1994) ascertained whether the change in trade volumes in these P&C


manufacturing products during the periods analysed were due more to intra-industry or
inter-industry trade. This measure, known as Marginal IIT (MIIT), is a transposition of
the G-L index using first differences of trade flows, and is measured for the j’th product
as




jtjt


jtjt
jt MX


MX
MIIT 


1


(4)


where Δ stands for the difference between the values of exports and imports in the j’th
product over a specific period t. This index also takes values from 0 to 1, and in
percentage terms goes from 0 to 100 as the G-L index. An MIIT value close to 100
indicates marginal trade during the periods analysed to be of the intra-industry variety,
and inter-industry if the MIIT index is 0 or close to it.











































120


Chapter V


Are the India’s trade agreements deep enough to support
production networks?



Mia Mikic



The analysis so far recognizes the important role of regional integration and/or
preferential trade agreements (PTAs) in influencing successful development of
international production networks (IPNs). Intuitively, one would expect a positive impact
of reciprocal trade liberalization as it should bring about a reduction of border barriers to
trade, and make the flows of goods, services and resources easier and cheaper, thus
allowing further fragmentation of production and efficient allocation of resources.
However, it turns out that in reality PTAs are not necessarily producing these results due
to at least two groups of (related) problems. One concerns a transformation of
agreements’ schedules into actual free and unobstructed trade flows, as it appears that
many PTAs are not satisfactorily utilized and that a significant portion of trade ends up
being left out of the liberalization coverage. India only recently started to entertain the
idea of “substantially all trade” when negotiating the coverage of tariff liberalization. Yet,
even if all products were on the list for liberalization, there would be problems in
accessing the market under these liberalized conditions. The most frequent culprit for this
is found in rules of origin (RoO), so this chapter reviews the substantial empirical
analyses done under ARTNeT to highlight implications in the case of India.

The other problematic area is that development of IPNs might not only need
smooth and open trade channels for goods, but also harmonization of national policies in
several key areas (for example, competition or investment). It is not clear that current
PTAs signed by countries, including India, will lead to such integration. We can say
“might” because the empirical evidence in this area is still inconclusive with regard to the
causal linkages between regional integration efforts and IPNs. ARTNeT (2011), in
focusing on a small number of countries and three sectors, summarized extensive
theoretical literature that pointed to wards the positive linkages between establishment
and the growth of IPNs and preferential trade agreements, including an increase in parts
and components trade; however, it failed to find strong empirical evidence about the
causal direction.88 Furthermore, WTO (2011a) and literature cited therein found that it
was deep integration, not just free trade that positively and strongly influenced production
network trade. It stated that “…on average, signing deep agreements increases trade in
production networks between member countries by almost 8 percentage points” (p. 146).
However, the report also acknowledged that it was likely that countries already
participating in IPNs might be willing, more than others, to sign deep(er) trade
                                                            
 
88 Given that most of the PTAs examined in that study were implemented very recently, while the IPNs
explored have been established for longer than a decade, it is not surprising that the study failed to confirm
that the occurrence of the PTAs could be given credit for the expansion of given IPNs.







121


agreements in order to secure stable environment for the growth of these IPNs. Thus, the
direction of causality between signing deep agreements and the amount of production
network trade (in essence, trade in parts and components or intermediate goods) needs
further scrutiny. One of the difficulties is the definition and measurement of “deep”
integration. Following Horn, Mavroidis and Sapir (2010), WTO (2011a) developed a
methodology to measure the depth of the integration achieved through PTAs; later in this
chapter the findings of the report are used to comment on the state of India’s efforts in
forging preferential trade deals supportive of production network trade as well as the
expansion of vertical specialization more generally.


1. India’s campaign for preferential trading deals

In 1995, India had no bilateral reciprocal preferential trade agreement, but it was a
member of the Asia-Pacific Trade Agreement (APTA), (then known as the Bangkok
Agreement), South Asia Preferential Trade Arrangement (SAPTA) and Global System of
Trade Preferences (GSTP). The first bilateral free trade agreement was signed in 1998
with Sri Lanka; from then until the end of 2011, India signed another nine bilateral and
two plurilateral agreements. 89 Figure 35 reflects how this proliferation of trade
agreements signed by India has resulted in a “noodle bowl” phenomenon – the tangle of
relationships created by multiple overlapping trading arrangements. With 15 trade
agreements already in implementation,90 India is well ahead of the Asia-Pacific region’s
average of 2.59 agreements and the WTO average of 1.94 agreements per country (as of
July 2011).91














                                                            
 
89 A full list of other agreements under negotiations are available from the Department of Commerce online
information, “Trade: International Trade: Other Agreements/Negotiations” at http://commerce.nic.in/
trade/international_ta.asp or from www.uneascap.org/tid/aptiad.
90 This number excludes SAPTA since it has been superseded by SAFTA, even though SAPTA provisions
are still being implemented.
91 The average for the region does not include those economies that do not have any PTAs, i.e., Mongolia,
Palau, Northern Mariana Islands, New Caledonia, Guam, French Polynesia, American Samoa, Timor-Leste
and Democratic People’s Republic of Korea (APTIAD, 2011).







122


Figure 35. India’s “noodle bowl”






Source: Based on “APTIAD noodle bowl”, available online at www.unescap.org/tid/aptiad.



As is evident from its negotiating history (see box 1), India initiated several PTAs


post-2000, starting with signing the framework agreements in 2003 and followed by PTA
negotiations. Most of these agreements were finally signed during 2009-2010. India has
embraced regionalism as one of the pillars of its trade policy, which started in early 2000
and is now materializing. Given the increasing opening of the Indian economy after 1995,
reciprocal trade arrangements were seen as a tool of obtaining market access for Indian
exports as a necessity for sustaining further import liberalization and other market-
oriented reforms. Putting more focus on “discriminatory and preferential” liberalization
coincided with, on one hand, a international Indian presence of competitive business in
some sectors and on the other hand, an impasse in the Doha Development Round
negotiations.















123





Box 1. Evolution of India’s approach to preferential trade liberalization


India has stated it is a believer of the rules-based multilateral trading system, and
historically it has not used PTAs as a trade policy instrument for its economic
engagements until the early 2000s. India’s regional engagements were mainly guided by
the political affiliations and traditionally the country followed a cautious and guided
approach towards PTAs. This can be observed from its engagements in some of the PTAs
such as the Bangkok Agreement (1975), GSTP (1988) and SAPTA (1993) or the
agreements with Bhutan and Nepal, which has the political objective of regional
prosperity. These agreements focused on promoting South-South trade; however,
intraregional trade remained insignificant.


While its commitment for regional prosperity and development in South Asia
started with SAARC, India started looking outside the South Asian region, especially to
the East, with its “Look East Policy” in 1991. Since India’s major trade interest was to
the West (the developed world), the “Look East Policy” provided it with an opportunity
to become a major partner of ASEAN in the areas of trade and investment. Since its
beginning, the partnership between India and ASEAN has been developing at quite a fast
pace. India became a sectoral dialogue partner 1992, a full dialogue partner in 1995, a
member of the ASEAN Regional Forum (ARF) in 1996 and, finally, a summit level
partner in 2002.


India’s initial attention to PTAs started in 2000 after the European Union initiated
plans for its expansion and the United States supported the Free Trade Area of the
Americas (FTAA). India felt that if it did not become a party to a major bloc in all
likelihood it would be “locked out” of the markets of its major trading partners. It then
focused on the SAARC, MERCOSUR and ASEAN markets. India’s position in ASEAN
was further strengthened after ASEAN signed the Framework Agreement with China, as
most of ASEAN’s members were slightly apprehensive of the economic size of China
and felt that their engagement with India would serve as a counterbalance.

In principle, preferential trade negotiations move faster and produce more tailored
results, and thus are preferred by many stakeholders, than a protracted and, at times,
frustrating multilateral process. However, the trade disciplines achieved are (not
unexpectedly) different across agreements in terms of tariff schedules, sector and/or
product coverage, implementation timelines, customs procedures or other conditions
important for traders and, most importantly in terms of RoO, that underlie the utilization
of negotiated concessions. Therefore, it is appropriate to question the existence and size







124


of the net benefits of each additional agreement that has been signed.92 For the subject
matter of this study, however, it is very important to understand how RoO, an
unavoidable part of each PTA, may influence operations of IPNs and related trade and
investment.


2. Rules of origin

Rules of origin define the conditions that a product must meet to be deemed as
originating from the country that has been given preferential access.93 Historically, the
raison d’être for RoO has been to prevent loss of tariff revenue by a country granting
preferential access to its market. This phenomenon is known as trade deflection, whereby
products from countries that do not have right to preferential access are redirected
through countries with such access to the partner country, in order to avoid payment of
the partner country’s customs duties. There are other important objectives that RoO could
help achieve, including promoting sophistication of domestic production through value
addition and the provision of incentives to increase trade and investment in a specific region
(cf. Das and Ratna, 2010). However, in reality, loading RoO with multiple objectives appears
to have resulted in (a) RoO becoming less transparent, (b) more costly to comply with, and
(c) in the end, preventing the use of tariff preferences negotiated in the PTAs. It is not rare to
find that the complexity of RoO is used to both accommodate and conceal protectionist
intentions. “By attaching multiple criteria for the satisfaction of origin, RoO may be another
avenue to effectively exclude product groups from a country’s liberalization commitments”
(Nag and De, 2011).

Apart from these “policy-driven” reasons for complex setting of the RoO, there is
another reason. In the world of fragmented production, with multi-stage processes located in
different countries becoming the normal way of production, it is increasingly difficult to
ascertain origin to meet the RoO (which originated when the world had different production
processes). Thus for a country like India which has aspirations and potential to become better
integrated in vertical and horizontal chains in Asia and globally, the RoO as a policy tool
becomes very important.

India applies different preferential RoO that are negotiated with each PTA.94 A
brief comparison of RoO characteristics for the agreements that are currently being
implemented is provided in table 20. As reported in WTO (2011b), so far the most
important rule used for determining origin is the limit on the foreign content. As table 20
shows, the range of these maxima is wide, from 30 per cent to 70 Per cent. India also uses
the rules of sufficient transformation and change in tariff classification to determine


                                                            
 
92 The “Trade Policy Review on India” (WTO, 2011b) noted that “despite this generally positive view of
regional agreements, India has some reservations regarding regionalism because of its complexity and
possible trade diversion”, referring to India’s Ministry of Finance text of 2011.
93 This could be through PTAs or other preferential schemes (such as GSP) but the focus here is only on
PTAs.
94 WTO document G/RO/N/1, 9 May 1995.







125


origin. There are product-specific RoO for several agreements, with the number of
products subject to such rules varying greatly among agreements (for example, 180
products under the SAFTA, 1,780 products under the BTA with the Republic of Korea
and 380 products under the BTA with Singapore.95


The preferential RoO provide incentives for producers to change their forward
and backward linkages. There are financial incentives (lower or zero tariffs) that
sometimes may lead to the replacement of cheaper or better-quality inputs from non-
participating members in the PTA by higher-cost inputs from member economies in order
to qualify for concessional entry. RoO can also adversely influence investment decisions
and give rise to significant compliance and administrative costs for businesses and
governments, respectively.96



























                                                            
 
95 Department of Commerce online information, “International Trade: Trade Agreements”, available at:
http://commerce.nic.in/trade/international_ta.asp?id=2&trade=i.
96 Another issue related to different RoO criteria for the same country but under different PTAs also is a
cause of concern as exporters get confused over which one to use and because it gives the customs
authorities extensive flexibility for evaluating the tariff concessions.
 







