Foreign Capital, National Strategy: Why China Managed FDI With Precision and India Often Didn't

Introduction: The Question Behind the Numbers

Between 1980 and the early 2020s, China absorbed something on the order of $4 trillion in cumulative inward foreign direct investment, built the world's largest manufacturing base, climbed from a peripheral economy to the world's second-largest, and did all of this while maintaining tight capital controls, extensive sectoral restrictions, and — for much of that period — outright legal requirements that foreign investors partner with local firms and transfer technology in exchange for market access (UNCTAD, World Investment Report, multiple years; IMF, Foreign Direct Investment in China, 2002). This was not an accident of scale or timing. It was the product of a government that understood, with unusual clarity, that foreign capital is only as valuable as the terms attached to it — and that treated every stage of market access as something to be negotiated, sequenced, and earned by the investor rather than simply granted. India, over a similar span, liberalized its investment regime dramatically, opened sector after sector to full foreign ownership, and by 2024 had accumulated roughly $559 billion in inward FDI stock — a substantial sum, but one that has not translated into anything resembling China's manufacturing depth, export sophistication, or technological self-sufficiency (UNCTAD, World Investment Report 2025). In several sectors, as this essay will show, India's comparative lack of conditions and screening did not merely leave value on the table — it produced specific, documented harm to domestic industry and Indian consumers that a more disciplined, China-style approach would very plausibly have reduced or avoided altogether.

This is the puzzle worth sitting with: why did one of the world's largest recipients of foreign capital manage to bend that capital toward a coherent national strategy, while another, opening its doors just as wide, has more often struggled to convert investment into durable industrial capability? The answer is that FDI is not a verdict on a country's economic health; it is a tool, and the outcome it produces depends almost entirely on the skill, patience, and strategic clarity with which a government wields it. China treated foreign capital as an input into a development plan it controlled, extracting technology, local partnership, and export performance as the price of entry. India, in large stretches of its post-1991 history, treated foreign capital's arrival as the achievement itself, with comparatively less attention paid to what happened next — and Indian industry and consumers have paid a real, traceable price for that gap.

This essay is not an argument against foreign investment, nor a brief for economic nationalism. It is an attempt to look honestly, with evidence, at what FDI does well, what it risks, how China and a handful of other successful industrializers actually managed it — flaws included — and what a more deliberate Indian approach might look like.

What Foreign Direct Investment Actually Is

FDI, in the standard definition used by the IMF, OECD, and UNCTAD, is an investment made by an entity in one country to acquire a lasting management interest — conventionally set at 10% or more of voting equity — in an enterprise operating in another country (IMF, Balance of Payments Manual, 6th ed.). This distinguishes it sharply from Foreign Portfolio Investment (FPI), which involves buying stocks, bonds, or other financial instruments without seeking control or a lasting management stake. The distinction matters enormously in practice: portfolio capital can leave a country in days if sentiment sours, as India discovered during the 2013 "taper tantrum" when FPI outflows helped drive a sharp rupee depreciation, whereas FDI — a factory, a joint venture, a majority stake in an operating company — is comparatively illiquid and sticky, which is part of why policymakers generally prefer it as a source of external capital.

Within FDI itself, a further distinction matters for this discussion: greenfield investment, where a foreign firm builds new productive capacity from scratch (a new Foxconn assembly plant, a new Hyundai factory), versus brownfield investment, typically structured as mergers and acquisitions, where a foreign firm buys an existing domestic company. Greenfield investment adds new productive capacity and, generally, new jobs; brownfield investment can do the same, but can equally consolidate an existing asset under new ownership without expanding capacity at all — which is precisely why UNCTAD tracks greenfield project announcements as a separate, closely watched indicator of genuine industrial expansion rather than pure ownership transfer (UNCTAD, World Investment Report 2025).

A final distinction separates horizontal FDI, where a firm replicates the same production it does at home in a new country (a car company building the same car in a new market), from vertical FDI, where a firm relocates a specific stage of its production chain abroad to exploit a cost or resource advantage (an electronics company moving component assembly to a lower-wage country while keeping design and final integration elsewhere). Vertical FDI is the primary mechanism through which countries get pulled into global value chains — and, as this essay will return to, the specific stage of the value chain a country is pulled into matters enormously for whether that integration builds durable capability or locks a country into low-value assembly work indefinitely.

