India’s China Dreamin’ and Implications for Foreign Businesses

India recently loosened foreign direct investment (FDI) policy strictures geared towards Chinese FDI.  It specifically allowed automatic approval of FDI from land bordering countries involving beneficial Chinese ownership of 10 percent or less (subject to sectoral FDI caps) and set a definitive approval timeline for FDI in critical sectors such as capital goods, electronic components, polysilicon (used in solar cells), and ingot wafers.[1]  The motivations driving New Delhi’s policy change are varied.  One is its desire to grow, advance the development of targeted sectors, and address capital shortages.[2]  Another is the unfriendliness of the United States (US), which has encouraged it to seek additional partners in a quest for political and economic diversification.[3]  Yet another is the fact that many Indian industrial policies have failed to deliver.  In addition, it should not be forgotten that the contested India-China border situation has stabilized, even if nothing is resolved.  Looking at the contemporary context, some imply India opened its doors to counter the economic stresses flowing from the US-Israel war against Iran.[4]

Historically, Chinese outward FDI (OFDI) entering India has been trivial in terms of annual flows, investment stocks, or relative to the size of the Indian economy.  According to India’s Department of Promotion of Industry and Internal Trade (DPIIT), the total Chinese OFDI (COFDI) stock for the period 2000-2025 was $2.51 billion.[5]  Some sources, though, suggest it totaled $16.8 billion.[6]  By way of comparison, Japanese FDI in India totals $47.59 billion while US FDI in India runs around $78.45.[7]  Chinese investors in India have included state-owned enterprises (SOEs) like Jiangxi Holitech and private companies such as Fosun (pharmaceuticals), Huawei (R&D), Midea (appliances), Trina Solar (solar modules), and Xiaomi (smartphones).[8]  Concerns about Chinese takeovers of teetering Indian firms during COVID, Chinese investment in sensitive areas, and the bilateral border conflict in 2020 created a very inhospitable environment for Chinese OFDI (COFDI).[9]  Reflective of the new environment, New Delhi embraced a plethora of measures against Chinese firms including foreign exchange and tax law violation investigations, stricter visa rules, product bans, and stricter investment screening.  Indian regulators also banned hundreds of Chinese apps, some permanently.[10]  This drove some Chinese companies such as Great Wall Motors to cancel planned investments and others to withdraw from India.[11]

It cannot be assumed that COFDI volumes will grow significantly.  First, not every sector nor every Chinese business benefits from India’s FDI policy liberalization.  Second, Chinese companies may conclude the investment environment is better elsewhere despite the allure of the huge Indian market.  Southeast Asian countries, for example, offer greater proximity to China, strong rule of law and less bureaucracy (though SEA countries obviously do not rank equally along these spectrums), and superior infrastructure.  Third, New Delhi’s perspective may change as COFDI increases and Indian politicians and bureaucrats understanding of COFDI’s positive and negative effects deepens.  For now, the conventional wisdom seems to be that COFDI assuredly will deliver benefits while negative externalities will be minimal or contained.[12]  Fourth, the bilateral, regional, and global (think U.S. relations with India and China) milieu is hardly static and may shift in a fashion unconducive to greater COFDI in India.[13]  Fifth, Beijing may be reluctant to let Chinese firms invest in India if they take tech or jobs with them.[14]  Regardless of these uncertainties and a lack of clarity about exactly where Chinese businesses will inject their money sectorally or geographically within India, it remains worthwhile to ponder what might be the ultimate implications if India’s door to COFDI opens wider and Chinese firms opt to exploit it.

With respect to manufacturing, an influx of Chinese investment could be detrimental to foreign firms in India.  The arrival of Chinese companies will intensify competitive pressures given their superior cost structures, government support (even where private-owned enterprises are involved), and experience operating in environments like India’s.  In addition, Chinese companies in India likely will displace “local” supply chains (which could include components from foreign companies like Japanese ones), increasing the dependency of foreign firms on Chinese ones.  Indeed, this is happening in Thailand with respect to automobile supply chains.  In the high-tech space, a larger Chinese manufacturing footprint could complicate matters for American, European, and Japanese and Korean firms if Chinese components are integrated into their products because this could undercut their data security claims.  In the service sector, Chinese businesses will present similar kinds of challenges because Chinese consumer, food, retail, travel, and related services will be extremely cost competitive even if they do not have brand power.  This said, foreign companies in India could benefit from Chinese firm competitiveness, speed, and logistic prowess if those Chinese firms constitute their suppliers.  Even so, there will be a certain amount of uncertainty about Chinese supply chain prospects given the vagaries of India-China and China-Pakistan (the latter being India’s arch-nemesis) relations.  Foreign firms may gain, too, if Chinese investments result in an expansion and upgrading of Indian infrastructure and logistics systems.