126


Table 20. Rules of origin under preferential trade agreements


Agreements Maximum foreign-content requirements Minimum cumulative local-content requirements


Regional
Asia-Pacific Trade Agreement
(APTA)


55% of the f.o.b. value (LDCs: 65%) 60% of the f.o.b. value (LDCs: 50%)


Global System of Trade
Preferences (GSTP)


50% of the f.o.b. value (LDCs: 60%) 60% of the f.o.b. value (LDCs: 50%)


South Asian Free-Trade Areas
(SAFTA)a


60% of the f.o.b. value (LDCs: 70%; Sri Lanka: 65%)
and change in tariff heading97


50% of the f.o.b. value, b and change in tariff heading with a
minimum 20% being achieved in the exporting member where
last stage of manufacturing done


South Asia Preferential Trade
Arrangement (SAPTA)


60% of the f.o.b. value (LDCs: 70%) 50% of the f.o.b. value (LDCs: 40%) with a minimum 20%
being achieved in the exporting member where last stage of
manufacturing done


Bilateral
Afghanistan 50% of the f.o.b. value and change in tariff heading 40% of the f.o.b. value and 30% of the f.o.b. valueb
ASEANa 65% of the f.o.b. value and change in tariff sub-


heading98
65% of the f.o.b. value and change in tariff sub-heading


Bhutan n.a. n.a.
Chile 60% of the f.o.b. valuec and change in tariff heading 60% of the f.o.b. value and change in tariff heading
Korea, Rep. ofa 65% of the f.o.b. value and change in tariff sub-


heading
65% of the f.o.b. value and change in tariff sub-heading


MERCOSUR 40% of the f.o.b. valuec 40% of the f.o.b. value
Nepal 70% of the f.o.b. value and change in tariff heading n.a.
Singaporea 60% of the f.o.b. value and change in tariff heading 60% of the f.o.b. value and change in tariff heading
Sri Lanka 65% of the f.o.b. value and change in tariff heading 35% of the f.o.b. value and 25% of the f.o.b. valuec with


change in tariff heading
Thailandd 60% of the f.o.b. value and change in tariff heading 40% of the f.o.b. value and change in the tariff heading


Other preferential areas
Mauritius, Seychelles, and
Tonga


50% of ex-work price of five specific itemse and 75%
ex-work prices for others


50% of ex-work price of five specific itemse and 75% ex-work
prices for others


Least-developed countries 70% of the f.o.b. value and change in tariff
classification for not wholly produced or obtained
category


70% of the f.o.b. value and change in tariff classification for
not wholly produced or obtained category


Source: WTO, 2011b.
Note: Rules of origin are not covered under the India-Bhutan preferential trade agreement.
n.a. = Not applicable.
a Product-specific RoO apply.
b Domestic value content in the exporting country.
c Foreign contents should not exceed 15% of the f.o.b. value for sets, as defined in General Rule 3 of the HS.
d Not notified to WTO.
e Manual sewing and knitting machines (and parts thereof) or those which require less than one quarter of one
brake-horsepower for their operation; cycles (other than motor cycles) and parts and accessories thereof, excluding rubber
tyres and tubes; motor cars including taxi-cabs and articles (other than rubber tyres and tubes) to be used as parts and
accessories thereof; motor omni-buses, chassis of motor omni-buses, motor vans and motor lorries, and parts of
mechanically propelled vehicles and accessories excluding rubber tyres and tubes; and motor cycles and motor scooters
and articles (other than rubber tyres and tubes) adapted for use as parts and accessories thereof.




                                                            
 
97 Change at 4-digit HS/tariff classification between “non-originating inputs” and export product.
98 Change at 6-digit HS/tariff classification between ”non-originating inputs” and export product. 







127




Empirical estimates of the restrictiveness of RoO are still not readily available for
all PTAs due to their relatively recent establishment as well as the evolving nature of
some of them. Restrictive RoO inhibit the growth of intra-industry trade, which often is
closely associated with trade in parts and components inherent to existence of IPNs.
Complex RoO can harm the natural growth of trade in components, which occurs with
the process of development in Asian developing countries. Several studies, including
under ARTNeT, have suggested that Indian RoO are relatively restrictive, both bilateral
and regional compared to some other agreements in or outside Asia (cf. Nag and De,
2011, Das and Ratna, 2010). Yet there are signs that this restrictiveness is weakening
over time.99 However, as pointed out above, there is no firm empirical evidence to
suggest if these steps have helped the rise in intraregional trade and investment flows.
UNCTAD (2003) analysed the India-Sri Lanka FTA and found that, despite being
restricted to liberalization of goods, it promoted intraregional investments. The report
attributed this result to the design of RoO in that agreement (see box 2). Today, India is
the second-largest foreign investor in Sri Lanka, despite not having an investment treaty.



Box 2. India-Sri Lanka free trade agreement and foreign direct investment


The free trade agreement gives duty-free market access to India and Sri Lanka
on a preferential basis. Covering 4,000 products, it foresaw a gradual reduction of
import tariffs during three years for India and eight years for Sri Lanka.


To qualify for duty concessions in either country, the RoO criteria spelled out
value-added at a minimum of 35 per cent for eligible imports. For raw materials sourced
from either country, the value-added component would be 25 per cent.


The effect? Sri Lankan exports to India increased from US$ 71 million in 2001
to US$ 168 million in 2002 while India’s exports to Sri Lanka increased from US$ 604
million to US$ 831 million during the same period. Although the agreement does not
address investment, it has stimulated new FDI for rubber-based products, ceramics,
electrical and electronic items, wood-based products, agricultural commodities and
consumer durables. Because of the agreement, 37 projects are now in operation, with a
total investment of US$ 145 million.
_________________
Source: UNCTAD, 2003.






                                                            
 
99 The change in tariff heading at the 4-digit HS level has now become change in tariff subheading at the 6-
digit HS level, which is less onerous to comply. Similarly, the local/regional value added has been reduced
from 50 per cent to 35 per cent (or the imported content increased from 50 per cent to 65 per cent).







128


3. Coverage of agreements

Two-thirds of all India’s agreements in force are with one partner only, just one of
which is a developed economy (Japan, signed in 2011) and two are high-income
developing countries (Republic of Korea and Singapore). The remainder form a
combination of membership in plurilateral (regional) trade agreements (table 21).100 As in
the case of other countries in the region, India has also doubled or tripled some of its
preferential deals by signing bilateral agreements with countries that are also members of
the regional agreements to which India is a party (e.g., Sri Lanka is in APTA, GSTP,
SAFTA and BIMSTEC, while Thailand, Malaysia and Singapore are in ASEAN). The
Trade Policy Review of India (WTO, 2011b) states that “tariff concessions under bilateral
agreements with countries that also belong to regional agreements to which India is a
party, are generally wider and deeper than those under the regional agreements, and that
the trader can choose which preference to use. With regard to rules of origin, the
authorities mentioned that product specific rules of origin are not necessarily the same in
the bilateral and regional agreements, but that the original criterion for products not
covered by specific rules has, by and large, been harmonized.” In practice, it appears that
some work remains to be done to improve the utilization rate of, and utility from the
Indian PTAs (see, for example, Jha, 2011).



Table 21 Taxonomy of India’s PTAs



Partial scope
Agreements


Free trade
agreements


Free trade and economic
integration agreements


Bilateral trade agreements 3 2 5
Regional trade agreements 1 1 -
Country-bloc agreements 1 1 -
Global (GSTP) 1 - -
Total 6 4 5

Source: Based on WTO TPR India 2011, and WTO RTA-IS, available online at www.wto.org.
Note: Solid shaded cells represent notification through the Enabling Clause, while the striped cell refers to
notification through GATT Article XXIV and GATS Article V.

Nine out of India’s 15 PTAs are labelled as free trade agreements (or a
combination of an FTA in goods and economic integration agreements [EIA] in services)
thus signalling the intention to improve on the multilateral liberalization commitments.
Appendix III of this book provides full details of the areas covered by PTAs, and a
summary is presented in figure 2. None of the agreements contain clearly designated
articles or sections/chapters on labour standards, and only three agreements have included


                                                            
 
100 India is a member of the Bay of Bengal Initiative on Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC), signed as a Framework Agreement to form a free trade area by 2012. However,
negotiations are still underway.







129


some provisions related to the environment. The most frequently found provisions (in 12
agreements) are those on dispute settlement, safeguards and anti-dumping (the latter
mostly expressing retention of the freedom to use anti-dumping actions as per WTO
disciplines). Thus, it is clear that most areas covered in the agreements are linked to
disciplines in goods trade, which supports prevalent opinion that, until recently, India had
been very much focusing on policy space-related border measures in its PTAs.
Agreements with provisions in services, intellectual property protection, investment etc.
are found in a few agreements, mostly with either developed (Japan) or higher-income
developing partners (Singapore, Republic of Korea and Malaysia).



Figure 36. Areas covered* by PTAs in force




Source: Based on data from WTO RTA-IS, WTO (2011b) and information from the Ministry of Commerce,
India
* Mention of the provisions in any of the areas is registered as coverage; obviously, there is a sizable
variation between agreements in terms of depth of obligations.

The outline of PTA coverage by PTAs given in figure 36 (and Annex table), while
illustrative, is not sufficient to assess how deep Indian regional integration efforts really are.
As mentioned above, since deep integration is found to be increasing network trade and
enhancing operations of networks, it is important to understand what the components of such
deep integration are, so that countries can pursue policies in that direction, if so desired.

In principle, the concept of “deep integration” implies a higher degree of
integration than achieved simply by a free trade agreement, which is limited to a removal
of tariffs and non-tariff barriers on trade in goods. The traditional literature on economic
integration, grades the levels of integration from most shallow (free trade area) to the
deepest (fiscal and political union) as shown in table 22. Even the common external trade
policy of the customs union will be deemed as just a step towards deep integration. Only







130


the processes that lead to liberalization in substantively all goods, services and resources,
accompanied by the development of some institutions to secure harmonization of certain
policies, will deliver deep integration.


A common market concept could be taken as an example of a fairly deep
integration. The integration “deepens” based on the expansion of coverage, both in terms
of policies and institutions necessary for managing harmonized polices. Lawrence (1996)
suggested that strengthening production networks would require harmonization of those
national policies facilitating smoother business activities. As harmonized policies also
lead to a demand for institutions with supranational power, he argued that countries
would move towards deeper integration in time. More recent literature, summarized in
WTO (2011a), found that an increase in trade in intermediate products also created
demand for deeper agreements.


Table 22. Progression from shallow to deep integration


  From Shallow to Deep Integration 


 


Removal of 
mutual 
trade 
barrier 



Harmonization 
of some beyond 
the borders 
standard 



Common 
external 
tariff 



Free 
movements of 
factors  (labour 
and capital) 



Integrated 
monetary and 
exchange rate 
policy 



Common 
fiscal 
policy 


 
Excample 


FTA              India‐Sri Lanka 


FTA+              India‐ Singapore 
Custom 
Union              EurAsEC 


Common 
Market             


European 
Union 


Monetary 
Union              Euro Area 


Fiscal 
Union             


United 
States 


Source: Adapted and modified from WTO, 2011a, table C.1.