Governments compete for FDI because, done well, it can deliver capital, technology, managerial know-how, and access to export markets simultaneously — a bundle that is difficult for a developing economy to assemble through purely domestic means. That is the theoretical promise. Whether it is realized depends on what comes next.

The Real, Documented Benefits of FDI

It would be dishonest to treat FDI skepticism as simply established fact; the empirical record on its benefits, under the right conditions, is genuinely strong.

Employment and industrialization. In Vietnam, FDI-linked manufacturing — led by Samsung's electronics complexes, which alone account for a substantial share of the country's total exports — has been central to a transformation that took the country from one of the world's poorest economies in the 1980s to a manufacturing hub exporting over $400 billion annually by the early 2020s (World Bank, Vietnam Country Economic Update, various years). In China's own case, the World Bank and IMF's joint assessments of the reform era credit foreign-invested enterprises with playing an outsized role in export growth and employment creation, particularly in coastal manufacturing hubs, even though they represented a minority share of total industrial output (World Bank, China 2030, 2013).

Technology transfer and productivity spillovers. A substantial academic literature, including work compiled by the OECD's Investment Policy Reviews, documents "spillover" effects where domestic firms operating in proximity to foreign multinationals — as suppliers, competitors, or former employees who go on to found local firms — absorb technology and management practices over time (OECD, FDI Spillovers Literature Review, various). Taiwan's semiconductor success offers one of the clearest documented cases: technology transferred to the government-backed Industrial Technology Research Institute in the 1970s and 1980s, sourced substantially through licensing and collaboration arrangements with foreign firms including RCA, directly seeded the spinoff that became TSMC — now the world's most important chipmaker (Choi and Shim, VoxDev research summary, 2026).

Integration into global value chains and export growth. UNCTAD's data consistently shows that countries which successfully attract vertical, export-oriented FDI see measurable gains in export sophistication over time, moving from raw or minimally processed goods toward higher value-added manufactured exports (UNCTAD, World Investment Report, various years). South Korea and Taiwan both used export performance as an explicit condition for state support to domestic firms partnering with or licensing from foreign multinationals, a design choice that tied FDI-adjacent benefits directly to measurable export outcomes rather than leaving the connection to chance (Korea Institute for Industrial Economics and Trade research; Wonhyuk Lim, The Chaebol and Industrial Policy in Korea).

Infrastructure and tax revenue. Even setting aside more contested effects, FDI in infrastructure-heavy sectors — telecoms, logistics, energy — has demonstrably accelerated the build-out of physical infrastructure in countries where domestic capital alone was insufficient, and foreign-invested enterprises are a measurable and often significant contributor to corporate tax revenue in host economies, India included, where DPIIT and Ministry of Finance data show foreign-invested firms contributing disproportionately to corporate tax collections relative to their share of total firms (Ministry of Finance, Annual Economic Survey, various years).

None of this is in serious dispute among economists across the ideological spectrum. The disagreement begins over what happens when these benefits are pursued without corresponding safeguards.

The Hidden Risks: What the Evidence Actually Shows

The risks associated with FDI are real, but they range from rigorously documented to more speculative, and a serious analysis has to distinguish between them rather than treating every concern as equally proven.

Profit repatriation and pressure on the balance of payments sits at the well-documented end of the spectrum. RBI data on India's balance of payments shows that while gross FDI equity inflows reached roughly $50 billion in FY2025 (DPIIT data), net FDI — after accounting for repatriation and disinvestment by existing foreign investors — was considerably lower, at around $29 billion (RBI data, cited in UNCTAD's 2025 country monitor). This gap between gross inflows and net FDI is not a crisis in itself, but it is a structural reminder that FDI is not free capital sitting permanently in a country; profits earned by foreign-owned firms are, quite legitimately, often repatriated to shareholders abroad, and a country that has built critical sectors on a foundation of foreign ownership is exposed to that repatriation as a recurring drain on its current account, not a one-time inflow.