At this point in time, foreign businesses in India primarily need to pay attention to the evolution of Indian policy towards COFDI.  If India opens the door further and the COFDI taps open, they should track the kinds of Chinese firms that are entering India as well as the sectors into which Chinese companies are starting to invest.  This will provide a basis for knowing what kinds of opportunities and challenges may emerge and what steps might be required to reduce supply chain vulnerabilities.

[1] Sayan Chakraborty, “India Eases FDI Rules in Likely Opening for Chinese Investment,” Nikkei Asia, March 10, 2026, https://asia.nikkei.com/economy/india-eases-fdi-rules-in-likely-opening-for-chinese-investment; Krishn Kaushik and Chris Kay, “India Relaxes Rules on Chinese Investment,” Financial Times, March 11, 2026; and Mahendra Yadav, “The Door India Left Ajar,” Times of India, March 21, 2026, https://timesofindia.indiatimes.com/business/india-business/the-door-india-left-ajar-economic-ties-with-china-see-a-calibrated-reset-with-easing-of-fdi-rules-explained/articleshow/129718674.cms.

[2] Chakraborty, “India Eases FDI Rules in Likely Opening for Chinese Investment;” Kaushik and Kay, “India Relaxes Rules on Chinese Investment;” and Yadav, “The Door India Left Ajar.”.

[3] Kaushik and Kay, “India Relaxes Rules on Chinese Investment.”

[4] Chakraborty, “India Eases FDI Rules in Likely Opening for Chinese Investment.”

[5] Yadav, “The Door India Left Ajar.”

[6] American Enterprise Institute-Heritage Foundation, “China Global Investment Tracker” [hereinafter AEI CGIT], n.d., https://www.aei.org/china-global-investment-tracker.

[7] Indian Brand Equity Foundation, “Foreign Direct Investment,” n.d., https://www.ibef.org/economy/foreign-direct-investment.  These figures are based on DPIIT calculations and do not factor out tax havens.

[8] Qian Zhou and Giulian Interesse, “China-India Economic Ties,” China Briefing, October 11, 2024, https://www.china-briefing.com/news/china-india-economic-ties-trade-investment-and-opportunities; Chakraborty, “India Eases FDI Rules in Likely Opening for Chinese Investment;” and AEI CGIT.

[9] Ivan Lidarev, “Easing India’s Curbs on Chinese Investment,” ISAS Brief, No. 1335 (January 29, 2026), https://www.isas.nus.edu.sg/papers/easing-indias-curbs-on-chinese-investment-promise-and-complexities; Antara Ghosal Singh, “To Stay or To Go,” ORF Occasional Paper, May 20, 2024, https://www.orfonline.org/research/to-stay-or-to-go-decoding-chinese-enterprises-india-dilemma; and Yadav, “The Door India Left Ajar.”

[10] On these measures, see “India to Permanently Ban 59 Chinese Apps, Including TikTok,” Economic Times of India, January 26, 2021, https://economictimes.indiatimes.com/tech/technology/india-to-permanently-ban-59-chinese-apps-including-tiktok/articleshow/80451148.cms; “India’s Clampdown on Chinese Products and Investment,” Reuters, October 21, 2024, https://www.reuters.com/business/indias-clampdown-chinese-products-investment-2024-10-21; and Daniel Balazs and Xue Gong, “The ‘New Normal’ of Sino-Indian Economic Relations after Galwan,” China-India Brief 248 (Oct. 1-Oct. 31, 2024), https://lkyspp.nus.edu.sg/cag/publications/center-publications/publication-article/detail/the-new-normal-of-sino-indian-economic-relations-after-galwan.

[11] Singh, “To Stay or To Go;” and Chakraborty, “India Eases FDI Rules in Likely Opening for Chinese Investment.”

[12] For numerous studies showing positive effects from COFDI are not guaranteed, see Jean-Marc F. Blanchard, ed., The Effect of Chinese FDI in Southeast Asia (London: Routledge, 2026).

[13] Lidarev, “Easing India’s Curbs on Chinese Investment.”

[14] “China Moves to Stall Apple, BYD Manufacturing Shifts,” The Times of India, January 18, 2025, https://timesofindia.indiatimes.com/business/international-business/china-moves-to-stall-apple-byd-manufacturing-shifts/articleshow/117343173.cms.