WTO (2011a) expanded on the methodology developed by Horn, Mavroidis
and Sapir (2010) in order to empirically measure the depth of integration obtainable
through a country’s PTAs. Box 3 provides some details on the methodology used. A
derived measure represents two dimensions of integration: (a) an improvement of the
specific agreement in covering more than just removal/lowering of tariffs, this being
identified as the lowest common denominator in integration; and (b) an advance in
introducng new institutions to manage areas under harmonized policies.











131






Box 3. Methodology for determining depth of integration


The methodology consists of three steps: (a) identification of policy areas
classified into two groups (WTO+ provisions that are in the current WTO mandate and
commitments, and WTO-X provisions that are obligations outside the current WTO
coverage; see the table below for the list of 52 of these policy areas); (b) determining the
policy areas included in a PTA and legally enforceable (e.g., a policy area would not be
deemed enforceable if the legal language is unclear or loose); and (c) exploration of how
much the policy area and its enforceability matters in practice. For a more detailed
description refer to WTO (2011a).


WTO+ and WTO-X policy areas in PTAs
WTO+ areas WTO-X areas
PTA industrial goods Anti-corruption Health
PTA agricultural goods Competition policy Human rights
Customs administration Environmental laws Illegal immigration
Export taxes IPR Illicit drugs
SPS measures Investment measures Industrial cooperation
State trading enterprises Labour market regulation Information society
Technical barriers to
trade Movement of capital Mining
Countervailing
measures Consumer protection Money laundering
Anti-dumping Data protection Nuclear safety
State aid Agriculture Political dialogue


Public procurement
Approximation of
legislation Public administration


TRIMS measures Audio-visual Regional cooperation


GATS Civil protection
Research and
technology


TRIPS Innovation policies SMEs
Cultural cooperation Social matters
Economic policy dialogue Statistics
Education and training Taxation
Energy Terrorism
Financial assistance Visa and asylum



Source: WTO, 2011a.








132



The final results show that of all the policy areas tracked, five consistently matter


to deep integation, and understood to be motivated to promote production networks. In
other words, these five policies combined within an agreement would contribute most to
the expansion of production network trade. The five policy areas include measures for
state trading enterprises (STEs) and TRIPS from the current WTO mandate, and
competition policy, intellectual property rights and investment from the areas not covered
by current WTO agreements. The WTO exercise unfortunately contained only seven of
the India’s 15 PTAs (bilaterals with Chile, the Republic of Korea and Singapore, and
with ASEAN and MERCOSUR as well as the two plurilaterals of APTA and SAFTA).
Only the agreements with the Republic of Korea and Singapore were assessed as meeting
the condition for deep integration.101

It is not very difficult to see why these policy areas have important implications
for production networks. Competition policy provisions – which were proposed for
inclusion under the WTO mandate as one of the so-called Singapore issues and later
dropped except for trade facilitation – are there to ensure that abuse of market power does
not minimize benefits from liberalization. In the economic literature, competition policy
is often seen as an extension, and in special cases a substitute, for trade and investment
liberalization policies in goods and services areas.


While not many PTAs have separate competition policy chapters, there are
numerous competition-related provisions embedded in chapters on other policy areas,
such as services liberalization (especially financial and telecommunications services),
investment, intellectual property protection and government procurement chapters. These
policy areas are responsible for provisions identified in this book and elsewhere as key
factors for the operation of IPNs (e.g., infrastructural services, protection of investment or
intellectual property). Another benefit of adding competition policy provisions where
possible under the PTAs is their non-discriminatory character. As in other policies that
are part of regulation, it is more costly to design them to be discriminatory among firms
belonging to different countries than to not do so; therefore, this produces an additional
pro-competitive effect and improves transparency.


Similarly provisions on STEs are meant to remove the potential for trade
distortion caused by government involvement in the decisions and activities of an
enterprise. STEs are not a feature of only developing countries; in fact, many developed
countries nurture STEs in their agriculture and other sensitive sectors, or the areas linked
also to social and other special government strategies such as food security. For a


                                                            
 
101 Because India had still not finalized its agreement with Japan at the time of the WTO study, that
agreement was was not included in the original assessment. Given the features of the agreement, it is
suggested that it be added to the list of deep PTAs. The database is available at
www.wto.org/english/res_e/publications_e/wtr11_dataset_e.htm.







133


multiplicity of reasons, operations of STEs appear to suffer from low transparency.
Opening this policy area through PTAs would at least help to improve transparency.


Many would argue that trade and investment decisions are increasingly being
made by the same players in the market, and therefore liberalizing one policy area
without the other is not optimal. Provisions for liberalization of flows of capital,
including human capital, would allow MNCs to establish production based on relative
costs and would encourage FDI flows into those locations that are recognized as having
all necessary ingredients to be part of production sharing.

In summary, PTAs cannot be identified as delivering (deep) integration. In India
that is definitely not the case; despite an avalanche of PTAs signed in the past five years,
only three have potential for creating environments for IPNs. The positive news is that all
three agreements belong to the most recent vintage of PTAs, which might signal a change
in a general policy towards regional integration, from shallow and protectionist to deep
and trade enhancing. In addition, all partners in these agreements (Japan, the Republic of
Korea and Singapore) are important players in Asian production networks. However, the
fact cannot be ignored that trade and investment areas are not the only source of obstacles
for IPNs. It is also important to note that there are many more factors involved in
establishing and the functioning of production networks and in integrating producers
from different markets, including having good physical connectivity, efficient
infrastructural services and institutions for the protection of intellectual property (cf.
Bhattacharyay and De, 2009).

The empirical literature indicates that improving the depth of PTAs would
increase the production network trade, especially so in the sectors that are regulation-
intensive. For example, a 1 per cent rise in the depth of integration increases trade in
automotive parts and ITC products by 81 per cent and 56 per cent, respectively (Orifice
and Rocha, 2011). For India, both these sectors are at the top of industrial development
priorities. Thus, it would not make sense to exclude any of these products from the lists
of covered goods for tariff cuts as appeared to be the case for car parts in the past.

Furthermore, countries already participating in IPNs are more likely to be signing
deep PTAs subsequently, as IPNs create awareness and demand for them. This appears to
be the case in East Asia, where IPNs were established as a consequence of the region
undergoing de facto integration (that is, by market forces rather than contractual
obligations). According to Orifice and Rocha (2011), the almost five times higher chance
that a deep PTA would be signed between countries at different levels of development was
confirmed by Indian practice as well as the example of other agreements by Japan in Asia.







134


4. Conclusion


While there is a clear need to expand trade and deepen economic and other
relations among developing countries in the Asia-Pacific region, evidence from empirical
research finds that the agreements between countries at a similar and relatively low level
of development remain shallow and fail to provide support to operation of production
networks. On the other hand, if shallow agreements are the only possibility, it is better to
have them than nothing. Shallow trade agreements, while rarely having concrete trade
enlargement effects, might work towards developing trust and thus could help to generate
trade in the long term. It is also helpful to know that countries that increased trade with
partners with whom they had no preferential trade agreements have not been exceptions
in this region (see APTIAD, 2011).


In addition to contributing relatively little towards the deeper integration of India,
its current trade agreements are also disappointing in terms of utilization by traders
(exporting and importing firms).102 In principle, utilization of preferences is inversely
proportionate to the complexity of the rules of origin, given the margin of preference –
the more complex the rules of origin, the more expensive the compliance, resulting in low
propensity to use the preferences. Frequently, traders just use so-called “most-favoured-
nation” rules of origin without using preferential market access. This practice may result
in agreements that do not effectively increase trade. This is a serious problem, but it is
difficult to provide much more than anecdotal evidence in this regard as data are not
readily available.


                                                            
 
102 Jha (2011) estimated the utility of India-Sri Lanka FTA, which represents one of the more effective of
India’s PTAs, to be 11 per cent.







135


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APTIAD Briefing Note, No. 2. Available from
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WT/TPR/S/249. Geneva.







136


Annex
Deep integration components in India’s PTAs




  
Anti 


dumping  Competition  CVM  Customs  Dispute  Dom reg  Environment  Export res  GP  IPR  Investment  labour  SPS  Subsidies  TBT 
Safe 


guards  Services 


Chile ‐ India  x     x  x  x        x              x     x  x    
India ‐ 
Afghanistan  x           x                                x    


India ‐ Bhutan                                                    
India ‐ Japan  x  x  x  x  x  x  x  x  x  x  x     x  x  x  x  x 
India ‐ 
Malaysia  x  x  x  x  x        x     x  x     x  x  x  x  x 


India ‐ Nepal                                                    
India ‐ 
Singapore  x  x  x  x  x  x     x  x  x  x     x  x  x  x  x 
India ‐ Sri 


Lanka  x  x  x  x  x                          x     x    


Korea, 
Republic of ‐ 
India 


x  x  x  x  x  x  x  x  x  x  x     x  x  x  x  x 


India‐Thailand  x     x     x                                x    


ASEAN ‐ India  x     x  x  x  x  x  x              x     x  x    
MERCOSUR ‐ 
India  x     x  x  x                       x  x  x  x    


APTA‐ 
Accession of 


China 
x     x  x  x                                x    


SAFTA  x     x  x  x        x              x  x  x  x  x 
ALL  12  5  11  10  12  4  3  7  3  4  4     8  8  8  12  5 








137



Chapter VI



Prospects for India and lessons for latecomers



Witada Anukoonwattaka and Mia Mikic



The rapidly expanding international production networks driven by multinational


firms has stimulated economic and trade integration between Asian countries during
recent decades. The major countries in East and South-East Asia have benefited from the
expanding IPNs, especially in terms of export growth, employment creation and
technology transfer. However, the remainder of the region, especially low-income
countries, has found increasing their presence in existing IPNs to be a difficult challenge.



Building on the examination of India’s performance in IPNs, this study also offers


some policy recommendations to other low-income countries that have been missing out
on the opportunities presented by the IPN phenomenon. This study examines the current
performance of India, and evaluates its prospects and challenges for catching up in this
process, while taking into account India’s ongoing economic reforms and efforts to utilize
PTAs as a vehicle for integrating with the rest of the region. The lessons from India are
used to formulate policy recommendations relevant to fostering IPN participation by
countries that are trailing behind in this area.



Examination of India’s economic performance shows that the country has


followed a distinctive pattern of development, especially when compared to major
participants in Asian IPNs, including China. Recent trends reflect the fact that in creating
value-added India is continuing to focus on some services, which are relatively skill-
intensive with little prospects of generating demand for unskilled labour. The growth
pattern of India does not appear to be in line with the country’s overall factor endowment,
which reflects a relative abundance of unskilled labour; therefore, concerns have been
raised about “job-less” growth of India during the past two decades.



The trade performance of India reveals that, so far, there has not been any clear


evidence of the country entering into Asian IPNs that have created extensive trade
opportunities in the machinery and transport equipment sectors of East and South-East
Asian countries. Overall, the share of manufacturing exports in total exports by India has
been declining (from 56% in 2000 to 42% in 2010). Manufacturing exports by India are
still concentrating on resource-based manufacturing products and materials such as
leather products, gems and jewelry, and textiles and garments. However, there is
evidence of integration by some parts of the automotive and electronic industries into







138


IPNs. Multinationals such as Toyota, Suzuki and other MNCs have been increasingly
adding their operations in India to the evolution of their IPNs.