Transfer pricing and tax avoidance is similarly well-evidenced, not as a uniquely Indian problem but as a structural feature of multinational operations everywhere. The OECD's Base Erosion and Profit Shifting (BEPS) project, launched in 2013 specifically because member and non-member governments alike had documented systematic under-taxation of multinational profits through intra-firm pricing arrangements, estimated global revenue losses from these practices in the hundreds of billions of dollars annually (OECD, BEPS Action Plan, 2013). India's own tax authorities have pursued high-profile transfer pricing disputes with major multinationals, underscoring that this is an active enforcement challenge rather than a settled, solved problem.

Technology dependence and crowding out of domestic firms is more genuinely contested territory. The core argument, associated closely with economists like Ha-Joon Chang, is that unrestricted foreign entry into a sector before domestic firms have reached competitive maturity can crowd out the "infant industries" that might otherwise have grown into globally competitive players, locking a country instead into permanent dependence on imported technology and foreign-owned production (Chang, Kicking Away the Ladder, 2002). Chang's broader historical claim — that virtually every currently developed economy, from Britain to the United States to Germany, in fact used tariffs, infant-industry protection, and restrictions on foreign capital during its own developmental phase, before advocating free-market openness to others once it had already climbed the ladder — draws directly on the nineteenth-century German economist Friedrich List, who argued in The National System of Political Economy (1841) that backward economies cannot develop new industries without state intervention in the presence of more advanced competitors. This argument is not universally accepted; critics, including some development economists reviewing Chang's work, argue that correlation between protectionist policy and eventual development does not establish causation, and that institutional quality — property rights, rule of law, contract enforcement — may matter more than the specific trade and investment policy chosen (EH.net review of Kicking Away the Ladder, 2003). The honest position is that this remains a live, evidence-contested debate in development economics, not a settled question either way.

Data sovereignty and digital platform dominance represent a newer and still-evolving risk category. UNCTAD's 2025 report itself flags that the digital economy has become the primary engine of new FDI project value globally, and that a small handful of countries — roughly ten — capture the overwhelming majority of digital-sector greenfield investment in the Global South, raising concerns about a new form of dependency built around data flows and platform infrastructure rather than physical factories (UNCTAD, World Investment Report 2025).

National security concerns tied to strategic sectors — telecommunications equipment, critical minerals, semiconductors, ports, and land near sensitive borders — have moved from a niche concern to mainstream policy across multiple democracies in the past decade, discussed in detail below.

It is worth being explicit about what is not well-supported by evidence: broad claims that FDI generically "extracts" wealth from host countries, or that foreign ownership is inherently exploitative regardless of sector or safeguard, are not consistent with the substantial body of research showing net positive growth, employment, and technology effects from well-regulated FDI across dozens of countries. The risks above are specific, documentable, and manageable through policy design — which is precisely the point this essay is building toward.

China's Strategic Approach: Precision, Not Simply Openness

China's management of foreign investment is frequently described in the West as either a story of authoritarian discipline or of naked coercion. The more accurate picture, drawn from IMF, World Bank, and academic case-study research, is a story of sequenced, deliberately incomplete liberalization, calibrated to what Chinese planners believed the domestic economy could absorb and benefit from at each stage.

Special Economic Zones as controlled experiments. Rather than liberalizing nationally overnight, China's 1978 reform-and-opening program established four Special Economic Zones in 1980 — Shenzhen, Zhuhai, and Shantou in Guangdong, and Xiamen in Fujian — each deliberately located near a specific source of capital and expertise: Shenzhen abutting Hong Kong, Xiamen facing Taiwan (World Bank, China's First Special Economic Zone, working paper series). By the end of 1985, these four zones alone accounted for roughly 20% of China's total realized FDI, and Shenzhen specifically grew at an extraordinary 58% annual rate in its first years, versus roughly 10% national GDP growth over the same period (World Bank Policy Research Working Paper 5583, drawing on Wong, 1987, and Shenzhen Statistics Bureau data). The zones functioned as controlled testbeds: preferential tax rates, streamlined administration, and flexibility in hiring were permitted inside clearly bounded geographic areas before being extended, cautiously and unevenly, to the rest of the country — allowing planners to observe outcomes and correct course before committing nationally.

Joint venture requirements and structured technology transfer. China's 1979 Law on Joint Ventures Using Chinese and Foreign Investment provided the initial legal framework for foreign entry, and for years after, wholly foreign-owned enterprises were not permitted outside the SEZs at all — foreign firms wanting broader market access typically had to structure their entry as a joint venture with a Chinese partner, a structure that mechanically created opportunities for technology and management practices to move from the foreign partner to the domestic one (IMF, Foreign Direct Investment in China: Some Lessons for Other Countries, 2002). The 1986 Law on Wholly Foreign-Owned Enterprises formally extended full ownership rights beyond the SEZs only after this earlier phase had run its course. This sequencing — restricted entry requiring local partnership first, broader ownership rights extended later, and largely after China's 2001 WTO accession locked in further liberalization commitments — meant Chinese policy could extract a technology-transfer premium from firms eager for access to a market of over a billion people, a bargaining position India, as a smaller and historically less centrally coordinated market at the time of its own 1991 opening, did not command to nearly the same degree.

The results speak for themselves. By treating foreign capital as leverage rather than a favor to be courted unconditionally, China built not just factories but an entire, deeply layered domestic supplier ecosystem underneath the foreign firms it hosted — the reason a smartphone or an electric vehicle can be designed, componented, assembled, and shipped almost entirely from within a few hundred kilometers of the Pearl River Delta today. The World Bank credits this model with helping lift several hundred million people out of poverty over four decades, alongside a manufacturing base so comprehensive that China now supplies not just finished goods but the machine tools, components, and industrial inputs that much of the rest of the world's manufacturing — including India's own — depends on (World Bank, China 2030, 2013; UNCTAD, World Investment Report, various years). That outcome was not an accident of geography or population size. It was the direct, compounding dividend of decades spent insisting that foreign capital arrive on China's terms, not the investor's.

India's Liberalization Journey: Openness Without an Equivalent Strategy

India's own FDI story begins with a genuine crisis rather than a considered long-term plan: the 1991 balance-of-payments emergency, in which foreign exchange reserves fell to barely enough to cover a few weeks of imports, forcing the Narasimha Rao government, with Manmohan Singh as finance minister, into a rapid liberalization program that dismantled much of the license-permit-quota regime governing industry, opened numerous sectors to foreign investment, and set India on a path toward the current dual-track FDI approval system: an automatic route requiring no prior government approval for most sectors, and a government approval route retained for sectors deemed more sensitive (RBI, History of the Reserve Bank of India, Volume 4; Ministry of Finance retrospectives on 1991).

Over the following three decades, successive Indian governments progressively expanded the automatic route and relaxed sectoral caps — insurance moved from a 26% to a 74% and then, in some structures, 100% foreign ownership ceiling; defence manufacturing, once tightly restricted, saw its automatic-route cap raised to 74%; e-commerce and digital sectors saw specific, if contested, restrictions layered on marketplace-model platforms to protect domestic retail interests. This has been, by most measures, a genuinely liberal trajectory, and it has delivered real results: India ranked among the top five destinations globally for greenfield project announcements in UNCTAD's 2025 report, with particular strength in semiconductors, electric-vehicle components, and digital infrastructure (UNCTAD, World Investment Report 2025).

What distinguishes India's approach from China's or South Korea's is less the degree of openness than the comparative absence, for much of this period, of a systematic mechanism converting that openness into leverage for technology transfer, domestic value addition, or export-linked obligations. Where China required joint ventures as the price of market access during its formative decades, India's automatic route has more often permitted full foreign ownership with minimal accompanying conditions in many sectors — a genuinely more investor-friendly regime, but one that gave Indian policymakers correspondingly less structural ability to extract commitments around local sourcing, R&D investment, or export performance as conditions of entry.