The reasons behind this rather unimpressive performance by India’s


manufacturing exports are pointed out in existing literature that is referred to in this study.
Many of the reasons relate to distortions created by import substitution policies that India
adopted prior to the economic reforms initiated in 1991.103 Those policies were translated
into tight controls of foreign and domestic investment, heavy public sector involvement
in production, and policy biases in favour of capital- and skill-intensive industries.
Consequently, production by the Indian manufacturing sector has been focused on
capital-intensive, large-scale and heavy manufacturing industries, notwithstanding India’s
comparative advantage in labour-intensive production. The distorted economic patterns
remain despite the fact that the economic reforms have removed some policy
impediments.



At the same time, foreign investment in India was discouraged by highly


restrictive investment regulations, industrial licensing, rigid constraints imposed to
businesses on their entry to, and exit from the market as well as high protection for
workers and small-scale firms. The lack of policy flexibility led to India being perceived
as an unattractive place for FDI, particularly for those firms driven by efficiency-seeking
motives.



Those policies contributed to the underperformance of India’s manufacturing


sector when compared to East and South-East Asian economies, whose economic policies
were relatively more open. Although the economic reforms started in 1991 have
increasingly opened the Indian economy, comparisons show that there is still a large gap
between India and rapidly growing East and South-East Asian economies. India still
needs to reduce tariffs further, especially on raw materials, parts and components, and
semi-processed goods, if it wants to match the level of ASEAN and East Asian countries.
Most importantly, steps are necessary to address significant concerns about non-tariff
barriers and the “behind-the-border” issues. Private investors are still required to apply
for permission from a large number of government offices to start a business.104 Once
permits and clearances are obtained, investors are still faced with a high level of
                                                            
 
103 A comprehensive analysis is provided by, for example Athukorala, 2008; Grabowski, 2009; Kochhar,
Kumar, Rajan, Subramanian and Tokatlisdis, 2006; and Srinivasan, 2003.
104 According to Henry (2004), starting a new business in India required, on average, 10 permits, compared
with the six permits required to legally establish the same business in China. In addition, the permit process
took 90 days on average in India, three times longer than in China.  







139


government oversight – the so-called “inspector Raj.” The management time required to
accommodate a steady stream of inspections becomes burdensome for private
investors.105



Further reforms are needed in the labour market. While it is important to adhere to


high workers’ protection in the organised labour market, for the purposes of efficiency
reforms could be taken at the same time to improve market functioning. For example,
labour laws designed to protect workers makes it difficult to dismiss employees or to
employ temporary workers. As a result, factories are reluctant to take on new workers
unless they are confident that demand for their output will be steady. Exiting a market by
unviable and uncompetitive business units remains difficult in India, making it urgent to
introduce competition mechanisms that will allow the more efficient firms to enter and
the less efficient firms to exit more easily. For infrastructure services, significant reforms
and upgrading have been made in telecommunications and road systems, but other
crucial infrastructural elements such as power, freight and cargo services have not
undergone significant improvements (Kalish, 2006).106



Despite the reforms and recent rapid growth of FDI inflows, India is still having


limited success in attracting FDI into manufacturing sector. This could be attributed to
four factors. First, heavy regulations have not been completely removed. Second,
reservation of products for production by small-scale firms prevents utilization of full
market size to utilize benefits from scale economies. Third, inadequate soft and hard
infrastructure limits India’s productive capacity and reduces its attractiveness to MNCs.
Furthermore, India has been at a disadvantage with regard to first-comers in this
international specialization, particularly by China and ASEAN countries, as there is
considerable agglomeration of companies that have already fixed their location in those
countries.


However, prospects for India to emerge as a player to be counted on in the
specialization process of IPNs do exist. Important advantages of India arise from the
sheer size of the country’s economy and population, the large pool of engineers and
                                                            
 
105 In India, 16 per cent of senior management’s time may be occupied by interactions with government
officials, compared with 9.9 per cent of management time in China (Henry, 2004).
106 For example, highways comprise a very small share of India’s roads. Of 3.3 million kilometres of Indian
roadways, only 195,000 kilometres are highways. In contrast, China has approximately 1.4 million
kilometres of highway . There is insufficient capacity to service today’s large cargo ships at Indian ports,
and which have yet to prepare for the next generation of container ships that will be even larger and more
sophisticated, requiring long docks, deep harbours and very tall cranes. Again, in contrast, China already
handles one fifth of the world’s container shipments and is developing massive new ports in Shenzhen and
Shanghai (Karlish, 2006) 







140


relatively sound intellectual property protection. An initial requirement for a country to
integrate into IPNs is to offer low trade costs. Clearly, India has to further liberalize its
economy and rapidly upgrade crucial infrastructure in order to bring down trade costs to
an adequate level.



India is building upon some positive results from its autonomous reforms by


scaling up its efforts in preferential liberalization. Since the early 2000s, India has
embarked on bilateral trade arrangements with all those countries in Asia that have
proved to be successful participants in the Asian and global IPNs, i.e., Japan, the
Republic of Korea, Malaysia and Singapore. Furthermore, it has signed a comprehensive
trade agreement with ASEAN, thus securing links to potentially useful suppliers in
Indonesia, the Philippines and Thailand. An inspection of these agreements from a
perspective of fitting into the “deep integration” type of PTAs (WTO, 2011a) finds that
indeed only these latest agreements feature disciplines in those policy areas that matter
for the development of IPNs, including competition, investment and intellectual property
protection. Other agreements, including those signed with neighbours in South Asia, are
all shallow agreements.



Anecdotal evidence supports the view that efforts in securing deeper PTAs were a


reaction to a demand that had built up as a result of the increasing amount of production
network trade (parts and components amounted to 10% of India’s manufacturing exports
and 23% of manufacturing imports, on average, during 2006-2007). However, the long
implementation periods negotiated for agreements with these strategic partners (2021
with Japan, 2019 with Malaysia and the Republic of Korea, and 2015 with Singapore)
could prove to be a deterrent to some investors who are now having a second look at Asia
and deciding on alternate locations, given the changes in China’s labour costs and issues
with the exchange rates.



India is not saved from the similar problems arising from exchange rate


management. A managed float system was introduced in India in 1992-1993. There is
considerable evidence that the Reserve Bank of India has intervened to keep the exchange
rate from appreciating in order to preserve export competitiveness. However, there are
limits to what the Reserve Bank of India can do to keep the Indian rupee from
appreciating, given rising capital inflows and a high inflation rate. Although attempting to
keep the exchange rate low may help the IT, textiles and tourism sectors, as their exports
generally have low imported input content, it may increase the production costs of
industries participating in IPNs because imported inputs, parts and components are a
critical element of their production for export.








141


The ongoing weak prospects for the global economy will make competition for
market share tougher and the achievement of inclusive growth more difficult. While the
previous episode of global collapse in international trade enforced the adverse effects of
strong interconnectivity among economies, the ability of Asian economies to recover
their trade equally quickly also proved the value of being connected to the production
networks. Asian economies have shown stronger resilience to external shocks. It is not
possible for all countries to be part of IPNs. Some could prosper even without
participating in these vertical specializations, based on their specific endowments and
patterns of production and trade. However, those low-income countries that are only
labour-abundant and are facing the challenges of unemployment would do well to
consider introducing similar policies to those followed by other significant players, and
which are reviewed in this study, in order to become players in IPNs.







142


References


Athukorala, P. (2010). “Global production sharing, trade patterns, and determinants of
trade flows in East Asia”, ADB Working Paper Series on Regional Economic
Integration, No. 41. Asian Development Bank, Manila.


——— (2008). “Export performance in the reform era: Has India regained the lost
ground?” ASARC Working Paper, No. 2008/03. Australia South Asia Research
Centre, Australian National University, Canberra.


Grabowski, R. (2009). “An alternative Indian model?” Journal of Asian Economics, No.
20; pp. 50-61.


Henley, J. (2004). “Chasing the dragon: Accounting for the under-performance of India
by comparison with China in attracting foreign direct investment”, Journal of
International Development, vol.16, No.7; pp.1039-1052.


Kalish, I. (2006). “China and India: The reality beyond the hype”. Deloitte Research,
New York.


Kochhar, K., U. Kumar, R. A. Subramanian and I. Tokatlidis (2006). “India’s pattern of
development: What happened, what follows?” IMF Working Paper, No. WP/06/22.
International Monetary Fund, Washington, D.C.


Srinivasan, T. N. (2003). “Indian economic reforms: A stocktaking”, SCID Working
Paper, No. 190. Stanford Center for International Development, Stanford University,
California.






















143















Appendices











144


List of Appendix tables




Appendix I Lists of parts and components (based on the 5-digit SITC Revision 3)………177
Appendix II India’s trade of top 10 items of manufacturing parts and components,
1994 2008…………………………………………………………………………….....188


Appendix III Overview of India’s preferential trade agreement, 2011 ......................... 193







177




Appendix I


Lists of parts and components (based on the 5-digit SITC Revision 3)
Commodity code Description


71191 Parts for boilers of subgroup 7111


71192 Parts for apparatus and appliances of subgroup 7112


7128 Parts for turbines of subgroup 7121
71311 Spark-ignition reciprocating or rotary internal combustion piston engines for aircraft


71319 Parts, n.e.s., of aircraft engines of heading 71311


71321 Reciprocating piston engines of a cylinder capacity not exceeding 1,000 cc


71322 Reciprocating piston engines of a cylinder capacity not exceeding 1,000 cc


71323 Compression-ignition engines (diesel or semi-diesel engines)


71332 Other spark-ignition reciprocating or rotary engines


71333 Compression-ignition engines (diesel or semi-diesel engines)


71391 Parts, n.e.s., suitable for use solely or principally with spark-ignition internal combustion piston engines


71392 Parts, n.e.s., suitable for use solely or principally with compression-ignition internal combustion piston engines


71441 Turbojets
71449 Other than turbojets
71481 Turbo propellers
71489 Other gas turbines
71491 Parts for turbojets or turbo propellers
71499 Parts for gas turbines, n.e.s.


7169 Parts, n.e.s., suitable for use solely or principally with the machines falling within group 71893
71819 Parts, including regulators, of hydraulic turbines and water/wheels
71878 Parts of nuclear reactors







178


71899 Parts of engines and motors of headings 71449,718191,71892 and 71893
71219 Parts of the machinery of subgroup 7221
72129 Parts of the machinery of subgroup 7221 through 72126
72139 Parts for milking machines and dairy machinery
72198 Parts of machinery of heading 72191
72199 Parts of machinery and appliances of heading 72195 and 72196
72392 Bulldozer or angle dozer blades
72393 Parts for boring or sinking machinery
72399



Parts n.e.s., of civil engineering etc. machinery, including mining and public works machinery Parts (heading 723) and cranes etc.