Press Note 3 stands as the clearest recent exception to this pattern — and a useful case study in both the strengths and limits of India's more selective, security-driven approach. Introduced in April 2020 amid the pandemic-era fear of opportunistic acquisitions of distressed Indian firms, and following the People's Bank of China's disclosed stake purchase in HDFC, Press Note 3 required all FDI proposals from countries sharing a land border with India — China foremost among them — to go through the government approval route regardless of sector, with no automatic-route access at all (DPIIT, Press Note 3 of 2020 Series; CCG Blog analysis, 2020). The measure was effective in its narrow goal: Chinese FDI into India, which had reached roughly $2.5 billion cumulatively between 2000 and the policy's introduction, slowed to a trickle — just $67 million between April 2020 and December 2025, or roughly 0.034% of total FDI inflows in that window, with only 124 of 526 submitted proposals approved through April 2024 (Beacon Filing regulatory analysis, 2026, citing DPIIT data). It is a useful proof of concept: when India has actually chosen to screen foreign capital with China-style deliberateness, it has been able to do so effectively. The lesson of Press Note 3 is less that screening doesn't work, and more that India applied this discipline late, narrowly, and only under acute security pressure — rather than as the default posture China maintained across its entire economy for decades.

The Cost of Not Choosing: FDI Setbacks India Could Have Avoided

Press Note 3 shows what happens when India does apply China-style conditions to foreign capital. Several other sectors show, just as clearly, what happens when it doesn't — and the record here is not theoretical. It is documented, litigated, and in some cases still unfolding.

Pharmaceuticals: trading away the "pharmacy of the developing world." India's pharmaceutical sector permits up to 100% FDI in existing companies through the automatic route for a large share of transactions, with no requirement that acquiring multinationals commit to technology transfer, continued generic production, or price discipline as a condition of the deal (Spice Route Legal, regulatory overview; PMC, "Buyouts of Indian Pharmaceutical Companies," 2011). The consequences were foreseeable and were, in fact, foreseen: when Japan's Daiichi Sankyo acquired Ranbaxy, India's largest drugmaker, for $4.6 billion in 2008, and when Abbott Laboratories acquired Piramal Healthcare's domestic formulations business for $3.7 billion in 2010, India's own Department of Industrial Policy and Promotion warned publicly that such acquisitions were aimed at capturing market share rather than fulfilling any developmental purpose, and that because no technology-transfer obligation was attached, the deals could "not really bring any qualitative change in the domestic pharma industry" (Department of Industrial Policy and Promotion official, quoted in The Pharma Letter, 2018). India's Ministry of Health separately warned that continued unconditional buyouts risked handing foreign firms control of nearly half the domestic drug retail market, with predictable upward pressure on medicine prices for a country that had built its global reputation, and a great deal of its export economy, on cheap generic drugs (PMC, 2011; Deccan Herald, "Taking medicines out of the poor's reach," 2013). A joint-venture requirement or a binding technology-transfer condition of the kind China routinely attached to market access in its own formative decades — rather than a blanket automatic-route welcome — could have preserved the acquisition's capital benefits while protecting the domestic generic-manufacturing base that keeps medicine affordable for hundreds of millions of Indians and, through Indian exports, for much of the developing world besides.

E-commerce: FDI capital used to fund the deliberate destruction of small retailers. India's FDI rules formally bar foreign-owned marketplace e-commerce platforms from holding inventory or influencing pricing in ways that create an unfair advantage over other sellers — a rule that exists precisely because policymakers understood the risk of a foreign-capitalized platform using its financial depth to simply outlast smaller Indian competitors. In practice, enforcement has lagged badly behind the rule. The Competition Commission of India's own investigation unit found in 2024 that Amazon and Walmart-owned Flipkart had breached Indian competition law through predatory pricing and preferential treatment of favored sellers — allegations both companies dispute — while the Confederation of All India Traders has argued for years that deep, loss-funded discounting by foreign-capitalized platforms, sustained by exactly the FDI inflows the marketplace-model restriction was meant to keep at arm's length from pricing power, has driven large numbers of small Indian retailers out of business (Asian Legal Business, CCI investigation explainer, 2024; Outlook Business, Amazon-CCI timeline, 2024; CAIT petitions to the Ministry of Finance, 2018 and 2022). Commerce Minister Piyush Goyal himself stated publicly that predatory pricing by e-commerce majors was harming small sellers and warranted formal investigation. This is, in essence, the crowding-out risk economists like Ha-Joon Chang describe in the abstract, playing out concretely in Indian retail: foreign capital, entering under a lightly conditioned FDI framework, funding years of below-cost pricing that a more tightly enforced, China-style entry regime — with binding, actively monitored conditions on pricing conduct and inventory control rather than rules that exist on paper but are contested for years in litigation — would have made considerably harder to sustain.