(heading 744.3)
72439 Parts of the machines and furniture subgroup 7243


72449 Parts and accessories of textile machinery designed for use in the preparation and production of textile fibres and yarns
72461 Auxiliary machinery for machines of headings 72441, 72442, 72243, 72451, 72452 and 72453


72467 Parts and accessories of weaving machines (looms) of heading 72451 or of their auxiliary machinery


72468 Parts and accessories of knitting and stitch-bonding machines, tulle, lace, embroidery, net etc. machines or their auxiliary machines


72488 Parts for machinery of subgroup 7248


72491 Parts for machinery of subgroups 7247 and 7751


72492 Parts for machinery of subgroups 7247 and 7751 for the machines of headings 72472, 72473, 72474, 77512
72591 Parts for machinery of subgroup 7251


72599 Parts for machinery of subgroup 7252


72635 Printing type, blocks, plates, cylinders and other printing components


72689 Parts for bookbinding machinery
72691



Parts for machines of heading 726.31 and subgroups 726.5 and 726.6 for the machines of
heading 726.31


72699 Parts for machines of heading 726.1 and subgroups 7265 and 7266
72719 Parts for machines of headings 72127 and 72711
72729 Parts for the machinery, n.e.s. for the industrial preparation or manufacture of food or drink







179


72819 Parts and accessories suitable for use solely or principally with machine tools of subgroup 7281
72839



Parts of machinery for sorting, washing, crushing or mixing earth, stone, ores etc., and for shaping solid mineral fuels, ceramic pastes
etc.


72851 Parts for machines of heading 72841


72852 Parts of machinery for working rubber or plastics or manufacturing products made from rubber or plastics, n.e.s.


72853 Parts for machines of heading 72843


72855


Parts, n.e.s., of machinery for public works etc., preparing animal or fixed vegetable fats and oils, and specialized for particular
industries n.e.s.


73511 Tool holders and self-opening die-heads


73513 Work holders


73515 Dividing heads and other special attachments for machine tools
73591



Parts, n.e.s., and accessories suitable solely or principally for use with metalworking machine tools working by removing metal or other
material


73595 Parts and accessories suitable for use solely or principally in machines of group 731 for machines of group 733


73719 Foundry machine parts
73729 Rolls and other Parts for metal-rolling mills


73739 Parts for machines and apparatus of subgroup 7373
73749 Parts for machinery and apparatus of subgroup 7374
74128 Parts for burners and other articles of subgroup 7412


74135 Parts for the equipment of headings 74131 through 74134
74139 Parts for furnaces and ovens of headings 74136 through 74138
74149 Parts of refrigerators, freezers and other refrigerating or freezing equipment (electric or other)
74159



Parts for air-conditioning machines (having a motor-driven fan and elements for changing the temperature and humidity) of heading
7415


74172 Parts for generators of heading 74171


7419 Parts, n.e.s., for machinery of headings 74173 through 74189
74291 Parts of pumps for liquids
74295 Parts of the pumps and liquid elevators of group 742, of liquid elevators







180


7438 Parts for pumps, compressors, fans and hoods of subgroups 7431 and 7434
74391 Parts of machines and apparatus of subgroups 7435 and 7436 of centrifuges (including centrifugal driers)


74395 Parts of filtering or purifying machinery and apparatus
74419 Parts of trucks and tractors of headings 74414 and 74415
74491 Parts suitable for use in machinery of subgroups 7442 and 7444
74492 Parts suitable for use in machinery of headings 744.1, 74412 and 74413
74493 Parts suitable for use in lifts, skip hoists or escalators
74494 Parts for lifting, handling, loading or unloading machinery, n.e.s.
74519 Parts of tools of subgroup 7451
74529 Parts of machinery of subgroup 7452 and heading 7753
74539 Weighing-machine weights of all kinds; Parts of the weighing machinery of subgroup 7453


74568 Parts of appliances of subgroup 7456


74593 cylinders and other Parts for machines of heading 74591
74597 Parts for automatic goods-vending machines (postage stamps, cigarettes, food etc.)


7461 Ball-bearings
7462 Tapered roller bearings (including cone and tapered roller assemblies)


7463 Spherical roller bearings
7464 Needle roller bearings
7465 Other cylindrical roller bearings
7468 Other ball- or roller bearings (including combined ball-/roller bearings)


74691 Balls, needles and rollers
74699 Parts of ball and roller bearings, n.e.s.


7471 Pressure-reducing valves
7472 Valves for oleo-hydraulic or pneumatic transmissions


7473 Check-valves
7474 Safety or relief valves


7478 Taps, cocks, valves and similar appliances, n.e.s.







181


7479 Parts for the appliances of group 747
7481 Transmission shafts (including camshafts and crankshafts) and cranks


74821 Bearing housings, incorporating ball- or roller bearings
74822 Bearing housings, not incorporating ball- or roller bearings; plain shaft bearings
74839 Parts of articulated link chain


7484 Gears and gearing and other transmission elements presented separately)
7485 Flywheels and pulleys (including pulley blocks)


7486 Clutches and shaft couplings (including universal joints)
7489 Parts, n.e.s., for articles of group 748


7492 Gaskets and similar joints of metal sheeting combined with other materials


74991 Ships’ or boats’ propellers and blades


74999 Machinery Parts, not containing electrical connectors, insulators, coils, contacts or other electrical features, n.e.s.


7591 Parts and accessories of photocopying and thermo-copying apparatus of subgroup 7513


75991 Parts and accessories for machines of subgroup 7511


75993 Parts and accessories for machines of subgroup 7519


75995


Parts of calculating machines, accounting machines, cash registers. postage-franking machines and similar machines incorporating a
calculating device


75997


Parts of automatic data processing machines and units thereof, magnetic or optical readers, and machines for transcribing and
processing data, n.e.s.


76211 Radio broadcast receivers, incorporating sound-recording or reproducing apparatus


76212 Radio broadcast receivers, not incorporating sound-recording or reproducing apparatus


76491 Parts of electrical apparatus for line telephony or line telegraphy (including apparatus for carrier-current line systems)
76492



Parts of microphones, loudspeakers, headphones, earphones and combined microphone/speaker sets; audio-frequency electric amplifiers
etc.


76493


Parts of television receivers, radio broadcast receivers, transmission apparatus for radio telephony, telegraphy, broadcasting or
television etc.


76499 Parts of apparatus for sound recorders or reproducers and parts of television image and sound recorders or reproducers







182


77129 Parts of electric power machinery (other than rotating electric power generating machinery and equipment), and parts thereof


7722 Printed circuits
77231 Fixed carbon resistors, composition- or film-type


77232 Other fixed resistors


77233 Wire-wound variable resistors (including rheostats and potentiometers)


77235 Other variable resistors (including rheostats and potentiometers)


77238 Parts for electrical resistors of subgroup 7723


77241 Fuses


77242 Automatic circuit-breakers for voltages of less than 72.5 kv
77243 Other automatic circuit-breakers


77244 Isolating switches and make-and-break switches


77245 Lightning arresters, voltage limiters and surge suppressors for voltages exceeding 1,000 volts


77249


Electrical apparatus for switching or protecting electrical circuits, or making connections to or in electrical circuits, n.e.s., exceeding
1,000 volts


77251 Fuses


77252 Automatic circuit-breakers for a voltage not exceeding 1,000 volts


77253 Apparatus for protecting electrical circuits, n.e.s., not exceeding 1,000 volts
77254 Relays


77255 Other switches


77257 Lamp-holders


77258 Plugs and sockets
77259



Electrical apparatus for switching or protecting electrical circuits or making connections to or in electrical circuits, n.e.s., not exceeding
1,000 v


77261
Switchboards etc <1000v


77262 Switchboards etc >1000v


77281 Switchboards etc unequip







183


77282 Switchgear parts nes
77312 Co-axial cables and other co-axial conductors


77313 Ignition wiring sets and other wiring sets of a type used in vehicles, aircraft or ships


77322 Electrical insulators of glass
77323 Electrical insulators of ceramics
77324 Electrical insulators of materials other than glass or ceramics


77423 X-ray tubes


77429


Electro-diagnostic apparatus for medical, surgical, dental or veterinary sciences and radiological apparatus, n.e.s., including parts and
accessories


77549 Parts of hair clippers


77579 Parts of food grinders and mixers (fruit or vegetable juice extractors)


77589 Parts of electro-thermic appliances of subgroup 7758
77611 Television picture tubes, colour
77612 Television picture tubes, black and white or other monochrome
77621 Television camera tubes; image converters and intensifiers; other photocathode tubes
77623 Other cathode-ray tubes


77625 Microwave tubes (excluding grid-controlled tubes)
77627 Other valves and tubes


77629 Parts of the tubes and valves of subgroups 7761 and 7762
77631 Diodes, other than photosensitive or light-emitting diodes


77632 Transistors (excluding photosensitive transistors) with a dissipation rate of less than one watt
77633 Transistors (excluding photosensitive transistors) with a dissipation rate of one watt or more
77635 Thyristors, diacs and triacs (excluding photosensitive devices)
77637 Photosensitive semiconductor devices; light emitting diodes
77639 Other semiconductor devices
77641 Digital monolithic integrated units
77643 Non-digital monolithic integrated units







184


77645 Hybrid integrated circuits
77649 Electronic integrated circuits and micro-assemblies, n.e.s.


77681 Piezoelectric crystals, mounted
77688



Parts of the devices of subgroup 7763 and of the mounted piezoelectric crystals of item
77681


77689 Parts of electronic integrated circuits and micro-assemblies
77811 Primary cells and primary batteries
77812 Electric accumulators (storage batteries)
77817 Parts of primary cells and primary batteries
77819 Parts of electric accumulators
77822 Discharge lamps (other than ultraviolet lamps)


77823 Sealed-beam lamp units
77824 Ultraviolet or infrared lamps; arc lamps


77829 Parts of electric filaments or discharge lamps
77831



Electrical ignition or starting equipment used for spark-ignition or compression-ignition
internal combustion engines


77833


Parts of electrical ignition or starting equipment for internal combustion engines; parts of generators and cut-outs used with such
engines


77834 Electrical lighting or signalling equipment, windscreen wipers etc., used for cycles or motor vehicles


77835 Parts of equipment of heading 77834


77848 Hand elec-mech tool part


77869 Parts of electrical capacitors


77879 Parts el equip of 7787


77883 Parts of the equipment of heading 77882


77885 Parts of electric sound or visual signaling apparatus, n.e.s. (including parts of indicator panels, burglar and fire alarms)


77886 Carbon electrodes, carbon brushes, lamp carbons, battery carbons and other carbon articles


77889 Electrical parts of machinery or apparatus, n.e.s.







185


78425 Bodies (including cabs) for tractors, trucks and special purpose motor vehicles and road motor vehicles n.e.s.


78431 Bumpers and parts thereof, for tractors, motor cars and other motor vehicles etc.


78432 Other parts and accessories of motor vehicle bodies of headings 8701 to 8705 (including cabs)


78433 Brakes and servo-brakes, and parts thereof, for tractors, motor cars and other motor vehicles etc.
78434 Gearboxes


78435 Drive axles with differential, whether or not provided with other transmission components


78436 Non-driving axles, and parts thereof, for tractors, motor cars and other motor vehicles etc.
78439



Parts and accessories n.e.s. for tractors, motor cars and other motor vehicles, trucks, public transport vehicles and road motor vehicles,


n.e.s.
78535 Parts and accessories for motorcycles (including mopeds)
78536 Parts and accessories for invalid carriages


78537 Parts and accessories for bicycles and other cycles (except motorcycles and mopeds), n.e.s.
78689



Parts of trailers and semi-trailers of heading 7861, subgroup 7862 and headings 78683
and 78685


79199


Parts of railway or tramway locomotives or rolling stock railway vehicles; parts of railway or tramway coaches, vans, trucks, service
vehicles etc.


79291 Propellers and rotors, and parts thereof
79293 Undercarriages and parts thereof for aircraft
79295 Parts of airplanes or helicopters, n.e.s.
79297 Other parts of goods of group 792


81219 Parts for boilers of heading 81217
8138 Parts of portable electric lamps of heading 81312 (excluding storage batteries)


81391 Parts, n.e.s., of lamps, light fittings etc. of glass
81392 Parts, n.e.s., of lamps, light fittings etc. of plastics


81399 Parts, n.e.s., of lamps, light fitting etc. other
82111 Seats of a type used for aircraft
82112 Seats of a type used for motor vehicles







186


82119 Parts of seats of subgroup 8211
84848 Headbands, linings, covers, hat foundations, hat frames, peaks and chin-traps, for headgear


87119 Binoc/telescope part/acc
87139 Electron/etc diffr parts


87149 Microscopes parts/access
87199 Parts and accessories of liquid crystal devices, n.e.s., lasers (other than laser diodes), and other optical appliances and instruments, n.e.s.


87319 Parts and accessories of gas, liquid or electricity meters


87329 Parts and accessories of revolution and production counters, odometers, pedometers, speedometers, tachometers, stroboscopes etc.


87412 Parts and accessories of navigational instruments and appliances


87414 Parts and accessories for articles of heading 87413
87424 Parts and accessories for articles of headings 87422 and 87423


87426 Parts and accessories for articles of heading 87425


87439 Fluid instrum parts/acc
87454 Parts and accessories for machines and appliances of heading 87453


87456 Parts and accessories for instruments of heading 87455
87469 Parts and accessories for automatic regulating or controlling instruments, and apparatus


87479 Parts and accessories for instruments and apparatus of subgroup 8747
8749 Parts and accessories for machines, appliances, instruments and apparatus, n.e.s.


88112 Flash bulbs, flash-cubes and the like


88113 Photographic flashlight apparatus (other than the discharge lamps of subgroup 7782)
88114 Parts and accessories for the photographic cameras of heading 88111


88115 Parts and accessories for photographic flashlight apparatus
88123 Parts and accessories for the cinematographic cameras of heading 82121


88124 Parts and accessories for cinematographic projectors


88134 Parts and accessories for the equipment of headings 88131 through 88133


88136 Parts and accessories for the apparatus and equipment of heading 88135







187


88422 Parts for frames and mountings of spectacles, goggles or the like


88431 Objective lenses for cameras, projectors or photographic enlargers or reducers


88432 Other objective lenses


88433 Filters


88439 Mounted optical elements, n.e.s.
88571



Instrument panel clocks and clocks of a similar type, for vehicles, aircraft, spacecraft or
vessels


88591 Watch-cases, and parts thereof


88597 Clock cases and cases of a similar type for other goods of group 885, and parts thereof


88598 Complete watch or clock movements, unassembled or partly assembled (movement sets)


88599 Clock or watch parts, n.e.s.


89121 Cartridges for riveting or similar tools or for captive-bolt humane killers, and parts thereof
89195 Other parts of shotguns and rifles of heading 89131


89410 Baby carriages, and parts thereof, n.e.s.


89423 Parts and accessories of dolls representing only human beings


8989 Parts and accessories of musical instruments


89935 Parts of lighters, n.e.s., other than flints or wicks


89949 Parts, trimmings and accessories of articles falling under heading 89941 or 89942


89984 Button moulds and other parts of buttons; button blanks


89986 Parts of slide fasteners
89992



Skins and other parts of birds with their feathers or down, feathers, parts of feathers, down
and articles thereof


89994 Human hair, animal hair, or other textile materials, prepared for use in making wigs or the like


89997 Vacuum flasks and other vacuum vessels, complete with cases, and parts thereof (other than glass inners)
Source: Athukorala, 2010.







188



Appendix II


India’s trade of top 10 items of manufacturing parts and components, 1994-2008



Table 1a. India’s exports of top 10 items of manufacturing parts and components, 1994-2004




Exports (1994) Exports (1999) Exports (2004)


Commodity
code


Value
(US$ million)


Share in total P&C
exports (%)


Commodity
code


Value
(US $ million)


Share in total P&C
exports (%


Commodity
code


Value
(US$ million)


Share in total P&C
exports (%)


78537 101.2 15.9 78436 1 64.0 14.9 78439 529.7 17.5
78439 100.4 15.8 78536 145.4 13.2 75997 221.1 7.3
75997 66.2 10.4 75995 84.6 7.7 71392 162.5 5.4
71392 33.6 5.3 77885 66.8 6.1 78537 139.1 4.6
71391 28.0 4.4 71392 47.6 4.3 72855 133.1 4.4
77249 13.5 2.1 71391 32.0 2.9 71391 111.3 3.7
78431 13.2 2.1 79293 26.1 2.4 89410 87.1 2.9
74291 12.9 2.0 76499 25.1 2.3 77637 85.0 2.8
72855 12.2 1.9 72449 22.9 2.1 78431 82.7 2.7
72449 12.1 1.9 72855 21.6 2.0 77611 80.3 2.7


Top 10 P&C 393.2 61.8 Top 10 P&C 636.1 57.9 Top 10 P&C 1,631.9 53.9
Total P&C 636.5 Total P&C 1,098.4 Total P&C 3,027.8


Share of P&C
exports in total
mfg. exports (%) 3.2


Share of P&C
exports in total
mfg. exports (%) 3.8


Share of P&C
exports in total
mfg. exports (%) 5.2


Source: Calculated from United Nations, 2010. Note: See Appendix I of this book for detailed commodity description.







189


Table 1b. India’s exports of top 10 items of manufacturing parts and components, 2005-2008


Exports (2005) Exports (2006) Exports (2007) Exports (2008)


Commodity
code


Value
(US$


million)


Share in
total P&C


exports (%)


Commodity
code


Value
(US$


million)


Share in
total P&C


exports
(%)


Commodity
code


Value
(US$


million)


Share in
total P&C


exports (%)


Commodity
code


Value
(US$


million)


Share in
total P&C


exports
(%)


78439 778.3 20.5 78439 880.0 18.8 78439 919.5 15.6 79295 1,119.4 13.1
71392 229.3 6.0 71392 327.0 7.0 71392 423.5 7.2 78439 1,085.1 12.7
75997 221.3 5.8 75997 200.6 4.3 79295 288.6 4.9 77637 528.8 6.2
72855 155.5 4.1 72855 164.4 3.5 77637 212.8 3.6 71392 505.7 5.9
78537 148.8 3.9 78537 160.7 3.4 76493 193.4 3.3 79297 242.8 2.9
71391 138.3 3.6 78431 150.0 3.2 72855 167.0 2.8 77282 233.9 2.7


78431 113.0 3.0 71391 143.5 3.1 77282 141.2 2.4 78434 206.9 2.4
77637 93.7 2.5 77637 133.9 2.9 71391 137.5 2.3 78537 184.4 2.2


73591 82.8 2.2 76493 122.0 2.6 78431 136.9 2.3 76493 175.4 2.1
78434 78.9 2.1 78434 112.6 2.4 78434 124.6 2.1 72855 158.0 1.9


Top 10
P&C 2,039.6 53.8 Top 10 P&C 2,394.6 51.2 Top 10 P&C 2,745.1 46.5 Top 10 P&C 4,440.5 52.1


Total P&C 3,795.0 Total P&C 4,673.8 Total P&C 5,905.0 Total P&C 8,526.6
Share of P&C


exports in
total mfg.


exports (%)
5.3


Share of P&C
exports in total


mfg. exports
(%)


5.8
Share of P&C


exports in total
mfg. exports


(%)
6.2


Share of P&C
exports in total


mfg. exports (%)
7.3


Source: Calculated from United Nations, 2010..
Note: See Appendix I for detailed commodity description.








190



Table 2a. India’s imports of top 10 items of manufacturing parts and components, 1994-2004



Imports (1994) Imports (1999) Imports (2004)


Commodity code


Value (US$
million)


Share in total
P&C imports (%)


Commodity code


Value (US$
million)


Share in total P&C
imports (%)


Commodity code


Value (US$
million)


Share in total
P&C imports (%)


79295 292.1 12.4 75997 428.3 14.2 75997 1,064.5 15.2
78439 156.9 6.7 78439 309.9 10.3 78439 546.6 7.8
75997 129.2 5.5 77641 202.8 6.7 76493 445.2 6.3
71499 123.1 5.2 76493 138.0 4.6 79295 396.3 5.6
76493 75.5 3.2 71392 104.7 3.5 76491 292.8 4.2
72449 73.2 3.1 76491 77.9 2.6 77643 226.1 3.2
77643 67.3 2.9 71391 69.5 2.3 77282 172.6 2.5
71392 66.2 2.8 74291 54.2 1.8 72399 139.5 2.0
78431 64.5 2.8 71499 54.1 1.8 71392 133.1 1.9
74494 60.5 2.6 79295 53.1 1.8 72393 133.0 1.9


Top 10 P&C 1,108.5 47.2 Top 10 P&C 1,492.5 49.5 Top 10 P&C 3,549.6 50.5
Total P&C 2,349.9 Total P&C 3,017.6 Total P&C 7,028.0


Share of P&C
imports in total
mfg. imports (%)


16.3
Share of P&C
imports in total
mfg. imports (%)


13.2
Share of P&C
imports in total
mfg. imports (%)


13.7


Source: Calculated from United Nations, 2010.
Note: Please see Appendix I of this book for detailed commodity description.







191


Table 2b. India’s imports of top 10 items of manufacturing parts and components, 2005-2008


Imports (2005) Imports (2006) Imports (2007) Imports (2008)
Commodity


code




Value
(US$


million)



Share in
total


P&C
imports


(%)


Commodity
code






Value
(US$


million)



Share
in total


P&C
imports


(%)


Commodity
code






Value
(US$


million)



Share
in total


P&C
imports


(%)


Commodity
code






Value
(US$


million)



Share in
total


P&C
imports


(%)
75997 1,287.6 14.7 75997 1,413.5 12.7 75997 1,231.5 8.8 78439 1,834.3 11.3
79295 636.2 7.3 79295 800.9 7.2 78439 931.3 6.6 75997 1,242.8 7.7
78439 624.5 7.1 76493 784.4 7.1 79295 859.3 6.1 76493 878.8 5.4
76493 499.7 5.7 78439 760.3 6.8 76493 785.1 5.6 79295 647.5 4.0
76491 323.8 3.7 76491 443.8 4.0 76491 649.8 4.6 77282 503.7 3.1
77643 272.6 3.1 77643 361.4 3.3 77282 438.3 3.1 72399 446.6 2.8
77282 253.5 2.9 77282 344.1 3.1 77643 414.6 3.0 77637 420.0 2.6
72399 186.2 2.1 72399 284.3 2.6 72399 356.4 2.5 71392 370.5 2.3
71392 174.5 2.0 72855 217.8 2.0 72393 277.6 2.0 77812 355.9 2.2
72855 145.8 1.7 71392 170.0 1.5 72699 274.4 2.0 73729 350.6 2.2


Top 10 P&C 4,404.3 50.2 Top 10 P&C 5,580.5 50.2 Top 10 P&C 6,218.3 44.2
Top 10


P&C 7,050.6 43.4


Total P&C 8,767.7 Total P&C 11,113.8 Total P&C 14,076.8 Total P&C 16,233.5


Share of P&C
imports in total


mfg. imports
(%)


10.9


Share of
P&C


imports in
total mfg.


imports (%


11.3


Share of
P&C


imports in
total mfg.


imports (%)


11.6


Share of
P&C


imports in
total mfg.


imports (%)


9.5


Source: Calculated from United Nations, 2010.
Note: See Appendix I of this book for detailed commodity description.