Shallow electronics assembly without the deep supplier base China built underneath it. India's recent, genuine success in attracting greenfield electronics investment — Apple's expanding iPhone assembly through Foxconn and other partners, encouraged by the PLI scheme — is real and worth acknowledging. But independent assessments from industry analysts and NITI Aayog's own reviews note that the domestic value addition captured in this assembly work remains comparatively shallow: a large share of high-value components — chips, displays, precision optics — continue to be imported rather than manufactured in India, meaning India captures assembly-stage employment without yet capturing the deeper supplier ecosystem China spent decades building through its joint-venture and local-content conditions. This is precisely the outcome a more binding domestic-value-addition or local-supplier-development requirement, of the kind routinely attached to market access in China and Korea during their own formative decades, is designed to prevent — and its comparative absence from much of India's PLI design is a large part of why India's electronics exports, while growing quickly, remain concentrated in final assembly rather than the higher-value component manufacturing China now dominates.

Each of these cases shares the same underlying structure: capital arrived, a real economic activity followed, and yet the absence of binding, actively enforced conditions on that capital — the precise discipline China applied as standard practice for four decades — left Indian generic drugmakers, small retailers, and component manufacturers measurably worse off than a more conditional approach would very plausibly have left them.

Comparative Models: Six Paths to the Same Goal

Placing India and China side by side risks implying there are only two models. In practice, successful industrializers have converged on broadly similar goals — technology absorption, export competitiveness, domestic value addition — through meaningfully different institutional routes.

South Korea took the most distinctive path of the major East Asian economies: rather than embracing large-scale FDI at all, Korea's post-war industrial strategy under Park Chung-hee's government deliberately minimized foreign equity ownership, financing industrialization instead through foreign loans and arm's-length technology transfer — licensing, reverse engineering, and original equipment manufacturing arrangements — precisely to avoid what planners saw as excessive foreign control over emerging national champions, the chaebol (Chung, "Excelsior: The Korean Innovation Story," Issues in Science and Technology, 2022; OECD, Lessons from Investment Policy Reform in Korea). The government paired this technology-acquisition strategy with export performance requirements, channeling preferential credit and business opportunities toward firms that met export targets, and only substantially liberalized its FDI regime from the mid-1990s onward, as part of its OECD accession and subsequent recovery from the 1997 Asian financial crisis. Korea's chaebol-centered model produced its own well-documented problems — the concentration of economic power that contributed to the 1997 crisis, the ongoing governance concerns around chaebol family control that persist today — but it demonstrates that heavy FDI inflows are not, in fact, a precondition for successful technology-intensive industrialization; disciplined, conditional technology acquisition through other channels achieved comparable results.

Taiwan pursued a closely related but distinct strategy, using state-supported research institutions — most notably the Industrial Technology Research Institute, founded in 1973 — as the vehicle for absorbing and diffusing foreign technology (often licensed from firms like RCA) into what would become the island's semiconductor industry, directly seeding the 1987 spinoff of TSMC (VoxDev research summary of Choi and Shim, 2026). Where Korea concentrated capability inside large private conglomerates, Taiwan built durable public research infrastructure as the transfer mechanism, then let private firms compete on top of that shared technological base.

Singapore represents close to the opposite pole from Korea: a small city-state with limited scope for import substitution, Singapore has pursued sustained, aggressive FDI attraction as the core of its development model since the 1960s, but paired that openness with heavy, continuous state investment in education, infrastructure, and — crucially — highly selective, sector-targeted incentive structures administered through its Economic Development Board, which has functioned for decades as a sophisticated, professionalized negotiator with individual multinationals over the specific terms, incentives, and commitments attached to major investments, rather than treating all FDI as interchangeable.

Germany, as a mature advanced economy, offers a different comparison point: it maintains a formally open investment regime overall, but has progressively tightened its foreign investment screening mechanism — most notably following contested Chinese acquisition attempts in robotics and semiconductor-adjacent firms in the mid-2010s — through amendments to its Foreign Trade and Payments Act that lowered the ownership threshold triggering government review in sensitive sectors including critical infrastructure, media, and dual-use technology, a model closely coordinated with the European Union's own 2019 FDI screening regulation.

Vietnam, by contrast, has pursued something closer to India's liberal openness but with more consistent execution on the infrastructure and ease-of-doing-business side, becoming a primary beneficiary of the "China plus one" diversification of electronics supply chains, with Samsung's Vietnamese operations alone constituting one of the largest single-country manufacturing investments by any multinational globally.

The common thread across the genuinely successful cases — Korea, Taiwan, Singapore, and China, despite their sharply different tools — is not any specific policy instrument. It is that each country's government treated the terms on which foreign capital entered as a variable actively worth negotiating and adjusting over time, rather than as a fixed liberal default to be maximized simply by removing barriers. India's post-1991 approach, more liberal on the whole than any of these except perhaps Singapore's, has more often treated the volume of inflows itself — dollars committed, greenfield projects announced — as the primary measure of policy success, with comparatively less systematic attention to the terms attached.

Should Every Sector Welcome FDI Equally?

The case for treating some sectors differently from others is, at this point, closer to global consensus than contested territory, even among economists broadly sympathetic to open investment regimes.

Defence and dual-use technology sit at the least controversial end: virtually every major economy, including the most FDI-friendly ones, restricts or heavily screens foreign ownership in defence manufacturing, and India's own cautious raising of the automatic-route cap to 74% (with anything beyond requiring case-by-case approval, and full ownership essentially reserved for cases offering access to cutting-edge technology) reflects this near-universal pattern rather than an outlier position.

Critical infrastructure, telecommunications, and ports occupy similar ground, particularly given documented instances — cited in India's own Press Note 3 rationale and in Germany's tightened screening regime — of foreign state-linked entities acquiring stakes in infrastructure assets during periods of financial distress, at valuations and terms unavailable in normal market conditions.

Semiconductors and critical minerals have moved rapidly up this hierarchy of concern over the past five years specifically, as the US-China technology rivalry has made semiconductor supply chains a matter of explicit national strategy across multiple governments simultaneously — the US CHIPS Act, the EU Chips Act, and India's own Semicon India Mission all represent, in different ways, a shared judgment that this specific sector cannot be left to pure market allocation of foreign capital, given how concentrated global fabrication capacity has become in a small number of firms and jurisdictions.

Financial services, media, and digital platforms generate more genuine disagreement. Proponents of continued openness point to the efficiency, product diversity, and capital-market depth foreign entrants bring; critics point to concerns over data sovereignty, editorial and information influence in media, and the risk of a small number of globally dominant platforms crowding out domestic digital champions before they can achieve scale — a concern UNCTAD's own 2025 report flags as a live structural feature of the current digital-FDI landscape, with a small handful of countries capturing the overwhelming share of digital-sector greenfield investment (UNCTAD, World Investment Report 2025).

The honest position, consistent with the evidence across all these sectors, is that blanket rules in either direction — full openness everywhere, or heavy restriction everywhere — are both harder to defend than a genuinely differentiated approach calibrated to the specific strategic sensitivity, competitive dynamics, and technological trajectory of each sector.

Can India Design a Better FDI Policy?

Economists and policy researchers across the spectrum, including those broadly sympathetic to liberalization, have converged on a reasonably consistent set of reform proposals worth evaluating on their individual merits.