192


Table 3a. Estimates of intra-industry trade in india’s top 10 products involving P&C trade: 1994-2004


1994 1999 2004


Commodity
code


IIT
(US$ million)


G-L
Index


Commodity
code


IIT
(US$ million)


G-L
Index


Commodity
code


IIT
(US$ mil


lion)
G-L


Index
78439 200.8 78.1 71392 95.2 62.5 78439 1,059.4 98.4
75997 132.4 67.8 71391 64.1 63.1 75997 442.1 34.4


71392 67.1 67.3 76499 50.2 87.1 71392 266.2 90.0
71391 28.8 67.9 72449 45.9 90.5 72855 201.9 86.3
78431 26.4 33.9 72855 43.2 74.9 77611 160.7 86.2
74291 25.8 54.2 73591 39.7 98.4 71391 127.8 72.9
72855 24.3 43.8 77811 22.1 97.4 77429 108.0 88.5
72449 24.1 28.3 77252 21.3 93.0 73591 103.2 96.9
73591 20.1 81.7 87469 21.2 56.4 77637 89.6 69.0
78535 17.9 94.5 77833 20.5 80.8 74291 88.6 63.9


Source: Calculated from United Nations, 2010.
Note: See Appendix 1 for detailed commodity description.


Table 3b. Estimates of intra-industry trade in India’s top 10 products involving P&C trade: 2005-08


2005 2006 2007 2008
Commodity


code
IIT (US$


million)
G-L


Index
Commodity


code
IIT (US$


million)
G-L


Index
Commodity


code
IIT (US$


million)
G-L


Index
Commodity


code
IIT (US$


million)
G-L


Index
78439 1,249.1 89.0 78439 1,520.6 92.7 78439 1,838.9 99.4 78439 2,170.2 74.3
75997 442.5 29.3 75997 401.1 24.9 79295 577.1 50.3 79295 1,295.0 73.3


71392 349.0 86.4 71392 340.0 68.4 71392 481.7 72.5 77637 840.1 88.5
72855 291.6 96.8 72855 328.8 86.0 76493 386.9 39.5 71392 741.0 84.6
73591 151.2 95.4 76493 244.0 26.9 77637 337.8 88.5 77282 467.9 63.4
77259 134.1 75.9 78537 229.0 83.2 72855 334.0 76.8 78434 380.9 95.9
71391 124.5 62.1 77637 209.6 87.8 77282 282.3 48.7 76493 350.8 33.3
77429 117.2 93.5 71391 194.7 80.8 71391 275.0 94.2 78537 318.6 92.7
74291 111.8 57.5 77129 157.5 95.8 75997 247.0 18.2 72855 316.0 65.0
77129 109.6 83.1 77259 154.4 67.4 72839 220.0 86.9 71391 303.4 88.7


Source: Calculated from United Nations, 2010.
Note: See Appendix I of this book for detailed commodity description.







193


Appendix III
Overview of India's preferential trade agreements, 2011



Asia Pacific Trade Agreement (APTA)


Parties Bangladesh, China, India, Korea (Rep. of), Lao People's Democratic Republic and Sri Lanka


Date of signature/entry into force 31.07.1975/17.06.1976a


Transition for full implementation Immediately on implementation


India's duty-free tariff lines (2009/10) 3.36% of the totalb


Provisions concerning goods Rules of origin, safeguards, balance-of-payment measures, and dispute settlement


Trade in goods Tariff concessions apply to 570 HS 6-digit tariff lines (margin of preferences: 5%-100%) Special
concessions apply to 48 HS 6-digit tariff lines (margin of preferences: 14%-100%) for LDC members.
The fourth round of negotiations aimed at widening the coverage of preferences to at least 40% of the
tariff lines of each member State at an average margin of preference of 40%, was scheduled to be
completed in October 2009 but has not been concluded yet


India's merchandise trade (2009/10) Imports from APTA: 13.9% of total; exports to APTA: 11% of total


of which preferential Imports: ..


WTO document series L/4418 (GATT), BISD 25S/L4635 (GATT), WT/COMTD/N/22, and WT/COMTD/62


South Asian Free-Trade Agreement (SAFTA)


Parties Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka


Date of signature/entry into force 06.01.2004/01.06.2006


Transition for full implementation 2013


India's duty-free tariff lines (2009/10) 0.028% of the totalb


Provisions concerning goods Rules of origin, safeguards, balance-of-payment measures, general exceptions, and dispute settlement


Trade in goods Tariff reduction to 20% for non-LDC members by 2008 (30% for LDC members), followed by a
reduction to 0%-5% by 2013 (by 2014 for Sri Lanka and by 2018 for LDC members). Tariff reduction to
0%-5% on imports from LDC members by 2009. However, India granted duty-free access on imports
from LDC members on 1 January 2008 (i.e., one year ahead of the tariff liberalization schedule). The
base rate is the MFN tariff in force on 1 January 2006. India's sensitive list includes 744 products from
LDC members and 865 products from non-LDC membersc


India's merchandise trade (2009/10) Imports from SAFTA: 0.5% of total; exports to SAFTA: 4.4% of total


of which preferential Imports ..


WTO document series WT/COMTD/N/26


South Asian Preferential Trade Arrangement (SAPTA)d


Parties Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka


Date of signature/entry into force 11.04.1993/07.12.1995


Transition for full implementation On implementation


India's duty-free tariff lines (2009/10) 0.028% of the totalb


Provisions concerning goods Balance-of-payment measures, dispute settlement, rules of origin, and safeguards


Trade in goods Tariff concessions apply to 2,565 HS 6-digit tariff lines (margin of preferences: 10%-90% for non-LDC
members and 10%-100% for LDC members)


India's merchandise trade (2009/10) Imports from SAPTA: 0.5% of total; exports to SAPTA: 4.4% of total


of which preferential Imports: ..


WTO document series WT/COMTD/10


Association of Southeast Asian Nations (ASEAN)


Parties India and Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia,
Myanmar, Philippines, Singapore, Thailand and Viet Nam


Date of signature/entry into force 13.08.2009/01.01.2010e


Transition for full implementation 31.12.2019







194


India's duty-free tariff lines (2009/10) 1.13% of the totalb


Provisions concerning goods Rules of origin, dispute settlement, safeguards, balance-of-payment measures, customs-related
measures, exceptions (general and for security) and dispute settlement


Trade in goods Tariff concessions apply to 12,169 HS 8-digit tariff lines. For “normal track” products, applied MFN
rates will be reduced and subsequently eliminated by end-December 2013 (7,775 HS 8-digit tariff lines)
and by end-December 2016 (1,252 HS 8-digit tariff lines). For “sensitive track” products (1,805 HS
8-digit tariff lines), applied MFN rates higher than 5% will be reduced to 5% by end-December 2016.
For special products,f applied MFN rates will be reduced from 70%-100% to 37.5%-50% by end-
December 2019. For “highly sensitive” products, MFN applied rates will be reduced to 50% for
category I products (nine HS 8-digit tariff lines), 45% for category II products (30 HS 8-digit tariff
lines), and 37.5% for category III products (one HS 8-digit tariff line) by end-December 2019. The
exclusion list (1,297 HS 8-digit tariff lines) must be reviewed annually


India's merchandise trade (2009/10) Imports from ASEAN: 8.9% of total; exports to ASEAN: 10.1% of total


of which preferential Imports: ..


WTO document series WT/COMTD/N/35


MERCOSUR


Parties India and Argentina, Brazil, Paraguay, and Uruguay
Date of signature/entry into force 25.01.2004/01.06.2009
Transition for full implementation Immediate on implementation
India's duty-free tariff lines (2009/10) 0.25% of the totalb
Provisions concerning goods Rules of origin, safeguards, and dispute settlement
Trade in goods 450 HS 8-digit tariff lines are granted tariff concessions (margin of preferences: 10%, 20% or 100%)
India's merchandise trade (2009/10) Imports from MERCOSUR: 1.4% of total; exports to MERCOSUR: 1.5% of total


of which preferential Imports: ..
WTO document series WT/COMTD/N/31


India-Afghanistan


Parties India and Afghanistan
Date of signature/entry into force 06.03.2003/13.05.2003
Transition for full implementation Immediately on implementation
India's duty-free tariff lines (2009/10) Nilb
Provisions concerning goods Rules of origin, safeguards, balance-of-payment measures, state trading, dispute settlement, general


exceptions, safeguards, and national treatment
Trade in goods Tariff reductions apply to 38 HS 6-digit tariff lines. Margin of preferences is 50% or 100% of the MFN


tariff in force as of 13 May 2003
India's merchandise trade (2009/10) Imports from Afghanistan: 0.04% of total; exports to Afghanistan: 0.3% of total


of which preferential Imports: ..
WTO document series WT/COMTD/N/32


India-Bhutan


Parties India and Bhutan
Date of signature/entry into force 28.07.2006/29.07.2006
Transition for full implementation Immediate
India's duty-free tariff lines (2009/10) Negligibleb
Provisions concerning goods Safeguards and customs-related measures
Trade in goods Tariff exemptions on all goods imported from Bhutan. No restrictions on Bhutan's trade with third


countries. Non-tariff restrictions may be imposed on imports of third countries from Bhutan. Annual
refund of excise duties. Bhutan-flagged vessels operating to and from Indian ports are given equal
treatment than granted to vessels from other foreign country


India's merchandise trade (2009/10) Imports from Bhutan: 0.1% of total; exports to Bhutan: 0.1% of total
of which preferential Imports: ..