Export-linked and domestic-value-addition incentives, structured similarly to the conditions China and Korea attached to market access during their formative decades, would tie preferential treatment — tax incentives, faster approvals, land access — to measurable commitments around export performance and the share of value genuinely added within India, rather than assembly-only operations with high import content masquerading as domestic manufacturing. India's Production-Linked Incentive (PLI) schemes, launched from 2020 onward across electronics, pharmaceuticals, and other sectors, represent a first serious move in this direction, and early assessments from NITI Aayog and independent economists suggest meaningful, if uneven, success in specific sectors like mobile phone assembly — though critics note the scheme's design still leaves considerable room for shallow, low-value-addition assembly to qualify for incentives originally intended to build deeper domestic capability.

Stronger, more granular strategic screening, moving beyond the blunt nationality-based test of Press Note 3 toward the kind of technology- and control-specific review used in Germany's amended Foreign Trade and Payments Act, would allow India to distinguish between genuinely low-risk minority investments and the specific transactions — control stakes in critical infrastructure, sensitive data assets, or dual-use technology — that actually warrant scrutiny, rather than applying uniform friction to an entire category of investors regardless of the underlying transaction's risk profile.

Domestic R&D and local-supplier development requirements, of the kind Korea and Taiwan used to ensure foreign technology diffused into the broader domestic industrial base rather than remaining isolated within foreign-owned enclaves, could be structured as graduated incentives rather than blunt mandates — recognizing that WTO commitments and India's own broader interest in remaining an attractive investment destination constrain how far mandatory local-content requirements can go without inviting the same kind of trade friction China ultimately faced over its own technology-transfer practices.

Stable, transparent, and predictable regulatory frameworks are, somewhat counterintuitively, cited by international investors themselves — in successive World Bank Ease of Doing Business assessments before the index's 2021 discontinuation, and in OECD Investment Policy Reviews — as at least as significant a factor in investment decisions as the specific generosity of incentives on offer; retrospective and frequently changing tax rulings, such as India's own contested 2012 retrospective tax amendment applied to the Vodafone case, have measurably damaged investor confidence in ways that arguably cost India more in foregone investment than any single restrictive sectoral policy.

Stronger competition law enforcement, addressing concerns about a small number of dominant foreign digital platforms crowding out domestic competitors before they achieve scale, represents a genuinely underdeveloped area of Indian policy relative to the EU's more assertive digital-market regulation, and deserves serious consideration independent of, and alongside, FDI-specific screening.

Each of these proposals carries real trade-offs — tighter screening risks deterring genuinely benign investment through added friction and delay; local-content requirements risk the rent-seeking and permanent-protection outcomes critics like Panagariya and Krueger have documented in other contexts; and India's federal structure, where land and labor remain substantially state subjects, means even well-designed central policy can be blunted by inconsistent state-level implementation. None of these reforms is a costless improvement, and a serious policy conversation has to weigh each on its specific merits rather than assuming more strategic conditionality is automatically better.

Conclusion: A Servant, Not a Master

The real debate India needs to have is not whether to welcome or resist foreign capital — that argument, largely settled by the lived experience of 1991 and the three decades since, need not be relitigated. The more useful question is how India ensures foreign capital serves a development strategy the country itself controls, rather than allowing openness on its own to substitute for having a strategy at all.

China's record offers a genuinely instructive template, not a flawless one to copy line for line, but one whose core discipline deserves real credit: sequencing liberalization deliberately, treating market access as continuously negotiable leverage rather than a fixed default, and pairing openness with clear, enforced expectations around technology diffusion and export performance. That discipline is a large part of why China converted foreign capital into the deepest manufacturing base on earth, while India, despite a genuinely more liberal and investor-friendly regime overall, has left specific, documented damage on the table in pharmaceuticals, retail, and electronics that a more conditional, China-style approach would very plausibly have reduced. India's own successful reformers, and its own occasional successes — Press Note 3 chief among them — show that this discipline is not foreign to Indian policymaking; it has simply been the exception rather than the rule. The evidence across all these cases points toward the same underlying lesson: the amount of foreign capital a country attracts matters considerably less than the quality of the institutions and policies governing what that capital is permitted, encouraged, or required to do once it arrives — and on that specific measure, China's precision has consistently outperformed India's openness.

Foreign capital should be a servant of national development, never its master.

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