WTO document series WT/COMTD/N/28







195


India-Chile


Parties India and Chile
Date of signature/entry into force 08.03.2006/17.08.2007g
Transition for full implementation Immediately on implementation
India's duty-free tariff lines (2009/10) 0.004% of the total
Provisions concerning goods Anti-dumping and countervailing measures, customs-related measures, dispute settlement, general


exceptions, import/export restrictions, rules of origin, safeguards, sanitary and phytosanitary measures,
national treatment, state trading, agriculture export subsidies, and technical barriers to trade


Trade in goods Tariff preferences apply to 178 HS 8-digit tariff lines (margin of preferences: 10%-50%)
India's merchandise trade (2009/10) Imports from Chile: 0.4% of total; exports to Chile: 0.2% of total


of which preferential Imports: ..
WTO document series WT/COMTD/N/30, WT/COMTD/RTA/M/3, and WT/COMTD/RTA/4


India-Korea (Rep. of)


Parties India and Republic of Korea
Date of signature/entry into force 07.08.2009/01.01.2010
Transition for full implementation 2019
India's duty-free tariff lines (2009/10) 0.32% of the totalb
Provisions concerning goods Rules of origin, customs-related measures, anti-dumping and countervailing measures, safeguards,


technical regulations, exceptions (general and for security), state trading, non-tariff measures, and
sanitary and phytosanitary measures


Trade in goods E-0 group of products (460 HS 8-digit tariff lines) have been free of duty since 1 January 2010. Phased
elimination of duty for E-5 group of products (448 HS 8-digit tariff lines) by 2014. Phased elimination of
duty for E-8 group of products (7,248 HS 8-digit tariff lines) by 2017. Phased reduction of duty to
0%-5% for RES products (941 HS 8-digit tariff lines) by 2017. Phased reduction of duty to 50% for SEN
products (704 HS 8-digit tariff lines) by 2019. Exemption of tariff reduction or elimination applies to
1,895 HS 8-digit tariff lines. The base rate is the MFN duty in force as of 1 April 2006


Provision concerning services Yes
India's merchandise trade (2009/10) Imports from the Republic of Korea: 3.0% of total; exports to Republic of Korea: 1.9% of total


of which preferential Imports: ..
India's commercial services trade
(2009/10)


..


WTO document series WT/REG286/N/1 and S/C/N/558, and WT/COMTD/N/36 and S/C/N/570


India-Nepal


Parties India and Nepal
Date of signature/entry into force 27.10.2009/27.10.2009
Transition for full implementation Immediate on implementation
India's duty-free tariff lines (2009/10) 0.002% of the totalb
Provisions concerning goods Rules of origin and safeguards
Trade in goods Tariff exemptions for all goods. Imports of vegetable fats, copper products, acrylic yarn, and zinc oxide


are subject to annual quotas. Imports of alcoholic liquors/beverages (except industrial spirits),h perfumes,
and cosmetics with non-Nepalese/non-Indian brand names, and cigarettes and tobacco are not allowed
preferential entry into India


India's merchandise trade (2009/10) Imports from Nepal: 0.2% of total; exports to Nepal: 0.9% of total
of which preferential Imports: ..


WTO document series WT/COMTD/N/34


India-Singapore


Parties India and Singapore
Date of signature/entry into force 29.06.2005/01.08.2005
Transition for full implementation 01.12.2015


India's duty-free tariff lines (2009/10) ..


Provisions concerning goods Rules of origin, customs-related measures, safeguards, standards and technical regulations, sanitary and
phytosanitary measures, and dispute settlement







196


Trade in goods 506 HS 8-digit tariff lines have been granted duty-free access since 1 August 2005. Phased elimination
of duty for 2,202 HS 8-digit tariff lines by 1 April 2009. Phased reduction of duty for 2,407 HS 8-digit
tariff lines by 1 April 2009. Some 6,550 HS 8-digit tariff lines are excluded from duty reductions


Provision concerning services Yes


Other provisions Investment and government procurement


India's merchandise trade (2009/10) Imports from Singapore: 2.2% of total; exports to Singapore: 4.2% of total


of which preferential Imports: 0.58% of total during 2009-10


India's commercial services trade
(2009/10)


..


WTO document series WT/REG228/N/1 and S/C/N/393, WT/REG228/2, WT/REG228/1/Rev.1, WT/REG228/3, and
WT/REG228/M/1


India-Sri Lanka


Parties India and Sri Lanka
Date of signature/entry into force 28.12.1998/15.12.2001
Transition for full implementation 18.03.2003
India's duty-free tariff lines (2009/10) 0.001% of the totalb
Provisions concerning goods General exceptions, national treatment, state trading, rules of origin, safeguards, balance-of-payment


measures, disputes settlement, and rules of origin
Trade in goods As of 18 March 2003, all tariff lines (except those in the negative list and those under tariff rate quotas)


have been free of duty. India's negative list comprises 429 tariff lines. Tariff concessions on textiles are
restricted to 25% below the MFN rate; although textiles under HS chapters 61-62 remain in India's
negative list, an annual quota of 8 million pieces is offered a 75% tariff concession on a fixed basis.i
Tariff quota also applies to tea: a 50% tariff concession on a fixed basis is offered, subject to an annual
quota of 15 million kg


India's merchandise trade (2009/10) Imports from Sri Lanka: 0.1% of total; exports to Sri Lanka: 1.2% of total
of which preferential Imports: ..


WTO document series WT/COMTD/N/16


India-Japan


Date of signature/entry into force 16.02.2011/..
Transition for full implementation Within 10 years from the date of implementation
India's duty-free tariff lines (2009/10) 0.25% of the totalb
Provisions concerning goods Customs-related measures, export subsidies, import/export restrictions, safeguards, anti-dumping


measures, balance-of-payment measures, and rules of origin
Trade in goods For category A products (1,378 HS 8-digit tariff lines), customs duties are to be eliminated as from the


date of entry into force of the agreement. For category B5 products (509 HS 8-digit tariff lines), customs
duties are to be eliminated in six equal annual installments from the base rate to free. For category B7
products (two HS 8-digit tariff lines), customs duties are to be eliminated in eight equal annual
instalments from the base rate to free. For category B10 products (7,151 HS 8-digit tariff lines), customs
duties are to be eliminated in 11 equal annual instalments from the base rate to free. For gearboxes and
diesel engines of a capacity exceeding 250 cc (two HS 8-digit tariff lines), customs duties are to be
reduced to 6.25% and 5%, respectively, by 1 January 2019. Category X products (1,535 HS 8-digit tariff
lines) are to be excluded from any customs reduction or elimination


Provision concerning services Yes
Other provisions Investment, intellectual property, government procurement, and competition
India's merchandise trade (2009/10) Imports from Japan: 2.3% of total; exports to Japan: 2% of total


of which preferential Imports: ..
India's commercial services trade
(2009/10)


..


WTO document series Not notified to the WTO


India-Malaysia


Parties India and Malaysia


Date of signature/entry into force 18.02.2011/01.07.2011


Transition for full implementation 31.12.2019


India's duty-free tariff lines (2009/10) 0.25% of the totalb







197


Provisions concerning goods Rules of origin, sanitary and phytosanitary measures, technical barriers to trade, trade remedies, general
exceptions, and customs-related measures


Trade in goods For “normal track” products: (a) applied MFN rate will be reduced and subsequently eliminated for
7,747 HS 8-digit tariff lines by end-September 2013 and for 1,270 HS 8-digit tariff lines by end-
June 2016; and (b) tariff lines that bear a zero-rated duty cannot be changed (402 HS 8-digit tariff lines).
For “sensitive track” products, applied MFN rates higher than 5% will be reduced to 5% by end-
June 2016. For special products,j the applied MFN rates will be reduced from 80%-100% to 37.5%-50%
by end-December 2019. For “highly sensitive” products, MFN applied rates will be reduced to 50% and
45% for category I and II products, respectively, (42 HS 8-digit tariff lines) and to 37.5% for category III
products (one HS 8-digit tariff line) by end-December 2019. For “special track” products,k the applied
MFN rate will be reduced from 30% to 5%-10% by end-December 2016. The exclusion list (1,224 HS 8-
digit tariff lines) must be reviewed annually


Provision concerning services Yes


Other provisions Dispute settlement and investment


India's merchandise trade (2009/10) Imports from Malaysia: 1.6% of total; exports to Malaysia: 1.8% of total


of which preferential Imports: ..


India's commercial services trade
(2009/10)


..


WTO document series Not notified to the WTO


India-Thailand


Parties India and Thailand
Date of signature/entry into force 09.10.2003/01.09.2004
Transition for full implementation 17 rounds of negotiations have been held. The free-trade agreement is expected to be concluded during


2011
India's duty-free tariff lines (2009/10) 0.09% of the totalb
Provisions concerning goods Rules of origin, general exceptions, and dispute settlement
Trade in goods Duty-free access for 82 HS 6-digit tariff lines since March 2006
Provision concerning services Yes
Other provisions Investment, dispute settlement, and trade facilitation
India's merchandise trade (2009/10) Imports from Thailand: 1% of total; exports to Thailand: 1% of total


of which preferential Imports:
India's commercial services trade
(2009/10)


..


WTO document series Not notified to the WTO


GSTP


Parties (as notified) Algeria, Argentina, Bangladesh, Benin, Bolivarian Republic of Venezuela, Brazil, Cameroon, Chile,
Colombia, Cuba, Democratic People's Republic of Korea, Ecuador, Egypt, Ghana, Guinea, Guyana,
India, Indonesia, Iran (Islamic Rep. of), Iraq, Korea (Rep. of), Libyan Arab Jamahiriya, Macedonia
(FYR), Malaysia, Mexico, Morocco, Mozambique, Myanmar, Nicaragua, Nigeria, Pakistan, Peru,
Philippines, Pluri-national State of Bolivia, Singapore, Sri Lanka, Sudan, Tanzania, Thailand, Trinidad
and Tobago, Tunisia, Viet Nam and Zimbabwe


Date of signature/entry into force 13.04.1988/19.04.1989
Transition for full implementation On implementation
India's duty-free tariff lines (2009/10) ..
Provisions concerning goods Rules of origin, balance-of-payment measures, safeguards and dispute settlement


Trade in goods Tariff concessions on 53 HS 6-digit tariff lines (margin of preferences: 10%-30%). A 50% tariff
concession applies to three tariff lines for imports from LDC members only (Bangladesh, Benin, Guinea,
Haiti, Mozambique, Sudan, and Tanzania)


India's merchandise trade (2009/10) Imports from GSTP: 26.5% of total; exports to GSTP: 23.4% of total


of which preferential Imports: ..


WTO document series L/6564 (GATT)


Source: WTO Trade Policy Review India, WT/TPR/S/249, September 2011.
.. = Not available.







198


a APTA was formerly known as the Bangkok Agreement. The amended agreement entered into force on
1 September 2006.


b Information provided by the Indian authorities.
c India has offered Bangladesh market access for 8 million pieces of garments, which are on India's sensitive list,


without any sourcing condition.
d SAPTA was superseded by SAFTA. However, concessions granted under SAPTA remain in force for the


contracting parties until the SAFTA trade liberalization programme is completed by 2014 (SAFTA Agreement,
Article 22).


e The agreement entered into force on 1 January 2010 for India, Malaysia, Singapore and Thailand, and on
1 June 2010 for Myanmar and Viet Nam. For the remaining parties, entry into force is in accordance with Article 23
of the Agreement (i.e., mutually agreed date).


f India's special products are crude and refined palm oil, coffee, black tea and pepper.
g The Agreement effectively entered into force in India on 11 September 2007.
h Nepalese beers can be imported on payment of the applicable liquor excise duty equal to the effective excise duty as


levied on Indian beers.
i Of which 6 million pieces will be extended the concession only if made of Indian fabric, provided that no category


of garments exceeds 1.5 million pieces per year.
j India's special products are crude palm oil, refined palm oil, palm kernel oil, palm kernel oil and its fractions,


margarine of vegetable origin, coffee, black tea and pepper.
k India’s “special track” products include pineapples and bird eggs (HS 0407.00.10, 0407.00.20 and 0407.00.90).







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